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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A-2
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
INTERNATIONAL IMAGING, INC.
(Name of Small Business Issuer in its charter)
Delaware 13-3469649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Eseco Road, Cushing, Oklahoma 74023
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (918) 225-1266
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered: each class is to be registered:
NONE NOT APPLICABLE
Securities to be registered under Section 12(g) of the Act:
Common Stock (par value $0.0012 per share)
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ITEM 1. DESCRIPTION OF BUSINESS
International Imaging, Inc. (the "Company") was originally organized as
a Delaware corporation in June 1988 under the name of J&E Beauty Supply Inc. On
July 27, 1994, the Company reorganized its operations and changed its core
business from beauty supply operations to the manufacture and sale of
photographic, graphic arts and x-ray equipment. This change was accomplished
through a merger with Electronic Systems Engineering Co. ("ESECO"), located in
Cushing, Oklahoma, coupled with the divestiture of the beauty supply operations
subsequent to the merger, pursuant to the Company's restructuring plan. As a
result of the divestiture of the beauty supply operations the Company was
considered to be a public shell corporation whose purpose was to be merged with
a non-public acquiror (ESECO). The merger of ESECO and the Company is treated
as a recapitalization, in which the transaction was accounted for as an
issuance of ESECO's common stock in exchange for the public shell. Because the
merger does not constitute a business combination pursuant to Accounting
Principles Board Opinion No. 16., the financial statements of the non-public
acquiror (ESECO) are substituted below for those of the public shell
corporation (the Company, which was the legal acquiror) prior to the date of
the combination on July 27, 1994. In addition, pro forma information is not
presented since the merger is not considered a business combination.
A total of 1,750,000 shares of common stock of the Company was offered
to the shareholders of ESECO at the ratio of 1.75 Company shares for each ESECO
share. At November 30, 1996, approximately 92% of the ESECO common stock had
been surrendered by ESECO shareholders and exchanged for shares of the Company's
common stock. The exchange ratio was based on the estimated fair market value of
ESECO's net assets at the time of the merger with ESECO and an adjusted stock
price of eighty-four cents ($0.84) per share. The remaining ESECO common stock
will be exchanged as soon as it is surrendered. Such shares have been considered
as already surrendered and exchanged for shares of the Company's common stock in
the computation of the amount of shares outstanding included herein. At this
time, there are no plans to actively encourage the remaining shareholders of
ESECO to exchange their ESECO shares. However, it is anticipated that should any
of the remaining shareholders tender their ESECO shares, they would be exchanged
on the same terms as the other shareholders who have already tendered their
ESECO shares.
After the merger with ESECO, the corporate name was changed to
International Imaging, Inc. ("IMGI") to reflect the change in business direction
and the international nature of the business. ESECO's primary assets at the time
of the merger consisted of production line machinery, equipment and a
manufacturing facility. ESECO manufactures and sells photographic laboratory,
graphic arts and x-ray equipment products used by several departments of the
United States Government, including the United States Navy, the Federal Bureau
of Investigation, the National Aeronautics and Space Administration, and the
United States Naval Observatory. In addition, such products are utilized by
companies in the private sector such as Eastman Kodak, DuPont, IBM and United
Technologies. ESECO's international customers include the United Kingdom's Royal
Air Force and departments of the Australian and Canadian governments.
The Company imports and markets a full line of film and paper
processors under its Speedmaster(TM) label; the Company also manufactures
densitometers, color analyzers, darkroom doors, computer controlled image
enlargers and roll paper production transport systems. Through its ESECO
subsidiary, the Company has a 25 year presence in the photographic industry
through its specialization in electronic densitometer and color analyzer
markets. In 1987, ESECO introduced automated continuous process imaging
enlargers and management believes that it has since established itself as a
worldwide leader in this enlarger market.
As mentioned above, prior to the merger with ESECO, the Company, under
the name J&E Beauty Supply Inc. ("J&E") operated as a cosmetic and beauty supply
distributor at both the retail and wholesale levels. These operations were never
profitable, with the Company showing an accumulated deficit of approximately
$267,000 from inception through July 27, 1994; the Company divested itself of
this line of business shortly after the time that it merged with ESECO.
After the merger with ESECO, the directors of J&E elected Arthur
Kaminshine, then President of ESECO, as President of the Company. The offices of
the Company were then moved to the offices of ESECO in Cushing, Oklahoma. Prior
to this time, ESECO had entered into a distribution agreement on April 7, 1994
with Colenta Labortechnik, GmbH and Art Processor-Technik, GmbH (collectively
"Colenta"), to distribute, on an exclusive basis, that group's Colenta line of
automatic photographic paper and film processors in the United States and Canada
under ESECO's Speedmaster label. After the merger with ESECO, the Company agreed
with Colenta to distribute its products to the remainder of the Western
Hemisphere. In addition, the Company has entered into an agreement with
Colenta pursuant to which Colenta is distributing the Company's products to
customers in the Eastern Hemisphere. The processor lines were added so that
ESECO could provide its customers with a full line of photographic equipment for
the laboratory.
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MARKETING AND COMPETITION
The Company distributes its product line primarily through direct sales
to customers. Prior to January 1, 1996, approximately 60% of its sales were
through dealers or other manufacturers, while approximately 40% of its sales
were made directly to end-users. Beginning in January 1996, the Company added
eight commission representatives, each with an exclusive territory. One manager
of the field representatives was added at that time. The result of this change
in marketing strategy has been to improve profit margins and to give the Company
control of product pricing.
The Company has four primary product lines in the Western Hemisphere:
enlargers, densitometers, processors, and dark room doors. Prior to January 1,
1996, the Company had contracts with thirteen select dealers in the United
States and two in Canada that are authorized to handle the entire product line.
On that date, all but one of the dealers' distribution agreements with ESECO
were terminated or modified. At the same time the Company added eight commission
representatives and one employee manager to the marketing department to provide
more intensive and focused distribution efforts. The Company also has contracts
with a number of other dealers and catalog sales companies who may sell part of
the product line but who lack the required technical training to sell the more
sophisticated equipment produced by the Company.
The Company is primarily represented in the Eastern Hemisphere by
Colenta and Kodak A.O., although sales are made to Japan and China through
established representatives or by direct sales. The Company also supplies its
equipment to other manufacturers, including some that compete with the Company,
which is either sold under such manufacturers' labels or incorporated into their
respective manufactured equipment.
The overall photographic market is somewhat mature with expected growth
of 3 to 5 per cent per year. The Company operates in a niche of that market by
providing more efficient and faster ways to process photographic products. The
Company believes that this part of the market, while relatively small, will
experience greater growth than the overall photographic market.
