<PAGE> 1
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
X Annual Report Under Section 13 or 15(d) of the Securities Exchange
--
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1995
Transition Report Pursuant to Section 13 or 15(D) of the Securities
--
Exchange Act of 1934 (No Fee Required)
For the transition period from to
Commission File Number 33-47567-NY
HEADSTRONG GROUP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 22-3663311
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Lexington Avenue, East Brunswick, N.J. 08816
(Address of Principal Executive Offices) (Zip Code)
(908) 254-3433
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
None
- ---------------------------------- -----------------------------------
- ---------------------------------- -----------------------------------
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
None
- -------------------------------------------------------------------------------
(Title of Class)
- -------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(D) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB X
State issuer's revenues for its most recent fiscal year. $5,955,353
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked of prices of such stock, as of a specified date
within the past 60 days. As of March 29, 1996: $10,145,102
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12,13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares of each of the issuer's classes of common
equity, as of the latest practicable date. 9,968,129
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to
security-holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities
Act"). The listed documents should be clearly described for identification
purposes (e.g., annual report to security-holders for fiscal year ended December
31, 1990).
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
History and Summary
Headstrong Group, Inc., formerly known as The Bullseye Marketing
Group, Inc. ("the Company") was formed on September 1, 1989 and, pursuant to an
agreement dated January 26, 1995, between the Company and Renaissance Marketing,
Inc., acquired all of the outstanding shares of Renaissance Marketing, Inc. On
February 23, 1995, the Board of Directors passed two resolutions: (1) the
Company and it's wholly-owned subsidiary merged into a Delaware corporation and
(2) the Company effected a merger on March 20, 1995 whereby Renaissance
Marketing, Inc. merged into the Company. The result of these actions is that
Renaissance Marketing, Inc. is extinguished as a corporation and the Company is
the sole surviving entity incorporated in the State of Delaware.
Business of Issuer
The Company manufactures and sells recreational safety helmets used
by persons participating in bicycling, in-line skating, skateboarding and
related activities where the use of a protective helmet is recommended or where
require by law. The Company manufactures and sells more than 100 different types
of helmets of varying sizes, styles, colors and graphics. The Company sells the
helmets through a combination of factory representatives and in-house sales
people and is currently focusing on regional sales people, employed by the
Company, to work with and oversee the activities of the factory representatives
in the geographic region.
The helmets manufactured and sold by the Company consist of a number
of components which are assembled at the Company's facility in New Jersey. These
components, which include an inner padded shell made from molded expanded
polystrene, a hard PVC outer shell, webbing and padding, and an outer box and
shipper, are purchased by the Company from independent suppliers. The expanded
polystrene, or foam, protects the consumer's head; the hard PVC plastic outer
shell gives the helmet its color and graphics; the webbing and padding enables
the consumer to "custom-fit" and secure the helmet to their head; and the outer
box and shipper allows the Company to exhibit additional graphics and implement
its marketing strategies. It is management's experience that these materials are
readily available from a variety of sources at prices competitive with those now
paid by the Company, except that the molded expanded polystrene and PVC outer
shell may be difficult to obtain on short-term notice because of the advance
time required by the supplier to custom manufacture the components to the
Company's specifications. Management of the Company does not anticipate any
interruprtion in its production schedule as a result of a supplier's delay or
termination because the Company has alternative sources for materials at similar
prices and similar quantities.
The Company uses its in-house design team and independent inventors to
develop helmet designs.
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Upon the creation of the design, the Company submits it to one of the
independent industry recognized safety certification companies, which certifies
the helmet and its design as safe and in accordance with their standards of
design.
The Company's products are manufactured to meet or exceed the safety
standards dictated by the following organizations: The Snell Memorial
Foundation, the American Safety Institute, the Canadian Standards Association
and the American Society for the Testing of Matetrials. All of these
organizations are recognized in the industry as establishing safety criteria for
products such as those distributed by the Company. The Company seeks approval
from one or more of those companies depending upon the preference of the
Company's customer. Upon approval by one or more of the foregoing, the Company
contracts with suppliers to manufacture the newly approved helmet's components.
The hard PVC or plastic outer shell is submitted to one of the
Company's vendors as a mold. The Company contracts with the vendor to build the
tooling at the vendor's plant site. Another mold for the inner padded shell is
also sent to the Company's vendors who then build the required tooling on site.
Currently, the Company has approximately $992,000 invested in tooling machinery,
all of which is custom-built to the Company's specifications for every shape
helmet sold by them. The Company estimates that its tooling machinery has a 3 -
5 year life based upon average volume usage. All of the Company's current
tooling is two years old or less. In addition, the Company contracts for
additional tooling when required to meet sales demand by its customers and when
the Company's in-house design team develops new designs.
The Company utilizes helmet designs which either its in-house design
team creates or which it acquires through licensing agreements or otherwise. The
designs created by the Company are not patented. The Company believes the time
and cost associated with patent protection for its designs are not justified due
to the high cost of obtaining patent protection relative to the degree of
protection obtained from the types of patents available. Instead, the Company
relies on the high cost of entry to the recreational helmet industry as a hurdle
for new competitors to enter this market.
