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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB12G/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ELGIN TECHNOLOGIES, INC
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(Name of Small Business issuer in its charter)
DELAWARE 95-4581906
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(State or other jurisdiction of (I. R. S. Employer
Incorporation or organization) identification no.)
12 Executive Drive
Hudson, NH 03051
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(Address of principal executive offices) (Zip Code)
(603) 598-4700
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(Issuer's telephone number, including area code)
Michael J. Smith
Executive Vice President and Chief Financial Officer
Elgin Technologies, Inc.
12 Executive Drive
Hudson, NH 030451
Securities to be registered pursuant to section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Exchange Act:
Voting Common Stock,
$.000833 par value per share
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ELGIN TECHNOLOGIES, INC.
Table of Contents
Part I
Item 1. Description of Business..............................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................20
Item 3. Description of Property.............................................26
Item 4. Security Ownership of Certain Beneficial Owners and Management......27
Item 5. Directors and Executive Officers, Promoters and Control Persons.....29
Item 6. Executive Compensation..............................................31
Item 7. Certain Relationships and Related Transactions......................32
Item 8. Descriptions of Securities..........................................33
Part II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters ...............................35
Item 2. Legal Proceedings...................................................36
Item 3. Changes and Disagreements with Accountants..........................37
Item 4. Recent Sales of Unregistered Securities.............................37
Item 5. Indemnification Of Directors and Officers...........................38
Part F/S
Part III
Item 1. Index to Exhibits...................................................40
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PART I
Item 1. DESCRIPTION OF BUSINESS
(a) Business Development and History of the Company
The history of Elgin Technologies, Inc. (the "Company") dates back forty
years to the founding of Elgin Electronics, which, prior to its acquisition by a
subsidiary of the Company in 1994, progressed through two ownership changes and
a 1993 bankruptcy filing by its then owner, Charter Technologies, Inc.
("Charter"). Prior to its 1993 bankruptcy, Charter, doing business as Elgin
Electronics, was a well-regarded provider of custom power supplies and services
to the medical, data processing, military and industrial controls market. Elgin
Electronics' products focused on low-voltage systems in the 2 to 800 volt range
at power levels of 30 to 50,000 watts and high-voltage systems in the 1kv to15kv
range at power levels up to 10,000 watts.
On April 28, 1994, Elgin e^2, Inc. ("EEI"), a Delaware Corporation created
by the Company's former Chief Executive Officer and Chairman, acquired from a
United States Bankruptcy Trustee in Erie, Pennsylvania the net assets of
Charter. As part of that transaction, EEI assumed certain secured debt from Star
Bank, N. A., which agreed to fund EEI's operations under a revolving asset based
line of credit.
In October 1994, EEI acquired the net assets of the Erie, Pennsylvania
operations of I.S.S., a division of Comptek Research, Inc. I.S.S. was a contract
manufacturer of electronic equipment, including printed circuit boards, power
supplies and cables.
In November 1994, EEl entered into a series of agreements to acquire
certain inventory, outstanding sales orders and intangible assets of Hyperion
Power Technologies, Inc. ("Hyperion"). Hyperion designed and manufactured custom
power supplies for the electronics and telecommunications industries. EEI had
acted as a subcontractor for Hyperion prior to that transaction.
In July 1996, EEI acquired all of the stock of Ascom Warren, Inc., a New
Hampshire company and a wholly owned subsidiary of Ascom Holdings (USA), Inc.
Immediately following the acquisition, Ascom Warren merged with and became the
Warren Power Systems division of EEI. This division (which the Company
eventually transferred to a wholly-owned subsidiary) designs and manufactures
high quality DC power systems and custom power supplies for the electronics and
telecommunications industries.
In December 1996, the Company's investment bankers, Mason Cabot Holdings,
Ltd. ("Mason Cabot") formed Elgin Acquisition Corporation ("EAC") for the
purpose of acquiring the assets of a Massachusetts based contract manufacturing
company. EEI made loans to EAC of approximately $750,000, and provided labor,
materials and management services to EAC in consideration of which EEI received
an option to purchase the stock of EAC. These loans were
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written off as bad debt in fiscal 1998 when the assets of the creditors of the
affiliate foreclosed on their security interests and sold its assets.
In September 1997, EEI entered into a transaction with Cross Atlantic
Capital, Inc., a publicly traded corporation with no operations, which had been
created in May 1986, pursuant to which the stockholders of EEI became
stockholders of the Company and EEI became a wholly owned subsidiary of the
Company. Simultaneously, EEI changed its name to e^2 Electronics, Inc. and the
Company changed its name, first to Elgin e^2, Inc. and later to Elgin
Technologies, Inc.
On December 17, 1997, the Company acquired the stock of its second
operating subsidiary, Logic Laboratories, Inc., ("Logic Labs") a Delaware
corporation that was created in December 1995. Logic Labs is a research and
development company specializing in electronic ballast system design.
In April 1998, the Company purchased 100% of the stock of and merged with
Communication Service Company ("CSC"), an installation services company
specializing in the installation and maintenance of the types of telecom power
products manufactured and sold by the Company's Warren Power Systems division.
In March 1998, the Company created Warren Power Systems, Inc. ("Warren
Power"), a Delaware corporation, as a third wholly owned subsidiary. EEI then
transferred to Warren Power the assets that constituted its Warren Power Systems
division in consideration of the assumption by Warren Power of liabilities
substantially in excess of the value of the Warren Power assets.
Accordingly, as of March 1998, the Company had three operating
subsidiaries: (i) EEI, which operated the original Charter Technologies (i.e.,
Elgin Electronics) business; (ii) Warren Power, which operated the business
purchased from Ascom Warren; and (iii) Logic Labs, as well as a division which
operated the CSC installation services business.
In April 1998, the principals of Mason Cabot, formed DC&A Partners, Inc.
for the purpose of purchasing (with investor funds) Star Bank's revolving debt
facility with EEI and Star Bank's first position security interests over the
assets of EEI. In connection with that transaction, Warren Power Systems became
an additional obligor with respect to the line of credit, as well as certain
other secured obligations of EEI.
On June 1, 1998, EEI filed for Chapter 7 Bankruptcy protection in the U.S.
Bankruptcy Court for the District of Pennsylvania. In connection with that
proceeding, the court has approved the bankruptcy trustee's motion to sell EEI's
assets to DC&A.
(b) Business of Issuer
The Company has two major product lines; Master Lite Ballast Systems
(MLBS(TM)) and Telecom Power.
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MASTER LITE BALLAST SYSTEM (MLBS(TM))
OVERVIEW
The fluorescent lighting products used in today's market have remained
essentially unchanged in the past fifty (50) years. Twenty-five (25) years after
the oil embargo, the United States has given up almost all the gains realized
through energy conservation efforts during the late eighties and early nineties.
The Department of Energy reported that the lighting costs for 1997 reached a
level of $28.3 billion. The Company's dimmable electronic distributed lighting
system (MLBS(TM)) may represent the ability for substantial savings for every
energy lighting dollar.
[GRAPHIC OMITTED]
Light represents a substantial factor of commercial electrical
consumption. A wide range of initiatives and efforts in the U.S. Department of
Energy ("DOE") and National Energy Strategies has focused on commercial lighting
as a potential source of energy conservation. According to the DOE, the average
energy used to light one square foot of space per year is 6 kWh per square foot;
with MLBS(TM) the energy used could be as low as 2.1 kWh for that same space.
Lighting Energy Conservation Potential
Substantial energy savings are possible using more efficient commercial
lighting equipment and practices. Estimates of the potential savings depend
heavily on assumptions regarding the types of lamps and fixtures to be replaced,
the effectiveness of various lighting conservation measures, and how strong a
lighting level is to be maintained. The savings estimates under various
assumptions span a wide range, from under 30 percent to nearly 80 percent of
current use (Figure ES1).
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o Savings from Compact Fluorescent Lamps: Converting all incandescent bulbs
(the typical screw-in type) to compact fluorescent lamps with reflectors
is estimated to save close to 30 percent of current (1986) energy use for
commercial lighting.
o Savings Without Compact Fluorescent Lamps: Even greater savings can be
achieved without using any compact fluorescent lamps, but converting all
lamps and fixtures to the most efficient version of the same type
(fluorescent, high-intensity discharge, or incandescent), together with
lighting control devices.
o Savings from Comprehensive Improvements: Universal replacement of lamps
and fixtures by more efficient equivalents, together with lighting
controls, could save as much as 72 percent of current commercial lighting
energy use. The replacements for this case include the better of the
previous two cases. If, in addition, lighting levels are reduced by 25
percent, the total savings could reach nearly 80 percent.
[GRAPHIC OMITTED]
Current Fluorescent Lamp Ballast Market Position and Outlook
Fluorescent lamps and ballasts were first commercially introduced into the
U.S. market in 1938. Since then, fluorescent lighting has slowly gained
dominance in the commercial and industrial lighting market. Today, the use of
fluorescent lamp ballasts is standard practice in most commercial and industrial
facilities. It is estimated that there are approximately 2.3 billion commercial
and industrial lighting fixtures in the U.S. today. Relatively inefficient core
and coil ballasts operate approximately 52%, or 1.1 billion fixtures.
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[GRAPHIC OMITTED]
The Company estimates that each of these 1.1 billion lighting fixtures
consumes approximately 784 kWh of electricity per year and contributes 196 watts
to hourly peak electric demand (assumes 4,000 hours of operation per year). If
standard hybrid ballasts replaced these magnetic ballasts, hourly energy demand
could be cut by 40 watts and annual energy savings would be 224 kWh per year,
per fixture. If all 1 billion fixtures were retrofitted with hybrid electronic
ballasts, these power savings would translate into lowering of national peak
electric demand by 38,400 mw, and energy usage would drop by 215,000 gWh per
year. Savings associated with this reduction would equate to $27.5 billion per
year. The resulting reduction in demand would forestall the need for sixty-four
1,000 mw coal-fired power stations at an initial cost of over $64 billion.
[GRAPHIC OMITTED]
In the late 1980's, electric utilities, faced with rising costs and
pressure from conservation groups, began to adopt lighting conversion programs
to replace inefficient magnetic ballasts. Immediately, the demand for electronic
ballasts skyrocketed and continues to increase today. The United States
Department of Commerce census shows that electronic ballasts sales during the
first
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half of the 1990's grew at a compound annual rate of approximately 70%.
Conversely, magnetic ballast sales have risen at a compound annual rate of less
than 1%.
While utility conservation programs in the late 1980's created the initial
market impetus for electronic ballast sales, regulatory changes implemented in
1992 are driving electronic ballast sales to new heights. Specifically,
regulation mandating lamp changes (and consequently ballast changes) is
projected to force sales of electronic ballasts to grow at an annual rate of 10%
to 18%. The market opportunity appears extremely strong with current electronic
ballast manufacturers unable to fully meet demand.
o U.S. sales for electronic ballasts are approximately $600 million
and growing rapidly; projected to be at $650 million in 1999 and
over $800 million by the year 2001.
o International market opportunity is projected to be 10 times as
large.
Market Trends and Drivers
The U.S. fluorescent lighting market, and consequently the ballast market,
has been historically driven by capital costs. Electricity costs in the U.S.
have historically been low, so energy costs have not factored heavily in the
buying decisions for ballasts. Further there has existed a disjunction between
the motivations of builders and owner/operators. A building owner is more
interested in the initial costs of a building than in the operating costs. Low
cost magnetic ballasts (costing approximately $8) versus high efficiency
electronic ballasts (costing approximately $20) would save the developer of a
one million square foot building (assuming 1 ballast per 100 square feet of
floor space) approximately $120,000. However, the building owner could save
$172,180 per year (224 kWh savings X 10,000 electronic ballasts X 7.7 cents/kWh)
if more energy efficient ballasts were installed.
The incentive to install low initial cost, high operating cost ballasts
versus more costly, higher efficiency ballasts is changing as a result of:
o Deregulation and increased competition forcing electric utilities to
become active in promoting the purchase of higher efficiency
ballasts
o Energy service companies ("ESCO's") and retrofitters are seeing
significant profit opportunities in replacing existing ballasts with
higher efficiency ballasts
o State and federal agencies are mandating energy efficiency in new
and existing lighting fixtures
o Consumers are becoming more aware of energy costs and demanding more
energy efficient lighting in their buildings
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Utilities
In the early 1980's, many electric utilities experienced generating
constraints and rising electricity production costs. As a result, Public Utility
Commissions ("PUC's") in New England, California and Wisconsin were the first to
require utilities to implement Conversion and Load Management ("C&LM") programs.
These programs directed utilities to promote the replacement of inefficient
lighting, heating and cooling equipment. It was expected that these programs
would lower electricity demand as well as the need to increase generating
capacity.
Since lighting accounts for roughly 40% - 50% of the electric bill for
commercial accounts, lighting programs were typically the first conservation
programs to be launched. Because magnetic ballasts are so inefficient, ballast
replacement programs were incorporated into their initial conservation programs.
Such programs provided a quick and dependable payback for utilities, and
consequently, such programs flourished.
C&LM programs have had significant impacts on the demand for electronic
ballasts. A report conducted by Arthur D. Little for Northeast Utilities
concluded that utility programs created actual shortages in electronic ballasts
in the early 1990's.
ESCO's
Energy Service Companies were created in response to the rise of
utility-sponsored energy conservation programs. Energy service companies make it
simpler and less troublesome to execute a retrofit. Energy conservation programs
typically required consumers to replace or retrofit existing equipment in order
to receive utility subsidies. To fill the increased demand for this type of
work, entrepreneurs created energy service companies to perform the task of
replacing all or part of installed lamp fixtures. The process of retrofitting
typically entails replacing the entire lamp fixture which contains two ballasts
and four T12 lamps, with one electronic ballast and two or three T8 lamps. Most
industrial and commercial end-users retrofit part or all of their buildings to
capture energy savings and/or upgrade existing equipment.
ESCO'S typically contract with industrial or commercial end-users to
evaluate energy consumption, make recommendations for energy savings and install
energy efficient equipment. Many of these companies have employed unique
techniques to attract business and reap profits. For instance, they are willing
to work on a contingency basis and are paid a percentage of their customers'
energy savings. As a result, they have increased the demand for electronic
ballasts.
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Federal and State Programs
Federal and state governments are becoming more active in promoting and
maintaining demand:
o The Environmental Protection Agency ("EPA") is promoting energy
efficiency for environmental reasons, particularly in regard to
global warming. For example, the EPA Green Lights Program encourages
Fortune 500 companies to install energy efficient lighting in return
for media exposure and other public relations benefits.
o The U.S. Department of Energy continues to research new technologies
and is increasingly under pressure to make conservation an integral
part of the National Energy Strategy.
o The U.S. Congress passed the "National Appliance Conservation
Amendments of 1988" which stipulated that only energy efficient
ballasts, including some magnetic and all electronic ballasts, could
be manufactured after 1990.
o The Federal Energy Management Program requires all federal buildings
to convert to energy efficient ballasts within two to three years.
Considering that there are roughly 500,000 federal buildings with
annual lighting related energy costs of more than $700 million, this
law could have a major impact on the demand for electronic ballasts.
o The 1992 Energy Policy Act was enacted to "save consumers money
through reduced energy expenditures and improve the international
competitiveness of the United States economy". Toward this end,
congress established limitations on the types of fluorescent lamps
produced. Most of the inefficient fluorescent lamps in use today
(commonly referred to as T12 lamps) went out of production on April
30, 1994. These lamps are being replaced or retrofitted with
electronic ballasts and energy efficient T10 and T8 lamps. The EPA
also set minimum requirements for ballast efficiency.
Consumer Awareness
Environmentalism has increased the demand for energy efficient and
environmentally friendly products, including energy efficient ballasts. For
example, "Energy User News", which targets issues relating to energy management,
discovered in a survey that almost 80% of end users rate energy savings as the
main driver in their decision to upgrade or replace existing lighting systems.
