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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 1-15735
ELGIN TECHNOLOGIES, INC.
F/K/A CROSS ATLANTIC CAPITAL, INC.
(Name of Small Business Registrant In Its Charter)
DELAWARE 95-4581906
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10 COLUMBIA DRIVE
AMHERST, NH 03031
(Address of Principal Executive Offices and Zip Code)
(603) 598-4700
(Registrant's telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act:
NONE
Securities registered under to Section 12(g) of the Exchange Act:
VOTING COMMON STOCK,
$.000833 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
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Registrant's revenues for its most recent fiscal year were $7,423,771.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $9,113,386 as of March 31, 2000, based upon the
closing price on the National Quotation Bureau "Pink Sheets." Shares of Common
Stock held by each executive officer and director and by each person who
beneficially owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.
There were 20,051,601 shares of Common Stock issued and outstanding as
of March 31, 2000.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
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 e2 Inc. in exchange for 5,710,000
shares of its $.000833 par value common stock. The Company presently has two
major product lines: Telecom Power and Master Lite Ballast Systems (Master
Light-TM-).
TELECOM POWER
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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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
---------------- --------------- ------------ ----------- ------------------
48V/24V CELLULAR PCS FIBER CENTRAL OFFICE
---------------- --------------- ------------ ----------- ------------------
3AMP/6AMP X X X
---------------- --------------- ------------ ----------- ------------------
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
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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 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 approximately $166.1 million. Here too, there is little foreign
trade. Imports totaled only 10% of production of U.S. consumption. In this case,
foreign
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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 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.
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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.
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.
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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).
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.
MASTER LITE BALLAST SYSTEM (MASTER LIGHT-TM-)
---------------------------------------------
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 Company's dimmable electronic distributed lighting system (Master Light-TM-)
may represent the ability for substantial savings for every energy lighting
dollar.
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
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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
embraced the technology and are rapidly replacing existing magnetic ballasts
with electronic ballasts.
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 Master Light-TM- technology in the fluorescent light
industry. The results indicated a major market potential for the Master
Light-TM- technology and with a favorable report against competition in today's
fluorescent lighting industry.
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 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 Master Light-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' Master Light-TM- is able to
provide these features at a fraction of the competitors' cost, thereby further
increasing energy savings.
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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 Master Light-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 Master Light-TM- to give the customer the
freedom and flexibility to attain their desired lighting using its distributed
dimmable electronic lighting system. The multi-faceted features of the Master
Light-TM- allow the customer to realize significant energy savings by utilizing
the 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 Master
Light-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 Labs' 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 Master Light-TM- technology. To date,
the Company has been granted three patents. The Company is in the 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 Master Light-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 Master Light-TM-
with integrated energy management. Given the centralized power control of the
Master Light-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%.
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The Company plans to attempt to expand Master Light-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 fluorescents, one of the highest margin
and fastest growing markets in lighting today. Compact fluorescents were
designed to replace inefficient incandescent lights. By placing the lamp driver
inside the lamp, the Company believes that it can significantly increase energy
efficiency and reduce harmonic distortions. Such features could allow the
"inside the lamp" technology to replace incandescent lighting. From an energy
savings standpoint, the Company believes that, when fully developed, Master
Light-TM- may far exceed core coil magnetic ballast competition.
Four (4) customers accounted for 52% (15%,14%,13% and 10% respectively)
of accounts receivable as of March 31, 2000. Sales to three (3) major customers
amounted to 45% (18%,14% and 13% respectively) of total sales for the year ended
March 31, 2000. Two (2) customers accounted for 14% and 12% of total sales for
the year ended March 31, 1999.
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.
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As of June 30, 2000, the Company employed a total of fifty-seven (57)
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters and manufacturing facility is located in
Amherst, New Hampshire in a 32,000 sq. ft., single story, brick and mortar
building, maintained in very good condition. Use and occupancy costs are
approximately $15,500 per month.
The Company relocated from its Hudson, NH facility and entered into a
new lease for the current headquarters on May 1, 2000. The new lease is for five
years having an annual escalator and expires in April 2005. (See Risk
Factors -- Dependence on Major Production Facilities, herein below).
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 closed this facility and ended its lease in May 2000.
The Company has also leased 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 has been performed at
this facility.
On February 28, 2000, the Company terminated its obligation to lease a
small office space in Saco, Maine, which had been leased for a monthly rental
fee of Four Hundred Dollars ($400).
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 3. 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.
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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, the Company's investment bankers, Mason Cabot Holdings,
Ltd., 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
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PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER 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."
The high and low sales prices of the Company's common stock for each of
the following quarters are:
<TABLE>
<CAPTION>
Quarter Ended High/Ask Low/Bid
---------------------------- ----------------------- --------------------------
<S> <C> <C>
March 31, 2000 3.00 .10
---------------------------- ----------------------- --------------------------
December 31, 1999 .50 .06
---------------------------- ----------------------- --------------------------
September 30, 1999 1.875 .125
---------------------------- ----------------------- --------------------------
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 6.00
---------------------------- ----------------------- --------------------------
June 30, 1998 10.50 7.00
---------------------------- ----------------------- --------------------------
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.
