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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 000-24847
CURTIS INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
Ontario 98-0154299
- ------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
315 Attwell Drive
Etobicoke, Ontario M9W 5C1
- ------------------ ---------
(Address of principal executive offices) (Zip Code)
(416) 674-2123 (Registrant's telephone number, including area code)
--------------
Securities registered pursuant to Section 12 (b) of the Exchange Act
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [_]
Indicate by check mark if there is disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of August 25, 1999 was $6,844,294.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the registrant's Common Stock, No Par
Value, on August 25, 1999 was 5,373,145 shares.
Documents incorporated by reference: None
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CURTIS INTERNATIONAL LTD.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 7
Item 3. Legal Proceedings.............................................................. 7
Item 4. Submission of Matters to Vote of Security Holders.............................. 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter.......... 8
Item 6. Selected Financial Data....................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 15
Item 8. Financial Statements and Supplementary Data................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures................................................................... 15
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 16
Item 11. Executive Compensation........................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 24
Item 13. Certain Relationships and Related Transactions................................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 26
Signatures.................................................................................. 27
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation, those
concerning (i) the Company's strategy, (ii) the Company's expansion plans and
(iii) the Company's capital expenditures, contained forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Business."
The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
Curtis International Ltd. designs, distributes and markets quality,
value-priced consumer electronics products. The Company offers a broad line of
telecommunication, audio, video and computer products including, telephones,
answering machines, caller ID systems, CD and cassette systems, portable
televisions and computer accessories. The Company's products are primarily sold
under the brand names "Curtis" and "CTP Worx," as well as private labels. The
Company's strategy has been to build a portfolio of diverse consumer electronics
products which offers retailers flexible merchandising programs. The Company's
products are available in approximately 2,300 stores throughout Canada and
10,000 stores in the United States through approximately 35 retail chains in
Canada and the United States. All of the Company's products are manufactured by
independent manufacturers.
The Company's customers include mass merchandisers such as Pic n Save,
Consolidated Stores, Value City, Family Dollar, Bradlees, Dollar General and
Bi-Way Stores; drug store chains such as Rite-Aid, London Drugs, Thrifty
Payless, Jean Coutu and Ker Drugs; specialty marketers such as QVC, the Home
Shopping Network, Shop at Home, ValueVision and Amway; consumer electronic
retailers such as Future Shop, Fry's and ABC Warehouse; and appliance and
department stores such as Boscov. The Company has operated profitably and has
recently undergone a period of rapid sales growth. In Fiscal 1999, the Company's
sales increased by $11,837,449, or 43.1% to $39,309,062 from $27,471,613 in
Fiscal 1998 and $14,914,142 in Fiscal 1997. The Company only entered the United
States market in 1996 and has since opened accounts with approximately 25 retail
chains in the United States. The Company's sales in the United States were
$19,766,469 in Fiscal 1999 as compared to $11,716,935 in Fiscal 1998 and
$2,217,058 in Fiscal 1997, an increase of approximately 791% from Fiscal 1997 to
Fiscal 1999. The Company believes there is an opportunity to continue to
significantly increase its business in the United States through both its
current customers and potential new customers.
THE CONSUMER ELECTRONICS INDUSTRY
The consumer electronics industry is large and diverse, encompassing a wide
variety of technologies and products, including televisions, VCRs, audio
systems, CD players, cassette players and telephones. The Consumer Electronics
Manufacturers Association ("CEMA") estimates that total factory sales of
consumer electronics products in 1997 were approximately $72 billion, an
increase of 4.0% from 1996. CEMA estimates that factory sales will grow to
approximately $92 billion by the year 2001, an increase of 115% in ten years,
and believes that the consumer electronics industry is one of the fastest
growing sectors of the United States economy.
GROWTH STRATEGY
The Company plans to establish itself as a leading supplier of quality,
value-priced consumer electronics products. The Company believes that its broad
portfolio of products, superior design capabilities, flexible and low-cost
sourcing and superior service offered both prior to and after-sale provide it
with distinct competitive advantages. The Company plans to continue to grow its
business using a strategy comprised of the following principal elements:
-- CONTINUE TO OFFER VALUE-PRICED, QUALITY PRODUCTS. The Company designs
and markets products which are value-priced, yet fill a market void
through their design and up-to-date style. The Company's packaging
further distinguishes its products in the marketplace from those of
its competitors. In addition to increasing its product offering (as
described below), the Company plans to continue to offer its customers
quality products at competitive prices.
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-- EXPAND CUSTOMER BASE. The Company believes that it has significant
opportunities to expand its customer base both in Canada and the VK
Fund United States. The Company intends to use its existing
relationships in Canada with retailers such as Wal-Mart, Staples and
Toys "R" Us, to penetrate the United States market in such retailers'
stores. In addition, the Company continually seeks to expand its
distribution channels through various means. For example, the
Company's initial promotion with the Home Shopping Network proved
extremely successful resulting in a growing relationship and numerous
other major planned promotions. In addition, the Company will attempt
to enter selected international markets in Mexico, South America and
Central America in the year 2000. Management believes there are
significant opportunities in such markets. To date, the Company has
not entered such markets due to limited financial and human resources.
With the increased growth of the middle class in such countries, the
Company believes that there are significant opportunities in such
markets. To gain entrance in such markets, the Company intends to hire
additional sales representatives to focus on such markets and to
utilize its contacts with existing customers who already have a
presence in such areas.
-- EXPAND INTERNET OPERATIONS. The Company recently began selling its
products over the internet through several auction sites, including
Bid.com and Amazon.com, and is in the process of establishing its own
web-site "www.buyrefurb.net" through which the Company will offer both
its products as well as refurbished brand-name electronics products
directly to the consumer. Through such internet operations, the
Company intends to become the one stop destination for quality and
value priced consumer electronics products.
-- INCREASE PENETRATION AND SALES TO EXISTING UNITED STATES CUSTOMERS.
In the short period in which the Company has focused significant
marketing efforts in the United States, it has established
relationships with several major retailers. The Company plans to focus
its efforts on broadening its product selection being sold by these
retailers and substantially increasing the dollar volume of sales to
these existing customers.
-- ACQUIRE AND LICENSE ADDITIONAL PRODUCTS. Discount retail chains and
mass merchants limit the number of vendors with which they deal,
preferring to deal with a limited number of vendors with a wide range
of products. However, the Company has an extensive line of products
and strives to fill substantially all of its customers' electronic
requirements. The Company believes that there are a number of
companies which have a superior niche type product, but have a limited
line of customer electronics products, which makes it difficult to
sell their product to mass merchants and discount chain stores because
of their reluctance to deal with a supplier with a limited number of
products. By entering into arrangements with or acquiring these small
companies, the Company can add to its already wide selection of
consumer electronic products.
-- DEVELOP STRATEGIC ALLIANCES. The Company intends to develop strategic
alliances with large discount chain stores and mass merchants.
Management believes that many retailers whose primary business is not
consumer electronics look for a strategic alliance with a vendor who
has the experience, customer service and product selection to create a
successful consumer electronics program in their stores. Development
of strategic alliances whereby the Company provides these services in
exchange for commitments to stock and sell the Company's products will
assist the Company in the establishment of long-term relationships
with such discount chain stores and mass merchants.
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PRODUCTS
The Company designs, distributes and markets quality value-priced consumer
electronics products, including telephones, audio equipment, personal
televisions, radios and computer accessories, to a wide variety of customers.
The Company currently offers over 150 models of consumer electronic products.
The Company's core business currently consists of the following consumer
electronic products:
TVs HOME AND PORTABLE AUDIO PRODUCTS
- - Portable black and white TVs - Home audio systems with single
- - Portable combination TV/Audio CD player
products - Home audio systems with
CD changer systems
TELEPHONE PRODUCTS
- - Corded and cordless telephones - Portable AM/FM cassette systems
- - "Feature" telephones - Portable CD systems with detachablespeakers
- - Answering machines - Portable CD stereo systems
- - Combination telephone/ - Portable CD changer stereo systems
answering machines - Personal CD players
- - Telephone clock radios - Personal cassette players
- - Caller ID systems - Personal sports electronics products
designed for use when exercising
or traveling
COMPUTER ACCESSORIES - Portable radios
- - Ergonomically designed - Electronic clock radios
keyboards - Electronic clock radios with CD players
- - Mouse attachments - Electronic clock radios with cassette
players
- Hand-held micro cassette recorders
PRODUCT DESIGN AND DEVELOPMENT
Value-priced consumer electronic products typically do not have unique or
innovative technical features. Competition in this segment is therefore more
dependent on product design, visual appeal and price. As such, the Company
recognizes that superior product design provides an important competitive
advantage. The Company believes that the superior design and style of its
products distinguish them from those of its competitors in the value-priced
category and help drive consumer purchasing decisions.
Management believes that the enhancement and extension of the Company's
existing products and the development of new product categories have contributed
significantly to the Company's growth to date and are necessary for the
Company's continued success and growth. The Company's product design and
engineering team, along with its outside graphic and design artists, evaluate
new ideas and seek to develop new products and improvements to existing products
to satisfy industry requirements and changing consumer preferences. The Company
selects design and manufacturing specifications that adapt and implement
available technology features to satisfy its customers' requirements for
quality, product mix and pricing. Company employees work closely with both
retailers and suppliers to identify trends in consumer preferences and to
generate new product ideas.