There are currently several major suppliers of enlargers both in the
United States and in foreign countries. The Company's marketing and engineering
staff continuously monitor its competition through attendance at trade shows and
through trade publications and believes its enlargers are more technologically
advanced and operate more automatically than all but two competitors.
The Company believes it is the second largest manufacturer of photo
instrumentation devices in the United States, providing a family of very
sensitive, reliable devices. The basic application technology of the
densitometer is currently being modified that will enable it to be a color
sensing device in other applications.
There are currently two manufacturers of processor lines in the United
States. The Company believes that it can compete successfully with each of them
due to superior technology and customer support with the imported processors
from Colenta in Germany.
There is one other manufacturer of revolving darkroom doors in the
United States. It primarily manufactures metal doors, whereas the Company
manufactures doors using plastic components, which is currently placing the
Company at a cost disadvantage. However, the Company believes that the
advantages of the plastic doors such as their light weight and durable finish
outweigh any such cost disadvantage.
The Company engages in an aggressive advertising campaign relative to
its size to create name recognition and a quality image. The Company does not
depend on any one or even a few major customers for its sales; at November 30,
1996, no individual customer accounted for more than 5% of total sales for the
prior twelve months although management expects various subsidiaries of the
Eastman Kodak Company will account for approximately 15% of sales in total
during the next year.
The Company's enlargers are used by photographic laboratories in both
commercial and governmental settings. The Federal Bureau of Investigation and
the New York City Police Department utilize enlargers which are used to enlarge
crime scene photographs for evidence. Commercial photographic labs utilize
enlargers for portrait enlargements as well as for advertising presentations.
Other uses include map making and crop estimation by both governmental and
commercial photographic laboratories.
Film processors are used to develop photographic and x-ray film while
paper processors are used to generate the final photograph after the film
negative is used to produce a print or a print enlargement. Film and paper
processors are used by commercial photographic laboratories, governmental
agencies, schools, newspapers, medical facilities, and any business that
requires a large volume of photographs.
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Densitometers are used to control the chemical content of the
developing baths utilized to develop film and print photographs. Any agency or
business that uses film or paper processors is a potential densitometer user.
Revolving darkroom doors are sold through designers of darkrooms such
as architects and photographic supply houses. The revolving door is useful where
traffic in and out of a dark room may be significant in places such as a
newspaper publisher, on board a ship, or at facilities such as the National
Aeronautics and Space Administration.
CONSOLIDATED STRATEGY
The Company's management believes that it has built a reputation for
advanced engineering and responsiveness to customer needs over the past thirty
years as a supplier to the photographic laboratory market. Management plans to
utilize this image to move strongly into the processor segment of its market in
the United States. By expanding the variety of products and related technical
services available to its customers, the Company believes it will be able to
increase market penetration. This, in turn, should lead to greater market share
and better profit margins.
The Company has been redesigning some of its products for Third World
markets. It is in the process of entering these markets in association with
Colenta. By removing some of the more sophisticated electronics from its
products, the Company's products will be more compatible with the maintenance
capabilities of many developing countries.
EMPLOYMENT
As of November 30, 1996, the Company employed 49 people, all of whom
were located in the United States. In addition to two field sales employees, the
Company had contracts with seven independent sales representatives.
The Company's employees may be categorized in the following functional
areas:
Administrative, marketing, and accounting 15
Engineering and research 5
Manufacturing, procurement, and quality control 29
WARRANTIES
ESECO warrants its Speedmaster(TM) processors for one year on parts and
90 days on labor, while its Speedmaster(TM) and Speedmatic(TM) darkroom doors
and roll easels each carry a one year warranty on both parts and labor when
returned to the plant in Cushing. ESECO's Compucolor(TM) and Compumatic(TM)
enlargers are warranted for thirty months on both parts and labor when returned
to the plant in Cushing. The Company has never experienced material warranty
claims.
MANUFACTURING
The Company manufactures or distributes all of its product lines from
its plant in Cushing, Oklahoma. The Company also manufactures most of the
electronic assemblies used in its products. Metal stampings and fabrication are
also performed on site; however, its die casting and plastic extrusions projects
are subcontracted out to other manufacturers. The die castings are a small part
of the total cost of manufacturing, are used for only one product and sufficient
supplies are maintained for at least six months of production. The plastic
extrusions are in sheet form and are available from multiple suppliers.
Most processors are imported from Colenta in Germany and held for
distribution at the plant; some specialized processors are shipped directly to
the customer from Italy and installed by ESECO technicians, while all other
products are assembled and held for distribution or assembled to order at the
plant. Dependence on outside sources for castings and other components may
cause delays during periods of strong demand; nevertheless, the Company
believes that this method of production represents the most cost effective
approach at the current time.
RESEARCH AND DEVELOPMENT
The Company maintains an engineering staff of five professionals to
develop new products or new applications for existing products. The department
is currently developing a digital imaging enlarger and has recently developed
small, portable photo instrumentation devices as well as ultra-sensitive photo
instrumentation and dosimetry devices. The total amount of research and
development expenses during 1995-96 did not exceed 5% of total sales.
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PATENTS AND COPYRIGHTS
The Company holds patents on various of its easels and masks and pays
royalties to third party inventors of various other devices, including some of
the enlarger heads. The Company has also registered various of its trademarks,
has vigorously defended them in the past, and plans to continue to engage in
such defense in the future. The Company has a patent application pending on the
digital imaging device.
GOVERNMENT APPROVAL AND REGULATION
No business activities of the Company are subject to significant
regulation by any federal, state or local governmental agency. In addition, no
governmental approvals of new or existing products are required. Finally, the
Company does not use any unusual or hazardous chemicals in its operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In January 1996, the Company reorganized its marketing operations and
changed its method of distribution from dealers with protected territories to
field marketing representatives. The decision was made because sales by the
dealer network had been declining for several quarters and the dealers were not
carrying the inventory the Company felt was appropriate for maximum market
penetration. The eight field representatives with whom the Company has entered
into contracts are experienced in the photographic and x-ray fields and it is
anticipated they will produce greater sales than were forthcoming under the
dealer system.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Condensed Consolidated Financial Statements.
A. THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE MONTHS ENDED SEPTEMBER
30, 1995
Sales decreased to $755,536 for the quarter ended September 30, 1996
compared to $888,857 for the quarter ended September 30, 1995. Processor sales
for the second quarter of fiscal 1996 were $198,000 compared to $254,000 during
the same period in 1995. A price increase was implemented on the smaller
processors resulting in reduced demand for the machines priced between $10,000
and $23,000. This decrease accounted for approximately 40% of the total decrease
in sales for the quarter in 1996 over the comparable period in 1995. The more
profitable product lines also decreased by approximately $78,000 due to slack
demand which management thinks is merely a delay in new orders and not a loss of
production. Cost of goods sold increased to 83.7% of sales for the second
quarter ended September 30, 1996 compared to 76.1% of sales for the same period
in 1995. Photographic processors have a lower gross profit margin than
proprietary manufactured product lines such as enlargers and densitometers
resulting in the reduced profitability for the quarter.