SHAREHOLDERS OF RECORD
There were 220 holders of record of the Common stock of the Company as
of March 31, 2000.
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.
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").
12
<PAGE>
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 hereinabove.
The Company issued 2,000,000 shares of unregistered common stock to
American Compact Lighting in January 1998, 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. at a purchase price of $3.00 per share, for 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. In
November, 1998 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.
In April, 1998 the Company issued one hundred thousand (100,000)
unregistered shares of common stock 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 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.
13
<PAGE>
ITEM 6. MANAGEMENT'S 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-KSB or that are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in the Form 10-KSB 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 or
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
OPERATING LOSSES, CASH FLOW SHORTAGES AND GOING CONCERN
The Company has limited access to available working capital, which
impacts the Company's ability to operate efficiently. As a consequence, results
from operations have been negatively affected and it is expected that they 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 $39,775,000 at March 31, 2000. For the year ending March 31, 2000 , the
Company has continued to experience losses of $4,280,000 on revenues of
$7,424,000. The major contributors to the accumulated losses were continued
research and development efforts to bring Master Light-TM- to market, along with
the capital needed to rebuild the telecom power and conversion businesses.
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 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
14
<PAGE>
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 Master Light-TM-
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.
The substantial operating losses of the Company's operating segments
incurred through and subsequent to March 31, 2000, and the Company's limited
ability to obtain financing other than from one major investor 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, raises substantial doubt among the Company's
independent auditors 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.
Management is making every effort to reverse these trends by the hiring of a
new President/CEO and appointing a new Vice President as head of sales to
implement a turnaround of the Company's businesses. New management will
continue efforts to reduce the operating costs of the Company's existing
product lines and seek to expand into less costly, more profitable products
and services. These efforts will, however, require increased working capital
infusions. At present the Company's sole source of financing is from one
major investor. Management cautions that there can be no assurances that
these efforts will be successful or that the investor will continue to
provide financing or that alternative sources of funds will be available for
management to implement its plan.
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 Master Light-TM-, 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
15
<PAGE>
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.
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 YEARS ENDED
MARCH 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Sales $7,424,000 $7,218,000
Cost of sales 6,960,000 7,088,000
------------ ----------
Gross margin (loss) 464,000 130,000
Operating expenses 3,538,000 4,379,000
------------ ----------
Operating loss ( 3,074,000) ( 4,249,000)
Other expenses 1,206,000 754,000
============ ============
Net loss ($4,280,000) ($5,003,000)
============ ============
</TABLE>
16
<PAGE>
SALES
The Company had sales of $7,424,000 for fiscal 2000 and $7,218,000 for
fiscal 1999. The nominal increase in sales of $206,000 (2.9 %) 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.
COST OF SALES
The cost of sales for fiscal 2000 and 1999 were $6,960,000 and
$7,088,000 (representing 94% and 98% of sales respectively). Fiscal 2000
reflects the cost reduction benefits implemented during the year. The low volume
levels that the company has experienced in both fiscal years has limited the
margin contribution to fixed manufacturing costs resulting in nominal gross
margins.
OPERATING EXPENSES
Operating expenses were down $841,000 (19%) from $4,379,000 (61% of
sales) in fiscal 1999 to $3,538,000 (48% of sales) in 2000. Cost reductions and
lower legal fees were the major contributors to this reduction. In addition, the
Company reduced spending in R&D by $580,000, as the Master Lite Ballast Systems'
technology transitioned to production. In fiscal 1999 the Company had excess bad
debt reserves resulting in income of $110,000 and in fiscal 2000 the Company
provided $72,000 in reserves for bad debt resulting in an increase in spending
of $182,000. Also in fiscal 1999 the Company issued stock to employees at a cost
of $292,000.
OTHER EXPENSES
Other expenses increased $452,000 (60%) from $754,000 (10% of sales) to
$1,206,000 (17% of sales) in fiscal 1999 and 2000, respectively. Interest
expense on the loan agreement increased by $706,000 due to increased borrowings
from an affiliate.. Fiscal 1999 included net intangible write-offs and
amortization of $330,000. This increase is attributable to a charge to
operations for the goodwill associated with an acquisition at the time of
purchase. The Company abandoned property assets of $14,000 in 1999.
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-
17
<PAGE>
communications Products Division (CSC). The Company has yet to name a successor
to Mr. Kuniegel's position.
INFLUENCE BY CHAIRMAN; STOCKHOLDERS AGREEMENT
The Company's Chairman, Primo Ianieri, beneficially owns 3,220,099
shares of Common Stock, representing 6.4% 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:
The Company's Board of Directors shall consist of seven (7) seats;
Three (3) of said Directors shall be selected by Mr. Ianieri and one of
which shall be Mr. Peter Bordes, Sr.
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.
