UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ELGIN TECHNOLOGIES, INC
-----------------------
(Name of Small Business issuer in its charter)
DELAWARE 95-4581906
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(State or other jurisdiction of (I. R. S. Employer
Incorporation or organization) identification no.)
12 Executive Drive
Hudson, NH 03051
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(Address of principal executive offices) (Zip Code)
(603) 598-4700
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(Issuer's telephone number, including area code)
Michael J. Smith
Executive Vice President and Chief Financial Officer
Elgin Technologies, Inc.
12 Executive Drive
Hudson, NH 030451
Securities to be registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Voting Common Stock, OTC Bulletin Board
$.000833 par value per share ------------------
----------------------------
Securities to be registered pursuant to Section 12(g) of the Exchange Act:
NONE
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ELGIN TECHNOLOGIES, INC.
Table of Contents
Part I
Item 1. Description of Business..............................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................20
Item 3. Description of Property.............................................26
Item 4. Security Ownership of Certain Beneficial Owners and Management......27
Item 5. Directors and Executive Officers, Promoters and Control Persons.....29
Item 6. Executive Compensation..............................................31
Item 7. Certain Relationships and Related Transactions......................32
Item 8. Descriptions of Securities..........................................33
Part II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters ...............................35
Item 2. Legal Proceedings...................................................36
Item 3. Changes and Disagreements with Accountants..........................37
Item 4. Recent Sales of Unregistered Securities.............................37
Item 5. Indemnification Of Directors and Officers...........................38
Part F/S
Part III
Item 1. Index to Exhibits...................................................41
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PART I
Item 1. DESCRIPTION OF BUSINESS
(a) Business Development and History of the Company
The history of Elgin Technologies, Inc. (the "Company") dates back forty
years to the founding of Elgin Electronics, which, prior to its acquisition by a
subsidiary of the Company in 1994, progressed through two ownership changes and
a 1993 bankruptcy filing by its then owner, Charter Technologies, Inc.
("Charter"). Prior to its 1993 bankruptcy, Charter, doing business as Elgin
Electronics, was a well-regarded provider of custom power supplies and services
to the medical, data processing, military and industrial controls market. Elgin
Electronics' products focused on low-voltage systems in the 2 to 800 volt range
at power levels of 30 to 50,000 watts and high-voltage systems in the 1kv to15kv
range at power levels up to 10,000 watts.
On April 28, 1994, Elgin e^2, Inc. ("EEI"), a Delaware Corporation created
by the Company's former Chief Executive Officer and Chairman, acquired from a
United States Bankruptcy Trustee in Erie, Pennsylvania the net assets of
Charter. As part of that transaction, EEI assumed certain secured debt from Star
Bank, N. A., which agreed to fund EEI's operations under a revolving asset based
line of credit.
In October 1994, EEI acquired the net assets of the Erie, Pennsylvania
operations of I.S.S., a division of Comptek Research, Inc. I.S.S. was a contract
manufacturer of electronic equipment, including printed circuit boards, power
supplies and cables.
In November 1994, EEl entered into a series of agreements to acquire
certain inventory, outstanding sales orders and intangible assets of Hyperion
Power Technologies, Inc. ("Hyperion"). Hyperion designed and manufactured custom
power supplies for the electronics and telecommunications industries. EEI had
acted as a subcontractor for Hyperion prior to that transaction.
In July 1996, EEI acquired all of the stock of Ascom Warren, Inc., a New
Hampshire company and a wholly owned subsidiary of Ascom Holdings (USA), Inc.
Immediately following the acquisition, Ascom Warren merged with and became the
Warren Power Systems division of EEI. This division (which the Company
eventually transferred to a wholly-owned subsidiary) designs and manufactures
high quality DC power systems and custom power supplies for the electronics and
telecommunications industries.
In December 1996, the Company's investment bankers, Mason Cabot Holdings,
Ltd. ("Mason Cabot") formed Elgin Acquisition Corporation ("EAC") for the
purpose of acquiring the assets of a Massachusetts based contract manufacturing
company. EEI made loans to EAC of approximately $750,000, and provided labor,
materials and management services to EAC in consideration of which EEI received
an option to purchase the stock of EAC. These loans were
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written off as bad debt in fiscal 1998 when the assets of the creditors of the
affiliate foreclosed on their security interests and sold its assets.
In September 1997, EEI entered into a transaction with Cross Atlantic
Capital, Inc., a publicly traded corporation with no operations, which had been
created in May 1986, pursuant to which the stockholders of EEI became
stockholders of the Company and EEI became a wholly owned subsidiary of the
Company. Simultaneously, EEI changed its name to e^2 Electronics, Inc. and the
Company changed its name, first to Elgin e^2, Inc. and later to Elgin
Technologies, Inc.
On December 17, 1997, the Company acquired the stock of its second
operating subsidiary, Logic Laboratories, Inc., ("Logic Labs") a Delaware
corporation that was created in December 1995. Logic Labs is a research and
development company specializing in electronic ballast system design.
In April 1998, the Company purchased 100% of the stock of and merged with
Communication Service Company ("CSC"), an installation services company
specializing in the installation and maintenance of the types of telecom power
products manufactured and sold by the Company's Warren Power Systems division.
In March 1998, the Company created Warren Power Systems, Inc. ("Warren
Power"), a Delaware corporation, as a third wholly owned subsidiary. EEI then
transferred to Warren Power the assets that constituted its Warren Power Systems
division in consideration of the assumption by Warren Power of liabilities
substantially in excess of the value of the Warren Power assets.
Accordingly, as of March 1998, the Company had three operating
subsidiaries: (i) EEI, which operated the original Charter Technologies (i.e.,
Elgin Electronics) business; (ii) Warren Power, which operated the business
purchased from Ascom Warren; and (iii) Logic Labs, as well as a division which
operated the CSC installation services business.
In April 1998, the principals of Mason Cabot, formed DC&A Partners, Inc.
for the purpose of purchasing (with investor funds) Star Bank's revolving debt
facility with EEI and Star Bank's first position security interests over the
assets of EEI. In connection with that transaction, Warren Power Systems became
an additional obligor with respect to the line of credit, as well as certain
other secured obligations of EEI.
On June 1, 1998, EEI filed for Chapter 7 Bankruptcy protection in the U.S.
Bankruptcy Court for the District of Pennsylvania. In connection with that
proceeding, the court has approved the bankruptcy trustee's motion to sell EEI's
assets to DC&A.
(b) Business of Issuer
The Company has two major product lines; Master Lite Ballast Systems
(MLBS(TM)) and Telecom Power.
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MASTER LITE BALLAST SYSTEM (MLBS(TM))
OVERVIEW
The fluorescent lighting products used in today's market have remained
essentially unchanged in the past fifty (50) years. Twenty-five (25) years after
the oil embargo, the United States has given up almost all the gains realized
through energy conservation efforts during the late eighties and early nineties.
The Department of Energy reported that the lighting costs for 1997 reached a
level of $28.3 billion. The Company's dimmable electronic distributed lighting
system (MLBS(TM)) may represent the ability for substantial savings for every
energy lighting dollar.
[GRAPHIC OMITTED]
Light represents a substantial factor of commercial electrical
consumption. A wide range of initiatives and efforts in the U.S. Department of
Energy ("DOE") and National Energy Strategies has focused on commercial lighting
as a potential source of energy conservation. According to the DOE, the average
energy used to light one square foot of space per year is 6 kWh per square foot;
with MLBS(TM) the energy used could be as low as 2.1 kWh for that same space.
Lighting Energy Conservation Potential
Substantial energy savings are possible using more efficient commercial
lighting equipment and practices. Estimates of the potential savings depend
heavily on assumptions regarding the types of lamps and fixtures to be replaced,
the effectiveness of various lighting conservation measures, and how strong a
lighting level is to be maintained. The savings estimates under various
assumptions span a wide range, from under 30 percent to nearly 80 percent of
current use (Figure ES1).
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o Savings from Compact Fluorescent Lamps: Converting all incandescent bulbs
(the typical screw-in type) to compact fluorescent lamps with reflectors
is estimated to save close to 30 percent of current (1986) energy use for
commercial lighting.
o Savings Without Compact Fluorescent Lamps: Even greater savings can be
achieved without using any compact fluorescent lamps, but converting all
lamps and fixtures to the most efficient version of the same type
(fluorescent, high-intensity discharge, or incandescent), together with
lighting control devices.
o Savings from Comprehensive Improvements: Universal replacement of lamps
and fixtures by more efficient equivalents, together with lighting
controls, could save as much as 72 percent of current commercial lighting
energy use. The replacements for this case include the better of the
previous two cases. If, in addition, lighting levels are reduced by 25
percent, the total savings could reach nearly 80 percent.
[GRAPHIC OMITTED]
Current Fluorescent Lamp Ballast Market Position and Outlook
Fluorescent lamps and ballasts were first commercially introduced into the
U.S. market in 1938. Since then, fluorescent lighting has slowly gained
dominance in the commercial and industrial lighting market. Today, the use of
fluorescent lamp ballasts is standard practice in most commercial and industrial
facilities. It is estimated that there are approximately 2.3 billion commercial
and industrial lighting fixtures in the U.S. today. Relatively inefficient core
and coil ballasts operate approximately 52%, or 1.1 billion fixtures.
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[GRAPHIC OMITTED]
The Company estimates that each of these 1.1 billion lighting fixtures
consumes approximately 784 kWh of electricity per year and contributes 196 watts
to hourly peak electric demand (assumes 4,000 hours of operation per year). If
standard hybrid ballasts replaced these magnetic ballasts, hourly energy demand
could be cut by 40 watts and annual energy savings would be 224 kWh per year,
per fixture. If all 1 billion fixtures were retrofitted with hybrid electronic
ballasts, these power savings would translate into lowering of national peak
electric demand by 38,400 mw, and energy usage would drop by 215,000 gWh per
year. Savings associated with this reduction would equate to $27.5 billion per
year. The resulting reduction in demand would forestall the need for sixty-four
1,000 mw coal-fired power stations at an initial cost of over $64 billion.
[GRAPHIC OMITTED]
In the late 1980's, electric utilities, faced with rising costs and
pressure from conservation groups, began to adopt lighting conversion programs
to replace inefficient magnetic ballasts. Immediately, the demand for electronic
ballasts skyrocketed and continues to increase today. The United States
Department of Commerce census shows that electronic ballasts sales during the
first
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half of the 1990's grew at a compound annual rate of approximately 70%.
Conversely, magnetic ballast sales have risen at a compound annual rate of less
than 1%.
While utility conservation programs in the late 1980's created the initial
market impetus for electronic ballast sales, regulatory changes implemented in
1992 are driving electronic ballast sales to new heights. Specifically,
regulation mandating lamp changes (and consequently ballast changes) is
projected to force sales of electronic ballasts to grow at an annual rate of 10%
to 18%. The market opportunity appears extremely strong with current electronic
ballast manufacturers unable to fully meet demand.
o U.S. sales for electronic ballasts are approximately $600 million
and growing rapidly; projected to be at $650 million in 1999 and
over $800 million by the year 2001.
o International market opportunity is projected to be 10 times as
large.
Market Trends and Drivers
The U.S. fluorescent lighting market, and consequently the ballast market,
has been historically driven by capital costs. Electricity costs in the U.S.
have historically been low, so energy costs have not factored heavily in the
buying decisions for ballasts. Further there has existed a disjunction between
the motivations of builders and owner/operators. A building owner is more
interested in the initial costs of a building than in the operating costs. Low
cost magnetic ballasts (costing approximately $8) versus high efficiency
electronic ballasts (costing approximately $20) would save the developer of a
one million square foot building (assuming 1 ballast per 100 square feet of
floor space) approximately $120,000. However, the building owner could save
$172,180 per year (224 kWh savings X 10,000 electronic ballasts X 7.7 cents/kWh)
if more energy efficient ballasts were installed.
The incentive to install low initial cost, high operating cost ballasts
versus more costly, higher efficiency ballasts is changing as a result of:
o Deregulation and increased competition forcing electric utilities to
become active in promoting the purchase of higher efficiency
ballasts
o Energy service companies ("ESCO's") and retrofitters are seeing
significant profit opportunities in replacing existing ballasts with
higher efficiency ballasts
o State and federal agencies are mandating energy efficiency in new
and existing lighting fixtures
o Consumers are becoming more aware of energy costs and demanding more
energy efficient lighting in their buildings
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Utilities
In the early 1980's, many electric utilities experienced generating
constraints and rising electricity production costs. As a result, Public Utility
Commissions ("PUC's") in New England, California and Wisconsin were the first to
require utilities to implement Conversion and Load Management ("C&LM") programs.
These programs directed utilities to promote the replacement of inefficient
lighting, heating and cooling equipment. It was expected that these programs
would lower electricity demand as well as the need to increase generating
capacity.
Since lighting accounts for roughly 40% - 50% of the electric bill for
commercial accounts, lighting programs were typically the first conservation
programs to be launched. Because magnetic ballasts are so inefficient, ballast
replacement programs were incorporated into their initial conservation programs.
Such programs provided a quick and dependable payback for utilities, and
consequently, such programs flourished.
C&LM programs have had significant impacts on the demand for electronic
ballasts. A report conducted by Arthur D. Little for Northeast Utilities
concluded that utility programs created actual shortages in electronic ballasts
in the early 1990's.
ESCO's
Energy Service Companies were created in response to the rise of
utility-sponsored energy conservation programs. Energy service companies make it
simpler and less troublesome to execute a retrofit. Energy conservation programs
typically required consumers to replace or retrofit existing equipment in order
to receive utility subsidies. To fill the increased demand for this type of
work, entrepreneurs created energy service companies to perform the task of
replacing all or part of installed lamp fixtures. The process of retrofitting
typically entails replacing the entire lamp fixture which contains two ballasts
and four T12 lamps, with one electronic ballast and two or three T8 lamps. Most
industrial and commercial end-users retrofit part or all of their buildings to
capture energy savings and/or upgrade existing equipment.
ESCO'S typically contract with industrial or commercial end-users to
evaluate energy consumption, make recommendations for energy savings and install
energy efficient equipment. Many of these companies have employed unique
techniques to attract business and reap profits. For instance, they are willing
to work on a contingency basis and are paid a percentage of their customers'
energy savings. As a result, they have increased the demand for electronic
ballasts.
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Federal and State Programs
Federal and state governments are becoming more active in promoting and
maintaining demand:
o The Environmental Protection Agency ("EPA") is promoting energy
efficiency for environmental reasons, particularly in regard to
global warming. For example, the EPA Green Lights Program encourages
Fortune 500 companies to install energy efficient lighting in return
for media exposure and other public relations benefits.
o The U.S. Department of Energy continues to research new technologies
and is increasingly under pressure to make conservation an integral
part of the National Energy Strategy.
o The U.S. Congress passed the "National Appliance Conservation
Amendments of 1988" which stipulated that only energy efficient
ballasts, including some magnetic and all electronic ballasts, could
be manufactured after 1990.
o The Federal Energy Management Program requires all federal buildings
to convert to energy efficient ballasts within two to three years.
Considering that there are roughly 500,000 federal buildings with
annual lighting related energy costs of more than $700 million, this
law could have a major impact on the demand for electronic ballasts.
o The 1992 Energy Policy Act was enacted to "save consumers money
through reduced energy expenditures and improve the international
competitiveness of the United States economy". Toward this end,
congress established limitations on the types of fluorescent lamps
produced. Most of the inefficient fluorescent lamps in use today
(commonly referred to as T12 lamps) went out of production on April
30, 1994. These lamps are being replaced or retrofitted with
electronic ballasts and energy efficient T10 and T8 lamps. The EPA
also set minimum requirements for ballast efficiency.
Consumer Awareness
Environmentalism has increased the demand for energy efficient and
environmentally friendly products, including energy efficient ballasts. For
example, "Energy User News", which targets issues relating to energy management,
discovered in a survey that almost 80% of end users rate energy savings as the
main driver in their decision to upgrade or replace existing lighting systems.
The survey further indicated that advanced lighting technologies have become
mainstream choices for end users, with only 38% responding that they would use
incandescent lamps in their lighting systems. The following are other major
findings in this survey:
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o 89% of all users surveyed intended to buy electronic ballasts
o 79% of users intended to upgrade existing lighting systems to energy
efficient "T8" lamps
o 29% of surveyed users would seek utility program rebates to help
fund their projects
o 18% of users intended to buy high power factor ballasts; 15% would
buy high output ballasts; 13% would purchase reduced harmonic
ballasts.
Product Overview
The lamp ballast is a critical element in the efficient operation of a
fluorescent light. Ballasts typically perform two primary tasks in a fluorescent
light: 1) power control conditioning, filtering and voltage transformation and
2) lamp control for both starting and continuous operation. Traditionally, these
tasks have been performed together by a magnetic ballast in an approximately 2"
x 12" box weighing about 2 to 6 pounds.
Magnetic ballasts have been optimized, but at their best they present
serious problems in noise, efficiency and regulation. Furthermore, their poor
power factor limits the ability of the power utility to drive real power. In
recognition of the seriousness of the disadvantages of the magnetic ballasts,
the 1990 National Appliance Energy Conservation Act ("NAECA") required all
ballasts for commercial fluorescent lighting systems to have efficiencies
greater than or equal to those of energy efficient magnetic ballasts. This
legislation effectively banned the use of a majority of magnetic technology for
new lighting applications.
To fill the void, the ballast industry has replaced the heavy magnetic
ballast with solid state electronic units. This electronic circuitry converts
the input AC voltage to a high voltage DC level using high frequency switching
to boost the voltage while correcting the power factor. The DC is then converted
back to high frequency AC avoiding noise and raising the light emission of the
lamp for a given power input.
The overall failure rate of existing electronic ballasts is higher than
the rate of core and coil ballasts. This is a result of two factors: 1) hundreds
of dependent components - if one fails, the entire ballast fails; and 2)
attempts to lower total ballast cost through lower grade components (which fail
more readily), increasing ballast failure rates.
Despite poor reliability, inefficient design, and high cost, electronic
ballast manufacturers have not been able to expand production quickly enough for
demand. Electronic ballasts, despite their failings, have provided significant
value to consumers through low total life cycle costs and enhanced lighting
quality. Lighting engineers, building owners, and newly formed ESCO's have
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embraced the technology and are rapidly replacing existing magnetic ballasts
with electronic ballasts.
Master Light Ballast System(TM). The mission of the Company's Logic Labs
subsidiary has been to develop a product that could improve existing ballast
designs and become the benchmark for all future ballast products. After years of
diligent research and design, Logic Labs has not only developed an improvement
to existing ballasts, it believes that it will develop a revolutionary system
that may represent a quantum leap in ballasting. Logic Labs technology moves
away from traditional ballast design by separating power control and lamp
control. The Company believes that this approach may result in a product that
will no longer be simply a ballast, but a power distribution system which will
out-perform every existing ballast in efficiency, reliability, flexibility and
power quality at a cost below that of core coil magnetic ballasts.
The Company engaged the Economics Resource Group, Inc. to evaluate the
market potential of the MLBS technology in the fluorescent light industry. The
results indicated a major market potential for the MLBS technology and with a
favorable report against competition in today's fluorescent lighting industry.
See Exhibit 15.1 attached hereto.
Dimming is provided as a standard feature at no additional cost. The
drivers sense the output of the "master" and dim as commanded by the customer's
control(1) of the "master". This unique patented approach requires no additional
wiring other than adjustment control and can be retrofitted into existing
systems.
Logic Labs is developing innovative features related to energy management
as add-on components to the base MLBS(TM). These features include daylight
harvesting, occupancy sensing and in process lamp usage monitoring. Some "high
end" ballasts presently offer these features as separate components, but at a
wholesale price of more than 100% over the cost of the ballast. The Company
believes that Logic Labs' MLBS(TM) is able to provide these features at a
fraction of the competitors' cost, thereby further increasing energy savings.
Competition
Virtually every ballast manufacturer in today's marketplace has built its
business by developing and delivering a large array of ballasts for the
fluorescent lighting industry. The Company plans to make one of the primary
attributes of the MLBS(TM) technology the ability to address a wide range of the
fluorescent lighting industry's needs with a multi-purpose distributed dimmable
electronic lighting system.
The present design allows MLBS(TM) to give the customer the freedom and
flexibility to attain their desired lighting using its distributed dimmable
electronic lighting system. The multi-facet features of the MLBS(TM) allow the
customer to realize significant energy savings by utilizing the
- - ----------
(1) Customer control of the "master" can be manual, digital or analog.
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dimming and daylight harvesting features of the system; maintain constant
desired lumen outputs per lamp as needed in each workplace environment and
realize low harmonic distortion of less than 3%.
Historically, fluorescent industry lighting users were required to select
a specific ballast for a specific need or application. When the MLBS(TM)
distributed dimmable electronic system is fully developed, the Company believes
that the customer may be able to realize all attributes at a market competitive
price with competition's best in class product.
Logic Lab's competitors vary depending upon specific focus and overall
fluorescent lighting needs. Motorola, Magnetek and Advance Transformer are
primary competitors with Sunpark, SLI and Howard as secondary competitors.
Patents
The Company has developed a network of interrelated patents, which cover
the various configurations of the MLBS(TM) technology. To date, the Company has
been granted three patents. The Company is in the final application process for
two additional patents.
Future Opportunities
The Company plans development efforts, which may include international
expansion, new product launches and product expansions. The Company holds
international patent protection for the MLBS(TM) in the European community,
Korea and Canada. When fully developed, the Company believes that the system
will be so flexible that it may be able to operate in virtually any foreign
electric system without redesign. The Company projects the foreign fluorescent
lighting market to be ten (10) times the size of the U.S. market.
The Company also intends to launch as a new product MLBS(TM) with
integrated energy management. Given the centralized power control of the
MLBS(TM), the system could be ideally suited for advanced energy management and
control. The Company has developed a patented approach to dimming control for
light output. Current testing reveals that this feature enables light output
dimming below 40% normal output. Further dimming capability raises the wholesale
cost of the ballast substantially with diminished savings. The Company expects
its dimming control to increase costs by no more than 10% to 20%.
The Company plans to attempt to expand MLBS(TM) to applications outside
the fluorescent lighting industry such as the neon lighting industry,
transportation including automotive, avionics and shipbuilding and the high
intensity gas tube lighting market such as metal halide, argon and sodium.
The Company is also attempting to develop the ability to place the lamp
driver inside the lamp. This technology would allow the Company to provide a
substitute technology for use of compact fluorescent, one of the highest margin
and fastest growing markets in lighting today. Compact fluorescents were
designed to replace inefficient incandescent lights at a cost of
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approximately $15 - $20 per lamp. By placing the lamp driver inside the lamp,
the Company can increase energy efficiency by 30% - 35% and reduce harmonic
distortions by up to 90%. Such features could allow the "inside the lamp"
technology to replace incandescent lighting.
Fluorescent Lamp Ballast Competition
From an energy savings standpoint, the Company believes that, when fully
developed, MLBS(TM) may far exceed core coil magnetic ballast competition.
Assuming 4,000 hours of annual operation, it is anticipated that the MLBS(TM)
system will typically require as little as 280 kWh of electricity while other
ballasts require from 344 kWh to 784 kWh to produce the same light output.
Benchmarking to a magnetic core and coil ballast which would cost approximately
$60.36 per year to operate, electronic ballasts (standard and high light output)
create a cost savings of $27.27 to $30.55. However, the Company believes that
MLBS(TM), when fully developed, will create an annual cost savings of $38.80,
which would exceed other electronic ballasts by $8.25 to $11.53 per year, or
18.7% to 29.7% annual cost savings.
TELECOM POWER
Overview
The telecommunications power market is changing dramatically. This change
is taking place within the central offices of telephone companies and cellular
networks, as a result of the introduction of PCS (or Personal Communications
System) and the development of the "information superhighway". Overall, the
telecommunications power market is moving toward lower power requirements. The
existing central office infrastructure, which consists of very large power
plants, is changing. With telecommunications equipment requiring less power,
many of these power plants are now being downsized to much smaller plants or are
being retired totally. The RBOC's (or Regional Bell Operating Companies) are
also downsizing their power staffing, which requires equipment that is easier to
maintain. With the rapid growth in cellular telecommunication, smaller power in
much higher volume is required. These companies are faced with not having an
abundance of space or large maintenance staffs like the RBOC's. Cellular
companies need compact equipment that is modular in design allowing for easy
maintenance. Requirements include small power supplies that are deployed
throughout the network which power various types of equipment. PCS is the newest
area and is still being defined. The general requirement will be for very small
power supplies and systems. The chart below indicates the range of power
supplies by size and market segment.
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<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
48V/24v Cellular PCS Fiber Central Office
===============================================================================================
<S> <C> <C> <C> <C>
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 is made up of
individual components and total systems. Components must be compatible with the
individual power system, and each power system must meet the specifications of
the customer's network needs. Many of the small systems are either incorporated
into the customer's system/product or are standalone and support their remote
equipment. These systems include the following: rectifiers, batteries,
monitors/alarms and power distribution devices. Industry trends and projections
point to rapid growth in the cellular, PCS and fiber telecommunications market
over the next decade.
Market Trends
A telecommunications power plant is a fully integrated power system used
in telephony applications. It can be located in either the central office, an
outside plant with a controlled environment, or at the point where PBX service
is received at the client site. The DC power boards and DC systems used in power
plants are comprised of several individual components. A typical power plant
consists of five (5) subsystems: AC distribution, rectifiers and inverters,
controllers, batteries and DC distribution. Those components specific to the
business of the Company's Warren Power subsidiary include rectifiers, converters
and inverters. Rectifiers convert the AC voltage into the DC voltage, DC-to-DC
converters take DC input voltage and reduce voltage levels for specific
applications, and inverters convert DC voltage back to AC. A broadband power
plant is similar to a telecommunications power plant in that power condition
equipment is supplied to a central location for broadband communications system.
These systems include CATV, RBOCs, cellular and PCS.
While the U.S. market for power plants is diminishing at the central
office, it is growing in other areas of the world. As central offices abroad
convert from analog to digital and reorganize power distribution and equipment,
the efficiency of older power plants is in question. In addition, as demand for
power increases, the interest in efficient, compact modular units increases. The
objective is to increase the reliability of the central office by upgrading
analog systems to digital
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based equipment, increasing power quality and reducing cable congestion. Market
opportunity exists in Latin America and the Far East and is growing at an annual
rate of approximately 20%.
The greatest growth area for power plants is the PCS industry as this is
the technology of the future in personal communications. CATV and cellular
applications will also be major growth contributors. Currently, CATV providers
entering the telecommunications market must meet the increased demands placed on
telephone companies for reliability. This translates into increased demand for
back-up power provided by power plants. A high level of interest in this
industry is evidenced by the investments made by COX, Comcast, TCI and Time
Warner. Further, the increase in both cellular communication use and product
demand will lead to more complex product offerings and an increased need for
power supplies. The market in Latin America is virtually untapped, indicating a
vast opportunity for growth.
The U.S. market for converters is $25.5 million while foreign market
penetration has been quite low. In 1995, exports represented just 14% of total
U.S. production. Even though most converters are supplied nationally, these
levels indicate tremendous opportunity if pricing is targeted. Given the fact
that foreign markets offer opportunities to suppliers around the world,
competition is tight. The U.S. market for inverters is growing and is expected
to keep pace with the overall communications power industry. The foreign
opportunity for inverters is similar to that of converters. The U.S. market for
rectifiers is $166.1 million. Here too, there is little foreign trade. Imports
totaled only 10% of production of U.S. consumption. In this case, foreign
exports provide a greater market potential for suppliers. Currently, U.S.
suppliers are shipping over 30% of their product abroad.
The U.S. market for these power components is supplied according to a
two-tier system. On the first tier, producers generally ship units to end-users,
distributors, contractors and Value Added Resellers ("VAR's"). The distributor
is the primary point person on the second tier. In this case, the distributor
will ship products to the end-users, contractors and VAR's. On both levels, the
majority of shipments are made directly to defined end-users such as OEM's
manufacturing complete systems or private customers buying components that will
be installed by independent contractors.
Product Overview
The telecom power systems and components of the Company's Warren Power
subsidiary are a composite of products from Elgin and Warren Power Systems with
combined industry brand-name recognition of more than 80 years and are designed
to be integrated into the energy subsystems which power communications systems.
The telecom power business services the OEM, Central Office, Customer
Premise/PBX, Cellular, Microwave, Fiber Optic and Government Telecommunications
markets with four basic product categories.
Proprietary Power Products include battery chargers, eliminators, key
system power supplies, ringing generations, converters, inverters, rectifiers
and fuse panels. Most communication systems are designed to operate from a
single DC Input or "rectifier", the purpose of which is to
16
<PAGE>
provide a continuous supply of DC power to the system at a highly regulated
voltage under a variety of input and output conditions. The three technologies
by which the output voltage is regulated are: 1) Linear or thyristor, 2)
Ferroresonant, and 3) Switch-Mode. Warren Power offers a number of 48V and 24V
Controlled Ferro-Regulated (CFR) units at a variety of output current levels.
Further, Warren Power has introduced a new Switch-Mode Rectifier (SMR) to meet
the rising demand for higher power densities in telecommunication applications.
Key system power supplies support the business telephone equipment market, i.e.
key telephone system/PBX phone equipment.
While most telecommunications power plants operate from a single DC input
voltage, auxiliary power requirements exist for other DC voltages as well as to
replace commercial AC power during an outage. The conversion hardware performing
these functions are called converters (i.e., they convert one DC voltage to
another), and inverters (which convert a source of DC power to AC output).
Ringing generators that produce and control the various signaling sources (i.e.
busy signal, dial tone, etc.) are considered part of the telecom power market.
Ringing generators are virtually identical to inverters from a functional
standpoint, being powered from a DC source and producing an AC sine wave output.
Warren Power offers a full line of ringing generators as well as a combination
key telephone power supply and ringing generator system.
Engineered Power Distribution Systems include 24V and 48V, 50 to 4000 amp
power board systems as well as microprocessor controlled remote monitor and
control systems. Warren Power's standard power boards feature microprocessor
controlled battery chargers and convert AC power to the DC power needed for
telecommunications switching (central office) systems. The systems also provide
other features that monitor and control critical operating parameters in order
to protect the telecommunications switching equipment.
Access Products include voice and data couplers. The access products
consist of a line of protective devices registered with the FCC that are
required when connecting unregistered equipment to a telephone line. The data
couplers are used in conjunction with computers, data terminals and point of
sale ("POS") terminals that send data via modem over telephone lines. The voice
couplers provide the requisite protective functions for unregistered answering
machines, dictation equipment and multi-trade voice recording equipment.
At the outset of the FCC Equipment Registration Program initiated under
Part 68 of the FCC Rules, the market for such registered couplers was quite
lucrative since equipment manufacturers sought an interim solution that would
permit continued sales of unregistered products. More recently, most OEM's have
incorporated the required protective functions into their products and
registered them with the FCC. Thus, while the market has declined significantly,
there remains a residual demand for the OEM sector as well as a replacement
market in the end-use segment.
Installation and Service. CSC, the Company's engineering and installation
division installs power systems manufactured by Warren Power and other
manufacturers that meet all RBOC standards. The Company's staff of senior
engineers and technicians provides domestic and international installation and
full detailed engineering services.
17
<PAGE>
Competition
The competition in the power supply segment of the telecom market is
substantial, dominated by large companies such as AT&T, Lucent Technologies,
Northern Telecom and Lorain. These companies have enormous capital resources
that provide them with a substantial advantage over smaller vendors. In
addition, smaller companies such as Power Conversion Products, PECO II, Argus
and LaMarche provide additional direct competition to the Company. Management
believes that the overall size of the market provides substantial opportunities
and that the Company's product offerings and service capabilities will allow it
to successfully define its niche.
The Company's customer base includes a wide variety of manufacturers of
telecommunications equipment, computers, medical equipment and industrial
controls. The customer list also includes some of the regional telephone
operating companies, defense contractors, U.S. government agencies, public
utilities and independent cellular operators.
The Company currently has no publicly announced new product or service.
The Company's business is subject to significant competition. The
Company's products and capabilities are designed to serve two distinct markets.
These are telecommunications power and custom power conversion. The following
sections describe the competitors under each market segment.
Telecommunications Power
As a relatively small company with very large competitors, customer
service is essential to the success of the Company's business plan. The Company
must be able to deliver quality product quickly, provide flexibility to the
customer and maintain a full service offering. The major manufacturers of
telecommunications power equipment engaged in competition within the U.S. market
are AT&T Energy Systems (Mesquite, TX) and Lorain Products (Lorain, OH), which
maintain a combined approximate market share of 60%.
Custom Power Conversion
The Company's brand names and product lines have been leading elements of
the custom power conversion manufacturing business since the mid 1960's. The
keys to success in this business are the abilities to deliver the
electrical/mechanical design, gain prototype approval and move the product
through production to delivery, all within a minimal lead time. The major
national and regional competitors in the custom power supplies industry are
Zytec (Eden Prairie, MN), ITT Power Systems (Tucson, AZ), Acme Electric (Cuba,
NY), AT&T Energy Systems (Mesquite, TX), Preferred Electronics (Westfield, MA)
and Technipower (Danbury, CT).
18
<PAGE>
The Company procures electronic components, metal work, sub-assemblies and
other raw materials utilizing a state of the art materials requirement planning
system that ensures timely purchase of materials in order to meet production
schedules and promised customer delivery dates. The Company relies heavily on
external sources of supply and, for most components, has developed multiple
commercial sources, including large and small distributors and OEM's. Passive
electronic components are readily available through any of the large
distributors within short lead times. For active electronic devices,
availability varies, with most items readily available and a limited number of
components available only from a single source of supply due to allocation or
short supply. While delays in delivery of such single sourced critical
components could cause deferment of planned production and delays in shipment of
certain products, the Company attempts to identify acceptable alternate
components or makes purchase arrangements through brokerage firms that
specialize in locating difficult to find electronic items. The Company believes
that the loss of any single source of supply would not materially affect the
Company's business.
Two customers accounted for 44% (31% and 13% respectively) of accounts
receivable as of March 31, 1999. Sales to these major customers amounted to 20%
(9% and 11% respectively) of total sales for the year ended March 31, 1999. No
individual customer amounted to greater than 9% of total sales for the year
ended March 31, 1998. For the nine months ending December 31, 1999 and 1998,
sales to major customers amounted to 47% and 25% respectively.
The Company's Telecom Power business does not currently own any patents,
trademarks, licenses, concessions or franchises that are of any material value
to its business, now or in the future. The Company is not party to any royalty
or labor agreements.
Products manufactured by the Company generally do not require any
government approval. Products sold to agencies of the U.S. government (i.e.,
military, FAA, etc.) require adherence to certain specifications in the normal
and ordinary course of manufacture.
There exists no known current or pending government regulation that would
either impede or enhance the operations of the Company.
The Company's operations do not use, consume or generate any hazardous or
environmentally dangerous materials. As a result, minimal costs are incurred in
the compliance with Federal, State and local environmental laws.
As of March 1, 2000, the Company employed a total of sixty-seven (67)
employees, all of which are full time employees. None of these employees is
covered by a collective bargaining agreement. The Company believes that its
labor relations are good.
19
<PAGE>
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included herein.
Forward Looking Statements and Certain Risk Factors
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward-looking statements that may be deemed to have been made in this Form
10-SB or that are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in the Form 10-SB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors that may affect the Company's results
include, but are not limited to, the Company's lack of profitability, its
dependence on a limited number of customers and key personnel, its ongoing need
for additional financing and its dependence on certain industries. The Company
is also subject to other risks detailed herein or which will be detailed from
time to time in the Company's future filings with the Securities and Exchange
Commission.
Risk Factors
Going Concern; Operating Losses and Cash Flow Shortages
The Company does not have available working capital to market its products
effectively. As a consequence, sales have significantly decreased and it is
expected that sales will continue to be adversely affected. There exists a
substantial risk that the Company will be required to curtail or discontinue its
current business operations.
Since EEI commenced operations in 1994, the Company and its subsidiaries,
have produced losses in each year and had an accumulated deficit of $35,499,000
at March 31, 1999. Through the nine (9) months ended December 31, 1999, the
Company has continued to experience losses of $3,898,000 on revenues of
$5,427,000. The continued research and development efforts to bring MLBS to
market, along with the capital needed to rebuild the telecom power and
conversion businesses, were the major contributors to the accumulated losses.
The Company and its subsidiaries have experienced cash flow constraints
throughout their operating history, resulting in lower orders and decreased
margins. The Telecom Power business
20
<PAGE>
has been negatively impacted in its efforts to turnaround and expand,
principally by the Company's history of lack of working capital, restructuring,
consolidations and substantial operating losses. Management is making every
effort to reverse these trends by reducing the operating costs of the Company's
existing product lines and seeking to expand into less costly, more profitable
products and services. These efforts will, however, require increased capital
infusion and Management cautions that there can be no assurances that these
efforts will be successful.
Even though the Company is in the process of bringing MLBS to market,
there can be no assurance that the Company will successfully complete the
product's technology or that the product and technology will gain acceptance or
that the Company will not experience adverse operating results, including, but
not limited to substantial additional losses, in the future.
Subsidiary Bankruptcy
On June 1, 1998, EEI (the Company's wholly-owned subsidiary) filed a
Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the
Western District of Pennsylvania. In connection with the bankruptcy, DC&A
Partners, EEI's largest secured creditor, purchased EEI's assets from the
Bankruptcy Court for $177,000. DC&A is a company formed by principals of Mason
Cabot, the Company's former investment banking firm. Until the bankruptcy has
been concluded, there is a possibility that the Bankruptcy Court could
invalidate certain pre-petition transactions or make other findings,
determinations or rulings that could have material adverse effects on the
Company and/or its properties.
Business Development Risks
The Company is following a business plan intended to expand its sales
efforts and market penetration along with the continued development and
marketing of the MBLS technology. Implementation of this plan will require
substantial additional capital for product development, marketing and promotion.
No assurance can be given that the Company will be successful in expanding its
current sales or distribution capabilities or developing new products that
result in increased sales and earnings or that its marketing and promotion
activities will have the intended effect of expanding sales and increasing
earnings.
Completion of Technology Development; Reliance on New Product Introductions
The ability of the Company to execute its business plan is substantially
reliant upon the completion of the development of its proprietary technologies,
including but not limited to MLBS, and the successful marketing of products
based upon those technologies. There can be no assurance that the Company will
complete this development or that such development will result in viable and/or
marketable products. The Company's failure to complete the development of its
technologies and/or market products based thereon could have a material adverse
effect on the Company's financial condition and results of operations.
21
<PAGE>
Furthermore, as a result of technological changes and developments, many
technologies are successfully marketed for only a short period of time. There
can be no assurance that (i) any of the Company's current or future products
will continue to be accepted for any significant period of time or (ii) the
market will accept the Company's new products, or if such acceptance is
achieved, that it will be maintained for any significant period of time. The
Company's success will be dependent upon the Company's ability to bring existing
products to market and to develop new products and product lines. The failure of
the Company's products and product lines to achieve and sustain market
acceptance and to produce acceptable margins could have a material adverse
effect on the Company's financial condition and results of operations.
Need for Additional Financing
The Company currently has only one major investor as its sole financing
source. There can be no assurance that this investor will continue to fund the
Company's operations. Without working capital from this investor or an
alternative financing source, the Company could be required to curtail or
discontinue its current business operations. The Company's business plan is
based upon current assumptions about the costs of its implementation. If these
assumptions prove incorrect or if there are unanticipated expenses, the Company
may be required to seek additional equity and/or debt financing. No assurance
can be given that the Company will be able to obtain such financing upon
favorable terms and conditions. Moreover, no assurance can be given that the
Company will be able to successfully implement any or all of its business plan,
or if implemented, that it will accomplish the desired objectives of product
expansion and increased revenues and earnings.
Selected Financial Data
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Years Ended
December 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,427,000 $ 4,817,000 $ 7,218,000 $ 6,980,000
Cost of sales 5,811,000 5,213,000 7,088,000 7,974,000
------------ ------------ ------------ ------------
Gross margin (loss) (384,000) (396,000) 130,000 (994,000)
Operating expenses 2,659,000 3,356,000 4,379,000 12,146,000
------------ ------------ ------------ ------------
Operating loss (3,043,000) (3,752,000) (4,249,000) (13,140,000)
Other expenses 855,000 542,000 754,000 1,602,000
============ ============ ============ ============
Net loss ($ 3,898,000) ($ 4,294,000) ($ 5,003,000) ($14,742,000)
============ ============ ============ ============
</TABLE>
22
<PAGE>
Sales
The Company had sales of $7,218,000 for fiscal 1999 and $6,980,000 for
fiscal 1998. The nominal increase in sales (3.4%) was mainly the result of
regaining stability in the business, which had been interrupted in 1998 as a
result of the consolidation of the Company's Erie, Pennsylvania and Hudson, New
Hampshire facilities. In addition, the acquisition of CSC in May, 1998 helped to
offset the loss in sales from the filing of Chapter 7 bankruptcy protection by
the Company's subsidiary, EEI in June, 1998.
Sales for the nine months ending December 31, 1999 and 1998 were
$5,427,000 and $4,817,000, respectively. The sale increase of $620,000 (12.9%)
was the continued result of regaining stability in the telecom business and the
first sales of the lighting segment's products of $24,000.
Cost of Sales
The cost of sales for fiscal 1999 and 1998 were $7,088,000 (98% of sales)
and $7,974,000 (114% of sales), respectively. Cost of sales for the nine months
ending December 31, 1999 were $5,811,000 (107% of sales) as compared to
$5,213,000 (108% of sales) for the corresponding period in the previous year.
Cost of sales, as a percent of sales experienced a reduction due to the benefits
of cost reductions and the addition of CSC installations that carried a higher
gross profit margin in fiscal 1999 and the nine months ended December 31, 1999.
The actual cost of sales increased $598,000 (11.5%) in the current nine months
period over the comparable period in 1998. This corresponds favorably to the
12.2% sales increase in the current period.
Operating Expenses
Operating expenses were down $7,664,000 (64%) from $12,146,000 (174% of
sales) in fiscal 1998 to $4,379,000 (61% of sales) in 1999. Included in fiscal
1998's operating expenses was the write-off of acquired research and development
costs in the amount of $7,901,000 associated with the acquisition of Logic Labs.
Additionally, in fiscal 1999, the Company had excess bad debt reserves resulting
in income of $110,000. In 1998, the Company wrote off $750,000 of uncollectible
loans to an affiliate. For the nine months ended December 31, 1999 and 1998,
operating costs were $2,659,000 (49% of sales) and $3,356,000 (70% of sales),
respectively. This $698,000 (21%) reduction is partially the result of
consolidation and moving costs incurred in 1998 resulting from the abandonment
of the Erie, Pa. warehouse and assembly facility as well as management's other
efforts to reduce costs. Additionally, in the nine months ended December 31,
1998, certain employees were given stock bonuses of 97,200 common shares whose
fair value was $292,000.
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<PAGE>
Other expenses
Other expenses declined $848,000 (53%) from $1,602,000 (23% of sales) to
$754,000 (10% of sales) in fiscal 1998 and 1999, respectively. Fiscal 1998
included abandonment of assets of $663,000 and restructuring costs of $50,000.
Fiscal 1999 included net intangible write-offs and amortization of $330,000 or
an increase of $171,000 over 1998. This increase is attributable to a charge to
operations for the goodwill associated with an acquisition at the time of
purchase. These increases were offset by lower interest costs in 1999 of
$320,000 (44%) from $730,000 (11% of sales) in 1998 to $410,000 (6% of sales) in
1999. The decrease in interest for the nine (9) months ending December 31, 1999
over 1998 was $474,000 (217%) due to increased borrowings from an affiliate. In
the current nine (9) months, the Company abandoned property assets of $94,000 as
compared to $14,000 in 1998. During the prior nine (9) month period the
write-off of and amortization of intangibles exceeded the current period's by
$243,000.
Executive Officers and Key Managers
On January 25, 2000, the Company's President and Chief Executive Officer,
William Mosconi resigned. From January 25, 2000 to February 21, 2000, Michael J.
Smith, a member of the Company's board of directors, served as President,
Interim Chief Executive Officer and Interim Chief Financial Officer. On February
21, 2000, the Company entered into an employment agreement with Jonathan Scott
Harris, to serve as President and Chief Executive Officer for an initial term of
two years. Mr. Smith continues as a member of the Company's board of directors,
and as the Company's Chief Financial Officer and Executive Vice President.
On February 28, 2000, the Company terminated the employment of Lewis W.
Kuniegel for cause. Mr. Kuniegel served as Vice President of the Installation
and Servicing of Tele-communications Products Division (CSC). The Company has
yet to name a successor to Mr. Kuniegel's position.
Influence by Executive Officer; Stockholders Agreement
The Company's Chairman, Primo Ianieri, beneficially owns 3,220,099 shares
of Common Stock, representing 7.6% of the Company's issued and outstanding
stock, and rights to purchase stock. As a result, Mr. Ianieri could influence
most matters requiring approval of the stockholders of the Company. Furthermore,
the Company, Mr. Ianieri and other significant stockholders of the Company are
parties to a Stockholders Agreement dated as of September 28, 1997 that
provides, inter alia, that:
(i) The Company's Board of Directors shall consist of seven (7) seats;
(ii) Three (3) of said Directors shall be selected by Mr. Ianieri and one of
which shall be Mr. Peter Bordes, Sr.(2)
- - ----------
(2) Mr. Peter Bordes, Sr. is deceased.
24
<PAGE>
(iii) The three (3) Directors selected by Mr. Ianieri shall comprise an
Executive Committee of the Board of Directors, which shall have veto power
over any proposed acquisition, merger, offering or sale of equity
securities, borrowings or other issuances of debt securities.
Copies of said Stockholders Agreement are available from the Company and the
Placement Agent.(3)
Influence by Investor; Substantially all Assets Pledged; Continued Dilution
In connection with a Secured Revolving Credit Agreement, 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 December 31, 1999,
Mr. Ardinger beneficially owns or has the right to acquire 23,082,151 shares of
the Company's common stock which is 54.7% 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. 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.
Dependence on Major Production Facilities
One hundred (100%) percent of the Company's production is located at its
facility in Hudson, New Hampshire. An interruption of that production or
transportation to and from the production facilities, by natural disasters or
other causes, would materially and adversely affect the Company's business and
results of operations. The owner of this facility recently terminated the
Company's lease and commenced an action to evict the Company from the facility.
On October 29,
- - ----------
(3) Horace T. Ardinger, who is not a party to the Stockholders Agreement, has
the right to acquire a sufficient number of shares of common stock to render the
parties to the Stockholders Agreement without sufficient voting power to
effectuate any of the covenants set forth therein.
25
<PAGE>
1999, the Company and the Landlord settled the litigation by entering into an
agreement that provides, inter alia, that the Company may continue to occupy the
facility as a tenant at will. The Company has identified and executed a lease
for an alternate facility and intends to commence an orderly transition to that
facility during 2000.
Limitation on Directors' Liabilities under Delaware Law
Under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
Absence of Dividends
The Company has paid no cash dividends on its Common Stock since
inception. The Company currently intends to retain earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future.
Item 3. DESCRIPTION OF PROPERTY
The Company's headquarters and manufacturing facility is located in
Hudson, New Hampshire in a 38,000 sq. ft., single story, brick and mortar
building, maintained in very good condition. Use and occupancy costs are
approximately $23,000 per month.