B. SIX MONTHS ENDED SEPTEMBER 30, 1996 VS. SIX MONTHS ENDED SEPTEMBER 30,
1995
During the six month period ending September 30, 1996 as compared to
the same period in 1995, sales decreased by 5.1% percent during the period,
while cost of sales decreased by 11.3%. Gross profit margins increased from
30.1% of sales in 1995 to 34.6% of sales in 1996. This was primarily due to a
small relative decrease in sales of photographic processors which have lower
sales margins than the products manufactured by the Company and reductions from
the cost cutting programs.
Operating expenses as a percentage of sales increased from 33.1% in
1995 to 44.0% in 1996. This was caused primarily by the additional legal and
accounting costs required due to SEC filings and commissions paid to the
contract field marketing representatives.
C. FOR THE YEAR ENDED MARCH 31, 1996 AS COMPARED TO THE YEAR ENDED MARCH
31, 1995
After the merger with ESECO, the corporate name was changed to reflect
the change in business direction and the international nature of the business.
As set forth in Form 8-K/A filed October 10, 1994, ESECO's primary assets at the
time of the merger on July 27, 1994 consisted of production line machinery,
equipment and a manufacturing facility. As a result of treating the transaction
as a recapitalization described in Item 1., the financial information included
herein reflects the historical operating results of ESECO through July 27, 1994,
and the results of the combined companies from the date of the merger.
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Sales for the fiscal year ended March 31, 1996 amounted to $3,557,627,
an increase of $514,521 or 16.9% over fiscal 1995. Increased processor sales
accounted for $585,983 of this amount. Other product lines were approximately
level compared to the prior fiscal year.
Cost of goods sold increased 19.9%. to $2,684,356 from the previous
year. The net increase in sales and cost of goods sold resulted in a $68,587
increase in gross profit. The resulting gross profit margin was 24.5% of sales,
down from 26.4% in the previous fiscal year. This deterioration in gross profit
resulted from the introduction of the processor line of equipment which is less
profitable than equipment manufactured by the Company.
Operating expenses decreased 35.7% to $1,537,979 for the 1996 fiscal
year. The largest component of this decrease was a non-cash restructuring charge
of $841,677 recorded in September 1994 which did not occur in fiscal year 1996.
If that charge had not been recorded in the fiscal year ended March 31, 1995,
operating expenses in the current fiscal year would have been only $13,503 less
than the prior year.
Interest expense increased 49.1% in the fiscal year 1996 because the
cash made available from the exercise of stock options was down significantly
from the prior year, thereby creating the need to borrow funds. Other income
(expense), net included an adjustment for the permanent decline in the market
value of investments held by the Company in fiscal year 1995 which did not
occur in fiscal 1996, thus resulting in a reduction of $106,109 for the year.
TRENDS
The Company anticipates that by mid-1997 nearly one-half of its sales
volume will consist of processors imported from Germany. These machines are
priced in U.S. dollars, but weakness in the U.S. dollar relative to the Deutsche
Mark ("DM") results in higher costs to the Company. This results because the
Company absorbs all exchange rate declines below 1.50 DM to the U.S. dollar
under an agreement entered into April 1, 1995. This agreement calls for the
Company to adjust its payments to Colenta so that Colenta will not receive less
than 1.50 DM to the U.S. dollar on purchases from Colenta by the Company. This
same agreement sets a ceiling of 1.67 DM to the dollar so that if the dollar
should strengthen against the Deutsche Mark the Company will enjoy a benefit
should the exchange rate exceed 1.67 Marks. On November 1, 1996 the exchange
rate was 1.5145 DM to the U.S. dollar. The cost of this agreement has not been
material to the Company.
Sales have declined substantially relative to the prior quarter and to
the quarter ended one year previously. Because management is concerned that the
overall sales trend is flat or declining for conventional photographic products,
the Company is developing a digital imaging system that is anticipated to
strengthen the Company's marketing and financial position. At this time, the
Company expects to have the product ready to sell by March 1997, but there can
be no assurances the Company will in fact be able to develop such a product
prior to various competitors introducing similar equipment. Further, even if the
Company does develop such a product, there can be no assurances that the Company
will have the financial capability to manufacture and market such a product.
The Company is also exploring other distribution channels for existing
products or modifications of existing products.
CAPITAL RESOURCES AND LIQUIDITY
For the six months ended September 30, 1996
Net working capital decreased by approximately $209,000 compared to
March 31, 1996. The working capital ratio was approximately two to one at
September 30, 1996. This decrease was a reflection of the reduction in accounts
receivable, inventory, and accounts payable.
The ability of the Company to continue to expand its operations through
the expansion of existing facilities, introduction of new products, or the
acquisition of new facilities or businesses, may require additional funding
beyond the Company's current working capital. Such additional funding may come
from public or private financial sources, bank financing or a combination
thereof. However, there are no assurances that any such additional funds may be
obtained.
Net cash provided by operating activities was $52,240 for the six
months ended September 30, 1996, as compared to $140,244 used by operations for
the same period in 1995. The change was due primarily to the decrease in
accounts receivable and inventories, and an increase in accounts payable as a
result of decreased sales levels.
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The Company currently has certain bank financing that matures in July
1997. Management of the Company believes this financing will be renewed by the
bank when it matures and the debt has been classified as short term debt in the
September 30, 1996 financial statements.
For the fiscal year ended March 31, 1996
The Company incurred combined losses of $2,510,667 during fiscal years
1996 and 1995. These losses included special non-cash charges of $841,677 (see
Note 3 to the Consolidated Financial Statements) resulting from management's
plan to revise its product line and normal operating losses related primarily
to the introduction of the photographic processor line and the increased
overhead in administrative, accounting and legal expenses, incurred as a result
of operating as a public company. The Company has funded these losses through
the sale of stock in the amount of $1,666,763 and bank and related party
borrowings of $1,025,503. As reflected in the consolidated statements of cash
flows, cash has decreased $332,840 from April 1, 1994 to March 31, 1996, while
inventory has increased by $843,860 during the same period. The Company's
management anticipates that it should return to profitability during fiscal
year 1998 because of the introduction of new products, reduction of overhead
costs primarily achieved through voluntary reductions of various management
salaries, restructuring of the Company's distribution methods effective January
1,1996, focusing on direct sales and significantly reducing commissions to
dealers, and the availability of processors for sale.