INFLUENCE BY INVESTOR; SUBSTANTIALLY ALL ASSETS PLEDGED; CONTINUED DILUTION
In connection with a Secured Revolving Credit Agreement, Convertible
Revolving Promissory Note, 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 March 31, 2000,
Mr. Ardinger beneficially owns or has the right to acquire 31,082,151 shares of
the Company's common stock which is 62.0% 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 5.1), 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, who also
currently serves as the Company's Chief Financial Officer and Executive Vice
President. 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 5.2). 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.
18
<PAGE>
DEPENDENCE ON MAJOR PRODUCTION FACILITIES
One hundred (100%) percent of the Company's production is located at
its facility in Amherst, 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.
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.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
MARCH 31, 2000
I N D E X
<TABLE>
<CAPTION>
PAGE NO.
FINANCIAL STATEMENTS:
<S> <C>
Independent Accountants' Report ...................................21
Consolidated Balance Sheet as at March 31, 2000 ...................22
Consolidated Statements of Operations
For the Years Ended March 31, 2000 and 1999 .....................23
Consolidated Statements of Changes in Capital Deficiency
For the Years Ended March 31, 2000 and 1999 .....................24
Consolidated Statements of Cash Flows
For the Years Ended March 31, 2000 and 1999 ...................25 - 26
Notes to Consolidated Financial Statements ......................27 - 42
</TABLE>
20
<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, 2000, 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, 2000, and the results of their operations and their cash flows for
each of the two years ended March 31, 2000, 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 $11,272,070 and liabilities
exceed assets by $11,070,149 at March 31, 2000 and, in addition, the Company has
incurred losses since inception. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to this matter is discussed in Note 1. 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.
May 25, 2000
21
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
Cash $ 144,839
Accounts receivable, less allowances for
doubtful accounts and customer deductions 1,194,315
Inventories, at cost, reserve for obsolescence,
excess quantities and valuation 1,603,391
Prepaid expenses and other current assets 77,747
Total current assets ------------- $ 3,020,292
Property assets, net of accumulated depreciation 53,818
Other assets:
Deferred financing costs, net 59,395
Deposits and other assets 88,708
Total other assets -------- 148,103
-------
$ 3,222,213
===========
LIABILITIES AND CAPITAL DEFICIENCY
----------------------------------
Current liabilities:
Revolving credit agreement $ 6,725,000
Current maturities of long-term debt 2,206,663
Due to affiliates 1,141,273
Accounts payable 1,549,619
Pre-petition liabilities 1,012,000
Accrued expenses and other current liabilities 1,657,807
---------
Total current liabilities $14,292,362
Long-term debt 2,206,663
Less: Current maturities 2,206,663
Total long-term debt --------- -
Capital deficiency:
Common stock, $.000833 par value
Authorized - 60,000,000 shares
Issued - 20,051,601 shares 16,703
Additional paid-in capital 28,830,006
Accumulated deficit ( 39,775,234)
Treasury stock - at cost ( 141,624)
------------
Total capital deficiency ( 11,070,149)
-------------
$ 3,222,213
=============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Net sales $ 7,423,771 $ 7,217,586
Cost of sales 6,959,921 7,087,955
----------- -----------
Gross margin 463,850 129,631
----------- -----------
Operating expenses:
Selling 896,965 577,515
Research and development 826,680 1,407,048
General and administrative 1,742,406 2,504,030
Bad debts 71,656 ( 110,300)
----------- -----------
Total operating expenses 3,537,707 4,378,293
----------- -----------
Loss from operations (3,073,857) (4,248,662)
----------- -----------
Other expenses:
Interest 1,116,646 410,499
Amortization of intangibles
and financing costs 89,091 29,697
Write-off of intangibles -- 300,000
Abandonment of property assets -- 14,038
=========== ===========
Total other expenses 1,205,737 754,234
----------- -----------
Net loss ($4,279,594) ($ 5,002,896)
=========== ============
Net loss per common share ($0.22) ($0.31)
=========== ===========
Weighted average number of
shares outstanding 19,885,303 15,900,850
=========== ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
NUMBER ADDITIONAL nUMBER
OF PAID-IN OF
SHARES AMOUNT CAPITAL SHARES AMOUNT
------- ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1998 9,590,333 $ 7,990 $21,186,324 - $ -
Purchase of redeemable common
stock for cash and issuance
of cashless warrants for debt - - 410,000 2,460,000 (141,624)
Net proceeds from sale of
securities 2,163,334 1,802 5,966,381 - -
Common stock issued in partial
payment of acquisition
of subsidiary 100,000 83 299,917 - -
Common stock issued in
settlement of litigation 16,800 14 50,386 - -
Common stock issued as
employee compensation 97,200 81 291,519 - -
Debt converted into common
stock and warrants 105,950 88 625,924 - -
Conversion of warrants into
common stock 6,859,434 5,714 ( 5,714) - -
Net loss for the year - - - - -
------------ -------- ----------- ---------- ----------
Balance at March 31, 1999 18,933,051 15,772 28,824,737 2,460,000 (141,624)
Conversion of warrants into
stock 1,117,000 930 ( 930) - -
Conversion of debt into common -
stock 1,550 1 6,199 - -
Net loss for the year - - - - -
------------ -------- ----------- ---------- ----------
Balance at March 31, 2000 20,051,601 $16,703 $28,830,006 2,460,000 ($141,624)
