UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the year ended October 31, 1996
Commission file # 1-6496
LUNDELL TECHNOLOGIES, INC.
--------------------------
Name of small business issuer in its charter
State of Washington 91-0413022
- ------------------- ----------
State of Incorporation I.R.S. Employer Identification No.
45 Orchard Street
Manhasset, New York 11030
-------------------------
Address of principal executive offices
Issuer's telephone no. (516) 869-7960
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes /_/ No /X/
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Issuer's revenues for the year ended October 31, 1996 were $453,026
The aggregate market value of the voting stock held by non-affiliates is
$1,500,000. The market value is an estimate by management based upon the book
value of the registrant as well as the value of the registrant as an operating
business. Only estimates are available as a result of there being no published
or otherwise available bid and/or asked quotes during the past 60 days.
As at April, 1997, there were 5,165,500 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Form 8-K with exhibits filed on January 31, 1996.
Form 8-K/A filed on or about December 4, 1996.
Form 8-K filed on April 25, 1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL The Company was incorporated under the laws of the State of
Washington on March 6, 1940 as Slate Creek Mining Company. The Company's name
was changed to Western Gold Mining, Inc. on April 18, 1952. On February 5, 1996,
the Company filed Articles of Merger with the State of Washington evidencing
that the Company had merged with Lundell Technologies, Inc. a Delaware
corporation ("Lundell Delaware") wherein the Company was the surviving
corporation (the "Merger"). Also on February 5, 1996, the Company filed Articles
of Amendment to the Company's Articles of Incorporation providing (i) that the
Company's name was changed to Lundell Technologies, Inc., and (ii) that the
authorized capital of the Company was increased from 5,000,000 shares of common
stock ($.05 par value) to 20,000,000 shares of common stock ($.001 par value).
These actions were approved by the Shareholders of the Company in a special
meeting held January 12, 1996.
Pursuant to the Merger approved by the Shareholders on January 12, 1996,
the Company effected a "reverse split" of its common stock, converting each
outstanding share of common stock to 0.0800261 share. As a result, the 4,998,368
shares of Company common stock outstanding immediately prior to the Merger were
converted into 400,000 shares. Subsequently, in consideration for the surrender
of all of the 5,000,000 outstanding shares of the common stock of Lundell
Delaware, the Company issued common stock to the former shareholders of Lundell
Delaware at a ratio of 0.9 share of Company common stock for each share of
Lundell Delaware common stock. As a result, the former shareholders of Lundell
Delaware currently hold 4,500,000 shares of the Company's common stock. In
addition, the Shareholders approved, and the Company effected, the issuance of
70,000 post-split shares of common stock for legal services rendered.
Prior to the Merger, the Company's activities consisted of exploration for
minerals, mill test runs and periodic maintenance of its former plant and
facilities on its gold mining property in the Slate Creek Mining District,
Whatcom County, Washington. As part of the Merger transaction approved by
Shareholders on January 12, 1996, the Company distributed all of its right title
and interest in and to its mining properties (patented and unpatented claims), a
Class D Road Permit, and 30,000 post-split shares of common stock to North
Cascades Exploration, Inc., of which Mark L. Johnson, former President and a
former Director of the Company, is President and a Director. In consideration of
the distribution, North Cascades Exploration, Inc. assumed certain liabilities
of the Company, including past management fees, mining claim lease fees,
reforestation expense, debris clean-up expense, accounting and legal fees, and
taxes.
The Company's mining operations had no revenue for the years 1993, 1994,
and 1995. The Company has discontinued all mining operations.
Lundell Delaware was incorporated in the State of Delaware on November 29,
1994. Lundell Delaware acquired Lundell Manufacturing Company, Incorporated, an
Iowa corporation ("Lundell Manufacturing"), on August 4, 1995. Lundell
Manufacturing is a wholly owned subsidiary of the Company.
On February 6, 1996, Lundell Aquametrics, Inc. ("LAC") was incorporated in
the State of Delaware as a wholly owned subsidiary of the Company.
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BUSINESS OF THE COMPANY
LUNDELL MANUFACTURING.
General
The business environment for the solid waste industry has been challenging
due to a court decision that lifts restrictions on haulers as to where they can
dispose of waste. Under the decision, haulers can dispose of waste at
practically any location whereas in the past they were required to deliver to
sites which, because they assessed higher tip fees, were able to support
alternative disposal and recycling facilities. The reduced use of such disposal
sites has in turn caused a number of the Company's projects to be put on hold.
In addition, there has been increase in landfill capacity in a number of
locations and lower prices due to competition. At the same time, there was a
world-wide shortage of paper, causing paper prices to soar and diverting large
amounts of paper from the waste stream. All of these factors caused a decline in
the number of recycling systems and projects produced by the Company. However,
substantial improvement for the solid waste recycling industry is expected by
the Company as the Company believes that landfill fees will increase and paper
prices have been reduced from over $200 per ton to $30 per ton.
Lundell Manufacturing is in the business of developing, designing,
manufacturing and marketing solid waste recycling equipment. The equipment
produced by the Company serves both to reduce reliance on landfills and to
convert solid waste into recycled products suitable for use as fuel, as
construction material, or other industrial application. The Company recently
announced its new model 860 densifier, which features patented heated dies,
increased horsepower over previous models, a newly designed die, and heavier
main, base and side plates. The Company exhibits at major trade shows and
conventions for the recycling and environmental industries, and markets by means
of independent sales representatives, printed advertisements and direct mail.
The Company markets its equipment and related support and consulting services
internationally.
During the year ended October 31, 1996 ("Fiscal 1996"), customers
accounting for greater than ten percent of the Company's net sales was the
following: Marshall Municipal Utilities (38%).
Fiscal 1997 Business and Backlog
In January, 1996, the Company entered into an agreement (the "Thai
Agreement") with Group 79 Company. Ltd., ("Group") a Thai corporation, pursuant
to which the Company and Group agreed that Tung Bua Ltd., a Thai corporation,
would be formed to build a solid waste recycling center near Bangkok, Thailand.
The Thai Agreement provided that: (i) Group would invest 80 million Baht (U.S.
$ 3.2 million) in Tung Bua Ltd.; (ii) Tung Bua Ltd. would borrow 144 million
Baht (U.S.$ 5.76 million) from a bank, of which the Company would guarantee
repayment of 48 million Baht (U.S. $ 1.92 million); (iii) Tung Bua Ltd. would
issue purchase orders to the Company for equipment and buildings totaling in
excess of U.S. $7 million; (iv) the Company would issue a credit to Tung Bua
Ltd. in an amount of 40 million Baht (U.S. $ 1.6 million; and, (v) the Company
would become the owner of one third (33 1/3%) of Tung Bua Ltd. upon delivery of
the full purchase order and the issuance of the equipment credit. In September
and October, 1996, the Company received: (i) purchase orders totaling
approximately U.S. $7.25 million from Tung Bua Ltd.; and (ii) Irrevocable
Letters of Credit for approximately U.S. $ 5.675 million. The Company commenced
production of the equipment and building in November, 1996, and made partial
delivery in February, 1997. The Company believes it will complete delivery of
the Tung Bua Ltd. purchase order in the third quarter of fiscal 1997.
3
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In October 1996, the Company received a purchase order from Reedy Creek
Improvement District ("Reedy Creek") of Lake Buena Vista, Florida for $1.07
million in recycling equipment. Reedy Creek is controlled by The Walt Disney
Company. As at April 14, 1997 approximately 90% of the equipment has been
delivered. Reedy Creek will employ the equipment to pelletize paper waste for
use as a fuel supplement.
In November 1996, the Company delivered a Lundell system (the "System") to
Great Lakes Chemical Corp. of Omaha, Nebraska and received payment of $363,977.
The System will grind, shred, and pelletize corn stalks for later processing
into chemicals.
Intellectual Property
The Company holds nine patents and over 169 patent claims pending in waste
processing systems. Over the past two years, the Company has devoted 1,000 hours
on research and development activities, none of which expense was passed
directly on to customers.