On July 25, 1994 the Company granted options to various officers,
directors, employees, and consultants for 1,000,000 shares of common stock at
$2.00 per share with a total of 619,333 of those options being exercised. Not
all of the remaining 380,667 options are expected to be exercised prior to their
expiration on July 25, 1997 because the Company's common stock is trading at a
significantly lower price than the option price.
The Company's liquidity may be adversely affected by three market
factors. First, liquidity could be adversely affected if the Company were not
able to pass along to its customers any increases in the cost of importing
equipment should exchange rates deteriorate. Second, the introduction of a
product by a competitor company could negatively impact the profit margins of
the Company. Third, liquidity could be impacted negatively if the Company is not
able to effectively contain its internal costs.
There are currently no material commitments for capital expenditures.
CONTINUING OPERATIONS
The Company discontinued its beauty supply operations around the same
time as the combination with ESECO . All costs and liabilities relating to that
activity have been disposed of. The lease commitments and other liabilities were
assumed by the transferee of the operations. Continuing operations will include
photography equipment and the related markets in which ESECO has been engaged
for over 25 years.
SEASONALITY
The Company is not aware of any seasonal factors affecting its business
although the sale of darkroom doors tends to be slower in the fourth calendar
quarter of the year.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's headquarters is presently located at One Eseco Road,
Cushing, Oklahoma 74023, at the office of its President. The Company owns its
headquarters as well as its manufacturing facilities, which are also located in
Cushing, Oklahoma. The premises contain approximately 44,000 square feet, of
which approximately 75% is used for manufacturing with the balance being used
for administrative, marketing, and engineering functions. The Company does not
own or lease any other facilities at this time. Management believes that its
current facilities are adequate and suitable for its current needs, but if the
need arises, the Company has adequate land available for reasonable expansion.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of November 30, 1996,
concerning shares of Common Stock of the Company beneficially owned by each
director and officer and by all directors and officers as a group. Unless
expressly indicated otherwise, each stockholder exercises sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------- ------------------ --------
<S> <C> <C>
Arthur A. Kaminshine
P. O. Box 1505
Cushing, OK 74023 362,143 7.65%
Edward L. Handlin
P. O. Box 84
Chandler, OK 74834 17,913 (1)
</TABLE>
(1) Beneficial ownership of less than one percent (1%)
(2) Number of outstanding shares used to calculate percentage computed as
described in the preceding paragraph: 4,733,416
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and current positions
with the Company held by Directors, Executive Officers and Significant
Employees, together with the year such positions were assumed. There is no
immediate family relationship between or among any of the Directors, Executive
Officers or Significant Employees, other than Jerome L. Kaminshine, the
Executive Vice President of ESECO, is the son of Arthur A. Kaminshine. The
Company is not aware of any arrangement or understanding between any Director or
Executive Officer and any other person pursuant to which he was elected to his
current position.
<TABLE>
<CAPTION>
POSITION
NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Arthur A. Kaminshine 72 President/Director 1994
Edward L. Handlin 57 Chief Financial 1994
Officer/Director
</TABLE>
BUSINESS EXPERIENCE - Business experience for the last five years and other
information relating to each Director and Executive Officer is as follows:
Arthur A. Kaminshine, age 72, has been President and a Director of the
Company since July 1994. In addition, prior to its combination with the Company,
Mr. Kaminshine had been a director of ESECO since 1964. Mr. Kaminshine received
a Bachelor of Science degree from Southwestern State College. During his tenure
at the Company and ESECO, Mr. Kaminshine has supervised anywhere from six to 110
people at any one time.
Edward L. Handlin, age 57, has been Chief Financial Officer and a
Director of the Company since July 1994. Mr. Handlin received a Bachelor of
Science from the University of California and an MBA from the University of
Chicago. Prior to its combination with the Company, Mr. Handlin had been the
Chief Financial Officer for ESECO since November 1993. Mr. Handlin has also been
a practicing Certified Public Accountant in the State of Oklahoma for the last
twelve years.
ITEM 6. EXECUTIVE COMPENSATION
For services rendered to the Company during the fiscal year ended March
31, 1996, no executive officers received cash compensation in excess of
$100,000. The following table sets forth information concerning all annual cash
compensation paid to the chief executive officer of the Company for services
rendered to the Company during the twelve month period ended March 31, 1996.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CAPACITY CASH
OR NUMBER IN GROUP SERVED COMPENSATION
- ------------------ ------ ------------
<S> <C> <C>
Arthur A. Kaminshine President and Chief Executive Officer $77,755
</TABLE>
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In addition, the Company makes available certain non-monetary benefits
to its executive officers with a view to acquiring and retaining qualified
personnel and facilitating job performance. The Company considers such benefits
to be ordinary and incidental business costs and expenses. The value of such
benefits did not exceed, in the case of any named individual, 10% of the cash
compensation of the individual. Finally, the Company's ESECO subsidiary is
continuing to make deferred compensation payments to a retired officer of ESECO
at the rate of $1667 per month, as discussed in Note 8 to the Company's
Financial Statements on page 35 herein.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth information regarding transactions between the
Company and the following persons: directors, officers and persons who
potentially own in excess of 5% of the Company's Common Stock:
None, other than a series of relatively small loans made by the
President, Mr. Kaminshine, to ESECO.
The Company granted warrants to purchase 2,050,000 shares to Mr. Arthur
Kaminshine in exchange for his personal guarantee of the Company's bank lines of
credit (see Note 12 in the Consolidated Financial Statements). As part of this
agreement, all of the voting stock of ESECO was placed in escrow for the life of
these guarantees (see Note 6 in the Consolidated Financial Statements).
ITEM 8. DESCRIPTION OF SECURITIES
The $.0012 par value Common Stock of the Registrant being registered
hereunder is the Registrant's only authorized class of stock. Each share of
Common Stock is entitled to participate pro rata in dividends and distributions
upon liquidation and to one vote for all purposes. There are no preemptive
rights nor are there conversion rights, redemption provisions or sinking fund
provisions relating to the Common Stock. The shares of Common Stock have no
cumulative voting rights. All outstanding shares of such Common Stock are fully
paid and nonassessable.