The survey further indicated that advanced lighting technologies have become
mainstream choices for end users, with only 38% responding that they would use
incandescent lamps in their lighting systems. The following are other major
findings in this survey:
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o 89% of all users surveyed intended to buy electronic ballasts
o 79% of users intended to upgrade existing lighting systems to energy
efficient "T8" lamps
o 29% of surveyed users would seek utility program rebates to help
fund their projects
o 18% of users intended to buy high power factor ballasts; 15% would
buy high output ballasts; 13% would purchase reduced harmonic
ballasts.
Product Overview
The lamp ballast is a critical element in the efficient operation of a
fluorescent light. Ballasts typically perform two primary tasks in a fluorescent
light: 1) power control conditioning, filtering and voltage transformation and
2) lamp control for both starting and continuous operation. Traditionally, these
tasks have been performed together by a magnetic ballast in an approximately 2"
x 12" box weighing about 2 to 6 pounds.
Magnetic ballasts have been optimized, but at their best they present
serious problems in noise, efficiency and regulation. Furthermore, their poor
power factor limits the ability of the power utility to drive real power. In
recognition of the seriousness of the disadvantages of the magnetic ballasts,
the 1990 National Appliance Energy Conservation Act ("NAECA") required all
ballasts for commercial fluorescent lighting systems to have efficiencies
greater than or equal to those of energy efficient magnetic ballasts. This
legislation effectively banned the use of a majority of magnetic technology for
new lighting applications.
To fill the void, the ballast industry has replaced the heavy magnetic
ballast with solid state electronic units. This electronic circuitry converts
the input AC voltage to a high voltage DC level using high frequency switching
to boost the voltage while correcting the power factor. The DC is then converted
back to high frequency AC avoiding noise and raising the light emission of the
lamp for a given power input.
The overall failure rate of existing electronic ballasts is higher than
the rate of core and coil ballasts. This is a result of two factors: 1) hundreds
of dependent components - if one fails, the entire ballast fails; and 2)
attempts to lower total ballast cost through lower grade components (which fail
more readily), increasing ballast failure rates.
Despite poor reliability, inefficient design, and high cost, electronic
ballast manufacturers have not been able to expand production quickly enough for
demand. Electronic ballasts, despite their failings, have provided significant
value to consumers through low total life cycle costs and enhanced lighting
quality. Lighting engineers, building owners, and newly formed ESCO's have
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embraced the technology and are rapidly replacing existing magnetic ballasts
with electronic ballasts.
Master Lite Ballast System(TM). The mission of the Company's Logic Labs
subsidiary has been to develop a product that could improve existing ballast
designs and become the benchmark for all future ballast products. After years of
diligent research and design, Logic Labs has not only developed an improvement
to existing ballasts, it believes that it will develop a revolutionary system
that may represent a quantum leap in ballasting. Logic Labs technology moves
away from traditional ballast design by separating power control and lamp
control. The Company believes that this approach may result in a product that
will no longer be simply a ballast, but a power distribution system which will
out-perform every existing ballast in efficiency, reliability, flexibility and
power quality at a cost below that of core coil magnetic ballasts.
The Company engaged the Economics Resource Group, Inc. to evaluate the
market potential of the MLBS technology in the fluorescent light industry. The
results indicated a major market potential for the MLBS technology and with a
favorable report against competition in today's fluorescent lighting industry.
See Exhibit A-1 attached hereto.
Dimming is provided as a standard feature at no additional cost. The
drivers sense the output of the "master" and dim as commanded by the customer's
control(1) of the "master". This unique patented approach requires no additional
wiring other than adjustment control and can be retrofitted into existing
systems.
Logic Labs is developing innovative features related to energy management
as add-on components to the base MLBS(TM). These features include daylight
harvesting, occupancy sensing and in process lamp usage monitoring. Some "high
end" ballasts presently offer these features as separate components, but at a
wholesale price of more than 100% over the cost of the ballast. The Company
believes that Logic Labs' MLBS(TM) is able to provide these features at a
fraction of the competitors' cost, thereby further increasing energy savings.
Competition
Virtually every ballast manufacturer in today's marketplace has built its
business by developing and delivering a large array of ballasts for the
fluorescent lighting industry. The Company plans to make one of the primary
attributes of the MLBS(TM) technology the ability to address a wide range of the
fluorescent lighting industry's needs with a multi-purpose distributed dimmable
electronic lighting system.
The present design allows MLBS(TM) to give the customer the freedom and
flexibility to attain their desired lighting using its distributed dimmable
electronic lighting system. The multi-facet features of the MLBS(TM) allow the
customer to realize significant energy savings by utilizing the
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(1) Customer control of the "master" can be manual, digital or analog.
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dimming and daylight harvesting features of the system; maintain constant
desired lumen outputs per lamp as needed in each workplace environment and
realize low harmonic distortion of less than 3%.
Historically, fluorescent industry lighting users were required to select
a specific ballast for a specific need or application. When the MLBS(TM)
distributed dimmable electronic system is fully developed, the Company believes
that the customer may be able to realize all attributes at a market competitive
price with competition's best in class product.
Logic Lab's competitors vary depending upon specific focus and overall
fluorescent lighting needs. Motorola, Magnetek and Advance Transformer are
primary competitors with Sunpark, SLI and Howard as secondary competitors.
Patents
The Company has developed a network of interrelated patents, which cover
the various configurations of the MLBS(TM) technology. To date, the Company has
been granted three patents. The Company is in the final application process for
two additional patents.
Future Opportunities
The Company plans development efforts, which may include international
expansion, new product launches and product expansions. The Company holds
international patent protection for the MLBS(TM) in the European community,
Korea and Canada. When fully developed, the Company believes that the system
will be so flexible that it may be able to operate in virtually any foreign
electric system without redesign. The Company projects the foreign fluorescent
lighting market to be ten (10) times the size of the U.S. market.
The Company also intends to launch as a new product MLBS(TM) with
integrated energy management. Given the centralized power control of the
MLBS(TM), the system could be ideally suited for advanced energy management and
control. The Company has developed a patented approach to dimming control for
light output. Current testing reveals that this feature enables light output
dimming below 40% normal output. Further dimming capability raises the wholesale
cost of the ballast substantially with diminished savings. The Company expects
its dimming control to increase costs by no more than 10% to 20%.
The Company plans to attempt to expand MLBS(TM) to applications outside
the fluorescent lighting industry such as the neon lighting industry,
transportation including automotive, avionics and shipbuilding and the high
intensity gas tube lighting market such as metal halide, argon and sodium.
The Company is also attempting to develop the ability to place the lamp
driver inside the lamp. This technology would allow the Company to provide a
substitute technology for use of compact fluorescent, one of the highest margin
and fastest growing markets in lighting today. Compact fluorescents were
designed to replace inefficient incandescent lights at a cost of
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approximately $15 - $20 per lamp. By placing the lamp driver inside the lamp,
the Company can increase energy efficiency by 30% - 35% and reduce harmonic
distortions by up to 90%. Such features could allow the "inside the lamp"
technology to replace incandescent lighting.
Fluorescent Lamp Ballast Competition
From an energy savings standpoint, the Company believes that, when fully
developed, MLBS(TM) may far exceed core coil magnetic ballast competition.
Assuming 4,000 hours of annual operation, it is anticipated that the MLBS(TM)
system will typically require as little as 280 kWh of electricity while other
ballasts require from 344 kWh to 784 kWh to produce the same light output.
Benchmarking to a magnetic core and coil ballast which would cost approximately
$60.36 per year to operate, electronic ballasts (standard and high light output)
create a cost savings of $27.27 to $30.55. However, the Company believes that
MLBS(TM), when fully developed, will create an annual cost savings of $38.80,
which would exceed other electronic ballasts by $8.25 to $11.53 per year, or
18.7% to 29.7% annual cost savings.
TELECOM POWER
Overview
The telecommunications power market is changing dramatically. This change
is taking place within the central offices of telephone companies and cellular
networks, as a result of the introduction of PCS (or Personal Communications
System) and the development of the "information superhighway". Overall, the
telecommunications power market is moving toward lower power requirements. The
existing central office infrastructure, which consists of very large power
plants, is changing. With telecommunications equipment requiring less power,
many of these power plants are now being downsized to much smaller plants or are
being retired totally. The RBOC's (or Regional Bell Operating Companies) are
also downsizing their power staffing, which requires equipment that is easier to
maintain. With the rapid growth in cellular telecommunication, smaller power in
much higher volume is required. These companies are faced with not having an
abundance of space or large maintenance staffs like the RBOC's. Cellular
companies need compact equipment that is modular in design allowing for easy
maintenance. Requirements include small power supplies that are deployed
throughout the network which power various types of equipment. PCS is the newest
area and is still being defined. The general requirement will be for very small
power supplies and systems. The chart below indicates the range of power
supplies by size and market segment.
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<TABLE>
<CAPTION>
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48V/24v Cellular PCS Fiber Central Office
===============================================================================================
<S> <C> <C> <C> <C>
3amp/6amp X X X
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6amp/12amp X X X
-----------------------------------------------------------------------------------------------
12amp/25amp X
-----------------------------------------------------------------------------------------------
25amp/50amp X
-----------------------------------------------------------------------------------------------
50amp/100amp X X
-----------------------------------------------------------------------------------------------
100 amp X
-----------------------------------------------------------------------------------------------
200-400 amp X
-----------------------------------------------------------------------------------------------
</TABLE>
The central office ("CO") requires much larger power systems than the
cellular market environment. PCS and fiber require low-level power supplies, and
new technology is pushing the levels lower than indicated on the above chart.
Fiber includes "fiber to the curb" applications, "controlled environment vaults"
and powering of "information network" applications. This market is made up of
individual components and total systems. Components must be compatible with the
individual power system, and each power system must meet the specifications of
the customer's network needs. Many of the small systems are either incorporated
into the customer's system/product or are standalone and support their remote
equipment. These systems include the following: rectifiers, batteries,
monitors/alarms and power distribution devices. Industry trends and projections
point to rapid growth in the cellular, PCS and fiber telecommunications market
over the next decade.
Market Trends
A telecommunications power plant is a fully integrated power system used
in telephony applications. It can be located in either the central office, an
outside plant with a controlled environment, or at the point where PBX service
is received at the client site. The DC power boards and DC systems used in power
plants are comprised of several individual components. A typical power plant
consists of five (5) subsystems: AC distribution, rectifiers and inverters,
controllers, batteries and DC distribution. Those components specific to the
business of the Company's Warren Power subsidiary include rectifiers, converters
and inverters. Rectifiers convert the AC voltage into the DC voltage, DC-to-DC
converters take DC input voltage and reduce voltage levels for specific
applications, and inverters convert DC voltage back to AC. A broadband power
plant is similar to a telecommunications power plant in that power condition
equipment is supplied to a central location for broadband communications system.
These systems include CATV, RBOCs, cellular and PCS.
While the U.S. market for power plants is diminishing at the central
office, it is growing in other areas of the world. As central offices abroad
convert from analog to digital and reorganize power distribution and equipment,
the efficiency of older power plants is in question. In addition, as demand for
power increases, the interest in efficient, compact modular units increases. The
objective is to increase the reliability of the central office by upgrading
analog systems to digital
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based equipment, increasing power quality and reducing cable congestion. Market
opportunity exists in Latin America and the Far East and is growing at an annual
rate of approximately 20%.
The greatest growth area for power plants is the PCS industry as this is
the technology of the future in personal communications. CATV and cellular
applications will also be major growth contributors. Currently, CATV providers
entering the telecommunications market must meet the increased demands placed on
telephone companies for reliability. This translates into increased demand for
back-up power provided by power plants. A high level of interest in this
industry is evidenced by the investments made by COX, Comcast, TCI and Time
Warner. Further, the increase in both cellular communication use and product
demand will lead to more complex product offerings and an increased need for
power supplies. The market in Latin America is virtually untapped, indicating a
vast opportunity for growth.
The U.S. market for converters is $25.5 million while foreign market
penetration has been quite low. In 1995, exports represented just 14% of total
U.S. production. Even though most converters are supplied nationally, these
levels indicate tremendous opportunity if pricing is targeted. Given the fact
that foreign markets offer opportunities to suppliers around the world,
competition is tight. The U.S. market for inverters is growing and is expected
to keep pace with the overall communications power industry. The foreign
opportunity for inverters is similar to that of converters. The U.S. market for
rectifiers is $166.1 million. Here too, there is little foreign trade. Imports
totaled only 10% of production of U.S. consumption. In this case, foreign
exports provide a greater market potential for suppliers. Currently, U.S.
suppliers are shipping over 30% of their product abroad.
The U.S. market for these power components is supplied according to a
two-tier system. On the first tier, producers generally ship units to end-users,
distributors, contractors and Value Added Resellers ("VAR's"). The distributor
is the primary point person on the second tier. In this case, the distributor
will ship products to the end-users, contractors and VAR's. On both levels, the
majority of shipments are made directly to defined end-users such as OEM's
manufacturing complete systems or private customers buying components that will
be installed by independent contractors.
Product Overview
The telecom power systems and components of the Company's Warren Power
subsidiary are a composite of products from Elgin and Warren Power Systems with
combined industry brand-name recognition of more than 80 years and are designed
to be integrated into the energy subsystems which power communications systems.
The telecom power business services the OEM, Central Office, Customer
Premise/PBX, Cellular, Microwave, Fiber Optic and Government Telecommunications
markets with four basic product categories.
Proprietary Power Products include battery chargers, eliminators, key
system power supplies, ringing generations, converters, inverters, rectifiers
and fuse panels. Most communication systems are designed to operate from a
single DC Input or "rectifier", the purpose of which is to
16
<PAGE>
provide a continuous supply of DC power to the system at a highly regulated
voltage under a variety of input and output conditions. The three technologies
by which the output voltage is regulated are: 1) Linear or thyristor, 2)
Ferroresonant, and 3) Switch-Mode. Warren Power offers a number of 48V and 24V
Controlled Ferro-Regulated (CFR) units at a variety of output current levels.
Further, Warren Power has introduced a new Switch-Mode Rectifier (SMR) to meet
the rising demand for higher power densities in telecommunication applications.
Key system power supplies support the business telephone equipment market, i.e.
key telephone system/PBX phone equipment.
While most telecommunications power plants operate from a single DC input
voltage, auxiliary power requirements exist for other DC voltages as well as to
replace commercial AC power during an outage. The conversion hardware performing
these functions are called converters (i.e., they convert one DC voltage to
another), and inverters (which convert a source of DC power to AC output).
Ringing generators that produce and control the various signaling sources (i.e.
busy signal, dial tone, etc.) are considered part of the telecom power market.
Ringing generators are virtually identical to inverters from a functional
standpoint, being powered from a DC source and producing an AC sine wave output.
Warren Power offers a full line of ringing generators as well as a combination
key telephone power supply and ringing generator system.
Engineered Power Distribution Systems include 24V and 48V, 50 to 4000 amp
power board systems as well as microprocessor controlled remote monitor and
control systems. Warren Power's standard power boards feature microprocessor
controlled battery chargers and convert AC power to the DC power needed for
telecommunications switching (central office) systems. The systems also provide
other features that monitor and control critical operating parameters in order
to protect the telecommunications switching equipment.
Access Products include voice and data couplers. The access products
consist of a line of protective devices registered with the FCC that are
required when connecting unregistered equipment to a telephone line. The data
couplers are used in conjunction with computers, data terminals and point of
sale ("POS") terminals that send data via modem over telephone lines. The voice
couplers provide the requisite protective functions for unregistered answering
machines, dictation equipment and multi-trade voice recording equipment.
At the outset of the FCC Equipment Registration Program initiated under
Part 68 of the FCC Rules, the market for such registered couplers was quite
lucrative since equipment manufacturers sought an interim solution that would
permit continued sales of unregistered products. More recently, most OEM's have
incorporated the required protective functions into their products and
registered them with the FCC. Thus, while the market has declined significantly,
there remains a residual demand for the OEM sector as well as a replacement
market in the end-use segment.