In addition, the Company highlights the design and style features of its
products with detailed descriptions and illustrations on packaging, which the
Company believes further distinguishes its products from those of its
competitors. The Company believes that this packaging strategy makes its
products more attractive to consumers and facilitates an understanding of the
product features in retail locations where salespersons may not be available to
provide detailed explanations and demonstrations.
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SALES AND DISTRIBUTION
The Company sells its products in Canada and the United States to mass
merchandisers such as Pic n Save, Consolidated Stores, Value City and Bradlees;
drug store chains such as Rite-Aid and London Drugs; and specialty marketers
such as QVC, Shop at Home, Amway, ValueVision and the Home Shopping Network. The
Company does not have long-term contracts with any of its customers, but rather
receives orders on an ongoing basis. Products imported by the Company are
shipped by ocean freight and stored in the Company's warehouse or contracted
public warehouse facilities, for shipment to customers. All merchandise received
by the Company is automatically updated into the Company's inventory system.
The Company has implemented an integrated system to coordinate purchasing,
sales and distribution segments of its operations. The Company is equipped to
receive orders from its major accounts electronically or by the conventional
modes of facsimile, telephone or mail. The Company is in the process of
upgrading its management information system ("MIS"), which management believes
will increase the efficiency of the Company's distribution efforts. The
Company's new MIS will allow the Company to track its customers inventory levels
and help its customers identify their more popular and profitable items. This
added service will allow the Company to take a more active role in its
customers' electronics business and will help them maintain sufficient inventory
levels.
The Company also makes available to its customers a direct import program,
pursuant to which products are imported directly by the Company's customers. The
Company has increased this activity due to the fact that its introduction to
customers has been received with much success. Sales under such plan are made at
a reduced cost but also result in savings to the Company. These savings result
from the customer opening its line of credit directly to the manufacturer,
allowing the manufacturer to ship the goods directly to the customer. Under such
arrangement the Company does not incur any interest cost under its line of
credit or any shipping costs.
MARKETING
The Company's strategy is to initially gain entrance to new accounts with
one or two of its products, and thereafter develop such account. The Company's
goal is to ultimately become its customers' primary consumer electronics
supplier.
The Company does not undertake any direct advertising. However, the
Company's retail customers place advertisements that generally promote the
Company's brand names in newspapers and other publications, catalogs, flyers and
by displaying point-of-purchase advertising. Under such co-op advertising
arrangements, the Company generally pays the customer a small percentage of
sales by the retailer of the Company's products featured in such advertising.
The Company markets its products to retailers at trade shows, including the
Consumer Electronics Show held in Las Vegas, Nevada in January of each year.
Aaron Herzog, the Company's President, has established significant contacts
and is directly responsible for handling the accounts of the Company's primary
customers.
A portion of the Company's sales are made through independent sales
representatives, which receive sales commissions and work closely with Company
sales personnel. The Company has 11 independent sales representatives based in
Canada and the United States. The outside sales representatives also sell, in
addition to the Company's products, allied, but generally non-competitive
products. In most instances, either party may terminate a sales representative
relationship on 30 days prior notice in accordance with customary industry
practice.
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MANUFACTURING
The Company is responsible for the final design and specifications of all
of its products. Actual assembly is performed by one of its independent
manufacturers in accordance with specifications mandated by the Company.
During Fiscal 1999 and Fiscal 1998, the Company's three largest independent
manufacturers, which are located in China, supplied approximately 44% and 17.0%
of the Company's total products, respectively. The Company changes suppliers
from time to time as market conditions require. Substantially all of these
suppliers assemble products with components that they purchase from third
parties who manufacture these types of components. The Company has no agreement
with the component suppliers. The Company believes that this is the standard
method of operating and contracting for the manufacture of products in the
consumer electronics industry. During production, the Company's employees
coordinate with the independent manufacturers' facilities to monitor and
facilitate timely manufacture and delivery of products produced to the Company's
specifications.
The Company considers its relationships with its independent manufacturers
and component suppliers to be good and believes that, absent extreme
circumstances affecting the supply of materials or the demand on manufacturing
time, the supply of products will be available when needed. The Company does not
maintain long-term purchase contracts with manufacturers and operates
principally on a purchase order basis. The Company believes that it is not
currently dependent on any single manufacturer for any of its products, and that
the loss of any one manufacturer would not have a long-term material adverse
effect on the Company because other independent manufacturers with which the
Company does business would be able to increase production to fulfill the
Company's requirements. However, the loss of a significant supplier could, in
the short-term, materially and adversely affect the Company's business until
alternative supply arrangements could be secured.
QUALITY CONTROL
The Company employs a quality control inspector who inspects the Company's
products before each shipment is sent from its manufacturers to ensure that such
products meet both the Company's quality standards and industry standards.
Additionally, the Company's quality control team does a second quality control
inspection when its products arrive in either the United States or Canada. If
the Company's quality control team feels that the tested products do not meet
both the Company's standards and industry standards, such products are not
accepted by the Company for shipment to its customers and are returned to the
manufacturer, without any expense to the Company.
PRODUCT RETURNS AND WARRANTY CLAIMS
The Company offers its customers limited warranties comparable to those
offered to retailers by its competitors and accepts returns from its customers
in accordance with customary industry practices, on most of its products. If a
low priced item is returned, the Company generally does not repair the item, but
will generally return it to the manufacturer for either credit or exchange.
Higher priced items returned to the Company are generally repaired with parts
supplied by the manufacturer. The Company generally has the ability to return
all defective products to the manufacturer for either credit or exchange.
Backlog
From time-to-time, the Company has substantial orders from customers on
hand. Management believes, however, that backlog is not a significant factor in
its operations. As of August 26, 1999, the Company had a backlog of
approximately $8,050,000. Backlog consists of purchase orders and commitments
which are to be filled within the next two months. However, since orders and
commitments may be rescheduled or canceled, management believes that
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backlog is an inconclusive indicator of future financial performance.
Notwithstanding the foregoing, the ability of management to correctly anticipate
and provide for inventory requirements is essential to the successful operation
of the Company's business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
TRADEMARKS
The Company has trademarked the names "Curtis" and "CTP Worx" in Canada and
has applied for such trademarks in the United States and other countries. The
Company intends to renew all such trademarks before their expiration. The
Company does not consider the "Curtis" and "CTP Worx" trademarks to be of
material importance to its business.
REGULATION
Most of the Company's customers (as well as several state and local
authorities) require that the Company's products meet the electrical safety
standards of the Underwriters Laboratories, Inc. The Company ensures that all of
its products sold in Canada and the United States which require electrical
safety approval are registered with either the Underwriters Laboratories, Inc.,
Canadian Standards Association or Warnock Hersey. Certain of the Company's
products sold for use in the United States must be registered with and approved
by the FCC. Products sold in Canada must comply with the standards of the
Canadian Standards Association. The Company has not experienced difficulty in
satisfying such standards.
COMPETITION
The consumer electronics industry is extremely competitive and is dominated
by large well-capitalized companies. The Company competes with the entire
electronics industry for consumer dollars, shelf space and promotional displays
for products and sales support. The Company's competitors may not rely on
external financing or relationships with independent manufacturers to the same
extent as the Company. Furthermore, the Company's competitors may have cost
advantages depending on labor costs, currency exchange rates and other factors
in the countries where their manufacturing operations take place, relative to
the countries where the Company's products are manufactured. The Company has
adopted a marketing strategy that targets the value-priced segment of the
consumer electronics market, which is particularly price sensitive. There is
competition among a number of brands in this market, including Emerson and GPX,
as well as foreign-based manufacturers and distributors. In addition, although
General Electric, Sony, Aiwa and Panasonic brand products are not currently
emphasized in the value-priced segment of the market, they do compete with the
Company's products for consumer dollars, shelf space and sales support. To the
extent that these brands compete directly with the Company's brands on the basis
of price, or their product prices were otherwise reduced, the Company's ability
to market and sell competitive products could be severely affected, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
As of July 31, 1999, the Company employs 57 persons, which include two
senior executives, six administrative personnel, and 49 full-time non-unionized
hourly laborers. One of the Company's employees is located in Asia. The Company
believes that its relationships with its employees are good. The Company is not
party to any collective bargaining agreement, nor is the Company aware of any
effort to organize employees of the Company into any union or similar
organization.
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ITEM 2. PROPERTIES
The Company leases the following premises:
Current
Location Address Expiration Date Square Feet Annual Rent
- ---------------- -------------------------------- ---------------- ----------- ------------
Toronto, Ontario 315 Attwell Road (Principal May 31, 2002 76,290 Cdn$228,876
Executive Offices and Warehouse)
Montreal, Quebec 8170 Montview
(Sales and Marketing) October 31, 2000 2,500 Cdn$ 20,375
All of the premises the Company presently occupies are leased. In January
1999, the Company successfully completed its consolidation of all of its
warehouse space with its principal executive offices, resulting in significant
operating efficiencies. Management believes its current facilities are adequate
and suitable for its present business and its expected growth.