In addition, the rights of the holders of the Common Stock of the
Registrant may not be modified otherwise than by a vote of a majority or more of
the shares outstanding voting as a class. There are no restrictions on the
repurchase of redemption of shares of such Common Stock by the Registrant while
there is any arrearage in the payment of dividends or sinking fund installments.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is presently traded on the over-the-counter
market under the symbol "IMGI". The following table shows the high and low bid
and ask prices of the stock during the last two fiscal years:
COMMON STOCK
<TABLE>
<CAPTION>
BID PRICES(2) ASK PRICES
------------ -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
CALENDAR QUARTERS
1994 Third Quarter (1) $2.25 $1.625 $2.375 $2.125
Fourth Quarter $2.25 $1.75 $2.50 $2.125
1995 First Quarter $2.063 $1.375 $2.25 $1.75
<CAPTION>
CLOSING PRICES
--------------
HIGH LOW CLOSE
---- --- -----
<S> <C> <C> <C>
Second Quarter $2.375 $1.375 $1.50
Third Quarter $1.750 $0.5625 $0.625
Fourth Quarter $0.9375 $0.5000 $0.9375
1996 First Quarter $0.8125 $0.625 $0.8125
Second Quarter $0.5100 $0.3125 $0.3720
Third Quarter No trades reported
</TABLE>
(1) There was no public trading market for the common stock of the Company
prior to its combination with ESECO in July 1994. To the extent that any
limited trading occurred, such transactions were limited to the
over-the-counter market.
(2) The bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
(b) HOLDERS
The number holders of record of the Company's Common Stock as of
November 30, 1996 was 236.
(c) DIVIDENDS
The Company has never paid cash dividends on its Common Stock and
intends to utilize current resources to expand its operations. Therefore, it is
not anticipated that cash dividends will be paid on the Company's common stock
in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings
other than ordinary routine litigation incidental to the business.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since November 30, 1993, the Registrant has sold securities
unregistered under the Securities Act of 1933 (the "Act"), in the following
transactions:
10
<PAGE> 11
NONE
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company provide for indemnification by the Company of
directors, officers, employees, and agents of the Company under certain
circumstances. Such indemnification provisions are in conformance with
applicable Delaware corporate law.
11
<PAGE> 12
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of International Imaging, Inc.
and Subsidiaries, together with the reports thereon of Arthur Andersen LLP dated
May 17, 1996, are set forth on pages 14 through 31 hereof, which immediately
follows the Exhibits listed below.
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. TYPE OF EXHIBIT NUMBER
- ----------- --------------- ------
<S> <C> <C>
None
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
NOT APPLICABLE
12
<PAGE> 13
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTERNATIONAL IMAGING, INC.
(Registrant)
Date: December 27, 1996 By: /s/ Arthur A. Kaminshine
-------------------------------
Arthur A. Kaminshine, President
Date: December 27, 1996 By: /s/ Edward L. Handlin
-------------------------------
Edward L. Handlin,
Chief Financial Officer
13
<PAGE> 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, 1996 March 31, 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 37,789 $ 12,790
Short-term investments 17,515 18,191
Accounts receivable - net 243,240 489,820
Inventories 1,420,415 1,608,226
Other current assets 60,388 19,203
---------- ----------
Total current assets 1,779,347 2,148,230
---------- ----------
PROPERTY AND EQUIPMENT:
Building 663,848 663,848
Furniture, fixtures and equipment 556,226 520,701
Land 12,560 12,560
---------- ----------
Total property and equipment 1,232,634 1,197,109
Less-Accumulated depreciation 698,894 651,335
---------- ----------
Net property and equipment 533,740 545,774
---------- ----------
OTHER ASSETS:
Intangible and other assets 11,771 11,324
---------- ----------
Total assets $2,324,858 $2,705,328
========== ==========
</TABLE>
14
<PAGE> 15
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30,1996 March 31, 1996
------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 520,230 $ 667,751
Accrued expenses 152,641 165,228
Deferred compensation 20,000 20,000
Short-term debt 705,030 205,030
Current portion of long-term debt 27,471 27,471
----------- -----------
Total current liabilities 1,425,372 1,085,480
NONCURRENT LIABILITIES:
Long-term debt, net of current portion 541,472 1,032,512
Deferred compensation 50,112 60,112
----------- -----------
Total noncurrent liabilities 591,584 1,092,624
STOCKHOLDERS' EQUITY:
Common stock 5,680 5,680
Additional paid in capital 2,615,540 2,615,540
Accumulated deficit (2,313,318) (2,093,996)
----------- -----------
Total stockholders' equity $ 307,902 $ 527,224
----------- -----------
Total liabilities and stockholders' equity $ 2,324,858 $ 2,705,328
=========== ===========
</TABLE>
See Notes to consolidated condensed financial statements.
15
<PAGE> 16
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 755,536 $ 888,857 $1,835,516 $1,933,872
COST OF SALES 632,638 676,775 1,199,960 1,352,012
---------- ---------- ---------- ----------
GROSS PROFIT 122,898 212,082 635,556 581,860
OPERATING EXPENSES 388,991 358,707 808,291 640,050
---------- ---------- ---------- ----------
OPERATING PROFIT (LOSS) (266,093) (146,625) (172,735) (58,190)
OTHER INCOME (EXPENSES)
Interest income 4,977 2,896 5,395 6,070
Interest expense (36,410) (17,429) (55,358) (31,590)
Other income (expense), net 1,536 (17,333) 3,376 (61,138)
---------- ---------- ---------- ----------
Total other income (expense) (29,897) (31,866) (46,587) (86,658)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (295,990) (178,491) (219,322) (144,848)
INCOME TAXES 0 0 0 0
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (295,990) $ (178,491) $ (219,322) $ (144,848)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ (0.06) $ (0.04) $ (0.05) $ (0.03)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,733,416 4,733,416 4,733,416 4,733,416
========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(219,322) $(144,848)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Depreciation and amortization 48,006 23,522
Gain on sale of property & investments -- (7,463)
Deferred compensation (10,000) (10,001)
Changes in current assets and liabilities -
Decrease (increase) in accounts receivable 246,580 (179,063)
Decrease (increase) in inventories 187,811 18,745
Decrease (increase) in other assets (41,185) (35,387)
Increase (decrease) in accounts payable (147,521) 165,030
Increase (decrease) in accrued liabilities (12,587) 29,667
Other 458 (446)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES 52,240 (140,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment -- 11,519
Capital expenditures (35,525) (63,366)
Purchase (sale) of short-term investments (676) 301
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (36,201) (51,546)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 87,500
Proceeds from long-term debt 8,960 120,000
Repayment of debt -- (31,370)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,960 176,130
--------- ---------
NET INCREASE (DECREASE) IN CASH 24,999 (15,660)
CASH, beginning of period 12,790 51,648
--------- ---------
CASH, end of period $ 37,789 $ 35,988
========= =========
Cash paid during period for -
Interest $ 55,358 $ 31,590
</TABLE>
See notes to consolidated condensed financial statements.
17
<PAGE> 18
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated condensed financial statements included herein have been
prepared by International Imaging, Inc. (the "Company"), and subsidiaries,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary to present fairly the
resulting operations for the indicated periods. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-KSB.