Installation and Service. CSC, the Company's engineering and installation
division installs power systems manufactured by Warren Power and other
manufacturers that meet all RBOC standards. The Company's staff of senior
engineers and technicians provides domestic and international installation and
full detailed engineering services.
17
<PAGE>
Competition
The competition in the power supply segment of the telecom market is
substantial, dominated by large companies such as AT&T, Lucent Technologies,
Northern Telecom and Lorain. These companies have enormous capital resources
that provide them with a substantial advantage over smaller vendors. In
addition, smaller companies such as Power Conversion Products, PECO II, Argus
and LaMarche provide additional direct competition to the Company. Management
believes that the overall size of the market provides substantial opportunities
and that the Company's product offerings and service capabilities will allow it
to successfully define its niche.
The Company's customer base includes a wide variety of manufacturers of
telecommunications equipment, computers, medical equipment and industrial
controls. The customer list also includes some of the regional telephone
operating companies, defense contractors, U.S. government agencies, public
utilities and independent cellular operators.
The Company currently has no publicly announced new product or service.
The Company's business is subject to significant competition. The
Company's products and capabilities are designed to serve two distinct markets.
These are telecommunications power and custom power conversion. The following
sections describe the competitors under each market segment.
Telecommunications Power
As a relatively small company with very large competitors, customer
service is essential to the success of the Company's business plan. The Company
must be able to deliver quality product quickly, provide flexibility to the
customer and maintain a full service offering. The major manufacturers of
telecommunications power equipment engaged in competition within the U.S. market
are AT&T Energy Systems (Mesquite, TX) and Lorain Products (Lorain, OH), which
maintain a combined approximate market share of 60%.
Custom Power Conversion
The Company's brand names and product lines have been leading elements of
the custom power conversion manufacturing business since the mid 1960's. The
keys to success in this business are the abilities to deliver the
electrical/mechanical design, gain prototype approval and move the product
through production to delivery, all within a minimal lead time. The major
national and regional competitors in the custom power supplies industry are
Zytec (Eden Prairie, MN), ITT Power Systems (Tucson, AZ), Acme Electric (Cuba,
NY), AT&T Energy Systems (Mesquite, TX), Preferred Electronics (Westfield, MA)
and Technipower (Danbury, CT).
18
<PAGE>
The Company procures electronic components, metal work, sub-assemblies and
other raw materials utilizing a state of the art materials requirement planning
system that ensures timely purchase of materials in order to meet production
schedules and promised customer delivery dates. The Company relies heavily on
external sources of supply and, for most components, has developed multiple
commercial sources, including large and small distributors and OEM's. Passive
electronic components are readily available through any of the large
distributors within short lead times. For active electronic devices,
availability varies, with most items readily available and a limited number of
components available only from a single source of supply due to allocation or
short supply. While delays in delivery of such single sourced critical
components could cause deferment of planned production and delays in shipment of
certain products, the Company attempts to identify acceptable alternate
components or makes purchase arrangements through brokerage firms that
specialize in locating difficult to find electronic items. The Company believes
that the loss of any single source of supply would not materially affect the
Company's business.
Two customers accounted for 44% (31% and 13% respectively) of accounts
receivable as of March 31, 1999. Sales to these major customers amounted to 20%
(9% and 11% respectively) of total sales for the year ended March 31, 1999. No
individual customer amounted to greater than 9% of total sales for the year
ended March 31, 1998. For the nine months ending December 31, 1999 and 1998,
sales to major customers amounted to 47% and 25% respectively.
The Company's Telecom Power business does not currently own any patents,
trademarks, licenses, concessions or franchises that are of any material value
to its business, now or in the future. The Company is not party to any royalty
or labor agreements.
Products manufactured by the Company generally do not require any
government approval. Products sold to agencies of the U.S. government (i.e.,
military, FAA, etc.) require adherence to certain specifications in the normal
and ordinary course of manufacture.
There exists no known current or pending government regulation that would
either impede or enhance the operations of the Company.
The Company's operations do not use, consume or generate any hazardous or
environmentally dangerous materials. As a result, minimal costs are incurred in
the compliance with Federal, State and local environmental laws.
As of March 1, 2000, the Company employed a total of sixty-seven (67)
employees, all of which are full time employees. None of these employees is
covered by a collective bargaining agreement. The Company believes that its
labor relations are good.
19
<PAGE>
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included herein.
Forward Looking Statements and Certain Risk Factors
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward-looking statements that may be deemed to have been made in this Form
10-SB or that are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in the Form 10-SB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors that may affect the Company's results
include, but are not limited to, the Company's lack of profitability, its
dependence on a limited number of customers and key personnel, its ongoing need
for additional financing and its dependence on certain industries. The Company
is also subject to other risks detailed herein or which will be detailed from
time to time in the Company's future filings with the Securities and Exchange
Commission.
Risk Factors
Going Concern; Operating Losses and Cash Flow Shortages
The Company does not have available working capital to market its products
effectively. As a consequence, sales have significantly decreased and it is
expected that sales will continue to be adversely affected. There exists a
substantial risk that the Company will be required to curtail or discontinue its
current business operations.
Since EEI commenced operations in 1994, the Company and its subsidiaries,
have produced losses in each year and had an accumulated deficit of $35,499,000
at March 31, 1999. Through the nine (9) months ended December 31, 1999, the
Company has continued to experience losses of $3,898,000 on revenues of
$5,427,000. The continued research and development efforts to bring MLBS to
market, along with the capital needed to rebuild the telecom power and
conversion businesses, were the major contributors to the accumulated losses.
The Company and its subsidiaries have experienced cash flow constraints
throughout their operating history, resulting in lower orders and decreased
margins. The Telecom Power business
20
<PAGE>
has been negatively impacted in its efforts to turnaround and expand,
principally by the Company's history of lack of working capital, restructuring,
consolidations and substantial operating losses. Management is making every
effort to reverse these trends by reducing the operating costs of the Company's
existing product lines and seeking to expand into less costly, more profitable
products and services. These efforts will, however, require increased capital
infusion and Management cautions that there can be no assurances that these
efforts will be successful.
Even though the Company is in the process of bringing MLBS to market,
there can be no assurance that the Company will successfully complete the
product's technology or that the product and technology will gain acceptance or
that the Company will not experience adverse operating results, including, but
not limited to substantial additional losses, in the future.
Subsidiary Bankruptcy
On June 1, 1998, EEI (the Company's wholly-owned subsidiary) filed a
Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the
Western District of Pennsylvania. In connection with the bankruptcy, DC&A
Partners, EEI's largest secured creditor, purchased EEI's assets from the
Bankruptcy Court for $177,000. DC&A is a company formed by principals of Mason
Cabot, the Company's former investment banking firm. Until the bankruptcy has
been concluded, there is a possibility that the Bankruptcy Court could
invalidate certain pre-petition transactions or make other findings,
determinations or rulings that could have material adverse effects on the
Company and/or its properties.
Business Development Risks
The Company is following a business plan intended to expand its sales
efforts and market penetration along with the continued development and
marketing of the MBLS technology. Implementation of this plan will require
substantial additional capital for product development, marketing and promotion.
No assurance can be given that the Company will be successful in expanding its
current sales or distribution capabilities or developing new products that
result in increased sales and earnings or that its marketing and promotion
activities will have the intended effect of expanding sales and increasing
earnings.
Completion of Technology Development; Reliance on New Product Introductions
The ability of the Company to execute its business plan is substantially
reliant upon the completion of the development of its proprietary technologies,
including but not limited to MLBS, and the successful marketing of products
based upon those technologies. There can be no assurance that the Company will
complete this development or that such development will result in viable and/or
marketable products. The Company's failure to complete the development of its
technologies and/or market products based thereon could have a material adverse
effect on the Company's financial condition and results of operations.
21
<PAGE>
Furthermore, as a result of technological changes and developments, many
technologies are successfully marketed for only a short period of time. There
can be no assurance that (i) any of the Company's current or future products
will continue to be accepted for any significant period of time or (ii) the
market will accept the Company's new products, or if such acceptance is
achieved, that it will be maintained for any significant period of time. The
Company's success will be dependent upon the Company's ability to bring existing
products to market and to develop new products and product lines. The failure of
the Company's products and product lines to achieve and sustain market
acceptance and to produce acceptable margins could have a material adverse
effect on the Company's financial condition and results of operations.
Need for Additional Financing
The Company currently has only one major investor as its sole financing
source. There can be no assurance that this investor will continue to fund the
Company's operations. Without working capital from this investor or an
alternative financing source, the Company could be required to curtail or
discontinue its current business operations. The Company's business plan is
based upon current assumptions about the costs of its implementation. If these
assumptions prove incorrect or if there are unanticipated expenses, the Company
may be required to seek additional equity and/or debt financing. No assurance
can be given that the Company will be able to obtain such financing upon
favorable terms and conditions. Moreover, no assurance can be given that the
Company will be able to successfully implement any or all of its business plan,
or if implemented, that it will accomplish the desired objectives of product
expansion and increased revenues and earnings.
Selected Financial Data
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Years Ended
December 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,427,000 $ 4,817,000 $ 7,218,000 $ 6,980,000
Cost of sales 5,811,000 5,213,000 7,088,000 7,974,000
------------ ------------ ------------ ------------
Gross margin (loss) (384,000) (396,000) 130,000 (994,000)
Operating expenses 2,659,000 3,356,000 4,379,000 12,146,000
------------ ------------ ------------ ------------
Operating loss (3,043,000) (3,752,000) (4,249,000) (13,140,000)
Other expenses 855,000 542,000 754,000 1,602,000
============ ============ ============ ============
Net loss ($ 3,898,000) ($ 4,294,000) ($ 5,003,000) ($14,742,000)
============ ============ ============ ============
</TABLE>
22
<PAGE>
Sales
The Company had sales of $7,218,000 for fiscal 1999 and $6,980,000 for
fiscal 1998. The nominal increase in sales (3.4%) was mainly the result of
regaining stability in the business, which had been interrupted in 1998 as a
result of the consolidation of the Company's Erie, Pennsylvania and Hudson, New
Hampshire facilities. In addition, the acquisition of CSC in May, 1998 helped to
offset the loss in sales from the filing of Chapter 7 bankruptcy protection by
the Company's subsidiary, EEI in June, 1998.
Sales for the nine months ending December 31, 1999 and 1998 were
$5,427,000 and $4,817,000, respectively. The sale increase of $620,000 (12.9%)
was the continued result of regaining stability in the telecom business and the
first sales of the lighting segment's products of $24,000.
Cost of Sales
The cost of sales for fiscal 1999 and 1998 were $7,088,000 (98% of sales)
and $7,974,000 (114% of sales), respectively. Cost of sales for the nine months
ending December 31, 1999 were $5,811,000 (107% of sales) as compared to
$5,213,000 (108% of sales) for the corresponding period in the previous year.
Cost of sales, as a percent of sales experienced a reduction due to the benefits
of cost reductions and the addition of CSC installations that carried a higher
gross profit margin in fiscal 1999 and the nine months ended December 31, 1999.
The actual cost of sales increased $598,000 (11.5%) in the current nine months
period over the comparable period in 1998. This corresponds favorably to the
12.2% sales increase in the current period.
Operating Expenses
Operating expenses were down $7,664,000 (64%) from $12,146,000 (174% of
sales) in fiscal 1998 to $4,379,000 (61% of sales) in 1999. Included in fiscal
1998's operating expenses was the write-off of acquired research and development
costs in the amount of $7,901,000 associated with the acquisition of Logic Labs.
Additionally, in fiscal 1999, the Company had excess bad debt reserves resulting
in income of $110,000. In 1998, the Company wrote off $750,000 of uncollectible
loans to an affiliate. For the nine months ended December 31, 1999 and 1998,
operating costs were $2,659,000 (49% of sales) and $3,356,000 (70% of sales),
respectively. This $698,000 (21%) reduction is partially the result of
consolidation and moving costs incurred in 1998 resulting from the abandonment
of the Erie, Pa. warehouse and assembly facility as well as management's other
efforts to reduce costs. Additionally, in the nine months ended December 31,
1998, certain employees were given stock bonuses of 97,200 common shares whose
fair value was $292,000.
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<PAGE>
Other expenses
Other expenses declined $848,000 (53%) from $1,602,000 (23% of sales) to
$754,000 (10% of sales) in fiscal 1998 and 1999, respectively. Fiscal 1998
included abandonment of assets of $663,000 and restructuring costs of $50,000.
Fiscal 1999 included net intangible write-offs and amortization of $330,000 or
an increase of $171,000 over 1998. This increase is attributable to a charge to
operations for the goodwill associated with an acquisition at the time of
purchase. These increases were offset by lower interest costs in 1999 of
$320,000 (44%) from $730,000 (11% of sales) in 1998 to $410,000 (6% of sales) in
1999. The decrease in interest for the nine (9) months ending December 31, 1999
over 1998 was $474,000 (217%) due to increased borrowings from an affiliate. In
the current nine (9) months, the Company abandoned property assets of $94,000 as
compared to $14,000 in 1998. During the prior nine (9) month period the
write-off of and amortization of intangibles exceeded the current period's by
$243,000.
Executive Officers and Key Managers
On January 25, 2000, the Company's President and Chief Executive Officer,
William Mosconi resigned. From January 25, 2000 to February 21, 2000, Michael J.
Smith, a member of the Company's board of directors, served as President,
Interim Chief Executive Officer and Interim Chief Financial Officer. On February
21, 2000, the Company entered into an employment agreement with Jonathan Scott
Harris, to serve as President and Chief Executive Officer for an initial term of
two years. Mr. Smith continues as a member of the Company's board of directors,
and as the Company's Chief Financial Officer and Executive Vice President.
On February 28, 2000, the Company terminated the employment of Lewis W.
Kuniegel for cause. Mr. Kuniegel served as Vice President of the Installation
and Servicing of Tele-communications Products Division (CSC). The Company has
yet to name a successor to Mr. Kuniegel's position.
Influence by Executive Officer; Stockholders Agreement
The Company's Chairman, Primo Ianieri, beneficially owns 3,315,685 shares
of Common Stock, representing 18.8% of the Company's issued and outstanding
stock, and rights to purchase stock. As a result, Mr. Ianieri could influence
most matters requiring approval of the stockholders of the Company. Furthermore,
the Company, Mr. Ianieri and other significant stockholders of the Company are
parties to a Stockholders Agreement dated as of September 28, 1997 that
provides, inter alia, that:
(i) The Company's Board of Directors shall consist of seven (7) seats;
(ii) Three (3) of said Directors shall be selected by Mr. Ianieri and one of
which shall be Mr. Peter Bordes, Sr.(2)
----------
(2) Mr. Peter Bordes, Sr. is deceased.
24
<PAGE>
(iii) The three (3) Directors selected by Mr. Ianieri shall comprise an
Executive Committee of the Board of Directors, which shall have veto power
over any proposed acquisition, merger, offering or sale of equity
securities, borrowings or other issuances of debt securities.
Copies of said Stockholders Agreement are available from the Company and the
Placement Agent.(3)
Influence by Investor; Substantially all Assets Pledged; Continued Dilution
In connection with a Secured Revolving Credit Agreement, Secured Note
Payable, Stock Pledge Agreement and Security Agreements between the Company and
Horace T. Ardinger, Jr. dated as of November 13, 1998 and subsequent amendments
thereto, (the "Ardinger Credit Documents") as well as credit agreements with
others, the Company has pledged substantially all of its assets as security for
the performance of its obligations. In the event that the Company was to default
on the payment of any amounts owed under the agreements, the lenders would have
the ability to satisfy the obligations by selling or causing the sale of some or
all of the assets of the Company.
Under the terms of the Ardinger Credit Documents, as of December 31, 1999,
Mr. Ardinger beneficially owns or has the right to acquire 23,349,151 shares of
the Company's common stock which is 61.6% of the total amount of beneficially
owned common stock of the Company (see Item 4 hereinbelow). As a result, Mr.