The Company also receives shipment of its products from its manufacturers
at 100 Sonwil Drive, Buffalo, New York, an independently operated distribution
center which ships the Company's products to certain of the Company's
customers. The Company does not lease or own such facility but rather pays a
usage charge for each case of product shipped to such location. The Company
owns a condominium in Florida which it is seeking to sell.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on The Nasdaq National Market System
("Nasdaq NMS") under the symbol "CURT." The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Common Stock
as reported by the Nasdaq NMS. The Company's Common Stock began trading on the
Nasdaq NMS on November 13, 1999. The Company's fiscal year ends on May 31.
COMMON STOCK
FISCAL 2000 HIGH LOW
----------- ------ -----
First Quarter(through August 25, 1999) 7.125 3.75
Fiscal 1999 High Low
----------- ------ -----
Second Quarter(from November 13, 1998) 5.75 5.188
Third Quarter 6.125 5.25
Fourth Quarter 6.25 5.50
As of August 25, 1999, there were approximately 12 holders of record of the
Company's 5,373,145 outstanding shares of Common Stock. On August 25, 1999, the
last sales price for the Common Stock as reported on the Nasdaq SmallCap was
$3.75.
The Company completed an initial public offering of its Common Stock, no
par value ("Common Stock") pursuant to a registration statement declared
effective by the Securities and Exchange Commission on November 12, 1998, File
No. 333-56661 ("Registration Statement").
The following are the Company's expenses incurred in connection with the
issuance and distribution of the Securities in the offering from the effective
date of the Registration Statement to the ending date of the reporting period of
this 10-K.
EXPENSE AMOUNT
------- ----------
Underwriter's Discounts and Commission $ 836,573
Financial Advisory Fee $ 82,500
Expenses Paid To or For Underwriters $ 35,950
Other Expenses(1) $ 644,291
Total Expenses $1,599,314
None of the foregoing expenses were paid, directly or indirectly, to any
director or officer of the Company or their associates, to any person who owns
10 percent or more of any class or equity of securities of the Company, or to
any affiliate of the Company.
On December 14, 1998, the Underwriter exercised a portion of the
over-allotment option resulting in additional net proceeds of $754,171 to the
Company.
The net offering proceeds to the Company after deducting the foregoing
expenses were approximately $6,766,411.
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To date the Company has utilized the net proceeds from its initial public
offering as follows: repayment of loan $900,000, upgrading of M.I.S $80,000,
relocation to new facilities $100,000, sales and marketing $50,000. The balance
of approximately $5,636,411 has been used to temporarily reduce the outstanding
balance on the Company's line of credit with CIBC and for working capital and
general corporate purposes. The Company's temporary reduction of its line of
credit reduces the interest expense payable by the Company, while keeping open
such line of credit for immediate use by the Company.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business. The Company's line of credit with CIBC prohibits the payment
of any dividends without CIBC's consent while there is any outstanding balance
on the line of credit.
DESCRIPTION OF SECURITIES
The total authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, with no par value, and 1,000,000 shares of Preferred
Stock, with no par value per share. The following descriptions contain all
material terms and features of the Securities of the Company, are qualified in
all respects by reference to the Articles of Incorporation and Bylaws of the
Company, copies of which are filed as Exhibits to the Registration Statement of
which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 15,000,000 of shares of Common
Stock, no par value per share, of which as August 25, 1999, 5,373,145 shares of
Common Stock are outstanding. All outstanding Shares of common stock are validly
authorized and issued, fully paid, and non-assessable.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock are entitled to receive ratably dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining, if any, after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
Pursuant to the Business Corporation Act, Ontario ("BCA"), a stockholder of
an Ontario Corporation has the right to have the corporation pay the stockholder
the fair market value for his shares of the corporation in the event such
stockholder dissents to certain actions taken by the corporation such as
amalgamation or the sale of all or substantially all of the assets of the
corporation and such stockholder follows the procedures set forth in the BCA.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of Preferred Stock with designations, rights and preferences
determined from time to time by its Board of
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Directors. Accordingly, the Company's Board of Directors is empowered, without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, or other rights that could adversely affect the rights of the
holders of the Common Stock. Although the Company has no present intention to
issue any shares of its Preferred Stock, there can be no assurance that it will
not do so in the future.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial information for the fiscal years 1999, 1998
and 1997 have been derived from the audited financial statements of the Company
percent are percent of Net Sales
INCOME STATEMENT DATA:
Year ended May 31,
---------------------------------------------------------------------------
1999 % 1998 % 1997 %
----------- ---- ----------- ---- ----------- ----
Net Sales $39,309,062 100% $27,471,613 100% $14,914,142 100%
- --------- ----------- ---- ----------- --- ----------- ---
Gross Margin..................................... 7,266,563 18 5,121,646 19 2,740,394 18
Other Expenses................................... 4,814,041 12 3,654,299 13 2,617,015 17
Income from continuing operations................ 2,452,522 6 1,467,347 5 123,379 1
Net income....................................... 1,343,757 3 864,905 3 93,001 1
----------- ---- ----------- --- ----------- ---
Basic Earnings Per Share......................... 0.29 0.23 0.02
----------- ----------- -----------
BALANCE SHEET DATA:
May 31,
-----------------------------------
1999 1998
------------ ------------
Total assets........................... $14,663,946 $13,685,372
Total liabilities...................... 4,494,470 12,248,664
Working capital........................ 9,283,274 1,416,422
Stockholders' equity................... 10,169,476 1,436,708
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Company's
Financial Statements and the Notes thereto and the other financial data included
elsewhere in this Form 10-K. This Form 10-K may contain forward-looking
statements regarding the plans and objectives of management for future
operations. The forward-looking statements included herein are based on current
expectations and assumptions that involve numerous risks and uncertainties.
Although management believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
GENERAL
The company designs, distributes and markets quality, value-priced consumer
electronics products. The Company offers a broad line of telecommunication,
audio, and video products including telephones, answering machines, caller ID
systems, CD and cassette systems, and portable televisions. The Company's
products are primarily sold under the brand name "Curtis" as well as private
labels. The Company's strategy has been to build a portfolio of diverse
consumer electronics products, which offers retailers flexible merchandising
programs. The company's products are available in approximate 2,300 stores
throughout Canada and 10,000 stores in the United States through approximately
35 retail chains in Canada and the United States.
Curtis International Ltd. was incorporated in the Province of Ontario on
December 12, 1990. The Company subsequently amalgamated (or merged) with Unique
Investments Limited and AEG Trading Limited on January 26, 1998 and Worldwide
Holdings Limited on May 31, 1998. In both cases, the Company was the surviving
entity. The Company's principal executive offices are located at 315 Attwell
Drive, Etobicoke, Ontario M9W 5C1 and its telephone number is (416) 674-2123.
RESULTS OF OPERATIONS
Fiscal Year Ended May 31, 1999 ("Fiscal 1999") Compared to Fiscal Year Ended
May 31, 1998 ("Fiscal 1998").
Sales for Fiscal 1999 were $39,309,062 a 43.1% increase over sales of
$27,471,613 for Fiscal 1998. This increase was primarily due to an increase of
68.7% in sales in the United States and to a lesser degree, a 22.3% increase in
sales in Canada. The Company's strategy is to continue to increase sales in the
United States while maximizing sales in Canada.
As a result of the 43.1% increase in sales, cost of sales for Fiscal 1999
were $32,042,499 a 43.4% increase over cost of sales of $22,349,967 for Fiscal
1998.
Gross profit margin for Fiscal 1999 was 18.5% of sales as compared to 18.6%
in Fiscal 1998. Lower prices charged to customers who purchased items in large
quantities were offset by the Company's increased purchasing power, which
resulted in slightly lower per item costs. The Company
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expects that its increased buying power and broadened customer base will lead to
a slight increase in gross profit in the coming periods.
Selling expenses increased by $1,023,047 in Fiscal 1999 over Fiscal 1998 as
a result of continuing increased sales efforts particularly in the United
States. These expenses include salaries and commission, delivery charges and
advertising and promotion. The Company expects to further increase its
marketing efforts in the United States, but expects increased sales will offset
such costs. As a percentage of sales, selling expenses increased slightly from
4.6% to 5.8% of sales as a result of higher customer allowances and rebates.
Administrative expenses of $1,644,825 in Fiscal 1999 were $113,488 lower than in
Fiscal 1998. As a percentage of sales, administrative expenses continued to
decline from 6.4% to 4.2%, as a result of relatively stable expenses coupled
with the Company's sales growth. The Company believes that it can continue to
increase sales with only a minor increase in administrative expenses. Financial
expenses increased from $474,154 to $880,263 a 85.6% increase which was the
result of lower interest expense, from $329,922 to $261,490 as a result of
reduced borrowing, due to proceeds from the initial public offering, and an
increase from $144,232 to $618,773 in the Company's reserve for bad debts. As a
result of the Company's higher sales volume (43.1% increase), increased
marketing efforts, and certain one-time charges, total operating expenses
increased from $3,654,299 in Fiscal 1998 to $4,814,041(31.7%) in Fiscal 1999.