On October 29, 1999, the Company settled an eviction litigation commenced
by the owner of the facility in June 1999. The settlement provides that the
Company may continue to occupy the facility as a tenant at will. The Company has
identified and executed a lease for an alternate facility and plans to make an
orderly transition to that facility during 2000. (See Risk Factors - Dependence
on Major Production Facilities, herein above).
In addition, the Company maintains a small leased office facility
(approximately 1000 sq. ft.) in Erie, Pennsylvania where certain administrative
functions reside for the monthly rental fee of One Thousand One Hundred Dollars
($1,100).
The Company also leases a small office in Leesburg, Virginia for the
monthly rental fee of Five Hundred Dollars ($500), on a month-to-month basis.
Research and development of the MSLB product line is performed at this facility.
On February 28, 2000, the Company terminated its obligation to lease a
small office space in Saco, Maine for a monthly rental fee of Four Hundred
Dollars ($400).
26
<PAGE>
Were funds to become available for investment, it is the opinion of
management that those funds would be conservatively invested in short to medium
range savings vehicles insured by the F.D.I.C. or its equivalent. Purchases of
real estate would be limited to buildings occupied by the Company or its
divisions. The Company has no intention to invest in real estate mortgages,
non-occupied real estate or securities of any nature.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners and management.
The following table sets forth as of December 31, 1999; 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:
27
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Amount and Nature of Beneficial Percent of
Ownership(1) Class
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
- - -------------------------------------------------------------------------------------------------
Primo Ianieri
480 Rt. 9
Englishtown, NJ 07726 3,220,099(3) 7.6%
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
Peter Bordes, Jr.
140 W. 79th St., Apt. 4B
New York, NY 10004 2,250,000 5.3%
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
Robert C. Smallwood
P.O. Box 4405
Leesburg, VA 20177 1,443,905 3.4%
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
Michael Smith
455 Grand Street
Brooklyn, NY 11211 10,000 .0%
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
All officers and directors as a group
(four (4) individuals) 6,924,004 16.4%
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
Horace T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247 23,082,151(4) 54.7%
- - -------------------------------------------------------------------------------------------------
</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].
(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 December 31, 1999 totaled $5,925,000.
$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 $650,000 of the loans are convertible at the equivalent
price of .10/share for a total of 6,500,000 shares. In connection with loans he
has made to the Company, Mr. Ardinger holds 534,000 warrants to purchase shares
of 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.
(b) Changes in control
None
28
<PAGE>
Item 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Date
Term of Directorship
Name Position Age Directorship Commenced
---- -------- --- ------------ ---------
<S> <C> <C> <C> <C>
Primo Ianieri Director (Chairman)
& Secretary 65 (1) April 1994
Peter Bordes, Jr. Director 37 (1) July 1995
Jonathan Scott Harris President and Chief 43
Executive Officer
Michael J. Smith Director, Chief Financial
Officer and Executive Vice 40 (1) July 1999
President
Robert Smallwood Director 57 (1) December 1997
</TABLE>
- - ----------
(1) All members of the Board of Directors serve for a one (1) year term or
until their successors shall have been appointed.
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
Primo Ianieri, 65, co-founded the Company in April 1994. He is the founder and
sole owner of Key International, Inc., and the Chairman of the Boards of
Directors of both the Company and Key International, Inc. He is a graduate of
Lehigh University where he received a Bachelor of Science degree in engineering
and business. He received a Masters Degree in Marketing from Farleigh Dickinson
University. In 1968, Mr. Ianieri and a partner formed Key International, Inc. to
fulfill a need in the pharmaceutical and food industries whereby process
equipment could be offered on a short cycle time in order for these companies to
enter the market on an accelerated basis.
Peter Bordes, Jr., 37, became a director of the Company in 1995. In 1995, Mr.
Bordes became Principal of Mason Cabot, LLC, an investment banking and research
boutique. From November, 1994 through December 1995, Mr. Bordes was employed at
Stires and O'Donnell, Inc. Mr. Bordes also serves as a director of other
publicly held companies.
29
<PAGE>
Jonathan Scott Harris, 43, became President and Chief Executive Officer of the
Company in February 2000. Mr. Harris has extensive management and supervisory
experience in the technology sector, including oversight of marketing and sales
divisions and cost and inventory control programs. Mr. Harris is a graduate of
the Air Force Academy where he received a Bachelor of Science degree in
Electrical Engineering. Mr. Harris also holds a Masters in Business
Administration from Purdue University. Previously, Mr. Harris served as Director
of Operations for Bell Atlantic and as Vice President of Operations for Mastec,
a telecommunications and utility contractor.
Michael J. Smith, 40, became a director of the Company in March 1999, and Chief
Financial Officer and Executive Vice President in February 2000. From January
25, 2000 to February 21, 2000, Mr. Smith served as President, Interim Chief
Executive Officer and Interim Chief Financial Officer. Mr. Smith has over
fourteen years of experience in the securities industry specializing in finance
for middle market and emerging growth companies. Previously, Mr. Smith served as
an investment banker for Brill Securities, a New York investment firm, as
President of Stanhope Capital, Inc., a New York venture capital firm, and as
Managing Director of Condor Ventures, Inc. a Connecticut based venture capital
firm. In addition, Mr. Smith has served as an outside business consultant to
numerous private emerging growth companies.
Robert C. Smallwood, 57, joined Elgin as Director of Research and Development in
December 1997 when the Company acquired his company, Logic Laboratories. Mr.
Smallwood was President of Logic Laboratories and is the inventor of the Master
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.
30
<PAGE>
Item 6. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
the compensation paid to the Company's President and Chief Executive Officer and
top compensated officers of the Company for services rendered in all capacities
to the Company for the fiscal years ended March 31, 1997, 1998 and 1999:
Summary Compensation Table:
<TABLE>
<CAPTION>
Fiscal All Other
Name and Year Ended Salary Bonus Compensation
Principal Position March 31, ($) ($) Options ($)
- - ------------------ --------- --- --- ------- ---
<S> <C> <C> <C> <C> <C>
William Mosconi(1)............... 1999 $180,000 None None None
Chief Executive Officer 1998 141,923(2) None None None
President & Chief Financial 1997 90,000(2) None None None
Officer
Robert Smallwood................. 1999 119,581 None None None
Director 1998 20,769 None None None
Gerard Mosconi(3)................ 1999 120,000 None None None
Vice President of 1998 94,154 None None None
Operations, Warren Power 1997 97,846 None None None
Systems, Inc.
</TABLE>
The Company had no other executive officers whose total annual salary and
bonus exceeded $100,000 for such fiscal years.
(1) Mr. William Mosconi resigned as of January 2000.
(2) Pursuant to his resignation agreement, Mr. Mosconi released the Company
from $128,077 of accrued but unpaid salary for the years 1997 and 1998.
(3) The Company terminated Gerard Mosconi's employment as of November 1,1999.
31
<PAGE>
Item 7. CERTAIN RELATIONSHIPS AND RELATED PARTIES
(a) Related Transactions
As discussed under Part I, Items 2 and 4, and Part II, Item 4, Horace T.
Ardinger is currently the chief source of operating capital funds to the
Company. He has invested in the Company through a number of loans and stock
purchases. In connection with these loans and investments, the Company has
entered into the Ardinger Credit Documents pursuant to which Mr. Ardinger has,
as of December 31, 1999, the ability to convert the principal sum of Five
Million Nine Hundred Twenty Five Thousand Dollars ($5,925,000) in debt into
equity, which would result in his beneficial ownership of 54.7% of the
outstanding shares of the Company's common stock. As discussed elsewhere in this
Registration Statement, Mr. Ardinger holds security interests in substantially
all the assets of the Company. Mr. Ardinger also has the right to have himself
or his designee elected to one (1) seat on the Board of Directors of the
Company.
Peter Bordes, Jr., a director of the Company, is a principal in Mason
Cabot Holdings, Ltd., an investment banking firm which has arranged a series of
private placements of subordinated debt through convertible notes and cashless
warrants by the Company which raised a total of Eleven Million, Two Hundred
Three Thousand Dollars ($11,203,000). The Company is currently negotiating with
Mason Cabot Holdings, Ltd. with respect to the amount and kind of compensation
which may be payable to that firm as a result of those activities.
The Company presently owes $106,000 to Key International, Inc. in
connection with loans and services rendered to the Company. Primo Ianieri, the
Chairman of the Board of Directors of the Company, is President and Chief
Executive Officer of Key International, Inc.
(b) Family Relationships
William Mosconi, who until January 2000 was the President and Chief
executive of the Company, is the son-in-law of Primo Ianieri, the Chairman of
the Board of Directors of the Company. William Mosconi is the brother of Gerard
Mosconi who until January 2000 held the position of Vice President of Operations
and General Manager of a subsidiary of the Company.
32
<PAGE>
Item 8. DESCRIPTIONS OF SECURITIES
(a) Common Stock
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock,
$0.000833 par value. As of December 31, 1999, 20,075,051 shares of Common Stock
were outstanding. Other than options and warrants to purchase common stock of
the Company, which are authorized and granted by resolution of the Board of
Directors, no other type of securities are authorized by the Company at this
time.
COMMON STOCK
The holders of Common Stock are entitled to one (1) vote for each share
held of record on all matters to be voted on by the shareholders (exclusive of
rights which may have been granted under the Voting Agreement, Article I and the
Stockholders Agreement, sections 1 and 2, attached hereto as Exhibits 5.1 and
5.3). In addition, such holders are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. The holders of common stock do not have
cumulative voting rights or preemptive or other rights to acquire or subscribe
for additional, unissued or treasury shares, which means that the holders of
more than 50% of such outstanding shares, voting at an election of directors can
elect all the directors on the Board of Directors if they so choose and, in such
event, the holders of the remaining shares will not be able to elect any of the
directors. All outstanding shares of common stock are fully paid and
non-assessable.
DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and
does not presently intend to pay cash dividends. The payment of cash dividends
in the future, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements and general financial condition. The
payment of any dividends will be within the discretion of the Company's then
board of directors. It is the present intention of the Board of Directors to
retain all earnings, if any, for use in the Company's business operations and,
accordingly, the Board of Directors does not anticipate paying any cash
dividends in the foreseeable future.
CHANGE IN CONTROL PROVISIONS
The Company's charter and by-laws do not contain provisions that would
delay, defer or prevent a change in control of the Company.
33
<PAGE>
STOCK TRANSFER AGENT
The stock transfer agent for the common stock is Pacific Stock Transfer &
Trust Company, 5844 South Pecos Road, Suite D, Las Vegas, Nevada 89120,
Telephone (702) 361-3033.
(b) Debt Securities to be Registered
None
(c) Other Securities to be Registered:
None
34
<PAGE>
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market information
The Company's stock was quoted on the OTC Bulletin Board from October 1997
through mid-November 1999 (Symbol: ELGN). As of mid-November 1999, bid and ask
quotations for the Company's stock have been available on the NQB "Pink Sheets."
(i) The high and low sales prices of the Company's common stock for each
of the following quarters are:
Quarter Ended High Low
- - --------------------------------------------------------------------------------
December 31, 1999 9/16 1/16
- - --------------------------------------------------------------------------------
September 30, 1999 1 7/8 1 1/4
- - --------------------------------------------------------------------------------
June 30, 1999 3 1/4 1 1/2
- - --------------------------------------------------------------------------------
March 31, 1999 3 3/4 2 1/4
- - --------------------------------------------------------------------------------
December 31, 1998 5 1/2 1 3/4
- - --------------------------------------------------------------------------------
September 30, 1998 8 3/8 6
- - --------------------------------------------------------------------------------
June 30, 1998 10 1/2 7 1/2
- - --------------------------------------------------------------------------------
March 31, 1998 10 1/2 9
- - --------------------------------------------------------------------------------
December 31, 1997 9 1/2 4 3/8
- - --------------------------------------------------------------------------------
Source: Standard and Poor's Comstock
These quotations reflect inter-dealer prices, without retail mark-up, mark
down or commission and may not represent actual transactions.
(c) Shareholders of Record
There were 231 holders of record of the Common stock of the Company as of
December 31, 1999.
(d) Dividends Declared
There are no, nor have there been any, cash dividends declared on the
Voting Common stock of the Company. The Company is not likely to declare and pay
dividends in the foreseeable future.
35
<PAGE>
Item 2. LEGAL PROCEEDINGS
Romeo Fegundes & Dawn Fegundes v. Warren Power Systems
This is an action filed in Supreme Court in Kings County, New York in July
1998 against Warren Power, New York Telephone Company, and Bell Atlantic seeking
damages for personal injuries sustained during an installment by Comforce
Global, Inc., a contractor for Warren Power. Comforce Global, Inc. has been
brought into the case as a third party defendant. The complaint seeks
compensatory damages of $10,000,000 and punitive damages of $3,000,000. The case
involves an injury to a worker on a construction site that was supervised and
controlled by Warren Power. Discovery is complete and the case has been set for
trial. Warren Power has turned the matter over to its liability insurance
carrier that has appointed legal counsel to represent Warren Power.
Inverness Corporation and Menotomy Funding, LLC v. The Company
This is an action filed in Middlesex Superior Court in Cambridge,
Massachusetts in June, 1997 against the Company, EEI, EAC Acquisition I
Corporation ("EAC") and others, alleging breach of contract and a variety of
other causes of action relating to the alleged failure of EAC to repay certain
loans and the failure of the Company to honor certain warrants to purchase
common stock.
In late 1996, Mason Cabot formed EAC for the purpose of acquiring the
assets of a troubled corporation located in Billerica, Massachusetts. The
parties intended that EAC would acquire the assets of the business and then
manage its operations in an effort to make it a viable concern. As part of the
transaction, Inverness sold the assets to EAC in return for a short-term note
for $1,640,442. During the negotiation of the loan agreement, Inverness
represented that it would provide working capital of $300,000 pursuant to the
Revolving Line of Credit of $1,780,000 referenced in the loan agreement. As part
of the consideration for the transaction, EEI issued a warrant to purchase
750,000 shares of stock in a publicly traded company that would be the survivor
of a merger with EEI. Neither the Company nor EEI was ever a party to the loan
transaction, nor did either guarantee the debt of EAC. Mason Cabot granted to
the Company an option to purchase all of the common stock of EAC.
The parties anticipated that the short-term note would be paid through the
infusion of new capital from third party investors. However, after several loan
forbearances for which EEI issued additional warrants, neither the working
capital from Inverness nor any new capital from investors was forthcoming. By
May 1997, EAC ceased to operate. Inverness filed suit to obtain money damages in
the amount of $7,650,000 for the alleged failure to honor the warrants issued by
EEI in connection with the transaction. It is the Company's position that the
warrants are invalid because the issuance of the warrants was fraudulently
induced and that the conditions precedent to the exercise of the warrants never
occurred. The Company and EAC have counterclaimed against
36
<PAGE>
Inverness for common law fraud, breach of contract and related claims. The
Company and EAC allege they were fraudulently induced into entering into the
loan transaction and issuing the warrants in exchange for a non-existent
operating line of credit based upon false representations by Inverness that it
had the liquidity and ability to fund the line of credit. The case is presently
in the discovery phase and trial is not expected before the year 2001.
Item 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
In July, 1998 the Company's auditors, Grant Thornton LLP, resigned and the
Company's Board of Directors selected Weinick Sanders Leventhal & Co., LLP as
its auditors. During the fiscal years ended March 31, 1999, 1998, and 1997 there
were no disagreements with Weinick Sanders Leventhal & Co., LLP and during the
years ended March 31, 1996 and 1995 there were no disagreements with Grant
Thornton LLP, the predecessor auditors, on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which if not resolved to the satisfaction of the firm, would have caused them to
make reference to the subject matter of such disagreements in their reports on
such financial statements.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES
From March 1996 through December 1997, the Company raised $1,637,505
through various private placements of convertible notes and cashless warrants to
purchase 409,375 shares of the Company's common stock at a purchase price of
$4.00 per share. These transactions were exempt from registration under Section
4(2) and/or Rule 504 of Regulation D of the Securities Act of 1933, as amended
(the "Securities Act").
From January 1997 through November 1997, the Company raised $7,300,000
through various private placements of warrants to purchase 7,300,000 of the
Company" common stock at a price of $1 per share. These transactions were exempt
from registration under Section 4(2) and/or Rule 504 of Regulation D of the
Securities Act.
From December 1997 through March 1998, the Company raised $2,365,301
through various private placements of warrants to purchase 788,434 of the
Company's common stock at a price of $3 per share. These transactions were
exempt from registration under Section 4(2) and/or Rule 504 of Regulation D of
the Securities Act.
In late 1996 and early 1997, warrants to purchase 1,350,000 shares of the
common stock of the Company were issued to Inverness Corporation in connection
with a loan agreement related to EAC. The validity and exercisability of these
warrants are currently being challenged by the Company, as described in Part II,
Item 2 of this Registration Statement.
37
<PAGE>
American Compact Lighting received 2,000,000 shares of unregistered common
stock of the Company in January 1998, by resolution of the Board of Directors of
the Company dated December 20, 1997, in connection with the Company's purchase
of Logic Labs, Inc. These transactions were exempt from registration under
Section 4(2) of the Securities Act.
In March and April of 1998, the Company sold 2,333,333 shares of common
stock to Horace T. Ardinger, Jr. for a purchase price of $3.00 per share, or a
total of $7,000,000. The transaction was exempt from registration under Section
4(2) and/or Rule 504 of Regulation D of the Securities Act. In connection with
this sale, Mr. Ardinger also received warrants to purchase 100,000 shares of the
Common Stock of the Company for which he paid nominal consideration. Said
warrants are exercisable at $3.00 per share and expire March 10, 2003. The
Company granted Mr. Ardinger additional rights to avoid dilution of his
ownership of the issued and outstanding or issuable shares of the Common Stock
of the Company, as set forth in that certain Stock Purchase Agreement between
Mr. Ardinger and the Company dated as of November 13, 1998, a copy of which is
attached hereto as Exhibit 6.4.
By resolution of the Board of Directors of the Company dated April 17,
1998 One Hundred Thousand Shares (100,000) of unregistered shares of the
Company's common stock was issued to Lewis and Judith Kuniegel ("Kuniegel")
pursuant to the Company's Agreement of Merger with Communication Service
Company, a Maine corporation and Kuniegel. These transactions were exempt from
registration under Section 4(2) of the Securities Act.
In fiscal 1998, the Company issued 30,000 shares of its common stock,
whose fair value was $90,000 at the date of issuance, to its corporate general
counsel in payment of legal services rendered aggregating $90,000.
During fiscal 1999, the Company's Board of Directors authorized the
issuance of 97,200 shares of its common stock having a fair market value at the
time of issuance of $291,600 to officers and employees of the Company as bonuses
for services rendered.
Securities are issuable to Mason Cabot, as placement agent in several of
the Company's various private placements, the amount and form of which are
currently under negotiation.
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers and directors under certain circumstances against
expenses and liabilities actually and reasonably incurred as a result of a claim
against them as agents of the Corporation and requires Delaware corporations to
indemnify their officers and directors against expenses incurred in legal
proceedings because of their being or having been an officer or a director, if
the corporate agent is successful in his defense on the merits or otherwise in a
proceeding against him. In such
38
<PAGE>
circumstances, said individual must have acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the Corporation.
The Company does not currently carry any directors or officers liability
or errors and omissions insurance.
39
<PAGE>
PART F/S
40
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
DECEMBER 31, 1999
I N D E X
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
FINANCIAL STATEMENTS:
Independent Accountants' Report ............................................ F-2
Consolidated Balance Sheets as at December 31, 1999 (Unaudited)
and March 31, 1999 ...................................................... F-3
Consolidated Statements of Operations
For the Nine Months Ended December 31, 1999 and 1998 (Unaudited)
and For the Years Ended March 31, 1999 and 1998 ......................... F-4
Consolidated Statements of Changes in Capital Deficiency
For the Nine Months Ended December 31, 1999 (Unaudited)
and for the Years Ended March 31, 1999 and 1998 ......................... F-5
Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1999 and 1998 (Unaudited)
and for the Years Ended March 31, 1999 and 1998 ......................... F-6 - F-7
Notes to Consolidated Financial Statements ................................. F-8 - F-25
</TABLE>
<PAGE>
WEINICK SANDERS LEVENTHAL & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
1515 BROADWAY NEW YORK, N.Y. 10036
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Elgin Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Elgin
Technologies, Inc. (formerly Cross Atlantic Capital, Inc.) and subsidiaries as
at March 31, 1999, and the related statements of operations, cash flows, and
capital deficiency for the two years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Elgin
Technologies, Inc. (formerly Cross Atlantic Capital, Inc.) and subsidiaries as
at March 31, 1999, and the results of their operations and their cash flows for
each of the two years ended March 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has a working capital deficiency of $7,124,543 and liabilities
exceed assets by $6,799,755 at March 31, 1999 and in addition the Company has
incurred losses since inception. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/S/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
August 23, 1999
F-2
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 250,697 $ 1,584,480
Accounts receivable, less allowances for
doubtful accounts and customer deductions 1,376,102 1,529,169
Inventories, at cost, less allowances for
obsolescence, excess quantities and valuation 740,002 834,129
Prepaid expenses and other current assets 184,186 44,953
------------ ------------
Total current assets 2,550,987 3,992,731
------------ ------------
Property assets, net of accumulated depreciation 15,917 172,942
------------ ------------
Other assets:
Deferred financing costs, net 81,667 148,486
Deposits and other assets 3,000 3,360
------------ ------------
Total other assets 84,667 151,846
------------ ------------
$ 2,651,571 $ 4,317,519
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Revolving credit agreement $ 5,925,000 $ 4,225,000
Current maturities of long-term debt 2,136,781 2,486,783
Due to affiliates 870,608 357,961
Accounts payable 2,447,631 2,280,376
Accrued expenses and other current liabilities 1,762,545 1,767,154
------------ ------------
Total current liabilities 13,142,565 11,117,274
------------ ------------
Long-term debt 2,136,781 2,486,783
Less: Current maturities 2,136,781 2,486,783
------------ ------------
Total long-term debt -- --
------------ ------------
Capital deficiency:
Common stock, $.000833 par value
Authorized - 60,000,000 shares
Issued - 20,075,051 shares at December 31, 1999
Issued - 18,933,051 shares at March 31, 1999 16,723 15,772
Additional paid-in capital 29,030,049 28,824,737
Accumulated deficit (39,396,142) (35,498,640)
Treasury stock - at cost (141,624) (141,624)
------------ ------------
Total capital deficiency (10,490,994) (6,799,755)
------------ ------------
$ 2,651,571 $ 4,317,519
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
December 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 5,427,379 $ 4,817,189 $ 7,217,586 $ 6,979,706
Cost of sales 5,811,131 5,212,792 7,087,955 7,973,992
------------ ------------ ------------ ------------
Gross margin (loss) (383,752) (395,603) 129,631 (994,286)
------------ ------------ ------------ ------------
Operating expenses:
Selling 501,678 548,424 577,515 799,887
Research and development 623,749 869,968 1,407,048 8,333,342
General and administrative 1,533,337 2,047,985 2,504,030 2,265,067
Bad debts -- (110,300) (110,300) 747,354
------------ ------------ ------------ ------------
Total operating expenses 2,658,764 3,356,077 4,378,293 12,145,650
------------ ------------ ------------ ------------
Loss from operations (3,042,516) (3,751,680) (4,248,662) (13,139,936)
------------ ------------ ------------ ------------
Other expenses:
Interest 694,146 218,165 410,499 730,115
Amortization of intangibles
and financing costs 66,819 10,307 29,697 159,331
Write-off of intangibles -- 300,000 300,000 --
Restructuring costs -- -- -- 49,608
Abandonment of property assets 94,121 14,038 14,038 663,190
------------ ------------ ------------ ------------
Total other expenses 855,086 542,510 754,234 1,602,244
------------ ------------ ------------ ------------
Net loss ($ 3,897,602) ($ 4,294,190) ($ 5,002,896) ($14,742,180)
============ ============ ============ ============
Net loss per common share ($ 0.20) ($ 0.28) ($ 0.31) ($ 1.85)
============ ============ ============ ============
Weighted average number of
shares outstanding 19,531,470 15,152,258 15,900,850 7,962,566
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 (Unaudited)
AND FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------------------- ---------------------------
Number Additional Number
of Paid-In of
Shares Amount Capital Shares Amount
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997 7,227,000 $ 6,021 $ 8,623,833 -- $ --
Common stock issued in partial
payment acquisition of subsidiary 2,000,000 1,667 5,998,333 -- --
Common stock issued for
legal services rendered 30,000 25 89,975 -- --
Net proceeds from sale of securities 333,333 277 6,474,183 -- --
Net loss for the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at March 31, 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 common
stock (Unaudited) 1,117,000 930 (930) -- --
Conversion of debt into common
stock (Unaudited) 25,000 21 206,242 -- --
Net loss for the nine months ended
December 31, 1999 (Unaudited) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999
(Unaudited) 20,075,051 $ 16,723 $ 29,030,049 2,460,000 ($ 141,624)
============ ============ ============ ============ ============
<CAPTION>
Total
Accumulated Capital
Deficit Deficiency
------------ ------------
<S> <C> <C>
Balance at April 1, 1997 ($15,753,564) ($ 7,123,710)
Common stock issued in partial
payment acquisition of subsidiary -- 6,000,000
Common stock issued for
legal services rendered -- 90,000
Net proceeds from sale of securities -- 6,474,460
Net loss for the year (14,742,180) (14,742,180)
------------ ------------
Balance at March 31, 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 common
stock (Unaudited) -- --
Conversion of debt into common
stock (Unaudited) -- 206,263
Net loss for the nine months ended
December 31, 1999 (Unaudited) (3,897,502) (3,897,502)
------------ ------------
Balance at December 31, 1999
(Unaudited) ($39,396,142) ($10,490,994)
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
December 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 3,897,502) ($ 4,294,190) ($ 5,002,896) ($14,742,180)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
cash used in operating activities:
Accrued interest on affiliated debt 552,647 59,334 204,749 7,476
Depreciation and amortization 129,723 96,072 80,889 394,561
Abandonment of property assets 94,121 14,038 14,038 663,190
Provision for inventory obsolescence (2,310,709) (1,177,668) (1,615,950) (578,263)
Provision for doubtful accounts -- (5,169) (110,000) 425,000
Common stock issued for
Research and development -- -- -- 6,000,000
Litigation settlement -- 50,400 50,400 --
Services rendered -- 291,600 291,600 90,000
Write-off of intangibles -- 300,000 300,000 --
Changes in assets and liabilities:
Accounts receivable 153,067 (159,321) (896,078) 2,053,480
Inventories 2,404,836 651,891 1,508,931 1,256,363
Prepaid expenses and
other current assets (139,233) (10,786) 29,800 90,033
Deposits and other assets 360 (301,600) 13,400 (2,984)
Accounts payable 167,255 (1,491,812) (1,250,739) (314,647)
Accrued expenses and other
current liabilities 101,652 (18,215) (399,688) 1,528,450
------------ ------------ ------------ ------------
Total adjustments 1,153,719 (1,701,236) (1,778,648) 11,612,659
------------ ------------ ------------ ------------
Net cash used in
operating activities (2,743,783) (5,995,426) (6,781,544) (3,129,521)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of securities -- 5,968,183 5,968,183 6,574,460
Purchase of redeemable securities -- (141,624) (141,624) --
Proceeds from (repayment of)
affiliates debt 1,660,000 2,225,000 4,104,826 (18,000)
Proceeds from (repayment of)
debt (250,000) (909,781) (1,512,635) (4,451,259)
Deferred financing costs -- (178,183) (178,183) --
------------ ------------ ------------ ------------
Net cash provided by
financing activities 1,410,000 6,963,595 8,240,567 2,105,201
------------ ------------ ------------ ------------
Net increase (decrease) in cash (1,333,783) 968,169 1,459,023 (1,024,320)
Cash at beginning of period 1,584,480 125,457 125,457 1,070,019
Cash acquired with subsidiaries -- -- -- 79,758
------------ ------------ ------------ ------------
Cash at end of period $ 250,697 $ 1,093,626 $ 1,584,480 $ 125,457
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
December 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental Disclosures of
Cash Flow Information:
Cash payments made for:
Interest $ 36,165 $ 74,869 $ 74,869 $ --
=========== =========== =========== ==========
Income taxes $ -- $ -- $ -- $ --
=========== =========== =========== ==========
Supplemental Schedule of
Non-Cash Financing and
Investing Activities:
Conversion of debt to equity $ 206,263 $ 626,012 $ 626,012 $ 200,000
=========== =========== =========== ==========
Common stock issuances for
Research and development $ -- $ -- $ -- $6,000,000
=========== =========== =========== ==========
Litigation settlement $ -- $ 50,400 $ 50,400 $ --
=========== =========== =========== ==========
Services rendered $ -- $ 1,071,600 $ 1,071,600 $ 90,000
=========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ELGIN TECHNOLOGIES, INC. AND SUBSIDIARIES
(Formerly Cross Atlantic Capital, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999 and For the Nine Months Ended
December 31, 1999 and 1998
(Information Relating to the Nine Months Ended
December 31, 1999 and 1998 is Unaudited) And
As at March 31, 1999 and for the Two Years Then Ended
NOTE 1 - REALIZATION OF ASSETS - GOING CONCERN.
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles,
which contemplate continuation of the Company as a going concern. The
Company has incurred substantial operating losses in each of its segments
for the two years ended March 31, 1999 and the nine months ended December
31, 1999. Management on June 1, 1998 placed its contract engineering
division of its telecommunications segment into voluntary liquidation when
management caused a filing under Chapter 7 of Title 11 of the United
States Bankruptcy Code for its wholly-owned subsidiary, e^2 Electronics,
Inc. ("Petitioner"). The Court appointed a trustee who is liquidating the
assets of Petitioner for the benefit of its creditors.
The accompanying consolidated financial statements reflect a working
capital deficiency of $7,125,000 and $10,592,000 at March 31, 1999 and
December 31, 1999, respectively, of which $1,012,000 is attributable to
the net obligations of the Petitioner. Upon the conclusion of the
liquidation of the Petitioner, the capital deficiency of $6,800,000 and
$10,491,000 at March 31, 1999 and December 31, 1999, respectively, will
decrease by the forgiveness of the net indebtedness of the Petitioner of
$1,012,000. The Company's segments, lighting manufacturing and telecom
power system equipment manufacturing, incurred losses from operations of
$1,271,000 and $2,977,000, respectively, in fiscal 1999 and in fiscal 1998
incurred operating losses of $8,036,000 and $5,104,000, respectively. For
the nine months ended December 31, 1999 these segments incurred operating
losses of $989,000 and $2,053,000, respectively. In fiscal 1999 and in the
nine months ended December 31, 1999, these segments had a combined
negative cash flow from operating activities of $6,782,000 and $2,744,000.
The Company's primary source of cash has been the sale of its securities
and loans from a related party.
As described in Note 12, the Petitioner, the Company and/or its
continuing subsidiaries are defendants in a number of legal actions, some
of which, should the plaintiffs prevail, would have a serious adverse
effect on the Company's financial condition.
The substantial operating losses of the Company's operating segments
incurred through and subsequent to March 31, 1999 and December 31, 1999,
and the Company's limited ability to obtain financing other than from a
stockholder raises substantial doubt concerning the ability of the Company
to realize its assets and pay its obligations as they mature in the
ordinary course of business. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
F-8
<PAGE>
NOTE 2 - BANKRUPTCY PROCEEDINGS - CHAPTER 7.
On June 1, 1998, management filed a petition for its wholly-owned
subsidiary, e^2 Electronics, Inc., under Chapter 7 of Title 11 of the
United States Bankruptcy Code in the Western District of Pennsylvania of
the United States Bankruptcy Court (the "Court"). The Petitioner sought to
have the court liquidate its assets and disburse the proceeds therefrom to
its creditors for which the Court appointed a Trustee.
Certain assets aggregating $915,000 at historical cost and certain
liabilities aggregating $1,032,000 of the Petitioner which were part of
the Company's telecom power system manufacturing segment were sold by
management to another of the Company's subsidiaries in that segment at the
time of the filing of the petition. This sale was reviewed by the Trustee
who required an auction for the net assets. The winning bid for the net
assets of $177,000 was from an entity controlled by the Company's
investment bankers. This affiliated entity has agreed to resell these net
assets to the Company's subsidiary for the same amount of its successful
bid. The accompanying financial statements reflect the net assets
transferred to the manufacturing segment as assets and liabilities of the
power system manufacturing segment for all periods presented. The cost of
acquiring the assets from the affiliate is reflected as charge to
operations in fiscal 1999.
NOTE 3 - DESCRIPTION OF BUSINESS.
The Company was incorporated as Cross Atlantic Capital, Inc. under
the laws of the State of Delaware on May 28, 1986. The Company, since its
incorporation through September 30, 1997, was inactive at which time it
acquired all of the outstanding capital stock of Elgin e^2 Inc. in
exchange for 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 reverse acquisition in a manner similar to a pooling of interests. In
January 1998, the Company changed its name to Elgin e^2, Inc. and later to
Elgin Technologies, Inc. Simultaneously, Elgin e^2, Inc. changed its name
to e^2 Electronics, Inc. (the "Petitioner").
Petitioner was incorporated in Delaware in April 1994 as a provider
of contract manufacturing services and custom power equipment to original
equipment manufacturers in the industrial process control, medical
instrumentation and telecommunications industries. Petitioner commenced
operations in April 1994 with its acquisition of the net assets of Charter
Technologies, Inc. from a United States Bankruptcy Court appointed
Trustee. The Petitioner also acquired certain net assets from two other
entities in fiscal 1995. These three acquisitions resulted in the
recording of $1,018,000 in goodwill.
F-9
<PAGE>
NOTE 3 - DESCRIPTION OF BUSINESS. (Continued)
The Petitioner on July 10, 1996, acquired all of the capital stock
of Ascom Warren, Inc. ("Warren") in a transaction accounted for as a
purchase. Petitioner 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. The transaction is being
accounted for as a purchase in the accompanying financial statements. The
fair value of the common stock issued exceeded the fair value of the net
assets acquired by $300,000. The goodwill was charged to operations at the
acquisition date.
The accompanying consolidated financial statements as at March 31,
1999 and for the two years then ended and as at December 31, 1999 and for
the nine months ended December 31, 1999 and 1998 include the accounts of
the Company and its wholly-owned subsidiaries and reflect (i) the exchange
of securities between the Company and the stockholders of Petitioner as a
reverse acquisition as if it had occurred on April 1, 1997, and (ii) the
acquisitions of CSC, Logic, Warren and the net assets of Charter
Technologies, Inc. from their respective dates of their purchase through
December 31, 1999.
The consolidated financial statements as at December 31, 1999 and
for the nine months ended December 31, 1999 and 1998 have not been
audited. In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments and accruals, consisting only
of normal recurring adjustments and accruals, necessary to present fairly
the financial position of the Company and its subsidiaries as at December
31, 1999 and the results of their operations, changes in capital
deficiency and cash flows for the nine months ended December 31, 1999 and
1998. The results for the nine months ended December 31, 1999 and 1998 are
not necessarily indicative of the results to be expected for the full
year.
F-10
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Revenue Recognition:
The Company recognizes revenues in accordance with generally
accepted accounting principles in the period in which it performs its
installation or contracting services and in which its products are shipped
to its customers. The Company records expenses in the period in which they
are incurred, in accordance with generally accepted accounting principles.
(b) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
(c) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
(d) Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and
trade accounts receivable. The Company places its cash with high credit
quality financial institutions which at times may be in excess of the FDIC
insurance limit. Concentrations of credit risk with respect to trade
accounts receivable of the Company's segments are limited due to the wide
number of their customers. In fiscal 1999 two customers accounted for 20%
of sales: no customer accounted for more than 10% of sales in 1998. Three
customers accounted for 47% and 25% of sales in the nine months ended
December 31, 1999 and 1998,respectively. Additionally, the Company's
segments have an allowance for doubtful accounts of $90,000, $90,000 and
$100,000 as at December 31, 1999, March 31, 1999, and 1998, respectively.
The Company's discontinued contracting operations required an allowance
for doubtful accounts of $425,000 and $100,000 at March 31, 1997 and 1998,
respectively. With the filing of the Petitioner's bankruptcy proceedings,
the receivables of the contracting operations were placed in the custody
of the Trustee who is responsible for their liquidation.
(e) Inventories:
Inventories are valued at the lower of cost (first-in, first-out
method) or market. The financial statements reflect an allowance for
obsolescence and disposal of inventory of $2,920,000 at December 31, 1999,
$5,231,000, $6,847,000 and $7,425,000 at March 31, 1999, 1998 and April 1,
1997, respectively.
F-11
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(f) 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.
(g) Goodwill:
The cost in excess of the fair value of the assets acquired has been
recorded as goodwill which was amortized over a 10 year period. Management
continually reviewed the results of the business operations of its
acquisitions and in March 1997 determined that certain goodwill was
permanently impaired and charged the unamortized portion of the goodwill
to operations at the date it become impaired. The goodwill associated with
the acquisition in April 1998 of Community Services Company was charged to
operations at the purchase date due to the uncertainty of the Company's
ability to continue as a going concern. Accordingly, no amortization of
goodwill was charged to operations in any period presented in the
accompanying financial statements.
(h) Research and Development Costs:
The Company charges to operations all research and development costs
as incurred. All of the excess of the cost over the fair value of the net
assets of Logic, which amounted to $7,901,000, was allocated to in-process
research and development because Logic had devoted all of its effects
since its inception to develop its lighting products.
Purchased in-process research and development represents the value
assigned in a purchase business combination to research and development
projects of the acquired business that were commenced but not yet
completed at the date of acquisition and which, if unsuccessful, have no
alternative future use in research and development activities or
otherwise. In accordance with Statement of Financial Accounting Standards
No. 2 "Accounting for Research and Development Costs," as interpreted by
FASB Interpretation No. 4, amounts assigned to purchased in-process
research and development meeting the above criteria must be charged to
expense at the date of consummation of the purchase business combination.
In this regard the entire $7,901,000 was charged to operations in fiscal
1998.
F-12
<PAGE>
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(i) Deferred Financing Costs:
Direct costs incurred in connection with obtaining financing have
been capitalized and were being amortized over the term of the respective
financing agreements. Amortization of deferred financing costs aggregating
$67,000, $10,000, $20,000 and $65,000 was charged to operations in the
nine months ended December 31, 1999 and 1998 and for fiscal 1999 and 1998,
respectively. In the nine months ended December 31, 1999 and 1998 $0 and
$65,000 of financing was charged to operations as incurred. In fiscal 1999
and 1998, $65,000 and $95,000 of financing costs attributable to
indebtedness included in the bankruptcy proceedings were charged to
operations as incurred.
(j) Income Taxes:
The Company complies with Statement of Financial Accounting
Standards No. ("SFAS 109"), "Accounting for Income Taxes," which requires
an asset and liability approach to financing accounting and reporting for
income taxes. Deferred income tax assets are computed for differences
between financial statement and tax basis of assets and liabilities that
will result in future taxable or deductible amounts, based on the enacted
tax laws and rates in the periods in which differences are expected to
affect taxable income. The principal asset and liability differences are
deprecation and amortization of property and intangible assets, valuation
allowances of accounts receivable and inventories, and utilization of the
Company's tax loss carryforwards. Management has fully reserv-ed the net
deferred tax assets as its is not more likely than not that the deferred
tax asset will be utilized in the future.
(k) Loss Per Common Share:
Loss per common share is based on the weighted average number of
common shares outstanding. In March 1997,the Financial Accounting
Standards Broad issued Statement No. 128 ("SFAS 128"), "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per
share on the face of the statements of operations which the Company has
adopted. Basic loss per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
common shares outstanding for the period. Diluted loss per share reflects
the potential dilution that could occur if convertible debentures, options
and warrants were to be exercised or converted or otherwise resulted in
the issuance of common stock that then shared in the earnings of the
entity.
Since the effect of outstanding options, warrant and convertible
debenture conversions are antidilutive in all periods presented, it has
been excluded from the computation of loss per common share.
F-13
<PAGE>
NOTE 5 - ACCOUNTS RECEIVABLE - AFFILIATE.
In 1997, the Company advanced $250,000 to EAC Acquisition I
Corporation ("EAC"), an entity whose president was the general manager of
the Company and is the brother of the Company's former president. The
Company advanced an additional $500,000 to EAC in 1998. These advances
were deposits for acquiring $4,179,000 in assets by the Company's power
system manufacturing segment. EAC had previously acquired these assets by
issuing notes for the same $4,179,000 to the original sellers. EAC
defaulted on its debt payments to the original sellers and the original
sellers seized the assets they had sold to EAC in June 1997. The seizure
of the assets rendered EAC insolvent without any means to refund the
advances to the Company. Accordingly, the Company fully reserved this
asset and charged operations for a provision for doubtful accounts of
$750,000 in fiscal 1998.
NOTE 6 - INVENTORIES.
The components of the inventories in determining the cost of sales
are as follows:
December 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Raw materials $2,917,000 $3,866,000 $3,378,000 $4,902,000
Work-in-process 357,000 1,969,000 1,780,000 1,779,000
Finished goods 386,000 996,000 907,000 893,000
---------- ---------- ---------- ----------
3,660,000 6,831,000 6,065,000 7,574,000
Allowance for obsolesence
and disposal 2,920,000 5,578,000 5,231,000 6,847,000
---------- ---------- ---------- ----------
$ 740,000 $1,253,000 $ 834,000 $ 727,000
========== ========== ========== ==========
In May 1999, the manufacturing segment sold for $10,000 part of its
obsolete raw material and work-in-process inventories whose cost was
approximately $1,517,000. Management estimates that the remaining
$2,820,000 allowance for obsolescence at December 31, 1999 is sufficient
for the continuing operating segments to dispose of its obsolete and
excess inventory and to attain a normal profit margin on its remaining
inventory.
F-14
<PAGE>
NOTE 6 - INVENTORIES. (Continued)
The components of the inventories used in determining the cost of
sales of the Petitioner's operations are as follows:
March 31, April 1,
l998 1997
---------- ----------
Raw materials $1,765,000 $3,514,000
Work-in-process -- 442,000
Finished goods -- --
---------- ----------
1,765,000 3,956,000
Allowance for obsolescence
and disposal 1,752,000 3,925,000
---------- ----------
$ 13,000 $ 31,000
========== ==========
During fiscal 1999, the Trustee liquidated this operation's inventory and
the proceeds from such liquidation, if any, are being held by the Trustee
for distribution to the Petitioner's creditors.
NOTE 7 - PROPERTY ASSETS.
Property assets consist of the following as at:
March 31,
December 31, ---------------------
1999 1999 1998
-------- -------- --------
(Unaudited)
Machinery and equipment $ 59,000 $ 59,000 $ 59,000
Furniture and fixtures 85,000 85,000 90,000
Leasehold improvements -- 157,000 169,000
-------- -------- --------
144,000 301,000 318,000
Less: Accumulated depreciation 128,000 128,000 80,000
-------- -------- --------
$ 16,000 $173,000 $238,000
======== ======== ========
Depreciation charged to operations in fiscal 1999 and 1998 was
$51,000 and $235,000, respectively. Depreciation charged to operations for
the nine months ended December 31, 1999 and 1998 was $63,000 and $100,000.
In 1997 management reviewed the results of its contracting operations and
determined property assets with an undepreciated cost of $768,000 were
valueless and were abandoned resulting in a charge to discontinued
operations in a like amount. A portion of the property assets of the
Company's power system manufacturing segment which were located in
Petitioner's premises in PA were abandoned in 1998 when this segment's
operations were centralized in the Company's Manchester, NH facility. The
undepreciated cost of $663,000 was charged to operations in 1998. During
the nine months ended December 31,1999, the Company's landlord terminated
the lease for its premises in Hudson, N.H. resulting in the write-off of
its unamortized leasehold costs of $94,000. Management and the landlord
have subsequently agreed to allow the Company to remain in its present
facility until April 2000 at which time the Company will move to its new
leased facility in Amherst, N.H. (See Note 12).
F-15
<PAGE>
NOTE 8 - FINANCING.
(a) Revolving Lines of Credit:
The Company entered into a revolving credit agreement, as amended in
April 1996, with a bank for a borrowing facility of up to $5,000,000.
Borrowings under the facility were limited to a borrowing base amount
comprised of specified percentages of eligible accounts receivable,
inventories, and property assets. Interest was payable monthly at varying
amounts over the prime rate (14% at March 31, 1998). The outstanding
balance under this facility was $479,000 at March 31, 1998, which was
repaid in full in fiscal 1999. The average outstanding indebtedness under
this line of credit was $2,155,000 and $40,000 in fiscal 1998 and 1997,
respectively. Average interest rate charged was 17.2% and 14% in fiscal
1999 and 1998.
In November 1998, the Company entered into a revolving line of
credit with a major stockholder. The line, as amended, provides for
borrowings of up to $4,000,000. In January 1999, this stockholder advanced
an additional $225,000 over the line's maximum. At March 31, 1999,
$4,225,000 was outstanding under this facility. Through December 31, 1999,
the stockholder advanced an additional $1,700,000 under the facility which
aggregates $5,925,000 outstanding at December 31, 1999. Since the Company
has not made the required monthly stated interest payments of 10%, the
rate by the terms of the agreement is automatically increased to 15%.
Accrued interest of $726,000 and $179,000 is outstanding at December 31,
1999 and March 31,1998, respectively, which is included in due to
affiliates in the accompanying financial statements. The average
outstanding debt under the facility was $1,317,000 and $4,864,000 during
fiscal 1999 and the nine months ended December 31, 1999, respectively.
Interest charged to operations was $179,000 in fiscal 1999 and $547,000
during the nine months ended December 31, 1999 at an average interest rate
of 15%. The line of credit and accrued interest thereon are collateralized
by all of the Company's assets and, at the holder's option, are
convertible into the Company's common stock at $0.55 per share for the
first $4,225,000 of the obligation, $0.20 per share for the next
$1,050,000 of the obligation of $0.10 per share for the excess over
$5,275,000.
(b) Long-Term Debt:
Long-term debt is comprised of the following:
December 31, March 31,
1999 1999
---------- ----------
(Unaudited)
Acquisition note payable in annual
indebtedness of $250,000 plus
interest at 10% $ 250,000 $ 500,000
Commonwealth of Pennsylvania
Department of Commerce Bonds (i):
Machinery and equipment 359,000 359,000
Capital loan fund 29,000 29,000
Subordinated notes (ii) 919,000 1,019,000
Convertible subordinated notes (iii) 256,000 256,000
Other notes payable 324,000 324,000
---------- ----------
$2,137,000 $2,487,000
========== ==========
Portion currently payable $2,137,000 $2,487,000
========== ==========
F-16
<PAGE>
NOTE 8 - FINANCING. (Continued)
(b) Long-Term Debt: (Continued)
The Company is in violation of several covenants of its various debt
agreements at March 31, 1999 and December 31, 1999. Under the terms of the
debt agreements, the covenant violations accelerate principal repayment
and the entire amounts outstanding are due and payable immediately. Some
of the debt holders had commenced actions against the Company seeking
payment. The actions were resolved by the Company agreeing to make
installment payments to the creditors.
(i) In 1995, a subsidiary which is in bankruptcy (see Note 2), entered
into two loan agreements for an aggregate of $700,000 which was used
to acquire property assets. The Company has assumed these
obligations to the Commonwealth of Pennsylvania and certain of the
assets which the funds were used to acquire. The Court appointed
Trustee has custody of the remaining portion of the assets which he
will sell and use the proceeds as partial payment to the bankruptcy
proceedings creditors.