Ardinger would be able to greatly influence most matters requiring approval of
the stockholders of the Company, including the election of the majority of the
Board of Directors. Pursuant to a Voting Agreement dated as of April 1, 1998,
(see Exhibit 9.2), Mr. Ardinger is entitled to either be elected to the
Company's Board of Directors or have his designee so elected. Mr. Ardinger's
current designee to the Company's Board of Directors is Michael Smith. Mr.
Ardinger has also been granted a license in California, Texas and Florida in
certain proprietary technology of Logic Labs and rights of first refusal to
potential future licensing of certain related technology pursuant to a License
Agreement dated as of April 1, 1998 (see Exhibit 10.4). Furthermore, as a result
of ongoing capital contributions by Mr. Ardinger, his beneficial ownership of
the Company's common stock is likely to increase and may result in continued
substantial dilution to the current holdings of the other stockholders.
Dependence on Major Production Facilities
One hundred (100%) percent of the Company's production is located at its
facility in Hudson, New Hampshire. An interruption of that production or
transportation to and from the production facilities, by natural disasters or
other causes, would materially and adversely affect the Company's business and
results of operations. The owner of this facility recently terminated the
Company's lease and commenced an action to evict the Company from the facility.
On October 29,
----------
(3) Horace T. Ardinger, who is not a party to the Stockholders Agreement, has
the right to acquire a sufficient number of shares of common stock to render the
parties to the Stockholders Agreement without sufficient voting power to
effectuate any of the covenants set forth therein.
25
<PAGE>
1999, the Company and the Landlord settled the litigation by entering into an
agreement that provides, inter alia, that the Company may continue to occupy the
facility as a tenant at will. The Company has identified and executed a lease
for an alternate facility and intends to commence an orderly transition to that
facility during 2000.
Limitation on Directors' Liabilities under Delaware Law
Under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
Absence of Dividends
The Company has paid no cash dividends on its Common Stock since
inception. The Company currently intends to retain earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future.
Item 3. DESCRIPTION OF PROPERTY
The Company's headquarters and manufacturing facility is located in
Hudson, New Hampshire in a 38,000 sq. ft., single story, brick and mortar
building, maintained in very good condition. Use and occupancy costs are
approximately $23,000 per month.
On October 29, 1999, the Company settled an eviction litigation commenced
by the owner of the facility in June 1999. The settlement provides that the
Company may continue to occupy the facility as a tenant at will. The Company has
identified and executed a lease for an alternate facility and plans to make an
orderly transition to that facility during 2000. (See Risk Factors - Dependence
on Major Production Facilities, herein above).
In addition, the Company maintains a small leased office facility
(approximately 1000 sq. ft.) in Erie, Pennsylvania where certain administrative
functions reside for the monthly rental fee of One Thousand One Hundred Dollars
($1,100).
The Company also leases a small office in Leesburg, Virginia for the
monthly rental fee of Five Hundred Dollars ($500), on a month-to-month basis.
Research and development of the MSLB product line is performed at this facility.
On February 28, 2000, the Company terminated its obligation to lease a
small office space in Saco, Maine for a monthly rental fee of Four Hundred
Dollars ($400).
26
<PAGE>
Were funds to become available for investment, it is the opinion of
management that those funds would be conservatively invested in short to medium
range savings vehicles insured by the F.D.I.C. or its equivalent. Purchases of
real estate would be limited to buildings occupied by the Company or its
divisions. The Company has no intention to invest in real estate mortgages,
non-occupied real estate or securities of any nature.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners and management.
The following table sets forth as of February 28, 2000; information
concerning the names, addresses, amount and nature of beneficial ownership and
percent of such ownership with respect to (1) each person, or group known to the
Company to be the beneficial owner of more than five percent (5%) of the
Company's Common Stock; (2) each officer and director of the Company; and (3)
all officers and directors of the Company as a group.
Two companies affiliated with each other claim to hold warrants to
purchase 1,350,000 shares of the Company's Common Stock at an exercise price of
$2.01 per share. The Company disputes the validity of the warrants and is
litigating the matter. (see Legal Proceedings herein below and Note 11 to
Financial Statements)
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial
Name and Address Ownership Percent of Class
---------------- ---------- ----------------
<S> <C> <C>
Peter Bordes, Jr ...................... 2,250,000 12.8%
140 West 79 Street
Apartment 4B
New York, NY 10004
Jonathan Scott Harris ................. 0(1) *
c/o Elgin Technologies, Inc.
12 Executive Drive
Hudson, NH 03051
Primo Ianieri ......................... 3,315,685(2)(3) 18.6%(4)
c/o Key International, Inc.
480 Route 9
Englishtown, NJ 07726
Robert C. Smallwood ................... 1,406,695 8.0%
751 Miller Drive, S.E
Leesburg, VA 22075
Michael Smith ......................... 10,000 *
c/o Elgin Technologies, Inc.
12 Executive Drive
Hudson, NH 03051
All Officers and Directors
as a Group (5 persons) ............... 6,982,380(2) 39.1%(4)
27
<PAGE>
Horace T. Ardinger, Jr. ............... 23,349,151(2)(5) 61.6%(6)
9040 Governor's Row
Dallas, TX 75356
</TABLE>
-------------------
* Less than 1%
(1) Pursuant to the terms of Mr. Harris' employment agreement, Mr. Harris will
be granted 200,000 options to purchase shares of Common Stock on or about March
5, 2001 and on each anniversary thereafter. The options will vest incrementally
over a three year period subsequent to the date of each grant.
(2) In accordance with the rules of the Securities and Exchange Commission,
amount includes shares of common stock issuable upon the exercise of warrants
and/or other convertible securities currently exercisable, or exercisable or
convertible within sixty (60) days.
(3) Includes warrants to purchase 225,000 shares of the Company's Common Stock
for nominal consideration which were granted to Mr. Ianieri in connection with
the conversion of $108,000 of debt owed to him by the Company for loans and
services by him to the Company.
Includes 95,586 shares owned by Mr. Ianieri's children.
Includes 299,510 shares Mr. Ianieri holds in nominee for William Mosconi.
(4) Percentage is based on 17,816,601 shares of Common Stock which would be the
total number of shares outstanding upon the conversion by Mr. Ianieri of certain
warrants. Mr. Ianieri's present ownership of Common Stock issued and outstanding
is 3,090,685 shares or 17.6%.
(5) Includes 250,000 shares owned by Mr. Ardinger's wife.
Includes a Secured Note Payable (as amended) (the "Note") issued by the
Company, which as of December 31, 1999 totaled $5,925,000. $4,225,000 of the
Note is convertible at any time at the equivalent price of $0.55 per share for a
total of 7,681,818 shares; $1,050,000 of the Note is convertible at any time at
the equivalent price of $0.20 per share for a total of 5,250,000 shares and
$650,000 of the Note is convertible at the equivalent price of $0.10 per share
for a total of 6,500,000 shares.
In connection with loans he has made to the Company, Mr. Ardinger holds
534,000 warrants to purchase shares of the Company's Common Stock at $0.55 per
share and 300,000 warrants to purchase shares of the Company's Common Stock at
an exercise price of $3.00 per share.
(6) Percentage is based on 37,880,869 shares of Common Stock which would be the
total number of shares outstanding upon the conversion by Mr. Ardinger of
certain warrants, as well as the full conversion of that certain Secured Note
Payable. Mr. Ardinger's present ownership of Common Stock issued and outstanding
is 3,083,333 shares or 17.5%.
(b) Changes in control
None
28
<PAGE>
Item 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Date
Term of Directorship
Name Position Age Directorship Commenced
---- -------- --- ------------ ------------
<S> <C> <C> <C> <C>
Primo Ianieri Director (Chairman)
& Secretary 65 (1) April 1994
Peter Bordes, Jr. Director 37 (1) July 1995
Jonathan Scott Harris President and Chief 43
Executive Officer
Michael J. Smith Director, Chief Financial
Officer and Executive Vice 40 (1) July 1999
President
Robert Smallwood Director 57 (1) December 1997
</TABLE>
----------
(1) All members of the Board of Directors serve for a one (1) year term or
until their successors shall have been appointed.
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
Primo Ianieri, 65, co-founded the Company in April 1994. He is the founder and
sole owner of Key International, Inc., and the Chairman of the Boards of
Directors of both the Company and Key International, Inc. He is a graduate of
Lehigh University where he received a Bachelor of Science degree in engineering
and business. He received a Masters Degree in Marketing from Farleigh Dickinson
University. In 1968, Mr. Ianieri and a partner formed Key International, Inc. to
fulfill a need in the pharmaceutical and food industries whereby process
equipment could be offered on a short cycle time in order for these companies to
enter the market on an accelerated basis.
Peter Bordes, Jr., 37, became a director of the Company in 1995. In 1995, Mr.
Bordes became Principal of Mason Cabot, LLC, an investment banking and research
boutique. From November, 1994 through December 1995, Mr. Bordes was employed at
Stires and O'Donnell, Inc. Mr. Bordes also serves as a director of other
publicly held companies.
29
<PAGE>
Jonathan Scott Harris, 43, became President and Chief Executive Officer of the
Company in February 2000. Mr. Harris has extensive management and supervisory
experience in the technology sector, including oversight of marketing and sales
divisions and cost and inventory control programs. Mr. Harris is a graduate of
the Air Force Academy where he received a Bachelor of Science degree in
Electrical Engineering. Mr. Harris also holds a Masters in Business
Administration from Purdue University. Previously, Mr. Harris served as Director
of Operations for Bell Atlantic and as Vice President of Operations for Mastec,
a telecommunications and utility contractor.
Michael J. Smith, 40, became a director of the Company in March 1999, and Chief
Financial Officer and Executive Vice President in February 2000. From January
25, 2000 to February 21, 2000, Mr. Smith served as President, Interim Chief
Executive Officer and Interim Chief Financial Officer. Mr. Smith has over
fourteen years of experience in the securities industry specializing in finance
for middle market and emerging growth companies. Previously, Mr. Smith served as
an investment banker for Brill Securities, a New York investment firm, as
President of Stanhope Capital, Inc., a New York venture capital firm, and as
Managing Director of Condor Ventures, Inc. a Connecticut based venture capital
firm. In addition, Mr. Smith has served as an outside business consultant to
numerous private emerging growth companies.
Robert C. Smallwood, 57, joined Elgin as Director of Research and Development in
December 1997 when the Company acquired his company, Logic Laboratories. Mr.
Smallwood was President of Logic Laboratories and is the inventor of the Master
Lite Ballast System(TM). He holds a number of patents and is well known
throughout the ballast industry. A computer programmer and specialist since the
late 1960's, Mr. Smallwood has been an international entrepreneur and inventor.
He has founded, developed and sold businesses on both U.S. coasts. In the early
1980's, he was a prime mover in the original electronic ballast development and
has close associations in international manufacturing as a result.
30
<PAGE>
Item 6. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
the compensation paid to the Company's President and Chief Executive Officer and
top compensated officers of the Company for services rendered in all capacities
to the Company for the fiscal years ended March 31, 1997, 1998 and 1999:
Summary Compensation Table:
<TABLE>
<CAPTION>
Fiscal All Other
Name and Year Ended Salary Bonus Compensation
Principal Position March 31, ($) ($) Options ($)
------------------ --------- --- --- ------- ------------
<S> <C> <C> <C> <C> <C>
William Mosconi(1)............... 1999 $180,000 None None None
Chief Executive Officer 1998 141,923(2) None None None
President & Chief Financial 1997 90,000(2) None None None
Officer
Robert Smallwood................. 1999 119,581 None None None
Director 1998 20,769 None None None
Gerard Mosconi(3)................ 1999 120,000 None None None
Vice President of 1998 94,154 None None None
Operations, Warren Power 1997 97,846 None None None
Systems, Inc.
</TABLE>
The Company had no other executive officers whose total annual salary and
bonus exceeded $100,000 for such fiscal years.
(1) Mr. William Mosconi resigned as of January 2000.
(2) Pursuant to his resignation agreement, Mr. Mosconi released the Company
from $128,077 of accrued but unpaid salary for the years 1997 and 1998.
(3) The Company terminated Gerard Mosconi's employment as of November 1,1999.
31
<PAGE>
Item 7. CERTAIN RELATIONSHIPS AND RELATED PARTIES
(a) Related Transactions
As discussed under Part I, Items 2 and 4, and Part II, Item 4, Horace T.
Ardinger is currently the chief source of operating capital funds to the
Company. He has invested in the Company through a number of loans and stock
purchases. In connection with these loans and investments, the Company has
entered into the Ardinger Credit Documents pursuant to which Mr. Ardinger has,
as of December 31, 1999, the ability to convert the principal sum of Five
Million Nine Hundred Twenty Five Thousand Dollars ($5,925,000) in debt into
equity, which would result in his beneficial ownership of 61.6% of the
outstanding shares of the Company's common stock. As discussed elsewhere in this
Registration Statement, Mr. Ardinger holds security interests in substantially
all the assets of the Company. Mr. Ardinger also has the right to have himself
or his designee elected to one (1) seat on the Board of Directors of the
Company.
Peter Bordes, Jr., a director of the Company, is a principal in Mason
Cabot Holdings, Ltd., an investment banking firm which has arranged a series of
private placements of subordinated debt through convertible notes and cashless
warrants by the Company which raised a total of Eleven Million, Two Hundred
Three Thousand Dollars ($11,203,000). The Company is currently negotiating with
Mason Cabot Holdings, Ltd. with respect to the amount and kind of compensation
which may be payable to that firm as a result of those activities.
The Company presently owes $106,000 to Key International, Inc. in
connection with loans and services rendered to the Company. Primo Ianieri, the
Chairman of the Board of Directors of the Company, is President and Chief
Executive Officer of Key International, Inc.
(b) Family Relationships
William Mosconi, who until January 2000 was the President and Chief
executive of the Company, is the son-in-law of Primo Ianieri, the Chairman of
the Board of Directors of the Company. William Mosconi is the brother of Gerard
Mosconi who until January 2000 held the position of Vice President of Operations
and General Manager of a subsidiary of the Company.
32
<PAGE>
Item 8. DESCRIPTIONS OF SECURITIES
(a) Common Stock
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock,
$0.000833 par value. As of December 31, 1999, 17,615,051 shares of Common Stock
were outstanding. Other than options and warrants to purchase common stock of
the Company, which are authorized and granted by resolution of the Board of
Directors, no other type of securities are authorized by the Company at this
time.
COMMON STOCK
The holders of Common Stock are entitled to one (1) vote for each share
held of record on all matters to be voted on by the shareholders (exclusive of
rights which may have been granted under the Voting Agreement, Article I and the
Stockholders Agreement, sections 1 and 2, attached hereto as Exhibits 5.1 and
5.3). In addition, such holders are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. The holders of common stock do not have
cumulative voting rights or preemptive or other rights to acquire or subscribe
for additional, unissued or treasury shares, which means that the holders of
more than 50% of such outstanding shares, voting at an election of directors can
elect all the directors on the Board of Directors if they so choose and, in such
event, the holders of the remaining shares will not be able to elect any of the
directors. All outstanding shares of common stock are fully paid and
non-assessable.
DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and
does not presently intend to pay cash dividends. The payment of cash dividends
in the future, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements and general financial condition. The
payment of any dividends will be within the discretion of the Company's then
board of directors. It is the present intention of the Board of Directors to
retain all earnings, if any, for use in the Company's business operations and,
accordingly, the Board of Directors does not anticipate paying any cash
dividends in the foreseeable future.
CHANGE IN CONTROL PROVISIONS
The Company's charter and by-laws do not contain provisions that would
delay, defer or prevent a change in control of the Company.
33
<PAGE>
STOCK TRANSFER AGENT
The stock transfer agent for the common stock is Pacific Stock Transfer &
Trust Company, 5844 South Pecos Road, Suite D, Las Vegas, Nevada 89120,
Telephone (702) 361-3033.