LUNDELL AQUAMETRICS
LAC offers its line of products and services as a response to industry's
need to comply with the federal Clean Water Act, regulations promulgated by the
Environmental Protection Agency, and various state water recycling and
anti-pollution initiatives. LAC designs, markets and installs water recycling
systems and components for a variety of industrial and agricultural
applications. In addition, the Company provides field services to purchasers of
its equipment, and various laboratory and consulting services to clients in the
electronics, jewelry and mining industries. The waste water treatment
technologies LAC are applicable to many different businesses, purposes, and
customers, including the following:
Jewelry Manufacture Electronics
Automotive Service Car Wash
Potable Water Bottlers Potable Water Purification
Pulp and Paper Bleaching Process Water Purification
Medical, Bio Clean Rooms Phenol and Cyanide Removal
Iron and Manganese Removal Cooling Towers, Bio Control
Taste, Odor and Color Removal Aquaculture, Fish Farming
Fire and Smoke Restoration Odor Control and Sterilization
Electronic DI Water Agriculture, Perishable Foods
H2S Removal Wellhead and Cistern Treatment
Cold Water Laundry Wash Swimming Pools and Spas
Mold and Fungus Control
The Company believes that demand for LAC products and services increases in
relation to government enforcement, rising prices for water and other raw
materials, and rising costs of waste disposal.
LAC competes mainly with other small engineering and consulting firms. The
Company expects to experience little direct competition from the big regional
and national waste treatment equipment manufacturers because these companies
focus on very large industrial and municipal systems and tend to avoid smaller
clients who require customized service, which LAC provides. LAC does not
consider itself a factor in the water recycling industry.
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As at April 14, 1997, LAC has executed purchase orders for water recycling
equipment in an aggregate amount of $220,550.
Employees.
The Company, including its Lundell Manufacturing and LAC subsidiaries,
currently employs thirty one employees, all of whom are full-time.
ITEM 2. DESCRIPTION OF PROPERTY
In December 1996, the Company purchased a two story office building in
Manhasset, New York, in which the Company's executive offices are located. The
Company paid the $417,500 purchase price in cash. The building contains
approximately 2,700 square feet.
The Lundell Manufacturing facility, which is owned by Lundell
Manufacturing, is located in Cherokee, Iowa. The single-storey structure
contains approximately 197,000 square feet (approximately 3,000 square feet of
which is office space and the balance devoted to manufacturing and warehousing),
and is situated on approximately 24.5 acres of land.
LAC leases space from an unaffiliated party. It is a single story facility
containing 6,000 square feet, located in Johnston, Rhode Island.
ITEM 3. LEGAL PROCEEDINGS
In fiscal 1992, a jury awarded Lundell Manufacturing a judgment of
$1,058,000 for libel against American Broadcasting Companies ("ABC") for a story
concerning Lundell Manufacturing which aired nationwide on ABC television. The
jury award was vacated by the trial judge but was reinstated by the Eighth
Circuit Court of Appeals. ABC had filed a petition for a Writ of Certiorari to
the U.S. Supreme Court asking the Supreme Court to hear their appeal. On April
21, 1997, the Supreme Court rejected ABC's appeal. The Company has not recorded
a gain or the related contingent legal fees of approximately one third of the
settlement plus expenses because proceeds from this lawsuit were assigned to the
former shareholders of Lundell Manufacturing on February 2, 1994. Such former
shareholders, who are now shareholders of the Company (see "Item 11 - Security
Ownership of Certain Beneficial Owners and Management"), have agreed to pay all
of the related costs of litigation. However, $200,000 of the proceeds were
assigned in settlement of a judgment. (See below)
On October 5, 1990 a judgment was entered in the United States District
Court for the District of North Dakota against Lundell Manufacturing in favor of
Densified Fuel, Inc. ("DFI") relative to the performance of a recycling system
sold in December 1985. On March 31, 1997, Lundell Manufacturing and DFI entered
into a settlement agreement whereby Lundell Manufacturing agreed, with the
consent of the former shareholders of Lundell Manufacturing, that $200,000 of
the proceeds obtained from the judgment against ABC (plus interest) will be
assigned to DFI. In connection with the foregoing agreement, the Company
indemnified the former shareholders for the $200,000.
5
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On June 14, 1996, a judgment in the amount of $78,212.95 was entered in the
Iowa District Court for Cherokee County against Lundell Manufacturing and Vernon
Lundell in favor of Cook, Schuhmann & Groseclose, n/k/a Staley Delisio & Cook,
Inc. ("Staley") of Anchorage, Alaska. On or about August 23, 1996, Lundell
Manufacturing tendered to Staley a partial payment of the judgment in the amount
of $2,500. On or about November 19, 1996, the parties entered into a settlement
agreement whereby Lundell Manufacturing paid to Staley $30,000 in full
settlement of the judgment.
On December 16, 1996, Lundell Manufacturing received $92,500 in settlement
of a judgment obtained by Lundell Manufacturing in the U.S. District Court for
the Western District of Pennsylvania against Integra Bank, n/k/a National City
Bank of Pennsylvania, the successor of Ray's Disposal, Inc. In consideration for
such payment, Lundell Manufacturing released all of its claims relating to its
sale to Ray's Disposal, Inc. of a solid waste recycling system.
The Company is involved in various other legal actions arising from the
normal conduct of business. Management believes the outcome of these proceedings
will not have a material effect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 12, 1996, the Company, while still known as Western Gold Mining,
Inc., convened a special meeting of its Shareholders. Proxies were solicited for
this meeting in accordance with Section 14 of the Exchange Act. At the meeting,
the following proposed resolutions and election were submitted to a vote:
1. To approve a recapitalization and conversion of the Company's common
stock.
2. To amend the Company's Articles of Incorporation to change the stated
purpose of the Company.
3. To ratify and approve the transfer of certain liabilities, assets, and
common stock of the Company to North Cascades Exploration, Inc.
4. To ratify and approve the proposed acquisition agreement between the
Company and Lundell Technologies, Inc., a Delaware corporation.
5. To approve the issuance of 70,000 shares of the Company's common stock
as compensation for legal services rendered.
6. To amend the Company's Articles of Incorporation to change the name of
the Company from Western Gold Mining, Inc. to Lundell Technologies,
Inc.
7. To elect the following persons as directors of the Company:
Steven Massey Lawrence Artz
Stephen Paulsen Steven Lundell
Bernard Artz Vernon Lundell
With respect to each of the resolutions and election considered at the
meeting, the shareholders voted in the following manner:
1. 3,381,177.5 in favor; 50,400 against; 60,900 abstaining; and
144,375 exercising dissenters' rights.
2. 3,387,177.5 in favor; 46,800 against; 60,900 abstaining; and
144,375 exercising dissenters' rights.
3. 3,375,802.5 in favor; 49,975 against; 67,200 abstaining; and
144,375 exercising dissenters' rights.
4. 3,382,177.5 in favor; 51,900 against; 60,900 abstaining; and
144,375 exercising
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dissenters' rights.
5. 3,351,677.5 in favor; 72,900 against; 72,200 abstaining; and
144,375 exercising dissenters' rights.
6. 3,379,977.5 in favor; 52,100 against; 61,900 abstaining; and
144,375 exercising dissenters' rights.
7. 3,379,177.5 in favor; 35,100 against; 2,200 abstaining; and
144,375 exercising dissenters' rights.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public trading market for the Company's common stock.
The Company expects to apply for trading of its common shares on the OTC
Bulletin Board in the second quarter of 1997.
The approximate number of holders of record of the Company's common stock
is 1,400.
The Company has never paid dividends on its common stock. As a matter of
policy, the Company intends to reinvest retained earnings, if any, into
operations, and it is not the intention of the Company to pay any dividends in
the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains trend information and other forward
looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ materially from the Company's historical
results of operations and those discussed in the forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, those identified.
IN REVIEWING MANAGEMENT'S DISCUSSION AND ANALYSIS, REFERENCE SHOULD BE MADE TO
THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED AS ITEM 7 - FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB.
Overview
The Company operates principally to facilitate the sale of domestic product
to foreign markets. The original shareholders and officers of the Company
collectively have approximately fifty years of worldwide marketing experience.
Lundell Manufacturing is engaged principally in the manufacturing and
worldwide distribution of solid waste recycling equipment. Lundell Manufacturing
holds nine patents and over 169 patents pending in waste processing systems.
Lundell Manufacturing also manufactures and sells replacement parts for a line
of agricultural equipment it previously manufactured and sold throughout the
United States.