(ii) Commencing in 1996, e^2 Electronics, Inc. sold securities in a
private placement consisting of 10% interest bearing subordinated
notes and warrants to acquire shares of the e^2 Electronics, Inc.'s
common stock. No value was assigned to the warrants. Upon the
reverse acquisition by the Company of e^2 Electronics, Inc., the
subordinated debt became obligations of the Company and the warrants
were issued for shares in the Company's common stock. The Company
received $1,637,500 in proceeds from the offering before costs
related to the offering. Certain note holders converted their debt
into the Company's common stock in the amount of $100,000 during the
nine months ended December 31, 1999 and $419,000 was converted into
common stock in 1999. The holders of the notes aggregating
$1,019,000 at March 31, 1999 and $919,000 at December 31, 1999 are
due interest aggregating $368,000 and $351,000 at March 31, 1999 and
December 31, 1999, respectively.
(iii) In December 1997, a subsidiary issued two convertible subordinated
notes aggregating $256,000 to a corporate stockholder of the
Company. The 10% interest bearing notes which were due and payable
in December 1998 remain outstanding at March 31, 1999 and December
31, 1999. The notes and accrued interest thereon aggregating $34,000
(March 31, 1999) and $52,000 (December 31, 1999) are collateralized
by all of the Company's assets and, at the holder's option, are
convertible into the Company's common stock at $2.00 per share. The
noteholder also paid $65,000 for warrants to acquire 32,500 shares
of the Company's common stock for no additional consideration.
F-17
<PAGE>
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are comprised of the
following:
March 31,
December 31, ------------------------
1999 1999 1998
---------- ---------- ----------
(Unaudited)
Payroll and commissions $ 571,000 $ 575,000 $ 659,000
Vacation pay 67,000 140,000 139,000
Payroll taxes and fringe benefits 257,000 169,000 190,000
Professional fees 127,000 253,000 219,000
Interest 587,000 503,000 543,000
Warranty reserve 57,000 57,000 56,000
Other 97,000 70,000 65,000
Placement fees -- -- 497,000
---------- ---------- ----------
$1,763,000 $1,767,000 $2,368,000
========== ========== ==========
NOTE 10 - INCOME TAXES.
The components of the provision (benefit) for income taxes are as
follows:
For the Nine Months For the Years Ended
Ended December 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited)
Currently payable:
Federal $ -- $ -- $ -- $ --
State and local 6,000 6,000 8,000 8,000
------- ------- ------- -------
$ 6,000 $ 6,000 $ 8,000 $ 8,000
======= ======= ======= =======
Deferred:
Federal $ -- $ -- $ -- $ --
State and local (6,000) (6,000) (8,000) (8,000)
------- ------- ------- -------
($6,000) ($6,000) ($8,000) ($8,000)
======= ======= ======= =======
Total provision $ -- $ -- $ -- $ --
======= ======= ======= =======
F-18
<PAGE>
NOTE 10 - INCOME TAXES. (Continued)
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:
March 31,
December 31, ----------------------------
1999 1999 1998
------------ ------------ ------------
(Unaudited)
Net operating loss carryforward $ 8,950,000 $ 6,809,000 $ 3,893,000
Inventory obsolescence allowance 987,000 1,751,000 2,427,000
Allowance for doubtful accounts 294,000 294,000 333,000
Intangible assets 977,000 1,017,000 1,070,000
Other 47,000 47,000 11,000
------------ ------------ ------------
11,255,000 9,918,000 7,734,000
Less: Valuation allowance (11,255,000) (9,918,000) (7,734,000)
------------ ------------ ------------
Net deferred tax asset $ -- $ -- $ --
============ ============ ============
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.
The difference between income taxes computed using the statutory
federal income tax rate and the rate shown in the financial statements are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
--------------------------------------------
1999 % 1998 %
----------- ---- ------------- ----
<S> <C> <C> <C> <C>
Loss before income taxes ($5,003,000) ($14,742,000)
=========== =============
Computed tax benefit
at statutory rate ($1,751,000) (35.0) ($5,160,000) (35.0)
Non-deductible portion of compensatory
element of common stock issuances:
Research and development -- -- 2,100,000 14.2
Compensation for services 102,000 2.0 32,000 0.2
Goodwill 105,000 2.1 -- --
Finance charges 10,000 0.2 -- --
Other 16,000 0.3 14,000 0.1
Reserve for operating loss
carryforward tax asset 1,518,000 30.4 3,014,000 20.5
----------- ---- ------------- ----
Income tax benefit $ -- -- $ -- --
=========== ==== ============= ====
</TABLE>
F-19
<PAGE>
NOTE 10 - INCOME TAXES. (Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
---------------------------------------------------
1999 % 1998 %
----------- ---- ----------- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Loss before income taxes ($3,898,000) ($ 4,294,000)
=========== ===========
Computed tax benefit
at statutory rate ($1,364,000) (35.0) (1,503,000) (35.0)
Non-deductible portion of
Finance costs 23,000 0.6 4,000 0.1
Goodwill -- -- 105,000 2.4
Compensation for services -- -- 102,000 2.4
Other 4,000 0.1 12,000 0.3
Reserve for operating loss
carryforward tax asset 1,337,000 34.3 1,280,000 29.8
----------- ---- ----------- ----
Income tax benefit $ -- -- $ -- --
=========== ==== =========== ====
</TABLE>
The net operating loss carryforwards at December 31, 1999 expire as
follows:
2010 $ 905,000
2011 1,959,000
2012 1,676,000
2013 7,444,000
2014 7,473,000
2015 6,117,000
-----------
$25,574,000
===========
The Tax Reform Act of 1986 enacted a complex set of rules limiting
the utilization of net operating loss carryforwards to offset future
taxable income following a corporate ownership change. Among other things,
the Company's ability to utilize its operating loss carryforwards is
limited following a change in ownership in excess of fifty percentage
points in any three-year period. Additionally, the net operating loss will
be reduced to the extent of the amount of indebtedness extinguished, if
any, under the bankruptcy liquidation proceedings of one of the Company's
subsidiaries. The effects, if any, of the potential bankruptcy proceeding
debt extinguishment and the change in ownership are not reflected in the
foregoing tables.
F-20
<PAGE>
NOTE 11 - CAPITAL.
(a) Redeemable Common Stock:
As part of the purchase agreement for the acquisition of the net
assets of Charter Technologies, Inc., certain creditors of Charter were
issued shares of the Company's common stock redeemable at the holder's
option for cash of $410,000. In 1998, the holders accepted (i) $141,624 in
cash, (ii) warrants to acquire 303,043 shares of the Company's common
stock for no consideration (all of which are outstanding at December 31,
1999), and (iii) warrants to acquire 95,000 shares of the Company's common
stock at $3.00 per share (all of which are outstanding at December 31,
1999) as full payment of the Company's obligations under the redeemable
common stock. 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.
(b) Common Stock:
In January 1998, the Company issued 2,000,000 of its common shares
as part of the purchase of its subsidiary, Logic Labs, Inc. The value of
the shares at date of issuance was $6,000,000.
In March 5, 1998, an individual acquired 333,333 shares of the
Company's common stock for cash of $3.00 per share. In April 1998, this
individual purchased additional shares and warrants to acquire the
Company's common stock for $6,000,000 in cash before offering costs. Of
the 2,163,334 common shares acquired in April 1998, 163,333 are to be
issued to a consultant for his advisory services in connection with the
sale of the securities. The purchaser also received warrants to acquire an
additional 100,000 common shares at $3.00 per share. In November 1998, the
Company gave this individual additional rights to avoid dilution of his
ownership of the issued and outstanding or issuable shares of the
Company's common stock. This individual had loaned the Company $5,925,000
at December 31, 1999 under a revolving credit agreement (see Note 8). This
person has the option to convert the debt outstanding at December 31, 1999
into approximately 19,432,000 shares of the Company's common stock.
In fiscal 1998, the Company issued 30,000 shares of its common
stock, whose fair value was $90,000 at the date issuance, to its corporate
general counsel in payment of legal services rendered aggregating $90,000.
In April 1998, the Company issued 100,000 shares of its common stock
whose fair market value at date of issuance was $300,000 for the purchase
of Communication Service Company.
During fiscal 1999, the Company's Board of Directors authorized the
issuance of 97,200 shares of its common stock having a fair market value
at the time of issuance of $291,600 to officers and employees of the
Company as bonuses for services rendered.
F-21
<PAGE>
NOTE 11 - CAPITAL. (Continued)
(b) Common Stock: (Continued)
In fiscal 1999, the Company issued 16,800 of its common shares
having a fair market value of $50,400 as settlement of a lawsuit.
Pursuant to the convertible notes conversion option, certain holders
of the Company's subordinated convertible debentures (See Note 8)
converted their outstanding loans and accrued interest into 105,950 shares
(during fiscal 1999) and 25,000 shares (during the nine months ended
December 31, 1999) of the Company's common stock.
(c) Warrants:
In fiscal 1997, warrants to acquire 1,350,000 shares of the
Company's common stock were issued to Inverness Corporation in connection
with a loan agreement. The exercisability and validity of these warrants
are currently being challenged by the Company. Inverness Corporation has
initiated an action against the Company and others (See Note 12).
In fiscal 1997, 1998 and 1999, the Company sold 7,300,000 warrants
at $1.00 each and 788,434 at $3.00 each aggregating $9,665,000 prior to
related offering costs. Each warrant allowed the holder to convert the
warrant into a like number of the Company's common shares for no
additional consideration. Through December 31, 1999, 7,976,434 warrants
have been converted into a like number of the Company's common shares.
In fiscal 1996 and 1997, the Company raised $1,638,000 before
offering costs through private placements of its convertible notes of
$1,637,000 and cashless warrants to acquire 409,395 common shares at $4.00
per share. Through December 31, 1999, $931,000 of convertible debentures
and accrued interest have been converted into 180,950 shares of the
Company's common stock.
In fiscal 1998, the Company received $65,000 from the holder of a
subsidiary's convertible subordinated notes for a warrant to acquire
32,500 shares of the Company's common stock for no additional
consideration.
The Company employed the services of placement agents, consultants
and investment bankers to assist in and render advise with respect to the
sale of its common stock and warrants. One of the consultants agreed to
accept 163,333 shares of the Company's common stock as compensation for
its services. Although those shares have not actually been issued, they
are reflected in accompanying financial statements as issued and
outstanding.
F-22
<PAGE>
NOTE 11 - CAPITAL. (Continued)
(c) Warrants: (Continued)
An investment banker was granted, but not issued, for its financial
services rendered, warrants to acquire (i) 718,000 shares of the Company's
common stock at $1.00 per share, (ii) 71,000 shares of common stock at
$3.00 per share and (iii) 405,000 shares of the Company's common stock for
no additional consideration. Through December 31, 1999 warrants to acquire
44,000 common shares for no consideration were the only warrants issued as
well as exercised. The remaining warrants for 1,150,000 common shares
remain outstanding at March 31, 1999 and December 31, 1999. The financial
statements reflect the common shares underlying the warrants for 405,000
shares at no additional consideration as issued and outstanding at the
beginning of all periods presented. Current management is presently in
negotiations with this investment banker to reduce, eliminate, cancel or
change the terms, number, and exercise prices of the outstanding warrants.
The exact number of warrants or common shares that will be issued to this
investment banker, if any, is not presently determinable.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Leases:
The Company is lessee under an operating real property lease for its
manufacturing, warehouse and office facility in Hudson, N.H. The Company
was delinquent in remitting its rental payments. The landlord commenced an
action in 1999 in state court to evict the Company. The court found for
the landlord. Subsequent to the landlord receiving its judgement,
negotiations between the parties have resulted in the Company's being
allowed to remain in the premises essentially on a month to month bases
until April 2000, at which time the Company intends to move to its new
leased facilities in Amherst, N.H. The new lease is for three years
expiring in April 2003. Minimum annual rentals are $115,000 for each year.
The Company also leases office facilities on a month to month basis in
Erie, PA, Leesburg, VA and Saco, ME. The aggregate monthly rental is
$2,000.
(b) Year 2000:
The Company recognizes the need to insure its operations will not be
adversary affected by year 2000 software failures. The Company
communicated with its suppliers, customers and others with which it does
business to coordinate year 2000 conversion. The costs of achieving
compliance have been immaterial to date. Management believes that its
software is presently compliant and through February 15, 2000, the Company
has not experienced any problems associated year 2000 issues.
F-23
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) Litigation: (Continued)
(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 $13,000,000. The Company's insurance carrier
has appointed counsel to represent the subsidiary and such counsel as well
as management is unable to render an opinion on the ultimate outcome of
the lawsuit.
(ii) Elgin Technologies, Inc., the Petitioner, two former officers
and a stockholder of the Company, the Company's investment bankers and its
general corporate counsel as well as other parties are named defendants in
a lawsuit filed in Middlesex Superior Court in Cambridge, Mass. in June
1997 by Inverness Corporation and Menotomy Funding, LLC. The plaintiffs
allege breach of contract and a variety of other causes of action relating
to the alleged failure of Elgin Technologies, Inc. to honor certain stock
warrants.
In late 1996 a defendant, EAC Acquisition I Corporation ("EAC"), was
formed by the Company's investment bankers for the sole purpose of
acquiring assets of a troubled corporation located in Billerica, Mass. The
parties intended that EAC, whose President was an officer of Elgin
Technologies, Inc., would acquire the assets of the business and then
manage its operations in an effort to make it a viable concern. As part of
the transaction, plaintiffs sold the entire assets to EAC for a short-term
note aggregating $1,640,442.
During the negotiation of the loan agreement, the plaintiffs
represented that they would provide working capital of $300,000 pursuant
to the revolving line of credit of $1,780,000 referenced in the loan
agreement. As part of the consideration for the transaction, Elgin
Technologies, Inc. issued a warrant to purchase 750,000 shares of warrant
stock in a publicly traded company (CROA) that would be the survivor of a
merger with the Company. Elgin Technologies, Inc. was never a party to the
loan transaction and did not guarantee the debt of EAC.
The parties anticipated that the short-term note would be paid
through the infusion of new capital from third party investors. However,
after several loan forebearances for which the Company issued additional
warrants, neither the working capital from the plaintiffs nor any new
capital from investors was forthcoming. By May 1997, the plaintiffs
foreclosed on their security interest in EAC's assets, thereby forcing EAC
to cease operations.
Plaintiffs filed suit to obtain money damages in the amount of
$7,650,000 for the alleged failure to honor the warrants issued by the
Company in connection with the transaction. It is the Company's position
that the conditions precedent to the exercise of the warrants never
occurred. The Company and EAC have counterclaimed against the Plaintiffs
for common law fraud, beach of contract and related claims. The Company
and EAC allege they were fraudulently induced into entering into the loan
transaction and issuing the warrants in exchange for a non-existent
operating line of credit based upon false representations by plaintiffs
that it had the liquidity and ability to fund the line of credit. The case
is presently in the discovery phase and trial is not expected before the
latter part of the year 2000. Management is unable to determine the
ultimate resolution of this action and what effect, if any, the resolution
would have on the Company's financial condition.
F-24
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) Litigation: (Continued)
(iii) The Company and/or its subsidiaries are named defendants or
co-defendants in numerous actions with the Petitioner. These cases, in the
opinion of counsel, will be resolved through the bankruptcy proceedings.
The ultimate aggregate resolutions of the lawsuits, in management's
opinion, will not have a material adverse effect on the Company's
financial condition.
NOTE 13 - SEGMENT INFORMATION.
The Company's operations are comprised of its lighting manufacturing
and power system equipment manufacturing segments. Set forth below are
sales, operating losses, research and development costs, depreciation and
identifiable assets of the segments in thousands.
For the Nine For the
Months Ended Years Ended
December 31, March 31,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited)
Net sales:
Lighting $ 23 $ -- $ -- $ --
Power systems 5,404 4,817 7,218 6,980
------- ------- ------- -------
$ 5,427 $ 4,817 $ 7,218 $ 6,980
======= ======= ======= =======
Operating loss:
Lighting $ 989 $ 788 $ 1,271 $ 8,036
Power systems 2,053 2,964 2,977 5,104
------- ------- ------- -------
$ 3,042 $ 3,752 $ 4,248 $13,140
======= ======= ======= =======
Depreciation:
Lighting $ -- $ -- $ -- $ --
Power systems 63 100 51 235
------- ------- ------- -------
$ 63 $ 100 $ 51 $ 235
======= ======= ======= =======
Research and development:
Lighting $ 624 $ 661 $ 1,114 $ 8,036
Power systems -- 219 293 297
------- ------- ------- -------
$ 624 $ 880 $ 1,407 $ 8,333
======= ======= ======= =======
Identifiable assets:
Lighting $ 54 $ 47 $ -- $ --
Power systems 2,598 3,578 4,318 1,765
------- ------- ------- -------
$ 2,652 $ 3,625 $ 4,318 $ 1,765
======= ======= ======= =======
F-25
<PAGE>
PART III - EXHIBITS
Item 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Item # Description Page #
- - ------ ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation and amendments thereto
3.2 By-Laws
9. Voting Trust Agreements
9.1 Stockholders Agreement dated as of October 10, 1997 by and among Primo
Ianieri, Richard L. Audet, Dianne Toner, Michael Ianieri, Deborah
Antipin and Valerie Ianieri.
9.2 Voting Agreement dated as of April 1, 1998 by and among Elgin e^2,
Inc., Mason Cabot Holdings, Inc., Horace T. Ardinger, Jr., Primo
Ianieri, Peter Bordes and their spouses.
10. Material Contracts
10.1 Assumption, Payment Agreement and Amended and Restated Royalty
Agreement dated as of January 25, 1996 by and between Robert C.
Smallwood and American Compact Lighting, L.L.C.
10.2 Amendment to Royalty Agreement executed by Robert C. Smallwood on
April 1, 1998 by and between Robert C. Smallwood and American Compact
Lighting, L.L.C.
10.3 Employment Agreement dated as of December 1, 1997 by and between
Robert Smallwood and Logic Laboratories, Inc.
10.4 License Agreement dated as of April 1, 1998 by and between Horace T.
Ardinger, Jr. ("Licensee"), Logic Laboratories, Inc. and Elgin e^2,
Inc.
10.5 Employment Agreement dated as of April 1, 1998 by and between Lewis
Kunigel and Warren Power Systems, Inc. (terminated for cause by the
Company on February 28, 2000).
10.6 Secured Revolving Credit Agreement dated as of November 13, 1998 by
and between Elgin Technologies, Inc. and Horace T. Ardinger, Jr.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
10.7 Convertible Revolving Promissory Note dated as of November 13, 1998,
made by Elgin Technologies, Inc. in favor of Horace T. Ardinger, Jr.
10.8 Amendment, dated as of December 31, 1999, to Convertible Revolving
Promissory Note by Elgin Technologies, Inc. and in favor of Horace T.
Ardinger, Jr.
10.9 Agreement dated as of January 25, 2000 by and between William Mosconi
and Elgin Technologies, Inc., e^2 Electronics, Inc., Logic
Laboratories, Inc., Warren Power Systems, Inc., and William Mosconi,
concerning the resignation of William Mosconi.
10.10 Employment Agreement dated as of February 21, 2000 by and between
Jonathan Scott Harris and Elgin Technologies, Inc.
Addendum
A-1 "The Elgin Master Light Ballast System - Market Potential and Economic
Uncertainty" study by The Economics Resource Group, Inc., June 8,
1998.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Elgin Technologies, Inc.
- - ------------------------
(Registrant)
Date: March 3, 2000
-------------
By: /Michael J. Smith/
------------------
Name: Michael J. Smith
Title: Executive Vice President and Chief Financial Officer
42
EXHIBIT 3.1
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF INCORPORATION OF "CROSS ATLANTIC
CAPITAL INC.", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY OF
MAY, A.D. 1986, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403182
981436106 DATE: 11-12-98
<PAGE>
756148007
FILED
MAY 28, 1986
9 AM
/s/ [ILLEGIBLE]
[ILLEGIBLE]
CERTIFICATE OF INCORPORATION
OF
CROSS ATLANTIC CAPITAL INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the
"corporation") is
CROSS ATLANTIC CAPITAL INC.
SECOND: The address, including street, number, city, and county, of
the registered office of the corporation in the State of Delaware is 229 South
State Street, City of Dover, County of Kent; and the name of the registered
agent of the corporation in the State of Delaware at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is 50,000,000. The par value of each of such
shares is $.001. All such shares are of one class and are shares of Common
Stock.
FIFTH: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
J. A. Kent 229 South State Street, Dover, Delaware
SIXTH: The corporation is to have perpetual existence.
<PAGE>
SEVENTH: Whenever a compromise or arrangement is proposed between
this corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within The State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
EIGHTH: For the management of the business and for the conduct of
the affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed by, or in the manner provided in, the By--Laws. The phrase "whole
Board" and the phrase "total number of directors" shall be deemed to have
the same meaning, to wit, the total number of directors which the
corporation would have if there were no vacancies. No election of
directors need be by written ballot.
2. After the original or other By-Laws of the corporation have been
adopted, amended, or
-2-
<PAGE>
pealed, as the case may be, in accordance with the provisions of Section
109 of the General Corporation Law of the State of Delaware, and, after
the corporation has received any payment for any of its stock, the power
to adopt, amend, or repeal the By-Laws of the corporation may be exercised
by the Board of Directors of the corporation; provided, however, that any
provision for the classification of directors of the corporation for
staggered terms pursuant to the provisions of subsection (d) of Section
141 of the General Corporation Law of the State of Delaware shall be set
forth in an initial By-Law or in a By-Law adopted by the stockholders
entitled to vote of the corporation unless provisions for such
classification shall be set forth in this certificate of incorporation.
3. Whenever the corporation shall be authorized to issue only one
class of stock, each outstanding share shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders. Whenever
the corporation shall be authorized to issue more than one class of stock,
no outstanding share of any class of stock which is denied voting power
under the provisions of the certificate of incorporation shall entitle the
holder thereof to the right to vote at any meeting of stockholders except
as the provisions of paragraph (b) (2) of section 242 of the General
Corporation Law of the State of Delaware shall otherwise require;
provided, that no share of any such class which is otherwise denied voting
power shall entitle the holder thereof to vote upon the increase or
decrease in the number of authorized shares of said class.
NINTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it shall
have power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another
-3-
<PAGE>
capacity while holding such office, and shall continue as to a person who has
ceased to be director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
TENTH: From time to time any of the provisions of this certificate
of incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article TENTH.
Signed on May 28, 1986.
/s/ J.A. Kent
----------------------------------------
J.A. Kent
Incorporator
-4-
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF RENEWAL OF "CROSS ATLANTIC CAPITAL
INC.", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY, A.D.
1988, AT 10 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403183
981436106 DATE: 11-12-98
<PAGE>
FILED
10AM
JUL 14 1986
/s/ [ILLEGIBLE]
[ILLEGIBLE]
CERTIFICATE
for Renewal and Revival of Charter
Cross Atlantic Capital Inc., a corporation organized under the laws
of Delaware, the certificate of incorporation of which was filed in the office
of the Secretary of State on the 28th day of May 1986, and recorded in the
office of the Recorder of Deeds for ___________________ County, the charter of
which was voided for non-payment of taxes, now desires to procure a restoration,
renewal and revival of its charter, and hereby certifies as follows:
1. The name of this corporation is Cross Atlantic Capital Inc.
- - --------------------------------------------------------------------------------
2. Its registered office in the State of Delaware is located at 229
S. State St. Street, City of Dover Zip Code ______ County of Kent the name and
address of its registered agent is The Prentice-Hall Corporation Systems, Inc.
3. The date when the restoration, renewal, and revival of the
charter of this company is to commence is the 29th day of February, 1988, same
being prior to the date of the expiration of the charter. This renewal and
revival of the charter of this corporation is to be perpetual.
4. This corporation was duly organized and carried on the business
authorized by its charter until the 1st day of March A.D. 1988 at which time the
charter became inoperative and void for non-payment of taxes and this
certificate for renewal and revival is filed by authority of the duly elected
directors of the corporation in accordance with the laws of the State of
Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of
Section 312 of the General Corporation Law of the State of Delaware, as amended,
providing for the renewal, extension and restoration of charters. Harold W. Paul
the and last acting President, and Miriam Lacher, the last and acting Secretary
of Cross Atlantic Capital, Inc. have hereunto set their hands to this
certificate this 12th day of July, 1988
/s/ Harold W. Paul
----------------------------------------
Last and Acting President
ATTEST:
/s/ Miriam Lacher
----------------------------------------
Last and Acting Secretary
Miriam Lacher
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF RENEWAL OF "CROSS ATLANTIC CAPITAL
INC.", FILED IN THIS OFFICE ON THE THIRTY-FIRST DAY OF MARCH,
A.D. 1997, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403184
981436106 DATE: 11-12-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 03/31/1997
971103136 - 2092153
STATE OF DELAWARE
CERTIFICATE FOR RENEWAL AND REVIVAL
OF CHARTER
================================================================================
CROSS ATLANTIC CAPITAL INC. a corporation organized under the laws
of Delaware, the charter of which was forfeited for failure to obtain a
registered agent, now desires to procure a restoration, renewal and revival of
its charter, and hereby certifies as follows:
1. The name of this corporation is CROSS ATLANTIC CAPITAL INC.
-------------------------------------------------------------.
2. Its registered office in the State of Delaware is located at
1013 CENTRE ROAD City of WILMINGTON Zip Code 19805 County of
New Castle the name of its registered agent is The
Prentice-Hall Corporation System, Inc.
3. The date of filing of the original Certificate of
incorporation in Delaware was MAY 28, 1986.
4. The date when restoration, renewal, and revival of the charter
of this company is to commence is the 28th day of February,
same being prior to the date of the expiration of the charter
This renewal and revival of the charter of this corporation is
to be perpetual.
5. This corporation was duly organized and carried on the
business authorized by its charter until the 1st day of March
AD. 1990, at which time its charter become inoperative and
forfeited for failure to obtain a registered agent and this
certificate for renewal and revival is filed by authority of
the duly elected directors of the corporation in accordance
with the laws of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this certificate to
be signed by an authorized officer this 25th day of MARCH A.D. 1997.
BY /s/ Philip Dascher
-------------------------------------
Authorized Officer
Philip Dascher
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "CROSS ATLANTIC CAPITAL
INC.", FILED IN THIS OFFICE ON THE THIRTY-FIRST DAY OF MARCH,
A.D. 1997, AT 9:01 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403185
981436106 DATE: 11-12-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:01 AM 03/31/1997
971103140 - 2092153
ARTICLES OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
CROSS ATLANTIC CAPITAL INC
(A Delaware Corporation)
Pursuant to the applicable provisions of the Delaware Corporation Law, the
undersigned corporation adopts the following Articles of Amendment to its
Certificate of Incorporation by stating the following:
FIRST: The following Amendment to its certificate of Incorporation was
duly adopted by the shareholders of the corporation on May 30, 1996, in the
manner prescribed by Delaware law.
SECOND: Article FOURTH of the Articles of Incorporation of tins
corporation is amended to read in full as follows:
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is 60,000,000. The par value of each
of such shares is $.000833. All such shares are one class and are
shares of Common Stock. Upon the amendment of this Article to read
as hereinabove set forth, each five (5) outstanding shares is split,
reconstituted and converted into six (6) shares of a par value of
$.000833.
THIRD: The foregoing Amendment to the Certificate of Incorporation had
been duly approved by the Board of Directors on April 15, 1996.
FOURTH: The foregoing Amendment to the Certificate of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Delaware law on May 30, 1996. The total number of outstanding shares of the
corporation is 500,000. The number of shares voting in favor of the Amendment
equaled or exceeded to vote required. The number of shares voting for such
Amendment was 489,000 and the number of shares voting against such Amendment was
0.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this Certificate are true and correct of
our own knowledge.
<PAGE>
In witness whereof, the corporation has caused this Articles of Amendment
to Certificate of Incorporation to be signed by authorized officers this 30th
day of July, 1996.
DATED: July 30, 1996 CROSS ATLANTIC CAPITAL INC.
By: /s/ Philip Dascher
------------------------------------
Philip Dascher, President
By: /s/ Amy Moll
------------------------------------
Amy Moll, Secretary
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "CROSS ATLANTIC CAPITAL
INC.", CHANGING ITS NAME FROM "CROSS ATLANTIC CAPITAL INC." TO
"ELGIN E2, INC.", FILED IN THIS OFFICE ON THE FIFTH DAY OF
JANUARY, A.D. 1998, AT 4:30 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403186
981436106 DATE: 11-12-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS ARTICLE OF AMENDMENT TO
FILED 04:30 PM 01/05/1998 CERTIFICATE OF INCORPORATION
981004450 - 2092153 OF
CROSS ATLANTIC CAPITAL INC.
(A DELAWARE CORPORATION)
(PURSUANT TO SECTION 242)
Pursuant to the applicable provisions of the Delaware corporation Law, the
undersigned corporation adopts the following Articles of Amendment to its
Certificate of Incorporation by stating the following:
FIRST: The following Amendment to the Certificate of Incorporation had
been duly approved by the Board of Directors on September 30, 1997.
SECOND: Article FIRST of the Certificate of Incorporation of this
corporation is amended to read in full as follows:
"FIRST: The name of the corporation is:
Elgin e 2, Inc."
THIRD: The foregoing Amendment to the Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with Delaware
law on September 30, 1997. The total number of shares voting in favor of the
Amendment equaled or exceeded the vote required. The number of shares voting for
such Amendment was 2,948,992 and the number of shares voting against such
Amendment was 0.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this certificate are true and correct of
our own knowledge.
In witness whereof, the corporation has caused this Articles of Amendment
to Certificate of Incorporation to be signed by authorized officers this 30th
day of September, 1997.
DATED: September 30, 1997 CROSS ATLANTIC CAPITAL INC.
By: /s/ Philip Dascher
------------------------------------
Philip Dascher, President
By: /s/ Amy Moll
------------------------------------
Amy Moll, Secretary
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF MERGER, WHICH MERGES:
"COMMUNICATION SERVICE COMPANY", A MAINE CORPORATION,
WITH AND INTO "ELGIN E2, INC." UNDER THE NAME OF "ELGIN E2,
INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF
THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE
TWENTY-FOURTH DAY OF APRIL, A.D. 1998, AT 1:50 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100M AUTHENTICATION: 9403187
981436106 DATE: 11-12-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 01:50 PM 04/24/1998
981157121 - 2092153
CERTIFICATE OF MERGER
OF
COMMUNICATION SERVICE COMPANY
INTO
ELGIN E 2, INC.
*************
The undersigned corporation does hereby certify:
FIRST: That the names and cases of incorporation of each of the
constituent corporations of the merger are as follows:
NAME STATE OF INCORPORATION
---- ----------------------
Elgin e 2, Inc. Delaware
Communication Service Company Maine
SECOND: That an Agreement of Merger between the parties to the merger has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 252 of
the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation of the merger is Elgin
e2, Inc.
FOURTH: That the certificate of incorporation of Elgin e 2, Inc., a
Delaware corporation, which is the surviving corporation, shall continue in full
force and effect as the certificate of incorporation of the surviving
corporation.
FIFTH: That the executed agreement of merger is on file at the principal
place of business of the surviving corporation which is 12 Executive Drive,
Hudson, New Hampshire 03501.
SIXTH: That a copy of the Agreement of Merger will be furnished, on
request and without cost, to any stockholder of any constituent corporation.
SEVENTH: The authorized capital stock of each constituent corporation
which is not a Delaware corporation is: 2,000 shares, no par value.
- - --------------------------------------------------------------------------------
<PAGE>
EIGHTH: That this Certificate of Merger shall be effective on April 24,
1998.
Dated April 23, 1998.
ELGIN E2, INC.
By: /s/ William Mosconi
------------------------------------
William Mosconi
Its President and Chief Executive Officer
Hereunto Duly Authorized
2
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "ELGIN E2, INC.",
CHANGING ITS NAME FROM "ELGIN E2, INC." TO "ELGIN TECHNOLOGIES,
INC.", FILED IN THIS OFFICE ON THE SIXTEENTH DAY OF JUNE, A.D.
1998, AT 2:30 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
2092153 8100 AUTHENTICATION: 9403188
981436106 DATE: 11-12-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:30 PM 06/16/1998
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
******
ELGIN e2, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"):
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said Corporation, by the unanimous
written consent of its members, filed with the minutes of the Board, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said Corporation:
RESOLVED, that the Certificate of Incorporation of ELGIN e2, INC. be
amended by changing Article 1 thereof so that, as amended, said Article
shall be and read as follows:
"1. The name of the Corporation is: Elgin Technologies, Inc."
SECOND: That in lieu of a meeting and vote of stockholders having not less
than the minimum number of votes that would be necessary to authorize or take
such action have given written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by William Mosconi, its President, this 8th day of May, 1998. ELGIN e2,
INC.
By: /s/ William Mosconi
------------------------------------
William Mosconi, its President
EXHIBIT 3.2
ELGIN TECHNOLOGIES, INC.
* * * * *
BY-LAWS
* * * * *
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors shall
be held at such place either within or without the State of Delaware as shall be
designated from time to time by the board of directors and
<PAGE>
tered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the
<PAGE>
purpose or purposes for which the meeting is called, shall be given not less
than ten nor more than sixty days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. if the adjournment is for more than thirty days, or if after
<PAGE>
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of
<PAGE>
the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole board
shall be one. The director shall be elected at the annual meeting of the
stockholders, except as provided in Section 2 of this Article, and each director
elected shall hold office until his successor is elected and qualified.
Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number
<PAGE>
of directors may be filled by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director, and the directors so chosen
shall hold office until the next annual election and until their successors are
duly elected and shall qualify, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which nay exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these
<PAGE>
by-laws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
<PAGE>
Section 6. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board may be called by the president on
ten days' notice to each director, either personally or by mail or by telegram;
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of two directors unless the board
consists of only one director; in which case special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of the sole director.
Section 8. At all meetings of the board a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the board of directors the directors present thereat may
adjourn the meeting from time
<PAGE>
to time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 9. Unless otherwise restricted by the certificate of incorporation
or these by-laws, any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed by a majority
of the whole board, desig-
<PAGE>
nate one or more committees, each committee to consist of one or more of the
directors of the corporation. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
Any such committee, to the extent provided in the resolution of the board
of directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) fix any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series or the same or
any other class or classes of stock of the corporation) adopting an agreement
of merger or consolida-
<PAGE>
tion, recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the by-laws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors.
Section 12. Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at
<PAGE>
each meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with
<PAGE>
postage thereon prepaid, and such notice shall be deemed to be given at the time
when the same shall be deposited in the United States mail. Notice to directors
may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board of
directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional vice-presidents,
and one or more assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each annual
meeting of stockholders shall
<PAGE>
choose a president, one or more vice-presidents, a secretary and a treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the board
of directors may be removed at any time by the affirmative vote of a majority of
the board of directors. Any vacancy occurring in any office of the corporation
shall be filled by the board of directors.
THE PRESIDENT
Section 6. The President shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of
<PAGE>
the corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board of directors to some
other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
<PAGE>
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election)
<PAGE>
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be
<PAGE>
renewed every six years) in such sum and with such surety or sureties as shall
be satisfactory to the board of directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
Section 14. The assistant treasurer, or if there shall be more than one,
the assistant treasurers in the order determined by the board of directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be signed by, or in
the name of the
<PAGE>
corporation by, the chairman or vice-chairman of the board of directors, or the
president or a vice-president, and by the treasurer or an assistant treasurer,
or the secretary or an assistant secretary of the corporation.
Within a reasonable time after the issuance or transfer of uncertificated
stock, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to Sections 151, 156, 202(a) or 218(a) or a statement that
the corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Section 2. Any of or all the signatures on a certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he
<PAGE>
were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates or uncertificated shares to be issued in place of any certificate
or certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates or uncertificated
shares, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and/or to give the corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be cancelled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the corporation.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any
<PAGE>
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting: provided, however,
that the board of directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present
<PAGE>
at each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
<PAGE>
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
EXHIBIT 9.1
STOCKHOLDERS AGREEMENT
This Agreement ("Agreement") is dated as of October 10, 1997 and entered
into by and among Primo Ianieri ("P. Ianieri"), Richard L. Audet, Dianne Toner,
Michael Ianieri, Deborah Antipin and Valerie Ianieri (hereinafter collectively
referred to as the "Stockholders").
WITNESSETH:
WHEREAS, Cross Atlantic Capital, Inc. (the "Company") was incorporated
under the laws of the State of Delaware on May 28, 1986; and
WHEREAS, the total number of authorized shares of capital stock of the
Company (hereinafter referred to as the "Stock") consists of 60,000.000 shares
of common voting stock, par value $.000833 (the "Common Stock" or the "Stock");
and
WHEREAS, 3,200,000 shares of the Company's Common Stock have been issued
to the Stockholders; and
WHEREAS, the parties hereto desire to provide for the composition of the
Board of Directors of the Company and certain other corporate matters concerning
the orderly operation and management of the Company, and to set forth their
respective rights and obligations in connection therewith; and
NOW THEREFORE, in consideration of the mutual promises contained herein
and of the mutual benefits to be gained by the performance thereof, for so long
as P. Ianieri directly or beneficially owns or controls Five Percent (5%) or
more of the issued and outstanding Common Stock of the Company the parties
hereto do hereby agree as follows:
<PAGE>
1. Composition of Board of Directors. The Board of Directors of the
Company shall consist of not less than Seven (7) members: (i) Three (3) of which
shall be designated by P. Ianieri (the "P. Ianieri Directors"), which P. Ianieri
Directors shall comprise the Executive Committee of the Board of Directors (the
"Executive Committee"); (ii) Two (2) of which shall be designated by Peter
Bordes, Sr.; and (iii) Two (2) of which shall be outside directors.
2. Executive Committee. The Executive Committee shall have the power to:
(i) veto any proposed acquisition, merger, offering or sale of securities of the
Company; (ii) veto any borrowings or issuances of debt securities of the
Company; (iii) select corporate officers of the Company; and (iv) determine the
compensation of the senior management of the Company. The undersigned shall
cause the Board of Directors to form the Executive Committee consistent with the
provisions hereof.
3. Binding Effect. All of the terms and provisions of this Agreement shall
be binding upon, inure to the benefit of, and be enforceable by the parties and
their respective administrators, executors. legal representatives, heirs,
successors and permitted assigns.
4. Amendments. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by all of
the parties hereto.
5. Notices. All notices, elections, demands or other communications
required or permitted to be made or given pursuant to this Agreement shall be in
writing and shall be considered as properly given or made if sent prepaid and
actually received by telecopier, hand delivery, certified mail, overnight
delivery service or courier service addressed to the respective parties as
indicated below. Any party may change its notice instructions by giving notice
thereof, in writing, to the other parties.
To the Company: Elgin e^2, Inc.
12 Executive Drive
2
<PAGE>
Hudson, NH 03501
Attention: Mr. William Mosconi, President
With a copy to: Lev, Berlin and Dale, P.C.
535 Connecticut Avenue
Norwalk, CT 06854
Attention: Eric J. Dale, Esquire
To any of the
Stockholders: c/o Primo Ianieri
Key International Inc.
480 Route 9
Englishtown, NJ 07726
In each case
with a copy to: Richard Audet
Key International Inc.
480 Route 9
Englishtown, NJ 07726
and: Lev, Berlin and Dale, P.C.
535 Connecticut Avenue
Norwalk, CT 06854
Attention: Eric J. Dale, Esquire
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
/s/ Primo Ianieri
------------------------------
Primo Ianieri
/s/ Primo Ianieri
------------------------------
Richard L. Audet atty in fact
/s/ Primo Ianieri atty in fact
------------------------------
Dianne Toner
3
<PAGE>
/s/ Michael Ianieri atty in fact
--------------------------------
Michael Ianieri
/s/ Primo Ianieri atty in fact
--------------------------------
Deborah Antipin
/s/ Primo Ianieri atty in fact
--------------------------------
Valerie Ianieri
Acknowledged and agreed to as of
the 10th day of October, 1997
- - --------------------------------
Peter A. Bordes, Sr.
4
<PAGE>
--------------------------------
Michael Ianieri
--------------------------------
Deborah Antipin
--------------------------------
Valerie Ianieri
Acknowledged and agreed to as of
the 10th day of October, 1997
/s/ Peter A. Bordes, Sr.
- - --------------------------------
Peter A. Bordes, Sr.
EXHIBIT 9.2
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement"), dated as of April 1, 1998, is
among Elgin E^2, Inc., a Delaware corporation (the "Corporation"), Mason Cabot
Holdings, Inc., a New York corporation (the "Mason"), Horace T. Ardinger, Jr.
("Ardinger"), Primo Ianieri ("Ianieri"), and Peter Bordes ("Bordes"), (Mason,
Ardinger, Ianieri and Bordes are sometimes collectively referred to as
"Shareholders" and individually referred to as "Shareholder"), and the spouses
of the individual Shareholders.
RECITALS:
The authorized capital stock of the Corporation consists of 60,000,000
shares of Common Stock, $.000833 par value per share ("Common Stock"), of which
18,999,737 shares of Common Stock are issued and outstanding or issuable
pursuant to outstanding securities on the date hereof. (The shares of Common
Stock issued and outstanding or issuable pursuant to securities issued and
outstanding on the date hereof are all described on Exhibit A attached hereto
and are collectively referred to as the "Stock"). The Shareholders believe it is
in their best interests to provide for certain agreements with respect to the
future voting of the Stock and desire to set forth their agreements with respect
to voting the Stock.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby covenant and agree as follows:
ARTICLE I - VOTING; BOARD APPROVAL
1.1 Nomination and Election of Directors. On and after the date hereof,
at any meeting of the shareholders or by written consent in lieu of a meeting,
Ardinger shall have the right to nominate one (1) member of the Corporation's
Board of Directors (the "Board"), for each seven (7) members then serving on the
Board, rounded to the nearest whole number, so that Ardinger will continue to
control at least one-seventh (1/7) of the seats on the Board. The Shareholders
shall vote all of their respective shares of the Stock which they currently own
or may hereafter acquire (collectively, the "Shares") in favor of the election
of the person or persons so nominated by Ardinger.
1.2 Removal of Directors. No Shareholder shall vote his or its Shares in
favor of the removal of a director elected hereunder; provided, however, that
upon the request of Ardinger to remove a director nominated by Ardinger, the
Shareholders shall vote all of their Shares in favor or of the removal of such
director.
1.3 Vacancies in the Board. If any vacancy occurs in the Board because of
the death, disability, resignation, retirement, or removal of a director
nominated by Ardinger, Ardinger shall nominate a successor, and all Shareholders
shall vote their Shares in favor of the election of such successor to the Board.
Any such vacancy that occurs shall be filled as promptly as possible upon the
request of Ardinger.
1.4 Proxies. Neither the Corporation nor any Shareholder shall give any
proxy or power of attorney to any person or entity that permits the holder
thereof to vote in his or its discretion on any matter that may be submitted to
the Corporation's shareholders for their consideration and approval, unless such
proxy or power of attorney is made expressly subject to and is exercised in
conformity with the provisions of this Agreement.
<PAGE>
1.5 General Voting. Each Shareholder hereby agrees to vote his or its
Shares in such a manner as to carry out and enforce this Agreement.
ARTICLE II - DISPOSITION OF SHARES
2.1 Restrictions on Disposition. So long as this Agreement is in effect,
no Shareholder shall sell, assign, transfer, give, encumber, pledge, or in any
other way dispose of his or its Shares, except as otherwise provided in or
permitted by that certain letter agreement dated March 5, 1998, among Ardinger,
the Corporation, and Mason.
ARTICLE III - MISCELLANEOUS
3.1 Endorsement on Certificates. Upon execution of this Agreement, the
stock certificates representing the Shares shall contain substantially the
following legend, in addition to any other legends deemed appropriate or
necessary by the Corporation:
This certificate is transferable only upon compliance with and subject to,
and the securities evidenced by this certificate must be voted in
compliance with and subject to, the provisions of the Voting Agreement,
dated as of March 27, 1998, among the Corporation, certain shareholders of
the Corporation and their respective spouses, a copy of which is on file
in the office of the Secretary of the Corporation at its principal place
of business. The Corporation will furnish a copy of such Voting Agreement
to the record holder of this certificate, without charge, upon written
request to the Corporation at its principal place of business.
3.2 Specific Performance. The parties hereto recognize that it is to the
benefit of the Corporation and the Shareholders that this Agreement be carried
out; and for that and other reasons, the parties hereto would be irreparably
damaged if this Agreement is not specifically enforced in the event of a breach
hereof. If this Agreement is breached, then the parties hereto hereby agree that
remedies at law might be inadequate and that, therefore, such rights and
obligations, and this Agreement, shall be enforceable by specific performance.
The remedy of specific performance shall not be an exclusive remedy, but shall
be cumulative of all other rights and remedies of the parties hereto at law, in
equity, or under this Agreement.
3.3 Transferee and Future Shareholders. The Corporation and the
Shareholders shall cause any transferee of any Shares, and such transferee's
spouse, to execute a consent, in the form attached hereto as Exhibit B, to be
bound by the terms of this Agreement.
3.4 Notices. Any notice or other communication required or permitted to be
given under this Agreement must be in writing and given by (a) deposit in the
United Stares mail, addressed to the party to be notified, postage prepaid and
registered certified with return receipt requested, (b) delivery in person, by
courier service, or by overnight delivery service, or (c) transmission by
telecopy. Each notice or communication that is mailed, delivered, or transmitted
in the manner described above shall be deemed sufficiently given, served, sent,
and received, in the case of mailed notices, on the third business day following
the date on which it is mailed and, in the case of notices delivered by hand,
courier service, overnight delivery service, or telecopy, at such time as it is
delivered to the addressee (with the delivery receipt or the affidavit of the
courier service or overnight delivery service being proof of delivery) or at
such time as delivery is refused by the addressee upon presentation. For
purposes of notice, the addresses of the
-2-
<PAGE>
parties shall be the addresses set forth beside the signatures of the parties
hereto. Any party may change its address for notice by written notice given to
the other parties hereto.
3.5 Binding Effect. This Agreement shall be binding upon and enforceable
by the parties hereto and their respective executors, administrators,
successors, personal representatives, heirs, and assigns.
3.6 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED, CONSTRUED, AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICTS OF LAWS
PRINCIPLES THEREOF. The parties agree that any litigation directly or indirectly
relating to this Agreement must be brought before and determined by a court of
competent jurisdiction within Dallas County, Texas, and the parties hereby agree
to waive any rights to object to, and hereby agree to submit to, the
jurisdiction of such courts.
3.7 Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal.
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision, there shall be
added automatically as part of this Agreement, a provision as similar in its
terms to such illegal, invalid, or unenforceable provision as may be possible
and be legal, valid, and enforceable.
3.8 Entire Agreement. This Agreement and the Exhibits hereto constitute
the entire agreement and understanding between the parties relating to the
subject matter hereof and thereof and supersede all prior representations.
endorsements, premises, agreements, memoranda, communications, negotiations,
discussions, understandings, and arrangements, whether oral, written, or
inferred, between the parties relating to the subject matter hereof.
3.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The parties intend that
faxed signature pages to this Agreement will be enforceable without presentation
of the manually executed signature pages.
3.10 Amendments. This Agreement may not be modified, amended, rescinded,
canceled, altered, or supplemented, in whole or in part, except upon the
execution and delivery of a written instrument executed by Ardinger.