2. COMMON STOCK AND OPTIONS:
During the six months ended September 30, 1996, no options were exercised under
the Company's stock option plan.
3. INCOME TAXES:
The income tax expense from continuing operations for the six month period ended
September 30, 1996, varied from the statutory federal income tax rate primarily
due to adjustments of a valuation allowance related to the realizability of net
operating loss carryforwards. The Company's net tax operating loss carryforwards
expire at specific future dates and utilization of certain carryforwards is
limited to specific amounts each year. Due to past performance and the
expiration dates, the ultimate realization of such tax benefits is uncertain.
The Company has established a valuation allowance against these carryforward
benefits and will recognize the benefits only as reassessment demonstrates they
are realizable. Realization is primarily dependent upon future earnings.
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
International Imaging, Inc.:
We have audited the consolidated balance sheet of International Imaging, Inc. (a
Delaware corporation), formerly J & E Beauty Supply Inc. and subsidiaries as of
March 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended March 31, 1996 and 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 audit 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 audit provides 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 International Imaging, Inc. and
subsidiaries as of March 31, 1996, and the results of their operations and their
cash flows for the years ended March 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
May 17, 1996
19
<PAGE> 20
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 12,790
Short-term investments 18,191
Accounts receivable, net of allowance for doubtful accounts
of $73,404 489,820
Inventories 1,608,226
Other current assets 19,203
----------
Total current assets 2,148,230
----------
PROPERTY AND EQUIPMENT:
Building 663,848
Furniture, fixtures and equipment 520,701
Land 12,560
----------
Total property and equipment 1,197,109
Less: Accumulated depreciation 651,335
----------
Net property and equipment 545,774
OTHER NONCURRENT ASSETS, net of amortization 11,324
----------
Total assets $2,705,328
==========
</TABLE>
20
<PAGE> 21
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 667,751
Accrued liabilities 165,228
Deferred compensation 20,000
Short-term advances - related parties 205,030
Current portion of long-term debt 27,471
-----------
Total current liabilities 1,085,480
-----------
NONCURRENT LIABILITIES:
Long-term debt, net of current portion 1,032,512
Deferred compensation 60,112
-----------
Total noncurrent liabilities 1,092,624
-----------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.0012; authorized 300,000,000 shares;
issued and outstanding 4,733,416 shares 5,680
Additional paid-in capital 2,615,540
Retained earnings (deficit) (2,093,996)
-----------
Total stockholders' equity 527,224
-----------
Total liabilities and stockholders' equity $ 2,705,328
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
21
<PAGE> 22
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
SALES $3,557,627 $ 3,043,106
COST OF SALES 2,684,356 2,238,422
---------- -----------
GROSS PROFIT 873,271 804,684
---------- -----------
OPERATING EXPENSES:
Selling and administrative 1,537,979 1,551,482
Special charges (Note 3) -- 841,677
---------- -----------
1,537,979 2,393,159
---------- -----------
OPERATING LOSS (664,708) (1,588,475)
---------- -----------
INTEREST AND OTHER INCOME (EXPENSE):
Interest income 36,631 18,758
Interest expense (90,041) (60,381)
Other income (expense), net (28,171) (134,280)
---------- -----------
(81,581) (175,903)
---------- -----------
NET LOSS $ (746,289) $(1,764,378)
========== ===========
NET LOSS PER WEIGHTED AVERAGE SHARE OF COMMON STOCK $ (0.16) $ (0.53)
========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,728,139 3,310,086
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------ Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 677,764 $ 67,777 $ 886,680 $ 416,671 $ 1,371,128
Issuance of common stock 322,236 32,223 395,874 -- 428,097
Recapitalization (Note 1) 3,114,083 (95,063) 95,063 -- --
Exercise of stock options 575,583 691 1,150,475 -- 1,151,166
Net loss -- -- -- (1,764,378) (1,764,378)
--------- -------- ---------- ----------- -----------
BALANCE, March 31, 1995 4,689,666 5,628 2,528,092 (1,347,707) 1,186,013
Exercise of stock options 43,750 52 87,448 -- 87,500
Net loss -- -- -- (746,289) (746,289)
--------- -------- ---------- ----------- -----------
BALANCE, March 31, 1996 4,733,416 $ 5,680 $2,615,540 $(2,093,996) $ 527,224
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE> 24
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(746,289) $(1,764,378)
Adjustments to reconcile net loss to net cash used in operating
activities-
Special charges -- 841,677
Depreciation and amortization 83,340 101,026
Gain on sales of property, equipment and investments (6,057) (43,294)
Unrealized loss on investments -- 172,692
Deferred compensation (16,840) (17,433)
Changes in current assets and liabilities-
Increase in accounts receivable (11,835) (156,374)
Increase in inventories (337,612) (506,248)
Decrease in other assets 13,091 67,956
Increase in accounts payable 299,935 210,367
Increase (decrease) in accrued liabilities 12,778 (308,911)
Other (59) (629)
--------- -----------
Net cash used in operating activities (709,548) (1,403,549)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (105,274) (318,250)
Purchase of short-term investments (3,124) (176,633)
Proceeds from sales of property and equipment 11,519 46,407
Proceeds from sale of investments -- 53,125
--------- -----------
Net cash used in investing activities (96,879) (395,351)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 87,500 1,579,263
Proceeds from the issuance of debt and related party advances 875,503 150,000
Repayment of debt (195,434) (224,145)
--------- -----------
Net cash provided by financing activities 767,569 1,505,118
--------- -----------
NET DECREASE IN CASH (38,858) (293,982)
CASH, beginning of year 51,648 345,430
--------- -----------
CASH, end of year $ 12,790 $ 51,648
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for-
Interest $ 84,387 $ 51,742
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
24
<PAGE> 25
INTERNATIONAL IMAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
1. COMPANY INFORMATION:
International Imaging, Inc. (the "Company") is a manufacturer and distributor of
equipment for the specialty photographic laboratory market. International
Imaging entered this market when it merged with Electronic Systems Engineering
Co. ("ESECO") on July 27, 1994.
Prior to the merger with ESECO, the Company, under the name J & E Beauty Supply
Inc. ("J & E"), operated as a cosmetic and beauty supply distributor at both the
retail and wholesale levels. These operations were never profitable and J & E
reported an accumulated deficit of approximately $267,700 from these operations
from inception through July 27, 1994. J & E divested itself of this line of
business shortly after the merger and the net assets of J & E were distributed
to one of the principals of J & E who was involved in arranging the merger.