LAC designs, markets and installs water recycling systems and components
for a variety of industrial applications.
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Financial Statements Analyzed
The consolidated financial statements of the Company for Fiscal 1996 are
being compared and analyzed to the combination of the Company's financial
statements for the period November 29, 1994 (incorporation date of Lundell
Delaware) to November 4, 1995 (which encompasses Lundell Manufacturing from the
merger date of August 4, 1995) and for the period November 6, 1994 to August 3,
1995 (Predecessor Period) for Lundell Manufacturing ("Combined 1995 Year").
Net Sales
The Company's net sales decreased to $453,026 for Fiscal 1996 from $637,664
for the Combined 1995 Year, or a decrease of $184,638. The Company's net sales
consist primarily of solid waste recycling equipment and replacement parts. The
decrease in net sales can be attributed to the lack of marketing. The domestic
demand for the Company's products has continued to declined. In Fiscal 1996 the
Company refocused its marketing efforts to the developing foreign markets.
Cost of Sales
The Company's cost of sales decreased to $304,592 for Fiscal 1996 from
$309,317 for the Combined 1995 Year, or a decrease of $4,725. The gross profit
percentage decreased to 32.8% for Fiscal 1996 from 51.5%, or a decrease of
18.7%. The primary reason for the decrease in gross profit percentage was fixed
overhead (direct labor, heat, light and power) in anticipation of a significant
increase in sales for the year ended October 31, 1997 ("Fiscal 1997").
Operating Expenses
The Company's operating expenses increased to $1,060,581 for Fiscal 1996
from $773,453 for the Combined 1995 Year, or an increase of $287,128. Selling,
general and administrative expenses increased by $16,762 in Fiscal 1996 due to
the preparation for significant sales for Fiscal 1997. Depreciation and
amortization increased by $270,366 in Fiscal 1996 as a result of the values
ascribed to certain property, plant and equipment and goodwill in the merger
with Lundell Manufacturing.
Other Income and Expenses
The Company's other income and expenses increased to $669,389 for Fiscal
1996 from ($87,511) for the Combined 1995 Year, or an increase of $756,900.
Settlement income with vendors and customers increased by $750,713 in Fiscal
1996. On March 31, 1997 Lundell Manufacturing and Densified Fuels, Inc. entered
into a settlement agreement, as a result of which the Company recognized other
income from this transaction of $649,000 (see Item 3 - Legal Proceedings). In
addition, the Company recognized $136,713 in other income upon entering into two
additional settlements in Fiscal 1996. Interest expense decreased by $71,169 in
Fiscal 1996 while interest expense - related parties increased by $64,982 due to
a restructuring of the Company's debt.
Provision for Income Tax Credits
The Company's provision for income tax credits decreased to $98,000 for
Fiscal 1996 from $171,000 for the Combined 1995 Year, or a decrease of $73,000.
The decrease can be attributable to the smaller loss for Fiscal 1996.
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Financial Condition and Liquidity
As of October 31, 1996, the Company had cash of $360,802, working capital
of $494,694 and $5,236,438 of stockholders' equity, Operating activities
provided cash of $24,825 for Fiscal 1996. The net loss was ($144,758). Increases
in inventory ($246,613) and settlement income on the judgment liability
($649,000) were offset by increases in advances on contracts of $740,827 and
increases in accrued expenses $274,591.
Investing activities used cash of ($118,635) while financing activities
provided cash of $360,720. During Fiscal 1996, the Company's predecessor Lundell
Delaware issued $477,000 of convertible subordinated debentures. These
debentures automatically converted into 159,000 shares of the Company's common
stock upon the merger between the Company and Lundell Delaware at the conversion
price of $3 per share. In November 1995 the Company repaid $492,500 owed under a
bank line of credit. In addition, the Company has restructured obligations of
$871,729 to stockholders from on demand loans to notes payable due January 31,
1999 bearing interest at 7% per annum.
In January 1996, the Company entered into an agreement to sell four of its
recycling systems for approximately $7 million with Tung Bua Ltd., a Thailand
corporation. The sale price is to be paid through the issuance of irrevocable
letters of credit to the Company through a Thailand bank. In September 1996, the
Company received an initial deposit of $519,435. As of April 1, 1997, the
Company has received additional progress payments of approximately $1,900,000.
On August 23, 1996 the Company agreed to issue a credit to Tung Bua Ltd. in the
amount of $1.600,000 and the Company will acquire a one-third interest in Tung
Bua Ltd. when certain conditions are met. The Company has guaranteed $1,920,000,
representing one-third of certain bank borrowings of Tung Bua Ltd.
On December 16, 1996, the Company purchased a building in Manhasset, New
York for $417,500 in cash. The seller is permitted to rent approximately half
the building through August 31, 1997. The Company has no additional significant
commitments for capital expenditures for Fiscal 1997.
The Company plans that all current and future foreign sales will be made
pursuant to irrevocable letters of credit with structured payments, The rapid
growth of the Company may require additional capital resources. Should the
Company's cash flow from operations be insufficient to meet all of its
requirements, the Company would seek additional capital through the issuance of
stock in the public market, private financing and/or joint ventures.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
---- --- --------
Steven A. Massey 39 President and Director
Bernard Artz 72 Chief Financial Officer, Vice
President, Director and Co-
Chairman of the Board of Directors
Vernon Lundell 75 Director and Co-Chairman of the
Board of Directors
Lawrence Artz 46 Vice President and Director
Stephen Paulsen 48 Vice President and Director
Steven Lundell 47 Vice President and Director
Howard Schachter 63 Director
Joseph Cerra 45 Secretary
Steven Massey has been the President and a Director of the Company since
January, 1996. Between November, 1994 and January, 1996, Mr. Massey was the
president and a Director of Lundell Technologies, Inc., a Delaware corporation.
From 1994 to the present, Mr. Massey has been a Director and Vice-President of
Neurotech Corporation, a public company. From 1993 to the present, Mr. Massey
has been a Director of Global Investment Fund, Ltd. From 1993 to the present,
Mr. Massey has been a Vice President and Director of Travel Safety Corp. Mr.
Massey has been a certified financial planner since 1982.
Bernard Artz has been the Chief Financial Officer, a Director and
Co-Chairman of the Board of Directors since January, 1996. Between November,
1994 and January, 1996, Mr. Artz was a Director of Lundell Technologies, Inc., a
Delaware corporation. From 1994 to the present, Mr. Artz has been a Director and
Vice President of Neurotech Corporation. From 1993 to the present, he has been a
Vice President and Director of Travel Safety Corp. From 1994 to the present, he
has been a Director of Global Investment Fund Ltd. From 1993 to November, 1996,
he was chairman of Nurell Capital, Inc. From 1989 to 1992, he was President of
Post Merchandising, Inc. Mr. Artz is the father of Lawrence Artz.
Vernon Lundell has been a Director and Co-Chairman of the Board of
Directors since August, 1995. Mr. Lundell has been an Officer and a Director of
Lundell Manufacturing since its inception in 1945. Mr. Lundell is the father of
Steven Lundell and the father-in-law of Stephen Paulsen.
Lawrence Artz has been a Vice-President and a Director of the Company since
January, 1996.
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Between November, 1994 and January, 1996, Mr. Artz was a Vice-President and a
Director of Lundell Technologies, Inc., a Delaware corporation. From 1994 to the
present, Mr. Artz has been a Director and a Vice-President of Neurotech
Corporation, a reporting company under the Exchange Act. From 1993 to the
present, Mr. Artz has been Director and Vice-President of Safety & Technology
Group, Ltd. of Hong Kong, a manufacturer of non-ozone depleting refrigerants and
children's safety products. From 1993 to the present, Mr. Artz has been a
Director of Global Investment Fund, Ltd. From 1991 to 1993, Mr. Artz has been a
managing director of Starcomm, Ltd., a manufacturer of children's safety
products. From 1987 to 1991, Mr. Artz was a managing director of Asia
Industries. Mr. Artz is the son of Bernard Artz.
Stephen Paulsen has been a Vice-President and a Director of the Company
since August , 1995. Mr. Paulsen has been an Officer and a Director of Lundell
Manufacturing for more than 10 years. Mr. Paulsen is the son-in-law of Vernon
Lundell and the brother-in-law of Steven Lundell.