(b) Debt Securities to be Registered
None
(c) Other Securities to be Registered:
None
34
<PAGE>
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market information
The Company's stock was quoted on the OTC Bulletin Board from October 1997
through mid-November 1999 (Symbol: ELGN). As of mid-November 1999, bid and ask
quotations for the Company's stock have been available on the NQB "Pink Sheets."
(i) The high and low sales prices of the Company's common stock for each
of the following quarters are:
<TABLE>
<CAPTION>
Quarter Ended High Low
--------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1999 .50 .06
--------------------------------------------------------------------------------
September 30, 1999 1.875 1.25
--------------------------------------------------------------------------------
June 30, 1999 3.438 1.563
--------------------------------------------------------------------------------
March 31, 1999 3.75 2.25
--------------------------------------------------------------------------------
December 31, 1998 6.25 1.75
--------------------------------------------------------------------------------
September 30, 1998 8.375 6.0
--------------------------------------------------------------------------------
June 30, 1998 10.50 7.0
--------------------------------------------------------------------------------
March 31, 1998 10.50 9.875
--------------------------------------------------------------------------------
December 31, 1997 9.50 4.375
--------------------------------------------------------------------------------
</TABLE>
Source: Standard and Poor's Comstock
These quotations reflect inter-dealer prices, without retail mark-up, mark
down or commission and may not represent actual transactions.
(c) Shareholders of Record
There were 231 holders of record of the Common stock of the Company as of
December 31, 1999.
(d) Dividends Declared
There are no, nor have there been any, cash dividends declared on the
Voting Common stock of the Company. The Company is not likely to declare and pay
dividends in the foreseeable future.
35
<PAGE>
Item 2. LEGAL PROCEEDINGS
Romeo Fegundes & Dawn Fegundes v. Warren Power Systems
This is an action filed in Supreme Court in Kings County, New York in July
1998 against Warren Power, New York Telephone Company, and Bell Atlantic seeking
damages for personal injuries sustained during an installment by Comforce
Global, Inc., a contractor for Warren Power. Comforce Global, Inc. has been
brought into the case as a third party defendant. The complaint seeks
compensatory damages of $11,000,000 and punitive damages of $3,000,000. The case
involves an injury to a worker on a construction site that was supervised and
controlled by Warren Power. Discovery is complete and the case has been set for
trial. Warren Power has turned the matter over to its liability insurance
carrier that has appointed legal counsel to represent Warren Power.
Inverness Corporation and Menotomy Funding, LLC v. The Company
This is an action filed in Middlesex Superior Court in Cambridge,
Massachusetts in June, 1997 against the Company, EEI, EAC Acquisition I
Corporation ("EAC") and others, alleging breach of contract and a variety of
other causes of action relating to the alleged failure of EAC to repay certain
loans and the failure of the Company to honor certain warrants to purchase
common stock.
In late 1996, Mason Cabot formed EAC for the purpose of acquiring the
assets of a troubled corporation located in Billerica, Massachusetts. The
parties intended that EAC would acquire the assets of the business and then
manage its operations in an effort to make it a viable concern. As part of the
transaction, Inverness sold the assets to EAC in return for a short-term note
for $1,640,442. During the negotiation of the loan agreement, Inverness
represented that it would provide working capital of $300,000 pursuant to the
Revolving Line of Credit of $1,780,000 referenced in the loan agreement. As part
of the consideration for the transaction, EEI issued a warrant to purchase
750,000 shares of stock in a publicly traded company that would be the survivor
of a merger with EEI. Neither the Company nor EEI was ever a party to the loan
transaction, nor did either guarantee the debt of EAC. Mason Cabot granted to
the Company an option to purchase all of the common stock of EAC.
The parties anticipated that the short-term note would be paid through the
infusion of new capital from third party investors. However, after several loan
forbearances for which EEI issued additional warrants, neither the working
capital from Inverness nor any new capital from investors was forthcoming. By
May 1997, EAC ceased to operate. Inverness filed suit to obtain money damages in
the amount of $7,650,000 for the alleged failure to honor the warrants issued by
EEI in connection with the transaction. It is the Company's position that the
warrants are invalid because the issuance of the warrants was fraudulently
induced and that the conditions precedent to the exercise of the warrants never
occurred. The Company and EAC have counterclaimed against
36
<PAGE>
Inverness for common law fraud, breach of contract and related claims. The
Company and EAC allege they were fraudulently induced into entering into the
loan transaction and issuing the warrants in exchange for a non-existent
operating line of credit based upon false representations by Inverness that it
had the liquidity and ability to fund the line of credit. The case is presently
in the discovery phase and trial is not expected before the year 2001.
Item 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
In July, 1998 the Company's auditors, Grant Thornton LLP, resigned and the
Company's Board of Directors selected Weinick Sanders Leventhal & Co., LLP as
its auditors. During the fiscal years ended March 31, 1999, 1998, and 1997 there
were no disagreements with Weinick Sanders Leventhal & Co., LLP and during the
years ended March 31, 1996 and 1995 there were no disagreements with Grant
Thornton LLP, the predecessor auditors, on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which if not resolved to the satisfaction of the firm, would have caused them to
make reference to the subject matter of such disagreements in their reports on
such financial statements.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES
From March 1996 through December 1997, the Company raised $1,637,505
through various private placements of convertible notes and cashless warrants to
purchase 409,375 shares of the Company's common stock at a purchase price of
$4.00 per share. These transactions were exempt from registration under Section
4(2) and/or Rule 504 of Regulation D of the Securities Act of 1933, as amended
(the "Securities Act").
From January 1997 through November 1997, the Company raised $7,300,000
through various private placements of warrants to purchase 7,300,000 of the
Company" common stock at a price of $1 per share. These transactions were exempt
from registration under Section 4(2) and/or Rule 504 of Regulation D of the
Securities Act.
From December 1997 through March 1998, the Company raised $2,365,301
through various private placements of warrants to purchase 788,434 of the
Company's common stock at a price of $3 per share. These transactions were
exempt from registration under Section 4(2) and/or Rule 504 of Regulation D of
the Securities Act.
In late 1996 and early 1997, warrants to purchase 1,350,000 shares of the
common stock of the Company were issued to Inverness Corporation in connection
with a loan agreement related to EAC. The validity and exercisability of these
warrants are currently being challenged by the Company, as described in Part II,
Item 2 of this Registration Statement.
37
<PAGE>
American Compact Lighting received 2,000,000 shares of unregistered common
stock of the Company in January 1998, by resolution of the Board of Directors of
the Company dated December 20, 1997, in connection with the Company's purchase
of Logic Labs, Inc. These transactions were exempt from registration under
Section 4(2) of the Securities Act.
In March and April of 1998, the Company sold 2,333,333 shares of common
stock to Horace T. Ardinger, Jr. for a purchase price of $3.00 per share, or a
total of $7,000,000. The transaction was exempt from registration under Section
4(2) and/or Rule 504 of Regulation D of the Securities Act. In connection with
this sale, Mr. Ardinger also received warrants to purchase 100,000 shares of the
Common Stock of the Company for which he paid nominal consideration. Said
warrants are exercisable at $3.00 per share and expire March 10, 2003. The
Company granted Mr. Ardinger additional rights to avoid dilution of his
ownership of the issued and outstanding or issuable shares of the Common Stock
of the Company, as set forth in that certain Secured Revolving Credit Agreement
between Mr. Ardinger and the Company dated as of November 13, 1998, a copy of
which is attached hereto as Exhibit 10.6.
By resolution of the Board of Directors of the Company dated April 17,
1998 One Hundred Thousand Shares (100,000) of unregistered shares of the
Company's common stock was issued to Lewis and Judith Kuniegel ("Kuniegel")
pursuant to the Company's Agreement of Merger with Communication Service
Company, a Maine corporation and Kuniegel. These transactions were exempt from
registration under Section 4(2) of the Securities Act.
In fiscal 1998, the Company issued 30,000 shares of its common stock,
whose fair value was $90,000 at the date of issuance, to its corporate general
counsel in payment of legal services rendered aggregating $90,000.
During fiscal 1999, the Company's Board of Directors authorized the
issuance of 97,200 shares of its common stock having a fair market value at the
time of issuance of $291,600 to officers and employees of the Company as bonuses
for services rendered.
Securities are issuable to Mason Cabot, as placement agent in several of
the Company's various private placements, the amount and form of which are
currently under negotiation.
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers and directors under certain circumstances against
expenses and liabilities actually and reasonably incurred as a result of a claim
against them as agents of the Corporation and requires Delaware corporations to
indemnify their officers and directors against expenses incurred in legal
proceedings because of their being or having been an officer or a director, if
the corporate agent is successful in his defense on the merits or otherwise in a
proceeding against him. In such
38
<PAGE>
circumstances, said individual must have acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the Corporation.
The Company does not currently carry any directors or officers liability
or errors and omissions insurance.
39
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
DECEMBER 31, 1999
I N D E X
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
FINANCIAL STATEMENTS:
Independent Accountants' Report ................................ F-2
Consolidated Balance Sheets as at December 31, 1999 (Unaudited)
and March 31, 1999 ............................................ F-3
Consolidated Statements of Operations
For the Nine Months Ended December 31, 1999 and 1998 (Unaudited)
and For the Years Ended March 31, 1999 and 1998 ............... F-4
Consolidated Statements of Changes in Capital Deficiency
For the Nine Months Ended December 31, 1999 (Unaudited)
and for the Years Ended March 31, 1999 and 1998 ............... F-5
Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1999 and 1998 (Unaudited)
and for the Years Ended March 31, 1999 and 1998 ............... F-6 - F-7
Notes to Consolidated Financial Statements ..................... F-8 - F-29
</TABLE>
<PAGE>
WEINICK SANDERS LEVENTHAL & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
1515 BROADWAY NEW YORK, N.Y. 10036
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Elgin Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Elgin
Technologies, Inc. (formerly Cross Atlantic Capital, Inc.) and subsidiaries as
at March 31, 1999, and the related statements of operations, cash flows, and
capital deficiency for the two years then ended. 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 amount 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 consolidated financial position of Elgin
Technologies, Inc. (formerly Cross Atlantic Capital, Inc.) and subsidiaries as
at March 31, 1999, and the results of their operations and their cash flows for
each of the two years ended March 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has a working capital deficiency of $7,124,543 and liabilities
exceed assets by $6,799,755 at March 31, 1999 and in addition the Company has
incurred losses since inception. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
August 23, 1999
F-2
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 250,697 $ 1,584,480
Accounts receivable, less allowances for
doubtful accounts and customer deductions 1,376,102 1,529,169
Inventories, at cost, less allowances for
obsolescence, excess quantities and valuation 740,002 834,129
Prepaid expenses and other current assets 184,186 44,953
------------- ------------
Total current assets 2,550,987 3,992,731
------------- ------------
Property assets, net of accumulated depreciation 15,917 172,942
------------- ------------
Other assets:
Deferred financing costs, net 81,667 148,486
Deposits and other assets 3,000 3,360
------------- ------------
Total other assets 84,667 151,846
------------- ------------
$ 2,651,571 $ 4,317,519
============= ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Affiliate's Secred Note Payable $ 5,925,000 $ 4,225,000
Current maturities of long-term debt 2,136,781 2,486,783
Due to affiliates 870,608 357,961
Accounts payable 2,447,631 2,280,376
Accrued expenses and other current liabilities 1,762,545 1,767,154
------------- ------------
Total current liabilities 13,142,565 11,117,274
------------- ------------
Long-term debt 2,136,781 2,486,783
Less: Current maturities 2,136,781 2,486,783
------------- ------------
Total long-term debt - -
------------- ------------
Capital deficiency:
Common stock, $.000833 par value
Authorized - 60,000,000 shares
Issued - 17,615,051 shares at December 31, 1999
Issued - 16,473,051 shares at March 31, 1999 14,673 13,722
Additional paid-in capital 28,890,475 28,685,163
Accumulated deficit (39,396,142) (35,498,640)
------------- ------------
Total capital deficiency (10,490,994) (6,799,755)
------------- ------------
$ 2,651,571 $ 4,317,519
============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
DECEMBER 31, MARCH 31,
--------------------------- ----------------------
1999 1998 1999 1998
-------- ----------- ---------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $5,427,379 $ 4,817,189 $7,217,586 $ 6,979,706
Cost of sales 5,811,131 5,212,792 7,087,955 7,973,992
----------- ----------- ---------- -----------
Gross margin (loss) (383,752) (395,603) 129,631 (994,286)
----------- ----------- ---------- -----------
Operating expenses:
Selling 501,678 548,424 577,515 799,887
Research and development 623,749 869,968 1,407,048 8,333,342
General and administrative 1,533,337 2,047,985 2,504,030 2,265,067
Bad debts - (110,300) (110,300) 747,354
----------- ----------- ---------- -----------
Total operating expenses 2,658,764 3,356,077 4,378,293 12,145,650
----------- ----------- ---------- -----------
Loss from operations (3,042,516) (3,751,680) (4,248,662) (13,139,936)
----------- ----------- ---------- -----------
Other expenses:
Interest 694,146 218,165 410,499 730,115
Amortization of intangibles
and financing costs 66,819 10,307 29,697 159,331
Write-off of intangibles - 300,000 300,000 -
Restructuring costs - - - 49,608
Abandonment of property assets 94,121 14,038 14,038 663,190
----------- ----------- ---------- ----------
Total other expenses 855,086 542,510 754,234 1,602,244
----------- ----------- ---------- ----------
Net loss ($ 3,897,602) ($4,294,190) ($5,002,896) ($14,742,180)
=========== ========== ========== ===========
Net loss per common share ($0.23) ($0.34) ($0.37) ($2.68)
=========== ========== ========== ===========
Weighted average number of
shares outstanding 17,071,470 12,692,258 13,440,850 5,502,566
=========== ========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 (Unaudited)
AND FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
------------------
Number Additional Total
of Paid-in Accumulated Capital
Shares Amount Capital Deficit Deficiency
--------- -------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997 4,767,000 $ 3,971 $ 8,625,883 ($15,753,564) ($ 7,123,710)
Common stock issued in partial
payment acquisition of subsidiary 2,000,000 1,667 5,998,333 - 6,000,000
Common stock issued for legal services rendered 30,000 25 89,975 - 90,000
Net proceeds from sale of securities 333,333 277 6,474,183 - 6,474,460
Net loss for the year - - (14,742,180) (14,742,180)
---------- -------- ----------- ----------- -----------
Balance at March 31, 1998 7,130,333 5,940 21,188,374 (30,495,744) (9,301,430)
Purchase of redeemable common stock for cash
and issuance of cashless warrants for debt - 268,376 - 268,376
Net proceeds from sale of securities 2,163,334 1,802 5,966,381 - 5,968,183
Common stock issued in partial
payment of acquisition of subsidiary 100,000 83 299,917 - 300,000
Common stock issued in settlement of litigation 16,800 14 50,386 - 50,400
Common stock issued as employee compensation 97,200 81 291,519 - 291,600
Debt converted into common stock and warrants 105,950 88 625,924 - 626,012
Conversion of warrants into common stock 6,859,434 5,714 (5,714) - -
Net loss for the year - - (5,002,896) (5,002,896)
---------- -------- ----------- ----------- -----------
Balance at March 31, 1999 16,473,051 13,722 28,685,163 (35,498,640) (6,799,755)
Conversion of warrants into common
stock (Unaudited) 1,117,000 930 (930) - -
Conversion of debt into common
stock (Unaudited) 25,000 21 206,242 - 206,263
Net loss for the nine months ended
December 31, 1999 (Unaudited) - - (3,897,502) (3,897,502)
---------- -------- ----------- ----------- -----------
Balance at December 31, 1999 (Unaudited) 17,615,051 $14,673 $28,890,475 ($39,396,142) ($10,490,994)
========== ========= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($3,897,502) ($4,294,190) ($5,002,896) ($14,742,180)
---------- ---------- ---------- -----------
Adjustments to reconcile net loss to
cash used in operating activities:
Accrued interest on Affiliate's Secured Note Payable 552,647 59,334 204,749 7,476
Depreciation and amortization 129,723 96,072 80,889 394,561
Abandonment of property assets 94,121 14,038 14,038 663,190
Provision for inventory obsolescence (2,310,709) (1,177,668) (1,615,950) (578,263)
Provision for doubtful accounts - (5,169) (110,000) 425,000
Common stock issued for
Research and development - - - 6,000,000
Litigation settlement - 50,400 50,400 -
Services rendered - 291,600 291,600 90,000
Write-off of intangibles - 300,000 300,000 -
Changes in assets and liabilities:
Accounts receivable 153,067 (159,321) (896,078) 2,053,480
Inventories 2,404,836 651,891 1,508,931 1,256,363
Prepaid expenses and
other current assets (139,233) (10,786) 29,800 90,033
Deposits and other assets 360 (301,600) 13,400 (2,984)
Accounts payable 167,255 (1,491,812) (1,250,739) (314,647)
Accrued expenses and other
current liabilities 101,652 (18,215) (399,688) 1,528,450
---------- ---------- ---------- -----------
Total adjustments 1,153,719 (1,701,236) (1,778,648) 11,612,659
---------- ---------- ---------- -----------
Net cash used in
operating activities (2,743,783) (5,995,426) (6,781,544) (3,129,521)
---------- ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from sale of securities - 5,968,183 5,968,183 6,574,460
Purchase of redeemable securities - (141,624) (141,624) -
Proceeds from (repayment of) Affiliates's
Secured Note Payable 1,660,000 2,225,000 4,104,826 (18,000)
Proceeds from (repayment of) debt (250,000) (909,781) (1,512,635) (4,451,259)
Deferred financing costs - (178,183) (178,183) -
---------- ---------- ---------- -----------
Net cash provided by
financing activities 1,410,000 6,963,595 8,240,567 2,105,201
---------- ---------- ---------- -----------
Net increase (decrease) in cash (1,333,783) 968,169 1,459,023 (1,024,320)
Cash at beginning of period 1,584,480 125,457 125,457 1,070,019
Cash acquired with subsidiaries - - - 79,758
---------- ---------- ---------- -----------
Cash at end of period $ 250,697 $1,093,626 $1,584,480 $ 125,457
========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
December 31, March 31,
-------------------------- -------------------------------
1999 1998 1999 1998
------------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental Disclosures of
Cash Flow Information:
Cash payments made for:
Interest $ 36,165 $ 74,869 $ 74,869 $ -
======== ======== ======== ==========
Income taxes $ - $ - $ - $ -
======== ======== ======== ==========
Supplemental Schedule of
Non-Cash Financing and
Investing Activities:
Conversion of debt to equity $206,263 $626,012 $626,012 $ 200,000
======== ======== ======== ==========
Common stock issuances for
Research and development $ - $ - $ - $6,000,000
======== ======== ======== ==========
Litigation settlement $ - $ 50,400 $ 50,400 $ -
======== ======== ======== ==========
Services rendered $ - $291,600 $291,600 $ 90,000
======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999 and For the Nine Months Ended
December 31, 1999 and 1998
(Information Relating to the Nine Months Ended
December 31, 1999 and 1998 is Unaudited) And
As at March 31, 1999 and for the Two Years Then Ended
NOTE 1 - REALIZATION OF ASSETS - GOING CONCERN.