For financial reporting purposes, the merger transaction was treated as a
recapitalization in which the transaction was accounted for as an issuance of
ESECO's common stock in exchange for the public shell. The financial statements
presented reflect the historical operating results of ESECO through July 27,
1994, and the results of the merged companies from the date of the merger. Pro
forma information is not presented since the combination is not considered a
business combination.
The Company has incurred losses of $2,510,667 during the prior two fiscal years.
These losses included special non-cash charges of $841,677 (see Note 3)
resulting from management's plan to revise its product line and normal operating
losses related primarily to the introduction of the photographic processor line
and the increased overhead in administrative, accounting and legal expenses,
incurred as a result of operating as a public company. Also, the Company
experienced some supply problems in obtaining processors to sell during fiscal
year 1995 and the early part of fiscal year 1996. The Company has funded these
losses through the sale of stock in the amount of $1,666,763 and bank and
related party borrowings of $1,025,503. As reflected in the consolidated
statements of cash flows, cash has decreased $332,840 from April 1, 1994 to
March 31, 1996, while inventory has increased by $843,860 during the same
period. Management anticipates the Company will return to profitability during
fiscal 1998, as a result of a number of changes that have been put in place
since January 1, 1996. Such changes include introduction of new products,
voluntary management salary reductions, changing the way the Company distributes
its products, and the increased availability of processors for sale.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company, ESECO (a wholly owned subsidiary), and ESECO International Corporation
(a wholly owned inactive corporation formed in fiscal 1982). All significant
intercompany accounts and transactions have been eliminated in the accompanying
consolidated financial statements.
Short-term Investments
Short-term investments, which consist of equity securities, are stated at fair
market value based on quoted market prices, as available. Unrealized losses on
current marketable securities are reported as a net amount in stockholders'
equity net of related income taxes until realized. Unrealized losses believed to
reflect a permanent decline in value and realized gains or losses are determined
on the specific
25
<PAGE> 26
identification method and are reflected in other income (expense), net in the
accompanying consolidated statement of operations.
Property and Equipment
Property and equipment is recorded at cost. Normal maintenance and repairs are
expensed as incurred. Upon the sale or retirement of depreciable properties, the
costs and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in other income (expense), net.
Depreciation of property and equipment is computed on the straight-line method
over estimated useful lives. Depreciation of property and equipment used in the
manufacture of goods for sale was $65,786 and $85,594 for the years ended March
31, 1996 and 1995, respectively, and is included in cost of sales in the
accompanying consolidated statements of operations.
Estimated useful lives, in years, are as follows:
Building and improvements 10 - 40
Equipment and tools 5 - 10
Office furniture and equipment 5 - 10
Rental and demonstration equipment 10
Automobiles 5
Income Taxes
Deferred income taxes reflect the estimated future tax effects of differences
between financial statement and tax bases of assets and liabilities at year-end.
Earnings Per Share and Shares Outstanding
Earnings per share of common stock are based upon the weighted average number of
shares outstanding during the year.
Financial Instruments
The Company values its financial instruments as required by SFAS No. 107,
"Disclosures About Fair Values of Financial Instruments." Unless otherwise
noted, the carrying value of the Company's financial instruments approximates
the fair market value.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of reporting cash flows, cash includes cash on hand and highly
liquid cash investments with a maturity of three months or less.
26
<PAGE> 27
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective for years beginning after December 15, 1995. This
statement requires long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Management has not assessed
the impact of this new accounting statement and plans to adopt the provisions in
1997.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement defines a revised
method of accounting for an employee stock option or similar equity instruments
and requires an entity to either adopt the revised accounting method or present
pro forma disclosures as if the new accounting method had been applied. The
Company has not assessed the impact of this new accounting statement and plans
to adopt SFAS No. 123 during fiscal 1997.
3. SPECIAL CHARGES:
During fiscal year 1995, ESECO recognized special, nonrecurring pretax charges
of $841,677. These charges arose as a result of management's plan to revise its
product line. The special charges included reserves for obsolete inventory of
$614,720, and a writedown of certain manufacturing and demonstration equipment
of $226,957.
4. INVENTORIES:
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following as of March 31, 1996:
<TABLE>
<S> <C>
Finished goods $ 565,512
Work-in-process 504,860
Parts and supplies 537,854
-----------
$1,608,226
==========
</TABLE>
Provisions have been made to reduce excess and obsolete inventories to net
realizable values.
5. SHORT-TERM ADVANCES:
At March 31, 1996, the Company had outstanding cash advances from related
parties of $205,030 primarily used to meet fiscal year 1996 operating cash flow
needs. The repayment terms of the advances made are not defined and thus have
been reflected as current liabilities as repayment could be demanded by the
respective parties. The advances are noninterest bearing.
27
<PAGE> 28
6. LONG-TERM DEBT:
Long-term debt consisted of the following as of March 31, 1996:
<TABLE>
<S> <C>
Line of credit to a bank with interest at 2% over National prime (10.25%
at March 31, 1996), adjusted annually, accrued interest due monthly
with unpaid principal and accrued interest due upon maturity at July
1997 $ 500,000
Notepayable to a bank, with interest at 10.25%, accrued interest due
monthly with unpaid principal and accrued interest due upon
maturity at October 1997
388,510
Note payable to a bank, due in monthly installments of $2,500, including
interest, at 10.25%, to June 2001 150,000
Note payable to a bank, due in monthly installments of $617, including interest
at 6.9%, to December 1997 12,131
Note payable to a bank, due in monthly installments of $1,028, including
interest at 8.5%, to January 1997 9,342
----------
1,059,983
Less- Current portion of long-term debt 27,471
----------
$1,032,512
==========
</TABLE>
The line of credit agreement allows the Company to borrow amounts based on
certain percentages of its inventories and receivable balances, as defined.
On January 12, 1996, the Company entered into an agreement with the Small
Business Administration ("SBA") which allows the Company to borrow up to
$1,000,000 based on certain percentages of its foreign receivable balances, as
defined. Amounts outstanding bear interest at 2.5% above Wall Street Journal
prime rates. At March 31, 1996, no amounts were outstanding under this
agreement.
Borrowings under substantially all of the notes payable, the line of credit
agreement, and the SBA loan are personally guaranteed by the president of the
Company.
In March 1996, the Board of Directors approved an agreement between
International Imaging, Inc. and the president of the Company to place in escrow
all of the voting stock of ESECO, the Company's operating subsidiary, in
exchange for personal guarantees by the president of approximately $2,000,000 of
the Company's debt obligations. The stock of ESECO will be held in escrow until
the Company's obligations under the debt agreements are repaid in full. While in
escrow, the president individually has voting power of the stock. The escrowed
shares will be delivered to International Imaging, Inc. upon payment in full of
the notes and release of the president from his personal guarantees within three
years of the escrow agreement. If the notes are not paid within three years, the
ESECO shares, along with any accompanying stock powers will be released to the
president.