Steven Lundell has been a Vice-President and a Director of the Company
since August, 1995. Mr. Lundell has been an Officer and a Director of Lundell
Manufacturing for more than 10 years. Mr. Lundell is the son of Vernon Lundell
and the brother-in-law of Stephen Paulsen.
Joseph Cerra has been the Secretary of the Company since January, 1996.
Between November, 1994 and January, 1996, Mr. Cerra was a Director of Lundell
Technologies, Inc., a Delaware corporation. From 1994 to the present, Mr. Cerra
has been a Director of Neurotech Corporation. From 1991 to the present, Mr.
Cerra has been a Manager of User Services for Consolidated Edison of New York.
From 1976 to 1991, Mr. Cerra held various managerial and administrative
positions with Consolidated Edison.
Howard Schachter has been a Director of the Company since October 18, 1996.
He has been the President of LAC since July, 1996. Between April, 1993 and
February, 1996, Mr. Schachter was the President and a Director of Aquametrics
Industries, Inc. Between November, 1990 and April, 1993, Mr. Schachter was the
President and Director of Environmet Corporation.
ITEM 10. EXECUTIVE COMPENSATION
On November 1, 1996, the Company entered into oral employment agreements
with each of Steven A. Massey, Bernard Artz, and Lawrence Artz. Each of the
employment agreements terminates on October 31, 1999 and provides for an annual
salary of $80,000 for the first year, $100,000 for the second year, and $120,000
for the third year. Any monies due under previous agreements were waived.
Lundell Manufacturing entered into employment agreements dated November 1,
1996 with each of Vernon Lundell (a director of the Company), Stephen Lundell (a
director and officer of the Company) and Stephen Paulsen (a director and officer
of the Company). Each of the agreements terminates after three years and
provides an annual salary of $80,000 for the year ending October 31, 1997,
$100,000 for the year ending October 31, 1998, and $120,000 for the year ending
October 31, 1999. Any monies due under previous agreements were waived.
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<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Name / Position Period Annual Compensation Long-Term and other Compensation
Salary Bonus Other Awards Payouts Other
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven Massey 11/5/95- $27,549.17 None None None None None
President 10/31/96
8/4/95- $20,000.00 None None None None None
11/4/95
Lawrence Artz 11/5/95- $10,217.48 None None None None None
Vice President 10/31/96
8/4/95- $20,000.00 None None None None None
11/4/95
Bernard Artz 11/5/95- $33,295.00 None None None None None
CFO and VP 10/31/96
8/4/95- $20,000.00 None None None None None
11/4/95
Vernon Lundell 11/5/95- $31,187.21 None None None None None
Director 10/31/96
8/4/95- $12,500.00 None None None None None
11/4/95
Steven Lundell 11/5/95- $31,187.21 None None None None None
Vice President 10/31/96
8/4/95- $12,500.00 None None None None None
11/4/95
Steven Lundell 11/5/95- $31,187.21 None None None None None
Vice President 10/31/96
8/4/95- $12,500.00 None None None None None
11/4/95
</TABLE>
12
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners.
<TABLE>
<CAPTION>
Amount and nature of
Title of class Name / address of beneficial owner beneficial owner Percent of class
- -------------- ---------------------------------- ---------------- ----------------
<S> <C> <C> <C>
Common Global Investment Fund, Ltd. (1) 1,629,874 31.6%
45 Orchard Street
Manhasset, NY 11030
Vernon Lundell (2) 585,000 11.3%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Waldene Lundell (2) 585,000 11.3%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Steven Lundell (3) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Denise Lundell (3) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Stephen Paulsen (4) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Verdene Paulsen (4) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
<CAPTION>
Security ownership of management.
Amount and nature of
Title of class Name / address of beneficial owner beneficial owner Percent of class
- -------------- ---------------------------------- ---------------- ----------------
<S> <C> <C> <C>
Common Global Investment Fund, Ltd. (1) 1,629,874 31.6%
45 Orchard Street
Manhasset, NY 11030
Vernon Lundell (2) 585,000 11.3%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Steven Lundell (3) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
Stephen Paulsen (4) 270,000 5.2%
Box 171 / Highway 3 & 59
Cherokee, IA 51012
</TABLE>
13
<TABLE>
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Joseph Cerra 18,752 0.4%
35 Orchard Street
Manhasset, NY 11030
Combined Management (1) 2,773,626 53.7%
</TABLE>
(1) Bernard Artz, Steven Massey and Lawrence Artz each own one third of the
outstanding capital voting shares of Global Investment Fund Ltd. and each
is an officer and director of Global Investment Fund Ltd. For this reason,
Global is listed among the Company's management and its shares are included
under the item "Combined Management" in the table "Security ownership by
management" set forth above. Lawrence Artz is the son of Bernard Artz.
(2) Vernon Lundell and Waldene Lundell are husband and wife. Each disclaims a
beneficial interest in the other's shares.
(3) Steven Lundell and Denise Lundell are husband and wife and are respectively
the son and daughter-in-law of Vernon Lundell and Waldene Lundell. Each
disclaims a beneficial interest in the other's shares.
(4) Stephen Paulsen and Verdene Paulsen are husband and wife and are
respectively the son-in-law and daughter of Vernon Lundell and Waldene
Lundell. Each disclaims a beneficial interest in the other's shares.
Shareholders Agreement.
Steven Massey, Bernard Artz, Lawrence Artz, Vernon Lundell, Waldene
Lundell, Steven Lundell, Denise D. Lundell, Stephen Paulsen and Verdene A.
Paulsen have entered into an agreement (the "Shareholder's Agreement") pursuant
to which all have agreed to vote their shares, or the shares they control
through Global Investment Fund Ltd., for the election of Steven Massey, Bernard
Artz, Lawrence Artz, Vernon Lundell, Steven Lundell and Stephen Paulsen to the
Board of Directors of the Company. The Shareholder's Agreement terminates when
and if the Company's shares commence trading on the Nasdaq exchange.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 31, 1996, the Company issued promissory notes in the aggregate
amount of $871,529 to the following related persons and entities: Vernon
Lundell, $241,476; Steven Lundell, $ 48,754; Stephen Paulsen, $ 24,814; Lundell
Enterprises Inc. (a company related by common ownership), $497,059; Global
Investment Fund, Ltd. (a company related by common ownership), $ 59,426.
14
<PAGE>
ITEM 13. EXHIBITS
The following exhibits are appended to this Form 10-KSB or are incorporated
herein by reference:
<TABLE>
<CAPTION>
<S> <C> <C>
3(i) Articles of Incorporation of the Company, as amended (incorp. by ref. from Form 10-
KSB for fiscal 1995)
3(ii) By-laws of the Company (incorp. by ref. from Form 10-
KSB for fiscal 1995)
10 Agreement and Plan of Merger dated August 4, 1995 (incorp. by ref. from Form 8-K
dated January 12, 1996)
22 List of Subsidiaries
</TABLE>
There were no reports on Form 8-K filed by the Company during the last
quarter of the year ended October 31, 1996.
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lundell Technologies, Inc.
by: /s/ STEVEN A. MASSEY
--------------------------------
Steven A. Massey, President
date: April 30, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ STEVEN A. MASSEY date: April 30, 1997
- ---------------------------------------
Steven A. Massey
President and Director
/s/ BERNARD ARTZ date: April 30, 1997
- ---------------------------------------
Bernard Artz
Chief Financial Officer, Director
and Co-Chairman
/s/ VERNON LUNDELL date: April 30, 1997
- ---------------------------------------
Vernon Lundell, Director and
Co-Chairman
/s/ STEPHEN LUNDELL date: April 30, 1997
- ---------------------------------------
Stephen Lundell
Vice President and Director
/s/ STEVEN PAULSEN date: April 30, 1997
- ---------------------------------------
Steven Paulsen
Vice President and Director
/s/ LAWRENCE ARTZ date: April 30, 1997
- ---------------------------------------
Lawrence Artz
Vice President and Director
/s/ HOWARD SCHACHTER date: April 30, 1997
- ---------------------------------------
Howard Schachter
Director
16
<PAGE>
EXHIBIT 22 - SUBSIDIARIES
The Company has two subsidiaries:
Lundell Manufacturing Company, Inc., an Iowa corporation
Lundell Aquametrics, Inc., a Delaware corporation
Each of the subsidiaries do business under their respective corporate
names.