------------ -------- ----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED CAPITAL
DEFICIT DEFICIENCY
------------ ------------
<S> <C> <C>
Balance at April 1, 1998 ($30,495,744) ($ 9,301,430)
Purchase of redeemable common
stock for cash and issuance
of cashless warrants for debt - 268,376
Net proceeds from sale of
securities - 5,968,183
Common stock issued in partial
payment of acquisition
of subsidiary - 300,000
Common stock issued in
settlement of litigation - 50,400
Common stock issued as
employee compensation - 291,600
Debt converted into common
stock and warrants - 626,012
Conversion of warrants into
common stock - -
Net loss for the year ( 5,002,896) ( 5,002,896)
------------- ------------
Balance at March 31, 1999 ( 35,498,640) ( 6,799,755)
Conversion of warrants into
stock - -
Conversion of debt into common - -
stock - 6,200
Net loss for the year ( 4,276,594) ( 4,276,594)
------------- ------------
Balance at March 31, 2000 ($39,775,234) ($11,070,149)
------------- ------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,276,594) ($5,002,896)
------------ ------------
Adjustments to reconcile net loss to
cash used in operating activities:
Accrued interest on affiliated debt 823,312 204,749
Depreciation and amortization 224,712 80,889
Abandonment of property assets - 14,038
Provision for inventory obsolescence (3,250,592) (1,615,950)
Provision for doubtful accounts 14,500 (110,000)
Common stock issued for
Litigation settlement - 50,400
Services rendered - 291,600
Write-off of intangibles - 300,000
Changes in assets and liabilities:
Accounts receivable 320,354 (896,078)
Inventories 2,481,330 1,508,931
Prepaid expenses and
other current assets (32,794) 29,800
Deposits and other assets (85,348) 13,400
Accounts payable 281,243 (1,250,739)
Accrued expenses and other
current liabilities (109,347) (399,688)
------------- -----------
667,370 (1,778,648)
------------- -----------
Net cash used in
operating activities (3,609,224) (6,781,544)
------------- -----------
Cash flows used in investing activities:
Property assets (16,497) -
------------- -----------
Cash flows from financing activities:
Proceeds from sale of securities - 5,968,183
Purchase of redeemable securities - (141,624)
Proceeds from (repayment of)
affiliates debt 2,436,080 4,104,826
Proceeds from (repayment of)
debt (250,000) ( 1,512,635)
Deferred financing costs - ( 178,183)
------------- -----------
Net cash provided by
financing activities 2,186,080 8,240,567
------------- -----------
Net increase (decrease) in cash (1,439,641) 1,459,023
Cash at beginning of period 1,584,480 125,457
------------- -----------
Cash at end of period $ 144,839 $1,584,480
============ ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
--------------------
2000 1999
----- ----
<S> <C> <C>
Supplemental Disclosures of
Cash Flow Information:
Cash payments made for:
Interest $ 128,071 $ 74,869
=========== ==========
Income taxes $ - $ -
=========== ==========
Supplemental Schedule of
Non-Cash Financing and
Investing Activities:
Conversion of debt to equity $ 6,200 $ 626,012
=========== ==========
Common stock issuances for
Litigation settlement $ - $ 50,400
=========== ==========
Services rendered $ - $ 291,600
=========== ==========
</TABLE>
See notes to consolidated financial
26
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at March 31, 2000 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, 2000. Management on June 1,
1998 placed its contract engineering division of its telecommunications
segment 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, e2 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 $11,272,000 at March 31, 2000, 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 at March 31, 2000, 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 $2,329,000 and
$745,000, respectively, and in fiscal 2000 and in fiscal 1999 incurred
operating losses of $1,271,000 and $2,978,000, respectively. In fiscal
2000 and 1999, these segments had a combined negative cash flow from
operating activities of $3,609,000 and $6,782,000. The Company's
primary source of cash has been the sale of its securities to and loans
from a stockholder.
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.
The substantial operating losses of the Company's operating
segments incurred through and subsequent to March 31, 2000, 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. Management is making every
effort to reverse these trends by the hiring of a new President/CEO and
appointing a new Vice President as head of sales to implement a
turnaround of the Company's businesses. New management will continue
efforts to reduce the operating costs of the Company's existing product
lines and seek to expand into less costly, more profitable products and
services. These efforts will, however, require increased working
capital infusions. At present the Company's sole source of financing is
from a stockholder. Management cautions that there can be no assurances
that these efforts will be successful or that the stockholder will
continue to provide financing or that alternative source of funds will
be available for management to implement its plan.
27
<PAGE>
NOTE 2 - BANKRUPTCY PROCEEDINGS - CHAPTER 7.
On June 1, 1998, management filed a petition for its wholly
owned subsidiary, e2 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"). e2
Electronics, Inc. sought to have the court liquidate its assets and
disburse the proceeds therefrom to its creditors for which the Court
appointed Trustee. The accompanying financial statements include the
results of operations of e2 Electronics, Inc. until the date of the
Chapter 7 filing. The results of operations of e2 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 entity in 1999
sold these net assets to another of the Company's subsidiaries for the
same amount as its successful bid.