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Maturities of long-term debt and lease financing obligations for years
subsequent to March 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 27,471
1998 910,415
1999 18,330
2000 20,300
2001 and thereafter 83,467
----------
$1,059,983
==========
</TABLE>
7. EMPLOYEE BONUS PLAN:
The Company has an arrangement with its president which calls for an annual
bonus of 5%, 7.5% or 10% of ESECO's income before bonuses and provision for
income taxes based upon specified relationships between income and sales.
Additionally, bonuses are paid to certain other employees based on net sales and
income before bonuses and provision for income taxes. At March 31, 1996, accrued
bonuses for fiscal year 1996 and accrued but unpaid bonuses for years prior to
fiscal year 1996, totaling approximately $92,000 were included in accrued
liabilities in the accompanying consolidated balance sheet.
8. DEFERRED COMPENSATION:
ESECO entered into a deferred compensation agreement with an officer of ESECO
whereby all bonuses due him are payable in installments, including interest,
upon his reaching retirement age in 1982. Deferred compensation payments are
being made at $1,667 per month. The current and noncurrent portions of the
payments due under this agreement and the related accrued interest have been
reflected as deferred compensation in the accompanying consolidated balance
sheet.
9. INCOME TAXES:
SFAS No. 109 requires that a valuation allowance be recorded against tax assets
which are not likely to be realized. The Company's net tax operating loss
carryforwards totaling approximately $890,000 expire at specific future dates
and utilization of certain carryforwards is limited to specific amounts each
year. However, due to past performance and the expiration dates, the ultimate
realization of such tax benefits is uncertain. The Company has established a
valuation allowance against the total amount of these carryforward benefits and
will recognize the benefits only as reassessment demonstrates they are more
likely than not to be realizable. Realization is primarily dependent upon future
earnings in specific tax jurisdictions. While the need for this valuation
allowance is subject to periodic review, if the allowance is reduced, the tax
benefits of the carryforwards will be recorded in future operations as a
reduction of the Company's income tax expense.
10. RELATED PARTY TRANSACTIONS:
The short-term investments held by the Company consist primarily of preferred
and common stock of Reconversion Technologies, Inc. The Company's general
counsel is also the chief executive officer of Reconversion Technologies, Inc.
During fiscal year 1995, Reconversion Technologies, Inc. lost a significant
patent infringement case which caused the quoted market value of the common
stock to substantially decline. The Company believes that although the preferred
stock is not publicly traded, its value has also suffered a similar decline. In
addition, the Company believes the decline in market value is a permanent
impairment in value and have therefore recognized a loss of approximately
$173,000 which is included in 1995 other income (expense), net in the
accompanying statements of operations.
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<PAGE> 30
In July 1994, the Company issued 86,487 shares of ESECO stock to a related party
of the Company's general counsel for $86,487.
11. EMPLOYMENT AGREEMENTS:
Effective July 1, 1994, ESECO entered into five year employment agreements with
eleven key employees. Such agreements provide for minimum salary levels,
adjusted annually for cost-of-living changes, as well as a lump-sum payment
equal to 300% of the total compensation if the employee is terminated other than
for cause, as defined. The annual salaries for these employees at March 31,
1996, was approximately $391,000
12. COMMON STOCK:
Common Stock Issuances
In fiscal year 1995, ESECO sold 235,749 shares of stock at $1.45 per share prior
to the merger for $341,610. Additionally, ESECO issued 86,487 shares of stock as
repayment of an advance to the Company for $86,487, or $1.00 per share. (See
Note 10).
Shares issued during the fiscal years 1996 and 1995, under the stock option plan
described in Note 13 totaled 43,750 shares and 575,583 shares, respectively, at
$2.00 per share.
In addition to the shares issued as described above, 37,500 shares of the
Company's common stock under the stock option plan described in Note 13 was
issued in error to an unrelated party during fiscal year 1996. Management of the
Company has requested the stock be returned or payment made for the shares
issued. A receivable related to this stock has not been recorded and the stock
has not been considered as issued or outstanding at March 31, 1996.
Warrants Outstanding
At March 31, 1996, the Company had redeemable, transferable warrants outstanding
to purchase 728,332 shares of common stock of the Company. The warrants are
exercisable at $6.00 per share through February 3, 1999, unless redeemed earlier
by the Company. The Company has the right to redeem these warrants at $0.0012
per warrant upon 30 days written notice.
In addition to the warrants above, the Company also has non-redeemable,
transferable warrants outstanding to purchase 36,417 shares of the Company's
stock at $0.72 per share and 72,834 shares at $6.00 per share through February
3, 1999.
During fiscal year 1996, the Company issued warrants to purchase 2,050,500
shares of common stock to the president of the Company for personal guarantees
he has made of the Company's debt obligations. The warrants are exercisable in
whole or in part solely at the option of the holder through December 31, 2005.
The exercise price is $0.50 per share, with provisions for a downward per share
adjustment for certain events defined in the agreement. No compensation related
to these warrants has been recorded by the Company. The common shares underlying
the warrants are shares restricted from trading on the public market. In
addition, at the date of issuance, the public shares were very thinly traded and
management of the Company believes the market quotes on the date of grant would
not be reflective of the market price for this volume of stock trading. In April
1996, warrants for an additional 45,000 shares of common stock were issued to
the president of the Company under the terms and conditions described above.
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<PAGE> 31
13. STOCK OPTION PLAN:
Effective June 1, 1994, the Board of Directors adopted a stock option plan under
which options to purchase up to 24,000,000 shares of common stock may be granted
to key employees or consultants of the Company. The Plan provides that the
option price may not be less than 85% of the then current market price without
approval of the Company's Board of Directors and that each option shall be made
exercisable as prescribed by the Company's Option Committee. No options may be
granted under the Plan after December 31, 1995.
In July 1994, options to purchase 1,000,000 shares of the Company's stock for
$2.00 per share were granted. Options exercised during fiscal years 1996 and
1995 totaled 43,750 and 575,583 shares, respectively. The unexercised options
expire in July 1997.
In December 1994, options to purchase 250,000 shares of the Company's stock for
$0.828 per share were granted to certain employees and officers of the Company.
None of these options were exercised during fiscal years 1996 or 1995. The
options expire in December 1997.
In July 1995, options to purchase 405,000 shares of the Company's common stock
for $0.5625 per share were authorized. Of these shares, 305,000 were granted and
issued to certain employees, officers, and related parties of the Company. The
remaining 100,000 shares authorized but not issued will be used by the Company
as part of an employment package to future employee(s). None of these options
were exercised during fiscal 1996. The options expire in July 1998.
31