The Company expects that sustained sales growth and increased marketing efforts
coupled with stable costs will promote further increases in net income.
Earnings before income taxes ("EBIT") increased by $985,175 to $2,452,522
(67.1%) for Fiscal 1999 versus Fiscal 1998. As a percentage of sales, EBIT for
Fiscal 1999 was 6.2% compared to 5.3% in Fiscal 1998. As a result of the
Company's increased income, the provision for income taxes increased from
$602,442 to $1,108,765 in Fiscal 1999. Net income increased from $864,905 in
Fiscal 1998 to $1,343,757 in Fiscal 1999. This increase in income is directly a
result of continued sales growth with stable administrative costs, which more
than offset the increase in selling expenses. Management believes, although
there can be no assurance, that the Company can continue this trend in the
future.
Fiscal Year Ended May 31, 1998 ("Fiscal 1998") Compared to Fiscal Year Ended
May 31, 1997 ("Fiscal 1997").
Sales for Fiscal 1998 were $27,471,613, an 84.2% increase over sales of
$14,914,142 for Fiscal 1997. This increase was primarily due to an increase of
428% in sales in the United States and to a lesser degree, a 24.1% increase in
sales in Canada. The Company's strategy is to continue to increase sales in the
United States, while maintaining and maximizing sales in Canada.
As a result of the 84.2% increase in sales, cost of sales for Fiscal 1998
were $22,349,967, an 83.6% increase over cost of sales of $12,173,748 for Fiscal
1997.
Gross profit margin for Fiscal 1998 was 18.6% of net revenues as compared
to 18.4% in Fiscal 1997. The Company's increased purchasing power which resulted
in slightly lower per item costs was largely offset by lower prices charged to
customers who purchased items in large quantities. The Company expects that its
increased buying power and broadened customer base will lead to a slight
increase in gross profit in the coming periods.
As a result of the Company's increased marketing efforts and certain
one-time charges, expenses increased from $2,617,015 in Fiscal 1997 to
$3,654,299 in Fiscal 1998. Selling expenses increased by $610,928 (93.3%) in
Fiscal 1998 over Fiscal 1997 as a result of increased sales efforts particularly
in the
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United States. These expenses include salaries and commissions, delivery charges
and advertising costs. The Company expects to further increase its marketing
efforts in the United States, but expects increased sales to offset such costs.
As a percentage of sales, selling expenses remained relatively stable at
approximately 4% of sales. Administrative expenses of $1,758,313 were $27,721
higher than in Fiscal 1997. However, as a percentage of sales, administrative
expenses were significantly reduced (from 11.6% to 6.4%), as a result of
relatively stable expenses coupled with the Company's sales growth. The Company
believes that it can continue to increase sales with only a minor increase in
administrative expenses. Financial expenses rose from $231,445 to $474,154, a
105% increase which was the result of higher interest expense, from $161,041 to
$329,922 as a result of increased borrowing to sustain the Company's growth and
an increase of $73,828 in the Company's reserve for bad debts. Management
believes that the proceeds of the Offering will allow the Company to increase
sales without increasing borrowing expenses which the Company has historically
incurred in order to fund its growth. In Fiscal 1998, the Company also incurred
a one-time lease cancellation fee of $155,926.
Earnings before income taxes ("EBIT") increased $1,343,968 to $1,467,347
(1,089%) for Fiscal 1998 versus Fiscal 1997. As a percentage of sales, EBIT for
Fiscal 1998 was 5.3% compared to .9% in Fiscal 1997. As a result of the
Company's increased income, the provision for income taxes increased from
$30,378 to $602,442. Net income increased from $93,001 for Fiscal 1997 to
$864,905 for Fiscal 1998. This increase in net income is directly a result of
continued sales growth with stable administrative costs, which more than offset
the increase in selling expenses. Management believes, although there can be no
assurance, that the Company can continue this trend in the future.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations from cash flow, its
credit line with Canadian Imperial Bank of Commerce ("CIBC"), and advances from
affiliates. As of May 31, 1999 the Company had net deposits of $2,927,886. The
$2,927,866 represents short term deposits maintained at the bank ($4,613,209)
less actual bank indebtedness ($1,685,323). The Company's executive officers,
either directly or through their affiliated corporations, loaned the Company an
aggregate of $656,762 in order to finance the Company's expansion. These loans
were memorialized into notes which bear interest at 8% and are repayable
quarterly over the next 12 months, provided the Company is profitable on a post
tax basis during each quarter.
The Company had a favorable change in the use of cash for operations of
$773,447 for Fiscal 1999. The principle use of cash was due to a reduction in
accounts payable and accrued expenses. This was partially offset by a decrease
in inventory.
The Company received net proceeds from its initial public offering in the
amount of $7,342,083. The proceeds were primarily used to pay down the
outstanding line of credit with CIBC. The Company believes that the proceeds of
the initial public offering, coupled with income from operations will fulfill
the Company's working capital needs for the next two years. It is the Company's
intention to utilize a significant portion of its financing to aggressively seek
synergistic acquisitions. The Company also intends to support its business
through increased marketing, advertising and distribution throughout North
America. As the Company continues to grow, bank borrowing, other debt
placements and equity offerings may be considered, in part, or in combination,
as the situation warrants.
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YEAR 2000 PREPARATION
Many computer systems and software products worldwide and throughout all
industries will not function properly as the year 2000 approaches unless
changed, due to a once-common programming standard that represents years using
two-digits. This is the "Year 2000 problem" that has received considerable media
coverage. The Company is in the process of upgrading its management information
systems. As part of this program, the Company will identify those systems and
applications that require modification, redevelopment or replacement. The
Company expects to be Year 2000 compliant by September 30, 1999 with respect to
its internal systems. Management of the Company does not believe that failure of
the Company's vendors or other third-party providers' systems to be Year 2000
compliant will have a material adverse effect upon the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS
The financial statements are included at the end of this Annual Report on
Form 10-K at the pages included below.
Page
Number
-------
Financial Statements:
Report of Independent Accountants..........................................F - 1
Balance Sheets as at May 31, 1999 and 1998................................ F - 2
Statements of Operations for the years ended
May 31, 1999, 1998 and 1997...........................................F - 4
Statements of Cash Flows for the years ended
May 31, 1999, 1998 and 1997...........................................F - 5
Statements of Stockholders' Equity for the years ended
May 31, 1999, 1998 and 1997...........................................F - 7
Notes to Financial Statements..............................................F - 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Directors
and Executive Officers of the Company:
Name Age Position
------------- --- -----------------------------------------------
Aaron Herzog 38 President, Chief Executive Officer and Director
Jacob Herzog 47 Chairman, Treasurer, Secretary and Director
Louis Drazin 63 Director
David Ben David 37 Director
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
AARON HERZOG is a co-founder of Curtis International Ltd., and has served
as the Company's President, Chief Executive Officer and Director since its
formation in 1990. Mr. Herzog also acts as sales director of the Company.
Mr. Herzog earned a degree in Management from McGill University in 1981.
JACOB HERZOG is a co-founder of Curtis International Ltd., and has served
as the Company's Chairman, Treasurer, Secretary and Director since its formation
in 1990. Mr. Herzog has been in the consumer electronics business since the
early 1970's.
LOUIS DRAZIN has been a Director of the Company since August 1998. From
1961 - present, Mr. Drazin has been a Senior Partner at Drazin, Ouaknine &
Friedman, Notaries. From 1990 - present he has been a senior executive at
Shutam Canada Inc., a real estate acquisition, investment and development
company. Mr. Drazin graduated from McGill University in 1957 with a B.A. with
honors in economics and political science. Mr. Drazin earned a Bachelor of
Civil Law from McGill University in 1960.
DAVID BEN DAVID has been a Director of the Company since August 1998. From
July 1990 - June 1997, Mr. David served as Vice President and Chief Financial
Officer of NSI Communications, Inc. From June 1997 - present, Mr. David has
served as President and Chief Operating Officer of NSI Communications, Inc. NSI
Communications, Inc. is a manufacturer of communications products. Mr. David
earned a B.A. in Economics in 1983 from Bar Ilan University in Israel, an M.B.A.
in 1987 from McGill University and a Public Accountant degree in 1989 from
McGill University.
Aaron Herzog and Jacob Herzog are brothers. There are no other family
relationships among the Company's directors and executive officers.
The term of office of each Director is until the next annual meeting of
stockholders and until a successor is elected and qualified or until the
Director's earlier death, resignation or removal from office.
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Executive officers hold office until their successors are chosen and qualified,
subject to earlier removal by the Board of Directors.
For the period of five years from November 12, 1999, Joseph Stevens &
Company, the representative of the Company's initial public offering, has been
granted the right to designate a nominee to the Company's Board of Directors.
COMMITTEES OF THE BOARD
The Company's Board of Directors has an Audit Committee, comprised of Jacob
Herzog, Louis Drazin and David Ben David, and a Compensation Committee,
comprised of Aaron Herzog, Louis Drazin and David Ben David. Neither the Audit
Committee nor the Compensation Committee met during the fiscal year ended
May 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is responsible for
making all compensation decisions with respect to the executive officers of the
Company. The Compensation Committee consists of Aaron Herzog, the Company's
President and Chief Executive Officer, Louis Drazin and David Ben David, each of
whom are independent outside directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
To the knowledge of the Company, no officers, directors, beneficial owner
of more than ten percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other person subject to Section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended May 31, 1999.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last three fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000.