The Company has been licensed to use a variety of helmet designs,
trademarks and their associated logos. In addition, the Company holds the rights
to and it is in the process of applying for trademark registrations on six other
product lines, among which are the right to utilize the trademark on its
flagship product line "Headstrong Helmets". The importance of these trademarks
and licenses to the Company and the industry are that they create a vehicle for
the Company to market its products and distinguish its products from others in
the market; that is product identification and recognition. The Company is not
disproportionately dependent on any one trademark or license and management of
the company believes that should any of the trademarks or licenses which the
Company may seek to renew become unrenewable, or if the licenses to use such
trademarks and logos are not renewed, the company could develop or identify
other trademarks and licenses which the Company can obtain to succesfully market
its products.
The manufacturing process of the helmets consists of assembling helmets
from component products manufactured by independent suppliers.
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The Company has over 100 different types of helmets comprised of
different combinations of styles, sizes, colors and graphics. The principal
markets and distribution for the helmets are mass merchants, specialty retailers
and independent bicycle shops in the United States, Canada, Mexico, Europe, Asia
and Israel. In 1994 and 1995, 100% of the Company's revenue was derived from
helmet sales, while in 1993 an immaterial percentage of revenues were derived
from helmet sales. No helmet sales were made by the Company in 1992.
Competition
In 1995, management estimated that the Company was the second largest
manufacturer of recreational safety helmets in the United States. Most of the
Company's competitors offer products incorporating helmet designs similar to
those distributed by the Company as well as similar warranties on their
products. Competition in the industry is based on: (1) promotional programs; (2)
product style; (3) package design; and (4) price. The Company acknowledges that
the types of product offered by most of the industry do not vary greatly with
respect to design, structure, shape, etc. Instead, management believes that it
differs from its competitors by emphasizing marketing programs to drive the sale
of helmets, rather than vice versa where product drives the marketing program.
In 1995 the Company developed a helmet style designed especially for in-line
skating. It incorporates a lower edge in the back of the helmet to provide
maximum protection for backward falls which, according to statistics, are the
most typical for in-line skating. The Company's helmet style has passed testing
by the Snell Memorial Foundation and meets the requirements for that type of
helmet which Snell describes as "N-94". The Company believes that it is the only
manufacturer with a helmet of that designation in mass production at this time.
Marketing
The Company markets its helmets in a variety of ways. For promotional
programs, the Company is leading the industry by involving alternative retailers
in their programs, i.e., grocery food chains, chain drug stores, non-profit
organizations and other product manufacturers as promotional "tie-ins" to their
own product. In addition, the Company believes that it must provide added value
to its products so that its customers will purchase the Company's products
rather than its competitors. Fututre success with a retailer is primarily
dependent upon the success of the previous promotion. Competition on product
design is primarily based upon the decorative aspect of the outer shell of the
helmet. The in-house creative staff at the Company tries to create brighter,
more colorful and more unique styles than its competitors. In addition, the
Company continues to introduce numerous new product designs including a helmet
line with increased venting and a helmet marketed specifically for in-line
skating.
The Company has also been innovative with its product packaging
recognizing the importance of packaging at the point of purchase. Competition on
price has been addressed by reducing manufacturing costs and targeting the lower
price points in the industry.
In addition the Company has sought perennial licenses which have
value over a longer period of time as opposed to expensive, high-profile
licenses which tend to have a limited period of value once a trend or fad
subsides.
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Customers
The Company does not expect to depend too heavily on any one customer
in 1996. During 1995, there were two customers which individually accounted for
10% or more of the Company's total revenue. The Company's two largest customers
accounted for 15% and 18% of the Company's total revenue for 1995 and 14% and
35%, respectively, of the Company's total revenue for 1994. Both are expected to
represent a significantly lower percentage of total 1996 revenue.
Seasonality
The Company's sales and operations are highly dependent upon
seasonal fluctuations which are consistent with the industry. Historically,
sales peaked in the February through April and the October/November seasons.
Sales for the remainder of the year remained relatively flat. The Company has
initiated a number of marketing programs which management expects will raise
sales during the periods which historically were flat, with the result that if
successful, seasonality will become a diminished factor. The Company employs up
to 300 employees in the peak sales seasons and approximately 38 persons on a
full time basis including four officers, eleven administrative staff and
twenty-three related to production.
Facilities
The Company's facility consists of 54,000 square feet of space
incorporating an assembly area for production, warehouse space and executive
offices. The Company entered into a lease agreement on the property located at 5
Lexington Avenue, East Brunswick, New Jersey on April 22, 1994 for a six year
lease term commencing September, 1994.
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
As a result of a severe liquidity shortage during 1995, the Comapny
was unable to make timely payments to some of its vendors. Thirty one of these
vendors commenced legal action against the Company for delinquent payments. All
of these actions have been settled pursuant to individual agreements by the
Company to make periodic payments to these vendors. The Company has fully
satisfied its obligations under thirteen of these payment agreements. The
Company's obligations under the remaining eighteen settlement agreements
aggregate approximately $682,000 between May 1996 and January 1977. The Company
has funded its obligations under these settlement agreements through a
combination of capital raises and cash flow in the ordinary course of business.
See Management's Discussion and Analysis or Plan of Operations for additional
information regarding the Company's ability to finance the balance of the
required payments.
The Company is defending three additional actions by vendors claiming
delinquent payments amounting to approximately $32,000 in the aggregate. The
Company disputes, and is vigorously defending, these claims. Regardless of the
outcome, the Company does not believe the effect on the Company's financial
condition or its relationship with its vendors will be material.