<PAGE>
<PAGE>
LUNDELL TECHNOLOGIES, INC.
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996 AND
NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED BALANCE SHEET F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-27
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
LUNDELL TECHNOLOGIES, INC.
MANHASSET, NEW YORK
We have audited the accompanying consolidated balance sheet of Lundell
Technologies, Inc. and Subsidiaries as of October 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended October 31, 1996. We have also audited the statement of
operations, changes in stockholders' equity and cash flows of Lundell
Manufacturing Company, Incorporated ("Predecessor") for the period November 6,
1994 to August 3, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of the Company referred to
above present fairly, in all material respects, the financial position of
Lundell Technologies, Inc. and Subsidiaries as of October 31, 1996 and the
results of their operations and their cash flows for the year ended October 31,
1996 and of the Predecessor for the period November 6, 1994 to August 3, 1995,
in conformity with generally accepted accounting principles.
We have also audited Schedule II of the Company for the year ended October 31,
1996 and of the Predecessor for the period November 6, 1994 to August 3, 1995,
included in the 1996 annual report of the Company on Form 10-K. In our opinion,
the schedule presents fairly the information required to be set forth therein.
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
April 1, 1997, except for
Note 12 which is dated
April 21, 1997
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Lundell Technologies, Inc.
Manhasset, New York
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Lundell Technologies, Inc. and
Subsidiary for November 29, 1994 (inception date) to November 4, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated statements of operations, changes in
stockholders' equity and cash flows referred to above present fairly, in all
material respects, the results of operations and cash flows of Lundell
Technologies, Inc. and Subsidiary for the period November 29, 1994 (inception
date) to November 4, 1995, in conformity with generally accepted accounting
principles.
Hunzelman, Putzier & Co., PLC
Storm Lake, Iowa
October 18, 1996
F-3
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 360,802
Accounts receivable - trade, less allowance for
doubtful accounts of $5,000 47,173
Inventories (Note 3) 1,290,908
Deferred income taxes (Note 11) 326,000
Prepaid expenses and other current assets 109,449
-----------
Total current assets 2,134,332
-----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization (Note 4) 6,002,213
-----------
OTHER ASSETS:
Intangible assets - net of accumulated amortization (Note 5) 1,986,592
Deposit on building (Note 19) 46,150
-----------
2,032,742
-----------
$10,169,287
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 173,121
Accrued expenses - related parties (Notes 9 and 13) 250,985
Advances on contract - related parties (Note 6) 519,435
Advances on contracts 225,149
Current maturities of long-term debt (Note 8) 61,000
Accrued expenses and other current liabilities (Notes 7 and 12) 409,948
-----------
Total current liabilities 1,639,638
-----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities (Note 8) 414,682
Notes payable - related parties (Note 9) 871,529
Deferred income taxes (Note 11) 2,007,000
-----------
3,293,211
-----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 20,000,000 shares
authorized; 5,165,500 shares issued (Notes 2 and 16) 5,165
Additional paid-in capital 5,644,100
Accumulated deficit (412,827)
-----------
Total stockholders' equity 5,236,438
-----------
$10,169,287
===========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-4
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 29,
1994 PREDECESSOR
(INCEPTION ------------
DATE) TO NOVEMBER 6,
YEAR ENDED NOVEMBER 4, 1994 TO
OCTOBER 31, 1995 AUGUST 3,
1996 AS RESTATED 1995
---------------------- ---------------------- -------------
<S> <C> <C> <C>
NET SALES (Note 10) $ 453,026 $ 52,943 $ 584,721
COST OF SALES (Note 10) 304,592 45,334 263,983
------------ ----------- ----------
GROSS PROFIT 148,434 7,609 320,738
------------ ----------- ----------
OPERATING EXPENSES:
Selling 355,314 108,684 121,806
General and administrative 321,582 221,705 207,939
Depreciation and amortization 383,685 93,201 20,118
------------ ----------- ----------
1,060,581 423,590 349,863
------------ ----------- ----------
LOSS FROM OPERATIONS (912,147) (415,981) (29,125)
------------ ----------- ----------
OTHER INCOME AND EXPENSES:
Settlement income with vendors and
customers (Note 12) 785,713 - 35,000
Interest expense (60,814) (26,090) (105,893)
Interest (expense) income -
related parties (Note 9) (55,510) 3,002 6,470
------------ ----------- ----------
669,389 (23,088) (64,423)
------------ ----------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES CREDITS (242,758) (439,069) (93,548)
PROVISION FOR INCOME TAX
CREDITS (Note 11) (98,000) (171,000) --
------------ ----------- ----------
NET LOSS $ (144,758) $ (268,069) $ (93,548)
============ =========== ==========
NET LOSS PER COMMON SHARE $(.03) $(.05) N/A
===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,123,066 5,000,000 N/A
========= =========
PRO FORMA INFORMATION (Note 18):
Net loss as presented N/A N/A $ (93,548)
Provision for income tax benefits
reflecting C corporation status N/A N/A 37,420
----------
Pro forma net loss N/A N/A $ (56,128)
==========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOVEMBER 29, 1994 (INCEPTION DATE) TO OCTOBER 31, 1996
AND NOVEMBER 6, 1994 TO AUGUST 3, 1995 (PREDECESSOR)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 29,
1994 (Inception Date) -- $ -- $ -- $ -- $ --
Issuance of stock for
acquisition of Lundell
Manufacturing Company,
Incorporated (Note 2) -
as restated 5,000,000 5,000 5,167,265 -- 5,172,265
Net loss for the period
November 29, 1994 to
November 4, 1995 - as restated -- -- -- (268,069) (268,069)
--------- ---------- ---------- ----------- -----------
BALANCE AT NOVEMBER 4,
1995 - as restated 5,000,000 5,000 5,167,265 (268,069) 4,904,196
Issuance of stock in connection
with the conversion of debt
(Note 16) 159,000 159 476,841 -- 477,000
Issuance of stock in connection
with the conversion of debt
(Note 16) 6,500 6 (6) -- --
Net loss for the year ended
October 31, 1996 -- -- -- (144,758) (144,758)
--------- ---------- ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1996 5,165,500 $ 5,165 $5,644,100 $ (412,827) $ 5,236,438
========= ========== ========== =========== ===========
PREDECESSOR
BALANCE AT NOVEMBER 6,
1994 - as previously reported 937,500 $ 937,500 $ 100,852 $(1,916,986) $ (878,634)
Prior period adjustment -
correction of accrued interest
on judgment payable
(Note 16) -- -- -- (200,000) (200,000)
--------- ---------- ---------- ----------- -----------
BALANCE AT NOVEMBER 6,
1994 - as restated 937,500 937,500 100,852 (2,116,986) (1,078,634)
Net loss for the period
November 6, 1994 to
August 3, 1995 -- -- -- (93,550) (93,550)
--------- ---------- ---------- ----------- -----------
BALANCE AT AUGUST 3, 1995 937,500 $ 937,500 $ 100,852 $(2,210,536) $(1,172,184)
========= ========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-6
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 29,
1994 PREDECESSOR
(INCEPTION --------------
DATE) TO NOVEMBER 6,
YEAR ENDED NOVEMBER 4, 1994 TO
OCTOBER 31, 1995 AUGUST 3,
1996 AS RESTATED 1995
---------------------- ---------------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (144,758) $ (268,069) $ (93,548)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 238,229 59,559 20,118
Amortization of intangible assets 145,456 33,642 --
Deferred income taxes (98,000) (171,000) --
Change in warranty reserve -- -- (35,000)
Settlement income on judgment liability (649,000) -- --
Change in assets and liabilities:
Accounts receivable (37,746) 1,007 19,481
Inventory (246,613) - 52,066
Prepaid and other current assets (102,238) (3,570) 8,736
Accounts payable (95,923) (37,669) 42,633
Accrued expenses and other current liabilities 274,591 225,269 (20,307)
Advances on contracts 740,827 -- --
Customer deposits -- -- (49,826)
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 24,825 (160,831) (55,647)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipt of cash from acquisition of subsidiary -- 63,235 --
Payment for deposit on building (46,150) -- --
Other intangibles (72,485) (143,205) --
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (118,635) (79,970) --
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances and notes from related
parties - net 407,119 351,167 104,531
Proceeds from loan payable - bank -- -- 37,500
Repayment of loan payable - bank (492,500) -- --
Proceeds from convertible subordinated debt 477,000 -- --
Repayments on long-term debt (30,899) (16,474) (41,470)
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 360,720 334,693 100,561
----------- ----------- ----------
NET CHANGE IN CASH 266,910 93,892 44,914
CASH - beginning 93,892 -- 18,321
----------- ----------- ----------
CASH - ending $ 360,802 $ 93,892 $ 63,235
=========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-7
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 29,
1994 PREDECESSOR
(INCEPTION --------------
DATE) TO NOVEMBER 6,
YEAR ENDED NOVEMBER 4, 1994 TO
OCTOBER 31, 1995 AUGUST 3,
1996 AS RESTATED 1995
------------------- ---------------------- -------------
<S> <C> <C> <C>
SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of shares in connection with the
conversion of debt (Note 16) $ 19,500 $ -- $ --
========== =========== ==========
Conversion of advances from related parties
to notes payable - related parties $ 871,529 $ -- $ --
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 60,814 $ 15,090 $ 72,893
Cash paid for income taxes -- -- --
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-8
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Lundell Technologies, Inc. (the "Company") was incorporated in the state of
Delaware on November 29, 1994. On February 5, 1996, the Company merged with
Western Gold Mining, Inc. ("Western") (a Washington state company) in
accordance with an Agreement and Plan of Reorganization dated August 4,
1995 (see Note 2).