Summary Compensation Table
Annual Compensation Long Term Compensation
-------------------------------- ---------------------------------------------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options/ SARs(#) Compensation
- ------------------ ------ ------ ----- ---------------- ----------------- ------------
Aaron Herzog(2) 1999 $175,000 $25,000 $ -0- -0- $12,000
CEO and Director 1998 28,000 -0- 177,192 -0- -0-
1997 28,000 -0- 213,962 -0- -0-
Jacob Herzog(3) 1999 $175,000 $25,000 $ -0- -0- $12,000
Chairman, Treasurer 1998 34,000 -0- 177,192 -0- -0-
Secretary and 1997 33,000 -0- 213,963 -0- -0-
Director
(1) Represents compensation paid to corporations (AEG Trading Limited and
Worldwide Holdings Limited) controlled by such persons solely for providing
the full time services of Messrs. Aaron and Jacob Herzog. See "Certain
Transactions."
(2) In addition, Aaron Herzog's wife received annual compensation of $35,000 in
each of the years 1997, 1998 and 1999 in her capacity as an administrative
assistant at the Company. "All Other Compensation" for 1999 includes a
car allowance of $1,000 per month.
(3) In addition, Jacob Herzog's wife received annual compensation of $35,000 in
each of the years 1997, 1998 and 1999 in her capacity as an administrative
assistant at the Company. "All Other Compensation" for 1999 includes a
car allowance of $1,000 per month.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
to each of the executives named in the Summary Compensation Table for the fiscal
year ending May 31, 1999:
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
TERM(1)
--------------------------
PERCENTAGE OF
TOTAL OF
NUMBER OF OPTIONS
SHARES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS DURING PRICE EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ---- -------- ------------ ------- ----------- ----- ----
Aaron Herzog 25,000 35.7% $5.00 11/1/08 $73,750 $309,500
Jacob Herzog 25,000 35.7% $5.00 11/1/08 $73,750 $309,500
__________
(1) The amounts shown in these columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Securities and Exchange
Commission's executive compensation disclosure rules and are not intended
to forecast appreciation of the Common Stock.
FISCAL YEAR-END OPTION VALUES
To date, no options have been exercised by the executives named in the
Summary Compensation Table. The following table sets forth certain information
concerning the number of shares covered by both exercisable and unexercisable
stock options as of May 31, 1999. Also reported are values of "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of May 31, 1999.
NUMBER OF SHARES SUBJECT TO
UNEXERCISED OPTIONS AT FISCAL VALUE OF IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR END(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Aaron Herzog 6,250 18,750 $6,250 $18,750
Jacob Herzog 6,250 18,750 $6,250 $18,750
__________
(1) Based on the closing bid price of the Company's Common Stock of $6.00 per
share on May 28, 1999.
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EMPLOYMENT AGREEMENTS
Effective June 1, 1998, the Company entered into two year employment
agreements with each of Aaron Herzog and Jacob Herzog. Such employment
agreements provide for annual salaries of $175,000 with an annual bonus of
$25,000 provided the Company meets certain performance criteria. In addition,
each is entitled to a $1,000 per month car allowance.
STOCK OPTION PLAN
The Plan will be administered by the compensation committee or the Board of
Directors, who determine among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
the options and the option exercise price.
The Plan is effective for a period for ten years, expiring in 2008. Options
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company. The Plan
is designed to enable management to attract and retain qualified and competent
directors, employees, consultants and independent contractors. Options granted
under the Plan may be exercisable for up to ten years, require a minimum two
year vesting period, and shall be at an exercise price all as determined by the
Board. Options are non-transferable except by the laws of descent and
distribution or a change in control of the Company, as defined in the Plan, and
are exercisable only by the participant during his or her lifetime. Change in
control includes (i) the sale of substantially all of the assets of the Company
and merger or consolidation with another Company, or (ii) a majority of the
Board changes other than by election by the stockholders pursuant to Board
solicitation or by vacancies filled by the Board caused by death or resignation
of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant three months
to exercise, except for termination for cause which results in immediate
termination of the option.
The exercise price of an option may not be less than the fair market value
per share of Common Stock on the date that the option is granted in order to
receive certain tax benefits under the Income Tax Act of Canada (the "ITA"). The
ITA requires that the exercise price of all future options will be at least 85%
of the fair market value of the Common Stock on the date of grant of the
options. A benefit equal to the amount by which the fair market value of the
shares at the time the employee acquires them exceeds the total of the amount
paid for the shares or the amount paid for the right to acquire the shares shall
be deemed to be received by the employee in the year the shares are acquired
pursuant to paragraph 7(1) of the ITA. Where the exercise price of the option is
equal to the fair market value of the shares at the time the option is granted,
paragraph 110(1)(d) of the ITA allows a deduction from income equal to one
quarter of the benefit as calculated above. If the exercise price of the option
is less than the fair market value at the time it is granted, no deduction under
paragraph 110(1)(d) is permitted. Options granted to any non-employees, whether
directors or consultants or otherwise will confer a tax benefit in contemplation
of the person becoming a stockholder pursuant to subsection 15(1) of the ITA.
The Company, however, has agreed not to grant any options under the Plan at less
than 100% of the fair market value of the Common Stock. Additionally, the
Company has agreed to limit the amount of options granted pursuant to the Plan
to Aaron Herzog and Jacob Herzog to an aggregate of 100,000 options,
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25
50,000 of which options have been granted and vest over a two-year period but
are not exercisable for at least six months from November 12, 1998. The options
are exercisable at $5.00 per share.
Options may not be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only the optionee.
Options under the Plan must be issued within ten years from the effective
date of the Plan.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan.
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plan may not be
increased without the consent of the stockholders of the Company. As of May 31,
1999, the Company issued an aggregate of 70,000 options pursuant to the Plan.
DIRECTORS COMPENSATION AND COMMITTEES
The Company has two formal committees; the Audit Committee, which consists
of Jacob Herzog, Louis Drazin and David Ben David and the Compensation
Committee, which consists of Aaron Herzog, Louis Drazin and David Ben David.
The Company does not currently have a Stock Option Committee or a Nominating
Committee.
The functions of the Audit Committee include: (i) recommending for approval
by the Board of Directors a firm of certified public accountants whose duty it
will be to audit the financial statements of the Company for the fiscal year in
which they are appointed, and (ii) to monitor the effectiveness of the audit
effort, the Company's internal financial and accounting organization and
controls and financial reporting. The Audit Committee will also consider
various capital and investment matters.
The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors of the Company, reviewing benefit plans
and administering each of the Company's stock option plans.
EXECUTIVE COMPENSATION POLICY
The Company's executive compensation policy is designed to attract,
motivate, reward and retain the key executive talent necessary to achieve the
Company's business objectives and contribute to the long-term success of the
Company. In order to meet these goals, the Company's compensation policy for its
executive officers focuses primarily on determining appropriate salary levels
and providing long-term stock-based incentives. To a lesser extent, the
Company's compensation policy also contemplates performance-based cash bonuses.
Cash Compensation. In determining its recommendations for adjustments to
officers' base salaries the Company focuses primarily on the scope of each
officer's responsibilities, each officer's
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contributions to the Company's success in moving toward its long-term goals
during the fiscal year, the accomplishment of goals set by the officer and
approved by the Board for that year, the Company's assessment of the quality of
services rendered by the officer, comparison with compensation for officers of
comparable companies and an appraisal of the Company's financial position. In
certain situations, relating primarily to the completion of important
transactions or developments, the Company may also pay cash bonuses, the amount
of which will be determined based on the contribution of the officer and the
benefit to the Company of the transaction or development.
Equity Compensation. The grant of stock options to executive officers
constitutes an important element of long-term compensation for the executive
officers. The grant of stock options increases management's equity ownership in
the Company with the goal of ensuring that the interests of management remain
closely aligned with those of the Company's stockholders. The Board believes
that stock options in the Company provide a direct link between executive
compensation and stockholder value. By attaching vesting requirements, stock
options also create an incentive for executive officers to remain with the
Company for the long term. See "Stock Option Plan."
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CORPORATE PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total stockholder
return from the Company's initial public offering on November 12, 1998 through
May 31, 1999 for the Company, the Nasdaq Stock Market - U.S. Index ("Nasdaq
U.S.") and the Nasdaq Non-Financial Index ("Nasdaq Non-Financial").
Graphic Omitted
Nasdaq
Curtis Nasdaq U.S. Non-Financial
------ ----------- -------------
November 12, 1998 100 100 100
February 1999 107 124 133
May 1999 114 126 136
The graph assumes that the value of the investment in the Company's Common
Stock, the Nasdaq U.S. and the Nasdaq Non-Financial was $100 on November 12,
1998 and that all dividends were reinvested. No dividends have been declared or
paid on the Company's Common Stock.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of the date hereof,
and as adjusted to give effect to the Offering and the transactions contemplated
thereby, with respect to the beneficial ownership of the Common Stock by (i)
each person known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each executive officer and director of
the Company and (iii) all executive officers and directors of the Company as a
group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned. Unless
otherwise indicated, the address of each person listed below is c/o Curtis
International Ltd., 315 Attwell Drive, Etobicoke, Ontario M9W 5C1.