3.11 Headings. The headings of the Articles and Sections of this Agreement
have been inserted for convenience of reference only and shall in no way
restrict or otherwise modify any of the terms or provisions hereof or affect in
any way the meaning or interpretation of this Agreement.
3.12 Waiver. The waiver of any breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other breach of
the same or any other term or condition.
3.13 No Third Party Beneficiaries. Except to the extent a third party is
expressly given rights herein, any agreement contained, expressed, or implied in
this Agreement shall be only for the benefit of the
-3-
<PAGE>
parties hereto and their respective executors, administrators, successors,
personal representatives, heirs, and assigns and such agreements shall not inure
to the benefit of the obligees of any indebtedness of any party hereto, it being
the intention of the parties hereto that no person or entity shall be deemed a
third party beneficiary of this Agreement except to the extent a third party is
expressly given rights herein.
3.14 Gender; Number. The use of terms denoting masculine, feminine, or
neuter gender shall include each other gender. The use of singular or plural
references shall include the other where appropriate.
3.15 Time is of the Essence. Time is of the essence with respect to all
time periods and dates referenced in this Agreement.
3.16 Termination of this Agreement. This Agreement shall continue until,
and shall terminate immediately and automatically upon (a) execution of a
written agreement of termination by Ardinger, (b) the merger of the Corporation,
other than with a wholly-owned subsidiary, pursuant to which the Shareholders do
not own at least 50.1% of the equity of the surviving corporation, or (c) the
dissolution and complete liquidation of the Corporation.
3.17 Spouses. By executing this Agreement, each spouse of each individual
Shareholder agrees to be bound in all respects by the terms of this Agreement to
the same extent as the Shareholders. Each spouse further agrees that should such
spouse predecease the Shareholder to whom such Shareholder is married or should
she become divorced from such Shareholder, any of the Shares which such spouse
may own or in which she may have any interest shall remain subject to all of the
restrictions and to all of the rights of the Shareholders contained in this
Agreement.
3.18 Arbitration. (a) In the event of a dispute arising out of or relating
to this Agreement, then, upon notice by any party to the other parties (an
"Arbitration Notice") and to the American Arbitration Association (the "AAA"),
the dispute shall be submitted to a sole arbitrator who is independent and
impartial, for binding arbitration in Dallas, Texas, in accordance with the
AAA's Commercial Arbitration Rules (the"Rules") as modified or supplemented by
this Agreement. The parties agree that they will faithfully observe this
Agreement and the Rules and that they will abide by and perform any award
rendered by the arbitrator. The arbitration shall be governed by the Federal
Arbitration Act (or by the same principles enunciated by such Act in the event
it may not be technically applicable). The award or judgment of the arbitrator
shall be final and binding on all parties and the judgment upon the award or
judgment of the arbitrator may be entered and enforced by any court having
jurisdiction. If any party becomes the subject of a bankruptcy, receivership, or
similar proceeding under the laws of the United States of America, any state or
commonwealth or any other nation or political subdivision thereof, then, to the
extent permitted or not prohibited by applicable law, any factual or substantive
legal issues arising in or during the pendency of any such proceeding shall be
subject to all of the foregoing mandatory arbitration provisions and shall be
resolved in accordance therewith. The agreements contained herein have been
given for valuable consideration, are coupled with an interest and are not
intended to be executory contracts. The fees and expenses of the arbitrator will
be shared equitably (as determined by the arbitrator) by all parties engaged in
the dispute.
(b) Promptly after the Arbitration Notice is given, the AAA will select
five (5) possible arbitrators, to whom the AAA will give the identities of the
parties and the general nature of the controversy. If any of those arbitrators
disqualified himself or declines to serve, the AAA shall continue to designate
potential arbitrators until the parties have a panel of five (5) arbitrators to
select from. After the panel of five
-4-
<PAGE>
(5) potential arbitrators has been completed, a two-page summary of the
background of each potential arbitrator will be given to each of the parties,
and the parties will have a period of ten (10) days after receiving the
summaries in which to attempt to agree upon the arbitrator to conduct the
arbitration. If the parties are unable to agree upon an arbitrator, then one (1)
of the parties shall notify the AAA and the other party, and the AAA will notify
each party that it has five (5) days from the AAA's notice to strike two (2)
names from the list and advise the AAA of the two (2) names stricken. After
expiration of the strike period, if all but one (1) candidate of the panel has
been stricken, the remaining one (1) person will be the arbitrator. If two (2)
or more have not been stricken, then the AAA shall select the arbitrator from
one of those not stricken. The decision of the AAA with respect to the selection
of the arbitrator will be final and binding in such case. For purposes of
selecting arbitrators, Ardinger will be one party and the Corporation and the
other Shareholders will be deemed to be one party.
(c) No litigation or other proceeding may ever be instituted at any time
in any court or before an administrative agency or body for the purpose of
adjudicating, interpreting, or enforcing any of the rights or obligations of the
parties hereto or any rights or obligations relating to the subject matter
hereof, whether or not covered by the express terms of this Agreement, or for
the purpose of adjudicating a breach or determination of the validity of this
Agreement, or for the purpose of having the award or judgment of an arbitrator,
except a proceeding instituted (i) for the purpose of having the award or
judgment of an arbitrator entered and enforced or (ii) to seek an injunction or
restraining order (but not damages in connection therewith) in circumstances
where such relief is available.
(d) Within 10 days after the selection of the arbitrator, the parties and
their counsel will appear before the arbitrator at a place in Dallas, Texas and
time designated by the arbitrator for the purpose of each party making a one
hour or less presentation and summary of the case. Thereafter, the arbitrator
will set dates and times for additional hearings in accordance with the Rules
until the proceeding is concluded. The desire and goal of the parties is, and
the arbitrator will be advised that his goal should be, to conduct and conclude
the arbitration proceeding as expeditiously as possible. If any party or his
counsel fails to appear at any hearing, the arbitrator shall be entitled to
reach a decision based on the evidence which has been presented to him by the
parties who did appear.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first written above.
ELGIN E^2, INC., a Delaware corporation
Address:
- - -------------------------------
By: /s/ [ILLEGIBLE]
- - ------------------------------- -----------------------------------
Its: President, CEO
- - ------------------------------- -----------------------------------
-5-
<PAGE>
MASON CABOT HOLDINGS, INC.,
a New York corporation
Address:
- - -------------------------------
By: /s/ [ILLEGIBLE]
- - ------------------------------- -----------------------------------
Its: INV. BANK [ILLEGIBLE]
- - ------------------------------- -----------------------------------
Address:
9040 Governor's Row /s/ Horace T. Ardinger, Jr.
P.O. Box 569360 ---------------------------------------
Dallas, TX 75356-9360 Horace T. Ardinger, Jr.
Address:
- - -------------------------------
- - ------------------------------- ---------------------------------------
Primo Ianieri
- - -------------------------------
Address:
- - -------------------------------
/s/ Peter Bordes
- - ------------------------------- ---------------------------------------
Peter Bordes
- - -------------------------------
-6-
<PAGE>
MASON CABOT HOLDINGS, INC.,
a New York corporation
Address:
- - -------------------------------
By:
- - ------------------------------- -----------------------------------
Its:
- - ------------------------------- -----------------------------------
Address:
9040 Governor's Row
P.O. Box 569360 ---------------------------------------
Dallas, TX 75356-9360 Horace T. Ardinger, Jr.
Address:
- - -------------------------------
/s/ Primo Ianieri
- - ------------------------------- ---------------------------------------
Primo Ianieri
- - -------------------------------
Address:
- - -------------------------------
- - ------------------------------- ---------------------------------------
Peter Bordes
- - -------------------------------
-6-
<PAGE>
Spouse's Signatures
Each of the undersigned, being the spouse of an individual Shareholder,
hereby acknowledges that he or she has read and understood the foregoing Voting
Agreement, and agrees to be bound by the terms thereof, including but not
limited to, Section 3.17 thereof.
/s/ [ILLEGIBLE]
-----------------------------------
-----------------------------------
-7-
<PAGE>
EXHIBIT A TO VOTING AGREEMENT
Stock Ownership
Ownership of
Name Common Stock
---- ------------
Horace T. Ardinger, Jr. 3,083,333
Peter Bordes 2,500,000
Primo Ianieri _________
Mason Cabot Holdings, Inc. _________
Exhibit A - Stock Ownership
<PAGE>
EXHIBIT B TO VOTING AGREEMENT
Consent
The undersigned, having purchased shares of Common Stock and/or securities
convertible and/or exchangeable into shares of Common Stock of Elgin E^2, Inc.,
a Delaware corporation (the "Corporation"), hereby agrees to be bound by the
terms and conditions of the Voting Agreement of the Corporation, the form of
which is attached hereto and agrees that the undersigned will hereafter be
deemed a "Shareholder" as defined in and described in the Voting Agreement.
Name ______________________________________
Signature ______________________________________
Address ______________________________________
______________________________________
______________________________________
Telecopy No. ______________________________________
No. of Shares
Common: ______________________________________
Preferred: ______________________________________
Date ______________________________________
I, the undersigned, being the spouse of the above-named Shareholder,
hereby acknowledge that I have read and understand the Voting Agreement, and I
agree to be bound by the terms thereof, including, but not limited to, Section
3.17 thereof.
Name _______________________________________________
Signature _______________________________________________
EXHIBIT 10.1
ASSUMPTION, PAYMENT AGREEMENT AND
AMENDED AND RESTATED ROYALTY AGREEMENT
This Assumption, Payment Agreement and Amended and Restated Royalty Agreement
("this Assumption and Agreement") is entered into as of January 25, 1996, by and
between Robert C. Smallwood, individually ("Smallwood"), and American Compact
Lighting, L.L.C., a Virginia limited liability company. Hereinafter, "ACL" shall
refer to American Compact Lighting, L.L.C., its successor, or its permitted
assign, as the case may be. Smallwood and ACL are referred to hereinafter as,
individually, "Party" and, collectively, "Parties."
W I T N E S S E T H
WHEREAS, ACL and Small wood entered into a Royalty Agreement, dated July
15, 1994 (the "Royalty Agreement"), under which ACL agreed to provide Smallwood
with a certain royalty in return for the consideration described in an
Assignment, dated January 10, 1994, executed by Smallwood (the "Assignment") to
ACL of certain rights of Smallwood in the field of electronic ballasts; and
WHEREAS, ACL owed W. Gray Price, IV ("Price") the sum of $212,000.00 and
Timothy E. Walsh ("Walsh") the sum $73,000.00 for monies loaned to ACL by price
and Walsh; and
WHEREAS, in connection with two promissory notes executed by Smallwood on
December 28, 1995, Smallwood assumed ACL's obligation to pay such sums to Price
and Walsh in consideration of ACL's willingness to amend and restate the Royalty
Agreement; and
WHEREAS, the Parties desire to amend and restate the Royalty Agreement to
reflect Smallwood's assumption of the above stated obligations of ACL and the
royalty to be paid Smallwood.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties, intending to be legally bound, agree as follows:
1. Smallwood hereby confirms his assumption of the obligation of ACL to
pay Price the sum of $212,000.00 and Walsh the sum of $73,000.00 and has
contemporaneously with his execution of this Assumption and Agreement executed
the promissory notes (the "Notes") attached as Exhibit A hereto, replacing the
promissory notes, dated December 28, 1995.
2. (a) In consideration for the rights, title and interests assigned to
ACL under the Assignment and Smallwood's obligations to pay Price and Walsh as
set forth in Paragraph 1, above, ACL hereby reaffirms its prior obligations and
agrees to pay Smallwood a royalty (the
1
<PAGE>
"Royalty") of five percent (5.00%) on all Royalty Revenue (as defined in
Paragraph 6 below) received by ACL during the Royalty Term (as defined in
Section 7 below) until such time as Smallwood receives from ACL a total payment
of $585,000 from ACL's Available Funds, pursuant to clauses (a) and (c) of
Paragraph 3, below, or from any other source in ACL's sole and absolute
discretion. If Smallwood has received from ACL an aggregate of $585,000 from
ACL's Available Funds, pursuant to clauses (a) and (c) of Paragraph 3, below, or
from any other source in ACL's sole and absolute discretion, the Royalty due
Smallwood pursuant to the immediately preceding sentence of this Paragraph 2
shall be reduced prospectively for the Royalty Term to a percentage equal to the
sum of (x) four and one-tenth percent (4.10%), plus (y) any percentage amount
(expressed in a percentage on all Royalty Revenue) Smallwood is obligated to pay
Richard M. Lavers, which percentage amount shall at no time exceed
fifteen-hundredths percent (0.15%) for an aggregate reduced Royalty of no more
than four and twenty-five hundredths percent (4.25%) on all Royalty Revenue.
Until Smallwood receives from ACL an aggregate of $585,000 from ACL's Available
Funds, pursuant to clauses (a) and (c) of Paragraph 3, below, or from any other
source in ACL's sole and absolute discretion, the Royalty due Smallwood pursuant
to the first sentence of this Paragraph 2 shall remain at five percent (5.0%)
for the Royalty Term on all Royalty Revenue received by ACL for the Royalty
Term.
(b) ACL covenants and agrees to use reasonable efforts to make the
$585,000 payment due Smallwood pursuant to pursuant to Section 3, below,
on or before January 10, 1997.
3. To the extent that, at the end each calendar quarter, any money remain
after all costs and expenses at ACL are paid as determined by the management of
ACL in their sole and absolute discretion, including without limitation,
employee salaries and the Royalty set forth in Paragraph 2, above (the
"Available Funds"), ACL shall at the end of each calendar quarter pay Smallwood
an amount (in addition to the Royalty) equal to the sum of the following
amounts; (a) $71,250.00, until a total of $285,000 is paid to Smallwood
pursuant to this clause (a), plus (b) all increase, if any, due Price and Walsh
under the Notes as of to end of such calendar quarters until the Notes are
entirely paid in full, plus (c) $75,000.00, until a total if $300,000.00 is paid
to Smallwood pursuant to this clause (c) of this Paragraph 3 by January 10,
1997, nine percent (9.0%) per annum interest beginning on January 11, 1997, on
any outstanding amount due Smallwood under clause (c) of this Paragraph 3. If,
at the end of a calendar quarter, such remaining Available Funds are less than
the entire amounts due Smallwood under clauses (a), (b), (c) and (d) of this
Paragraph 3, then ACL shall pay Smallwood pro rata portions of the amounts
otherwise due under such clauses (a), (b), (c), and (d), which portions when
combined equal such remaining Available Funds. Notwithstanding the foregoing,
ACL shall not be required to pay Smallwood any amount further under the
foregoing clauses (a) and (c) of this Paragraph 3 once all payments made under
such clauses equal or exceed $585,000.00. However, the payments under clause (b)
shall remain until such time as the Notes are paid in full.
2
<PAGE>
4. All amounts (including the Royalty) to be paid by ACL to Smallwood
under this Assumption and Agreement shall be payable within ten (10) calendar
days after the end of each calendar quarter and shall be reconciled annually to
audited records of ACL within (90) days after the end of each calendar year.
Smallwood shall have the right to examine the books and records of ACL to
determine the accuracy of all payments under this Assumption and Agreement, upon
reasonable request and subject to reasonable confidentiality arrangements. The
royalties payable under this Assumption and Agreement shall be in addition to
any other consulting fees, salaries, other royalties or other amounts that may
be paid or payable to Smallwood for services to ACL.
5. The rights and obligations of ACL under this Assumption and Agreement
shall be binding upon and inure to the successors and permitted assigns of ACL.
Smallwood agrees that ACL may assign its obligations under this Assumption and
Agreement to Logic Laboratories, Inc., a Delaware corporation. Except as
provided in the foregoing sentence, this Assumption and Agreement may not be
assigned by either Party without the written consent of the other Party.
6. As used in this Assumption and Agreement, "Royalty Revenue" means gross
revenue actually received by ACL, prior to any deductions for any expenses of
ACL including without limitation taxes, rents, and employee salaries and
bonuses, if any, but after deductions for rebates, warranties, tariffs, and
other shipping costs, from the domestic and international sale, licensing,
manufacturing and any other sources if income to ACL resulting from the
technology evidenced by the patents on Exhibit B attached hereto (the
"Patents"). The Parties acknowledge and agree that not Royalty shall be due
Smallwood hereunder from any income derived by ACL from technology other than
that listed on Exhibit B.
7. The Royalty due Smallwood hereunder shall terminate on the date which
is the expiration date of the last of the Patents listed on Exhibit B (the
"Royalty Term"). The amount due Smallwood pursuant to Section 3, above, shall
continue until satisfied in full; provided, however, such amounts shall become
due and payable in full immediately upon the merger, consolidation, dissolution,
or sale of substantially all of the assets of Logic Laboratories, Inc., once
this Assumption and Agreement has been assigned to Logic Laboratories, Inc.
8. This Assumptions and Agreement constitutes the entire agreement between
the Parties with respect to the subject matter hereof and supersedes all prior
agreements, understandings, proposals, offers, negotiations and discussions,
whether oral and written, between the Parties, including without limitation the
Royalty Agreement (which this Assumptions and Agreement amends and restates) and
the Memorandum to Timothy F. Sutherland from Smallwood, Price and Walsh, dated
December 6, 1995, with respect to the subject matter hereof.
9. This Assumptions and Agreement cannot be amended, modified to
terminated without the written consent of ACL, Smallwood and the holders of the
Notes.
3
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Assumptions and Agreement
to be executed on the date first above written
American Compact Lighting, L.L.C. Robert C. Smallwood, individually
By: /s/ Robert C. Smallwood By: /s/ Robert C. Smallwood
------------------------------- -------------------------------
Name: Robert C. Smallwood Date: Jan. 25, 1996
----------------------------- -----------------------------
Title: Mgr
----------------------------
Date: Jan. 25, 1996
-----------------------------
4
EXHIBIT 10.2
AMENDMENT TO ROYALTY AGREEMENT
This is an amendment to the Assumption, Payment Agreement and
Amended and Restated Royalty Agreement (the "Agreement") dated January 25, 1996,
by and between Robert C. Smallwood ("Smallwood") and American Compact Lighting,
L.L.C. ("ACL") for which ACL was succeeded in interest by Logic Laboratories,
Inc. (LLI), a Delaware corporation, pursuant to an Assignment and Assumption
Agreement retroactively entered into on December 4, 1995.
As a necessary condition to obtain investment funding in LLI's
parent company, Elgin E2, Inc. ("Elgin"), Smallwood and LI hereby agree as
follows:
1. Section 2(a) is amended to state that the royalty rate is one
percent (1%) of Royalty Revenue. The remainder of this section starting with the
words "until such time" in the first sentence is deleted. Section 2(b) is
deleted.
2. Section 3 is deleted.
3. "Royalty Revenue" remains as defined in Section 6. Smallwood
acknowledges and consents to the grant of a license by LU under the Patents to
Horace T. Ardinger Jr. ("Ardinger"), with certain rights of exclusivity.
Smallwood acknowledges and understands that his right to receive a royalty is
based on the gross revenues of LU only and is not applied to gross sales made by
LI's licensees. Royalties paid to LLI pursuant to such licenses are. however,
included in LI's Royalty Revenue. No royalty shall be due unless and until
LI's Royalty Revenue exceeds five million dollars ($5,000.000.00), in which
event LLI shall make a payment of $50,000 plus one percent of the amount over
$5,000,000, and continue to make royalty payments thereafter at the one percent
rate during the Royalty Term.
4. To the extent this Amendment varies from any prior agreement
concerning the subject matter hereof, including paragraph 3.26 of the December,
1997 Stock Purchase Agreement to which LI and Smallwood are parties, and the
letter dated March 31, 1998 signed by Smallwood, this Amendment shall supercede
all such prior agreements.
5. Section 9 of the Assumption, Payment Agreement and Amended and
Restated Royalty Agreement dated January 25, 1996 required that any modification
of that agreement required the consent of the Note holders. Smallwood
represents by singing below that he will obtain the consent of the Note holders
listed below within thirty (30) days of the date he signs this Amendment. LI
agrees to pay off either or both of the Note holders in the event that they are
not willing to consent to this Amendment, and to indemnify and hold Ardinger and
Elgin harmless from any loss or expense either incurs as a result of Smallwood's
failure to obtain such consents.
6. Smallwood represents and warrants that he has no other claim or
interest to the Patents or other intellectual property of LLI, other than as
provided by this Amendment and by his Security Agreement dated December 27,
1996, and that he hereby waives any such right
<PAGE>
which is not specifically mentioned in this Amendment. In the event that
Smallwood reacquires ownership to any Patent or other intellectual property of
LLI by means of such agreements, or by any other means, Smallwood agrees that
the license under the Patents granted by LLI to Ardinger shall remain in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
below.
Logic Laboratories, Inc.
By: /s/ William Muscom
-----------------------------------------
WILLIAM MUSCOM
_________________, President
Date: 4-15-98
---------------------------------------
____________________________________________
Robert C. Smallwood
Date:_______________________________________
Consented to by:
____________________________________________
W. Gary Price
Date:_______________________________________
____________________________________________
Timothy E. Walsh
Date:_______________________________________
<PAGE>
which is not specifically mentioned in this Amendment. In the event that
Smallwood reacquires ownership to any Patent or other intellectual property of
LLI by means of such agreements, or by any other means, Smallwood agrees that
the license under the Patents granted by LLI to Ardinger shall remain in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
below.
Logic Laboratories, Inc.
By: /s/ William Muscom
-----------------------------------------
_________________, President
Date: 4-1-98
---------------------------------------
/s/ Robert C. Smallwood
--------------------------------------------
Robert C. Smallwood
Date: 4-1-98
---------------------------------------
Consented to by:
____________________________________________
W. Gary Price
Date:_______________________________________
____________________________________________
Timothy E. Walsh
Date:_______________________________________
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of
December, 1997 by and between Logic Laboratories, Inc., a Delaware corporation
(the "Company"), and Robert Smallwood (the "Employee").
WHEREAS, the Company believes it is in the Company's best interest to
employ the Employee as its Vice President in charge of Lighting Technologies
Research and Development and Employee desires to be employed by the Company in
such capacity; and
WHEREAS, the Company and Employee desire to set forth the terms and
conditions on which Employee shall be employed by and provide his services to
the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto do hereby agree as
follows:
1. Employment. The Company hereby employs Employee as its Vice President
in charge of Lighting Technologies Research and Development and the Employee
hereby accepts such employment, all upon the terms and conditions hereinafter
set forth. The Company agrees that Employee may perform the services hereunder
from his home in Leesburg, Virginia and that he will not be required nor
requested to work in any other location; provided, however, that Employee shall,
at the reasonable request of the Company, travel for the benefit of the Company.
2. Term. Unless sooner terminated pursuant to the provisions of this
Agreement, the term of employment under this Agreement shall be for a period
commencing on the date first set forth above and shall continue for a period of
Five (5) years thereafter (the "Employment Period"). Employee has the option, in
his sole and absolute discretion, to extend the Employment Period for one
additional Five (5) year term (the "Option Term"). Such option shall be deemed
automatically
<PAGE>
exercised unless Employee provides written notice to the Company of his intent
not to exercise the option, such notice to be given 90 days prior to the initial
Five (5) year term.
3. Compensation.
(a) Salary. Employee shall be entitled to receive an annual salary during
the Employment Period of not less than One Hundred Twenty Thousand Dollars
($120,000.00). Such salary shall be payable in accordance with the normal
payroll policies of the Company and shall be subject to all appropriate
withholding taxes. Notwithstanding the foregoing, in the event that the
President of the Company receives salary increases during the term hereof
attributable to the performance of the Company, Employee shall be entitled to
periodic salary increases based upon the market value of services provided and
subject to the approval of the Board of Directors of the Company.
(b) Stock Options. The Company does not currently have a stock option plan
in place. In the event the Company does implement a stock option plan in the
future, Employee shall be entitled to participate in such plan in a manner
consistent with that of other executive-level employees of the Company.
(c) Bonus. Employee may be entitled to a bonus (the "Bonus") while on
full-time employment with the Company. The Bonus, if any, shall be at the
discretion of the Company's Board of Directors.
(d) Company Vehicle. Employee shall be entitled to a Company-leased
vehicle, which shall be comparable to the Lincoln Navigator that is currently
being provided by the Company to Employee.
4. Vacation. Employee shall be entitled up to Four (4) weeks of paid
vacation annually.
2
<PAGE>
5. Other Benefits. Employee agrees that the compensation set forth in
Section 3 hereof, and the vacation time specified in Section 4 hereof, are the
sole and exclusive compensation of the Employee for his duties hereunder;
provided, however, that Employee shall be entitled to participate in and receive
all benefits under any welfare benefit plan or program, including, without
limitation group medical and dental insurance for himself and his dependents,
and all employee benefits, including without limitation, hospital, medical,
health and disability insurance and/or any retirement savings plan or program
provided at any time by the Company to any of its executive-level employees. The
benefits offered by the Company are subject to change from time to time as
determined in the sole and absolute discretion of the Board of Directors of the
Company.
6. Business Expenses and Reimbursements.
(a) Employee shall be entitled to reimbursement by the Company for all
ordinary and necessary business expenses incurred by Employee in the performance
of his duties, which types of expenditures in excess of Three Thousand Dollars
($3,000.00) in the aggregate shall be approved, in writing in advance by the
President of the Company, or its Board of Directors, provided that:
(i) Each such expenditure is of a nature qualifying it as a proper
deduction on the Federal and State income tax returns of the Company as a
business expense and not as deductible compensation to the Employee; and
(ii) Employee furnishes the Company with the supporting statements,
bills or receipts evidencing the expenses for which Employee seeks reimbursement
and any such other related information or materials as the Company may
reasonably require.
(b) Employee agrees that, if at any time, any payment made to the Employee
by the Company, whether for salary or as a business expense reimbursement, shall
be disallowed in whole
3
<PAGE>
or in part as a deductible expense to Company by the appropriate taxing
authorities, Employee shall reimburse the Company to the full extent of such
disallowance, including penalties and interest, if any.
7. Duties. During the Employment Period:
(a) Employee shall report directly to the President and Chief
Executive Officer of the Company and shall furnish all manner of services in
connection with his position and duties as Vice President in charge of Lighting
Technologies Research and Development of the Company. Employee shall perform the
duties customarily associated with such positions and such other duties as may,
from time to time, be assigned to him.
(b) Employee shall devote full time, energy and skill to the service
of the Company and the promotion of its interests, and shall use his best
efforts in the performance of his services hereunder. The parties agree that
Employee may not, during the Employment Period, be engaged in any other business
activity whether or not such activity is pursued for gain, profit, or other
pecuniary advantage; provided, however, Employee may invest his personal assets
in non-competitive and non-related businesses where the form or manner of such
investment will not require any substantial devotion of time or attention.
8. Death or Incapacity. In the event of the death or incapacity
("incapacity" being defined as the involuntary failure of Employee to devote
full time to the service of the Company for a period of Sixty (60) consecutive
days), during the Employment Period, or longer period as determined in the sole
discretion of the Board of Directors, the Employee's employment hereunder shall
terminate immediately upon such death or determination of incapacity. The
Company shall pay to the Employee or Employee's estate all amounts owed to the
Employee hereunder which have accrued
4
<PAGE>
until the date of death or determination of incapacity, including without
limitation, the salary and vested stock options due under Section 3, and shall
continue to pay to Employee or Employee's estate the amount of salary payable to
Employee pursuant to Section 3(a) hereof immediately prior to the date of such
death or determination of incapacity for a period of One Hundred Eighty (180)
days subsequent to the date of death or determination of incapacity. Such
amounts shall be payable at such times and in the manner set forth in Section 3
herein.
9. Termination By Company. The Employee may be terminated by the Company
only for cause, "cause" being defined as adjudicated criminal misconduct, gross
negligence, malfeasance or material breach of this Agreement by Employee. In the
event Employee is terminated for cause, the Company shall be obligated to pay to
Employee the salary and vested stock options accrued through the date of
termination. In the event the Company terminates Employee without cause, the
Company shall endeavor to provide advance notice of such termination to Employee
and, in addition to any other rights and remedies the Employee may have, the
Company shall continue to pay the Employee the salary specified under Section
3(a), in the same manner and at the same times required under such section,
until the expiration of the Employment Period, including the Option Term,
provided, however, that in the event that during the Employment Period Employee
directly or indirectly, as owner, partner, joint venturer, lender, employee,
agent, corporate officer, principal, licensor, shareholder or in any other
capacity whatsoever, engages in or makes preparation to engage in or becomes
interested in or has any connection with any business competitive with the
business of the Company or any of its affiliates, subsidiaries or successors as
is conducted at the time of termination of Employee, then the Company shall have
no further obligation to Employee, including, without
5
<PAGE>
limitation, the payment obligations set forth in Paragraphs 3, 4, 5, and 7, nor
shall Employee have any right to the Option Term.
10. Confidentiality. In the course of his employment, the Company may
disclose or make known to the Employee, and the Employee may be given access to
or may become acquainted with, certain information, trade secrets, customers,
policies, and other information and know-how, all relating to or useful in the
Company's business (collectively "Information"), and which the Company considers
proprietary and desires to maintain confidential regardless of whether a patent
or copyright may be obtained for the Information.
During the Employment Period and at all times thereafter, the Employee
shall not in any manner, either directly or indirectly, divulge, disclose or
communicate to any person or firm, except to or for the Company's benefit as
directed by the Company any of the Information which he may have acquired in the
course of or as an incident to his employment by the Company, the parties
agreeing that such Information affects the successful and effective conduct of
the Company's business and its goodwill, and that any breach of the terms of
this Section is a material breach of this Agreement and shall serve as "cause"
for termination.
11. Restrictive Covenants. The Employee acknowledges that the Information
is unique in character and is of particular significance to the Company and that
the Company is in a competitive business. Therefore, during the Employment
Period and for a period of Five (5) years thereafter, Employee shall not
directly or indirectly, as owner, partner, joint venturer, lender, employee,
broker, agent, corporate officer, principal, licensor, member, shareholder or in
any other capacity whatsoever, engage in or make preparation to engage or become
interested in or have any connection with any business competitive with the
business of the Company, or any of its subsidiaries, affiliates
6
<PAGE>
or successors, if any as are conducted during said period (hereinafter a
"Competitive Business") nor shall the Employee solicit any other employee of the
Company for the purpose of hiring or engaging such other employee in connection
with any business of which Employee is an owner, partner, joint venturer,
vender, employee, broker, agent, officer, principal, licensor or shareholder.
If, in any legal proceedings, a court or arbitration board shall refuse to
enforce the covenants included in this Section, then such unenforceable
covenants shall be amended by such court or arbitration board to relate to such
lesser period or geographical area as shall be enforceable. Employee hereby
acknowledges that the restrictions on his activity as contained in this
Agreement are required for the reasonable protection of the Company and its
subsidiaries, affiliates and successors, if any. Employee hereby agrees that in
the event of the violation by him of any of the provisions of this Agreement,
the Company and its subsidiaries, affiliates and successors, if any, will be
entitled if any so elects, to institute and prosecute proceedings at law or in
equity to obtain damages with respect to such violation or to enforce the
specific performance of this Agreement by Employee or to enjoin Employee from
engaging in any activity in violation hereof. In the event Company or its
subsidiaries, affiliates or successors, if any, is determined to be the
prevailing party in any legal action or other proceeding for the enforcement of
this Section 11, the time for calculating the term of the covenants in this
Section 11 shall not include the period of time commencing with the filing of
legal action or other proceeding to enforce the terms hereof through the date of
final judgment or final resolution, including all appeals, if any, of such legal
action or other proceeding. Notwithstanding the foregoing, in the event that
Employee is terminated without cause, the restrictive covenants set forth in
this Paragraph 11 shall be of no force or effect.
7
<PAGE>
12. Entire Agreement. This Agreement represents the entire understanding
and agreement between the parties with respect to the subject matter hereof, and
supersedes all other negotiations, understandings and representations (if any)
made by and between such parties.
13. Amendments. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by the
party as to whom enforcement of any such amendment, supplement, waiver or
modification is sought and making specific reference to this Agreement.
14. Binding Effect. All of the terms and provisions of this Agreement,
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and permitted assigns.
15. Severability. If any part of this Agreement or any other Agreement
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full force
and effect so far as possible.
16. Waivers. The failure or delay of the Company or the Employee at any
time to require performance by the other party, as applicable, of any provision
of this Agreement, shall not affect the right of the Company or the Employee, as
applicable, to require performance of that provision or to exercise any right,
power or remedy hereunder, and any waiver by the Company or the Employee, as
applicable, of any breach of any provision of this Agreement should not be
construed as a waiver or any continuing or succeeding breach of such provision,
a waiver of the provision itself, or a waiver of any right, power or remedy
under this Agreement. No notice to or demand on
8
<PAGE>
the Employee or the Company, as applicable, in any case shall, of itself,
entitle such party to any other or future notice or demand in similar or other
circumstances.
17. Notices. All notices, requests, consents and other communications
required or permitted under this Agreement shall be in writing (including
facsimile) and shall be (as elected by the person giving such notice) by hand
delivery by messenger or courier service, facsimile, or United States Postal
Service (airmail if international) by registered or certified mail (postage
prepaid), return receipt requested, addressed to:
If to Company: Logic Laboratories, Inc.
12 Executive Drive
Hudson, NH 03051
Attention: Mr. William Mosconi, President
tel. 603-598-4700
fax. 603-598-8814
With a copy to: Lev, Berlin & Dale, P.C.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attention: Eric J. Dale, Esq.
tel. 203-838-8500
fax. 203-854-1652
If to Employee: Mr. Robert Smallwood
751 Miller Drive, S.E.
Leesburg, Virginia 22075
tel. 703-779-8144
fax. 703-777-5964
With a copy to: Odin, Feldman & Pittleman, P.C.
9302 Lee Highway, Suite 1100
Fairfax, VA 22031
Attention: F. Douglas Ross, Esq.
tel. 703-218-2127
fax. 703-218-2160
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Each such notice, request, consent and other communication shall be deemed
delivered (a) on the date delivered if by personal delivery, (b) on the date of
telecopy transmission if confirmed by telephone, and (c) on the date upon which
the return receipt is signed or delivery is refused or the notice is designated
by the postal authorities as not deliverable, as the case may be, if mailed.
18. Governing Law. This Agreement and all transactions contemplated by
this Agreement shall be governed by, and construed and enforced in accordance
with, the internal laws of the Commonwealth of Virginia without regard to
principles of conflicts of laws. The parties hereto consent to jurisdiction of
any dispute relating to or arising out of this Agreement or the interpretation
hereof to the Courts of the State of New York in Manhattan and the United States
District Court for the Southern District of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
LOGIC LABORATORIES, INC.
/s/ Robert Smallwood By: /s/ William Mosconi
- - -------------------- ------------------------
Robert Smallwood William Mosconi
Its President
Hereunto Duly Authorized
10
EXHIBIT 10.4
LICENSE AGREEMENT
This Agreement is effective as of the 1st day of April, 1998, by and
between Horace T. Ardinger, Jr. an individual resident of Texas (hereinafter
"Licensee"), Logic Laboratories, Inc., a Delaware corporation having a place of
business at Leesburg, Virginia, (hereinafter "LLI") and Elgin E^2 Inc., a
Delaware corporation having a place of business at 12 Executive Drive, Hudson,
New Hampshire 03051 (hereinafter "Elgin").
WHEREAS, LLI is the owner of certain patents and patent applications
related to lamp technology, especially for use in fluorescent lightning; and
WHEREAS, Elgin is the corporate parent of LLI and controls LLI; and
WHEREAS, Licensee as a condition of his investment in Elgin has
requested a license in LLI's proprietary fluorescent lamp technology as set
forth hereafter, and Elgin and LLI are willing to grant such a license.
NOW, THEREFORE, in consideration of the mutual promises made herein
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "Patent(s)" shall mean the issued patents and pending patent
applications relating to LLI's proprietary lamp technology, including without
limitation those listed in the attached Exhibit A, any divisions, continuations,
continuations-in-part or reissues thereof, and any foreign counterpart patents
and patent applications to any of the foregoing United States patents or patent
applications; and any U.S. or foreign patents covering "Improvements" as defined
below to any of the foregoing.
1.2 "Technical Data" shall mean any and all documents containing
design and technical information, engineering or production data, drawings,
plans, specifications, techniques, methods, processes, trade secrets, reports,
models, market research data, and any and all other material and matter used by
or in possession of LLI or Elgin and applicable to the design, manufacture,
assembly, service and sale of Products as defined hereafter.
1.3 "Know-how" shall mean the general and specific knowledge,
experience and information known to LLI or Elgin, not in written or printed
form, applicable to the design, manufacture, assembly, service and sale of
Products.
1.4 "Improvement" shall mean any modification of a product or method
described in a Patent, or any new product or method developed or acquired by
LLI or Elgin which relates to fluorescent lamp technology.
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1.5 "Product" means any product which if manufactured, used or sold
by an unlicensed entity would constitute an infringement of a valid claim of a
Patent of the relevant jurisdiction.
1.6 "Method" means any method or process which if practiced by an
unlicensed entity would constitute an infringement of a valid claim of a Patent
of the relevant jurisdiction.
1.7 "Net Selling Price" shall mean the gross invoice or contract
price charged by Licensee or a sublicensee for each Product, but excluding the
following:
(a) all commercial, trade or cash discounts; and
(b) all adjustments or allowances actually granted by Licensee;
and
(c) all charges made by Licensee for boxing or packaging and for
transportation to destination; and
(d) all sales tax or direct governmental taxes;
(e) parts or components purchased from Elgin or LLI, or their
successors under this Agreement; and
(f) all charges for design, installation or other services in
connection with contracts to both provide and install
Products, unless such services constitute a Licensed Method.
1.8 "Territory" shall mean the states or countries listed in Exhibit
B to this Agreement and any other exclusive territories which Licensee acquires
exclusive rights in by exercise of its right of first refusal as provided in
Section 3 hereafter.
1.9 "Exclusive Account(s)" shall mean the entities listed in Exhibit
B and any other entities which Licensee acquires exclusive rights in by exercise
of its right of first refusal as provided in Section 3 hereafter, and
subsidiaries, parents, affiliates and successors of all such entities.
1.10 "Confidential Information" shall mean information regarding the
development of products or otherwise relating to the business of either party or
of a related company, including without limitation Technical Data and Know-how.
Confidential Information shall include all documents prepared by one party after
receipt of Confidential Information from the other and which contain or
otherwise reflect the Confidential Information. Information shall not be
considered confidential nor subject to this Agreement if it can be demonstrated:
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(a) to have been rightfully in the possession of the receiving party
prior to the date of the disclosure of such information to receiving party
by the disclosing party;
(b) To have been in the public domain prior to the date of the
disclosure of such information to the receiving party by the disclosing
party;
(c) To have become part of the public domain by publication or by
any other means except an unauthorized act or omission by the receiving
party; or
(d) To have been supplied to the receiving party without restriction
by a third party who is under no obligation to the disclosing party to
maintain such information in confidence.
1.11 "Change of Control" shall mean a merger, consolidation, or
acquisition of a corporation, or other transactions which result in a new person
or entity having power to control the corporation as power to control is defined
in 13 C.F.R. 121.401 (c) and (e) as of the date of this Agreement.
1.12 "Reserved States" shall mean those states identified as such in
Exhibit B to this Agreement.
2. GRANT
2.1 LLI hereby grants to Licensee a world-wide, right and license
under the Patents, Technical Data, Know-how and any other related intellectual
property rights of LLI to make, use and sell Products and to practice Methods,
with the right on the part of Licensee to grant sublicenses. Such right and
license shall be non-exclusive except:
(a) Licensee shall have the exclusive right to sell, lease or otherwise
dispose of Products to customers located in the Territory, to
install Products at sites located in the Territory, and to practice
Methods in the Territory; and
(b) Licensee shall have the exclusive, world-wide right to sell, lease
or otherwise dispose of Products to Exclusive Accounts and to
practice Methods on behalf of Exclusive Accounts.
Purchasers of Products shall acquire the right to practice any and all Methods
unless Licensee expressly provides in writing that such purchaser is not so
licensed. Elgin and LLI do not retain any right to market Products directly or
indirectly to customers in the Territory, or to Exclusive Accounts.
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2.2 LLI and Elgin shall furnish Licensee with all Technical Data and
Know-how owned by or in the possession of LLI or Elgin which is applicable to
the Products.
2.3 LLI and Elgin will immediately disclose any Improvement to
Licensee.
2.4 The acceptance of the foregoing licenses and/or any technical
assistance provided by LLI or Elgin, or the payment of any royalty or other
compensation by Licensee to LLI with respect to any Products manufactured and
sold by Licensee shall in no way constitute an admission by Licensee that such
product comes within the scope of the Patents or that the Patents are valid or
enforceable against Licensee or its customers.
2.5 The granting by Licensee of sublicenses under the Patents,
Technical Data and Know-how shall be in the discretion of Licensee, and Licensee
shall have the sole power to determine whether or not to grant sublicenses, the
identity of the sublicensees, and the royalty rates, terms and conditions of
such sublicenses, provided that LLI is paid a royalty as provided in Section 4
on Products manufactured and sold by sublicensees just as if such Products had
been manufactured and sold by Licensee. Licensee shall further provide in the
terms of any sublicense that sublicensee's rights are subject to any existing or
future exclusive licenses granted by LLI, and that sublicensee may be required
to cease marketing of Products in areas outside the Territory, or to specific
customers, in accordance with such exclusive agreements.
2.6 Licensee agrees to use reasonable efforts to market Products
sold to Licensee by LLI in the Territory. Such obligation shall remain effective
until the last of the Patents covering states in the Territory expires, but
shall apply only if and to the extent that Products are made available to
Licensee by LLI pursuant to Section 6 below. Licensee may exploit the licenses
granted herein as determined in his sole discretion, and is under no express or
implied obligation to commercialize Products or Methods in the event that
Licensee's obligation to purchase Products from LLI lapses as provided in
Section 6.
3. ADDITIONAL LICENSES; RIGHT OF FIRST REFUSAL
3.1 LLI and Elgin agree that, for a period of two (2) years from the
effective date of this Agreement, neither LLI nor Elgin shall grant or offer to
grant to anyone other than Licensee an exclusive license under any of the
Patents, or an exclusive right to distribute Products, in any Reserved States.
If Licensee and/or its sublicensees make sales in a Reserved State during such
two year period, such state shall cease to be a Reserved State and become part
of the Territory.
3.2 In the event that LLI intends to grant an exclusive license
under any of the Patents, Technical Data or Know-how or an exclusive right to
distribute its products for a geographic area outside of the Territory or for a
customer other than an Exclusive Account, Licensee shall have a right of first
refusal as to such exclusive license or exclusive right of
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distribution. Upon receipt by Licensee of a copy of specific, detailed offer to
enter into an exclusive license or exclusive right of distribution, which
Licensee agrees to review in confidence, Licensee shall have fifteen (15)
business days from the date it receives the terms of the offer to enter into an
agreement adding the territory covered by the offer to the exclusive Territory
of this Agreement, or adding the customer to Licensee's Exclusive Accounts, on
substantially the same terms as the terms agreed to by the third party. LLI may
if it wishes withhold the name of the offeror from the terms of the offer it
provides to Licensee. If Licensee does not exercise his right of first refusal
as provided in this paragraph, then the scope of the license granted in Section
2 of this Agreement shall be deemed modified to exclude from the non-exclusive
license grant the territory or customer(s) to which exclusive rights have been
granted by LLI.
3.3 Any exclusive or non-exclusive license or distribution rights
granted by LLI to a third party shall unambiguously state that the third party
is prohibited from marketing products covered by a Patent in the Territory or to
an Exclusive Account, and shall include in the terms of any such license or
distribution agreement a provision for the termination of such agreement in the
event that a violation of Licensee's exclusive rights under this Agreement
occurs. LLI shall invoke such right of termination upon Licensee's request if
such a violation has occurred and continues unabated for more than 30 days after
LLI or Licensee informs the third party of the violation, and Licensee provides
LLI with reasonable evidence that a violation has occurred and is ongoing, or
LLI has ready access to such evidence. LLI shall also invoke such right of
termination upon Licensee's request if the same third party commits three or
more such violations, whether or not abated within 30 days of notice, and
Licensee provides LLI with reasonable evidence that the violations have
occurred, or LLI has ready access to such evidence.
4. ROYALTIES, REPORTS AND PAYTMENTS
4.1 Licensee agrees to pay a royalty at the rates provided for in
paragraph 4.4 of this Section 4 on all Products manufactured by Licensee or a
sublicensee and thereafter sold or otherwise disposed of for profit under the
license herein granted by Licensee or a sublicensee. No royalty shall be payable
on Products purchased by Licensee or a sublicensee from LLI or Elgin, other than
Products purchased from LLI or Elgin designated for delivery or installation in
the State of Texas, for which a royalty shall be payable. No royalty shall be
payable for Products purchased from LLI or Elgin designated for delivery or
installation in states of the Territory other than Texas.
4.2 Licensee agrees to make written reports to LLI quarterly within
thirty (30) days after the first days of each January, April, July and October,
during the life of this Agreement and, as of such dates, stating in each such
report the number and description of Products manufactured and thereafter, used,
sold or otherwise disposed of under the license herein granted during the period
for which the report is rendered. The first such report shall
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cover the quarterly period or portion of quarterly period beginning on the
effective date of this Agreement; provided, however, that no report shall be due
for any quarter if no Products are used, sold or otherwise disposed of during
such period by Licensee or a sublicensee, unless LLI has requested such a
report. LLI may not request such a report more often than semiannually.
4.3 Licensee also agrees to make a written report to LLI within
thirty (30) days after the date of any termination of this Agreement, stating in
such report the number and description of Products manufactured and thereafter
used, sold or otherwise disposed of and not previously reported to LLI.
4.4 Simultaneously with the making of each report provided for in
paragraphs 4.2 and 4.3 of this Section 4, Licensee agrees to pay to LLI for the
quarterly period covered by such report, a percent royalty of the Net Selling
Price of all royalty-bearing Products sold by Licensee or its sublicensee(s).
The royalty rate shall be two and a half percent (2.5%) of the Net Selling Price
of such Products.
4.5 When the total cumulative royalties paid to LLI pursuant to this
Section 4 reach one million dollars ($1,000,000.00), the licenses granted
hereunder shall be deemed paid-up, and Licensee and its sublicensees shall have
no further obligation to pay the royalty specified in paragraph 4.4.
5. RECORDS
Licensee agrees to keep records of manufacture, use, sale or other
disposition of Products by Licensee and any sublicensees with respect to which
royalty payments hereunder are to be made in sufficient detail to enable the
royalties payable hereunder by Licensee to be determined, and further agrees to
permit its books and records to be examined from time to time to the extent
necessary to verify the reports provided for in Section 4 hereof, such
examination to be made at the expense of LLI by LLI or any auditor appointed by
LLI reasonably acceptable to Licensee, such examination to occur on no less than
ten (10) business days advance notice in writing during Licensee's regular
business hours.
6. SUPPLY
6.1 For so long as a Patent covering a state in the Territory
remains valid and unexpired, LLI agrees to make and sell to Licensee the
Products listed in Exhibit C to this Agreement, and any Products of like kind
offered by LLI which supercede such listed Products. Such Products shall be made
available in amounts sufficient to meet one hundred percent (100%) of Licensee's
requirements and at prices and terms that are the most favorable prices and
terms for comparable products of similar nature sold by LLI. Licensee shall
place orders for Products from time to time in accordance with its needs, and
except as provided
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below, shall not purchase Products from other suppliers during the term of this
Agreement, but shall have no continuing obligation to purchase Products.