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles, which contemplate continuation of the Company as a going
concern. The Company has incurred substantial operating losses in
each of its segments for the two years ended March 31, 1999 and the
nine months ended December 31, 1999. Management on June 1, 1998
placed its contract engineering division of its telecommunications
segment originally located in Erie, Pennsylvania into voluntary
liquidation when management caused a filing under Chapter 7 of Title
11 of the United States Bankruptcy Code for its wholly-owned
subsidiary, e(2) Electronics, Inc. ("Petitioner"). The Court
appointed a trustee who is liquidating the assets of Petitioner for
the benefit of its creditors.
The accompanying consolidated financial statements reflect a
working capital deficiency of $7,125,000 and $10,592,000 at March
31, 1999 and December 31, 1999, respectively, of which $1,012,000 is
attributable to the net obligations of the Petitioner. Upon the
conclusion of the liquidation of the Petitioner, the capital
deficiency of $6,800,000 and $10,491,000 at March 31, 1999 and
December 31, 1999, respectively, will decrease by the forgiveness of
the net indebtedness of the Petitioner of $1,012,000. The Company's
segments, lighting manufacturing and telecom power system equipment
manufacturing, incurred losses from operations of $1,271,000 and
$2,977,000, respectively, in fiscal 1999 and in fiscal 1998 incurred
operating losses of $8,036,000 and $5,104,000, respectively. For the
nine months ended December 31, 1999 these segments incurred
operating losses of $989,000 and $2,053,000, respectively. In fiscal
1999 and in the nine months ended December 31, 1999, these segments
had a combined negative cash flow from operating activities of
$6,782,000 and $2,744,000. The Company's primary source of cash has
been the sale of its securities and loans from a related party.
As described in Note 12, the Petitioner, the Company and/or
its continuing subsidiaries are defendants in a number of legal
actions, some of which, should the plaintiffs prevail, would have a
serious adverse effect on the Company's financial condition.
F-8
<PAGE>
NOTE 1 - REALIZATION OF ASSETS - GOING CONCERN. (Continued)
The substantial operating losses of the Company's operating
segments incurred through and subsequent to March 31, 1999 and
December 31, 1999, and the Company's limited ability to obtain
financing other than from a stockholder raises substantial doubt
concerning the ability of the Company to realize its assets and pay
its obligations as they mature in the ordinary course of business.
These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
The new management team believes that it is possible to turn
around the Company's financial performance and has begun
implementing its business plan. This plan calls for focusing on two
main performance areas which are: 1) overhead reduction and 2)
revenue/margin improvement.
Overhead reduction.
Since the new management team came on board, the Company has
reduced its overhead and will continue to look for overhead
reduction opportunities in the future. Benefits have been realized
by consolidating all facilities and moving headquarters to a lower
cost facility, reducing staffing by streamlining operations and
closing facilities, and by implementing other outsourcing strategies
to limit the Company's overhead structure.
Revenue margin improvement.
The Company has a 60 year history of providing quality
products to the industry, and management has repositioned its
marketing of its products to focus on that history. Management has
implemented new strategies to improve margins by streamlining its
product offerings by focusing on those items in its product lines
that have higher margins and have strong market demand. By narrowing
its product offerings and purchasing more efficiently, the Company
is able to reduce its raw materials cost component thereby adding to
margin improvement. Management also intends to overhaul its
marketing efforts and restructure its sales department to strengthen
these strategies.
In addition, the Company is completing its beta site testing
of its Master Lite fluorescent product line. It is anticipated that
the Company will be able to generate revenues from this product line
in 2001.
F-9
<PAGE>
NOTE 2 - BANKRUPTCY PROCEEDINGS - CHAPTER 7.
On June 1, 1998, management filed a petition for its
wholly-owned subsidiary, e(2) Electronics, Inc., under Chapter 7 of
Title 11 of the United States Bankruptcy Code in the Western
District of Pennsylvania of the United States Bankruptcy Court (the
"Court"). The Petitioner sought to have the court liquidate its
assets and disburse the proceeds therefrom to its creditors for
which the Court appointed a Trustee. The accompanying financial
statements include the results of operations of e(2) Electronics,
Inc. until the date of the Chapter 7 filing. The results of
operations of e(2) Electronics, Inc., since the filing, are not
included in the accompanying financial statements because the all
operations and records thereof were conducted by the Court appointed
Trustee and are not available for audit.
Certain assets aggregating $915,000 at historical cost and
certain liabilities aggregating $1,032,000 of the Petitioner which
were part of the Company's telecom power system manufacturing
segment were sold by management to another of the Company's
subsidiaries in that segment at the time of the filing of the
petition. This sale was reviewed by the Trustee who required an
auction for the net assets. The winning bid for the net assets of
$177,000 was from an entity controlled by the Company's investment
bankers. This affiliated entity has agreed to resell these net
assets to the Company's subsidiary for the same amount of its
successful bid.
F-10
<PAGE>
NOTE 3 - DESCRIPTION OF BUSINESS.
The Company was incorporated as Cross Atlantic Capital,
Inc. under the laws of the State of Delaware on May 28, 1986. The
Company, since its incorporation through September 30, 1997, was
inactive at which time it acquired all of the outstanding capital
stock of Elgin e(2) Inc. in exchange for 3,250,000 shares of its
$.000833 par value common stock. Prior to the acquisition, CROA
had issued and outstanding 600,000 shares of its common stock. The
merger was treated as a recapitalization. In January 1998, the
Company changed its name to Elgin e(2), Inc. and later to Elgin
Technologies, Inc. Simultaneously, Elgin e(2), Inc. changed its
name to e(2) Electronics, Inc. (the "Petitioner").
Statement of Shareholder Equity - Common Stock
<TABLE>
<CAPTION>
Date Par Value Shares
---------------------- ---------------- --------------
<S> <C> <C> <C>
Initial issue of common stock
to original CROA May 28, 1986 $.000833 600,000
Equivalent number of shares issued
to stockholders of Elgin e(2) in
exchange for the share of Elgin e(2) September 30, 1997
to reflect the recapitalization as of May 2, 1987 $.000833 3,250,000
=========
Total shares issued and outstanding
after giving effect to merger treated
as a recapitalization 3,850,000
=========
</TABLE>
The petitioner was incorporated in Delaware in April 1994 as
a provider of contract manufacturing services and custom power
equipment to original equipment manufacturers in the industrial
process control, medical instrumentation and telecommunications
industries. Petitioner commenced operations in April 1994 with its
acquisition of the net assets of Charter Technologies, Inc. from a
United States Bankruptcy Court appointed Trustee. The Petitioner
also acquired certain net assets from two other entities in fiscal
1995. These three acquisitions resulted in the recording of
$1,018,000 in goodwill.
The Petitioner on July 10, 1996, acquired all of the capital
stock of Ascom Warren, Inc. ("Warren") in a transaction accounted
for as a purchase. e(2) Electronics, Inc. then merged Warren into
itself. The purchase price of $2,298,000 for the Company's power
system manufacturing segment was paid in cash of $1,298,000 plus the
issuance of a $1,000,000 promissory note (10% interest, payable in
four annual installments of $250,000). The Company was contingently
liable for additional payments to seller in the amount of 3% of net
sales that exceeded $10,000,000 in each of the three fiscal years
ended March 31, 1999. The segment did not achieve the requisite
sales level in any of the periods and no additional liability is due
to the seller of Warren.
F-11
<PAGE>
NOTE 3 - DESCRIPTION OF BUSINESS. (Continued)
In December 1997, Elgin Technologies, Inc. acquired all of
the capital stock of Logic Laboratories, Inc. ("Logic") for
2,000,000 shares of its common stock plus a conditional payment of
an additional 500,000 shares of the Company's common stock if and
when Logic achieves $10,000,000 in sales in any one fiscal year in a
transaction accounted for as a purchase. Logic commenced the sale of
its products during the three months ended December 31, 1999.
On April 24, 1998, the Company acquired all of the assets
and liabilities of Communication Service Company ("CSC") which
installs power systems for 100,000 shares of its common stock plus
the cash and accounts receivable of CSC on the date of acquisition.
The transaction is being accounted for as a purchase in the
accompanying financial statements. The fair value of consideration
paid to the sellers of CSC exceeded the fair value of the remaining
net assets acquired by $300,0000 and initially was recorded as
goodwill. The goodwill was charged to operations on the acquisition
date do the uncertainty of the Company's ability to continue as a
going concern.
The accompanying consolidated financial statements as at
March 31, 1999 and for the two years then ended and as at December
31, 1999 and 1998 and for the nine months ended December 31, 1999
and 1998 include the accounts of the Company and its wholly-owned
subsidiaries except for e(2) Electronics, Inc. whose accounts are
included from April 1, 1998 to the date of the filing of its
bankruptcy proceedings on June 1, 1998. Upon the filing of the
bankruptcy petition, the assets and liabilities are being liquidated
by the Trustee of the Court. The accompanying financial statements
reflect the acquisitions of CSC, Logic, Warren an the net assets of
Charter Technologies, Inc. from their respective dates of their
purchase through March 31, 2000.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Revenue Recognition:
The Company recognizes revenues in accordance with generally
accepted accounting principles in the period in which it performs
its installation or contracting services and in which its products
are shipped to its customers. The Company records expenses in the
period in which they are incurred, in accordance with generally
accepted accounting principles.
(b) Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
F-12
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
(d) Concentrations of Credit Risk:
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist principally of
cash and trade accounts receivable. The Company places its cash with
high credit quality financial institutions which at times may be in
excess of the FDIC insurance limit. Concentrations of credit risk
with respect to trade accounts receivable of the Company's segments
are limited due to the wide number of their customers. In fiscal
1999 two customers accounted for sales of $874,808 and $781,968,
respectively: no customer accounted for more than 10% of sales in
1998. Three customers accounted for $878,109, $725,233, and $819,275
of sales for the nine months ended December 31, 1999. One customer
amounted for $648,418 of sales in the nine months ended December 31,
1998. Additionally, the Company's segments have an allowance for
doubtful accounts of $90,000, $90,000 and $100,000 as at December
31, 1999, March 31, 1999, and 1998, respectively. The Company's
discontinued contracting operations required an allowance for
doubtful accounts of $425,000 and $100,000 at March 31, 1997 and
1998, respectively. With the filing of the Petitioner's bankruptcy
proceedings, the receivables of the contracting operations were
placed in the custody of the Trustee who is responsible for their
liquidation.
(e) Inventories:
Inventories are valued at the lower of cost (first-in,
first-out method) or market. The financial statements reflect an
allowance for obsolescence and disposal of inventory of $2,920,000
at December 31, 1999, $5,231,000, $6,847,000 and $7,425,000 at March
31, 1999, 1998 and April 1, 1997, respectively.
(f) Property and Equipment:
(i) The cost of property and equipment is depreciated
over the estimated useful lives of the related assets
of 5 to 10 years. The cost of leasehold improvements
is amortized over the lessor of the length of the
related leases or the estimated useful lives of the
assets. Depreciation is computed on the straight-line
method for financial reporting purposes. Repairs and
maintenance expenditures which do not extend original
asset lives are charged to income as incurred.
F-13
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(f) Property and Equipment: (Continued)
(ii) The Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Life Assets to be
Disposed of". The statement required that the Company
recognizes and measures impairment losses of
long-lived assets to be disposed of and long-term
liabilities. At March 31, 1999 and December 31, 1999,
the carrying value of the Company's other assets and
liabilities approximate their estimated fair value.
(g) Goodwill:
The cost in excess of the fair value of the assets acquired
has been recorded as goodwill which was amortized over a 10 year
period. Management continually reviewed the results of the business
operations of its acquisitions and in March 1997 determined that
certain goodwill was permanently impaired and charged the
unamortized portion of the goodwill to operations at the date it
become impaired. The goodwill associated with the acquisition in
April 1998 of Communication Services Company was charged to
operations at the purchase date due to the uncertainty of the
Company's ability to continue as a going concern. Accordingly, no
amortization of goodwill was charged to operations in any period
presented in the accompanying financial statements.
(h) Research and Development Costs:
The Company charges to operations all research and
development costs as incurred. All of the excess of the cost over
the fair value of the net assets of Logic, which amounted to
$7,901,000, was allocated to in-process research and development
because Logic had devoted all of its effects since its inception to
develop its lighting products.
Purchased in-process research and development represents the
value assigned in a purchase business combination to research and
development projects of the acquired business that were commenced
but not yet completed at the date of acquisition and which, if
unsuccessful, have no alternative future use in research and
development activities or otherwise. In accordance with Statement of
Financial Accounting Standards No. 2 "Accounting for Research and
Development Costs," as interpreted by FASB Interpretation No. 4,
amounts assigned to purchased in-process research and development
meeting the above criteria must be charged to expense at the date of
consummation of the purchase business combination. In this regard
the entire $7,901,000 was charged to operations in fiscal 1998.