Name and Address of
Beneficial Owner(1) Number Percentage
- ------------------ ----------- ----------
Aaron Herzog(2)(4) 1,780,250 33.1%
Jacob Herzog(3)(4) 1,780,250 33.1%
Louis Drazin(5) 2,500 *
David Ben David(6) 2,500 *
All Executive Officers and
Directors as a
Group (4 persons) 3,565,500 66.1%
- ---------------
*less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities and includes Shares of Common Stock issuable
upon conversion of outstanding preferred stock, or subject to options, or
warrants exercisable or convertible within 60 days.
(2) Consists of: (i) 1,689,208 shares of Common Stock owned directly by Aaron
Herzog; (ii) 84,792 shares of Common Stock owned by the A&E Herzog Family Trust
of which Aaron Herzog and Evelyn Fisher Herzog are the Trustees; and (iii) 6,250
shares of common stock issuable upon the exercise options granted under the
Company's Stock Option plan.
(3) Consists of: (i) 1,663,882 shares of Common Stock owned by Jacob Herzog;
(ii) 110,118 shares of Common Stock owned by the Herzog Family Trust of which
Jacob Herzog, Beatrice Herzog and Aaron Grubner are the Trustees; and (iii)
6,250 shares of common stock issuable upon the exercise of options granted under
the Company's Stock Option plan.
(4) Aaron and Jacob Herzog are parties to a voting trust agreement which
provides that they will vote their shares together.
(5) Consists of 2,500 shares of common stock issuable upon the exercise of
options granted under the Company's Stock Option Plan.
(6) Consists of 2,500 shares of common stock issuable upon the exercise of
options granted under the Company's Stock Option Plan.
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29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Aaron Herzog and Jacob Herzog, and companies controlled by them, advanced
monies to the Company, which advances are evidenced by promissory notes which
are non-interest bearing to May 31, 1998. Had such advances been valued at the
current value of cash flows at the Company's current rate of borrowing, the
advances would have been valued at $725,303 in 1998 and $832,295 in 1997. As of
June 1, 1998 the advances bear interest at the rate of 8% per annum and are
repayable in six quarterly installments in the 18 month period after the
Offering. The repayment of such loans on a quarterly basis is contingent on the
Company reporting profitability for such quarter on a post-tax. The loans were
utilized for working capital to fund the Company's expansion.
During Fiscal 1998 and Fiscal 1997, the Company paid an aggregate of
$354,384 and $427,925, respectively, to companies controlled by Aaron Herzog and
Jacob Herzog. These fees were in consideration solely for such companies
providing the Company with the services of Messrs. Aaron and Jacob Herzog. See
"Management#Executive Compensation."
During 1996 and 1997, the Company occupied office and warehouse space which
was owned by Worldwide Holdings Limited ("Worldwide"), a company owned by Jacob
Herzog. The Company paid rent of $102,767 during 1996, $102,587 during 1997 and
$8,548 for the month of January 1998, to Worldwide. Additionally, the Company
guaranteed the mortgage payments due from Worldwide to a mortgage corporation in
the principal amount of $1,305,000. The guarantee was also secured by the issue
of a collateral debenture containing a fixed charge and a floating charge on the
assets of the Company. On January 30, 1998, Worldwide sold the office and
warehouse space to an independent third party. The Company paid Worldwide a
lease cancellation fee of $155,926. Thus, Worldwide no longer acts as landlord
to the Company. In addition, on May 31, 1998, Worldwide was amalgamated with and
into the Company.
The Company has secured a line of credit facility with Canadian Imperial
Bank of Commerce bank, which bears interest at the bank's prime lending rate
plus 0.50% per annum. As security, the Company has provided a general assignment
of accounts receivable, a general security agreement and an assignment of fire
insurance on the business assets, with personal guarantees by Aaron Herzog and
Jacob Herzog and companies they control. The Company's line of credit extends to
$8,140,000.
In July 1998, Jacob Herzog's father-in-law loaned the Company $900,000 at
7.5% per annum, which was repaid on November 24, 1998.
In August 1998, Aaron and Jacob Herzog and their affiliates returned an
aggregate of 300,000 shares of Common Stock to the Company for cancellation, for
which they received no consideration.
Aaron Grubner, a former director, is a partner with the law firm of
Grubner, Krauss, which serves as counsel to the Company. The Company has paid
legal fees to Grubner, Krauss for services rendered.
All future transactions between the Company and its officers, directors or
5% stockholders, and their affiliates, will be on terms no less favorable than
could be obtained from unaffiliated third parties.
25
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements.
Report of Independent Accountants.............................. F-1
Balance Sheets as at May 31, 1999 and 1998..................... F-2
Statements of Operations
for the years ended May 31, 1999, 1998 and 1997.............. F-4
Statements of Cash Flows
for the years ended May 31, 1999, 1998 and 1997.............. F-5
Satements of Stockholders' Equity
for the years ended May 31, 1999, 1998 and 1997.............. F-7
Notes to Financial Statements.................................. F-8
(b) Reports on Form 8-K.
None.
(c) Exhibits.
**3.1 Bylaws of Registrant
**3.2 Articles of Amalgamation dated January 23, 1998
**3.3 Articles of Amalgamation dated May 29, 1998
**4.3 Specimen Common Stock Certificate
**10.2 1998 Stock Option Plan
**10.4 Employment Agreement with Aaron Herzog
**10.5 Employment Agreement with Jacob Herzog
**10.6 Credit Facility with Canadian Imperial Bank of Commerce
**10.7 Promissory note dated July 15, 1998
**10.8 Promissory notes dated June 1, 1998
*27 Financial Data Schedule
__________
*Filed herewith.
**Incorporated by reference to Curtis International Ltd. Registration
Statement No. 333-56661.
26
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CURTIS INTERNATIONAL LTD.
By: /s/ Aaron Herzog
--------------------------------------
Aaron Herzog
President and Chief Executive Officer
Dated: August 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Aaron Herzog
-------------------------------------
Aaron Herzog
President and Chief Executive Officer
Date: August 29, 1999
By: /s/ Jacob Herzog
--------------------------------------
Jacob Herzog
Chairman, Principal Accounting Officer
Treasurer and Secretary
Date: August 29, 1999
By:_______________________________________
Louis Drazin
Director
Date: August 29, 1999
By: /s/ David Ben David
--------------------------------------
David Ben David
Director
Date: August 29, 1999
27
32
CURTIS INTERNATIONAL LTD.
FINANCIAL STATEMENTS
AS OF MAY 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
33
CURTIS INTERNATIONAL LTD.
FINANCIAL STATEMENTS
AS OF MAY 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
Report of Independent Auditors F - 1
Balance Sheets F - 2 to F - 3
Statements of Income F - 4
Statements of Cash Flows F - 5 to F - 6
Statements of Stockholders' Equity F - 7
Notes to Financial Statements F - 8 to F - 18
34
[Schwartz Levistky Letterhead]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Curtis International Ltd.
We have audited the accompanying balance sheets of Curtis International Ltd.
(incorporated in Canada) as of May 31, 1999, and 1998 and the related statements
of income, cash flows and changes in stockholders' equity for each of the years
ended May 31, 1999, 1998 and 1997. 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 Curtis International Ltd. as of
May 31, 1999, and 1998 and the results of its operations and its cash flows for
each of the years ended May 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles in the United States of America.
Toronto, Ontario
August 13, 1999 Chartered Accountants
F - 1
35
CURTIS INTERNATIONAL LTD.
Balance Sheets
As at May 31
(Amounts expressed in US dollars)
1999 1998
$ $
ASSETS
CURRENT ASSETS
Cash 4,613,209 3,401,181
Accounts receivable (notes 3 & 7) 4,108,487 4,084,729
Inventory (notes 4 & 7) 4,997,296 5,853,118
Prepaid expenses and sundry assets 58,752 8,737
Mortgage receivable (note 5) - 75,553
----------- -----------
13,777,744 13,423,318
DEFERRED ISSUE COSTS - 89,845
PROPERTY, PLANT AND EQUIPMENT (note 6) 310,530 172,209
DEFERRED INCOME TAXES (note 10) 575,672 -
----------- -----------
14,663,946 13,685,372
=========== ===========
F - 2
36
CURTIS INTERNATIONAL LTD.
Balance Sheets
As at May 31
(Amounts expressed in US dollars)
1999 1998
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 7) 1,685,323 8,729,357
Accounts payable (note 8) 1,042,253 2,259,681
Income taxes payable 1,110,132 534,323
Current portion of advances from
affiliated parties (note 9) 656,762 483,535
----------- -----------
4,494,470 12,006,896
ADVANCES FROM AFFILIATED PARTIES (note 9) - 241,768
----------- -----------
4,494,470 12,248,664
----------- -----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 10) 7,342,163 80
CUMULATIVE TRANSLATION ADJUSTMENT (47,062) (93,990)
RETAINED EARNINGS 2,874,375 1,530,618
----------- -----------
10,169,476 1,436,708
----------- -----------
14,663,946 13,685,372
=========== ===========
The accompanying notes are an integral part of these financial statements.