6.2 If LLI is unable to produce and sell to Licensee Products at
prices, quality and quantity reasonably acceptable to Licensee, Licensee shall
give notice to LLI in writing of the basis for its non-acceptance, and LLI shall
have a period of thirty (30) days in which to take corrective action or to seek
arbitration, if the dispute is over what constitutes a reasonable price for
Products and quality and quantity are not at issue. If at the end of such thirty
day period the condition(s) which caused Licensee to give such notice have not
been corrected and neither party has requested arbitration pursuant to Section
14 below, then Licensee may elect to obtain Products from another supplier or
suppliers, or manufacture Products on his own account, or pursue the same
options with products competitive with Products offered by LLI not covered by a
Patent of the relevant jurisdiction.
6.3 During the pendency of any arbitration proceeding concerning
pricing of Products, LLI will continue to sell Products to Licensee at the price
in effect prior to the request for arbitration, or if there is no price then in
effect, at a price which represents the average of what LLI and Licensee each
consider to be a reasonable price.
6.4 Except as provided in Section 6.5, Licensee agrees to return to
purchasing Products from LLI if LLI can provide reasonable proof that it is able
once again to meet Licensee's current and reasonably foreseeable needs for
Products at prices, quality and quantity reasonably acceptable to Licensee.
6.5 Once Licensee has made a substantial investment in preparation
for manufacture of Products himself or through a sublicensee pursuant to
paragraph 6.2, should LLI again become able to meet such demand in the future,
LLI may be reinstated as sole supplier of the Products under this Section 6 by
purchasing at Licensee's original cost the manufacturing capability invested in
by Licensee and complying with the conditions of paragraph 6.4. In the event
that LLI purchases Licensee's manufacturing capability as provided herein,
orders for Products placed by Licensee or his sublicensees at that facility
shall have priority over and be filled prior to orders placed by others, such
that existing supplies of Products made at that facility shall not be shipped to
other customers while orders placed by Licensee or his sublicensees are pending.
7. TERMINATION
7.1 This Agreement shall remain in force perpetually until
terminated. The obligation to pay royalties pursuant to Section 4 shall expire
when the last of the Patents expires.
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7.2 Licensee shall have the right at its option to terminate this
Agreement for material breach by LLI or Elgin upon thirty (30) days' written
notice to LLI, unless within such 30 day period the breach shall have been cured
by Elgin or LLI.
7.3 Licensee's failure to use reasonable efforts to market Products
in the Territory as set forth in Paragraph 2.3 shall not be grounds for
termination of this Agreement by LLI or Elgin. LLI and Elgin's exclusive remedy
in such event will be to declare any state in which LLI or Elgin can prove
Licensee's failure to use reasonable efforts to market Products as provided in
Paragraph 2.3 no longer part of the Territory. In no event shall either LLI or
Elgin have the right to assert a failure by Licensee to use reasonable efforts
to market Products in the Territory as set forth in Paragraph 2.3 sooner than
two (2) years from the effective date of this Agreement.
7.4 In the event of any termination of this Agreement, Licensee and
its sublicensees shall continue to have a nonexclusive license to make, use and
sell Products and practice Methods for a period of one year thereafter, for the
sole and limited purpose of permitting Licensee and its sublicensees to complete
any and all then existing contracts and disposal of any inventory of Products.
Any such manufacture and sale or other disposition shall be subject to the
payments provided for hereunder. No termination of this Agreement pursuant to
the terms hereof shall relieve Licensee from its obligation to make any payments
accrued, due or payable up to the date of such termination.
8. INFRINGEMENTS
8.1 LLI shall have first right to institute actions for infringement
of the Patent(s). LLI shall exercise control over and bear the costs of any such
actions, and shall be entitled to retain the entire amount of any recovery by
way of judgment or settlement, except that Licensee shall be entitled to the
entire amount of any recovery by way of judgment or settlement attributable to
infringement in the Territory or sales to Exclusive Accounts. If LLI proceeds
under this paragraph, such payment to Licensee shall be without deduction of any
kind for costs or attorneys fees.
8.2 LLI shall have the option, if it declines to enforce a Patent as
provided in paragraph 8.1, of offering to enforce a Patent jointly with
Licensee. If Licensee agrees, LLI and Licensee shall exercise joint control over
any such action, split the costs of any such action equally, and shall share
equally in any recovery by way of judgment or settlement.
8.3 If LLI declines to proceed under either of paragraphs 8.1 or
8.2, then Licensee may institute an action for infringement of the Patent. In
such a case, Licensee shall exercise control over and bear the costs of any such
action, and shall be entitled to retain the entire amount of any recovery by way
of judgment or settlement, whether or not attributable to infringements in the
Territory or to Exclusive Accounts. LLI shall cooperate with Licensee in
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any such action, and agrees at Licensee's request and expense to join such an
action as plaintiff or co-plaintiff.
8.4 The parties will promptly inform each other of any actual or
suspected infringement of any Patent that they become aware of.
9. PROSECUTION AND MAINTENANCE OF PATENTS
9.1 LLI shall control the prosecution of all applications for
Patents, provided, however, that LLI must use reasonable efforts to obtain broad
patent coverage that will increase the value of the license granted herein to
Licensee. LLI agrees that it shall pay the expenses of filing, prosecution and
maintenance of the Patents, and that it will not abandon (without refiling) or
fail to maintain a Patent or application for a Patent without providing Licensee
an opportunity to take ownership of such patent as provided hereafter.
9.2 LLI agrees to keep pending a continuation or division claiming
priority of Serial No. 08/656,687, filed May 31, 1996, for a DYNAMIC RANGE
DIMMER FOR GAS DISCHARGE LAMPS, until such time as Licensee agrees in writing
that such an application need no longer be maintained.
9.3 LLI agrees to file, upon Licensee's request, an application for
a broadening reissue of Smallwood U.S. Patent No. 5,654,609 prior to August 5,
1999.
9.4 If Licensee so requests for one or more Patents, patent counsel
for LLI shall consult with patent counsel for Licensee to discuss patent
prosecution strategy before taking action on any application for a Patent. In no
event shall LLI or patent counsel for LLI take any action which would tend to
invalidate, render unenforcable, or disclaim any rights under any Patent (other
than terminal disclaimers required by law) without the prior written consent of
Licensee or patent counsel for Licensee.
9.5 Except as provided below, with respect to Improvements developed
or acquired by LLI, if LLI declines to file and prosecute an application to
obtain a Patent on such an Improvement, then Licensee may elect to file or take
over the prosecution of any such patent application. LLI shall assign such
patent application to Licensee without further consideration, and Licensee shall
bear all expenses thereafter incurred in connection with such prosecution. In
the event one or more patents owned by Licensee issue on such Improvements, LLI
shall have a non-exclusive license to practice inventions claimed in such
patents, provided it pays to Licensee a royalty of two and a half percent (2.5%)
of net sales of products covered by such patents. Notwithstanding the foregoing,
in the event that LLI determines in good faith that the Improvement is a
valuable trade secret, Licensee agrees not to file a patent application thereon
if LLI can provide reasonable evidence that the Improvement can be used
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commercially in a manner that competitors cannot reverse engineer in less than
three years, and that LLI has taken reasonable security measures to maintain the
secrecy of the trade secret.
9.6 LLI agrees that all applications for Patents shall be filed
first in the United States prior to filing in other countries.
9.7 If LLI determines that it wishes to abandon (without refiling)
or no longer maintain an issued Patent or pending application for a Patent, it
shall provide Licensee with a reasonable opportunity to take over the
prosecution or maintenance of such patent or application. LLI shall assign such
patent application to Licensee without further consideration, and Licensee shall
bear all expenses thereafter incurred in connection with such prosecution and
maintenance.
9.8 No later than nine (9) months following the filing date of any
United States application for a Patent, LLI shall give written notice to
Licensee or patent counsel for Licensee of its intention to file for foreign
patent protection based on the priority of such U.S. application. If LLI
determines that it does not wish to file for patent protection in one or more
countries in which Licensee desires protection, Licensee may file for such
protection on its own behalf and expense, and LLI shall assign such foreign
patent application(s) to Licensee without further consideration.
10. TRANSFERS
10.1 This Agreement and any license or rights hereunder shall be
assignable or otherwise transferable by Licensee, and any transferee of
Licensee, without the prior written consent of LLI.
10.2 This Agreement and any license or rights hereunder shall be not
assignable or otherwise transferable by LLI without the prior written consent of
Licensee, which shall not be unreasonably withheld. Licensee's withholding of
consent shall be deemed reasonable if it can demonstrate that the transfer of
the Agreement will have a material adverse effect on Licensee's ongoing business
under the license, or if it can demonstrate that the new owner will have
difficulty meeting its performance obligations under this Agreement. For
purposes of this section, this Agreement will be considered transferred if there
is a Change of Control of LLI or of Elgin.
10.3 LLI and Elgin agree that neither shall sell, pledge or
otherwise encumber any of the Patents, Technical Data or Know-how without the
prior written content of Licensee.
10.4 The licenses granted herein shall continue in effect in the
event that the ownership of the Patents changes, with or without breach of this
Agreement, and shall be considered to run with the Patents.
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11. REPRESENTATIONS AND WARRANTIES
(a) LLI covenants, represents and warrants that it is the exclusive
owner of all rights to the Patents, Know-how and Technical Data, except as noted
in (c) below.
(b) LLI and Elgin covenant, represent and warrant, to the best of
their knowledge, the Products do not infringe upon any other patents heretofore
issued in the United States or any foreign country, or the claims of any
presently pending third party patent application LLI or Elgin is aware of.
(c) LLI covenants, represents and warrants that there is no other
person, firm, corporation or other entity having any title or interest in or
license to the Invention, except as provided in the Security Agreements of
Robert Smallwood and Constance Smallwood, which are of record in the U.S. Patent
and Trademark Office.
(d) LLI covenants, represents and warrants that there are no
outstanding options, licenses or agreements of any kind relating to the Patents,
or to the manufacture, use, sale or distribution of the Products or Improvements
except as specifically stated in this Agreement.
(e) LLI and Elgin covenant, represent and warrant that LLI has full
power to grant the rights, licenses and privileges herein given.
(f) LLI covenants, represents and warrants that it can perform as
set forth in this Agreement without violating the terms of any agreement it has
with any third party.
12. INDEMNITY
LLI and Elgin jointly and severally agree to indemnify Licensee
against all losses or damages that Licensee may suffer, including Licensee's
reasonable attorneys' fees, as a result of LLI's breach of any of the warranties
or representations set forth in Section 11 of this Agreement, or as a result of
any claim of patent infringement, copyright infringement, trade secret
misappropriation, or other intellectual property claim resulting from Licensee's
or its sublicensee's manufacture, use or sale of Products or practice of
Methods. During the term of any action brought against it as a result of such a
breach of warranty or representation or intellectual property claim, Licensee
shall be entitled to withhold such royalties as may otherwise be due under this
Agreement pending the outcome of the action, provided that when and if such
claim is abated, Licensee shall promptly pay over to LLI any royalties so
withheld not used to offset such damages or losses.
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13. CONFIDENTIALITY
Each party agrees to hold all Confidential Information of the other
in confidence, and shall take all necessary care to maintain the confidentiality
of such other's Confidential Information. Each party shall each restrict the
number of employees having access to the Confidential Information to those
directly connected with the Products or those who otherwise need to know the
Confidential Information. Except as otherwise provided herein, neither party
shall use any of the Confidential Information made available to it by the other
for any purpose other than as contemplated by this Agreement without the prior
written consent of the other. Information communicated to Elgin or LLI by Mr.
Rick Arnold shall be considered information disclosed by Licensee for purposes
of this Agreement unless and until Mr. Arnold advises the parties hereto
otherwise.
14. ARBITRATION
In the event the parties cannot agree to what constitutes a
reasonable price for Products as stated in Section 6 of this Agreement, the
parties agree to submit the matter to binding arbitration in accordance with the
Rules for Commercial Arbitration (the "Rules") of the American Arbitration
Association ("AAA") in effect at the effective date of this Agreement and in
accordance with the following Subsections of this Section. In the event of any
inconsistency between the Rules and the arbitration provisions of this Section,
the latter shall control.
(a) The arbitration shall be conducted by a sole arbitrator, to be
appointed by the parties within ten days from the filing of the Demand and
Submission in accordance with Section 7 of the Rules. If the parties fail
to agree upon a sole arbitrator within such ten-day period and fail to
agree to an extension of such period, the arbitration shall be conducted
by a sole arbitrator appointed by the AAA in accordance with Section 14 of
the Rules. The arbitrator appointed shall be knowledgeable concerning the
subject matter of the dispute. namely pricing evaluation for lighting
products, or products of a similar nature.
(b) The place of arbitration shall be Dallas, Texas, and the final
decision or award of the arbitrator shall be issued at the place of
arbitration. The arbitrator may, however, call and conduct hearings and
meetings at such other places as (i) the parties hereto may agree or (ii)
the arbitrator may, on the motion of a party, determine to be necessary to
obtain significant testimony or evidence. The law applicable to the
arbitration procedure shall be the Federal Arbitration Act, as
supplemented by any law of the place of arbitration that is not
inconsistent with the Federal Arbitration Act.
(c) The arbitrator shall have the power to authorize discovery
(including depositions, interrogatories, and document production) on a
showing of particularized
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need that the requested discovery (i) is likely to lead to material
evidence needed to resolve the controversy and (ii) is not excessive in
scope, timing, or cost.
(d) The arbitrator shall not have the power to rule upon any issue
or controversy other than price determination pursuant to Section 6.
(e) The final decision of the arbitrator shall be made within 120
days after the appointment of the arbitrator pursuant to Subsection (a) of
this Section.
(f) The final decision of the arbitrator shall be final and binding
on the parties. The affected party shall pay to the other party the
difference between the interim price in effect since the controversy arose
as provided in paragraph 6.3 and the reasonable price as determined by the
arbitrator. A reasonable price as determined by the arbitrator under this
section shall remain in effect until a material change in business
conditions creates a need for re-pricing, but in any event not less than
one (1) year, and the arbitrator may provide for a mechanism for future
annual price adjustments to account for inflation or deflation.
(g) Each of the parties shall bear an equal portion of the
arbitrator's fees, and each shall bear all of its own expenses.
15. MISCELLANEOUS
15.1 This Agreement constitutes the entire understanding and
agreement of and between the parties with respect to the subject matter hereof
and supersedes all prior representations and agreements. It shall not be
modified or varied by any oral agreement or representation or otherwise than by
an instrument in writing of subsequent date hereto duly executed by the parties.
Failure of either party to insist upon strict performance of any of the
covenants, terms or conditions of this Agreement shall not be deemed to be a
waiver of any other breach of default in the performance of the same or any
other covenant, term or condition contained therein.
15.2 This Agreement shall be construed and interpreted in accordance
with the internal laws of the State of Texas.
15.3 The waiver of any breach of this Agreement by either party
hereto shall in no event constitute a waiver as to any future breach, whether
similar or dissimilar in nature.
15.4 Each of the parties hereto forthwith upon request from the
other shall execute and deliver such documents and take such actions as may be
reasonably requested in order to fully carry out the intent and purposes of this
Agreement.
-13-
<PAGE>
15.5 It is hereby declared and acknowledged by the parties hereto
that nothing herein shall constitute them partners or agents one for the other.
Neither LLI nor Elgin shall have any authority to bind Licensor legally or
equitably by contract, admission acknowledgement, undertaking or otherwise
except as expressly provided herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
below.
Elgin E^2 Inc.
By: /s/ William Mosconi
----------------------------------
William Mosconi
__________________, President
Logic Laboratories, Inc.
By: /s/ William Mosconi
----------------------------------
William Mosconi
__________________, President
/s/ Horace T. Ardinger, Jr.
---------------------------------------
Horace T. Ardinger, Jr.
-14-
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
U.S. PATENTS
------------
Title Patent No. Issue Date
- - ----- ---------- ----------
<S> <C> <C>
Gas discharge lamp and power distribution system therefor 5,485,057 January 16, 1996
Gas discharge lamp and power distribution system therefor 5,654,609 August 5, 1997
PENDING U.S. PATENTS
--------------------
Title Application No. Filing Date
- - ----- --------------- -----------
Improved dynamic range dimmer for gas discharge lamps 08/656,687 May 31, 1996
Socket and ballast for a gas discharge lamp 08/826,378
Light switch cover plate with audio recording and playback feature 08/885,027 June 30, 1997
FOREIGN PATENT APPLICATIONS
---------------------------
Country Application No. Filing Date
- - ------- --------------- -----------
PCT 94US9955 March 9, 1995
Australia 9477947 March 22, 1995
Europe 94928556 December 11, 1996
</TABLE>
-15-
<PAGE>
EXHIBIT B
Territory: Texas
Exclusive Accounts: Wal-Mart Stores, Inc.
The Boeing Company
Lockheed-Martin Corporation
Reserved States: Florida, California
-16-
<PAGE>
EXHIBIT C
Specific Products to be Sold by LLI:
Drivers for fluorescent lights
Control units for controlling operation of multiple drivers
-17-
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of April
1998 by and between Warren Power Systems, Inc., a Delaware corporation (the
"Company") and Lewis W. Kuniegel (the "Employee").
WHEREAS, the Company believes it is in the Company's best interest to
employ the Employee as the Vice President of its Installation and Servicing of
Telecommunications Products Division (the "Division") and Employee desires to be
employed by the Company in such capacity; and
WHEREAS, the Company and Employee desire to set forth the terms and
conditions on which Employee shall be employed by and provide his services to
the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto do hereby agree as
follows:
1. Employment. The Company hereby employs Employee as Vice President of
the Division and the Employee hereby accepts such employment, all upon the terms
and conditions hereinafter set forth.
2. Term. Unless sooner terminated pursuant to the provisions of this
Agreement, the term of employment under this Agreement shall be for a period
commencing on the date first set forth above and shall continue for a period of
Three (3) years thereafter (the "Employment Period").
3. Compensation.
(a) Salary. Employee shall be entitled to receive an annual salary during
the Employment Period of One Hundred Thousand Dollars ($100.000.00) (the "Base
Salary"). Such
<PAGE>
Base salary shall be payable in accordance with the normal payroll policies of
the Company and shall be subject to all appropriate withholding taxes.
(b) Stock Options. Employee is hereby granted stock options (the
"Options") to purchase from the Company up to 100,000 shares of the Company's
common stock, par value $.000833 per share (the "Shares") on the terms contained
below. It is the intention of the parties that the Options shall constitute
nonstatutory stock options under Section 83 of the Internal Revenue Code, as
amended ("IRC"), and not incentive stock options under Section 422 or 423 of the
IRC. The parties agree to act in good faith in cooperating to provide one
another with information or undertake such acts as may be requested by the
Internal Revenue Service, by any state taxing authority or by the other party
for the purpose of obtaining tax treatment of this Option under IRC Section 83,
including any election available to Employee under IRC Section 83(b) with
respect to the Options.
(i) The per share price at which Employee shall be entitled to purchase
the 100,000 Shares subject to these Options ("known as the Strike Price")
shall be the per share price at which the shares of common stock trade at
the close of trading on the Employee's initial day of employment (which
date shall be deemed to be the date first appearing in this Agreement),
provided, however, that if Employee's first day of employment is not a
trading date, then the Strike Price shall be the per share price at which
the shares of common stock of Elgin e2, Inc. trade at the close of
trading on the first trading date following Employee's first date of
employment.
(ii) These Options may not be exercised more than ten (10) years from the
date of its grant, and they are subject to vesting restrictions below.
During said ten-year period, Employee shall retain the right to exercise
the Option regardless of whether at the time of exercise Employee is
employed by the Company. In the event of Employee's death or incapacity
during said ten year period and prior to the exercise of Employee's full
number of Shares under the Option, the Option may be exercised by
Employee's conservators, executors or other legal representatives, as the
case may be, or by Employee's successor in interest entitled to succeed to
Employee's interest in the Option under Employee's last will and testament
or by operation of applicable intestacy law.
(iii) Employee's right to exercise the Option shall vest on the following
basis:
2
<PAGE>
Years of Service Number of Shares Employee May
Completed with Company Purchase by Exercise of the Option
---------------------- ----------------------------------
1 year of service 33,334 Shares
2 years of service an additional 33,333 Shares
3 years of service an additional 33,333 Shares
-------------------------------
Total: 100,000 Shares
(iv) The 100,000 Shares of common stock of Elgin e^2, Inc. shall be
adjusted as needed to reflect splits or consolidations in such sock that may
occur after the execution of this Agreement.
(v) The Company does not currently have a stock option plan in place.
However, in the event the Company does implement a stock option plan in the
future, the Options referenced in this paragraph shall be implemented in a
manner consistent with such plan; provided such plan does not restrict or
eliminate Employee's right to receive or exercise the Option granted hereunder.
(c) Bonus. While employed full-time by the Company pursuant to this
Employment Agreement, Employee shall be entitled to be paid an annual bonus (the
"Bonus") subject to the terms of this Paragraph (c). The Bonus, if any, shall be
based on the following formula: Five Percent (5%) of Base Salary for each One
Million Dollars ($1,000,000), pro rated, above the first Two Million Dollars
($2,000,000) of gross revenues attributable to the Division (i.e., if gross
revenues attributable to the Division are $2.5 million, Employee is entitled to
a bonus of $2,500). For purposes of computing the Bonus applicable to the
Division's gross revenue in any given year, the Company's and Division's normal
accounting method shall be used.
(d) Motor Vehicles. Upon expiration of the Employment Period, or upon
termination of this Agreement for any reason whatsoever, Employee shall have the
option to purchase the motor vehicles (the "Vehicles") set forth on Schedule
3(d) annexed hereto for consideration of One Dollar ($1.00) per Vehicle (the
"Purchase Option"). In addition, if during the Employment Period
3
<PAGE>
the Company decides to sell or trade any of the Vehicles, prior to such sale or
trade the Company shall provide written notice to the Employee of such
intention. The Employee shall then have the right to exercise the Purchase
Option within five (5) business days after receipt of such notice.
4. Vacation. Employee shall be entitled up to Four (4) weeks of paid
vacation annually during the first year of the Employment Period and Five (5)
weeks annually thereafter.
5. Other Benefits. Employee agrees that the compensation set forth in
Section 3 hereof (including the Option and Bonus), and the vacation time
specified in Section 4 hereof, are the sole and exclusive compensation of the
Employee for his duties hereunder; provided, however, that Employee shall
receive group medical and dental insurance for himself and his dependents, and
all employee group and individual benefits, including without limitation,
hospital, medical, health and disability insurance, provided at any time by the
Company to any of its executive-level employees. The benefits offered by the
Company are subject to change from time to time as determined in the sole and
absolute discretion of the Board of Directors of the Company.
6. Business Expenses and Reimbursements.
(a) Employee shall be entitled to reimbursement by the Company for
ordinary and necessary business expenses incurred by Employee in the performance
of his duties, which types of expenditures shall be determined and approved in a
manner consistent with past practice, provided that:
(i) Each such expenditure is of a nature qualifying it as a proper
deduction on the Federal and State income tax returns of the Company as a
business expense and not as deductible compensation to the Employee; and
(ii) Employee furnishes the Company with adequate records and other
documentary
4
<PAGE>
evidence required by Federal and State statutes and regulations for the
substantiation of such expenditures as deductible business expenses of the
Company.
(b) Notwithstanding anything set forth in (a) hereinabove, the Company
shall not be obligated to make any payment to or for the benefit of Employee if
the Company determines that Employee agrees that such payment may be disallowed
in whole or in part as a deductible expense to Company by the appropriate taxing
authorities.
(c) Employee shall be paid reimbursements for use of his automobile in
connection with the Company's business during the term hereof in a monthly
amount of Four Hundred and Fifty Dollars ($450.00).
7. Duties. During the Employment Period:
(a) Employee shall report directly to the President and Chief Executive
Officer of the Company and shall furnish all manner of services in connection
with his position and duties as Vice President of the Division, including, but
not limited to managing the Division's operations with respect to: (i)
installation and servicing of telecommunication products; and (ii) installation
and servicing needs of the Company and Warren Power Systems.
(b) Employee shall devote full time, energy and skill to the service of
the Company and the promotion of its interests, and shall use his best efforts
in the performance of his services hereunder. The parties agree that Employee
may not, during the Employment Period, be engaged in any other business activity
whether or not such activity is pursued for gain, profit, or other pecuniary
advantage; provided, however, Employee may invest his personal assets in
noncompetitive and non-related businesses where the form or manner of such
investment will not require any substantial devotion of time or attention. If
requested to do so by the Company,
5
<PAGE>
Employee shall relocate from his current residence to the greater Hudson, New
Hampshire area. Employee shall receive no additional consideration or
compensation in the event of relocation; provided, however, that the Company
shall pay or reimburse Employee for all reasonable costs and expenses attendant
to such relocation.
8. Death or Incapacity. In the event of the death or incapacity
("incapacity" being defined as the involuntary failure of Employee to devote
full time to the service of the Company for a period of Thirty (30) consecutive
days), during the Employment Period, or longer period as determined in the sole
discretion of the Board of Directors, the Employee's employment hereunder shall
terminate immediately upon such death or determination of incapacity. The
Company shall pay to the Employee or Employee's estate all amounts owed to the
Employee hereunder which have accrued until the date of death or determination
of incapacity, including without limitation, the salary (including any prorated
Bonus) due under Section 3, and shall continue to pay to Employee or Employee's
estate the amount of salary payable to Employee pursuant to Section 3 hereof
immediately prior to the date of such death or determination of incapacity for a
period of Ninety (90) days subsequent to the date of death or determination of
incapacity. Such amounts shall be payable at such times and in the manner set
forth in Section 3 herein.
9. Termination By Company. The Employee may be terminated by the Company
only for cause, "cause" being defined as adjudicated criminal misconduct, gross
negligence in the performance of or failure to perform Employee's duties
hereunder, malfeasance or a material breach of this Agreement by Employee. In
the event Employee is terminated for cause, the Company shall be obligated to
pay to Employee the salary accrued through the date of termination. In the event
the Company terminates Employee without cause, in addition to any other rights
and
6
<PAGE>
remedies the Employee may have, the Company shall continue to pay the Employee
the salary specified under Section 3, in the same manner and at the same times
required under such section, until the first to occur of (a) the expiration of
the Employment Period, or (b) alternate employment arrangements are secured by
Employee in which event the Company shall be obligated to pay to Employee the
difference between One Hundred Thousand Dollars ($100,000) per year and the
actual gross compensation of Employee pursuant to such alternate employment
arrangements, provided that the foregoing shall confer no obligation upon
Employee to seek alternate employment arrangements, provided, however, that in
the event that during the Employment Period Employee directly or indirectly, as
owner, partner, joint venturer, lender, employee, agent, corporate officer,
principal, licensor, shareholder or in any other capacity whatsoever, engages in
or makes preparation to engage in or becomes interested in or has any connection
with any business competitive with the business of the Company or any of its
affiliates, subsidiaries or successors as is conducted at the time of
termination of Employee, then the Company shall have no further obligation to
Employee, including, without limitation, the payment obligations set forth in
Paragraphs 3, 4, 5, and 7. Nothing set forth herein shall be deemed to terminate
this Agreement as the Employee, including, without limitation, Employee's
obligations under Paragraph 10.
10. Confidentiality. In the course of his employment, the Company may
disclose or make known to the Employee, and the Employee may be given access to
or may become acquainted with, certain information, trade secrets, customers,
policies, and other information and know-how, all relating to or useful in the
Company's business (collectively "Information"), and which the Company considers
proprietary and desires to maintain confidential regardless of whether a patent
or copyright may be obtained for the Information.
7
<PAGE>
During the Employment Period and at all times thereafter, the Employee
shall not in any manner, either directly or indirectly, divulge, disclose or
communicate to any person or firm, except to or for the Company's benefit as
directed by the Company any of the Information which he may have acquired in the
course of or as an incident to his employment by the Company, the parties
agreeing that such Information affects the successful and effective conduct of
the Company's business and its goodwill, and that any breach of the terms of
this Section is a material breach of this Agreement and shall serve as "cause"
for termination.
11. Restrictive Covenants. The Employee acknowledges that the Information
is unique in character and is of particular significance to the Company and that
the Company is in a competitive business. Therefore, during the Employment
Period and for a period of Three (3) years thereafter, Employee shall not
directly or indirectly, as owner, partner, joint venturer, lender, employee,
broker, agent, corporate officer, principal, licensor, member, shareholder or in
any other capacity whatsoever, engage in or make preparation to engage in or
acquire any interest in or have any connection with any business competitive
with the business of the Company, or any of its subsidiaries, affiliates or
successors, if any as are conducted during said period (hereinafter a
"Competitive Business") nor shall the Employee solicit any other employee of the
Company for the purpose of hiring or engaging such other employee in connection
with any business of which Employee is an owner, partner, joint venturer,
vender, employee, broker, agent, officer, principal, licensor or shareholder.
If, in any legal proceedings, a court or arbitration board shall refuse to
enforce the covenants included in this Section, then such unenforceable
covenants shall be amended by such court or arbitration board to relate to such
lesser period or geographical area as shall be enforceable. Employee hereby
acknowledges that the restrictions on his activity as
8
<PAGE>
contained in this Agreement are required for the reasonable protection of the
Company and its subsidiaries, affiliates and successors, if any. Employee hereby
agrees that in the event of the violation by him of any of the provisions of
this Agreement, the Company and its subsidiaries, affiliates and successors, if
any, will be entitled if any so elects, to institute and prosecute proceedings
at law or in equity to obtain damages with respect to such violation or to
enforce the specific performance of this Agreement by Employee or to enjoin
Employee from engaging in any activity in violation hereof. In the event Company
or its subsidiaries, affiliates or successors, if any, is determined to be the
prevailing party in any legal action or other proceeding for the enforcement of
this Section 11, the time for calculating the term of the covenants in this
Section 11 shall not include the period of time commencing with the filing of
legal action or other proceeding to enforce the terms hereof through the date of
final judgment or final resolution, including all appeals, if any, of such legal
action or other proceeding. Notwithstanding the foregoing, in the event that
Employee is terminated without cause, the restrictive covenants set forth in
this Paragraph 11 shall be of no force or effect.
12. Entire Agreement. This Agreement represents the entire understanding
and agreement between the parties with respect to the subject matter hereof, and
supersedes all other negotiations, understandings and representations (if any)
made by and between such parties.
13. Amendments. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by the
party as to whom enforcement of any such amendment, supplement, waiver or
modification is sought and making specific reference to this Agreement.
14. Binding Effect. All of the terms and provisions of this Agreement,
whether so
9
<PAGE>
expressed or not, shall be binding upon, inure to the benefit of, and be
enforceable by the parties and their respective administrators, executors, legal
representatives, heirs, successors and permitted assigns.
15. Severability. If any part of this Agreement or any other Agreement
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full force
and effect so far as possible.
16. Waivers. The failure or delay of the Company at any time to require
performance by the Employee of any provision of this Agreement, even if known,
shall not affect the right of the Company to require performance of that
provision or to exercise any right, power or remedy hereunder, and any waiver by
the Company of any breach of any provision of this Agreement should not be
construed as a waiver or any continuing or succeeding breach of such provision,
a waiver of the provision itself, or a waiver of any right, power or remedy
under this Agreement. No notice to or demand on the Employee in any case shall,
of itself, entitle such party to any other or future notice or demand in similar
or other circumstances.
17. Notices. All notices, requests, consents and other communications
required or permitted under this Agreement shall be in writing (including
facsimile) and shall be (as elected by the person giving such notice) by hand
delivery by messenger or courier service, facsimile, or United States Postal
Service (airmail if international) by registered or certified mail (postage
prepaid), return receipt requested, addressed to:
10
<PAGE>
If to Company: Warren Power Systems, Inc.
12 Executive Drive
Hudson, New Hampshire 03501
Attention: William Mosconi
If to Employee: Mr. Lewis Kuniegel
Communication Service Company
29 Woodman Road (Buxton)
Saco, Maine 04072
In each case with
a copy to: Lev, Berlin & Dale, P.C.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attention: Eric J. Dale, Esq.
and James A. Houle, Esq.
Bernstein, Shur, Sawyer & Nelson, P.A.
P.O. Box 9729
100 Middle Street
Portland, Maine 04104-5029
Each such notice, request, consent and other communication shall be deemed
delivered (a) on the date delivered if by personal delivery, (b) on the date of
telecopy transmission if confirmed by telephone, and (c) on the date upon which
the return receipt is signed or delivery is refused or the notice is designated
by the postal authorities as not deliverable, as the case may be, if mailed.
18. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware without regard to
the principles thereof relating to conflicts of law. The parties hereto consent
to the jurisdiction of the courts of the State of New York and the United States
District Court for the Southern District of New York.
11
<PAGE>
19. Assignability. This Agreement may not be assigned by Employee. This
Agreement may be assigned to an affiliate or subsidiary of the Company in the
sole discretion of the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
WARREN POWER SYSTEMS, INC.
By: /s/ William Mosconi
---------------------------------------
William Mosconi
Its: President, Chief Executive Officer
Hereunto Duly Authorized
ELGIN e^2, INC.
By: /s/ William Mosconi
---------------------------------------
William Mosconi
Its: President, Chief Executive Officer
Hereunto Duly Authorized
/s/ Lewis W. Kuniegel
-------------------------------------------
Lewis W. Kuniegel
12
<PAGE>
SCHEDULE 3(d)
Motor Vehicles
EXHIBIT 10.6
================================================================================
$4,000,000
SECURED REVOLVING CREDIT AGREEMENT
Dated as of
November 13, 1998
Between
ELGIN TECHNOLOGIES, INC.
AND
HORACE T. ARDINGER, JR.
================================================================================
<PAGE>
TABLE OF CONTENTS
SECTION 1. DEFINITIONS; INTERPRETATION ..................................... 1
Section 1.1 Definitions ............................................. 1
Section 1.2 Interpretation .......................................... 10
SECTION 2. THE CREDIT FACILITY ............................................. 10
Section 2.1 Loans ................................................... 10
Section 2.2 Manner of Borrowing ..................................... 10
Section 2.3 Interest Payments ....................................... 10
Section 2.4 Maturity of Loans ....................................... 11
Section 2.5 The Note ................................................ 11
Section 2.6 Optional Prepayments .................................... 12
Section 2.7 Mandatory Prepayments ................................... 12
Section 2.8 Revolving Commitment Reduction or Termination ........... 12
SECTION 3. PAYMENTS AND EXPENSES ........................................... 12
Section 3.1 Place and Application of Payments ....................... 12
Section 3.2 Expenses ................................................ 12
SECTION 4. CONDITIONS PRECEDENT ............................................ 13
Section 4.1 Conditions Precedent to Initial Borrowing .................. 13
Section 4.2 Conditions Precedent to all Borrowings ..................... 14
SECTION 5. REPRESENTATIONS AND WARRANTIES 15
Section 5.1 Organization ............................................ 15
Section 5.2 Power and Authority; Validity ........................... 15
Section 5.3 No Violation ............................................ 16
Section 5.4 Litigation .............................................. 16
Section 5.5 Use of Proceeds; Margin Regulations ..................... 16
Section 5.6 Investment Company Act .................................. 16
Section 5.7 Public Utility Holding Company Act ...................... 16
Section 5.8 True and Complete Disclosure ............................ 16
Section 5.9 Financial Statements .................................... 17
Section 5.10 No Material Adverse ..................................... 17
Section 5.11 Labor Controversies ..................................... 17
Section 5.12 Taxes ................................................... 17
Section 5.13 ERISA ................................................... 17
Section 5.14 Consents ................................................ 18
Section 5.15 Capitalization .......................................... 18
Section 5.16 Ownership of Property ................................... 18
Section 5.17 Compliance with Statutes ................................ 18
Section 5.18 Environmental Matters ................................... 18
Section 5.19 Year 2000 Compliance .................................... 19
SECTION 6. COVENANTS ....................................................... 19
Section 6.1 Existence ............................................... 20
Section 6.2 Maintenance ............................................. 20
-ii-
<PAGE>
Section 6.3 Taxes ................................................... 20
Section 6.4 ERISA ................................................... 20
Section 6.5 Insurance ............................................... 20
Section 6.6 Financial Reports and Other Information ................. 21
Section 6.7 Lender Inspection Rights ................................ 23
Section 6.8 Conduct of Business ..................................... 23
Section 6.9 New Subsidiaries ........................................ 23
Section 6.10 Dividends; Negative Pledges ............................. 23
Section 6.11 Restrictions on Fundamental Changes ..................... 24
Section 6.12 Environmental Laws ...................................... 24
Section 6.13 Liens ................................................... 24
Section 6.14 Indebtedness ............................................ 25
Section 6.15 Loans, Advances and Investments ......................... 26
Section 6.16 Capital Expenditures .................................... 26
Section 6.17 Transfer of Assets ...................................... 27
Section 6.18 Transactions with Affiliates ............................ 27
Section 6.19 Compliance with Laws .................................... 27
Section 6.20 Royalties ............................................... 27
Section 6.21 Corporate Governance Documents .......................... 27
SECTION 7. EVENTS OF DEFAULT AND REMEDIES .................................. 27
Section 7.1 Events of Default ....................................... 27
Section 7.2 Non-Bankruptcy Defaults ................................. 30
Section 7.3 Bankruptcy Defaults ..................................... 30
SECTION 8. MISCELLANEOUS ................................................... 30
Section 8.1 No Waiver of Rights ..................................... 30
Section 8.2 Non-Business Day ........................................ 30
Section 8.3 Documentary Taxes ....................................... 30
Section 8.4 Survival of Representations ............................. 31
Section 8.5 Setoff .................................................. 31
Section 8.6 Notices ................................................. 31
Section 8.7 Counterparts ............................................ 32
Section 8.8 Successors and Assigns .................................. 33
Section 8.9 Participations in Borrowings and Note; Transfers of
Borrowings and Note ..................................... 33
Section 8.10 Amendments .............................................. 33
Section 8.11 Headings ................................................ 33
Section 8.12 Legal Fees, Other Costs and Indemnification ............. 34
Section 8.13 Governing Law; Submission to Jurisdiction; Waiver of
Jury Trial; Arbitration ................................. 34
Section 8.14 Severability ............................................ 36
Section 8.15 Effective Date .......................................... 36
Section 8.16 Notice .................................................. 36
SCHEDULES
Schedule 5.4 - Litigation
Schedule 5.11 - Capitalization
-iii-
<PAGE>
SECURED REVOLVING CREDIT AGREEMENT, dated as of November 13, 1998, between
Elgin Technologies, Inc., a Delaware corporation (the "Borrower"), and Horace T.
Ardinger, Jr. (the "Lender").
WITNESSETH:
WHEREAS, the Borrower desires to obtain a commitment from the Lender to
make loans to the Borrower; and
WHEREAS, the Lender is willing to extend such commitment to the Borrower
on the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
SECTION 1. DEFINITIONS; INTERPRETATION.
Section 1. 1 Definitions. Unless otherwise defined herein, the following
terms shall have the following meanings:
"ACL" means American Compact Lighting, L.L.C.
"Affiliate" means, for any Person, (i) any other Person that directly or
indirectly through one or more intermediaries controls, or is under common
control with, or is controlled by, such Person, and (ii) any other Person owning
beneficially or controlling ten percent (10%) or more of the equity interests in
such Person. As used in this definition, "control" means the power, directly or
indirectly, to direct or cause the direction of management or policies of a
Person (through ownership of voting securities or other equity interests, by
contract or otherwise).
"Agreement" means this Secured Revolving Credit Agreement, as amended,
restated or supplemented from time to time.
"Borrower" means Elgin Technologies, Inc., a Delaware corporation.
"Borrowing" means any extension of credit made by the Lender by way of
Loans.
"Borrowing Base" means at any time an amount equal to the sum of (i)
eighty percent (80%) of Eligible Accounts, and (ii) fifty percent (50%) of
Eligible Inventory: The Borrowing Base shall be determined monthly and shall be
subject to field audits and other verification at the expense of the Borrower as
reasonably requested by the Lender.
"Borrowing Base Certificate" means a certificate in form and substance
satisfactory to the Lender.
<PAGE>
"Borrowing Request" means a borrowing request as defined in Section 2.2.
"Business Day" means any day other than a Saturday or Sunday on which
banks are not authorized or required to close in Dallas, Texas.
"Capital Expenditures" means, for any period, the sum, without
duplication, of all expenditures of the Borrower and its Subsidiaries for fixed
or capital assets made during such period which, in accordance with GAAP, are
required to be classified as capital expenditures.
"Capitalized Lease Obligations" means, for the Borrower and its
Subsidiaries, the amount of such Persons' liabilities under all leases of real
or personal property (or any interest therein) which is required to be
capitalized on the balance sheets of such Persons, determined in accordance with
GAAP.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof having maturities of not more than twelve (12) months
from the date of acquisition; (ii) U.S. Dollar denominated time deposits and
certificates of deposit maturing within one (1) year from the date of
acquisition thereof with the Lender or any other financial institution whose
short-term senior unsecured debt rating is at least A-1 from S&P or P-1 from
Moody's; (iii) LIBOR denominated time deposits and certificates of deposit
maturing within six (6) months from the date of acquisition thereof with the
Lender or any other financial institution whose short-term senior unsecured debt
rating is at least A-1 from S&P or P-1 from Moody's; (iv) commercial paper or
Eurocommercial paper with a rating of at least A-1 from S&P or P-1 from Moody's,
with maturities of not more than twelve (12) months from the date of
acquisition; (v) repurchase obligations entered into with any financial
institution whose short-term senior unsecured debt rating is at least A-1 from
S&P or P-1 from Moody's, which are secured by a fully perfected security
interest in any obligation of the type described in (i) above and has a market
value of the time such repurchase is entered into of not less than 100% of the
repurchase obligation of such Person thereunder; (vi) marketable direct
obligations issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within twelve (12) months from the date of acquisition thereof or providing for
the resetting of the interest rate applicable thereto not less often than
annually and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's; and (vii) money market funds which have
at least $1,000,000,000 in assets and which invest primarily in securities of
the types described in clauses (i) through (vi) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means all property and assets of the Borrower and its
Subsidiaries in which the Lender is granted a Lien pursuant to the terms of a
Security Document.
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"Credit Documents" means this Agreement, the Note, the Stock Pledge
Agreement, the Security Agreements, the Subsidiary Guaranties, the First
Additional Warrant, the Second Additional Warrant, the Registration Rights
Agreement, the First Amendment to Voting Agreement, the Borrowing Requests, the
Borrowing Base Certificates and any other documents or instruments executed by
any Credit Party in connection with this Agreement.
"Credit Party" means the Borrower, the Guarantors and any other Person who
from time to time is a party to a Credit Document.
"DC&A" means D C & A Partners, Inc., a New York corporation.
"Default" means any event or condition the occurrence of which would, with
the passage of time or the giving of notice, or both, constitute an Event of
Default.
"Dollar" and "U.S. Dollar" and the sign "$" means lawful money of the
United States of America.
"e^2" means e^2 Electronics, Inc., a Delaware corporation.
"e^2 Financing Documents" means the Financing Documents referenced in that
certain Assignment and Assumption Agreement dated as of April 23, 1998, by and
between DC&A and Star Bank, National Association, as heretofore amended.
"Effective Date" means the date this Agreement becomes effective as
defined in Section 8.15.
"Eligible Accounts" means, as of the date of the determination thereof,
the then aggregate outstanding unpaid balance of all accounts receivable owed to
the Borrower and its Subsidiaries arising from the sale by the Borrower and its
Subsidiaries of finished goods or services to account debtors which meet the
Borrower's or such Subsidiary's credit standards in effect on such date and
which meet all of the criteria listed below:
(a) the account receivable of an account debtor of the Borrower or
the relevant Subsidiary has not been outstanding for more than ninety (90)
days after the date of invoice and the account debtor of the account
receivable is not the debtor on any other account receivable owed to the
Borrower or any of its Subsidiaries where the account has been outstanding
for more than ninety (90) days after the date of invoice; provided that
(i) any account receivable more than ninety (90) days past due may be
included as an Eligible Account to the extent that the payment of the
account receivable by the account debtor is secured by a letter of credit
issued or confirmed by a financial institution reasonably acceptable to
the Lender with the terms thereof matching the terms of payment of such
invoice by such account debtor, or if the account receivable is not
supported by such a letter of credit, the account debtor of the account
receivable is insured on terms satisfactory
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to the Lender in its sole discretion or from a list of account debtors
approved by the Lender from time to time in its sole discretion and (ii)
the accounts receivable of the Borrower and its Subsidiaries more than
ninety (90) days past due as of the Effective Date (excluding any accounts
receivable the subject of a dispute or otherwise not qualifying as
Eligible Accounts pursuant to the terms of (b) through (h) below) shall be
included as Eligible Accounts for a period of sixty (60) days from the
Effective Date;
(b) the account receivable was invoiced on or within thirty (30)
days after the date of shipment of the finished goods covered thereby or
completion of the services giving rise to such account and the account
receivable is not for a progress billing or unbilled retainage;
(c) the account receivable constitutes a valid, binding and legally
enforceable obligation of the account debtor to the Borrower or the
relevant Subsidiary;
(d) the account receivable has not been sold or assigned, in whole
or in part, and is not subject to any Lien other than under the Security
Documents;
(e) neither the Borrower nor any of its Subsidiaries has any notice
that the account debtor of such account receivable is a debtor under any
proceeding under the Bankruptcy Code or any comparable insolvency law;
(f) the Lender at all times has a perfected first priority security
interest in such account receivable;
(g) the account debtor of the account receivable is not an Affiliate
of the Borrower or a governmental entity; and
(h) an account receivable shall not be included in the calculation
of Eligible Accounts to the extent that (i) such account receivable is
subject to any claimed offset, counterclaim or other defense, or the
goods, the sale of which gave rise to the account receivable, have been
returned, rejected, lost or damaged, or (ii) such inclusion would result
in the accounts receivable in the name of the account debtor (other than
receivables supported by a letter of credit issued or confirmed by a
financial institution acceptable to the Lender and other account debtors
approved by the Lender from time to time in its sole discretion)
constituting more than twenty percent (20%) of all Eligible Accounts.
"Eligible Inventory" means, as of the date of the determination thereof,
the historical cost (net of any write-downs thereto) of all goods held for sale
or to be furnished under contracts of service, including raw materials and
finished goods, but excluding obsolete and slow moving inventory, owned by the
Borrower or any Subsidiary and in the possession of such Person and located in
the United States of America in which the Lender has a perfected first priority
security
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interest and which is subject to no Lien other than under the Security
Documents, determined in accordance with GAAP.
"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violations, investigations or proceedings relating to any
Environmental Law ("Claims") or any permit issued under any Environmental Law,
including, without limitation, (i) any and all Claims by governmental or
regulatory authorities for enforcement, cleanup, removal, response, remedial or
other actions or damages pursuant to any applicable Environmental Law, and (ii)
any and all Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting from
Hazardous Materials or arising from alleged injury or threat of injury to health
or safety in relation to the environment.
"Environmental Law" means any federal, state or local statute, law, rule,
regulation, ordinance, code, policy or rule of common law now or hereafter in
effect, including any judicial or administrative order, consent, decree or
judgment relating to (i) the environment, (ii) health or safety in relation to
the environment or (iii) Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means any of the events or circumstances specified in
Section 7.1.
"First Additional Warrant" means the Warrant for 267,000 shares of common
stock of the Borrower at a strike price of $0.55 in form and substance
satisfactory to the Lender, as it may be amended, restated or supplemented from
time to time.