F-14
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(i) Deferred Financing Costs:
Direct costs incurred in connection with obtaining financing
have been capitalized and were being amortized over the term of the
respective financing agreements. Amortization of deferred financing
costs aggregating $67,000, $10,000, $20,000 and $65,000 was charged
to operations in the nine months ended December 31, 1999 and 1998
and for fiscal 1999 and 1998, respectively. In the nine months ended
December 31, 1999 and 1998 $0 and $65,000 of financing was charged
to operations as incurred. In fiscal 1999 and 1998, $65,000 and
$95,000 of financing costs attributable to indebtedness included in
the bankruptcy proceedings were charged to operations as incurred.
(j) Income Taxes:
The Company complies with Statement of Financial Accounting
Standards No. ("SFAS 109"), "Accounting for Income Taxes," which
requires an asset and liability approach to financing accounting and
reporting for income taxes. Deferred income tax assets are computed
for differences between financial statement and tax basis of assets
and liabilities that will result in future taxable or deductible
amounts, based on the enacted tax laws and rates in the periods in
which differences are expected to affect taxable income. The
principal asset and liability differences are deprecation and
amortization of property and intangible assets, valuation allowances
of accounts receivable and inventories, and utilization of the
Company's tax loss carryforwards. Management has fully reserv-ed the
net deferred tax assets as its is not more likely than not that the
deferred tax asset will be utilized in the future.
(k) Loss Per Common Share:
Loss per common share is based on the weighted average
number of common shares outstanding. In March 1997,the Financial
Accounting Standards Broad issued Statement No. 128 ("SFAS 128"),
"Earnings Per Share," which requires dual presentation of basic and
diluted earnings per share on the face of the statements of
operations which the Company has adopted. Basic loss per share
excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average common shares
outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur if convertible debentures,
options and warrants were to be exercised or converted or otherwise
resulted in the issuance of common stock that then shared in the
earnings of the entity.
Since the effect of outstanding options, warrant and
convertible debenture conversions are antidilutive in all periods
presented, it has been excluded from the computation of loss per
common share.
F-15
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(l) Fair Value of Financial Instruments:
The Company adopted Statement of Financial Accounting
Standards No. 191 ("SFAS No. 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The statement requires that the Company recognize and measure
impairment losses of long-lived assets to be disposed of and
long-term liabilities. The Company reviews long-lived assets and
certain identifiable intangibles held and used for possible
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Since the
Company has been unable to generate funds from its operations to
meet its obligations as they mature and management believes there is
uncertainty as to the Company's remaining a going concern,
management in April 1998 evaluated the goodwill recorded with the
acquisition of CSC. Management determined that it could not be
reasonably assured that the Company would ever recover the excess of
the cost of these net assets acquired over their fair value.
Accordingly, management wrote-off this goodwill and charged
operations for $300,000 in 1999. Management has continued to
evaluate its long-lived assets and liabilities and does not believe
any other assets or liabilities have incurred any impairment and the
amounts stated in the accompanying financial statements approximate
their fair value.
NOTE 5 - ACCOUNTS RECEIVABLE - AFFILIATE.
In 1997, the Company advanced $250,000 to EAC
Acquisition I Corporation ("EAC"), an entity whose president was the
general manager of the Company and is the brother of the Company's
former president. The Company advanced an additional $500,000 to EAC
in 1998. These advances were deposits for acquiring $4,179,000 in
assets by the Company's power system manufacturing segment. EAC had
previously acquired these assets by issuing notes for the same
$4,179,000 to the original sellers. EAC defaulted on its debt
payments to the original sellers and the original sellers seized the
assets they had sold to EAC in June 1997. The seizure of the assets
rendered EAC insolvent without any means to refund the advances to
the Company. Accordingly, the Company fully reserved this asset and
charged operations for a provision for doubtful accounts of $750,000
in fiscal 1998.
F-16
<PAGE>
NOTE 6 - INVENTORIES.
The components of the inventories in determining the cost of
sales are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Raw materials $2,917,000 $3,866,000 $3,378,000 $4,902,000
Work-in-process 357,000 1,969,000 1,780,000 1,779,000
Finished goods 386,000 996,000 907,000 893,000
---------- ---------- ---------- ----------
3,660,000 6,831,000 6,065,000 7,574,000
Allowance for obsolesence
and disposal 2,920,000 5,578,000 5,231,000 6,847,000
---------- ---------- ---------- ----------
$ 740,000 $1,253,000 $ 834,000 $ 727,000
========== ========== ========== ==========
</TABLE>
In May 1999, the manufacturing segment sold for $10,000 part
of its obsolete raw material and work-in-process inventories whose
cost was approximately $1,517,000. Management estimates that the
remaining $2,820,000 allowance for obsolescence at December 31, 1999
is sufficient for the continuing operating segments to dispose of
its obsolete and excess inventory and to attain a normal profit
margin on its remaining inventory.
The components of the inventories used in determining
the cost of sales of the Petitioner's operations are as follows:
<TABLE>
<CAPTION>
March 31, April 1,
l998 1997
---------- ------------
<S> <C> <C>
Raw materials $1,765,000 $3,514,000
Work-in-process - 442,000
Finished goods - -
---------- ----------
1,765,000 3,956,000
Allowance for obsolescence
and disposal 1,752,000 3,925,000
---------- ----------
$ 13,000 $ 31,000
========== ==========
</TABLE>
During fiscal 1999, the Trustee liquidated this operation's
inventory and the proceeds from such liquidation, if any, are being
held by the Trustee for distribution to the Petitioner's creditors.
F-17
<PAGE>
NOTE 7 - PROPERTY ASSETS.
Property assets consist of the following as at:
<TABLE>
<CAPTION>
March 31,
December 31, -------------------------
1999 1999 1998
------------ -------- --------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment $ 59,000 $ 59,000 $ 59,000
Furniture and fixtures 85,000 85,000 90,000
Leasehold improvements - 157,000 169,000
-------- -------- --------
144,000 301,000 318,000
Less: Accumulated depreciation 128,000 128,000 80,000
-------- -------- --------
$ 16,000 $173,000 $238,000
======== ======== ========
</TABLE>
Depreciation charged to operations in fiscal 1999 and 1998 was
$51,000 and $235,000, respectively. Depreciation charged to operations
for the nine months ended December 31, 1999 and 1998 was $63,000 and
$100,000. In 1997 management reviewed the results of its contracting
operations and determined property assets with an undepreciated cost of
$768,000 were valueless and were abandoned resulting in a charge to
discontinued operations in a like amount. A portion of the property
assets of the Company's power system manufacturing segment which were
located in Petitioner's premises in PA were abandoned in 1998 when this
segment's operations were centralized in the Company's Manchester, NH
facility. The undepreciated cost of $663,000 was charged to operations
in 1998. During the nine months ended December 31,1999, the Company's
landlord terminated the lease for its premises in Hudson, N.H.
resulting in the write-off of its unamortized leasehold costs of
$94,000. Management and the landlord have subsequently agreed to allow
the Company to remain in its present facility until April 2000 at which
time the Company will move to its new leased facility in Amherst, N.H.
(See Note 12).
F-18
<PAGE>
NOTE 8 - FINANCING.
(a) Revolving Lines of Credit:
The Company entered into a revolving credit agreement, as
amended in April 1996, with a bank for a borrowing facility of up to
$5,000,000. Borrowings under the facility were limited to a
borrowing base amount comprised of specified percentages of eligible
accounts receivable, inventories, and property assets. Interest was
payable monthly at varying amounts over the prime rate (14% at March
31, 1998). The outstanding balance under this facility was $479,000
at March 31, 1998, which was repaid in full in fiscal 1999. The
average outstanding indebtedness under this line of credit was
$2,155,000 and $40,000 in fiscal 1998 and 1997, respectively.
Average interest rate charged was 17.2% and 14% in fiscal 1999 and
1998.
In November 1998, the Company entered into a revolving line
of credit with a major stockholder. The line, as amended, provides
for borrowings of up to $4,000,000. In January 1999, this
stockholder advanced an additional $225,000 over the line's maximum.
At March 31, 1999, $4,225,000 was outstanding under this facility.
Through December 31, 1999, the stockholder advanced an additional
$1,700,000 under the facility which aggregates $5,925,000
outstanding at December 31, 1999. Since the Company has not made the
required monthly stated interest payments of 10%, the rate by the
terms of the agreement is automatically increased to 15%. Accrued
interest of $726,000 and $179,000 is outstanding at December 31,
1999 and March 31,1998, respectively, which is included in due to
affiliates in the accompanying financial statements. The average
outstanding debt under the facility was $1,317,000 and $4,864,000
during fiscal 1999 and the nine months ended December 31, 1999,
respectively. Interest charged to operations was $179,000 in fiscal
1999 and $547,000 during the nine months ended December 31, 1999 at
an average interest rate of 15%. The line of credit and accrued
interest thereon are collateralized by all of the Company's assets
and, at the holder's option, are convertible into the Company's
common stock at $0.55 per share for the first $4,225,000 of the
obligation, $0.20 per share for the next $1,050,000 of the
obligation of $0.10 per share for the excess over $5,275,000.
The convertibility of that portion of the convertible debt
which could result in the issuance of shares of common stock that
would exceed the number of shares authorized pursuant to the
Company's Certificate of Amendment, is subject to and conditioned
upon the amendment to the Certificate of Incorporation to authorize
the issuance of such shares of common stock.
F-19
<PAGE>
NOTE 8 - FINANCING. (Continued)
(b) Long-Term Debt:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Acquisition note payable in annual
indebtedness of $250,000 plus
interest at 10% $ 250,000 $ 500,000
Commonwealth of Pennsylvania
Department of Commerce Bonds (i):
Machinery and equipment 359,000 359,000
Capital loan fund 29,000 29,000
Subordinated notes (ii) 919,000 1,019,000
Convertible subordinated notes (iii) 256,000 256,000
Other notes payable 324,000 324,000
---------- ----------
$2,137,000 $2,487,000
========== ==========
Portion currently payable $2,137,000 $2,487,000
========== ==========
</TABLE>
The Company is in violation of several covenants of its
various debt agreements at March 31, 1999 and December 31, 1999.
Under the terms of the debt agreements, the covenant violations
accelerate principal repayment and the entire amounts outstanding
are due and payable immediately. Some of the debt holders had
commenced actions against the Company seeking payment. The actions
were resolved by the Company agreeing to make installment payments
to the creditors.
(i) In 1995, a subsidiary which is in bankruptcy (see
Note 2), entered into two loan agreements for an
aggregate of $700,000 which was used to acquire
property assets. The Company has assumed these
obligations to the Commonwealth of Pennsylvania and
certain of the assets which the funds were used to
acquire. The Court appointed Trustee has custody of
the remaining portion of the assets which he will
sell and use the proceeds as partial payment to the
bankruptcy proceedings creditors.
(ii) From February through October 1996, e(2) Electronics,
Inc. sold securities in a private placement
consisting of 10% interest bearing subordinated notes
and warrants convertible at $4 to acquire shares of
the e(2) Electronics, Inc.'s common stock. No value was
assigned to the warrants. Upon the reverse
acquisition by the Company of e(2) Electronics, Inc.,
the subordinated debt became obligations of the
Company and the warrants were issued for shares in
the Company's common stock. The Company received
$1,637,500 in proceeds from the offering before costs
related to the offering. Certain note holders
converted their debt into the Company's common stock
in the amount of $100,000 during the nine months
ended December 31, 1999 and $419,000 was converted
into common stock in 1999. The holders of the notes
aggregating $1,019,000 at March 31, 1999 and $919,000
at December 31, 1999 are due interest aggregating
$368,000 and $351,000 at March 31, 1999 and December
31, 1999, respectively.
F-20
<PAGE>
NOTE 8 - FINANCING. (Continued)
(c) Long-Term Debt:
(iii) In December 1997, a subsidiary issued two
convertible subordinated notes aggregating
$256,000 to a corporate stockholder of the
Company. The 10% interest bearing notes
which were due and payable in December 1998
remain outstanding at March 31, 1999 and
December 31, 1999. The notes and accrued
interest thereon aggregating $34,000 (March
31, 1999) and $52,000 (December 31, 1999)
are collateralized by all of the Company's
assets and, at the holder's option, are
convertible into the Company's common stock
at $2.00 per share. The noteholder also paid
$65,000 for warrants to acquire 32,500
shares of the Company's common stock for no
additional consideration.
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are comprised
of the following:
<TABLE>
<CAPTION>
March 31,
December 31, -----------------------------
1999 1999 1998
------------- ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Payroll and commissions $ 571,000 $ 575,000 $ 659,000
Vacation pay 67,000 140,000 139,000
Payroll taxes and fringe benefits 257,000 169,000 190,000
Professional fees 127,000 253,000 219,000
Interest 587,000 503,000 543,000
Warranty reserve 57,000 57,000 56,000
Other 97,000 70,000 65,000
Placement fees - - 497,000
---------- ---------- ----------
$1,763,000 $1,767,000 $2,368,000
========== ========== ==========
</TABLE>
F-21
<PAGE>
NOTE 10 - INCOME TAXES.
The components of the provision (benefit) for income taxes
are as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended December 31, March 31,
---------------------- ------------------------
1999 1998 1999 1998
------ ------ ------ -------
(Unaudited)
<S> <C> <C> <C> <C>
Currently payable:
Federal $ - $ - $ - $ -
State and local 6,000 6,000 8,000 8,000
------ ------ ------ ------
$6,000 $6,000 $8,000 $8,000
====== ====== ====== ======
Deferred:
Federal $ - $ - $ - $ -
State and local (6,000) (6,000) (8,000) (8,000)
------ ------ ------ ------
($6,000) ($6,000) ($8,000) ($8,000)
====== ====== ====== ======
Total provision $ - $ - $ - $ -
====== ====== ====== ======
</TABLE>
The deferred tax benefit results from differences in
recognition of expenses for tax and financial statement purposes and
for minimum tax provision of the various state and local taxing
authorities where the Company and its subsidiaries are subject to
tax. The Company has deferred tax assets consisting of the following
temporary differences:
<TABLE>
<CAPTION>
March 31,
December 31, -------------------------------
1999 1999 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Net operating loss carryforward $ 8,950,000 $ 6,809,000 $ 3,893,000
Inventory obsolescence allowance 987,000 1,751,000 2,427,000
Allowance for doubtful accounts 294,000 294,000 333,000
Intangible assets 977,000 1,017,000 1,070,000
Other 47,000 47,000 11,000
----------- ----------- ------------
11,255,000 9,918,000 7,734,000
Less: Valuation allowance (11,255,000) (9,918,000) (7,734,000)
----------- ----------- ------------
Net deferred tax asset $ - $ - $ -
=========== =========== ============
</TABLE>
In light of the continuing losses incurred by the Company
since its inception, management estimates that it is more likely
than not that the benefits from the deferred tax assets will not be
realized and, accordingly, the entire tax asset has been fully
reserved.