F - 3
37
CURTIS INTERNATIONAL LTD.
Statements of Income
For the years ended May 31
(Amounts expressed in US dollars)
1999 1998 1997
$ $ $
SALES (note 17) 39,309,062 27,471,613 14,914,142
Cost of sales 32,042,499 22,349,967 12,173,748
----------- ---------- -----------
GROSS PROFIT 7,266,563 5,121,646 2,740,394
----------- ---------- -----------
EXPENSES
Administrative 1,644,825 1,758,313 1,730,592
Selling 2,288,953 1,265,906 654,978
Financial 880,263 474,154 231,445
Lease cancellation fee - 155,926 -
----------- ---------- -----------
4,814,041 3,654,299 2,617,015
----------- ---------- -----------
INCOME BEFORE INCOME TAXES 2,452,522 1,467,347 123,379
Income taxes (note 13) 1,108,765 602,442 30,378
----------- ---------- -----------
NET INCOME 1,343,757 864,905 93,001
=========== ========== ===========
NET INCOME PER WEIGHTED
AVERAGE SHARE (note 12) 0.29 0.23 0.03
----------- ---------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(note 10) 4,591,692 3,700,000 3,700,000
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F - 4
38
CURTIS INTERNATIONAL LTD.
Statements of Cash Flows
For the years ended May 31
(Amounts expressed in US dollars)
1999 1998 1997
$ $ $
Cash flows from operating activities:
Net income 1,343,757 864,905 93,001
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 51,586 17,172 17,346
Decrease (increase) in accounts receivable (15,740) (2,446,164) 113,840
Decrease (increase) in inventory 566,982 (4,734,388) 10,675
Decrease (increase) in income taxes recoverable -- 11,419 (7,113)
Decrease (increase) in prepaid expenses and
sundry assets (48,942) (524) (2,182)
Increase (decrease) in accounts payable and
accrued expenses (1,163,492) 749,617 826,231
Increase (decrease) in income taxes payable 601,476 551,772 --
Increase (decrease) in deferred income taxes (562,180) -- --
------------ ---------- ---------
Net cash generated by operating activities 773,447 (4,986,191) 1,051,798
------------ ----------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (188,612) (35,730) --
Payment of mortgage receivable (72,929) (3,389) 872
------------ ----------- ---------
Net cash used in investing activities (261,541) (39,119) 872
------------ ----------- --------
- -
The accompanying notes are an integral part of these financial statements.
F - 5
39
CURTIS INTERNATIONAL LTD.
Statements of Cash Flows
For the years ended May 31
(Amounts expressed in US dollars)
1999 1998 1997
$ $ $
Cash flows from financing activity:
Increase (decrease) in bank indebtedness (6,780,298) 7,504,507 (463,749)
Increase (decrease) in advances from affiliated
parties (58,781) (92,517) 16,271
Deferred issuance costs 86,724 (92,779) --
Redemption of Class B share -- (1) --
Issuance of common stock, net 7,342,083 -- --
--------- --------- ---------
589,728 7,319,210 (447,478)
--------- --------- ---------
Effect of foreign currency exchange rate changes 110,394 (144,261) 1,260
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,212,028 2,149,639 606,452
Cash and cash equivalents
-- Beginning of year 3,401,181 1,251,542 645,090
--------- --------- ---------
-- End of year 4,613,209 3,401,181 1,251,542
========= ========= =========
Interest paid, net 255,357 408,649 142,792
========= ========= =========
Income taxes paid 490,765 50,670 44,221
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F - 6
40
CURTIS INTERNATIONAL LTD.
Statements of Stockholders' Equity
For the years ended May 31
(Amounts expressed in US dollars)
Common
Stock Cumulative
Number of Retained Translation
Shares Amounts Earnings Adjustments
--------- --------- --------- -----------
$ $ $
Balance as of May 31, 1996 3,700,000 80 572,712 (29,415)
Foreign currency translation - - - 14,874
Net income for the year - - 93,001 -
--------- --------- --------- -----------
Balance as of May 31, 1997 3,700,000 80 665,713 (14,541)
Foreign currency translation - - - (79,449)
Net income for the year - - 864,905 -
--------- --------- --------- -----------
Balance as of May 31, 1998 3,700,000 80 1,530,618 (93,990)
Foreign currency translation - - - 46,928
Issuance of capital stock 1,673,145 7,342,083 - -
Net income for the year - - 1,343,757 -
--------- --------- --------- -----------
Balance as of May 31, 1999 5,373,145 7,342,163 2,874,375 (47,062)
========= ========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F - 7
41
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
1. BASIS OF PRESENTATION
On January 26, 1998, Curtis International Ltd. amalgamated with Unique
Investments Ltd. and AEG Trading Ltd. to form Curtis International Ltd. On
May 31, 1998, the company amalgamated with Worldwide Holdings Ltd. to form
Curtis International Ltd. At the time of the amalgamations the only assets
of the holding companies were shares of Curtis International Ltd. These
financial statements reflect the operations of Curtis International Ltd.
for each of the years ended May 31, 1999, 1998 and 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i) Principal Activities
The company was incorporated in Canada on December 12, 1990. The
company is principally engaged in the distribution and sales of
electronics, audio visual products and computer accessories in Canada
and the United States of America.
ii) Cash, Cash Equivalents and Bank indebtedness
Cash, cash equivalents and bank indebtedness includes cash in bank,
amounts due to banks, and any other highly liquid investments
purchased with a maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of those
instruments.
iii) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these
instruments or the current nature of interest rates borne by these
instruments.
iv) Inventory
Inventory is valued at the lower of cost and net realizable value.
Cost is determined on the average cost basis.
v) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are amortized
on the declining balance basis over their estimated useful lives.
Leasehold improvements are amortized on the straight-line basis over
the term of the lease.
F - 8
42
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
vi) Sales
Sales represent the invoiced value of goods supplied to customers.
Sales are recognized upon delivery of goods and passage of title to
customers.
vii) Income taxes
The company accounts for income tax under the provisions of Statement
of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using
the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences
between the tax and financial statement bases of assets and
liabilities.
viii) Accounting Changes
On January 1, 1997, the company adopted the provision of SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that
long-lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 121
is effective for financial statements for fiscal years beginning
after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the company's result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting f0r stock-based compensation. It
encourages, but does not require, companies to recognize compensation
expense for stock-based compensation to employees based on the new
fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting
rules to disclose pro forma net income and earnings per share under
the new method. SFAS No. 123 is effective for financial statements
for fiscal years beginning after December 15, 1995. The company has
adopted the disclosure provisions of SFAS No. 123.
F - 9
43
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
ix) Net Income and Fully Diluted Net Income Per Weighted Average Common
Stock
Net income per common stock is computed by dividing net income for the
year by the weighted average number of common stock outstanding during
the year.
Fully diluted net income per common stock is computed by dividing net
income for the year by the weighted average number of common stock
outstanding during the year, assuming that all dilutive stock options
granted as described in note 10 were exercised. Stock warrants as
described in note 10 have not been included in the fully diluted net
income per common stock calculations as their inclusion would have
been anti-dilutive.
x) Foreign Currency Translation
The translation of the financial statements from Canadian dollars into
United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in
effect at the balance sheet date and income and expense accounts are
translated using an average exchange rate prevailing during each
reporting period. No representation is made that the Canadian dollar
amounts could have been, or could be, converted into United States
dollars at the rates on the respective dates and or at any other
certain rates. Adjustments resulting from the translation are included
in the cumulative translation adjustments in stockholders' equity.
xi) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals in the United States of America
requires management to make estimates and assumptions that affect
certain reported amounts of assets and liabilities and disclosures of
contingent 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.
3. ACCOUNTS RECEIVABLE
1999 1998
$ $
Accounts receivable 4,981,727 4,514,714
Less: Allowance for doubtful accounts 873,240 429,985
--------- ---------
Accounts receivable, net 4,108,487 4,084,729
========= =========
F - 10
44
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
4. INVENTORY
Inventory is comprised entirely of finished goods.
5. MORTGAGE RECEIVABLE
The company sold land and building owned by it on February 10, 1994 and
took back a mortgage due February 10, 1999. The mortgage was repaid during
the year.
6. PROPERTY, PLANT AND EQUIPMENT
1999 1998
-------------------------------------- -------
Accumulated
Cost Amortization Net Net
------- ------------ ------- -------
$ $ $ $
Land 29,574 29,574 29,920
Condominium 118,297 33,510 84,787 90,293
Furniture and
equipment 154,744 53,608 101,136 15,838
Automobile 33,970 31,592 2,378 3,437
Computer equipment 97,127 40,146 56,981 31,778
Leasehold
improvements 53,511 17,837 35,674 943
------- ------------ ------- -------
487,223 176,693 310,530 172,209
======= ============ ======= =======
Amortization for the year amounted to $51,586; ($17,172 in 1998 and 7,346
in 1997).