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 e2
Inc. in exchange for 5,710,000 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 acquisition transaction is
being accounted for as a recapital-ization at historical cost of Elgin
e2 in a manner similar to a pooling of interests. In January 1998, the
Company changed its name to Elgin e2, Inc. and later to Elgin
Technologies, Inc. Simultaneously, Elgin e2, Inc. changed its name to
e2 Electronics, Inc.
e2 Electronics, Inc. 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. e2
Electronics, Inc. commenced operations in April 1994 with its
acquisition of the net assets of Charter Technologies, Inc. from a
United States Bankruptcy Court appointed Trustee. e2 Electronics, Inc.
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.
28
<PAGE>
NOTE 3 - DESCRIPTION OF BUSINESS. (Continued)
e2 Electronics, Inc. on July 10, 1996, acquired all of the
capital stock of Ascom Warren, Inc. ("Warren") in a transaction
accounted for as a purchase. e2 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.
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 the consideration paid to the sellers of
CSC exceeded the fair value of the remaining net assets acquired by
$300,000 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, 2000 and for the two years then ended include the accounts of the
Company and its wholly-owned subsidiaries except for e2 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 and 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.
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.
29
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
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.
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.
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 that at times may be in excess of
the FDIC insurance limit.
Agencies of the U.S. government accounted for 13% and 14%
sales in fiscal 2000 and 1999, respectively. Another customer accounted
for 14% and 13% of sales in fiscal 2000 and 1999, respectively. A third
customer who accounted for 18% of sales in 2000 was less than 2% in
fiscal 1999. Although 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, Three customers at March 31, 2000
accounted for 15%, 14%,and 13% of accounts receivable. At March 31,
1999, agencies of the U.S. government accounted for 24% (3% at March
31, 2000) and another customer accounted for 33% (10% at March 31,2000)
of accounts receivable. Additionally, the Company's segments have an
allowance for doubtful accounts of $90,000, $90,000 and $100,000 as at
March 31,2000, 1999 and 1998, respectively. The Company's discontinued
contracting operations required an allowance for doubtful accounts of
$100,000 at March 31, 1998. With the filing of the e2 Electronics,
Inc.'s bankruptcy proceedings, the receivables of this subsidiary were
placed in the custody of the Trustee who is responsible for their
liquidation.
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 $1,980,000
$5,231,000, and $6,847,000 at March 31, 2000, 1999, and April 1, 1998,
respectively.
Property and Equipment:
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.
30
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
Goodwill:
The cost in excess of the fair value of the assets acquired
had previously been recorded as goodwill and had been 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 arising from those acquisitions was permanently
impaired. Management determined that these business operations could
not recover the cost associated with the goodwill in the foreseeable
future and charged the unamortized portion of the goodwill to
operations at the date it became impaired. The goodwill associated with
the acquisition in April 1998 of Community Services Company was charged
to operations at the purchase date because management was unable to
determine if such costs would be recovered in the future primarily due
to the continuing 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.
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 no sales nor
orders to date of acquisition, and 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.
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 $89,000 and $30,000 in 2000 and 1999 was charged to
operations. In fiscal 1999 $65,000 of financing costs attributable to
indebtedness included in the bankruptcy proceedings were charged to
operations as incurred.
31
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
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 depreciation 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.
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.
Fair Value of Financial Instruments:
The Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
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.
32
<PAGE>
NOTE 5 - INVENTORIES.
The components of the inventories in determining the cost of
sales are as follows:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $2,290,000
Work-in-process 740,000
Finished goods 553,000
----------
3,583,000
Allowance for obsolescence
and disposal 1,980,000
----------
$1,603,000
==========
</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
$1,980,000 allowance for obsolescence at March 31, 2000 is sufficient
for the continuing operating segments to dispose of its obsolete and
excess inventory including a profit margin sufficient to cover the
future costs to dispose of these excess assets.
During fiscal 1999, the Trustee liquidated e2 Electronics,
Inc.'s operations inventory and the proceeds from such liquidation, if
any, are being held by the Trustee for distribution to the e2
Electronics, Inc.'s creditors.
NOTE 6 - PROPERTY ASSETS.
Property assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $ 59,000
Furniture and fixtures 101,300
Leasehold improvements 157,000
--------
317,300
Less: Accumulated depreciation 263,500
--------
$ 53,800
========
</TABLE>
Depreciation charged to operations in fiscal 2000 and 1999 was
$135,600 and $51,000, respectively. During the year ended March 31,
2000, 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 $109,000. Management and the landlord subsequently agreed to
allow the Company to remain in its facility until April 2000 at which
time the Company moved to its new leased facility in Amherst, N.H. (See
Note 11).
33
<PAGE>
NOTE 7- FINANCING.