Lundell Manufacturing Company, Incorporated ("LMCI" or "Predecessor") was
incorporated in the state of Iowa on April 16, 1958. The Company purchased
100% of the outstanding shares of common stock of LMCI on August 4, 1995
(see Note 2).
Lundell Aquametrics, Inc. ("Aquametrics") was incorporated in the state of
Delaware on February 6, 1996 as a wholly-owned subsidiary of the Company.
BUSINESS
The Company and its wholly-owned subsidiaries listed below, are in the
following businesses:
1. LMCI is engaged in the manufacture and worldwide distribution of solid
waste recycling systems. LMCI also manufactures and sells replacement
parts for a line of agricultural equipment it previously manufactured
and sold throughout the United States.
2. Aquametrics is engaged in the manufacture and worldwide distribution
of water filtration equipment.
See Note 2.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The consolidated balance sheet includes
the accounts of the Company at October 31, 1996. The consolidated
statements of operations, cash flows and stockholders' equity include the
accounts of the Company for the year ended October 31, 1996 ("1996") and
the period November 29, 1994 (inception date) to November 4, 1995 ("1995")
as well as the accounts of the Predecessor for the period November 6, 1994
to August 3, 1995 ("Predecessor Period"). All significant intercompany
balances and transactions have been eliminated in consolidation.
F-9
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
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 these estimates.
REVENUE RECOGNITION
The Company recognizes revenue for the sale of waste recycling systems
under the percentage of completion method.
Under the percentage of completion accounting method, revenue is recognized
in the ratio that costs incurred bear to estimated total costs. Adjustments
to cost estimates are made periodically, and losses expected to be incurred
on contracts in progress are charged to operations in the period such
losses are determined. The aggregate of costs incurred and income
recognized on uncompleted contracts in excess of related billings is shown
as a current asset, and the aggregate of billings on uncompleted contracts
in excess of related costs incurred and income recognized is shown as a
current liability. At October 31, 1996, there are no costs incurred and
income recognized in excess of related billings and there are no billings
in excess of costs incurred and income recognized.
WARRANTIES
The Company provides an accrual for future warranty costs based upon the
historic relationships of prior years' sales to actual warranty costs.
F-10
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable at October 31, 1996 consisted of open trade accounts
with various companies. The Company performs ongoing credit valuations of
its customers and believes that adequate allowances for any uncollectible
receivables are maintained.
Three customers accounted for 45.2% of accounts receivable at October 31,
1996.
The Company's major customers are as follows:
1. 1996 - One customer accounted for 38.2% of net sales.
2. 1995 - One customer accounted for 12.7% of net sales.
3. Predecessor Period - Three customers accounted for 74.6% of net sales.
CASH
The Company maintains cash balances in its bank which at times may exceed
the limits of the Federal Deposit Insurance Corp.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets as
follows:
Building and improvements - 40 years
Machinery and equipment - 5 years
Furniture and fixtures - 3 years
Expenditures for repairs and maintenance are charged to expense as
incurred.
F-11
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
The excess of the purchase cost over the fair value of net assets acquired
in the acquisitions (see Notes 2 and 5) is included in intangible assets
and is being amortized over fifteen years on a straight-line basis in
accordance with Statement of Financial Accounting Standards No. 121 (SFAS
No. 121), "Accounting for the Impairment of Long-Lived Assets and For
Long-lived Assets to Be Disposed Of." The Company periodically reviews the
intangible assets to assess recoverability based upon undiscounted expected
future cash flows for each subsidiary. Testing for such recoverability in
each reporting period may not be cost effective for or even possible and in
such cases, the Company will test assets for impairment if a triggering
event occurs (events or changes in circumstances such that the carrying
amount of the assets may not be recoverable). Impairments would be
recognized if a permanent diminution in value were to occur. See Note 5.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they occur.
The Predecessor had elected to be taxed as an S corporation for federal and
state tax purposes, with all income and tax credits passing directly to the
stockholders. As such, no provision had been made for income taxes.
LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
F-12
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 2 - ACQUISITION AND MERGER
LUNDELL MANUFACTURING COMPANY, INCORPORATED
On August 4, 1995, the Company acquired all of the issued and outstanding
stock of LMCI which was accounted for as a purchase. The purchase was
accomplished through the exchange of 2,500,000 shares of the Company's
stock for all of the outstanding stock of LMCI.
The following condensed balance sheet reflects the purchase of the stock of
LMCI on August 4, 1995:
Current assets $ 1,129,067
Property, plant and equipment 6,300,000
Liabilities assumed (2,261,802)
------------
$ 5,167,265
============
WESTERN GOLD MINING, INC.
On February 5, 1996, Western Gold Mining, Inc. ("Western") completed a
reverse stock split pursuant to which each share of the then outstanding
4,998,368 shares of its $.05 par value common stock was converted into
.0800261 shares for a total of 400,000 common shares issued and
outstanding.
On February 5, 1996, Western merged with Lundell Technologies, Inc.
("Lundell") in accordance with an Agreement and Plan of Reorganization
dated August 4, 1995 whereby 4,500,000 shares of Western were exchanged for
5,000,000 shares of the then outstanding shares.
Western was the surviving corporation and changed its name to Lundell.
In addition, 30,000 shares were issued to North Cascades Exploration, Inc.
("Cascades") in exchange for Cascades taking over certain assets and
assuming certain liabilities of Western. An additional 70,000 shares were
also issued to an individual for services rendered.
F-13
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 3 - INVENTORIES
Inventories at October 31, 1996 consist of the following:
Finished goods $ 254,165
Work-in-process (including approximately
$595,000 of returned recycling systems) 910,024
Raw materials 126,719
------------
$ 1,290,908
============
The returned recycling systems are valued at the their original
manufactured cost. This equipment was returned as the result of settlements
reached with certain customers (see Notes 8 and 12).
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1996 consists of the
following:
Land, building and improvements $ 5,800,000
Machinery and equipment 497,196
Furniture and fixtures 2,804
------------
6,300,000
Less: Accumulated depreciation
and amortization 297,787
------------
$ 6,002,213
============
Depreciation and amortization amounted to $238,229, $59,559 and $20,118 for
1996, 1995 and the Predecessor Period, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets at October 31, 1996 consist of the following:
Goodwill $ 2,149,984
Organization expense 15,706(*)
------------
2,165,690
Less: Accumulated amortization 179,098
------------
$ 1,986,592
============
(*) Amortized over five years on a straight-line basis.
Amortization amounted to $145,456, $33,642 and $ -0- for 1996, 1995 and the
Predecessor Period, respectively.