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During 1995, Richard Berman, a former officer and director of the
Company, commenced a legal action against the Company alleging breach of
employment contract and wrongful termination. Certain officers and directors of
the Comapnywere also named as defendants on claims of breach of fiduciary duty
to Mr. Berman in his capacities as officer, director and Stockholder of the
Company. In March, 1996, the Company and Mr. Berman executed a settlement
agreement pursuant to which the Company is obligated to pay an aggregate of
approximately $449,000 to Mr. Berman. Through May 1, 1996, the Company has made
payments to Mr. Berman under the settlement agreement aggregating approximately
$213,192. The Company is current on its obligations to Mr. Berman pursuant to
the settlement agreement. Additional payments of $12,884 are paid weekly. On
July 5, 1996, Payments will be reduced to $5,769 to be paid bi-weekly with the
final payment due September 1, 1996. Aditionally, pursuant to the settlement
agreement, Mr. Berman received certain piggy-back stock registration rights. See
Management's Discussion and Analysis or Plan of Operations for information
regarding the financing of the remaining payments to Mr. Berman.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company commenced trading on the OTC Electronic Bulletin Board in
July, 1993. The following is a range of high and low bid and ask prices for the
Company's common equity for each quarter within the last two fiscal years
prepared by National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
Bid Prices Ask Prices
High Low High Low
<S> <C> <C> <C> <C>
1994
January 3 through March 31 4 4 5 5
April 4 through June 30 4 4 5 5
July 1 through September 30 4 1/2 4 5 1/2 5
October 3 through December 30 4 1/2 4 5 1/2 5
1995
January 3 through February 8 * 6 1/4 4 9 5
February 9 through March 31 * 3 3/8 1 4 1/2 2
April 1 through June 30 4 7/8 3 3/8 5 1/2 3 5/8
July 3 through September 29 4 15/16 3 1/4 5 1/2 3 5/8
October 2 through December 29 3 5/8 3/4 3 7/8 15/16
</TABLE>
* The Company effected a 7 for 1 forward stock split of its common
stock to holders of record on February 7, 1995.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of operations
Sales for the year ended December 31, decreased to $5,955,353 in
1995 from $8,472,304 in 1994. The decrease resulted from a severe working
capital shortage encountered in the third quarter which worsened in the fourth
quarter of 1995. During this period the Company was unable to commit to sales
shipping schedules and/or had to cancel sales due to an inability to secure
required components because of insufficient working capital.
Cost of sales increased to $7,161,340 for the year ended December 31,
1995 from $6,380,963 for the same period of the prior year. The resulting gross
profit was negative for the year ended December 31, 1995 totaling ($1,205,987)
compared with $2,091,341 for the year ended December 31, 1994. The negative
gross profit resulted from low sales levels in the second half of the year that,
at normal gross profit margins, did not cover fixed manufacturing costs.
In addition, as a result of the working capital shortage, the Company
incurred expediting penalties for the components it was able to secure and
suffered increased cost of sales as a result of; (1) litigation initiated by
suppliers to recover payment for components and (2) a provision for slow-moving
or potentially obsolete physical inventory.
Selling, general and administrative expenses totaled $6,663,404 for
the year ended December 31, 1995 as compared with $2,423,580 for the same period
of the prior year. The increase is principally accounted for by the following
unusual expenses which are not expected to be recurring:
1. A charge of $1,237,470 for the value of 300,000 common shares
which were issued for services under an investment banking agreement.
2. Charges totaling $1,744,890 comprised of; $476,904 for the
write off of an account receivable due from a customer to which the Company
provided product on an OEM basis and also has a royalty agreement under which
the customer receives royalties for a line of the Company's product; $688,000
for additional provision for doubtful accounts receivable and the balance for
the write off of specific doubtful accounts receivable.
3. A charge of $545,466 as a provision for the settlement of a
lawsuit brought by a former officer and director of the Company.
4. Additional Legal and professional charges totaling $415,000
principally related to the defense and settlement of a large number of lawsuits
as well as the costs related to restructuring during 1995.
Interest expense increased from $252,501 for the year ended December
31, 1994 to $546,269 for the year ended December 31, 1995 due to an increase,
during 1995, in the cost of borrowing, the addition during the year, of
subordinated debt prior to its conversion to equity and interest on payroll
taxes which were not timely paid to the Federal government.
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Liquidity and Capital resources
The Company's Statement of Cash Flows reflects that in 1994 $45,923
was provided by operating activities even though a net loss of $584,740 was
recorded in that year. In 1994 the Company borrowed from a factor, delayed
payment of trade indebtedness and was unable to meet its payroll tax obligations
on a current basis to fund increases in inventory, accounts receivable and
investments in tooling and equipment. In 1995, $6,606,630 was used in operating
activities which was funded by borrowings arranged by an investor group during
the year totaling $4,749,319 [of which $3,807,367 was converted to common
stock], by the sale of preferred stock and by the issuance of common shares for
services rendered under an investment banking agreement.
The Company's position at December 31, 1994 was one of a severe
working capital shortage due to rapid growth in 1994, prior year's losses, weak
second half sales and investment in tooling and inventory.
At December 31, 1994, the Company was past due on payment terms to
most suppliers, had been unable to meet payroll tax obligations on a timely
basis. In October 1994, the Company entered into an agreement with an investor
group which comitted to infuse $1 million for working capital.