"First Amendment to Voting Agreement" means the first amendment to the
Voting Agreement in form and substance satisfactory to the Lender, as it may be
amended, restated or supplemented from time to time.
"GAAP" means generally accepted accounting principles from time to time in
effect as set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the statements and pronouncements of the Financial Accounting Standards Board or
in such other statements, opinions and pronouncements by such other entity as
may be approved by a significant segment of the U.S. accounting profession.
"Guarantor" means each of Warren Power, Logic Labs, and any other
Subsidiary of the Borrower required to become a Guarantor pursuant to Section
6.9.
"Guaranty" by any Person means all obligations (other than endorsements in
the ordinary course of business of negotiable instruments for deposit or
collection) of such Person guarantying or in effect guarantying any
Indebtedness, dividend or other obligation (including, without limitation,
obligations in connection with sales of any property) of any other Person (the
"primary
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obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation, or
to purchase any property or assets constituting security therefor, primarily for
the purpose of assuring the owner of such Indebtedness or obligations of the
ability of the primary obligor to make payment of the Indebtedness or
obligation; or (ii) to advance or supply funds (x) for the purchase or payment
of such Indebtedness or obligation, or (y) to maintain working capital or other
balance sheet condition, or otherwise to advance or make available finds for the
purchase or payment of such Indebtedness or obligation, in each case primarily
for the purpose of assuring the owner of such Indebtedness or obligation of the
ability of the primary obligor to make payment of the Indebtedness or
obligation; or (iii) to lease property or to purchase securities or other
property or services of the primary obligor primarily for the purpose of
assuring the owner of such Indebtedness or obligation of the ability of the
primary obligor to make payment of the Indebtedness or obligation; or (iv)
otherwise to assure the owner of the Indebtedness or obligation of the primary
obligor against loss in respect thereof.
"Hazardous Material" shall have the meaning assigned to that term in the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Acts of 1986, and shall
include any substance defined as "hazardous" or "toxic" or words used in place
thereof under any Environmental Law applicable to the Borrower.
"Highest Lawful Rate" means the maximum nonusurious interest rate, if any,
that any time or from time to time may be contracted for, taken, reserved,
charged or received on the Loans or under laws applicable to the Lender, which
are presently in effect or, to the extent allowed by applicable law, under such
laws which may hereafter be in effect and which allow a higher maximum
nonusurious interest rate than applicable laws now allow. Determination of the
rate of interest for the purpose of determining whether the Loans are usurious
under all applicable laws shall be made by amortizing, prorating, allocating,
and spreading, in equal parts during the period of the full stated term of the
Loans, all interest at any time contracted for, taken, reserved, charged or
received from the Borrower in connection with the Loans, as applicable.
"Indebtedness" means, for any Person, the following obligations of such
Person, without duplication: (i) obligations of such Person for borrowed money;
(ii) obligations of such Person representing the deferred purchase price of
property or services other than accounts payable arising in the ordinary course
of business and other than amounts which are being contested in good faith and
for which reserves in conformity with GAAP have been provided; (iii)
obligations of such Person evidenced by bonds, debentures, notes, bankers
acceptances or other similar instruments of such Person or reimbursement
obligations or other obligations with respect to letters of credit issued for
such Person's account or letters of credit issued pursuant to such Person's
application therefor; (iv) obligations of other Persons, whether or not assumed,
secured by Liens upon property or payable out of the proceeds or production from
property now or hereafter owned or acquired by such Person, but only to the
extent of such property's fair market
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value; (v) Capitalized Lease Obligations of such Person; (vi) obligations under
Interest Rate Protection Agreements and any hedge, swap, exchange, forward,
future, collar or cap arrangements, fixed price agreements or other agreements
or arrangements designed to protect against fluctuations in commodity prices or
currency exchange rates; and (vii) obligations of such Person pursuant to a
Guaranty of any of the foregoing of another Person. For purposes of this
Agreement, the Indebtedness of any Person shall include the Indebtedness of any
partnership or joint venture to the extent such Indebtedness has recourse to
such Person.
"Initial Borrowing Date" means the date on which all conditions precedent
set forth herein to the initial Borrowings are satisfied or waived in writing
and the initial Borrowing hereunder occurs.
"Interest Payment Date" means the last Business Day of each calendar month
such Loan is outstanding commencing November 30, 1998.
"Investments" has the meaning assigned to such term in Section 6.15.
"Lender" is defined in the preamble.
"Lien" means any interest in any property or asset in favor of a Person
other than the owner of the property or asset and securing an obligation owed to
such Person, whether such interest is based on the common law, statute or
contract, including, but not limited to, the security interest lien arising from
a mortgage, encumbrance, pledge, conditional sale, security agreement or trust
receipt, or a lease, consignment or bailment for security purposes.
"Loan" has the meaning assigned to such term in Section 2.1.
"Logic Labs" means Logic Laboratories, Inc., a Delaware corporation and a
wholly owned Subsidiary of the Borrower.
"Material Adverse Effect" means an effect that results in a material
adverse change since September 30, 1998, in (i) the business, properties,
assets, condition (financial or otherwise) or prospects of the Borrower or the
Borrower and its Subsidiaries taken as a whole, or (ii) in the ability of the
Borrower or the Borrower and the Guarantors, taken as a whole, to perform its
Obligations under the Credit Documents to which it is a party.
"Maturity Date" means November 12, 2000.
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
"Note" means the convertible revolving promissory note of the Borrower
defined in Section 2.5.
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"Obligations" means all obligations of the Borrower and any other Credit
Party to pay fees, costs and expenses hereunder, to pay principal or interest on
Loans and to pay any other obligations to the Lender arising under or in
relation to any Credit Document.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Business" means any business described in Section 6.8.
"Permitted Liens" means the Liens described in Section 6.13.
"Person" means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization or any other entity or
organization, including a government or any agency or political subdivision
thereof.
"Plan" means an employee pension benefit plan covered by Title IV of ERISA
or subject to the minimum funding standards under Section 412 of the Code that
is either (i) maintained by the Borrower or any of its Subsidiaries or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
any of such entities is then making or accruing an obligation to make
contributions or has within the preceding five (5) plan years made or had an
obligation to make contributions.
"Registration Rights Agreement" means the Registration Rights Agreement by
and between the Borrower and the Lender dated as of November 13, 1998, as it may
be amended, restated or supplemented from time to time.
"Revolving Commitment" means the Lender's obligations to make Loans.
"Revolving Commitment Amount" means an amount equal to $4,000,000 minus
the aggregate principal amount of Loans converted to common stock of the
Borrower pursuant to the terms and conditions of the Note, if any, as such
amount may be reduced from time to time pursuant to the terms of this Agreement.
"Revolving Commitment Termination Date" means the earliest of (i) the
Maturity Date, (ii) the date on which the Revolving Commitment Amount has been
reduced to zero, or (iii) the occurrence of any Event of Default described in
Sections 7.1(f) or (g) or the occurrence and continuance of any other Event of
Default and the giving of written notice by the Lender to the Borrower pursuant
to Section 7.2 that the Revolving Commitment has been terminated.
"Revolving Line of Credit" has the meaning assigned to such term in
Section 2.1.
"Royalty Agreement" means that certain Assumption, Payment Agreement and
Amended and Restated Royalty Agreement dated as of January 25, 1996, by and
among Smallwood and ACL, as amended by that certain Amendment to Royalty
Agreement dated as of April 15, 1998, by and between Smallwood and Logic Labs.
"S&P" means Standard & Poor's Rating Group or any successor thereto.
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"Second Additional Warrant" means the Warrant for 267,000 shares of common
stock of the Borrower at a strike price of $0.55 in substantially the form of
the First Additional Warrant, as it may be amended, restated or supplemented
from time to time.
"Security Agreements" means the Security Agreements and Financing
Statements in form and substance satisfactory to the Lender executed by each of
the Borrower and the Guarantors, as they may be amended, restated or
supplemented from time to time.
"Security Documents" means the Stock Pledge Agreement, the Security
Agreements and all other security agreements, mortgages and like agreements or
instruments delivered by the Borrower or any Guarantor granting a Lien in any
of such Person's property or assets to the Lender to secure the Obligations, as
they may be amended, restated or supplemented from time to time.
"Smallwood" means Robert C. Smallwood.
"Stock Pledge Agreement" means the Stock Pledge Agreement executed by the
Borrower in form and substance satisfactory to the Lender executed by the
Borrower, as it may be amended, restated or supplemented from time to time.
"Subsidiary" means, for any Person, any corporation or other entity of
which more than fifty percent (50%) of the outstanding stock or comparable
equity interests having ordinary voting power for the election of the board of
directors of such corporation, any managers of such limited liability company or
similar governing body (irrespective of whether or not, at the time, stock or
other equity interests of any other class or classes of such corporation or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by such Person, as
applicable; provided that e^2 shall not be considered a Subsidiary of the
Borrower for purposes of this Agreement.
"Subsidiary Guaranty" means the Subsidiary Guaranty executed by each
Subsidiaries of the Borrower in form and substance satisfactory to the Lender,
as they may be amended, restated or supplemented from time to time.
"Taxes" has the meaning assigned to such term in Section 5.12.
"Unfunded Vested Liabilities" means, for any Plan at any time, the amount
(if any) by which the present value of all vested nonforfeitable accrued
benefits under such Plan exceeds the fair market value of all Plan assets
allocable to such benefits, determined as of the then most recent valuation date
for such Plan, but only to the extent that such excess represents a potential
liability of the Borrower or any of its Subsidiaries to the PBGC or such Plan.
"Voting Agreement" means the Voting Agreement dated as of April 1, 1998,
by and among the Borrower, Mason Cabot Holdings, Inc., Primo Ianieri, Peter
Bordes and the Borrower.
"Warren Power" means Warren Power Systems, Inc., a Delaware corporation
and a wholly owned Subsidiary of the Borrower.
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Section 1.2 Interpretation. The foregoing definitions shall be equally
applicable to the singular and plural forms of the terms defined. All references
to times of day in this Agreement shall be references to Dallas, Texas time
unless otherwise specifically provided.
SECTION 2. THE CREDIT FACILITY.
Section 2.1 Loans. Subject to the terms and conditions hereof, the Lender
agrees to make one or more loans (each, a "Loan") to the Borrower on a revolving
basis from time to time before the Revolving Commitment Termination Date in an
aggregate amount not to exceed at any time outstanding an amount equal to the
Revolving Commitment Amount, subject to any reductions of such commitment
pursuant to the terms of this Agreement (the "Revolving Line of Credit");
provided that the Lender shall have no obligation to make a Loan if, after the
making of such Loan, the outstanding principal amount of Loans would thereby
exceed the lesser of (i) the Revolving Commitment Amount then in effect, or (ii)
the Borrowing Base. Subject to the terms and conditions hereof, the Borrower may
borrow, repay and reborrow under the Revolving Line of Credit.
Section 2.2 Manner of Borrowing. The Borrower shall give notice to the
Lender by no later than 9:00 a.m. on the date the Borrower requests the Lender
to advance a Borrowing of Loans pursuant to a duly executed Borrowing Request (a
"Borrowing Request") in form and substance satisfactory to the Lender. Not later
than 1:30 p.m. on the date of any requested advance of a new Borrowing of a
Loan, the Lender, subject to all other provisions hereof, shall make available
its Loan in funds immediately available in Dallas, Texas for the benefit of the
Borrower. Each Borrowing shall be in a minimum amount of not less than $50,000.
Section 2.3 Interest Payments.
(a) Interest Rate. Each Loan shall bear interest (computed on the
basis of a 365/366-day year and actual days elapsed, excluding the date of
repayment) on the unpaid principal amount thereof from the date such Loan
is made until maturity (whether by acceleration or otherwise) at a rate
per annum equal to the lesser of (i) the Highest Lawful Rate, or (ii) a
fixed rate of ten percent (10%) per annum, payable in arrears on each
Interest Payment Date for such Loan and at maturity (whether by
acceleration or otherwise).
(b) Default Rate. If any payment of principal and/or interest on any
Loan is not made or paid when due (whether by acceleration or otherwise),
such Loan and/or interest thereon shall bear interest (computed on the
basis of a 365/366-day year and actual days elapsed) from the date such
payment was due until such principal and/or interest then due is paid in
full, payable on demand, at a rate per annum equal to the lesser of (i)
the Highest Lawful Rate, or (ii) the sum of fifteen percent (15%) per
annum.
(c) Usury Savings Clause. It is the intention of the Lender to
conform strictly to usury laws applicable to it. Accordingly, if the
transactions contemplated hereby or the Loans would be usurious as to the
Lender under laws applicable to it (including the laws of the United
States of America and the State of Texas or any other jurisdiction whose
laws
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may be mandatorily applicable to the Lender notwithstanding the other
provisions of this Agreement, the Note or any other Credit Document),
then, in that event, notwithstanding anything to the contrary in this
Agreement, the Note or any other Credit Document, it is agreed as follows:
(i) the aggregate of all consideration which constitutes interest under
laws applicable to the Lender that is contracted for, taken, reserved,
charged or received by the Lender under this Agreement, the Note or any
other Credit Document or otherwise shall under no circumstances exceed the
Highest Lawful Rate, and any excess shall be credited by the Lender on the
principal amount of the Note (or, if the principal amount of the Note
shall have been paid in full, refunded by the Lender to the Borrower);
(ii) in the event that the maturity of the Note is accelerated by reason
of an election of the holder or holders thereof resulting from any Event
of Default hereunder or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest
under laws applicable to the Lender may never include more than the
Highest Lawful Rate, and excess interest, if any, provided for in this
Agreement, the Note any other Credit Document or otherwise shall be
automatically canceled by the Lender as of the date of such acceleration
or prepayment and, if theretofore paid, shall be credited by the Lender on
the principal amount of the Note (or if the principal amount of the Note
shall have been paid in full, refunded by the Lender to the Borrower); and
(iii) if at any time the interest provided under this Agreement, the Note
or any other Credit Document, together with any other fees payable
pursuant to this Agreement, the Note or any other Credit Document and
deemed interest under applicable law, exceeds the amount that would have
accrued at the Highest Lawful Rate, the amount of interest and any such
fees to accrue to the Lender hereunder and thereunder shall be limited to
the amount which would have accrued at the Highest Lawful Rate, but any
subsequent reductions shall not reduce the interest to accrue to the
Lender hereunder and thereunder below the Highest Lawful Rate until the
total amount of interest accrued pursuant hereto and thereto and such fees
deemed to be interest equals the amount of interest which would have
accrued to the Lender if a varying rate per annum equal to the interest
hereunder had at all times been in effect plus the amount of fees which
would have been received but for the effect hereof; and in each case, to
the extent permitted by applicable law, the Lender shall not be subject to
any of the penalties provided by law for contracting for, taking,
reserving, charging or receiving interest in excess of the Highest Lawful
Rate. The Lender hereby elects to determine the applicable rate ceiling
under Chapter lD of Article 5069 of the Texas Credit Title Act, Title 79,
Texas Revised Civil Statutes by the weekly rate ceiling from time to time
in effect, subject to the Lender's right subsequently to change such
method in accordance with applicable law. The provisions of Chapter 346 of
Tex. Finance Code Ann. (Vernon 1998), regulating certain revolving credit
accounts shall not apply to this Agreement or the Note.
Section 2.4 Maturity of Loans. All outstanding Loans shall mature and
become due and payable, together with all accrued and unpaid interest thereon,
on the Maturity Date.
Section 2.5 The Note. The Loans shall be evidenced by a convertible
revolving promissory note of the Borrower payable to the Lender in form and
substance satisfactory to the Lender (such promissory note, together with any
replacements thereof, the "Note"). The holder of the Note shall record on its
books and records or on a schedule to the Note the amount of each Loan
outstanding from him to the Borrower, all payments of principal and interest and
the
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principal balance from time to time outstanding thereon. Such record, whether
shown on the books and records of a holder of the Note or on a schedule to the
Note, shall be prima facie evidence as to all such matters; provided, however,
that the failure of any holder to record any of the foregoing or any error in
any such record shall not limit or otherwise affect the obligation of the
Borrower to repay all Loans outstanding to it hereunder, together with accrued
interest thereon.
Section 2.6 Optional Prepayments. The Borrower shall have the privilege of
prepaying the Loans, subject to the Lender's right to convert the Note as
provided in the Note, without premium or penalty in whole or in part upon five
(5) Business Days' prior written notice to the Lender. Any optional prepayments
of principal shall be accompanied by accrued and unpaid interest thereon to the
date of any such prepayment.
Section 2.7 Mandatory Prepayments. If the aggregate principal amount of
outstanding Loans shall at any time for any reason exceed the lesser of the
Revolving Commitment Amount then in effect or the Borrowing Base, the Borrower
shall, (i) immediately and without notice or demand if such outstandings exceed
the Revolving Commitment Amount then in effect, or (ii) within two (2) Business
Days if such outstandings exceed the Borrowing Base but do not exceed the
Revolving Commitment Amount then in effect, pay the amount of such excess to the
Lender as a prepayment of the Loans. Immediately upon determining the need to
make any such prepayment, the Borrower shall notify the Lender of such required
prepayment. Each such prepayment shall be accompanied by a payment of all
accrued and unpaid interest on the Loans prepaid.
Section 2.8 Revolving Commitment Reduction or Termination. The Borrower
shall have the right at any time and from time to time, upon five (5) Business
Days' prior and irrevocable written notice to the Lender, to terminate or reduce
the Revolving Commitment without premium or penalty, in whole or in part;
provided that the Revolving Commitment may not be reduced to an amount less than
the sum of the aggregate principal amount of outstanding Loans. Any termination
of the Revolving Commitment pursuant to this Section 2.8 is permanent and may
not be reinstated.
SECTION 3. PAYMENTS AND EXPENSES.
Section 3.1 Place and Application of Payments. All payments of principal
of and interest on the Loans and all other amounts payable by the Borrower under
the Credit Documents shall be made by the Borrower to the Lender by no later
than 1:30 p.m. on the due date thereof at the office of the Lender in Dallas,
Texas (or such other location as the Lender may designate to the Borrower). Any
payments received by the Lender from the Borrower after 1:30 p.m. shall be
deemed to have been received on the next Business Day.
Section 3.2 Expenses. The Borrower shall pay to the Lender on or before
the Effective Date his expenses and costs relating to this Agreement and the
transactions contemplated hereby, including the fees and out-of-pocket costs of
his special counsel.
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SECTION 4. CONDITIONS PRECEDENT.
Section 4.1 Conditions Precedent to Initial Borrowing. The obligation of
the Lender to advance the initial Loans hereunder on the Initial Borrowing Date
is subject to the following conditions precedent, all in form and substance
satisfactory to the Lender:
(a) The Lender shall have received:
(i) Note. The duly executed Note of the Borrower;
(ii) Subsidiary Guaranties. The duly executed Subsidiary
Guaranty of each of the Guarantors;
(iii) Security Agreements. The duly executed Security
Agreement of each of the Borrower and the Guarantors, together with UCC-1
Financing Statements and appropriate filings with respect to the patents
referenced therein;
(iv) Stock Pledge Agreement. The duly executed Stock Pledge
Agreement of the Borrower, together with the stock certificates referenced
therein and undated stock powers with respect thereto;
(v) First Additional Warrant. The duly executed First
Additional Warrant;
(vi) Registration Rights Agreement. The duly executed
Registration Rights Agreement;
(vii) First Amendment to Voting Agreement. The duly executed
First Amendment to Voting Agreement executed by all parties thereto other
than Primo Ilanieri whose signature must be obtained by December 13, 1998;
(viii) Certificate of Officers of Borrower and Guarantors. A
certificate of an officer of each of the Borrower and the Guarantors
containing specimen signatures of the persons authorized to execute Credit
Documents on such Person's behalf or any other documents provided for
herein, together with (x) copies of resolutions of the Board of Directors
of such Person authorizing the execution and delivery of the Credit
Documents and of all other legal documents or proceedings taken by such
Person in connection with the execution and delivery of the Credit
Documents, (y) copies of such Person's Certificate of Incorporation,
certified by the Secretary of State of such Person's jurisdiction of
organization, and Bylaws and (z) a certificate of existence and good
standing from the appropriate governing agency of such Person's
jurisdiction of organization and of all jurisdictions where such Person is
authorized to do business:
(ix) Financial Condition Certificate. A certificate of the
chief financial officer of the Borrower with respect to the financial
condition of the Borrower and the Guarantors;
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(x) Lien Searches. The results of recent lien searches and
Uniform Commercial Code searches showing no Liens on any of the property
or assets of any of the Borrower or the Guarantors other than Permitted
Liens, or evidence that any such Liens other than Permitted Liens have
been terminated or will be terminated concurrently with the Initial
Borrowing Date, including, without limitation, the termination of any Lien
of Connie Smallwood or of DC&A against any assets of the Borrower or any
of its Subsidiaries (it being acknowledged by the Lender that DC&A will
still hold Liens against certain assets of e^2);
(xi) Forgiveness of Indebtedness by DC&A. The forgiveness by
DC&A of all Indebtedness owed by Warren Power to it pursuant to the e^2
Financing Documents (it being acknowledged by the Lender that e^2 shall
still owe DC&A Indebtedness pursuant thereto);
(xii) Legal Opinion. An opinion letter of Lev, Berlin & Dale,
P.C., legal counsel to the Borrower and the Guarantors;
(xiii) Other Documents. Such other documents as the Lender may
reasonably request.
(b) All other legal matters incidence to the execution and delivery
of the Credit Documents shall be satisfactory to the Lender.
Section 4.2 Conditions Precedent to all Borrowings. In the case of each
advance of a Borrowing hereunder:
(a) Borrowing Request. The Lender shall have received a Borrowing
Request;
(b) Representations and Warranties True and Correct. Each of the
representations and warranties of the Credit Parties set forth herein and
in the Credit Documents shall be true and correct in all material respects
as of the time of such new Borrowing, except as a result of the
transactions expressly permitted hereunder or thereunder and except to the
extent that any such representation or warranty relates solely to an
earlier date, in which case it shall have been true and correct in all
material respects as of such earlier date;
(c) No Default. No Default or Event of Default shall have occurred
and be continuing or would occur as a result of such Borrowing;
(d) New Litigation and Changes in Pending Litigation. No litigation
(including, without limitation, derivative or injunctive actions),
arbitration proceedings or governmental proceedings shall be pending or
known to be threatened against the Borrower or any of its Subsidiaries
which could reasonably be expected to have a Material Adverse Effect; and
no material development (whether or not disclosed) shall have occurred in
any litigation (including, without limitation, derivative or injunctive
actions), arbitration
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proceedings or governmental proceedings so disclosed, which could
reasonably be expected to have a Material Adverse Effect;
(e) Laws. The Borrowings to be made by the Borrower shall not result
in any of the Borrower or the Lender being in non-compliance with or in
violation of law and shall not be prohibited by any other legal
requirement imposed by the laws of Texas or the United States of America
or any other laws, and shall not otherwise subject the Lender to a penalty
or other onerous conditions under or pursuant to any legal requirement;
(f) No Material Adverse Effect. There has occurred no event or
effect that has had or could reasonably be expected to have a Material
Adverse Effect; and
(g) Second Additional Warrant. The Lender shall have received the
duly executed Second Additional Warrant if the requested Borrowing,
together with the aggregate principal amount of all Loans then outstanding
plus all Loans converted to common stock of the Borrower pursuant to the
terms and conditions of the Note, shall equal or exceed $2,000,000.
Each request for the advance of a Borrowing shall be deemed to be a
representation and warranty by the Borrower on the date of such Borrowing that
all conditions precedent to such Borrowing have been satisfied or fulfilled
unless the Borrower gives to the Lender written notice to the contrary, in which
case the Lender shall not be required to fund such advances unless the Lender
shall have previously waived in writing such non-compliance.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Organization.
(a) The Borrower and each of its Subsidiaries (i) is a duly
incorporated and existing corporation (or other Person) in good standing
under the laws of the jurisdiction of its organization; (ii) has all
necessary corporate power (or comparable power, in the case of a
Subsidiary that is not a corporation) to own the property and assets it
uses in its business and otherwise to carry on its business as presently
conducted; and (iii) is duly licensed or qualified and in good standing in
each jurisdiction in which the nature of the business transacted by it or
the nature of the property owned or leased by it makes such licensing or
qualification necessary.
(b) As of the Effective Date, the Borrower has no Subsidiaries other
than the Guarantors and e^2, and the Borrower owns one hundred percent
(100%) of each outstanding class of capital stock of each of the
Guarantors and e^2. Communication Service Company is a division of Warren
Power Systems, Inc.
Section 5.2 Power and Authority; Validity. Each of the Borrower and its
Subsidiaries has the corporate (or comparable power, in the case of a Subsidiary
that is not a corporation)
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power and authority to execute, deliver and carry out the terms and provisions
of the Credit Documents to which it is a party and has taken all necessary
corporate or comparable action to authorize the execution, delivery and
performance of the Credit Documents to which it is a party. Each of the Borrower
and its Subsidiaries has duly executed and delivered each such Credit Document
and each such Credit Document constitutes the legal, valid and binding
obligation of such Person enforceable in accordance with its terms, subject as
to enforcement only to bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity, regardless of whether in a proceeding in equity
or at law.
Section 5.3 No Violation. Neither the execution, delivery nor performance
by the Borrower or any of its Subsidiaries of the Credit Documents to which it
is a party nor compliance by any of such Persons with the terms and provisions
thereof, nor the consummation by it of the transactions contemplated herein or
therein, will (i) contravene any applicable provision of any law, statute, rule
or regulation, or any applicable order, writ, injunction or decree of any court
or governmental instrumentality; (ii) conflict with or result in any breach of
any term, covenant, condition or other provision of, or constitute a default
under or result in the creation or imposition of (or the obligation to create or
impose) any Lien other than any Permitted Lien upon any of the property or
assets of the Borrower or its Subsidiaries under the terms of any contractual
obligation to which the Borrower or any of its Subsidiaries is a party or by
which it or any of its properties or assets are bound or to which it may be
subject; or (iii) violate or conflict with any provision of the Certificate of
Incorporation, Bylaws or other governance documents of such Person.
Section 5.4 Litigation. There are no lawsuits (including, without
limitation, derivative or injunctive actions), arbitration proceedings or
governmental proceedings pending or threatened, involving the Borrower or any of
its Subsidiaries except as listed in Schedule 5.4.
Section 5.5 Use of Proceeds: Margin Regulations. The proceeds of the Loans
may only be used to provide working capital. Neither the Borrower nor any of its
Subsidiaries are engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock. No proceeds of any Loan will be used to
purchase or carry any "margin stock" (as defined in Regulation U of the Board
of Governors of the Federal Reserve System), to extend credit for the purpose of
purchasing or carrying any "margin stock," or for a purpose which violates
Regulations T, U or X of the Board of Governors of the Federal Reserve System.
Section 5.6 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries nor e^2 is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of
1940, as amended.
Section 5.7 Public Utility Holding Company Act. Neither the Borrower nor
any of its Subsidiaries nor e^2 is a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 5.8 True and Complete Disclosure. All factual information (not
including estimates, pro forma financial information and other projections)
heretofore or contemporaneously
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furnished by the Borrower or any of its Subsidiaries in writing to the Lender in
connection with any Credit Document or any transaction contemplated therein, and
all other such factual information hereafter furnished by any such Persons in
writing to the Lender in connection herewith, any of the other Credit Documents
or the Loans, is or will be true and accurate in all material respects, taken as
a whole, on the date of such information and not incomplete by omitting to state
any material fact necessary to make the information therein not misleading at
such time in light of the circumstances under which such information, taken as a
whole, was provided. All estimates, pro forma financial information and other
projections furnished by the Borrower or any of its Subsidiaries in writing to
the Lender in connection with any Credit Document or any transaction
contemplated therein, were prepared by the Borrower in good faith based upon
assumptions believed by the Borrower to be reasonable at the time such
information was prepared, it being recognized by the Lender that such financial
information as it relates to future events is not to be viewed as fact and that
actual results during the period or periods covered by such financial
information may differ from the projected results set forth therein.
Section 5.9 Financial Statements. The financial statements heretofore
delivered to the Lender for the Borrower's fiscal quarter ending September 30,
1998, were prepared on a consolidated basis in accordance with GAAP, and such
financial statements, together with the related notes and schedules, fairly
presents the financial position of the Borrower, its Subsidiaries, and e^2 as of
the date thereof and the results of operations for the period covered thereby,
subject to normal year-end adjustments and omission of certain footnotes. The
Borrower and its Subsidiaries have no material contingent liabilities or
Indebtedness other than those disclosed in such financial statements.
Section 5.10 No Material Adverse Effect. From September 30, 1998, there
has occurred no event or effect that has had, or to the best knowledge of the
Borrower could reasonably be expected to have, a Material Adverse Effect.
Section 5.11 Labor Controversies. There are no labor strikes, lock-outs,
slow downs, work stoppages or similar events pending or, to the best knowledge
of the Borrower, threatened against the Borrower or any of its Subsidiaries.
Section 5.12 Taxes. The Borrower and its Subsidiaries have filed all
federal tax returns and all other material tax returns required to be filed, and
have paid all governmental taxes, rates, assessments, fees, charges and levies
(collectively, "Taxes"), except such Taxes, if any, as are being contested in
good faith and for which reserves have been provided in accordance with GAAP,
and no tax liens have been filed and no claims are being asserted for Taxes. The
charges, accruals and reserves on the books of the Borrower and its Subsidiaries
for Taxes and other governmental charges have been determined in accordance with
GAAP.
Section 5.13 ERISA. With respect to each Plan, the Borrower and its
Subsidiaries have fulfilled their obligations under the minimum funding
standards of, and are in compliance in all material respects with, ERISA and
with the Code to the extent applicable to it, and have not incurred any
liability under Title IV of ERISA to the PBGC or a Plan other than a liability
to the PBGC for premiums under Section 4007 of ERISA, and neither the Borrower
nor any of its Subsidiaries has any contingent liability with respect to any
post-retirement benefits under a
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welfare plan as defined in ERISA other than liability for continuation coverage
described in Part 6 of Title I of ERISA, in each case except where such
liability could not reasonably be expected to have a Material Adverse Effect.
Section 5.14 Consents. All consents and approvals of, and filings and
registrations with, and all other actions of, all governmental agencies,
authorities or instrumentalities required to consummate the Borrowings
hereunder, on the date of each such Borrowing, have been obtained or made and
are or will be in full force and effect.
Section 5.15 Capitalization. All outstanding shares of the Borrower and
its Subsidiaries have been duly and validly issued, are fully paid and
nonassessable, and neither the Borrower nor any of its Subsidiaries nor e^2 has
outstanding any securities convertible into or exchangeable for its capital
stock or outstanding any rights to subscribe for or to purchase, or any options
for the purchase of, or any agreement providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to,
its capital stock, except as listed in Schedule 5.15. Schedule 5.15 accurately
sets forth the capitalization of the Borrower as of the Effective Date. The
Borrower will use its best efforts to (i) make any necessary filings under the
Securities Exchange Act of 1934, as amended, such that it shall become eligible
to file a Form S-3 under the Securities Act of 1933, or (ii) file a registration
statement under the Securities Act of 1933, as amended, in either case, as soon
as practicable.
Section 5.16 Ownership of Property. The Borrower and its Subsidiaries have
good title to or a valid leasehold interest in all of its property except to the
extent, in the aggregate, no Material Adverse Effect could reasonably be
expected to result from the failure to have such title or interest, subject to
no Liens except Permitted Liens. The Borrower and its Subsidiaries own or hold
valid licenses to use all the material patents, trademarks, permits, service
marks and trade names, free of any burdensome restrictions, that are necessary
to the operation of the business of the Borrower and its Subsidiaries as
presently conducted.
Section 5.17 Compliance with Statutes. The Borrower and its Subsidiaries
are in compliance in all material respects with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies and have all necessary permits, licenses and other necessary
authorizations with respect to the conduct of their businesses and the ownership
and operation of their properties.
Section 5.18 Environmental Matters.
(a) The Borrower and its Subsidiaries have complied with, and on the
date of each Borrowing will be in compliance with, all applicable
Environmental Laws and the requirements of any permits issued under such
Environmental Laws except where failure to so comply could not reasonably
be expected to have a Material Adverse Effect. To the best knowledge of
the Borrower, there are no pending, past or threatened Environmental
Claims against the Borrower or any of its Subsidiaries or any property
owned or operated by the Borrower or any of its Subsidiaries which could
reasonably be expected to have a Material Adverse Effect. To the best
knowledge of the Borrower, there are no conditions or occurrences on or
emanating from any property owned or operated by the Borrower or any of
its Subsidiaries or on any property adjoining or in the vicinity of any
such property that could reasonably be expected (i) to form the basis of
an Environmental Claim against the Borrower or any of its Subsidiaries or
any property owned or operated by the Borrower
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or any of its Subsidiaries; or (ii) to cause any property owned or
operated by the Borrower or any of its Subsidiaries to be subject to any
material restrictions on the ownership, occupancy, the current or intended
use or transferability of such property by the Borrower or any of its
Subsidiaries under any applicable Environmental Law except for any such
condition or occurrence described in clauses (i) or (ii) which could not
reasonably be expected to have a Material Adverse Effect.
(b) To the best knowledge of the Borrower (i) Hazardous Materials
have not at any time been generated, used, treated or stored on, or
transported to or from, any property owned or operated by the Borrower or
any of its Subsidiaries in a manner that has violated or could reasonably
be expected to violate any Environmental Law, except for such violation
which could not reasonably be expected to have a Material Adverse Effect;
and (ii) Hazardous Materials have not at any time been released on or from
any property owned or operated by the Borrower or any of its Subsidiaries
in a matter that has violated or could reasonably be expected to violate
any Environmental Law, except for such violation which could not
reasonably be expected to have a Material Adverse Effect.
Section 5.19 Year 2000 Compliance. All devices, systems, machinery,
information technology, computer software and hardware, and other date sensitive
technology (jointly and severally its "systems") necessary for the Borrower and
its Subsidiaries to carry on their business as presently contemplated to be
conducted will be Year 2000 Compliant within a period of time calculated to
result in no material disruption of any of their business operations. For
purposes hereof, "Year 2000 Compliant" means that such systems are designed to
be used prior to, during and after the Gregorian calendar year 2000 A.D. and
will operate during each such time period without error relating to date data,
specifically including any error relating to, or the product of, date data which
represents or references different centuries or more than one century. The
Borrower and its Subsidiaries will (i) undertake a detailed inventory, review,
and assessment of all areas within their businesses and operations that could be
adversely affected by the failure of the Borrower and its Subsidiaries to be
Year 2000 Compliant on a timely basis; and (ii) develop a detailed plan and
timeline for becoming Year 2000 Compliant on a timely basis. The Borrower will,
as soon as reasonably practicable, make written inquiry of each of its and its
Subsidiaries' key suppliers, vendors, and customers, and will obtain in writing
confirmations from all such Persons, as to whether such Persons have initiated
programs to become Year 2000 Compliant. For purposes hereof, "key suppliers,
vendors, and customers" refers to those suppliers, vendors, and customers of the
Borrower and its Subsidiaries whose business failure could reasonably be
expected to have a Material Adverse Effect. The fair market value of all
Collateral pledged to the Lender as collateral to secure the Loans is not and
shall not be less than currently anticipated or subject to substantial
deterioration in value because of the failure of such Collateral to be Year 2000
Compliant.
SECTION 6. COVENANTS.
The Borrower covenants and agrees that, so long as the Note or any other
Obligation is outstanding or the Revolving Commitment is outstanding hereunder:
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Section 6.1 Existence. The Borrower and its Subsidiaries will preserve and
maintain their existence except (i) for the dissolution of any Subsidiaries
whose assets are transferred to the Borrower or any of its Subsidiaries, and
(ii) as otherwise expressly permitted herein.
Section 6.2 Maintenance. The Borrower and its Subsidiaries will maintain,
preserve and keep their material plants, properties and equipment necessary to
the proper conduct of their businesses in reasonably good repair, working order
and condition (normal wear and tear excepted) and will from time to time make
all reasonably necessary repairs, renewals, replacements, additions and
betterments thereto consistent with usual and customary business practices so
that at all times such plants, properties and equipment are reasonably preserved
and maintained, in each case with such exceptions as could not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect;
provided, however, that nothing in this Section 6.2 shall prevent the Borrower
or any of its Subsidiaries from discontinuing the operation or maintenance of
any such plants, properties or equipment if such discontinuance is, in the
judgment of the Borrower or any such Subsidiary, as applicable, desirable in the
conduct of its business and not materially disadvantageous to the Lender.
Section 6.3 Taxes. The Borrower and its Subsidiaries will duly pay and
discharge all Taxes upon or against them or their properties before penalties
accrue thereon, unless and to the extent that the same is being contested in
good faith and by appropriate proceedings and reserves have been established in
conformity with GAAP.
Section 6.4 ERISA. The Borrower and its Subsidiaries will promptly pay and
discharge all obligations and liabilities arising under ERISA or otherwise with
respect to each Plan of a character which if unpaid or unperformed might result
in the imposition of a material Lien against any properties or assets of the
Borrower or any of its Subsidiaries and will promptly notify the Lender of (i)
the occurrence of any reportable event (as defined in ERISA) relating to a Plan
other than any such event with respect to which the PBGC has waived notice by
regulation; (ii) receipt of any notice from PBGC of its intention to seek
termination of any Plan or appointment of a trustee therefor; (iii) the
Borrower's or any of its Subsidiary's intention to terminate or withdraw from
any Plan if such termination or withdrawal would result in liability under Title
IV of ERISA; and (iv) the occurrence of any event that could reasonably be
expected to result in the incurrence of any material liability, fine or penalty,
or any material increase in the contingent liability of the Borrower or any of
its Subsidiaries, in connection with any post-retirement benefit under a welfare
plan benefit (as defined in ERISA).
Section 6.5 Insurance. The Borrower and its Subsidiaries will maintain or
cause to be maintained with responsible insurance companies, insurance against
any loss or damage to all material insurable property and assets owned by them,
such insurance to be of a character and in or in excess of such amounts as are
customarily maintained by well-insured companies similarly situated and
operating like property or assets (subject to self-insured retentions and
deductibles acceptable to the Lender in its sole discretion), all of which
policies shall provide that no policy shall terminate without at least thirty
(30) days' advance written notice to the Lender, shall name the Lender as named
assured and loss payee and be reasonably acceptable to the Lender. The Borrower
and each of its Subsidiaries will also insure employers' and public and product
liability
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risks with responsible insurance companies (naming the Lender as an additional
assured), all as reasonably acceptable to the Lender.
Section 6.6 Financial Reports and Other Information.
(a) The Borrower and its Subsidiaries will maintain a system of
accounting in such manner as will enable preparation of financial
statements in accordance with GAAP and will furnish to the Lender and his
authorized representatives such information about the business and
financial condition of the Borrower and its Subsidiaries as the Lender may
reasonably request, including, without limitation, any corporate documents
and records, within such time period as the Lender may reasonably request;
and, without any request, will furnish to the Lender:
(i) within thirty (30) days after the end of each fiscal month
of each fiscal year of the Borrower, the consolidated and consolidating
balance sheets of the Borrower and its Subsidiaries as at the end of such
fiscal month and the related consolidated and consolidating statements of
income and retained earnings and of cash flows for such fiscal month and
for the portion of the fiscal year ended with the last day of such fiscal
month, all of which shall be in reasonable detail and certified by an
officer of the Borrower acceptable to the Lender that such financial
reports fairly present the financial condition of the Borrower and its
Subsidiaries as of the dates indicated and the results of their operations
and changes in their cash flows for the periods indicated and that they
have been prepared in accordance with GAAP, in each case, subject to
normal year-end audit adjustments and the omission of footnotes; and
(ii) within ninety (90) days after the end of each fiscal year
of the Borrower, consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as at the end of such fiscal year and the
related consolidated and consolidating statements of income and retained
earnings and of cash flows for such fiscal year and setting forth
consolidated comparative figures for the preceding fiscal year, all of
which shall be in reasonable detail and certified by an officer of the
Borrower acceptable to the Lender that such financial statements fairly
present the financial condition of the Borrower and its Subsidiaries as of
the dates indicated and the results of their operations and changes in
their cash flows for the periods indicated and that they have been
prepared in accordance with GAAP, and audited with an unqualified opinion
by an independent nationally-recognized accounting firm acceptable to the
Lender.
(b) Each financial statement furnished to the Lender pursuant to
subsection (i) of Section 6.6(a) shall be accompanied by (i) a written
certificate signed by an officer of the Borrower acceptable to the Lender
to the effect that (x) no Default or Event of Default has occurred during
the period covered by such statements or, if any such Default or Event of
Default has occurred during such period, setting forth a description of
such Default or Event of Default and specifying the action, if any, taken
by the Borrower to remedy the same, and (y) the representations and
warranties contained herein are true and correct in all material respects
as though made on the date of such certificate; and (ii) a Borrowing Base
Certificate, together with an aged accounts receivable and accounts
payable listing.
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(c) Promptly upon receipt thereof, the Borrower will provide the
Lender with a copy of each report or "management letter" submitted to the
Borrower or any of its Subsidiaries by its independent accountants or
auditors in connection with any annual, interim or special audit made by
them of the books and records of the Borrower or any of its Subsidiaries.
(d) Promptly after obtaining knowledge of any of the following, the
Borrower will provide the Lender with written notice in reasonable detail
of: (i) any pending or threatened material Environmental Claim against the
Borrower or any of its Subsidiaries or any property owned or operated by
the Borrower or any of its Subsidiaries; (ii) any condition or occurrence
on any property owned or operated by the Borrower or any of its
Subsidiaries that results in material noncompliance by the Borrower or any
of its Subsidiaries with any Environmental Law; and (iii) the taking of
any material removal or remedial action in response to the actual or
alleged presence of any Hazardous Material on any property owned or
operated by the Borrower or any of its Subsidiaries.
(e) The Borrower will promptly and in any event, within two (2)
days, give written notice to the Lender of: (i) any pending or threatened
litigation or proceeding against the Borrower or any of its Subsidiaries
asserting any uninsured claim or claims against any of same in excess of
$25,000 in the aggregate; (ii) the occurrence of any Default or Event of
Default; and (iii) any circumstance that could reasonably be expected to
have a Material Adverse Effect.
(f) Within five (5) days after the sending thereof, the Borrower
will provide the Lender with copies of all financial statements or
projections, documents and other communications that the Borrower sends to
its stockholders generally.
(g) The Borrower and its Subsidiaries will maintain a fiscal year
ending December 31.
(h) The Borrower will (i) furnish such additional information,
statements and other reports with respect to the Borrower's compliance
(and its approach to and progress towards achieving compliance) with
Section 5.19 as the Lender may request from time to time; (ii) in the
event of any change in circumstances that causes or will likely cause any
of the Borrower's representations and warranties set forth in Section
5.19, to no longer be true, the Borrower shall promptly, and in any event
within ten (10) days of receipt of information regarding a change in
circumstances, provide the Lender with written notice that describes in
reasonable detail the change in circumstances and any additional
information the Lender requests of the Borrower in connection therewith;
and (iii) give any representative of the Lender access during all business
hours to, and permit such representative to examine, copy or make excerpts
from, any and all books, records and documents in the possession of the
Borrower and its Subsidiaries and relating to their affairs, and to
inspect any of the properties and systems of the Borrower and its
Subsidiaries, and to project test its systems to determine if they are
Year 2000 Compliant in an integrated environment, all at the sole cost and
expense of the Borrower.
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Section 6.7 Lender Inspection Rights. Upon reasonable notice from the
Lender, the Borrower will permit the Lender (and such Persons as the Lender may
reasonably designate), at the Borrower's expense during normal business hours
following reasonable notice to visit and inspect any of the properties of the
Borrower or any of its Subsidiaries, to examine all of their books and records,
to make copies and extracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers and independent public
accountants (and by this provision, the Borrower authorizes such accountants to
discuss with the Lender, and such Persons as the Lender may designate, the
affairs, finances and accounts of the Borrower and its Subsidiaries, all at such
reasonable times and as often as may be reasonably requested.
Section 6.8 Conduct of Business. The Borrower and its Subsidiaries will
not engage in any line of business other than the existing lines of business of
the Borrower and its Subsidiaries or businesses reasonably related thereto
(each, a "Permitted Business").
Section 6.9 New Subsidiaries. The Borrower shall cause any direct or
indirect Subsidiary which is formed or acquired after the Effective Date to
become a Guarantor with respect to, and jointly and severally liable with all
other Guarantors for, all of the Obligations under this Agreement and the Note
pursuant to a Subsidiary Guaranty. In addition, each such new Subsidiary shall
grant a Lien upon all of its property and assets pursuant to a Security
Agreement, and if applicable, a Stock Pledge Agreement, and shall execute and
deliver to the Lender UCC-1 financing statements with respect thereto and such
other documentation as reasonably requested by the Lender to perfect its Lien
upon such property and assets. All such documents shall be executed and
delivered within fifteen (15) days of the formation or acquisition of such new
Subsidiary.
Section 6.10 Dividends; Negative Pledges.
(a) The Borrower shall not pay or make any dividends or other
distributions on its capital stock or set aside funds for any such
purpose. The Borrower shall not redeem, purchase or otherwise acquire any
shares of its capital stock.
(b) Except as otherwise permitted herein, neither the Borrower nor
any of its Subsidiaries shall, directly or indirectly, create or otherwise
permit to exist or become effective any restriction on the ability of any
Subsidiary of the Borrower to (i) pay dividends or make any other
distributions on its capital stock or any other interest or participation
in its profits owned by the Borrower or to pay any Indebtedness owed to
the Borrower; or (ii) make loans or advances to the Borrower or any of its
Subsidiaries, except in either case for restrictions existing under or by
reason of applicable law, this Agreement and the other Credit Documents.
Neither the Borrower nor any of its Subsidiaries shall enter into any
agreement other than this Agreement and the Credit Documents prohibiting
the creation or assumption of any Lien upon its properties, revenues or
assets, whether now owned or hereafter acquired or prohibiting or
restricting the ability of the Borrower or any of its Subsidiaries to
amend or otherwise modify this Agreement or any Credit Document.
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Section 6.11 Restrictions on Fundamental Changes. Neither the Borrower nor
any of its Subsidiaries shall be a party to any merger into or consolidation
with, make an acquisition or otherwise purchase or acquire all or substantially
all of the assets or stock of, any other Person, or sell all or substantially
all of its assets or stock, except the Borrower may purchase or otherwise
acquire all or substantially all of the stock or assets of, or otherwise acquire
by merger or consolidation, any of its Subsidiaries, and any such Subsidiary may
merge into, or consolidate with, or purchase or otherwise acquire all or
substantially all of the assets or stock of or sell all or substantially all of
its assets or stock to, any other Subsidiary of the Borrower or the Borrower, in
each case so long as the Borrower shall be the surviving entity to any such
merger or consolidation if the transaction is with the Borrower. Except as
otherwise permitted in this Section 6.11, the Borrower shall not sell or dispose
of any capital stock of or its ownership interest in any of the Guarantors or
any other Subsidiaries which it may form or acquire.
Section 6.12 Environmental Laws. The Borrower and its Subsidiaries shall
comply in all respects with all Environmental Laws (including, without
limitation, obtaining and maintaining all necessary permits, licenses and other
necessary authorizations) applicable to or affecting the properties or business
operations of the Borrower or any of its Subsidiaries.