F-14
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 6 - ADVANCES ON CONTRACT - RELATED PARTY
In January 1996, the Company entered into an agreement to sell four of its
recycling systems for approximately $7 million to a Thai entity located in
Nakornpathom, Thailand. The project was in its initial stages at October
31, 1996 and no income or expenses have been recognized or recorded for the
fiscal year ended October 31, 1996. The sales price is to be paid by the
issuance of irrevocable letters of credit to the Company through a Thai
bank. In September 1996, the Company received an initial deposit of
$519,435 on this contract. As of April 1, 1997, the Company has received
additional progress payments on this contract of approximately $1,900,000
since October 31, 1996.
On August 23, 1996, the Company agreed to issue a credit against the total
contract price to the Thai entity in the amount of $1,600,000 and the
Company also agreed to acquire a one-third interest in this Thai entity
when certain conditions are met. The Company has guaranteed $1,920,000 of
certain bank borrowings of this foreign entity. The Thai entity will issue
shares to the Company when the recycling systems are completely delivered
to Thailand and the credit is issued. The Thai entity had minimal financial
activity during the year ended October 31, 1996.
NOTE 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at October 31, 1996 consists
of the following:
Settlement payable (Note 12) $200,000
Accrued payroll 106,728
Accrued payroll taxes 58,842
Accrued property taxes 19,900
Accrued warranty expense 5,000
Other 19,478
--------
$409,948
========
F-15
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 8 - LONG-TERM DEBT
Long-term debt at October 31, 1996 consists of the following:
Note payable to customer bearing interest
at prime adjusted on a quarterly basis and
payable in monthly installments of
principal and interest of $8,085 $475,682
Less: Current portion 61,000
--------
$414,682
========
The note was issued as a result of an agreement in connection with the
return of recycling equipment purchased by the customer. This equipment
(currently in inventory) is valued at approximately $300,000. The note is
guaranteed by certain of the Company's stockholders.
During the fiscal year ended October 31, 1996, the Company repaid $492,500
owed under its bank line of credit.
Scheduled maturities of long-term debt outstanding under the current rate
of interest are as follows:
YEAR ENDING OCTOBER 31,
-----------------------
1997 $ 61,000
1998 65,000
1999 71,000
2000 77,000
2001 84,000
Thereafter 117.682
--------
$475,682
========
Interest expense amounted to $60,814, $26,090 and $105,893 for 1996, 1995
and the Predecessor Period, respectively.
F-16
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at October 31, 1996 consist of five notes
which were issued on October 31, 1996 and are due on January 31, 1999
bearing interest at 7% per annum. These related party notes were previously
demand obligations and were reflected as current liabilities. The notes
consist of the following:
Notes payable - stockholders $315,044
Note payable - Lundell Enterprises, Inc.,
a company owned by certain stockholders
of the Company 497,059
Note payable - Global Investment Fund, Ltd., a
foreign stockholder of the Company 59,426
--------
$871,529
========
Maturities of notes payable - related parties are as follows:
YEAR ENDING OCTOBER 31,
-----------------------
1997 $ --
1998 --
1999 871,529
--------
$871,529
========
Interest expense incurred (earned) on the debt due to/from related parties
amounted to $55,510, $(3,002) and $(6,470) for 1996, 1995, and the
Predecessor Period, respectively. Accrued interest payable to related
parties at October 31, 1996 was $74,995.
NOTE 10 - BUSINESS SEGMENT DATA
The Company's operations are conducted through two business segments. All
Company sales have been earned in the United States for 1996, 1995 and the
Predecessor Period. These segments, and the primary operations of each, are
as follows:
BUSINESS SEGMENT OPERATIONS
---------------- ----------
Recycling equipment Manufacture and distribution of waste
recycling and water filtration equipment.
Agricultural parts Manufacture and sale of replacement parts
for a line of agricultural equipment
previously manufactured by the
Predecessor.
F-17
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 10 - BUSINESS SEGMENT DATA (CONTINUED)
Net sales of each segment are as follows:
<TABLE>
<CAPTION>
NOVEMBER 29, PREDECESSOR
1994 -------------
(INCEPTION NOVEMBER 6,
YEAR ENDED DATE) TO 1994 TO
OCTOBER 31, NOVEMBER 4, AUGUST 3,
1996 1995 1995
------------------ ------------------ -----------
(000'S OMITTED)
<S> <C> <C> <C>
Recycling equipment $ 350 $ 15 $528
Agricultural parts 103 38 57
----- ----- ----
$ 453 $ 53 $585
===== ===== ====
Operating loss of each segment is as follows:
Recycling equipment $ (83) $(419) $(74)
Agricultural parts 46 20 20
----- ----- ----
Operating loss of segments (37) (399) (54)
General corporate expense (146) (33) -
Interest expense (60) (7) (40)
----- ----- ----
$(243) $(439) $(94)
===== ===== ====
</TABLE>
Operating loss represents net sales less applicable operating expenses. In
computing operating loss, general corporate expenses and general interest
expense have been excluded.
Identifiable assets of each segment as of October 31, 1996 are as follows:
Recycling equipment $ 7,236
Agricultural parts 213
-------
Identifiable assets 7,449
General corporate assets 2,720
-------
$10,169
=======
F-18
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 10 - BUSINESS SEGMENT DATA (CONTINUED)
Identifiable assets by segment are those assets that are used in the
operations of each segment. General corporate assets consist principally of
cash and cash equivalents, deferred income taxes, intangible assets and
deposits.
Depreciation and amortization of each segment are as follows:
<TABLE>
<CAPTION>
NOVEMBER 29, PREDECESSOR
1994 -----------
(INCEPTION NOVEMBER 6,
YEAR ENDED DATE) TO 1994 TO
OCTOBER 31, NOVEMBER 4, AUGUST 3,
1996 1995 1995
------------------ ------------------ -----------
(000'S OMITTED)
<S> <C> <C> <C>
Recycling equipment $ 233 $ 59 $ 20
Agricultural parts 5 1 --
------- ------ -------
Segment depreciation and amortization 238 60 20
General corporate depreciation
and amortization 146 33 --
------- ------ -------
$ 384 $ 93 $ 20
======= ====== =======
</TABLE>
F-19
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 11 - INCOME TAXES
All of the Company's operations are presently located in the United States.
As such, loss before provision for income tax credits and provision for
income tax credits are generated from domestic sources.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loss before provision for
income tax credits $ (242,758) $ (439,069)
=========== ===========
The components of the provision for income tax credits by taxing
jurisdictions are as follows:
Federal:
Current $ -- $ --
Deferred (83,300) (145,350)
----------- -----------
(83,300) (145,350)
----------- -----------
States:
Current - -
Deferred (14,700) (25,650)
----------- -----------
(14,700) (25,650)
----------- -----------
$ (98,000) $ (171,000)
=========== ===========
</TABLE>
The major components of the deferred tax assets and liabilities at
October 31, 1996 are as follows:
<TABLE>
<S> <C>
Current:
Inventory $ 8,000
Accrued expenses 118,000
Net operating loss carryforwards 200,000
-------------
326,000
-------------
Non-current:
Property, plant and equipment (2,177,000)
Net operating loss carryforwards 170,000
-------------
(2,007,000)
-------------
Net liability $ (1,681,000)
=============
</TABLE>
F-20
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 11 - INCOME TAXES (CONTINUED)
At October 31, 1996, no valuation allowance was provided as the deferred
income tax assets were considered realizable considering estimates of
future income.
The difference between the statutory United States federal income tax rate
and the effective income tax rate is as follows:
1996 1995
------- -----
Statutory federal income tax rate 34.0 34.0
Current year state and local taxes
(net of federal tax effect) 6.0 6.0
Net operating loss carryforwards (40.0) (40.0)
Deferred income taxes (40.3) (38.9)
------- -----
(40.3)% (38.9)%
======= =====
A reconciliation for the Predecessor Period was not prepared as the
Predecessor was an S corporation.