F-22
<PAGE>
NOTE 10 - INCOME TAXES. (Continued)
The difference between income taxes computed using the
statutory federal income tax rate and the rate shown in the
financial statements are summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
1999 % 1998 %
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Loss before income taxes ($5,003,000) ($14,742,000)
========== ===========
Computed tax benefit
at statutory rate ($1,751,000) (35.0) ($ 5,160,000) (35.0)
Non-deductible portion
of compensatory element of
common stock issuances:
Research and development - - 2,100,000 14.2
Compensation for services 102,000 2.0 32,000 0.2
Goodwill 105,000 2.1 - -
Finance charges 10,000 0.2 - -
Other 16,000 0.3 14,000 0.1
Reserve for operating loss
carryforward tax asset 1,518,000 30.4 3,014,000 20.5
---------- ---- ----------- ----
Income tax benefit $ - - $ - -
========== ===== =========== ====
<CAPTION>
For the Nine Months Ended December 31,
------------------------------------------------------------
1999 % 1998 %
---------- --------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Loss before income taxes ($3,898,000) ($ 4,294,000)
========== ===========
Computed tax benefit
at statutory rate ($1,364,000) (35.0) (1,503,000) (35.0)
Non-deductible portion of
Finance costs 23,000 0.6 4,000 0.1
Goodwill - - 105,000 2.4
Compensation for services - - 102,000 2.4
Other 4,000 0.1 12,000 0.3
Reserve for operating loss
carryforward tax asset 1,337,000 34.3 1,280,000 29.8
----------- ---- ----------- ----
Income tax benefit $ - - $ - -
=========== ==== ============ ====
</TABLE>
F-23
<PAGE>
NOTE 10 - INCOME TAXES. (Continued)
The net operating loss carryforwards at December 31, 1999
expire as follows:
<TABLE>
<S> <C>
2010 $ 905,000
2011 1,959,000
2012 1,676,000
2013 7,444,000
2014 7,473,000
2015 6,117,000
-----------
$25,574,000
===========
</TABLE>
The Tax Reform Act of 1986 enacted a complex set of rules
limiting the utilization of net operating loss carryforwards to
offset future taxable income following a corporate ownership change.
Among other things, the Company's ability to utilize its operating
loss carryforwards is limited following a change in ownership in
excess of fifty percentage points in any three-year period.
Additionally, the net operating loss will be reduced to the extent
of the amount of indebtedness extinguished, if any, under the
bankruptcy liquidation proceedings of one of the Company's
subsidiaries. The effects, if any, of the potential bankruptcy
proceeding debt extinguishment and the change in ownership are not
reflected in the foregoing tables.
NOTE 11 - CAPITAL.
(a) Redeemable Common Stock:
As part of the purchase agreement for the acquisition of the
net assets of Charter Technologies, Inc., certain creditors of
Charter were issued shares of the Company's common stock redeemable
at the holder's option for cash of $410,000. In 1998, the holders
accepted (i) $141,624 in cash, (ii) warrants to acquire 303,043
shares of the Company's common stock for no consideration (all of
which are outstanding at December 31, 1999), and (iii) warrants to
acquire 95,000 shares of the Company's common stock at $3.00 per
share (all of which are outstanding at December 31, 1999) as full
payment of the Company's obligations under the redeemable common
stock.
F-24
<PAGE>
NOTE 11 - CAPITAL. (Continued)
(b) Common Stock:
In January 1998, the Company issued 2,000,000 of its common
shares as part of the purchase of its subsidiary, Logic Labs, Inc.
The value of the shares at date of issuance was $6,000,000.
In March 5, 1998, an individual acquired 333,333 shares of
the Company's common stock for cash of $3.00 per share. In April
1998, this individual purchased additional shares and warrants to
acquire the Company's common stock for $6,000,000 in cash before
offering costs. Of the 2,163,334 common shares acquired in April
1998, 163,333 are to be issued to a consultant for his advisory
services in connection with the sale of the securities. The
purchaser also received warrants to acquire an additional 100,000
common shares at $3.00 per share. In November 1998, the Company gave
this individual additional rights to avoid dilution of his ownership
of the issued and outstanding or issuable shares of the Company's
common stock. This individual had loaned the Company $5,925,000 at
December 31, 1999 under a revolving credit agreement (see Note 8).
This person has the option to convert the debt outstanding at
December 31, 1999 into approximately 19,432,000 shares of the
Company's common stock.
In fiscal 1998, the Company issued 30,000 shares of its
common stock, whose fair value was $90,000 at the date issuance, to
its corporate general counsel in payment of legal services rendered
aggregating $90,000.
In April 1998, the Company issued 100,000 shares of its
common stock whose fair market value at date of issuance was
$300,000 for the purchase of Communication Service Company.
During fiscal 1999, the Company's Board of Directors
authorized the issuance of 97,200 shares of its common stock having
a fair market value at the time of issuance of $291,600 to officers
and employees of the Company as bonuses for services rendered.
In fiscal 1999, the Company issued 16,800 of its common
shares having a fair market value of $50,400 as settlement of a
lawsuit.
Pursuant to the convertible notes conversion option, certain
holders of the Company's subordinated convertible debentures (See
Note 8) converted their outstanding loans and accrued interest into
105,950 shares (during fiscal 1999) and 25,000 shares (during the
nine months ended December 31, 1999) of the Company's common stock.
F-25
<PAGE>
NOTE 11 - CAPITAL. (Continued)
(c) Warrants:
In fiscal 1997, warrants to acquire 1,350,000 shares of the
Company's common stock were issued to Inverness Corporation in
connection with a loan agreement. The exercisability and validity of
these warrants are currently being challenged by the Company.
Inverness Corporation has initiated an action against the Company
and others (See Note 12).
In fiscal 1997, 1998 and 1999, the Company sold 7,300,000
warrants at $1.00 each and 788,434 at $3.00 each aggregating
$9,665,000 prior to related offering costs. Each warrant allowed the
holder to convert the warrant into a like number of the Company's
common shares for no additional consideration. Through December 31,
1999, 7,976,434 warrants have been converted into a like number of
the Company's common shares.
In fiscal 1996 and 1997, the Company raised $1,638,000
before offering costs through private placements of its convertible
notes of $1,637,000 and cashless warrants to acquire 409,395 common
shares at $4.00 per share. Through December 31, 1999, $931,000 of
convertible debentures and accrued interest have been converted into
180,950 shares of the Company's common stock.
In fiscal 1998, the Company received $65,000 from the holder
of a subsidiary's convertible subordinated notes for a warrant to
acquire 32,500 shares of the Company's common stock for no
additional consideration.
The Company employed the services of placement agents,
consultants and investment bankers to assist in and render advise
with respect to the sale of its common stock and warrants. One of
the consultants agreed to accept 163,333 shares of the Company's
common stock as compensation for its services. Although those shares
have not actually been issued, they are reflected in accompanying
financial statements as issued and outstanding.
An investment banker was granted, but not issued, for its
financial services rendered, warrants to acquire (i) 718,000 shares
of the Company's common stock at $1.00 per share, (ii) 71,000 shares
of common stock at $3.00 per share and (iii) 405,000 shares of the
Company's common stock for no additional consideration. Through
December 31, 1999 warrants to acquire 44,000 common shares for no
consideration were the only warrants issued as well as exercised.
The remaining warrants for 1,150,000 common shares remain
outstanding at March 31, 1999 and December 31, 1999. The financial
statements reflect the common shares underlying the warrants for
405,000 shares at no additional consideration as issued and
outstanding at the beginning of all periods presented. Current
management is presently in negotiations with this investment banker
to reduce, eliminate, cancel or change the terms, number, and
exercise prices of the outstanding warrants. The exact number of
warrants or common shares that will be issued to this investment
banker, if any, is not presently determinable.
F-26
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Leases:
The Company is lessee under an operating real property lease
for its manufacturing, warehouse and office facility in Hudson, N.H.
The Company was delinquent in remitting its rental payments. The
landlord commenced an action in 1999 in state court to evict the
Company. The court found for the landlord. Subsequent to the
landlord receiving its judgement, negotiations between the parties
have resulted in the Company's being allowed to remain in the
premises essentially on a month to month bases until April 2000, at
which time the Company intends to move to its new leased facilities
in Amherst, N.H. The new lease is for three years expiring in April
2003. Minimum annual rentals are $115,000 for each year. The Company
also leases office facilities on a month to month basis in Erie, PA,
Leesburg, VA and Saco, ME. The aggregate monthly rental is $2,000.
(b) Year 2000:
The Company recognizes the need to insure its operations
will not be adversary affected by year 2000 software failures. The
Company communicated with its suppliers, customers and others with
which it does business to coordinate year 2000 conversion. The costs
of achieving compliance have been immaterial to date. Management
believes that its software is presently compliant and through
February 15, 2000, the Company has not experienced any problems
associated year 2000 issues.
(c) Litigation:
(i) A subsidiary of the power manufacturing segment is
one of several defendants in an action for personal
injuries sustained by an individual. The plaintiff's
alleged injuries were allegedly incurred as a result
of the negligence of a contractor employed by the
subsidiary to install a power system at the
plaintiff's workplace. The plaintiff and his spouse
are seeking damages of $14,000,000. The Company's
insurance carrier has appointed counsel to represent
the subsidiary and such counsel as well as management
is unable to render an opinion on the ultimate
outcome of the lawsuit.
(ii) Elgin Technologies, Inc., the Petitioner, two former
officers and a stockholder of the Company, the
Company's investment bankers and its general
corporate counsel as well as other parties are named
defendants in a lawsuit filed in Middlesex Superior
Court in Cambridge, Mass. in June 1997 by Inverness
Corporation and Menotomy Funding, LLC. The plaintiffs
allege breach of contract and a variety of other
causes of action relating to the alleged failure of
Elgin Technologies, Inc. to honor certain stock
warrants.
F-27
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(c) Litigation: (Continued)
In late 1996 a defendant, EAC Acquisition I Corporation
("EAC"), was formed by the Company's investment bankers for the sole
purpose of acquiring assets of a troubled corporation located in
Billerica, Mass. The parties intended that EAC, whose President was
an officer of Elgin Technologies, Inc., would acquire the assets of
the business and then manage its operations in an effort to make it
a viable concern. As part of the transaction, plaintiffs sold the
entire assets to EAC for a short-term note aggregating $1,640,442.
During the negotiation of the loan agreement, the plaintiffs
represented that they would provide working capital of $300,000
pursuant to the revolving line of credit of $1,780,000 referenced in
the loan agreement. As part of the consideration for the
transaction, Elgin Technologies, Inc. issued a warrant to purchase
750,000 shares of warrant stock in a publicly traded company (CROA)
that would be the survivor of a merger with the Company. Elgin
Technologies, Inc. was never a party to the loan transaction and did
not guarantee the debt of EAC.
The parties anticipated that the short-term note would be
paid through the infusion of new capital from third party investors.
However, after several loan forebearances for which the Company
issued additional warrants, neither the working capital from the
plaintiffs nor any new capital from investors was forthcoming. By
May 1997, the plaintiffs foreclosed on their security interest in
EAC's assets, thereby forcing EAC to cease operations.
Plaintiffs filed suit to obtain money damages in the amount
of $7,650,000 for the alleged failure to honor the warrants issued
by the Company in connection with the transaction. It is the
Company's position that the conditions precedent to the exercise of
the warrants never occurred. The Company and EAC have counterclaimed
against the Plaintiffs for common law fraud, beach of contract and
related claims. The Company and EAC allege they were fraudulently
induced into entering into the loan transaction and issuing the
warrants in exchange for a non-existent operating line of credit
based upon false representations by plaintiffs that it had the
liquidity and ability to fund the line of credit. The case is
presently in the discovery phase and trial is not expected before
the latter part of the year 2000. Management is unable to determine
the ultimate resolution of this action and what effect, if any, the
resolution would have on the Company's financial condition.
(iii) The Company and/or its subsidiaries are named defendants or
co-defendants in numerous actions with the Petitioner. These
cases, in the opinion of counsel, will be resolved through the
bankruptcy proceedings. The ultimate aggregate resolutions of
the lawsuits, in management's opinion, will not have a
material adverse effect on the Company's financial condition.
F-28
<PAGE>
NOTE 13 - SEGMENT INFORMATION.
The Company's operations are comprised of its lighting
manufacturing and power system equipment manufacturing segments. Set
forth below are sales, operating losses, research and development
costs, depreciation and identifiable assets of the segments in
thousands.
<TABLE>
<CAPTION>
For the Nine For the
Months Ended Years Ended
December 31, March 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Lighting $ 23 $ - $ - $ -
Power systems 5,404 4,817 7,218 6,980
------ ------ ------ -------
$5,427 $4,817 $7,218 $ 6,980
====== ====== ====== =======
Operating loss:
Lighting $ 989 $ 788 $1,271 $ 8,036
Power systems 2,053 2,964 2,977 5,104
------ ------ ------ -------
$3,042 $3,752 $4,248 $13,140
====== ====== ====== =======
Depreciation:
Lighting $ - $ - $ - $ -
Power systems 63 100 51 235
------ ------ ------ -------
$ 63 $ 100 $ 51 $ 235
====== ====== ====== =======
Research and development:
Lighting $ 624 $ 661 $1,114 $ 8,036
Power systems - 219 293 297
------ ------ ------ -------
$ 624 $ 880 $1,407 $ 8,333
====== ====== ====== =======
Identifiable assets:
Lighting $ 54 $ 47 $ - $ -
Power systems 2,598 3,578 4,318 1,765
------ ------ ------ -------
$2,652 $3,625 $4,318 $ 1,765
====== ====== ====== =======
</TABLE>
F-29
<PAGE>
-------------------------------------------------------------------------------
PART III - EXHIBITS
Item 1. INDEX TO EXHIBITS - For full text of all exhibits, with the exception of
the amended Schedule FDS below, please see the Company's Form 10SB12G filed with
the Securities and Exchange Commission on March 9, 2000.
Item # Description
------ -----------
FDS Schedule FDS
3.1 Articles of Incorporation and amendments thereto
3.2 By-Laws
9. Voting Trust Agreements
9.1 Stockholders Agreement dated as of October 10, 1997 by and among Primo
Ianieri, Richard L. Audet, Dianne Toner, Michael Ianieri, Deborah
Antipin and Valerie Ianieri.
9.2 Voting Agreement dated as of April 1, 1998 by and among Elgin e^2,
Inc., Mason Cabot Holdings, Inc., Horace T. Ardinger, Jr., Primo
Ianieri, Peter Bordes and their spouses.
10. Material Contracts
10.1 Assumption, Payment Agreement and Amended and Restated Royalty
Agreement dated as of January 25, 1996 by and between Robert C.
Smallwood and American Compact Lighting, L.L.C.
10.2 Amendment to Royalty Agreement executed by Robert C. Smallwood on
April 1, 1998 by and between Robert C. Smallwood and American Compact
Lighting, L.L.C.
10.3 Employment Agreement dated as of December 1, 1997 by and between
Robert Smallwood and Logic Laboratories, Inc.
10.4 License Agreement dated as of April 1, 1998 by and between Horace T.
Ardinger, Jr. ("Licensee"), Logic Laboratories, Inc. and Elgin e^2,
Inc.
10.5 Employment Agreement dated as of April 1, 1998 by and between Lewis
Kunigel and Warren Power Systems, Inc. (terminated for cause by the
Company on February 28, 2000).
10.6 Secured Revolving Credit Agreement dated as of November 13, 1998 by
and between Elgin Technologies, Inc. and Horace T. Ardinger, Jr.
40
<PAGE>
10.7 Convertible Revolving Promissory Note dated as of November 13, 1998,
made by Elgin Technologies, Inc. in favor of Horace T. Ardinger, Jr.
10.8 Amendment, dated as of December 31, 1999, to Convertible Revolving
Promissory Note by Elgin Technologies, Inc. and in favor of Horace T.
Ardinger, Jr.
10.9 Agreement dated as of January 25, 2000 by and between William Mosconi
and Elgin Technologies, Inc., e^2 Electronics, Inc., Logic
Laboratories, Inc., Warren Power Systems, Inc., and William Mosconi,
concerning the resignation of William Mosconi.
10.10 Employment Agreement dated as of February 21, 2000 by and between
Jonathan Scott Harris and Elgin Technologies, Inc.
Addendum
A-1 "The Elgin Master Light Ballast System - Market Potential and Economic
Uncertainty" study by The Economics Resource Group, Inc., June 8,
1998.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Elgin Technologies, Inc.
------------------------
(Registrant)
Date: December 20, 2000
-------------
By: /s/ Michael J. Smith
--------------------
Name: Michael J. Smith
Title: Executive Vice President and Chief Financial Officer