Section 6.13 Liens. The Borrower and its Subsidiaries shall not create,
incur, assume or suffer to exist any Lien of any kind on any of their properties
or assets of any kind except the following (collectively, the "Permitted
Liens"):
(a) Liens arising in the ordinary course of business by operation of
law in connection with workers' compensation, unemployment insurance, old
age benefits, social security obligations, taxes, assessments, statutory
obligations or other similar charges, good faith deposits, pledges or
other Liens in connection with (or to obtain letters of credit in
connection with) bids, performance bonds, contracts or leases to which the
Borrower or its Subsidiaries are a party or other deposits required to be
made in the ordinary course of business; provided that in each case the
obligation secured is not for Indebtedness and is not overdue or, if
overdue, is being contested in good faith by appropriate proceedings and
reserves in conformity with GAAP have been provided therefor;
(b) mechanics', workmen, materialmen, landlords', carriers' or other
similar Liens arising in the ordinary course of business (or deposits to
obtain the release of such Liens) related to obligations not due or, if
due, that are being contested in good faith by appropriate proceedings and
reserves in conformity with GAAP have been provided therefor;
(c) inchoate Liens under ERISA and Liens for Taxes not yet due or
which are being contested in good faith by appropriate proceedings and
reserves in conformity with GAAP have been provided therefor;
(d) Liens arising out of judgments or awards against the Borrower or
any of its Subsidiaries, or in connection with surety or appeal bonds or
the like in connection with bonding such judgments or awards, the time for
appeal from which or petition for
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rehearing of which shall not have expired or for which the Borrower or
such Subsidiary shall be prosecuting on appeal or proceeding for review
and for which it shall have obtained a stay of execution or the like
pending such appeal or proceeding for review; provided that the aggregate
amount of uninsured or underinsured liabilities (including interest,
costs, fees and penalties, if any) of the Borrower and its Subsidiaries
secured by such Liens shall not exceed $25,000 at any one time outstanding
and provided further there is adequate assurance, in the sole discretion
of the Lender, that the insurance proceeds attributable thereto shall be
paid promptly upon the expiry of such time period or resolution of such
proceeding if necessary to remove such Liens;
(e) rights of a common owner of any interest in property held by a
Person and such common owner as tenants in common or through other common
ownership;
(f) easements, restrictions, servitudes, permits, conditions,
covenants, exceptions or reservations in any property or rights-of-way of
a Person for the purpose of roads, pipelines, transmission lines,
transportation lines, distribution lines, removal of gas, oil, coal,
metals, steam, minerals, timber or other natural resources, and other like
purposes, or for the joint or common use of real property, rights-of-way,
facilities or equipment, or defects, irregularity and deficiencies in
title of any property or rights-of-way which do not materially diminish
the value of or the ability to use such property;
(g) financing statements filed by lessors of property (but only with
respect to the property so leased) and Liens under any conditional sale or
title retention agreements entered into in the ordinary course of
business;
(h) Liens securing Indebtedness permitted by Section 6.14(c) on any
assets acquired; and
(i) any existing Liens of W. Gary Price and Timothy E. Walsh against
certain patents of Logic Labs, which must be released in full on or before
January 13, 1999;
(j) any existing Liens of Smallwood and ACL against certain patents
of Logic Labs, all of which expire (including, without limitation, any
reversionary interest therein) on December 3 1, 1999, assuming compliance
by the Borrower with the Royalty Agreement; and
(k) the existing Lien of BankBoston, N.A. against a certificate of
deposit of the Borrower in the approximate amount of $22,000.
Section 6. 14 Indebtedness. The Borrower and its Subsidiaries shall not
contract, assume or suffer to exist any Indebtedness (including, without
limitation, any Guaranties), except:
(a) Indebtedness under the Credit Documents;
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(b) unsecured intercompany loans and advances from the Borrower to
any of its Subsidiaries and unsecured intercompany loans and advances from
any of such Subsidiaries to the Borrower or any other Subsidiaries of the
Borrower, provided that the Borrower will not make any loans or advances
to e^2;
(c) Capitalized Lease Obligations and purchase money Indebtedness on
assets acquired in an aggregate amount not to exceed $250,000 at any one
time outstanding; and
(d) existing Indebtedness as disclosed on the Borrower's
consolidated financial statements for the fiscal quarter ending September
30, 1998, as renewed, extended or refinanced from time to time; provided
that the amount of such Indebtedness shall not be increased, the interest
rate payable or accrued thereon shall not be increased, the scheduled
payments thereon shall not be increased, the maturity date thereof shall
not be made sooner in time and any other terms thereof shall not be
amended so as to be more onerous than the terms hereof unless approved by
the Lender in his sole discretion.
Section 6.15 Loans, Advances and Investments. The Borrower and its
Subsidiaries shall not lend money or make advances to any Person, or purchase or
acquire any stock, indebtedness, obligations or securities of, or any other
interest in, or make any capital contribution to, any Person (any of the
foregoing, an "Investment") other than:
(a) Investments in Cash Equivalents;
(b) receivables owing to the Borrower or its Subsidiaries created or
acquired in the ordinary course of business and payable on customary trade
terms of the Borrower or such Subsidiary and in compliance with the
requirements of Section 6.17;
(c) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers arising
in the ordinary course of business;
(d) deposits made in the ordinary course of business consistent with
past practices to secure the performance of leases;
(e) as permitted by Section 6.14(b); and
(f) loans in the ordinary course of business to employees of the
Borrower or any of its Subsidiaries, provided that all such loans shall
not exceed $25,000 at any one time outstanding.
Section 6.16 Capital Expenditures. The Borrower shall not make any Capital
Expenditures in excess of $____________ in any twelve (12) month period without
the prior written consent of the Lender in his sole discretion.
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Section 6.17 Transfer of Assets. The Borrower and its Subsidiaries shall
not permit any sale, transfer, conveyance, assignment or other disposition of
any asset of the Borrower or any of its Subsidiaries except:
(a) transfers of inventory, equipment and other assets in the
ordinary course of business;
(b) the retirement or replacement of assets (with assets of equal or
greater value) in the ordinary course of business; and
(c) transfers of any assets among the Borrower and any of its
Subsidiaries provided that no transfers of assets may be made to e2.
Section 6.18 Transactions with Affiliates. Except as otherwise
specifically permitted herein, the Borrower and its Subsidiaries shall not enter
into or be a party to any material transaction or arrangement or series of
related transactions or arrangements which in the aggregate would be material
with any Affiliate of such Person, including without limitation, the purchase
from, sale to or exchange of property with or the rendering of any service by or
for, any Affiliate, except pursuant to the reasonable requirements of such
entity's business and upon fair and reasonable terms no less favorable to such
entity than would be able to be obtained in a comparable arm's-length
transaction with a Person other than an Affiliate.
Section 6.19 Compliance with Laws. The Borrower and its Subsidiaries shall
conduct their businesses and otherwise be in compliance in all material respects
with all applicable laws, regulations, ordinances and orders of all
governmental, judicial and arbitral authorities applicable to them and shall
obtain and maintain all necessary permits, licenses and other authorizations
necessary to conduct their businesses and own and operate their properties.
Section 6.20 Royalties. The Borrower or Logic Labs will pay timely all
royalties owing to Smallwood under the Royalty Agreement. Neither the Borrower
nor Logic Labs shall amend, supplement or resale the Royalty Agreement without
the consent of the Lender in his sole discretion.
Section 6.21 Corporate Governance Documents. Neither the Borrower nor any
of its Subsidiaries shall amend its corporate governance documents in any manner
materially disadvantageous to the Lender.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES.
Section 7.1 Events of Default. Any one or more of the following shall
constitute an Event of Default:
(a) default by the Borrower in the payment of the principal amount
of any Loan or any interest thereon or any fees payable hereunder or any
other Credit Document on the date when due;
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(b) default by the Borrower in the observance or performance of any
covenant agreement or obligation set forth in (i) Sections 6.6(e) (ii) or
(iii), 6.10, 6. 11 or 6. 16 of this Agreement, or (ii) in either the Note,
the First Additional Warrant, the Second Additional Warrant or the
Registration Rights Agreement;
(c) default by any Credit Party in the observance or performance of
any provision hereof or of any other Credit Document not mentioned in (a)
or (b) above, which is not remedied within thirty (30) days after the
earlier of (i) such default or event of default first becoming known to
any officer of the Borrower, or (ii) notice to the Borrower by the Lender
of the occurrence of such default or event of default;
(d) any representation or warranty made or deemed made herein, in
any other Credit Document or in any financial or other report or document
furnished in compliance herewith or therewith by the Borrower or any of
its Subsidiaries proves untrue in any material respect as of the date of
the issuance or making, or deemed issuance or making thereof;
(e) default occurs in the payment when due (after any applicable
grace period) of Indebtedness of the Borrower or any of its Subsidiaries
to another Person, or the occurrence of any other default, which with the
passage of time or notice would permit the holder or beneficiary of such
Indebtedness, or a trustee therefor, to cause the acceleration of the
maturity of any such Indebtedness or any mandatory unscheduled prepayment,
purchase, or other early funding thereof;
(f) the Borrower or any of its Subsidiaries (i) has entered
involuntarily against it an order for relief under the United States
Bankruptcy Code or a comparable action is taken under any bankruptcy or
insolvency law of another country or political subdivision of such
country; (ii) generally does not pay, or admits its inability generally to
pay, its debts as they become due; (iii) makes a general assignment for
the benefit of creditors; (iv) applies for, seeks, consents to, or
acquiesces in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any substantial part of
its property; (v) institutes any proceeding seeking to have entered
against it an order for relief under the United States Bankruptcy Code or
any comparable law, to adjudicate it insolvent, or seeking dissolution,
winding up, liquidation, reorganization, arrangement, adjustment or
composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors or fails to file an
answer or other pleading denying the material allegations of any such
proceeding filed against it; (vi) makes any board of directors resolution
in direct furtherance of any matter described in clauses (i)-(v) above; or
(vii) fails to contest in good faith any appointment or proceeding
described in Section 7.1(f);
(g) a custodian, receiver, trustee, examiner, liquidator or similar
official is appointed for the Borrower or any of its Subsidiaries or any
substantial part of its property, or a proceeding described in Section
7.l(f)(v) is instituted against the Borrower or any of
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its Subsidiaries, and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of sixty (60)
days;
(h) the Borrower or any of its Subsidiaries fails within thirty (30)
days (or such earlier date as any steps to execute on such judgment or
order take place) to pay, bond or otherwise discharge, or to obtain an
indemnity against on terms and conditions satisfactory to the Lender in
its sole discretion, any one or more judgments or orders for the payment
of money in excess of $25,000 in the aggregate which is uninsured or
underinsured by at least such amount (provided that there is adequate
assurance, in the sole discretion of the Lender, that the insurance
proceeds attributable thereto shall be paid promptly upon the expiration
of such time period or resolution of such proceeding), which is not stayed
on appeal or otherwise being appropriately contested in good faith in a
manner that stays execution;
(i) the Borrower or any of its Subsidiaries fails to pay when due an
amount aggregating in excess of $25,000 that it is liable to pay to the
PBGC or to a Plan under Title IV of ERISA; or a notice of intent to
terminate a Plan having Unfunded Vested Liabilities of the Borrower or any
of its Subsidiaries in excess of $250,000 (a "Material Plan") is filed
under Title IV of ERISA; or the PBGC institutes proceedings under Title IV
of ERISA to terminate or to cause a trustee to be appointed to administer
any Material Plan; or a proceeding is instituted by a fiduciary of any
Material Plan against the Borrower or any of its Subsidiaries to collect
any liability under Section 515 or 4219(c)(5) of ERISA and such proceeding
is not dismissed within thirty (30) days thereafter; or a condition exists
by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated;
(j) the Borrower, any Guarantor, e^2 or any Person acting on behalf
of the Borrower, any Guarantor or e^2 or any governmental, judicial or
arbitral authority challenges the validity of any Credit Document or any
Person's obligations thereunder, or any Credit Document ceases to be in
full force and effect in all material respects or ceases to give to the
Lender the rights, powers and Liens purported to be granted in its favor
thereby in all material respects;
(k) any Person or two or more Persons acting in concert (other than
the Lender or any Affiliate of the Lender) shall acquire beneficial
ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act
of 1934), directly or indirectly, of securities of the Borrower (or other
securities convertible into such securities) representing fifty percent
(50%) or more of the combined voting power of all outstanding securities
of the Borrower entitled to vote in the election of directors or a
majority of the directors of the Board of Directors of the Borrower on the
Effective Date shall fail to constitute a majority of the Board of
Directors at any time other than as a result of any directors nominated by
the Lender;
(l) a default or an event of default shall occur under the Royalty
Agreement; and
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(m) a default or an event of default shall occur under the Voting
Agreement.
Section 7.2 Non-Bankruptcy Defaults. When any Event of Default other than
those described in subsections (f) or (g) of Section 7. 1 with respect to the
Borrower has occurred and is continuing, the Lender may, by notice to the
Borrower (i) terminate the remaining Revolving Commitment and all other
obligations of the Lender hereunder on the date stated in such notice (which may
be the date thereof); (ii) declare the principal of and the accrued interest on
the Note to be forthwith due and payable and thereupon the Note, including both
principal and interest thereon, shall be and become immediately due and payable
together with all other amounts payable under the Credit Documents without
further demand, presentment, protest or notice of any kind, including, without
limitation, notice of intent to accelerate and notice of acceleration, each of
which is expressly waived by the Borrower; and (iii) convert all or any portion
of the outstanding principal amount of the Loans into common stock of the
Borrower pursuant to the terms and conditions of the Note.
Section 7.3 Bankruptcy Defaults. When any Event of Default described in
subsections (f) or (g) of Section 7.1 has occurred and is continuing with
respect to the Borrower, then (i) the Note shall immediately become due and
payable together with all other amounts payable under the Credit Documents
without presentment, demand, protest or notice of any kind, each of which is
expressly waived by the Borrower; and (ii) all obligations of the Lender to
extend further credit pursuant to any of the terms hereof shall immediately
terminate.
Section 7.4 Application of Proceeds. After the occurrence of and during
the continuance of an Event of Default, any payment to the Lender hereunder or
from the proceeds of any Collateral or cash Collateral shall be applied as the
Lender shall elect in its sole discretion.
SECTION 8. MISCELLANEOUS.
Section 8.1 No Waiver of Rights. No delay or failure on the part of the
Lender, or on the part of the holder or holders of the Note, in the exercise of
any power, right or remedy under any Credit Document shall operate as a waiver
thereof or as an acquiescence in any default, nor shall any single or partial
exercise thereof preclude any other or further exercise of any other power,
right or remedy. To the fullest extent permitted by applicable law, the powers,
rights and remedies under the Credit Documents of the Lender and the holder or
holders of the Note are cumulative to, and not exclusive of, any rights or
remedies any of them would otherwise have.
Section 8.2 Non-Business Day. If any payment of principal or interest on
any Loan or of any other Obligation shall fall due on a day which is not a
Business Day, interest or fees (as applicable) at the rate, if any, such Loan or
other Obligation bears for the period prior to maturity shall continue to accrue
in the manner set forth herein on such Obligation from the stated due date
thereof to and including the next succeeding Business Day on which the same
shall be payable.
Section 8.3 Documentary Taxes. The Borrower agrees that it will pay any
documentary, stamp or similar taxes payable with respect to any Credit Document,
including interest and
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penalties, in the event any such taxes are assessed irrespective of when such
assessment is made and regardless whether any credit is then in use or available
hereunder.
Section 8.4 Survival of Representations. All representations and
warranties made herein or in certificates given pursuant hereto shall survive
the execution and delivery of this Agreement and the other Credit Documents, and
shall continue in full force and effect with respect to the date as of which
they were made as long as the Borrower have any Obligation hereunder or the
Revolving Commitment is in effect.
Section 8.5 Setoff. In addition to any rights now or hereafter granted
under applicable law and not by way of limitation of any such rights, upon the
occurrence of, and throughout the continuance of, any Default or Event of
Default, the Lender and each subsequent holder of any of the Note is hereby
authorized by the Borrower at any time or from time to time, without notice to
the Borrower, any Guarantor or to any other Person, any such notice being hereby
expressly waived, to set off and to appropriate and to apply any and all
deposits (general or special, including, but not limited to, Indebtedness
evidenced by certificates of deposit, whether matured or unmatured, but not
including trust accounts, and in whatever currency denominated) and any other
Indebtedness at any time held or owing by the Lender or that subsequent holder
to or for the credit or the account of the Borrower, whether or not matured,
against and on account of the obligations and liabilities of the Borrower to the
Lender or that subsequent holder under the Credit Documents, including, but not
limited to, all claims of any nature or description arising out of or connected
with the Credit Documents, irrespective of whether or not (i) the Lender or that
subsequent holder shall have made any demand hereunder, or (ii) the principal of
or the interest on the Loans or the Note and other amounts due hereunder shall
have become due and payable hereunder and although said obligations and
liabilities, or any of them, may be contingent or unmatured.
Section 8.6 Notices. Except as otherwise specified herein, all notices
under the Credit Documents shall be in writing (including cable, telecopy or
telex) and shall be given to a party hereunder at its address, telecopier number
or telex number set forth below or such other address, telecopier number or
telex number as such party may hereafter specify by notice to the Lender or the
Borrower, as applicable, given by courier, overnight delivery, United States
certified or registered mail or telegram or by other telecommunication device
capable of creating a written record of such notice and its receipt. Notices
under the Credit Documents shall be addressed to the Lender and to the Borrower
as follows:
Horace T. Ardinger, Jr.
9040 Governor's Row
Dallas, Texas 75356
Telephone: (214) 631-9830
Fax No.: (214) 634-1270
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with a copy to:
Gardere & Wynne, L.L.P.
Attention: M. Douglas Adkins
1601 Elm Street, Suite 3000
Dallas, Texas 75201-4761
Telephone: (214) 999-3000
Fax No.: (214) 999-4667
and
Elgin Technologies, Inc.
Attention: Mr. William Mosconi
12 Executive Drive
Hudson, New Hampshire 03051
Telephone: (603) 598-4700
Fax No.: (603) 598-8814
with a copy to:
Lev, Berlin & Dale, P.C.
Attention: Mr. Duane Berlin
535 Connecticut Avenue
Norwalk, Connecticut 06854
Telephone: (203) 838-8500, x15
Fax No.: (203) 854-1652
Each such notice, request or other communication shall be effective (i) if
given by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section 9.7 and a confirmation of receipt of such telecopy has
been received by the sender, (ii) if given by telex, when such telex is
transmitted to the telex number specified in this Section 9.7 and the answer
back is received by sender, (iii) if given by courier or overnight delivery,
when delivered, (iv) if given by mail, five (5) days after such communication is
deposited in the mail, registered with return receipt requested, addressed as
aforesaid or (v) if given by any other means, when delivered at the addresses
specified in this Section 9.7; provided that any notice given pursuant to
Section 2 shall be effective only upon receipt and, provided further, that any
notice that but for this provision would be effective after the close of
business on a Business Day or on a day that is not a Business Day shall be
effective at the opening of business on the next Business Day.
Section 8.7 Counterparts. This Agreement may be executed in any number of
counterparts, and by the different parties on different counterpart signature
pages, each of which when executed shall be deemed an original but all such
counterparts taken together shall constitute one and the same Agreement.
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Section 8.8 Successors and Assigns. This Agreement shall be binding upon
the Borrower and the Lender and their respective successors and assigns, and
shall inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, including any subsequent holder of any of the Note. The
Borrower may not assign any of its rights or obligations under any Credit
Document without the consent of the Lender.
Section 8.9 Participations in Borrowings and Note; Transfers of Borrowings
and Note.
(a) The Lender may at any time sell to one or more Persons
("Participants"), participating interests in any Borrowing owing to the
Lender, the Note, the Revolving Commitment or any other interest of the
Lender hereunder, provided that the Lender shall not transfer, grant or
assign any participation under which the Participant shall have rights to
vote upon or consent to any matter to be decided by the Lender hereunder
or under any Credit Document or approve any amendment to or waiver of this
Agreement or any other Credit Document except to the extent such amendment
or waiver would (i) increase the amount of the Lender's Revolving
Commitment and such increase would affect such Participant, (ii) reduce
the principal of, or interest on, the Lender's Loans, or any fees or other
amounts payable to the Lender hereunder and such reduction would affect
such Participant, or (iii) postpone any date fixed for any scheduled
payment of principal of, or interest on, the Lender's Loans, or any fees
or other amounts payable to the Lender hereunder and such postponement
would affect such Participant. In the event of any such sale by the Lender
of participating interests to a Participant, the Lender's obligations
under this Agreement to the Borrower shall remain unchanged, the Lender
shall remain solely responsible for the performance thereof, the Lender
shall remain the holder of the Note for all purposes under this Agreement
and the Borrower shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this
Agreement. The Borrower agrees that if amounts outstanding under this
Agreement and the Note are due and unpaid, or shall have been declared or
shall have become due and payable upon the occurrence of an Event of
Default, each Participant shall be deemed to have the right of setoff in
respect of its participating interest in amounts owing under this
Agreement and the Note to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement or the Note.
(b) The Lender may sell all or any part of its rights and
obligations under this Agreement and the Note to one or more other Persons
at any time. If any such sale occurs, the purchasing Lender shall be
considered for all purposes as a Lender hereunder.
Section 8.10 Amendments. Any provision of the Credit Documents may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed by the Borrower and the Lender.
Section 8.11 Headings. Section headings used in this Agreement are for
reference only and shall not affect the construction of this Agreement.
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Section 8.12 Legal Fees. Other Costs and Indemnification. The Borrower,
upon demand by the Lender, agrees to pay the reasonable fees and disbursements
of legal counsel to the Lender in connection with the preparation and execution
of the Credit Documents, any amendment, waiver or consent related thereto,
whether or not the transactions contemplated therein are consummated, any
Default or Event of Default by the Borrower hereunder and any enforcement of any
of the Credit Documents. The Borrower further agrees to indemnify the Lender,
his Affiliates and their respective directors, officers, shareholders,
employees, representatives and attorneys (collectively, the "Indemnified
Parties"), against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all reasonable
attorneys' fees and other reasonable expenses of litigation or preparation
therefor, whether or not the Indemnified Party is a party thereto) which any of
them may pay or incur arising out of or relating to (i) any Credit Document, the
Loans or the application or proposed application by any of the Borrower of the
proceeds of any Loan, REGARDLESS OF WHETHER SUCH CLAIMS OR ACTIONS ARE FOUNDED
IN WHOLE OR IN PART UPON THE ALLEGED SIMPLE, SOLE OR CONTRIBUTORY NEGLIGENCE OF
ANY OF THE INDEMNIFIED PARTIES AND/OR ANY OF THEIR RESPECTIVE DIRECTORS,
OFFICERS, SHAREHOLDERS, EMPLOYEES OR ATTORNEYS, (ii) any investigation of any
third party or any governmental authority involving the Lender and related to
any use made or proposed to be made by the Borrower of the proceeds of the
Borrowings, or any transaction financed or to be financed in whole or in part,
directly or indirectly with the proceeds of any Borrowing, and (iii) any
investigation of any third party or any governmental authority, litigation or
proceeding, related to any environmental cleanup, audit, compliance or other
matter relating to any Environmental Law or the presence of any Hazardous
Material (including, without limitation, any losses, liabilities, damages,
injuries, costs, expenses or claims asserted or arising under any Environmental
Law) with respect to any of the Borrower, regardless of whether caused by, or
within the control of, any of the Borrower; provided, however, that the Borrower
shall not be obligated to indemnify any Indemnified Party for any of the
foregoing arising out of such Indemnified Party's gross negligence or willful
misconduct. The Borrower, upon demand by the Indemnified Party at any time,
shall reimburse the Indemnified Party for any legal or other expenses incurred
in connection with investigating or defending against any of the foregoing
except if the same is excluded from indemnification pursuant to the provisions
of the foregoing sentence.
Section 8.13 Governing Law: Submission to Jurisdiction: Waiver of Jury
Trial: Arbitration.
(a) This Agreement and the other Credit Documents, and the rights
and duties of the parties thereto, shall be construed in accordance with
and governed by the internal laws of the State of Texas.
(b) THE LENDER AND THE BORROWER EACH HEREBY WAIVES ITS RIGHT TO
RESOLVE DISPUTES, CLAIMS, AND CONTROVERSIES ARISING FROM THIS AGREEMENT,
ANY OTHER CREDIT DOCUMENT OR ANY MATTER IN CONNECTION THEREWITH,
INCLUDING, WITHOUT LIMITATION, CONTRACT DISPUTES AND TORT CLAIMS, THROUGH
ANY COURT PROCEEDING OR LITIGATION AND ACKNOWLEDGES THAT ALL
34
<PAGE>
SUCH DISPUTES, CLAIMS AND CONTROVERSIES SHALL BE RESOLVED PURSUANT TO THIS
SECTION, EXCEPT THAT EQUITABLE RELIEF AND CERTAIN OTHER RIGHTS AND
REMEDIES SET FORTH BELOW MAY BE SOUGHT FROM ANY COURT OF COMPETENT
JURISDICTION. THE BORROWER REPRESENTS TO THE LENDER AND THE LENDER
REPRESENTS TO THE BORROWER THAT THIS WAIVER IS MADE KNOWINGLY AND
VOLUNTARILY AFTER CONSULTATION WITH AND UPON ADVICE OF ITS COUNSEL AND IS
A MATERIAL PART OF THIS AGREEMENT. ALL SUCH DISPUTES, CLAIMS AND
CONTROVERSIES SHALL BE RESOLVED BY BINDING ARBITRATION PURSUANT TO THE
COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). Any
arbitration proceeding held pursuant to this arbitration provision shall
be conducted in Dallas, Texas or at any other place selected by mutual
agreement of the Lender and the Borrower. No act to take or dispose of any
collateral shall constitute a waiver of this arbitration agreement or be
prohibited by this arbitration agreement. This arbitration provision shall
not limit the right of either party during any dispute, claim or
controversy to seek, use, and employ ancillary, or preliminary rights
and/or remedies, judicial or otherwise, for the purposes of realizing
upon, preserving, protecting, foreclosing upon or proceeding under
forcible entry and detainer for possession of, any real or personal
property, and any such action shall not be deemed an election of remedies.
Such remedies include, without limitation, obtaining injunctive relief or
a temporary restraining order, invoking a power of sale under any deed of
trust or mortgage, obtaining a writ of attachment or imposition of a
receivership, or exercising any rights relating to personal property,
including exercising the right of set-off, or taking or disposing of such
property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims or controversies concerning the
lawfulness or reasonableness of an act, or exercise of any right or remedy
concerning any collateral, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral, shall also be
arbitrated; provided, however that no arbitrator shall have the right or
the power to enjoin or restrain any act of either party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. The statute of limitations, estoppel, waiver, laches and
similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement
of any action for these purposes. The federal arbitration act (Title 9 of
the United States Code) shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
(c) To the fullest extent permitted by applicable law, each party
hereto agrees that any court proceeding or litigation permitted by Section
8. 13(b) may be brought and maintained in the courts of the State of Texas
sitting in Dallas County or the United States District Court for the
Northern District of Texas. To the fullest extent permitted by applicable
law, the Borrower hereby expressly and irrevocably submits to the
jurisdiction of the courts of the State of Texas and the United States
District Court for the Northern District of Texas for the purpose of any
such litigation as set forth above and irrevocably
35
<PAGE>
agrees to be bound by any judgment rendered thereby in connection with
such litigation. To the fullest extent permitted by applicable law, the
Borrower further irrevocably consents to the service of process, by
registered mail, postage prepaid, or by personal service within or without
the state of Texas. To the fullest extent permitted by applicable law, the
Borrower hereby expressly and irrevocably waives any objection which it
may have or hereafter may have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that
any such litigation has been brought in an inconvenient forum. To the
extent that the Borrower has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through
service of notice, attachment prior to judgment, attachment in aid of
execution or otherwise) with respect to itself or its property, the
Borrower hereby irrevocably waives to the fullest extent permitted by
applicable law, such immunity in respect of its obligations under this
Agreement and the other Credit Documents.
(d) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY
HERETO VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY (BY THEIR
ACCEPTANCE HEREOF) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING PERMITTED BY SECTION 8.13(B) AND WAIVES ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT
OR OTHERWISE) ARISING OUT OF THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT,
ANY OTHER RELATED DOCUMENT OR ANY RELATIONSHIP BETWEEN THE LENDER, THE
BORROWER AND/OR ANY GUARANTOR, AND AGREES THAT ANY SUCH ACTION, PROCEEDING
OR DISPUTE SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS
PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO PROVIDE THE LOANS AND
THE LETTERS OF CREDIT.
Section 8. 14 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 8.15 Effective Date. This Agreement shall become effective on the
date (the "Effective Date") on which the Borrower and the Lender have each
signed and delivered such document.
Section 8.16 Notice. The Credit Documents constitute the entire
understanding among the Borrower and the Lender and supersede all earlier or
contemporaneous agreements, whether written or oral, concerning the subject
matter of the Credit Documents. THIS WRITTEN AGREEMENT TOGETHER WITH THE OTHER
CREDIT DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THIS WRITTEN
36
<PAGE>
AGREEMENT REPRESENTS TILE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized officers as of the day and
year first above written.
BORROWER:
ELGIN TECHNOLOGIES, INC.
By: /s/ Mosconi
-------------------------------------
Name: Mosconi
-----------------------------------
Title: President & CEO
----------------------------------
LENDER:
HORACE T. ARDINGER, JR.
/s/ [ILLEGIBLE]
----------------------------------------
37
<PAGE>
SCHEDULE 5.4
LIST OF LITIGATION
[TO COME]
<PAGE>
SCHEDULE 5.11
CAPITALIZATION
<PAGE>
ELGIN COMMON STOCK FINAL (7/6/98)
PRIMO IANIERI 2,999,122
DIANNE TONER 62,745
VALERIE IANIERI 31,272
DEBORAH ANTIPIN 31,372
MICHAEL lANERI 31,372
RICHARD AUDET 94,117
---------
TOTAL ELGIN INSIDERS 3,250,000
ROBERT SMALLWOOD 2,000,000
PUBLIC FLOAT (SEE 15 C-2)
AMY MOLL 12,000
HOWARD MOLL 12,000
EDWARD DASCHER 12,000
ED BART 3,600
LAWRENCE CATUSI 3,600
SANDRA CATUSI 3,600
JEFFREY COLE 2,400
MARCI DIAZ 3,800
VINCENT ESPOSITO 1,200
GERALD EPSTEIN 2,400
DANTE FIGINI 3,600
CLARA FONT 13,000
HARVEY FREUND 1,200
BARRY FRIEDMAN 2,400
DON GANN 1,200
DORA GLASSMAN 3,600
DAVID GOLDENBERG 3,000
JEFFREY GOLDENBERG 7,200
JULIA GOLDENBERG 3,800
LEON GOLDENBERG 3,600
MARK GOLDENBERG 3,600
REGINA GOLDENBERG 3,600
TINA GOLDENBERG 3,600
MARVIN GOLDSTEIN 2,400
ELLEN HUGHES 3,600
JENNIFER MARCHAND 12,000
JACK MATALON 1,200
DEBRA MAY 18,000
AMY MOLL 18,000
HOWARD MOLL 6,000
MORRIS MONSEHEIN 2,400
ELENA OCHBERG 18,000
ANGELIQUE PIREZZI 3,600
JOSEPH TISCHLER 1,200
IDA ZEIDENWEBBER 2,400
PHILIP DASCHER 396,000
-------
TOTAL FREE TRADING [ILLEGIBLE]
<PAGE>
PRIMO IANIERI 150,000
WILLIAM MOSCONI 75,000
GERARD MOSCONI 65,000
JOHN NAGY 45,000
WALTER SULLIVAN 25,000
OTHER EMPLOYEES 145,000
DUANE BERLIN 15,000
ERIC DALE 15,000
H T ARDINGER 2,333,333
LEWIS KUNIGEL 100,000
PETER BORDES, SR (CONVERSION) 50,000
PETER BORDES, SR (LOAN GUARANTEE:ASCOM) 50,000
GREATER MEDlA 152,000
STANHOPE CAPITAL 50,000
MASON CABOT (M & A: LOGIC & CSC) 45,000
MASON CABOT (M & A: WARREN) 105,000
JAY PATEL 4,125
MASON CABOT & AFFILIATES (STOCK COMP) 405,482
OPTION II CONVERTED DEBTHOLDERS
REM ELECTRONICS 226,182
CGL 36,878
AMERICAN ELECTRIC CABLE 38,138
PHIL PASCARELLI 163,334
---------
TOTAL 4,296,282
PREVIOUS TOTALS 10,145,082
TOTAL $1 CASHLESS WARRANTS 6,875,000
TOTAL $3 CASHLESS WARRANTS 890,342
BRIDGEHOLDERS CONVERSION 321,875
----------
GRAND TOTAL SHARES OUTSTANDING 18,032,899
ARDINGER'S WARRANTS ($3 TO BE PAID IN) 300,000
PRIMO IANIERI ($1 TO BE PAID IN) 221,966
MASON CABOT'S WARRANTS ($1 TO BE PAID IN) 496,034
V PATEL'S WARRANTS ($1 TO BE PAID IN) 50,000
MASON CABOT'S WARRANTS ($3 TO BE PAID IN) 90,000
REM ELECTRONICS ($3 TO BE PAID IN) 75,000
CGL ($3 TO BE PAID IN) 10,000
AMERICAN ELECTRIC CABLE ($3 TO BE PAID IN) 10,000
---------
TOTAL ADDITIONAL DILUTION 1,253,000
FULLY DILUTED [ILLEGIBLE]
<PAGE>
Sheet 1
($1.00 Warrant) ELGIN E2, INC 12/30/97
PRIVATE PLACEMENT
CERT # NAME STATE WARRANTS
------ ---- ----- --------
217 A ANDERSON FL $ 10,000
236 A ANDERSON FL $ 5,000
221 R KOFF NY $ 15,000
205 F KASSNER NJ $ 100,000
220 F KASSNER NJ $ 100,000
219 R MACK NY $ 10,000
201 L NIGHT OH $ 100,000
303 CONCEPT VA $ 100,000
240 H DAVIS FL $ 10,000
208 L FREEDMAN FL $ 80,000
214 L FREEDMAN FL $ 10,000
200 FREEDMAN IRA FL $ 100,000
203 J FRANZ NY $ 20,000
218 P SABO FL $ 10,000
232 P SABO FL $ 5,000
211 R REGAN CA $ 50,000
231 H AL-ALAMI VA $ 100,000
207 M BOCK NJ $ 10,000
226 P BORDES JR NY $ 250,000
202 S NESS NY $ 50,000
233 S NESS NY $ 50,000
230 T DONNELLY NY $ 50,000
244 M ROSENBAUM NY $ 50,000
241 T DEMERE NY $ 25,000
260 H GLICKER NY $ 30,000
282 D GLICKER NY $ 10,000
283 S GLICKER NY $ 10,000
213 H GRAF NY $ 50,000
248 B SLY IRA NY $ 150,000
245 D WASH NY $ 15,000
229 R HILDRETH FL $ 50,000
246 P PASCARELLI NY $ 50,000
222 M KOFF NY $ 15,000
204 F POLK NY $ 50,000
269 M ROWAN TX $ 25,000
249 S WASSERSTRUM FL $ 30,000
243 J ALBANESE NY $ 10,000
279 B HElM IL $ 60,000
258 B HElM IL $ 50,000
223 N GERBINO NY $ 50,000
247 DR MALAMPATI NY $ 10,000
242 G DEMARU NY $ 5,000
253 MRS INVESTMENTS NY $ 50,000
267 RIDGELAND VA $ 100,000
234 HT ARDINGER TX $ 500,000
235 M ARDINGER TX $ 250,000
239 V PATEL NC $ 400,000
Page 1
<PAGE>
Sheet 1
262 Z PATEL NC $ 450,000
263 Z PATEL NC $ 200,000
238 HOOVER IN $ 25,000
284 HOOVER IN $ 100,000
280 P BORDES JR NY $1,000,000
252 P BORDES JR NY $1,000,000
237 B JAMES SOHO NY $ 50,000
250 JON LEE NY $ 25,000
251 J FAWBERT GB $ 50,000
260 W PHARES NJ $ 10,000
255 A PRAEGER NY $ 15,000
256 E GAYDOS NY $ 7,000
271 MAXIM NZ $ 10,000
257 B VERDICCHIO NZ $ 10,000
272 MOANA MANAGE NZ $ 45,000
261 S HARGREAVES NZ $ 6,000
259 T SULLIVAN CT $ 25,000
273 S KENNEDY NZ $ 10,000
274 M GOODWIN NZ $ 3,000
275 M WHITWORTH NZ $ 7,000
276 G KERR NZ $ 4,000
277 CEDER CAPITAL NZ $ 15,000
278 ROUND HILL HOLD NZ $ 203,000
281 GOTHAM NY $ 100,000
270 HARBER COVE LTD NY $ 25,000
TOTAL $6,675,000
<PAGE>
$3.00 CASHLESS WARRANTS
Sheet 1
<TABLE>
<CAPTION>
Cert # Invester State Warrant Amount Date Wire/Check
<S> <C> <C> <C> <C> <C> <C>
601 Neal & Janine Wells CA 9,000 27,000 12/31/97
602 Janine Wells CA 3,000 9,000 12/31/97
603 Neal Wells CA 3,000 9,000 12/31/97
604 R. Hutton NZ 2,000 8,000 1/21/98 Check
605 H. Burns CA 50,000 150,000 1/23/98 Check
606 A. Llsyansky NY 5,000 15,000 1/22/98 Check
607 Robert W. Gardner CA 5,000 15,000 1/22/98 Check
608 Simon John Botherway 10,000 30,000 12/8/97 Wire
609 Profit Sharing Trust F/B/O Harvey GI 15,000 45,000 12/1/97
610 Solomon Klotz 75,000 225,000 12/8/97 Check
611 Allan Zarkin 6,000 18,000 12/23/97
612 Gerald Franz 3,000 9,000 12/23/97
613 Robert Hildreth Jr. 16,000 48,000 12/10/97
614 Dr. Margaret Verhery 33333.33 100,000 12/7/97
615 William H. Gregory Jr. 25,000 75,000 12/4/97 Wire
616 R.H. & P.S. Gregory 25,000 75,000 12/4/97 Wire
617 Mr. & Mrs. Gregory 16,667 50,001 12/4/97 Wire
618 Hay Trust 3,000 9,000 12/11/97
619 Karl Burtscher 33333.33 100,000 12/8/97
620 Alica V. Hildreth 4,000 12,000 12/10/97
621 Michael J. Resnick NY 15,000 45,000 12/26/97 Check
622 Richard E. Pittman FL 8,000 24,000 12/29/97 Check
623 David Gordon MD IA 10,000 30,000 1/9/97 Check
624 R. O'Connor IRA CA 0 0 12/31/97 VOID TO 624A
624A R. O'Connor IRA CA 10,000 30,000
625 Marvin Kobori CA 10,000 30,000 12/31/97
626 Lawrence Goldman NY 10,000 30,000 1/12/97
627 Eugene & Patty Cronin CA 11,000 33,000 12/31/97
628 Alice Atkinson GA 10,000 30,000 1/6/98
629 Helen S. Sly CT 0 0 1/6/98 VOID TO 629A+B
629A Helen S. Sly CT 5,000 15,000
629B KATHRYN DANDO VA 5,000 15,000
630 Leah Weinstein CA 3,500 10,500 29-Jan Check
631 Ben Weinstein CA 3,500 10,500 1/29/98 Check
632 Richard Weinstein CA 18,000 54,000 1/29/98 Check
633 Kathleen Cullen MD 5,433 18,300 3/5/98
634 Kirsten Hoekman IRA NY 13,333 40,000 3/6/98 Wire
635 Kirsten Hoekman NY 13,333 40,000 3/6/98 Wire
636 Nelson A. Sly CT 0 0 2/6/98 Wire VOID TO 6
636A NELSON A. SLY IRA CT 27,000 81,000
637 Chandu Patel NC 42,000 126,000 2/10/98 Wire
638 Cedar Capital NZ 50,000 150,000
639 M. Resnick NY 15,000 45,000 3/11/98 Check
640 S. Mallempati MA 5,000 15,000 3/10/98 Check
641 L. Turel FL 5,000 15,000 3/9/98 Check
642 Charles XUE NY 8,000 24,000 3/11/98 Check
651 Stephen Kennard NY 8,000 24,000 3/11/98
653 Robert Gregory MS 0 0 VOID TO 853A,B,C
653A R & P GREGORY MS 15,000 45,000
653B PATRICIA GREGORY MS 10,000 30,000
</TABLE>
Page 1
<PAGE>
Sheet 1
<TABLE>
<S> <C> <C> <C> <C> <C>
653C William H. Gregory Jr. MS 15,000 45,000
654 Robert Hildreth Jr. FL 25,000 75,000
655 Chandu Patel VA 5,000 15,000
656 B. Rodriguez 0 0 VOID TO 656A
656A BEN & KIM RODRIGUEZ 17,000 51,000
657 John Kinder UK 25,000 75,000
658 J. Walls Profit Sharing CA 15,000 45,000
659 K. Kolich OH 5,500 16,500
660 Tasman Trust NZ 5,000 15,000
Note Cedar Capital NZ 63,334 190,000
Note Cedar Capital NZ 22,075 56,224
661 J. Patel VA 0 0 Void to 661A
661A D. STEVEN DEFRIEST NY 10,000 30,000
B. Patterson NZ 1,000 3,000 warrant not done yet
D. Morgan NY 3,000 9,000 warrant not done yet
------- ---------
880,342 2,671,025
REVISED 5/5/98
</TABLE>
Page 2
<PAGE>
Sheet 1
ELGIN BRIDGE LOAN RECAP
NAME LOAN AMOUNT DATE WARRANTS
P. BORDES SR.* * 3/13/96 CONVERTED
C. CARTER $ 25,000.00 10/8/96 6,250
M. COSTANZA $ 37,500.00 5/30/96 9,375
J. EDMOND $ 25,000.00 10/14/96 6,250
T. FRYSTOCK $ 100,000.00 2/7/96 25,000
M. VON GERKHAN $ 150,000.00 6/21/96 37,500
9/20/96
A. HANDELL $ 25,000.00 3/28/96 6,250
W. HEIM $ 100,000.00 6/10/96 25,000
K. HOEKMAN $ 25,000.00 5/9/96 6,250
J. HOOVER $ 100,000.00 2/12/96 25,000
F.N. HUNTER $ 50,000.00 3/27/96 12,500
$ 50,000.00 5/5/96 12,500
F. KHAWAM $ 75,000.00 4/30/96 18,750
H. LAL $ 25,000.00 8/21/96 6,250
L. GOPAL $ 25,000.00 8/21/96 6,250
J. LEIMSIDER $ 25,000.00 8/26/96 6,250
J. PATEL $ 25,000.00 8/23/97 1,250
N. Glewwe Bought from J. Patel 4,000
B. Surpezenski Bought from J. Patel 1,000
S. PATEL $ 25,000.00 9/3/96 6,250
SURESH PATEL $ 25,000.00 8/23/96 6,250
R. REGAN $ 25,000.00 2/29/96 6,250
S. & C. REYNOLDS $ 25,000.00 5/4/96 6,250
B. TABB $ 50,000.00 5/26/96 12,500
3/26/96
J. WEBB $ 25,000.00 4/20/96 6,250
R. THOMAS $ 50,000.00 7/1/96 12,500
S. TAL $ 75,000.00 9/20/96 18,750
RIDGELAND $ 50,000.00 6/13/96 12,500
N. HUKKAWALA $ 25,000.00 6/25/96 6,250
CONCEPT MINING $ 50,000.00 6/13/96 12,500
TOTALS $1,287,500.00 321,875
Page 1
EXHIBIT 10.7
THE SECURITIES REPRESENTED BY THIS NOTE AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS NOTE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
---------------------------------
CONVERTIBLE REVOLVING PROMISSORY NOTE
$4,000,000.00 Dallas, Texas November 13, 1998
Elgin Technologies, Inc., a Delaware corporation (the "Borrower"), for
value received, hereby promises to pay to the order of Horace T. Ardinger, Jr.,
an individual residing in Dallas, Texas (the "Holder"), the principal sum of
Four Million and No/100 Dollars ($4,000,000.00) or such lesser amount as shall
be outstanding under this Note, together with interest on the outstanding amount
of such principal sum, payable in accordance with the terms set forth below.
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 Definitions. For all purposes of this Note, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles as promulgated from time to time by the Association of Independent
Certified Public Accountants; and
(c) the words "herein," hereof and "hereunder" and other words of
similar import refer to this Note as a whole and not to any particular Article,
Section or other subdivision.
"Applicable Law" has the meaning specified in Section 6.7.
<PAGE>
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in Dallas, Texas are authorized
or obligated by law or executive order to be closed.
"Closing Price" means on any particular date (i) the last sale price per
share of the Common Stock on such date on the principal stock exchange on which
the Common Stock has been listed or, if there is no such price on such date,
then the last sale price on such exchange on the date nearest preceding such
date; (ii) if the Common Stock is not listed on any stock exchange, the final
bid price for a share of Common Stock in the over-the-counter market, as
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") at the close of business on such date, or the last sales price
if such price is reported and final bid prices are not available; (iii) if the
Common Stock is not quoted on the NASDAQ, the bid price for a share of Common
Stock in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to its
functions of reporting prices); or (iv) if the Common Stock is not publicly
traded (x) the value of the Common Stock determined in good faith by the Board
of Directors of the Borrower and certified in a board resolution, based on the
most recently completed arm's length transaction between the Borrower and
another Person, the closing of which shall have occurred within the six (6)
months preceding such date, or (y) if no such transaction shall have occurred
within the six (6) months preceding such date, by an independent nationally
recognized investment banking firm reasonably acceptable to the Holder in all
other instances; provided that none of the transactions related to the foregoing
shall include purchases by any "affiliate" (as such term is defined in the
General Rules and Regulations under the Securities Act of 1933) of the Borrower
other than the Holder.
"Common Stock" means shares of the Common Stock, par value $.000833 per
share, of the Borrower.
"Conversion Price" means $0.55, subject to adjustment as provided in
Article V.
"Conversion Period" means the period between November 13, 1998, and the
date this Note is paid in full, the Revolving Commitment is permanently
terminated and all other obligations of the Credit Parties to the Lender under
the Credit Document are paid.
"Credit Agreement" means that certain Secured Revolving Credit Agreement
dated as of November 13, 1998, by and between Borrower and the Holder, as
amended, supplemented or restated from time to time.
"Event of Default" has the meaning specified in Section 3.1.
"Maturity Date" means November 12, 2000 (or such earlier date upon which
this Note is due and payable under Section 3.2).
"Note" means this Convertible Revolving Promissory Note, as amended,
substituted, replaced or extended from time to time.
Convertible Revolving Promissory Note - Page 2
<PAGE>
"Person" means any individual, corporation, entity, limited liability
partnership or company, partnership, joint venture, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act of 1933, as amended.
This Note is the Borrower's Convertible Revolving Promissory Note under the
Credit Agreement. Capitalized terms used herein but not defined herein shall
have the meanings given such terms in the Credit Agreement.