At October 31, 1996, for income tax purposes, the Company has unused net
operating loss carryforwards of approximately $926,000 expiring in 2010 and
2011.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LITIGATION
In fiscal 1992, a jury awarded the Predecessor a judgment of $1,058,000 for
libel against American Broadcasting Companies ("ABC") for a story
concerning the Predecessor which aired nationwide on ABC television. The
jury award was vacated by the trial judge but was reinstated by the Eighth
Circuit Court of Appeals. ABC had filed a petition for a Writ of Certiorari
to the U.S. Supreme Court asking the Supreme Court to hear their appeal. On
April 21, 1997, the Supreme Court rejected ABC's appeal. LMCI has not
recorded a gain or the related contingent legal fees of approximately one
third of the settlement plus expenses because proceeds from this lawsuit
were assigned to the former stockholders of the Predecessor on February 2,
1994. Such former stockholders, who are now stockholders of the Company,
have agreed to pay all of the related costs of litigation. However,
$200,000 of the proceeds were assigned in settlement of a judgment (see
following paragraph).
F-21
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On October 5, 1990, a judgment was entered against the Predecessor in
United States District Court by a customer relative to the performance of a
recycling system sold in December 1985. The judgment had stipulated that
the Predecessor pay damages of approximately $690,000 plus interest
accruing from the date the equipment was returned to the Predecessor in
March 1990. Prior to the settlement, the principal balance was $605,000 and
accrued interest totalled $244,000. On March 31, 1997, LMCI agreed to
settle the lawsuit by offering this customer an assignment of $200,000
(plus simple interest at the rate of 5.49% from the date of the settlement
agreement) from its ABC judgment which would fully satisfy the judgment
against LMCI. For the year ended October 31, 1996, the Company has
reflected this financial settlement and recognized other income from this
transaction of $649,000. The equipment from this project (currently in
inventory) is valued at approximately $182,000. The Company has agreed to
provide for indemnification and reimbursement of the Predecessor
stockholders in connection with this settlement.
During the year ended October 31, 1996, the Company settled various
lawsuits in which the Company was both plaintiff and defendant. The Company
is involved in various other legal actions arising from the normal course
of business. Management believes the outcome of these proceedings will not
have a material effect on the financial condition of the Company.
LEASE
In November 1996, the Company entered into a lease for its manufacturing
and office facilities in Rhode Island expiring in November 1999. Future
minimum rental payments required under the lease are as follows:
YEAR ENDING OCTOBER 31,
-----------------------
1997 $ 44,000
1998 52,000
1999 56,000
2000 4,000
--------
$156,000
========
Rent expense amounted to $13,750 , $26,370 and $-0- for 1996, 1995 and the
Predecessor Period, respectively.
F-22
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
On November 1, 1996, LMCI entered into new employment contracts with three
of its stockholders for the three year period ending October 31, 1999. The
stockholders have also entered into two year non-competition agreements
which commence upon the termination of their employment with the Company.
The aggregate compensation under these employment contracts are as follows:
YEAR ENDED OCTOBER 31,
----------------------
1997 $240,000
1998 300,000
1999 360,000
The previous employment agreements dated August 3, 1995 have been waived
and as of October 31, 1996, no monies were due pursuant to these
agreements.
The Company also has oral agreements with three other stockholders for the
period November 1, 1996 to October 31, 1999 under which they receive the
same aggregate compensation as the above-mentioned stockholders.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company's outside corporate counsel is a stockholder of the Company.
The Company incurred legal fees of approximately $80,295, $126,705 and $-0-
for 1996, 1995 and the Predecessor Period, respectively. At October 31,
1996, the Company owed $175,900 to the outside corporate counsel.
F-23
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 14 - RESTATEMENT OF FINANCIAL INFORMATION
The accompanying financial statements for the period November 29, 1994
(inception date) to November 4, 1995 have been restated for material
adjustments to intangible assets, deferred income taxes and paid-in
capital. The Company had previously recorded an intangible asset in the
amount of $771,000, and has now determined that the asset should not have
been recorded. In addition, the Company erroneously recorded $1,950,000 of
intangible assets as a reduction of paid-in capital. The Company did not
include in its calculation of deferred income tax liabilities, the
settlement payable of $605,000 and accrued interest of $244,000. The change
in the consolidated statement of operations for the period November 29,
1994 (inception date) to November 4, 1995 is as follows:
Net loss - as previously reported $(249,279)
---------
Adjustment of:
Depreciation and amortization (24,790)
Provision for income tax credits 6,000
---------
(18,790)
---------
Net loss - as restated $(268,069)
=========
Loss per common share remained at $(.05).
The change in the consolidated statement of stockholders' equity for the
period November 29, 1994 (inception date) to November 4, 1995 is as
follows:
AS REPORTED AS RESTATED
----------- -----------
Common stock $ 5,000 $ 5,000
Additional paid-in capital 3,345,045 5,167,265
Accumulated deficit (249,279) (268,069)
---------- ----------
Balance at November 4, 1995 $3,100,766 $4,904,196
========== ==========
F-24
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 15 - PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for the Predecessor Period have been
restated to correct an error made in prior years. The Predecessor did not
accrue interest on a judgment (see Note 12) from October 5, 1990 through
November 5, 1994. Such accrued interest amounted to $200,000. The
accumulated deficit of the Predecessor as at November 6, 1994 has been
adjusted for the effect of the restatement on prior years.
NOTE 16 - STOCKHOLDERS' EQUITY
During 1996, the Company issued $477,000 of convertible subordinated
debentures. These debentures automatically converted into 159,000 shares of
common stock upon the merger between the Company and Western Gold Mining,
Inc. (see Note 2) at the conversion price of $3 per share. In addition, the
Company issued 6,500 shares to a corporation for services rendered in
connection with the issuance of the debentures. The transaction was valued
at $3 per share and credited against additional paid-in capital.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts at which cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current liabilities are
presented in the balance sheet approximate their fair value due to their
short maturities. The following table presents the carrying amount and fair
value at October 31, 1996 for long-term debt:
CARRYING FAIR
AMOUNT VALUE
--------- --------
Notes payable - related parties $872,000 $817,000
Long-term debt 476,000 338,000
The fair value of notes payable - related parties and long-term debt has
been determined based on discounted cash flow using a market rate of
interest at the balance sheet date as applicable to comparable debt.
F-25
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
AND NOVEMBER 29, 1994 (INCEPTION DATE) TO NOVEMBER 4, 1995
NOTE 18 - PRO FORMA INFORMATION
Pro forma net loss has been presented to show results of operations
assuming the Predecessor filed its income tax returns as a C corporation.
NOTE 19 - SUBSEQUENT EVENTS
On December 16, 1996, the Company purchased a building in Manhasset, New
York for $417,500 in cash. The seller is permitted to rent approximately
one-half the building through August 31, 1997 for the following:
MONTHLY RENT
------------
December 1996 through June 1997 $ 2,500
July 1997 5,000
August 1997 10,000
F-26
<PAGE>
LUNDELL TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- ------------------ ------------------ ----------------- ------------
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO END OF
OF YEAR OPERATIONS DEDUCTIONS YEAR
------------------ ------------------ ------------------ --------------
DESCRIPTION
-----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended October 31, 1996 $ 5,000 $ - $ - $ 5,000
November 29, 1994 (Inception
Date) to November 4, 1995 5,000 - - 5,000
Predecessor - November 6, 1994
to August 3, 1995 5,000 - - 5,000
</TABLE>
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
LUNDELL TECHNOLOGIES, INC. & SUBSIDIARIES
EXHIBIT 27 - FINANCIAL STATEMENT DATA
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF
OCTOBER 31, 1996 AND STATEMENT OF OPERATIONS FOR THE
YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-5-1995
<PERIOD-END> OCT-31-1996
<CASH> 360,802
<SECURITIES> 0
<RECEIVABLES> 52,173
<ALLOWANCES> 5,000
<INVENTORY> 1,290,908
<CURRENT-ASSETS> 2,134,332
<PP&E> 6,300,000
<DEPRECIATION> 297,787
<TOTAL-ASSETS> 10,169,287
<CURRENT-LIABILITIES> 1,639,638
<BONDS> 0
5,165
0
<COMMON> 0
<OTHER-SE> 5,231,273
<TOTAL-LIABILITY-AND-EQUITY> 10,169,287
<SALES> 453,026
<TOTAL-REVENUES> 453,026
<CGS> 304,592
<TOTAL-COSTS> 304,592
<OTHER-EXPENSES> 1,060,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,324
<INCOME-PRETAX> (242,758)
<INCOME-TAX> (98,000)
<INCOME-CONTINUING> (144,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (144,758)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