From October 1994 and throughout the first half of 1995, the investor
group caused a total of $3.779 million to be infused into the Company as
subordinated debt which was used by the Company to reduce it's loan to a factor,
make payments for it's delinquent payroll tax liabilities, purchase components
for sales orders and make payments under time payment plans to it's vendors for
old, past due amounts. During the third quarter of 1995 the investor group
caused additional subordinated debt to be infused into the Company and during
the quarter, $3.8 million of subordinated debt was converted into preferred
stock and subsequently into common shares. During this period the investor group
slowed the infusion of working capital and by the end of the third quarter the
Company was again experiencing a working capital shortage. The investor group
informed the Company that it would no longer provide assistance in raising
additional working capital and that the shares held by the group had been sold
in the open market. As a result, the Company's position worsened during the
fourth quarter with the result that at December 31, 1995 the Company was again
suffering a severe working capital shortage. The Company sought additional funds
through a private placement of common stock, but a comittment for that placement
was not received until early in 1996.
The Company expects that as a result of the private placement it will
have sufficient working capital to purchase components in quantity sufficient to
meet it's sales demand and as a result, will return to profitable operations and
gradually return to operations in the usual and customary manner.
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Seasonality
The sales recorded in 1994 were extremely seasonal with the strongest
quarters being the first and second with the third and fourth being weak. The
seasonality resulted from sales success on a promotional basis in the first half
of the year and the inability to continue such sales in the second half of the
year. The same pattern was repeated in 1995 for another reason, that is that the
Company was unable to meet it's sales demand in the second half of 1995 due to a
working capital shortage which prevented the Company from purchasing the
components necessary to fill customer's orders. The Company expects the impact
of seasonality to be minimal in 1996 as a result of marketing programs that have
been designed to create sales demand on a smoother, continuing basis.
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Term
Name Age Positions and Offices Within the Company Commenced
---- --- ---------------------------------------- ---------
<S> <C> <C> <C>
Dale M. Friedman 39 President, Chief Executive Officer and 1995
Director
Jean-Francois Perreault 34 Director 1995
Thomas V. Malik, Jr. 36 Secretary, Vice President Production and
Director 1995
John J. Willis 55 Treasurer and Chief Financial Officer 1995
</TABLE>
Set forth below is a biographical description of each executive
officer and director of the Company based upon information supplied by them:
Dale M. Friedman has been President, Chief Executive Officer and a
Director of the Company since its inception and continues in those positions
with the Company since the acquisition in January, 1995. From 1986 to 1992 he
was President of Innotech Corp., a packaging company located in East Brunswick,
New Jersey.
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Jean-Francois Perreault has been a Director of the Company since January,
1995. From November 1993 to present he has been an investment manager at Fonds
de Solidarite des Travailleurs du Quebec (F.T.Q.), a venture capital firm
located in Montreal, Canada. From March 1992 to November 1993, he was a Manager
of the Corporate Finance Group at KPMG Peat Marwick in Montreal, Canada. From
August 1989 to March 1992, he was an investment manager at Canadian Corproate
Funding Limited, a private merchant bank locatde in Montreal, Canada.
Thomas V. Malik, Jr. has been Secretary and Vice President Production
of the Company since November 1992 and continues in those positions with the
Company since the acquisition in January, 1995. From September 1992 to November
1992 he was Production Manager of Banner Industries, Inc., a packaging company
located in East Brunswick, New Jersey. From July 1992 to September 1992 he was
Production Director of Innotech Corp., a packaging company located in East
Brunswick, New Jersey. From March 1991 to July 1992 he was owner/operator of S&K
Purifications, a packaging company located in Freehold, New Jersey.
John J. Willis has been Treasurer and Chief Financial Officer of the
Company since August 1994 and continues in those positions with the Company
since the acquisition in January 1995. From 1988 to 1994 he was Chief Financial
Officer of Standard Industries, Inc., a manufacturer of consumer and industrial
products located in Paterson, New Jersey.
Directors' Compensation
The Company has agreed, pursuant to a Board of Directors' resolution,
to compensate all outside directors the sum of $1,000 per month, per director as
their sole compensation for such services effective February 1, 1995.
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ITEM 10. EXECUTIVE COMPENSATION
The compensation for the executive officers of the Company is as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------- ------------------------------------
Awards Payouts
------------------------ --------
Securi-
ties
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation Award(s) SARs Payouts sation
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (I)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dale M. Friedman 1995 150,000
CEO 1994 150,000
1993
Thomas V.Malik, Jr. 1995 105,000
VP Production 1994 105,000
John J. Willis 1994 90,000
CFO 1995 90,000
</TABLE>
Employment Contracts
The annual compensation reflected in the chart above for the CEO and
the VP Production is memorialized in separate employment contracts for each of
the named executives. Both employment contracts provide for a three year term
ending on February 22, 1998 with base salaries as stated above, constant for
each of the the three years. In addition, the contracts provide for the Board of
Directors to establish a bonus compensation plan at the Board's discretion. The
contracts also provide for reasonable benefits including medical, insurance,
vacation and other benefits in the ordinary course of business. In addition,
both of the employment contracts provide for the termination for cause by the
Company.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following is a chart of security ownership of certain beneficial
owners:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and Address Amount and Nature
Title of of of Percent of
Class Beneficial Owner Beneficial Owner Class
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Richard Berman 603,750 6.0%
Common Stock 2 Pelham Place
East Brunswick, N.J. 08816
</TABLE>
The following is a chart of security ownership of certain beneficial
management:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and Address Amount and Nature
Title of of of Percent of
Class Beneficial Owner Beneficial Owner Class
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Dale Friedman 603,750 6.0%
Common Stock 18 Cedar Drive
Bayhead, N.J. 08742
Class A Thomas V. Malik, Jr. 280,000 2.8%
Common Stock 35 Koenig Lane
Freehold, N.J. 07728
Class A Directors and Officers 883,250 8.9%
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995, the Company had been negotiating financial consulting
agreements with Viking Investment Group II, Inc. ("Viking") and Parenteau
Corporation ("Parenteau") for the purpose of raising funds for the Company in
exchange for a fee relative to the amount of funds raised. Negotiations ceased
when, during the second half of 1995, Viking and Parenteau withdrew their
support of the Company and sold their common shares. No fees were paid to either
Viking or Parenteau. Both Viking and Parenteau were, prior to the sale of their
common shares, beneficial holders of more than 5% of the Company's common stock
and reported as such in Report on Form 10-KSB for 1994.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEADSTRONG GROUP, INC.