Revolving Lines of Credit:
In November 1998, the Company entered into a revolving line of
credit with a major stockholder. At March 31, 1999, $4,225,000 was
outstanding under this facility. Through March 31, 2000, the
stockholder advanced an additional $2,500,000 under the facility which
aggregates $6,725,000 outstanding at March 31, 2000. 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 $973,000 and $179,000 is outstanding at March 31,
2000 and March 31, 1999, respectively, which is included in due to
affiliates in the accompanying financial statements. The average
outstanding debt under the facility was $6,325,000 and $1,317,000
during fiscal 2000 and 1999, respectively. Interest charged to
operations was $794,000 in fiscal 2000 and $179,000 in fiscal 1999 at
an average interest rate of 15%. The outstanding principal and accrued
interest thereon are collateralized by all of the Company's assets.
Warren and Logic have guaranteed this indebtedness and have pledged
their assets as collateral for the outstanding principal and accrued
interest outstanding. Additionally, at the holder's option, the
principal outstanding indebtedness is 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,
and $0.10 per share for the excess over $5,275,000.
Long-Term Debt:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Acquisition note payable in annual indebtedness
of $250,000 plus interest at 10% $ 250,000
Commonwealth of Pennsylvania
Department of Commerce Bonds (i):
Machinery and equipment 359,000
Capital loan fund 29,000
ubordinated notes (ii) 919,000
onvertible subordinated notes (iii) 256,000
Other notes payable 394,000
----------
$2,207,000
==========
Portion currently payable $2,207,000
==========
</TABLE>
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 payable to the Commonwealth of Pennsylvania and certain of
the assets which the funds were used to acquire.
34
<PAGE>
NOTE 7 - FINANCING. (Continued)
Long-Term Debt (Continued):
Commencing in February 1996 through October 1996, e2
Electronics, Inc. sold securities in a private placement consisting of
10% interest bearing subordinated notes and warrants to acquire shares
of the e2 Electronics, Inc.'s common stock. No value was assigned to
the warrants. Upon the reverse acquisition by the Company of e2
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 $6,200
during 2000. The holders of the notes, aggregating $919,000 at March
31, 2000, are due interest aggregating $625,000 at March 31, 2000.
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, 2000. The notes and
accrued interest thereon aggregating $59,000 (March 31, 2000) $34,000
(March 31, 1999) are collateralized by all of this subsidiary's assets
and, at the holder's option, are convertible into the Company's common
stock at $3.00 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.
The Company is in violation of several covenants of its
various debt agreements at March 31, 2000 and 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.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are comprised
of the following:
<TABLE>
<CAPTION>
<S> <C>
Payroll and commissions $ 413,000
Vacation pay 122,000
Payroll taxes and fringe benefits 95,000
Professional fees 177,000
Interest 690,000
Warranty reserve 35,000
Other 126,000
----------
$1,658,000
==========
</TABLE>
35
<PAGE>
NOTE 9 - INCOME TAXES.
The components of the provision (benefit) for income taxes
are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
-------------------------------
2000 1999
--------- --------
Currently payable:
<S> <C> <C>
Federal $ -- $ --
State and local 10,000 8,000
--------- --------
$10,000 $8,000
========= ========
Deferred:
Federal $ -- $ --
State and local ( 10,000) ( 8,000)
--------- --------
($10,000) ($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,
-----------------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Net operating loss carryforward $ 8,993,000 $6,809,000
Inventory obsolescence allowance 614,000 1,751,000
Allowance for doubtful accounts 299,000 294,000
Intangible assets 963,000 1,017,000
Other 47,000 47,000
------------- ------------
10,916,000 9,918,000
Less: Valuation allowance ( 10,916,000) ( 9,918,000)
------------- -------------
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.
36
<PAGE>
NOTE 9 - 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,
---------------------------------------------------------
2000 % 1999 %
------------ ------ ------------ ------
<S> <C> <C> <C>
Loss before income taxes ($4,280,000) ($5,003,000)
============ ============
Computed tax benefit
at statutory rate ($1,497,000) (35.0) ($1,751,000) (35.0)
Non-deductible portion
of compensatory element of
common stock issuances:
Research and development - - - -
Compensation for services - - 102,000 2.0
Goodwill - - 105,000 2.1
Finance charges 31,000 0.7 10,000 0.2
Other 5,000 0.1 16,000 0.3
Reserve for operating loss
carryforward tax asset 1,461,000 34.2 1,518,000 30.4
------------ ------ ------------ ------
Income tax benefit $ - - $ - -
============ ====== ============ ======
</TABLE>
The net operating loss carryforwards at March 31, 2000 expire as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2010 $ 905,000
2011 1,959,000
2012 1,676,000
2013 7,444,000
2014 6,164,000
2015 7,546,000
-------------
$25,694,000
=============
</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's debt extinguishment and the
change in ownership are not reflected in the foregoing tables.
37
<PAGE>
NOTE 10 - CAPITAL.
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 fiscal 1999, 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 March 31, 2000), 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 March 31, 2000) as full payment of the Company's
obligations under the redeemable common stock's provisions. The cash
payment for the 2,460,000 redeemable common shares surrendered by the
holders was recorded as treasury stock and the $410,000 value assigned
to these securities at the time of issuance was reflected as additional
paid-in capital resulting in a net contribution to stockholders' equity
of $268,376.