7. BANK INDEBTEDNESS
The bank indebtedness bears interest at the bank's prime lending rate plus
0.50% per annum. As security, the company has provided a general assignment
of accounts receivable, a general security agreement and an assignment of
fire insurance on the business assets, guarantees by the directors and
affiliated companies, and assignment of life insurance totalling
$1,325,000. The company's line of credit extends to $8,140,000 and is
limited based on a formula which relates to receivables and inventory held
by the company as at May 31, 1999. The company met all covenants imposed by
the bank.
F - 11
45
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
8. ACCOUNTS PAYABLE
1999 1998
$ $
Trade payables 318,069 322,327
Accrued expenses 724,184 1,937,354
--------- ---------
1,042,253 2,259,681
========= =========
9. ADVANCES FROM AFFILIATED PARTIES
The advances from affiliated parties bear interest at 8% per annum
commencing June 1, 1998. The principal sums shall be repaid in equal
quarter yearly installments and the last payment is due and payable on
February 28, 2000. Had the advances been valued at the current value of
cash flows at the companies current rate of borrowing the advances would
have been valued at $725,303 in 1998 and $832,295 in 1997. Interest of
$54,448 would have been imputed for 1998 and interest of $49,823 would have
been imputed for 1997.
10. CAPITAL STOCK
a) Authorized
1,000,000 Preference shares
15,000,000 Common shares
Issued
1999 1998
$ $
5,373,145 Common shares (3,700,000 in 1998) 7,342,163 80
========= =====
Curtis International Ltd. amalgamated with Unique Investments Ltd. and AEG
Trading Ltd. on January 26, 1998 and with Worldwide Holdings Limited on May
31, 1998. There was no substantive effect to the amalgamations which
reorganized companies under common control. The outstanding shares of
4,000,000 issued on the amalgamations are treated as stock splits and
subsequent to May 31, 1998, the company redeemed 300,000 common shares at
no consideration. As a result 3,700,000 common shares were outstanding and
therefore the shares have been retroactively restated as of May 31, 1996.
F - 12
46
CURTIS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
10. CAPITAL STOCK (cont'd)
b) During 1998, the company issued 1,673,145 common shares and 165,000
warrants as follows:
Proceeds received from issuance $8,365,725
Issue costs (net of deferred income taxes of $575,672) 1,023,642
----------
Net proceeds $7,342,083
==========
Net proceeds include the non-cash items of deferred issue costs and
deferred income tax recoverable.
As at May 31, 1999, the company had 165,000 warrants outstanding to
purchase 165,000 shares of the common stock at $8.25 per share. The
warrants expire in 2003.
c) In 1998, the board of directors and stockholders adopted a Stock
Option Plan, pursuant to which 400,000 shares of Common Stock are
provided for issuance. The Plan is administered by the compensation
committee or the board of directors.
The Plan is effective for a period of ten years, expiring in 2008.
Options may be granted to officers, directors, consultants, key
employees, advisors and similar parties who provide their skills and
expertise to the Company. Options granted under this Plan may be
exercisable for up to ten years, require a minimum two year vesting
period, and shall be at an exercise price as determined by the board.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date the option is granted in
order to receive certain tax benefits under the Income Tax Act of
Canada (the "ITA"). The exercise price of all future options will be
at least 85% of the fair market value of the Common Stock on the date
of granting of the options.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become available
again for issuance under the Plan.
The Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved
for issuance upon the exercise of options granted under the Plan may
not be increased without the consent of the stockholders of the
Company.
The Board has granted 70,000 Options to date under the Plan to 4
persons, including officers, directors and key employees. The options
are exercisable at $5.00 to 5.50 per share.
F - 13
47
CURTIS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
11. COMPREHENSIVE INCOME
The company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" as of June 1, 1998 which requires new
standards for reporting and display of comprehensive income and its
components in the financial statements. However, it does not affect net
income or total stockholders' equity. The components of comprehensive
income are as follows:
1999 1998 1997
--------- ------- -------
$ $ $
Net income 1,343,757 864,905 93,001
Other comprehensive income (loss):
Foreign currency translation adjustments 46,928 (79,449) 14,874
--------- ------- -------
Comprehensive income 1,390,685 785,456 107,875
========= ======= =======
The components of accumulated other comprehensive income (loss) are as follows:
Accumulated other comprehensive loss, May 31, 1996 $(29,415)
Foreign currency translation adjustments for the year ended
May 31, 1997 14,874
---------
Accumulated other comprehensive loss, May 31, 1997 (14,541)
Foreign currency translation adjustments for the year ended
May 31, 1998 (79,449)
Accumulated other comprehensive loss, May 31, 1998 (93,990)
Foreign currency translation adjustments for the year ended
May 31, 1999 46,928
--------
Accumulated other comprehensive loss, May 31, 1999 $(47,062)
========
The foreign currency translation adjustments are not currently adjusted for
income taxes since the company is situated in Canada and the adjustments
relate to the translation of the financial statements from Canadian dollars
into United States dollars which is done only for the convenience of the
reader as disclosed in note 2(x).
F - 14
48
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
12. EARNINGS PER COMMON SHARE
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of both
basic and diluted earnings per share.
The stock options granted and outstanding warrants were not included in a
computation of earnings per common stock assuming dilution because the
exercise prices were greater than the average market price of the common
stock.
13. INCOME TAXES
1999 1998 1997
$ $ $
a) Current 1,108,765 602,442 30,378
b) Current income taxes consist of: ========= ======= ======
Amount calculated at basic Federal and
Provincial rates 1,079,110 611,490 28,179
Permanent and other differences 29,655 -- 2,199
Timing differences -- (9,048 --
--------- ------- ------
1,108,765 602,442 30,378
========= ======= ======
F - 15
49
CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
14. LEASE COMMITMENT
Minimum annual payments under the company's operating leases for premises,
exclusive of certain operating costs for which the company is responsible
is $151,630. The lease expires May 31, 2002.
15. TRANSACTIONS WITH AFFILIATED COMPANIES
1999 1998 1997
$ $ $
Management fees - 354,384 427,933
Rent expense - 66,154 102,587
Occupancy costs - 51,114 71,132
Interest paid to affiliated companies 56,010 - -
16. CONTINGENT LIABILITIES
The company's products are purchased overseas. The payment arrangement is
done through a letter of credit. Once the product leaves the country of
origin, the liability is recognized by the Company and results in an
accepted letter of credit. The company was contingently liable to the bank
for unaccepted letters of credit of approximately $2,540,000 as at May 31,
1999.
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CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
17. SEGMENTED INFORMATION
a) Sales to Major Customers
1999 1998 1997
$ $ $
Combined sales of top five customers 27,384,141 17,350,197 8,532,338
=========== =========== ===========
Percentage of total sales 70% 63% 57%
Accounts receivable due from major customers 3,016,080 2,814,165 1,448,283
Percentage of total accounts receivable 73% 69% 80%
Ongoing credit evaluations of each customer's financial condition are
performed and, generally, no collateral is required. The company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations.
b) Sales by Geographic Area
1999 1998 1997
$ $ $
Canada 19,260,580 15,754,678 12,697,084
United States of America 19,762,638 11,716,935 2,217,058
---------- ---------- ----------
39,023,218 27,471,613 14,914,142
========== ========== ==========
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CURTIS INTERNATIONAL LTD.
Notes to Financial Statements
May 31, 1999, 1998 and 1997
(Amounts expressed in US dollars)
17. SEGMENTED INFORMATION (cont'd)
c) Net Income by Geographic Area
The company's accounting records do not readily provide information on
net income by geographic area. Management is of the opinion that the
proportion of net income based principally on sales, presented below,
would fairly present the results of operations by geographic area.
1999 1998 1997
$ $ $
Canada 663,234 495,782 80,860
United States of America 680,523 369,123 12,141
--------- ------- ------
1,343,757 864,905 93,001
========= ======= ======
d) Identifiable Assets by Geographic Area
All identifiable assets were located in Canada for 1999, 1998 and
1997.
e) Purchases From Major Suppliers
1999 1998 1997
$ $ $
Purchases from major suppliers 13,740,209 3,754,794 2,093,884
Percentage of total purchases 44% 17% 17%
Accounts payable due to major suppliers 292,118 368,141 288,629
Percentage of total accounts payable 28% 16% 18%
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect a company's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
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52
EXHIBIT INDEX
Exhibit No. Description
- ----------- -------------------------------------------------------
**3.1 Bylaws of Registrant
**3.2 Articles of Amalgamation dated January 23, 1998
**3.3 Articles of Amalgamation dated May 29, 1998
**4.3 Specimen Common Stock Certificate
**10.2 1998 Stock Option Plan
**10.4 Employment Agreement with Aaron Herzog
**10.5 Employment Agreement with Jacob Herzog
**10.6 Credit Facility with Canadian Imperial Bank of Commerce
**10.7 Promissory note dated July 15, 1998
**10.8 Promissory notes dated June 1, 1998
*27 Financial Data Schedule
__________
*Filed herewith.
**Incorporated by reference to Curtis International Ltd. Registration
Statement No. 333-56661.