- --------------------------------------------------------------------------------
(Company)
By /S/ John J. Willis, Treasurer and C.F.O.
- --------------------------------------------------------------------------------
(Signature and Title)
Date May 16, 1996
- --------------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
By /S/ Dale M. Friedman, Director, President and C.E.O.
- --------------------------------------------------------------------------------
(Signature and Title)
Date May 16, 1996
- --------------------------------------------------------------------------------
By /S/ Thomas V. Malik, Jr., Director, President and VP Production
- --------------------------------------------------------------------------------
(Signature and Title)
Date May 16, 1996
- --------------------------------------------------------------------------------
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HEADSTRONG GROUP, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Headstrong Group, Inc.:
We have audited the accompanying balance sheet of the Headstrong Group, Inc. (a
Delaware Corporation) as of December 31, 1995, and the related statements of
operations, stockholders' deficit and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Headstrong Group, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
a working capital deficit and has a net capital deficiency which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 27, 1996 (except for Note 16
as to which the date is May 31, 1996)
<PAGE> 18
HEADSTRONG GROUP, INC.
BALANCE SHEET DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 45,517
Accounts receivable, less allowance
for doubtful accounts of $745,142 672,665
Due from stockholders (Note 10) 210,065
Inventories (Notes 1 and 3) 961,957
Prepaid expenses (Note 4) 176,791
Other current assets 43,569
-----------
Total current assets 2,110,564
-----------
PROPERTY AND EQUIPMENT (Note 1):
Tooling and equipment 945,685
Transportation equipment 17,874
Leasehold improvements 46,756
-----------
Total 1,010,315
Less- Accumulated depreciation (280,644)
-----------
Property and equipment, net 729,671
-----------
OTHER ASSETS (Note 11) 505,979
-----------
$ 3,346,214
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit (Note 9) $ 284,685
Subordinated note payable (Note 6) 1,119,26
Accounts payable 2,113,443
Accrued liabilities (Note 5) 1,599,483
Due to officers (Note 10) 26,456
Payroll taxes payable (Note 2) 562,869
Litigation reserve (Note 8) 468,000
-----------
Total current liabilities 6,174,203
-----------
CONVERTIBLE NOTES PAYABLE (Note 7) 375,000
-----------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' DEFICIT (Note 13):
Series A preferred stock, par value
$.001 per share, 1,000,000 shares
authorized, 101,775 shares issued
and outstanding 102
Common stock, Class A, par value
$.0001, 20,000,000 shares authorized
6,917,260 shares issued and outstanding 692
Common stock, Class B, par Value $.0001,
5,000,000 shares authorized, none issued
and outstanding 0
Additional paid-in capital 5,165,376
Accumulated deficit (8,369,159)
-----------
(3,202,989)
-----------
$ 3,346,214
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
<PAGE> 19
HEADSTRONG GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
NET SALES $ 5,955,353 $ 8,472,304
COST OF SALES 7,161,340 6,380,963
----------- -----------
Gross profit (loss) (1,205,987) 2,091,341
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,663,404 2,423,580
----------- -----------
Operating loss (7,869,391) (332,239)
INTEREST EXPENSE, NET 546,269 252,501
----------- -----------
Net loss ($8,415,660) ($ 584,740)
=========== ===========
LOSS PER COMMON SHARE ($ 1.46) ($ .12)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,783,396 5,030,900
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 20
HEADSTRONG GROUP, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
-------------------- -----------------
Shares Amount Shares Amount Capital Deficit Deficit
---------- ------- -------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 2,500 $ 2,500 0 $ 0 $ 90,000 ($ 318,008) ($ 225,508)
One for twenty-five reverse stock split (2,400) 0 0 0 0 0 0
Net loss 0 0 0 0 0 (584,740) (584,740)
---------- ------- -------- ----- ----------- ----------- -----------
BALANCE, December 31, 1994 100 2,500 0 0 90,000 (902,748) (810,248)
Effect of merger and recapitalization
(Note 1) 718,600 (1,997) 0 0 (990,188) 992,185 0
Seven for one stock split 4,312,200 0 0 0 0 0 0
Issuance of preferred stock 0 0 393,965 393 3,939,257 0 3,939,650
Conversion of preferred stock into
common 1,575,860 158 (393,965) (393) 235 0 0
Expenses related to private placement
of stock 0 0 0 0 (136,545) 0 (136,545)
Exercise of stock warrants 10,500 1 0 0 7,499 0 7,500
Preferred stock issued in connection with
private placement 0 0 99,900 100 998,900 0 999,000
Common stock issued for services rendered 300,000 30 0 0 1,237,470 0 1,237,500
Preferred stock dividend 0 0 1,875 2 18,748 (42,936) (24,186)
Net loss 0 0 0 0 0 (8,415,660) (8,415,660)
---------- ------- -------- ----- ----------- ----------- -----------
BALANCE, December 31, 1995 6,917,260 $ 692 101,775 $ 102 $ 5,165,376 ($8,369,159) ($3,202,989)
========== ======= ======== ===== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 21
HEADSTRONG GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($8,415,660) ($ 584,740)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation 166,106 101,038
Provision for doubtful accounts 1,214,904 250,000
Litigation reserve 468,000 0
Common stock issued for services rendered 1,237,500 0
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable, net 245,996 (2,217,584)