Common Stock:
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 $6,725,000 at March 31, 2000 (see Note 7). This person has the
option to convert the debt outstanding at March 31, 2000 into
approximately 27,432,000 shares of the Company's common stock.
In April 1998, the Company issued 100,000 shares of its common
stock whose fair market value at date of issuance was $300,000 as
partial consideration 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 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
7) converted their outstanding loans and accrued interest into 105,950
shares (during fiscal 1999) and 1,550 shares (during fiscal 2000) of
the Company's common stock.
38
<PAGE>
NOTE 10 - CAPITAL. (Continued)
Warrants:
In fiscal 1997, warrants to acquire 1,350,000 shares of the
Company's common stock were issued to Inverness Corporation and
Menotomy Funding, LLC in connection with a loan agreement. The
exercisability and validity of these warrants are currently being
challenged by the Company. Inverness Corporation and Menotomy Funding,
LLC have initiated an action against the Company and others (See Note
11).
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 March 31,2000, 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
$1,638,000 and cashless warrants to acquire 409,395 common shares at
$4.00 per share. Through March 31, 2000, $719,000 of convertible
debentures and accrued interest have been converted into 179,700 shares
of the Company's common stock.
The Company employed the services of placement agents,
consultants and investment bankers to assist in and to 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 March
31, 2000 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 March 31, 2000. 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.
39
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES.
Leases:
As of March 31, 20000, the Company was a 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 moved to its new leased
facilities in Amherst, N.H. The new lease is for five years expiring in
April 2005. The Company also leases office facilities on a month to
month basis in Erie, PA and Leesburg, VA. Whose aggregate monthly
rental is $1,600. The Erie, PA site was vacated in May 2000.
Minimum future rental commitments under the noncancellable operating
lease at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C> <C>
2001 $147,310
2002 168,065
2003 176,100
2004 184,135
2005 192,170
Thereafter 16,070
---------
Total minimum future
rental payments $883,850
=========
</TABLE>
Year 2000:
The Company recognized 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 were immaterial. Management believes that its
software is presently compliant and the Company has not experienced any
problems associated with year 2000 issues.
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.
40
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES. (Continued)
Litigation: (Continued)
(ii) Elgin Technologies, Inc., e2 Electronics, Inc., two
former officers, 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.
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 a
former 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, 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 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.
41
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) Litigation: (Continued)
(iii) The Company and/or its subsidiaries are named defendants
or co-defendants in numerous actions with its subsidiary in bankruptcy,
e2 Electronics, Inc. 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.
NOTE 12 - 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 YEARS ENDED
MARCH 31,
---------------------------
2000 1999
------- ------
<S> <C> <C>
Net sales:
Lighting $ 35 $ -
Power systems 7,389 7,218
------- ------
$7,424 $7,218
======= ======
Operating loss:
Lighting $ 745 $1,271
Power systems 2,329 2,978
------- ------
$3,074 $4,249
======= ======
Depreciation:
Lighting $ - $ -
Power systems 136 51
------- ------
$ 136 $ 51
======= ======
Research and development:
Lighting $ 516 $1,114
Power systems 300 293
------- ------
$ 816 $1,407
======= ======
Identifiable assets:
Lighting $ 84 $ -
Power systems 3,138 4,318
------- ------
$3,222 $4,318
======= ======
</TABLE>
42
<PAGE>
ITEM 8. 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, 2000, 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.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DATE
TERM OF DIRECTORSHIP
NAME POSITION AGE DIRECTORSHIP COMMENCED
---- -------- --- ------------ ------------
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>
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
43
<PAGE>
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.
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
Light 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.
44
<PAGE>
ITEM 10. 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, 1998, 1999 and
2000:
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>
Scott Harris 2000 $ 15,577(1) None None None
President & Chief Executive
Officer
William Mosconi(2).............. 2000 126,346 None None None
1999 180,000 None None None
Chief Executive Officer, 1998 141,923(3) None None None
President & Chief Financial
Officer
Robert Smallwood............. 2000 115,384 None None None
1999 119,581 None None None
Director 1998 20,769 None None None
Gerard Mosconi(4)........... 2000 87,692 None None None
1999 120,000 None None None
Vice President of 1998 94,154 None None None
Operations, Warren Power
Systems, Inc.
</TABLE>
----------------
The Company had no other executive officers whose total annual salary
and bonus exceeded $100,000 for such fiscal years.
(1) For the period February 21, 2000 through March 31, 2000.
(2) Mr. William Mosconi resigned as of January 2000.
(3) Pursuant to his resignation agreement, Mr. Mosconi released the Company from
$128,077 of accrued but unpaid salary for the years 1997 and 1998.
(4) The Company terminated Gerard Mosconi's employment as of November 1,1999.
45
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 31, 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:
<TABLE>
<CAPTION>
---------------------------------- --------------------------------- -----------
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL PERCENT OF
OWNER OWNERSHIP(1) CLASS
---------------------------------- --------------------------------- -----------
<S> <C> <C>
Primo Ianieri
480 Rt. 9
Englishtown, NJ 07726 3,220,099(3) 6.4.%
---------------------------------- --------------------------------- -----------
Peter Bordes, Jr.
140 W. 79th St., Apt. 4B
New York, NY 10004 2,250,000 4.5%
---------------------------------- --------------------------------- -----------
Robert C. Smallwood
P.O. Box 4405
Leesburg, VA 20177 1,443,905 2.9%
---------------------------------- --------------------------------- -----------
Michael Smith
455 Grand Street
Brooklyn, NY 11211 10,000 --
---------------------------------- --------------------------------- -----------
All officers and directors
as a group (four (4) individuals) 6,924,004 13.8%
---------------------------------- --------------------------------- -----------
Horace T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247 31,082,151(4) 62.0%
---------------------------------- --------------------------------- -----------
</TABLE>
-----------------
(1) In accordance with the rules of the Securities and Exchange Commission,
amounts include shares of common stock issuable upon the exercise of options or
warrants currently exercisable, or exercisable or convertible within sixty (60)
days, and are deemed outstanding and beneficially owned for computing the
percentage ownership of the person holding such options or warrants but are not
deemed outstanding for computing the percentage ownership of any other person.
Two companies affiliated with each other claim to hold warrants to purchase
1,350,000 shares of the common stock of the Company 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 Notes to
financials note 11).
(2) [Intentionally left blank].
46
<PAGE>
(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.
(4) Includes 250,000 shares owned by Mr. Ardinger's wife. Includes convertible
notes of the Company, which as of March 31, 2000 totaled $6,725,000. $4,225,000
of the loans are convertible at any time at the equivalent price of .55/share
for a total of 7,681,818 shares; $1,050,000 of the loans are convertible at any
time at the equivalent price of .20/share for a total of 5,250,000 shares and
$1,450,000 of the loans are convertible at the equivalent price of .10/share for
a total of 14,500,000 shares. In connection with loans he has made to the
Company, Mr. Ardinger holds 534,000 warrants to purchase shares of common stock
of the Company at .55 per share and 300,000 warrants to purchase shares of
common stock of the Company at an exercise price of $3.00 per share.
CHANGES IN CONTROL
None
ITEM 12. 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 for 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 March 31,
2000, the ability to convert the principal sum of Seven Million Seven Hundred
Twenty Five Thousand Dollars ($7,725,000) in debt into equity, which would
result in his beneficial ownership of 62.0% of the outstanding shares of the
Company's common stock. As discussed elsewhere in this Form 10-KSB, 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.
47
<PAGE>
PART IV
-------
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) Items Filed as Part of Report:
1. Financial Statements
The financial statements of the Company as set forth in the
Index to Consolidated Financial Statements under Part II, Item
8 of this Form 10-KSB are hereby incorporated by reference.
2. Financial Statement Schedule
The financial statement schedule of the Company as set forth
in the Index to Consolidated Financial Statements under Part
II, Item 8 of this Form 10-KSB is hereby incorporated by
reference.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this
Form 10-KSB.
(b) Reports on Form 8-K
NONE
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES* DESCRIPTION
<S> <C> <C> <C>
3.1 10-SB Articles of Incorporation and amendments
thereto
3.2 10-SB By-Laws
9.1 10-SB 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 10-SB Voting Agreement dated as of April 1, 1998
by and among Elgin e2, Inc., Mason Cabot
Holdings, Inc., Horace T. Ardinger, Jr.,
Primo Ianieri, Peter Bordes and their
spouses.
10.1 10-SB Assumption, Payment Agreement and Amended
and
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Restated Royalty Agreement dated as of
January 25, 1996 by and between Robert C.
Smallwood and American Compact Lighting,
L.L.C.
10.2 10-SB 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 10-SB Employment Agreement dated as of December 1,
1997 by and between Robert Smallwood and
Logic Laboratories, Inc.
10.4 10-SB License Agreement dated as of April 1, 1998
by and between Horace T. Ardinger, Jr.
("Licensee"), Logic Laboratories, Inc. and
Elgin e2, Inc.
10.5 10-SB 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 10-SB Secured Revolving Credit Agreement dated as
of November 13, 1998 by and between Elgin
Technologies, Inc. and Horace T. Ardinger,
Jr.
10.7 10-SB Convertible Revolving Promissory Note dated
as of November 13, 1998, made by Elgin
Technologies, Inc. in favor of Horace T.
Ardinger, Jr.
10.8 10-SB 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 10-SB Agreement dated as of January 25, 2000 by
and between William Mosconi and Elgin
Technologies, Inc., e2 Electronics, Inc.,
Logic Laboratories, Inc., Warren Power
Systems, Inc., and William Mosconi,
concerning the resignation of William
Mosconi.
10.10 10-SB Employment Agreement dated as of February
21, 2000 by and between Jonathan Scott
Harris and Elgin Technologies, Inc.
21 List of Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELGIN TECHNOLOGIES, INC.
(Registrant)
Date: JULY 14, 2000
By: /s/ MICHAEL J. SMITH
--------------------
Name: MICHAEL J. SMITH
Title: EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
50