Increase in due from stockholders (56,282) (153,782)
Decrease (increase) in inventories 643,849 (1,484,384)
(Increase) decrease in prepaid expenses (85,791) 43,164
Increase in other assets (72,351) (27,211)
(Decrease) increase in bank overdraft (83,790) 83,790
Increase in accounts payable 167,409 1,638,667
Increase (decrease) in due to officers 26,456 (71,500)
(Decrease) increase in loans from factor (1,928,524) 1,928,524
Increase in accrued expenses 1,029,315 83,174
Increase in payroll taxes payable 73,736 456,767
----------- -----------
Net cash (used in) provided by operating activities (5,369,127) 45,923
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES -- Purchase of
property and equipment, net (313,177) (566,275)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 4,749,319 837,000
Repayments of debt (3,807,367) (351,964)
Proceeds from issuance of stock, net of expenses 4,802,105 0
Exercise of stock warrants 7,500 0
Dividends paid (24,186) 0
----------- -----------
Net cash provided by financing activities 5,727,371 485,036
----------- -----------
Increase (decrease) in cash 45,067 (35,316)
CASH, beginning of year 450 35,766
----------- -----------
CASH, end of year $ 45,517 $ 450
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 350,338 $ 254,900
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 22
HEADSTRONG GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND ITS SIGNIFICANT
ACCOUNTING POLICIES:
Business-
Headstrong Group, Inc. (the "Company") manufactures and sells
recreational safety helmets used for bicycling, inline skating,
skateboarding and related activities where the use of a protective
helmet is recommended or required by law.
Basis of Presentation-
Headstrong Group, Inc. (the "Company") was formed pursuant to a stock
purchase agreement dated January 26, 1995 under which The Bullseye
Marketing Group, Inc. acquired all of the outstanding shares of the
capital stock of Renaissance Marketing, Inc. in exchange for 250,000
common shares of The Bullseye Marketing Group, Inc. In addition,
pursuant to the agreement, The Bullseye Marketing Group, Inc. amended
its certificate of incorporation to change the name of the corporation
to Headstrong Group, Inc., changed its capitalization to 26 million
shares (20 million Class A common, 5 million Class B common, par value
$.0001 and 1 million preferred shares, par value $.001) and effected a
7 for 1 split of its issued and outstanding common shares for holders
of record on February 7, 1995.
The merger of Bullseye and Renaissance is accounted for as a reverse
merger using the recapitalization method of accounting, with
Renaissance as the continuing accounting entity. The capital of
Bullseye was carried forward and its accumulated deficit ($321,238) was
transferred to additional paid in capital. The merger was accomplished
by Bullseye issuing 250,000 shares of common stock in exchange for the
outstanding common stock of Renaissance. At the date of the merger
Renaissance's accumulated deficit of $992,185 was transferred to
additional paid-in capital, due to termination of its S Corporation
status. The weighted average number of shares outstanding for the year
ended December 31, 1995, reflects the issuance of 250,000 shares of
common stock issued in exchange for Renaissance's common stock and the
stock split discussed above.
Renaissance Marketing, Inc., formed in November, 1992, operated as a
contract packager and assembler until late 1993 when it entered the
recreational safety helmet market. It ceased contract packaging
operations in December, 1993 and since that date has designed,
manufactured and distributed recreational safety helmets and other
related products which are sold to mass merchants, specialty retailers
and bicycle shops.
The Bullseye Marketing Group, Inc., formed in September, 1989, had
designed, distributed and sold recycling schedules to New Jersey
communities until, following a sudden downturn in its business, it
became inactive in July 1993.
<PAGE> 23
-2-
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the recorded amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Policy-
The Company recognizes revenue at the time of shipment and invoicing
for its goods.
The Company provides an allowance for doubtful accounts based upon
specific review of outstanding receivables as well as historical
collection information. In providing this allowance, management is
required to make certain estimates and assumptions regarding the timing
and amount of collections. Actual results could differ from those
estimates.
Inventory-
Inventory is valued at the lower of cost (on a first-in, first-out
basis) or market.
Property and Equipment-
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful lives
of the assets as follows-
<TABLE>
<CAPTION>
Method Life
------ ----
<S> <C> <C>
Machinery and equipment Straight-line 5 years
Transportation equipment Straight-line 5 years
</TABLE>
Maintenance and repair costs are expensed while additions and
betterments are capitalized. The cost and related accumulated
depreciation of assets sold or retired and are eliminated from the
accounts and any gains or losses are reflected in earnings.
Long-Lived Assets-
During 1995, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment
of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
Impairment of long-lived assets exists, if, at a minimum, the future
expected cash flows (undiscounted and without interest charges), from
an entity's operations are less than the carrying value of these
assets. As a result of its review, the Company does not believe that
any impairment exists in the recoverability of its long-lived assets as
of December 31, 1995.
<PAGE> 24
-3-
Income Taxes-
The Company had previously elected to be taxed as an S Corporation
under Subchapter S of the Internal Revenue Code. Consequently, the
stockholders were taxed on their proportionate share of the Company's
taxable income and accordingly, no provision for Federal taxes were
provided for in the statements of operations. Pursuant to the stock
purchase agreement dated January 26, 1995, the Company terminated its S
Corporation status. The Company accounts for income taxes in accordance
with the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under SFAS 109, the Company
recognizes a current tax liability or asset for current taxes payable
or prepaid, and a deferred tax asset or liability for the estimated
future tax effects of temporary differences between financial statement
and tax basis of assets and liabilities, using enacted tax rates
currently in effect.
Loss Per Common Share-
Loss per common share are based upon the weighted average number of
shares outstanding, adjusted to retroactively reflect the effect of the
stock split discussed above. Dividends on preferred stock amounting to
$42,936 in 1995 were added to the net loss available for common shares.
Outstanding warrants and common stock equivalents have not been
considered in the computations of earnings per common share in 1995
since their effect was antidilutive.
Statement of Cash Flows-
For purposes of the statement of cash flows, the Company considers the
liquid investments purchased with maturity of three months or less to
be cash equivalents.
(2) COMPANY OPERATIONS:
The Company's rapid growth during the first half of 1994, its inability
to increase sales in the second half of 1994 and in 1995, prior period
losses and continuing investments in tooling and inventory all
contributed to creating a severe working capital shortage.
The Company is past due on payment terms with the majority of its trade
vendors. The Company has since restructured payment plan with these
suppliers.
During 1994 and continuing in 1995, the Company was unable to make all
timely payroll tax payments to the state and Federal governments. As a
result, the Internal Revenue Service filed a tax lien against the Company
while an extended payment plan with respect to 1994 withholdings had been
agreed to with the state. In 1995, the Company made their 1994
withholding payments to the Internal Revenue Service including interest
and obtained a release of the tax lien. The Company has accrued the
payroll tax liability through December 31, 1995 exclusive of any
penalties and/or interest which may be assessed.
In the second half of 1995, the investor group which had provided and/or
raised needed working capital to the Company, slowed the infusion of
funds and, at the end of the third quarter, withdrew their support and
reported to the Company that they had sold their stock. As a result, the
Company was unable to buy the necessary components to fill customer
orders and did not accept sales orders which it could not expect to ship
with certainty. The dramatic decrease in third and fourth quarter sales
caused significant losses which resulted in a severe working capital
shortage.
<PAGE> 25
-4-
The Company sought additional financing but was unable to secure that
financing until February, 1996 (see Note 16).
In February and March 1996, the Company closed on $2,000,000 of new
equity financing and in April and May, 1996 raised an additional
$2,300,000 in new equity. The management of the Company believes that
restructured payment plans with trade suppliers, the additional capital
infusions and estimated sales growth will enable the Company to conduct
its operations in the normal course of business. The financial statements
have been prepared assuming that the Company will continue as a going
concern. For the years ended December 31, 1994 and 1995 the Company
incurred net losses, and as of December 31, 1995, the Company's current
liabilities exceeded its current assets by $3,626,139 and had an
accumulated deficit of ($8,369,159). Continuation of the Company as a
going concern is dependent upon successful future operations and the
ability to raise additional equity financing.
(3) INVENTORIES:
Inventories at December 31, 1995 consist of the following-
<TABLE>
<S> <C>
Purchased components $949,530
Finished goods 12,427
--------
$961,957
========
</TABLE>
All inventories are pledged as collateral to a financing company under
the revolving loan agreement.
(4) PREPAID EXPENSES:
Prepaid expenses consist of the following-
<TABLE>
<S> <C>
Prepaid insurance $91,478
Prepaid royalties 51,980
Miscellaneous prepaids 33,333
--------
$176,791
========
</TABLE>
(5) ACCRUED LIABILITIES:
Accrued liabilities consist of the following-
<TABLE>
<S> <C>
Financing costs (Note 11) $437,500
Vendor settlements(Note 14) 721,000
Rent 96,000
Commissions 97,000
Other miscellaneous 247,983
----------
$1,599,483
==========
</TABLE>
<PAGE> 26
-5-
(6) SUBORDINATED NOTES PAYABLE:
During 1994, the Company entered into an agreement with an investor group
in which the investor group committed to provide working capital loans to
the Company. Through 1995, a total of $5,058,917 had been loaned to the
Company of which $3,939,650 was converted to common stock resulting in an
outstanding balance of $1,119,267 at December 31, 1995. The loans bear
interest at 2% over the prime rate in effect on the date of the loan.
Principal repayments begin one year after issuance and are retired in six
monthly installments. The subordinated notes payable mature and are
scheduled for repayment in 1996. Subsequent to December 31, 1995, holders
of subordinated notes totaling $100,000 principal were converted into
common stock.
(7) CONVERTIBLE NOTES PAYABLE:
In November 1995, the Company sought to raise $1,000,000 in convertible
subordinated debentures under a private placement. At December 31, 1995,
$375,000 had been raised under this offering. In 1996, the Company raised
an additional $50,000. Borrowings under these notes payable are due July,
2000 and bear interest at 7%. Additionally, these convertible
subordinated debentures are convertible at the option of the holders, at
any time after 90 days from the date of issuance (through maturity), into
shares of the Company's common stock at a conversion price equal to 80%
of the market price of each share. The conversion is limited to no more
than 33% of the holder's debentures in a 30-day period. At December 31,
1995 no debenture holders had converted their debentures into common
stock.
(8) LITIGATION RESERVE:
Subsequent to December 31, 1995, the Company settled a lawsuit instituted
by a former officer and director for a total of $449,000 and has provided
a reserve for the settlement amount and legal fees at December 31, 1995.
The settlement requires periodic payments, with the final payment to be
made in September, 1997.
(9) LINE OF CREDIT:
From January, 1995, through August, 1995, the Company had factored its
accounts receivable under a factoring agreement by which the Company was
charged a commission of 1.25% of the net accounts receivable sold and was
charged 3% over the prime rate for borrowings up to a maximum of
$2,500,000. In addition, the Company had demand loans from the factor
(interest rate of prime plus 4%) related to the financing of inventory.
The amounts related to the above loans were repaid during 1995.
The Company entered into an asset based, revolving loan agreement with a
finance company in September, 1995 which provides for borrowings of 80%
of eligible accounts receivable, up to a maximum of $4,000,000,
collateralized by a security interest in all assets. Under the agreement,
the Company is charged interest at 1% over the prime rate for loans
outstanding and a monthly service fee of the greater of $2,500 or
four-tenths of 1% of the loans outstanding. Total indebtedness
outstanding under this agreement at December 31, 1995 was $284,685. On
January 31, 1996 the finance company terminated the revolving loan
agreement. The Company is currently negotiating with the finance company
to renew the revolving loan agreement.
Total commission and interest expense in 1995 were $97,940 and $121,234,
respectively.
<PAGE> 27
-6-
(10) DUE TO/FROM OFFICERS:
As of December 31, 1995, the Company had advanced funds to stockholders
totaling $210,065, of which approximately $206,000 is secured by
Company common stock. These advances are demand loans and bear interest
at 9% per annum. In addition, the Company also has a loan from a
shareholder for $26,456. The loan from the stockholders is payable on
demand and bears interest at 15% per annum.
(11) OTHER ASSETS:
During 1995, the Company entered into an agreement with an investment
bank which provided consulting services related to equity financing
during 1996 at a cost to the Company, payable in cash or stock of
$400,000 (see Note 16). In addition, the Company capitalized $37,500 of
commission due on the sale of convertible debentures.
(12) INCOME TAXES:
As of December 31, 1995, the Company had a deferred tax asset of
approximately $3,464,000. The components of the deferred tax asset at
December 31, 1995, consisted primarily of net operating loss
carryforwards of $2,670,000, allowance for doubtful accounts of
$306,000 and litigation and other reserves of $488,000. Other temporary
differences are not significant. The deferred tax asset as of December
31, 1995 has been offset by a valuation allowance, due to the
uncertainty of the realization of this asset.
(13) STOCKHOLDER'S DEFICIT:
During 1995, the Company issued through a private placement memorandum
393,965 shares of $.001 par value Series A Preferred Stock for $10 a
share. The preferred stock was convertible into four shares of the
Company's common stock. During 1995, all of the holders of the
Company's preferred stock converted into the Company's common stock.
As of December 31, 1995, the Company had outstanding 67,200 warrants
adjusted for the seven-for-one stock split to purchase the Company's
common stock (see Note 1). Each warrant entitles the holder to purchase
the Company's common stock at $.71 per share. During 1995, holders of
10,500 warrants exercised their warrants.
During 1995, the Company issued through a private placement memorandum
99,900 shares of its $.001 par value Series A Preferred Stock for $10 a
share. Holders of the stock are entitled to receive dividends of $1.20
per share, in equal quarterly payments at the option of the Company in
cash or additional shares. Dividends on the stock are cumulative and
shall accrue without interest. During 1995, the Company issued an
additional 1,875 shares of its Series A Preferred Stock to satisfy its
quarterly dividend requirement.
(14) COMMITMENTS AND CONTINGENCIES:
The Company has a lease agreement for production and office facilities
of approximately 54,000 square feet for a term of six years commencing
September, 1994.
<PAGE> 28
-7-
As of December 31, 1995 future minimum payments by year, and in the
aggregate under operating leases with an initial term of one year or more,
including the facility lease described above, consist of the following-
<TABLE>
<S> <C>
1996 $214,512
1997 275,640
1998 279,036
1999 289,224
2000 216,918
</TABLE>
Employment Contracts-
Two executive officers have employment agreements with the Company
which have three-year terms which expire in February, 1998, with
aggregate annual compensation of $255,000.
Vendor Settlements-
As a result of the sever liquidity shortage described in Note 2,
the Company was unable to make timely payments to its vendors.
Trade creditors commenced legal action against the Company to
recover amounts owed them. The Company has either paid, reached
settlement agreements or entered into negotiations to settle
claims with all significant vendors. The settlement agreements
include scheduled repayment terms through January 1997.
(15) SIGNIFICANT CUSTOMERS:
Two customers accounted for approximately 15% and 18%, respectively, of
total revenues for the year ended December 31, 1994, and 14% and 35%,
respectively, of total revenues for the year ended December 31, 1995.
(16) SUBSEQUENT EVENT:
In February and March, 1996, the Company closed on the sale of common
stock with net proceeds of approximately $2,000,000. In April and May,
1996, the Company issued additional common shares with estimated net
proceeds of approximately $2,300,000.