ARTICLE II
PAYMENTS
2.1 Interest. From the date of this Note through the Maturity Date,
interest shall accrue hereunder on the unpaid outstanding principal sum of this
Note at the lower of (i) ten percent (10%) per annum calculated on the basis of
a 365/366 day year or (ii) the highest rate of interest allowed by Applicable
Law. If any payment of principal and/or interest on any amount payable under
this Note is not made or paid when due (by acceleration or otherwise), such
principal and/or interest thereon shall bear interest (calculated on the basis
of a 365/366 day year) from the date such payment was due until such principal
and/or interest then due is paid in full, payable on demand at the lesser of (i)
fifteen percent (15%) per annum, or (ii) the highest rate of interest allowed by
Applicable Law.
2.2 Payment of Principal and Interest. Accrued but unpaid interest shall
be due and payable by the Borrower on the last Business Day of each calendar
month commencing November 30, 1998. The principal and all accrued and unpaid
interest of this Note shall be due and payable in full on the Maturity Date.
2.3 Loans and Payments. Subject to the terms and conditions of the Credit
Agreement, the Borrower may borrow, repay and reborrow under the Revolving Line
of Credit and this Note, and this Note reflects all Loans made by the Holder
under the Credit Agreement. Subject to the Holder's right to convert this Note
as provided herein, the Borrower may repay this Note, in whole or in part, upon
five (5) Business Days' prior written notice given to the Holder pursuant to
Section 6.4, without premium or penalty, and reborrow hereunder subject to the
terms and conditions of the Credit Agreement prior to the Maturity Date.
Payments shall be credited first to accrued but unpaid interest to the extent
thereof, and thereafter to unpaid principal.
2.4 Manner of Payment. Payments of principal and interest on this Note
will be made by delivery of Borrower checks to the Holder at its address as set
forth in this Note or by wire transfers pursuant to instructions from the
Holder. If the date upon which the payment of principal or interest is required
to be made pursuant to this Note occurs other than on a Business Day, then such
payment of principal and interest shall be due and payable and made on, and
shall include unpaid interest accrued through, the next occurring Business Day
following such payment date.
Convertible Revolving Promissory Note - Page 3
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ARTICLE III
EVENTS OF DEFAULT AND REMEDIES
3.1 Events of Default. It shall be an Event of Default under this Note if
an Event of Default has occurred and is continuing under the Credit Agreement.
3.2 Acceleration of Maturity. This Note shall become immediately due and
payable if an Event of Default described in Section 7.1 (f) or (g) occurs under
the Credit Agreement. Upon the occurrence and during the continuance of any
other Event of Default described in the Credit Agreement, the entire principal
balance and accrued but unpaid interest thereon shall, at the option of the
Holder, upon written notice to the Borrower, become due and payable.
3.3 Remedies. Upon the occurrence of and during the continuation of an
Event of Default, the Holder (i) may exercise, subject to the limitations set
forth in the Credit Agreement, all of its rights under the Credit Agreement and
all other rights at law or in equity, or (ii) may exercise the conversion
feature of this Note as set forth below. Upon the occurrence of and during the
continuation of an Event of Default, all payments received in respect of
obligations under this Note shall be applied in such order as the Holder shall
elect in his sole discretion. No right, power, or remedy conferred to the Holder
in this Note or in any documents supporting this Note or now or hereafter
existing at law, in equity, by statute, or otherwise shall be exclusive, and
each such right, power, or remedy shall to the full extent permitted by law be
cumulative and in addition to every other such right, power or remedy. No course
of dealing and no delay in exercising any right, power, or remedy conferred to
the Holder shall operate as a waiver of or otherwise prejudice any such right.
power, or remedy. No notice to or demand upon the Borrower shall entitle the
Borrower to similar notices or demands in the future. Without limiting the
generality of this paragraph, no description of the right to accelerate this
Note, charge default interest under this Note or otherwise exercise remedies
under this Note shall limit the right of the Holder to take any actions with
respect to this Note provided under the Credit Agreement.
ARTICLE IV
CONVERSION OF NOTE
4.1 Conversion Privilege and Conversion Price. At any time, including,
without limitation, during any period after the Borrower shall have given notice
pursuant to Section 2.3 hereof of its intent to repay all or any portion of the
principal amount outstanding hereunder and the later of five (5) Business Days
thereafter and the time all or such portion of such principal amount is repaid,
the Holder may convert all, or any part of the outstanding principal amount of
this Note into that number of fully paid and non-assessable shares of Common
Stock obtained by dividing the outstanding principal amount of this Note to be
so converted by the Conversion Price. The Conversion Price is subject to
adjustment in certain instances, as hereinafter provided. This Note may be
converted by surrender of this Note to the Borrower at its principal office,
accompanied by a duly executed notice of conversion and a written instrument or
instruments of transfer duly executed by the Holder or the Holder's
attorney-in-fact duly authorized in writing. Upon conversion
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<PAGE>
of all or any portion of this Note, the Holder shall be entitled to receive in
cash, in addition to the number of shares of Common Stock issuable upon such
conversion, all interest accrued to the date of conversion of this Note on the
principal amount converted.
4.2 Issuance of Common Stock on Conversion. As promptly as practicable
after the surrender of all or any portion of this Note for conversion, the
Borrower shall deliver or cause to be delivered to the Holder certificates
representing the number of fully paid and non-assessable shares of Common Stock
into which all or any portion of this Note may be converted in accordance with
the provisions of this Section 4. Such conversion shall be deemed to have been
made at the close of business on the date that all or any portion of this Note
shall have been surrendered for conversion so that the rights of the Holder with
respect to the portion of the principal hereof so converted shall cease at such
time and, subject to the following provisions of this Section 4, the Holder
shall be treated for all purposes with respect to the portion of the principal
so converted as having become the record holder of such Common Stock at such
time and such conversion shall be at the Conversion Price in effect at such
time; provided, however, that no such surrender on any date when the stock
transfer books of the Borrower shall be closed shall be effective to constitute
the Holder as the record holder of such Common Stock on such date, but such
surrender shall be effective to constitute the Holder as the record holder for
all purposes at the close of business on the next succeeding day on which such
stock transfer books are open; and, in that event such conversion shall be at
the Conversion Price in effect on the date that all or any portion of this Note
shall have been surrendered for conversion, as if the stock transfer books of
the Borrower had not been closed. If the last day for the exercise of the
conversion right shall not be a Business Day, then such conversion right may be
exercised on the next succeeding Business Day.
4.3 Registration Rights Agreement and Voting Agreement. After the issuance
of any Common Stock to the Holder pursuant to the terms and conditions hereof,
the Holder shall be entitled to substantially the same registration and voting
rights with respect thereto as that provided to the Holder in the Registration
Rights Agreement and the Voting Agreement, respectively.
4.4 No Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of this Note. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of this Note, the
Borrower shall pay a cash adjustment in respect of such fraction in an amount
equal to such fraction of a share multiplied by the current market price
(determined as provided in Section 5.1(h) below).
ARTICLE V
ADJUSTMENT OF CONVERSION PRICE AND SHARES
5.1 Anti-dilution Adjustments. The number and kind of securities issuable
upon the conversion of the Note shall be subject to adjustment, without
duplication, from time to time upon the happening of certain events occurring on
or after the date of original issue of this Note as follows:
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(a) If the Borrower shall (i) subdivide its outstanding Common Stock
into a greater number of shares, (ii) combine its outstanding Common Stock into
a smaller number of shares, (iii) pay a dividend or make a distribution on its
outstanding Common Stock in shares of its capital stock, or (iv) issue by
reclassification of its outstanding Common Stock (whether pursuant to a merger,
consolidation or otherwise) any other shares of capital stock of the Borrower,
the Holder of all or any portion of this Note surrendered for conversion after
the record date fixed by the Board of Directors for such subdivision,
combination, dividend, distribution or reclassification shall be entitled to
receive the aggregate number and kind of shares of capital stock of the Borrower
which, if all or any portion of this Note had been converted immediately prior
to such record date at the Conversion Price then in effect, the Holder would
have been entitled to receive by virtue of such subdivision, combination,
dividend, distribution or reclassification, and the Conversion Price shall be
deemed to have been adjusted after such record date to apply to such aggregate
number and kind of shares. Such adjustment shall be made successively whenever
any of the events listed above shall occur.
(b) If the Borrower shall pay a dividend or make a distribution on
any class of capital stock of the Borrower in shares of Common Stock, the
Conversion Price in effect from and after the record date therefor shall be
reduced so that it shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such record date by a fraction
of which (i) the numerator shall be the number of shares of Common Stock
outstanding on such record date, and (ii) the denominator shall be the sum of
the number of shares of Common Stock outstanding on such record date plus the
number of shares issued in such dividend or distribution.
(c) If the Borrower shall issue to all holders of Common Stock
rights or warrants entitling them to subscribe for or purchase Common Stock at a
price per share less than the then current market price per share (as determined
pursuant to clause (h) below), the Conversion Price in effect from and after the
record date therefor shall be reduced so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
such record date by a fraction of which (i) the numerator shall be the number of
shares of Common Stock outstanding on such record date plus the number of shares
of Common Stock which the aggregate offering price of the total number of shares
of Common Stock so offered for subscription or purchase would purchase at such
current market price, and (ii) the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock so offered for subscription or purchase. For the purpose
of this clause (c), the issuance of rights or warrants to subscribe for or
purchase securities convertible into Common Stock shall be deemed to be the
issuance of rights or warrants to purchase the Common Stock into which such
securities are convertible (without regard to any antidilution provision
contained therein for a subsequent adjustment of such number) at an aggregate
offering price equal to the aggregate offering price of such securities plus the
minimum aggregate amount (if any) payable upon conversion of such securities
into Common Stock. Such adjustment shall be made successively whenever such a
record date is fixed. In case such rights or warrants are not issued after such
a record date has been fixed, the Conversion Price shall be readjusted to the
Conversion Price which would have been in effect as if such record date had not
been fixed.
Convertible Revolving Promissory Note - Page 6
<PAGE>
(d) If the Borrower shall distribute to all holders of Common Stock
(whether pursuant to a merger, consolidation or otherwise) evidences of its
indebtedness or assets (excluding shares of capital stock of the Borrower and
cash dividends out of retained earnings), or rights to subscribe for Common
Stock at a price less than the then current market price per share (excluding
those referred to in clause (c) above), then in each such case, the Conversion
Price in effect from and after the record date therefor shall be adjusted so
that it shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to such record date by a fraction of which (i) the
numerator shall be the current market price per share (determined as provided in
clause (h) below) of the Common Stock on such record date less the fair market
value (as determined in good faith by the Board of Directors of the Borrower) of
the portion of the evidences of indebtedness or assets so distributed or of such
rights to subscribe applicable to one share of Common Stock, and (ii) the
denominator shall be such current market price per share of Common Stock. Such
adjustment shall be made successively whenever any such a record date is fixed.
In case such distribution is not made after such a record date has been fixed,
the Conversion Price shall be readjusted to the Conversion Price which would
have been in effect as if such record date had not been fixed.
(e) If the Borrower shall issue any additional shares of Common
Stock (other than as provided in (a) through (d) above and other than upon
exercise of any options issued to officers, directors or employees of the
Borrower pursuant to a stock option plan or an employment, severance or
consulting agreement as now or hereafter in effect, provided that the aggregate
number of shares of Common Stock which may be issuable thereunder shall at no
time exceed 400,000 shares without the prior written consent of the Holder or
upon exercise of any presently existing cashless warrants of the Borrower) at a
price per share less than the current market price per share of Common Stock but
above the Conversion Price, the Conversion Price in effect from and after the
record date therefor shall be reduced so that it shall equal the price
determined by multiplying the Conversion Price by a fraction of which (i) the
numerator shall be (x) the product of the number of shares of Common Stock
outstanding on such record date multiplied by the current market price plus the
consideration, if any, received or deemed received by the Borrower upon the
issuance of such additional shares of Common Stock, (y) divided by the total
number of shares of Common Stock outstanding immediately after the issuance of
such additional shares of Common Stock, and (ii) the denominator shall be the
current market price.
(f) If the Borrower shall issue any additional shares of Common
Stock (other than as provided in (a) through (e) above and other than upon
exercise of any options issued to officers, directors or employees of the
Borrower pursuant to a stock option plan or an employment, severance or
consulting agreement as now or hereafter in effect, provided that the aggregate
number of shares of Common Stock which may be issuable thereunder shall at no
time exceed 400,000 shares without the prior written consent of the Holder or
upon exercise of any presently existing cashless warrants of the Borrower) at a
price per share less than the Conversion Price per share of Common Stock, then
the Conversion Price in effect from and after the record date therefor shall be
reduced so that it shall equal the price determined by multiplying the
Conversion Price by a fraction of which (i) the numerator shall be (x) the
product of the number of shares of Common Stock outstanding on such record date
multiplied by the Conversion Price plus the consideration, if any, received and
deemed received by the Borrower upon the issuance of such additional shares of
Common Stock, (y) divided
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<PAGE>
by the total number of shares of Common Stock outstanding immediately after the
issuance of such additional shares of Common Stock, and (ii) the denominator
shall be the Conversion Price.
(g) If the Borrower shall issue any security or evidence of
indebtedness which is convertible into or exchangeable for Common Stock (a
"Convertible Security"), or any warrant, option or other rights to subscribe for
or purchase Common Stock or any Convertible Security (together with Convertible
Securities, a "Common Stock Equivalent"), or if, after any such issuance, the
price per share for which such additional shares of Common Stock that may be
issuable thereunder is amended, then the Conversion Price upon each such
issuance or amendment shall be adjusted as provided in the preceding paragraph
hereof on the basis that (i) the maximum number of additional shares of Common
Stock issuable pursuant to all such Common Stock Equivalents (without regard to
any antidilution provision contained therein for a subsequent adjustment of such
number) shall be deemed to have been issued as of the earlier of (x) the date on
which the Borrower shall enter into a firm contract for the issuance of such
Common Stock Equivalent or (y) the date of actual issuance of such Common Stock
Equivalent; and (ii) the aggregate consideration for such maximum number of
additional shares of Common Stock shall be deemed to be the minimum
consideration received or receivable by the Borrower for the issuance of such
additional shares of Common Stock pursuant to such Common Stock Equivalent. No
adjustment of the Conversion Price shall be made under this paragraph upon the
issuance of any Convertible Security which is issued pursuant to the exercise of
any warrants or other subscription or purchase rights therefor, if any
adjustments shall previously have been made in the Conversion Price then in
effect upon the issuance of such warrants or other rights pursuant to
subparagraphs (e) and (f). If any such Common Stock Equivalent shall not have
been converted, exercised or exchanged by the expiration date of the right to do
so, the Conversion Price shall be readjusted and be the price which it would
have been had the adjustment of the Conversion Price made upon the issuance or
sale of such Common Stock Equivalent been made on the basis of the issuance only
of the number of additional shares of Common Stock actually issued upon
exercise, conversion or exchange of such Common Stock Equivalent.
(h) The following provisions shall be applicable to the making of
adjustments in the Conversion Price provided in subparagraphs (c) through (f)
above:
(A) The consideration received by the Borrower for any additional
shares of Common Stock or any Common Stock Equivalents that are issued by
the Borrower (i) for cash consideration, a subscription price or an
initial public offering price, as applicable, shall be such cash
consideration, subscription price or initial public offering price, as
applicable, in each case excluding any amounts paid or receivable for
accrued interest or accrued dividends and without deduction of any
compensation, discounts, commissions or expenses paid or incurred by the
Borrower for and in the underwriting of, or otherwise in connection with,
the issue thereof; (ii) for a consideration other than cash, shall be the
fair market value of such consideration at the time of such issuance as
determined in good faith by the Borrower's Board of Directors; (iii) for
any additional shares of Common Stock issuable pursuant to any Common
Stock Equivalents, shall be the consideration received by the Borrower for
issuing such Common Stock Equivalents, plus the additional consideration
payable to the Borrower upon the exercise, conversion or exchange of such
Common Stock
Convertible Revolving Promissory Note - Page 8
<PAGE>
Equivalents; and (iv) for any additional shares of Common Stock or Common
Stock Equivalents in payment or satisfaction of any dividend upon any
class of stock other than Common Stock, shall be the amount of such
dividend so paid or satisfied. In any case in which the consideration to
be received or paid shall be other than cash, the Board of Directors shall
notify promptly the Holder of its determination made in good faith of the
fair market value of such consideration.
(B) The number of shares of Common Stock at any time outstanding
shall not include any shares thereof then directly or indirectly owned or
held by or for the account of the Borrower or any of its Subsidiaries.
(i) For the purpose of any computation hereunder, the "current
market price" shall be the following:
(A) With respect to a bonafide underwritten public offering, the
offering price agreed to by the underwriter;
(B) With respect to binding agreements made by the Borrower to issue
shares of Common Stock for a price that is determined with reference to a
market price as of the date of the binding agreement and without full
adjustment to the Closing Price on the day of issuance, the price as
determined by such binding agreement; or
(C) With respect to all other situations, the average of the daily
Closing Price for fifteen (15) consecutive trading days before the date in
question.
(j) In case at any time, as a result of an adjustment made
hereunder, the Holder of this Note thereafter surrendered for conversion shall
become entitled to receive any shares of capital stock of the Borrower other
than Common Stock, the number and kind of such other shares so receivable upon
conversion of this Note shall thereafter be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained herein, and the other
provisions of this Section 5.1 with respect to the Common Stock shall apply on
like terms to any such other shares.
(k) The Board of Directors of the Borrower may make such reductions
in the Conversion Price, in addition to those required by this Section 5.1, as
shall be determined by the Board of Directors to be advisable in order to avoid
taxation so far as practicable of any dividend of stock or stock rights or any
event treated as such for federal income tax purposes to the recipients.
(l) If any event or condition occurs as to which other provisions of
this Section 5 are not strictly applicable or if strictly applicable would not
fairly protect the conversion rights evidenced hereby in accordance with the
essential intent and principles of such provisions, or that might materially and
adversely affect the conversion rights of the Holder under any provisions of
this Note, then the Borrower shall make such adjustments in the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such exercise and purchase rights as aforesaid, and any adjustments
necessary with respect thereto.
Convertible Revolving Promissory Note - Page 9
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5.2 Reservation of Shares. The Borrower covenants that it will at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note. The Borrower
covenants that all shares of Common Stock which shall be so issuable shall, upon
issuance, be duly and validly issued and fully paid and non-assessable. The
Borrower shall from time to time, in accordance with applicable law, use all
commercially reasonable efforts to seek necessary stockholder approval to
increase the authorized amount of its Common Stock if at any time the authorized
amount of shares of Common Stock remaining unissued shall not be sufficient to
permit the conversion of all Notes at the time outstanding. Before taking any
action which would cause an adjustment reducing the Conversion Price below the
then stated or par value of the Common Stock issuable upon conversion of this
Note, the Borrower will take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Borrower may validly and legally
issue fully paid and non-assessable shares of such Common Stock at such adjusted
Conversion Price.
5.3 Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Borrower, or any consolidation,
merger or share exchange of the Borrower with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets in exchange for
their shares of Common Stock, then the following provisions shall apply:
(a) As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other disposition,
lawful and adequate provisions shall be made whereby the holder of this Note
shall thereafter have the right to purchase and receive upon the terms and
conditions specified in this Note and in lieu of the shares immediately
theretofore receivable upon the exercise of the rights represented hereby, such
shares of capital stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares immediately theretofore so receivable had
such reorganization, reclassification, consolidation, merger, share exchange or
sale not taken place, and in any such case appropriate provision shall be made
with respect to the rights and interests of the Holder to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Conversion Price and of the number of shares receivable upon the exercise)
shall thereafter be applicable, as nearly as possible, in relation to any shares
of capital stock, securities or assets thereafter deliverable upon the exercise
of this Note.
(b) In the event of a consolidation, merger or share exchange of the
Borrower with or into another Person as a result of which a number of shares of
common stock or their equivalent of the successor Person greater or lesser than
the number of shares of Common Stock outstanding immediately prior to such
merger, share exchange or consolidation are issuable to holders of Common Stock,
then the Conversion Price in effect immediately prior to such merger, share
exchange or consolidation and the number of shares of common stock or their
equivalent into which this Note is convertible shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock.
Convertible Revolving Promissory Note - Page 10
<PAGE>
(c) The constituent documents effecting any such consolidation,
merger or share exchange shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided in this paragraph.
The provisions of this paragraph shall apply similarly to successive
consolidations, mergers or share exchanges.
5.4 De Minimis Adjustments. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon conversion of the Note and no adjustment in the Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least $.01 in the Conversion Price; provided, however, that any
adjustments which by reason of this Section 5.4 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
5.5 Notice of Adjustment. Whenever the Conversion Price or the shares of
Common Stock issuable upon the conversion of this Note shall be adjusted as
herein provided, or the rights of the Holder shall change by reason of other
events specified herein, the Borrower shall compute the adjusted Conversion
Price and the adjusted number of shares of Common Stock in accordance with the
provisions hereof and shall prepare a certificate setting forth the adjusted
Conversion Price and the adjusted number of shares issuable upon the conversion
of this Note or specifying the other shares of stock, securities or assets
receivable as a result of such change in rights, and showing in reasonable
detail the facts and calculations upon which such adjustments or other changes
are based. The Borrower shall cause to be mailed to the Holder copies of such
certificate, together with a notice stating that the Conversion Price and the
number of shares purchasable upon conversion of this Note have been adjusted,
and setting forth the adjusted Conversion Price and the adjusted number of
shares of Common Stock or other securities or assets purchasable upon conversion
of this Note.
5.6 Notifications to the Holder. If at any time the Borrower proposes:
(a) to declare any dividend upon Common Stock payable in capital
stock to the holders of Common Stock;
(b) to offer for subscription pro rata to all of the holders of its
Common Stock any additional shares of capital stock of any class or other
rights;
(c) to effect any capital reorganization. or reclassification of the
capital stock of the Borrower, or consolidation, merger or share exchange of the
Borrower with another Person, or sale, transfer or other disposition of all or
substantially all of its assets; or
(d) to effect a voluntary or involuntary dissolution, liquidation or
winding up of the Borrower;
then, in any one or more of such cases, the Borrower shall give the Holder at
least thirty (30) days prior to the record or effective date, as applicable, (i)
written notice of the date on which the books of the Borrower shall close or a
record shall be taken for such dividend, distribution or subscription
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rights or for determining rights to vote in respect of any such issuance,
reorganization, reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, and (ii) in the
case of any such issuance, reorganization, reclassification, consolidation,
merger, share exchange, sale, transfer, disposition, dissolution, liquidation or
winding up, written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause (i) shall also specify, in the
case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation or winding up, as the case may be.
ARTICLE VI
MISCELLANEOUS
6.1 Collection; Fees. If this Note is placed in the hands of an attorney
for collection, or if it is collected through any legal proceedings at law or in
equity or in bankruptcy, receivership or other court proceedings, the Borrower
hereby undertakes to pay all costs and expenses of collection including, but not
limited to, court costs and the reasonable attorneys' fees of the Holder.
6.2 Benefits of Note. Nothing in this Note, express or implied, shall give
to any Person, other than the Borrower, the Holder, and their successors any
benefit or any legal or equitable right, remedy or claim under or in respect of
this Note.
6.3 Successors and Assigns. All covenants and agreements contained in this
Note by or on behalf or for the benefit of the Borrower and the Holder shall
bind and inure to the benefit of the respective successors and assigns of the
Borrower and the Holder.
6.4 Notice; Address of Parties. All notices and communications required or
permitted hereunder shall be in writing and may be given by depositing the same
in the United States mail, addressed to the party to be notified, postage
prepaid and registered or certified with return receipt requested, by confirmed
facsimile or by delivering the same in person to an officer or agent of such
party, as follows:
Convertible Revolving Promissory Note - Page 12
<PAGE>
(a) If to the Borrower, addressed to it as follows:
Elgin Technologies, Inc.
12 Executive Drive
Hudson, New Hampshire 03051
Attn: Mr. William Mosconi
with a copy to:
Lev, Berlin & Dale, P.C.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attn: Mr. Duane Berlin
(b) If to the Holder, addressed to him as follows:
Horace T. Ardinger, Jr.
9040 Governor's Row
P.O. Box 569360
Dallas, Texas 75356-9360
with a copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attn: Mr. M. Douglas Adkins
or such other address as the Borrower or the Holder hereto shall specify
pursuant to this Section 6.5 from time to time.
6.5 Severability Clause. In case any provision in this Note shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions in such jurisdiction shall not in
any way be affected or impaired thereby; provided, however, such construction
does not destroy the essence of the bargain provided for hereunder.
6.6 Governing Law. This Note shall be governed by, and construed in
accordance with, the internal laws of the State of Texas (without regard to
principles of choice of law).
6.7 Usury. It is the intention of the parties hereto to conform strictly
to the applicable laws of the State of Texas and the United States of America,
and judicial or administrative interpretations or determinations thereof
regarding the contracting for, charging and receiving of interest for the use,
forbearance, and detention of money ("Applicable Law"). the Holder shall have no
right to claim, charge or receive any interest in excess of the maximum of
interest, if any, permitted to be charged
Convertible Revolving Promissory Note - Page 13
<PAGE>
on that portion of the amount representing principal or interest which is
outstanding and unpaid from time to time by Applicable Law. Determination of the
rate of interest for the purpose of determining whether this Note is usurious
under Applicable Law shall be made by amortizing, prorating, allocating and
spreading in equal parts during the period of the actual time of this Note, all
interest or other sums deemed to be interest at any time contracted for, charged
or received from the Borrower in connection with this Note. Any interest
contracted for, charged or received in excess of the maximum rate allowed by
Applicable Law shall be deemed a result of a mathematical error and a mistake.
If this Note is paid in part prior to the end of the full stated term of this
Note and the interest received for the actual period of existence of this Note
exceeds the maximum rate allowed by Applicable Law, the Holder shall credit the
amount of the excess against any amount owing under this Note or, if this Note
has been paid in full, or if it has been accelerated prior to maturity, the
Holder shall refund to the Borrower the amount of such excess, and shall not be
subject to any of the penalties provided by Applicable Law for contracting for,
charging or receiving Interest in excess of the maximum rate allowed by
Applicable Law. Any such excess which is unpaid shall be canceled.
6.8 Transfers.
(a) This Note or any shares of Common Stock or other securities
issued or issuable upon conversion of this Note may not be offered or sold
except in conformity with the Securities Act.
(b) Certificates for shares of Common Stock or other securities
issued upon conversion of this Note shall bear the following legend:
The shares represented by this certificate were not issued in a
transaction registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities laws. The shares
represented hereby have been acquired for investment and may not be sold
or transferred unless such sale or transfer is covered by an effective
registration statement under the Securities Act and applicable state
securities laws or, in the opinion of counsel to the issuer, is exempt
from the registration requirements of the Securities Act and such laws.
Convertible Revolving Promissory Note - Page 14
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this instrument to be duly
executed on the date first above written.
ELGIN TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ William Mosconi
--------------------------
Name: William Mosconi
Title: President & CEO
Convertible Revolving Promissory Note - Page 15
EXHIBIT 10.8
AMENDMENT TO CONVERTIBLE REVOLVING PROMISSORY NOTE
This promissory note (the "Amendment") made as of this March 1, 2000 by
ELGIN TECHNOLOGIES, INC., a corporation organized and existing under the laws of
the State of Delaware, having an office at 12 Executive Drive, Hudson, New
Hampshire 03051 (the "Borrower"), and in favor of HORACE T. ARDINGER, JR. having
an address of 9040 Governor's Row, Dallas, Texas 75356 (the "Lender").
W I T N E S S E T H:
WHEREAS, on November 13, 1998, Borrower issued to Lender that certain
Convertible Revolving Promissory Note (the "Note") in the principal amount of
Four Million Dollars ($4,000,000) convertible into common stock of the Borrower
at a set conversion rate of $0.55 per share at any time so designated by the
Lender subject to limitations set forth in the Note;
WHEREAS, since the date of the Note, the Lender has made additional
advances to the Borrower that are also convertible into common stock of the
Borrower at conversion rates set to reflect the market price of the stock at the
time of each advance; and
NOW THEREFORE, the Borrower, for valued received, hereby agrees to amend
and modify the Note as follows:
1. As of December 31, 1999 (the "Amendment Date"), the total principal
amount of the Note was Five Million Nine Hundred Twenty Five Thousand Dollars
($5,925,000).
2. As of the Amendment date, the Lender may convert the principal into
common shares of the Borrower as follows:
a. Four Million Two Hundred Twenty Five Thousand Dollars
($4,225,000) convertible at the rate of $0.55 per share;
b. One Million Fifty Thousand Dollars ($1,050,000) convertible at
the rate of $0.20 per share;
c. Six Hundred Fifty Thousand Dollars ($650,000) convertible at the
rate of $0.10 per share (the "Note").
3. The Credit Agreement, as defined in the Note, is hereby modified and
amended to reflect the foregoing amendments and modifications to the Note.
4. Except as specifically set forth herein, the Note and the Credit
Agreement shall remain unchanged and in full force and effect.
5. The execution, delivery and performance by the Borrower of this
Amendment has been duly authorized by all necessary corporate action.
<PAGE>
6. This Amendment, the Note and the Credit Agreement, as amended, hereby
constitute the legal, valid and binding obligations of the Borrower as
applicable and enforceable against such party in accordance with its terms.
IN WITNESS WHEREOF, the Borrower has caused this promissory note to be
duly executed on its behalf and in its corporate name by its duly authorized
officer all as of the date first above written.
ELGIN TECHNOLOGIES, INC.
/s/ Michael J. Smith
--------------------------------
By: Michael J. Smith
Its: Chief Financial Officer and
Executive Vice President
EXHIBIT 10.9
AGREEMENT
AGREEMENT made as of the 25th day of January 2000 by and between Elgin
Technologies, Inc., a Delaware corporation (the "Company") e2 Electronics, Inc.,
a Delaware corporation ("EEI"), Logic Laboratories, Inc., a Delaware corporation
("Logic"), Warren Power Systems, Inc., a Delaware corporation ("Warren") and
William Mosconi of New York, New York ("Mosconi").
WHEREAS, EEI, Logic and Warren (collectively, the "Subsidiaries") are the
wholly owned subsidiaries of the Company; and
WHEREAS, Mosconi is the Company's President, Chief Executive Officer and
Chief Financial Officer and a member of the Company's board of directors; and
WHEREAS, Mosconi is an officer and a member of the board of directors of
each of the Subsidiaries; and
WHEREAS, Mosconi and the Company are parties to that certain Employment
Agreement dated as of October 10, 1997, pursuant to which the Company currently
employs Mosconi as its Chief Executive Officer (the "Employment Agreement"); and
WHEREAS, as of October 1, 1999 Mosconi has ceased to act in the above
referenced capacities with respect to the Company's day-to-day business
operations; and
WHEREAS, the Company, the Subsidiaries and Mosconi wish to provide for
Mosconi's resignation from such positions and for the termination of the
Employment Agreement.
NOW, THERFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. Mosconi hereby resigns, and the Company and the Subsidiaries hereby
accept Mosconi's resignation, effective immediately, from:
a. The boards of directors of the Company and the Subsidiaries;
b. The positions of President, Chief Executive and Chief Financial
Officer of the Company; and
c. All other posts, positions, appointments and offices of the
Company and the Subsidiaries.
2. Effective immediately, the Employment Agreement is hereby terminated
and rendered null, void and of no further effect. Mosconi and the Company hereby
waive and release each other from any and all liability, obligation, duty or
responsibility thereunder,
<PAGE>
past or future, accrued, pending or otherwise, including but not limited to the
restrictive covenants set forth in Paragraph 11 thereof.
4. The Company and the Subsidiaries hereby hereby waive, release and hold
Mosconi harmless, and Mosconi hereby waives, releases and holds the Company and
the Subsidiaries harmless, from and against any and all claims, actions or
choses in action that they or he may have against each other arising through the
date hereof.
5. Mosconi hereby covenants to the Company and the Subsidiaries that:
a. From and after the date hereof, he shall, to the extent that the
Company and its counsel determine in their reasonable discretion to be necessary
and appropriate, cooperate, aid and assist in the defense, prosecution and/or
discovery of any action, claim, litigation, administrative proceeding or
enforcement action now threatened or pending or hereinafter threatened, made,
brought or asserted by, against, involving or affecting the Company, the
Subsidiaries or any stockholder, officer, director or employee thereof which
arises or relates to facts or circumstances that occurred prior to the date of
this agreement, including but not limited to that certain action presently
pending in the Middlesex Massachusetts Superior Court entitled Inverness Corp.,
et at vs. Elgin e2, Inc., provided that the Company shall bear or reimburse
Mosconi for the reasonable costs and expenses of such cooperation, aid and
assistance;
b. Immediately after the execution of this agreement, he shall
either (i) assume the lease and all payments and other liabilities with respect
to that certain 1998 Lincoln Continental automobile presently in his possession
or (ii) return said automobile to the Company.
6. The Company and the Subsidiaries hereby covenant to Mosconi that:
a. From and after the date hereof, the Company and the Subsidiaries
shall indemnify and hold Mosconi harmless from and against any claim, action or
liability, including the reasonable costs and expenses of answering or defending
same, now pending or hereinafter made, threatened or asserted by any third party
or administrative or governmental agency, arising out of or directly in
connection with Mosconi having acted or served as an officer or director of the
Company or the Subsidiaries, including but not limited to that certain action
presently pending in the Middlesex Massachusetts Superior Court entitled
Inverness Corp., et al vs. Elgin e2, Inc.
b. From and after the date hereof, the Company and the Subsidiaries
shall indemnify and hold harmless Mosconi, Linda Ianieri, Primo Ianieri and Key
International, Inc., a New Jersey Corporation (collectively, the "Guarantors"),
from and against any claim, loss or liability arising under or pursuant to
guarantees of payment and/or performance issued by the Guarantors, or any of
them, with respect to obligations of the Company and/or any of the Subsidiaries
to:
2
<PAGE>
(i) The State of Pennsylvania or any agency, bureau or department
thereof; and
(ii) Ascom Holding, Inc., a Delaware Corporation.
5. This agreement shall be binding upon the parties hereto and their
heirs, successors and assigns.
6. This agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to principles of
conflicts of law.
7. This agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and may only be amended or modified by a
writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have this day set their hands and seals:
ELGIN TECHNOLOGIES, INC. WILLIAM MOSCONI
/s/ Michel Smith /s/ William Mosconi
- - ------------------------------------ -------------------------------------
By: Michael Smith
Its: Interim Chief Executive Officer
E2 ELECTRONICS, INC. WARREN POWER SYSTEMS, INC.
/s/ Michel Smith /s/ Michel Smith
- - ------------------------------------ -------------------------------------
By: Michael Smith By: Michael Smith
Its: Interim Chief Executive Officer Its: Interim Chief Executive Officer
LOGIC LABORATORIES, INC.
/s/ Michel Smith
- - ------------------------------------
By: Michael Smith
Its: Interim Chief Executive Officer
3
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this date
by and between ELGIN TECHNOLOGIES, INC. ("Corporation"), and JONATHAN SCOTT
HARRIS ("Employee").
WHEREAS, Employer and Employee desire that the term of this Agreement begin on
February 21, 2000 ("Effective Date").
WHEREAS, Employer desires to employ Employee as its President and Chief
Executive Officer and Employee is willing to accept such employment by Employer,
on the terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Employer as its President and Chief Executive Officer,
and Employer agrees to employ and retain Employee in such capacities. Employee
shall devote the substantial portion of his business time, energy, and skill to
the affairs of the Employer as Employee shall report to the Employer's Board of
Directors and at all times during the term of this Agreement shall have powers
and duties at least commensurate with his position as President and Chief
Executive Officer.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms shall
have the following meanings:
A. "Termination For Cause" shall mean termination by Employer of
Employee's employment by Employer by reason of Employee's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Employer or by
reason of Employee's willful material breach of this Agreement that has resulted
in material injury to Employer.
B. "Termination Other Than For Cause" shall mean termination by Employer
of Employee's employment by Employer (other than in a Termination for Cause) and
shall include constructive termination of Employee's employment by reason of
material breach of this Agreement by Employer, such constructive termination to
be effective upon notice from Employee to Employer of such constructive
termination.
C. "Voluntary Termination" shall mean termination by Employee of
Employee's employment by Employer other than (i) constructive termination as
described in subsection 2.1(b), (ii) "Termination Upon a Change in Control," and
(iii) termination by reason of Employee's death or disability as described in
Sections 2.5 and 2.6.
D. "Termination Upon a Change in Control" shall mean a termination by
Employee of Employee's employment with Employer within 120 days following a
"Change in Control."
<PAGE>
E. "Change in Control" shall mean (i) the time that Employer first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or
more of Employer's outstanding securities, unless a majority of the "Continuing
Directors" approves the acquisition not later than ten (10) business days after
Employer makes that determination, or (ii) the first day on which a majority of
the members of the Employer's Board of Directors are not "Continuing Directors."
F. "Continuing Directors" shall mean, as of any date of determination, any
member of the Board of Directors of Employer who (i) was a member of that Board
of Directors on February 21, 2000, (ii) has been a member of that Board of
Directors for the two years immediately preceding such date of determination, or
(iii) was nominated for election or elected to the Board of Directors with the
affirmative vote of the greater of (x) a majority of the Continuing Directors
who were members of the Board at the time of such nomination or election or (y)
at least four Continuing Directors.
2.2 Initial Term. The term of employment of Employee by Employer shall be for a
period of two (2) years beginning on the Effective Date ("Initial Term"), unless
terminated earlier pursuant to this Section. At any time prior to the expiration
of the Initial Term, Employer and Employee may by mutual written agreement
extend Employee's employment under the terms of this Agreement for such
additional periods as they may agree.
2.3 Termination For Cause. Termination For Cause may be effected by Employer at
any time during the term of this Agreement and shall be effected by written
notification to Employee. Upon Termination For Cause, Employee shall promptly be
paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Employer in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Employer may effect a Termination Other Than For Cause at any time
upon giving written notice to Employee of such termination. Upon any Termination
Other Than For Cause, Employee shall promptly be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Employer in which
Employee is a participant to the full extent of Employee's rights under such
plans (including accelerated vesting, if any, of awards granted to Employee
under the Employer's stock option plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance
2
<PAGE>
compensation provided in Section 4.2, but no other compensation or reimbursement
of any kind.
2.5 Termination by Reason of Disability. If, during the term of this Agreement,
Employee, in the reasonable judgment of the Board of Directors of Employer, has
failed to perform his duties under this Agreement on account of illness or
physical or mental incapacity, and such illness or incapacity continues for a
period of more than six (6) consecutive months, Employer shall have the right to
terminate Employee's employment hereunder by written notification to Employee
and payment to Employee of all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Employer in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, with the exception of medical
and dental benefits which shall continue through the expiration of the Initial
Term, but Employee shall not be paid any other compensation or reimbursement of
any kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this Agreement,
Employee's employment shall be deemed to have terminated as of the last day of
the month during which his death occurs and Employer shall promptly pay to his
estate or such beneficiaries as Employee may from time to time designate all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Employer in which Employee is a participant to the full extent of Employee's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Employee in connection with his duties hereunder, all to
the date of termination, but Employee's estate shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination, Employer
shall promptly pay all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Employer in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, but no other compensation or
reimbursement of any kind, including without limitation, severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon a
Change in Control, Employee shall immediately be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Employer in which
Employee is a participant to the full extent of Employee's rights under such
plans (including accelerated vesting, if any, of any awards granted to Employee
under Employer's Stock Option Plan), accrued vacation pay and any appropriate
business expenses
3
<PAGE>
incurred by Employee in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 4.1, but no
other compensation or reimbursement of any kind.
2.9 Notice of Termination. Employer may effect a termination of this Agreement
pursuant to the provisions of this Section upon giving thirty (30) days' written
notice to Employee of such termination. Employee may effect a termination of
this Agreement pursuant to the provisions of this Section upon giving thirty
(30) days' written notice to Employer of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Employer agrees to pay to Employee a "Base Salary" during the Initial Term and
any extensions thereof in the amount of ONE HUNDRED AND FIFTY THOUSAND DOLLARS
$150,000 per annum payable in equal monthly installments of TWELVE THOUSAND FIVE
HUNDRED DOLLARS ($12,500).
3.2 Bonuses. Employee shall be eligible to receive a bonus for each year (or
portion thereof) during the Initial Term and any extensions thereof this
Agreement and any extensions thereof, based upon the financial performance of
the Employer during such year, as follows:
(a) TWENTY FIVE THOUSAND DOLLARS ($25,000), if the Employer attains annual sales
of at least TWELVE MILLION DOLLARS (($12,000,000), plus
(b) TWENTY FIVE THOUSAND DOLLARS ($25,000) if the Employer attains annual EBITDA
of at least FIVE HUNDRED THOUSAND DOLLARS ($500,000)
3.3 Additional Benefits. During the term of this Agreement, Employee shall be
entitled to the following additional benefits:
A. Employee Benefits. Employee shall be eligible to participate in such of
Employer's benefits and deferred compensation plans as are now generally
available or later made generally available to executive officers of the
Employer, including, without limitation, Employer's Stock Option Plan, profit
sharing plans, annual physical examinations, dental and medical plans, personal
catastrophe and disability insurance, financial planning, retirement plans and
supplementary executive retirement plans, if any. For purposes of establishing
the length of service under any benefit plans or programs of Employer,
Employee's employment with the Employer will be deemed to have commenced on the
Effective Date. Notwithstanding the general availability of the foregoing
benefit plans to the Employers's executive officers, Employer will in any event
provide to Employee during the Initial Term and any extensions therof:
4
<PAGE>
(i) Major Medical Insurance coverage for the Employee, his wife and
his children; and
(ii) Non-statutory options to purchase TWO HUNDRED THOUSAND
(200,000) shares of the Employer's common stock for each year that this
agreement is in effect, at an exercise price equal to the average market bid
price for the thirty (30) day period preceding the date of such options, to be
granted by the Employer on or about the forty-fifth day following the end of
each year of the term hereof Each such option will vest over the three (3) year
period commencing on the date that it is granted at the rate of thirty-three and
thirty-three one-hundredths percent (33.33%) per year.
D. Vacation. Employee shall be entitled to four (4) weeks of vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
C. Moving and Temporary Housing Costs. The Employer will reimburse
Employee for fifty percent (50%) of his reasonable moving costs associated with
his relocation and one hundred percent (100%) of a temporary furnished executive
residence for a reasonable period of time until he has secured permanent
housing.
D. Automobile Allowance. For the Initial Term and any extensions thereof,
the corporation shall provide Employee with a reasonable annual automobile
allowance.
E. Reimbursement for Expenses. During the Initial Term and any extensions
thereof, Employer shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation his Base
Salary (at the rate payable at the time of such termination), for a period of
the lesser of the remaining portion of the Initial Term or four (4) months from
the date of such termination provided, however, that if Employee is employed by
a new employer during such period, the severance compensation payable to
Employee during such period will be reduced by the amount of compensation that
Employee actually receives from the new employer. However, Employee is under no
obligation to mitigate the amount owed Employee pursuant to this Section by
seeking other employment or otherwise. Notwithstanding anything in this Section
to the contrary, Employee may in Employee's sole discretion, by delivery of a
notice to Employer within thirty (30) days following a Termination Upon a Change
in Control, elect to receive Compensation in the form of a lump sum severance
payment by bank cashier's check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section.
Employee shall also be entitled
5
<PAGE>
to an accelerated vesting of any awards granted to Employee under the Employer's
Stock Option Plan to the extent provided in the stock option agreement entered
into at the time of grant, if any. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of the
Employer in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, though the remaining term of this Agreement; provided, however, that
the benefits under any such plans of the Employer in which Employee is a
participant, including any such perquisites, shall cease upon re-employment by a
new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for Cause.
In the event Employee's employment is terminated in a Termination Other Than for
Cause, Employee shall be paid as severance compensation his Base Salary (at the
rate payable at the time of such termination), for a period of the lesser of the
remaining portion of the Initial Term or four (4) months from the date of such
termination, on the dates specified in Section 3.1; provided, however, that if
Employee is employed by a new employer during such period, the severance
compensation payable to Employee during such period will be reduced by the
amount of compensation that Employee is receiving from the new employer.
Employee is under no obligation to mitigate the amount owed to the Employee
pursuant to this Section by seeking employment or other compensation. Employee
shall be entitled to an accelerated vesting of any awards granted to Employee
under Employer's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant, if any.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or his estate shall not
be paid any severance compensation.
4.4 Limit on Aggregate Compensation Upon a Change in Control. Notwithstanding
anything else in this Agreement, solely in the event of a Termination Upon a
Change in Control pursuant to Section 2.8, the amount of severance compensation
paid to Employee under Section 2 and 4 or otherwise, but exclusive of any
payments to Employee in respect of any stock options then held by Employee (or
any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time) or by virtue of Employee's exercise
of a Limited Right under the Option Plan upon a Change in Control, shall not
include any amount that Employer is prohibited from deducting for federal income
tax purposes by virtue of Section 280G of the Internal Revenue Code or any
successor provision.
Section 5. Payment Obligations. Employer's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought to
enforce or interpret any provision contained herein, Employer, to the extent
permitted by applicable law and the Employers' Articles of Incorporation and
Bylaws, hereby
6
<PAGE>
indemnifies Employee for Employee's reasonable attorneys' fees and disbursements
incurred in such litigation.
Section 6. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Employer shall be kept and
treated as confidential both during and after the term of this Agreement, except
as may be permitted in writing by Employer's Board of Directors or as such
information is within the public domain or comes within the public domain
without any breach of this Agreement.
Section 7. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.
Section 8. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Employer's Articles of Incorporation and
Bylaws, Employer shall indemnify Employee at all times during and after the term
of this Agreement to the maximum extent permitted under any applicable state
law, and shall pay Employee's expenses in defending any civil or criminal
action, suit, or proceeding in advance of the final disposition of such action,
suit or proceeding, to the maximum extent permitted under such applicable state
laws.
Section 9. Notices. Notice under this Agreement shall be in writing, sent by
mail, national overnight delivery service or facsimile and shall be effective
when actually delivered. If mailed, notice shall be deemed effective 48 hours
after mailing as registered or certified mail, postage prepaid, directed to the
other party at the address set forth below or such other address as the party
may indicate by written notice to the other:
To Employer:
Elgin Technologies
12 Executive Drive
Hudson, NH 03051
Attention: Chairman of the Board
With a copy to:
Duane L. Berlin, Esq.
Lev & Berlin, P.C.
535 Connecticut Avenue
Norwalk, CT. 06854
To Employee:
Mr. Jonathon Scott Harris
7
<PAGE>
Section 10. Waiver. Failure of either party at any time to require performance
of any provision of this Agreement shall not limit the party's right to enforce
the provision, nor shall any waiver of any breach of any provision be a waiver
of any succeeding breach of any provision or a waiver of the provision itself
for any other provision.
Section 11. Assignment. Except as otherwise provided within this Agreement,
neither party hereto may transfer or assign this Agreement without prior written
consent of the other party.
Section 12. Law Governing. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Hampshire.
Section 13. Arbitration. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbiter may be entered in any court having jurisdiction thereof.
Section 14. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 15. Titles and Captions. All article, section and paragraph titles or
captions contained in this Agreement are for convenience only and shall not be
deemed part of the context nor affect the interpretation of this Agreement.
Section 16. Entire Agreement. This Agreement contains the entire understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
Section 17. Agreement Binding. This Agreement shall be binding upon the heirs,
executors, administrators, successors and assigns of the parties hereto.
8
<PAGE>
Section 18. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of this Agreement.
Section 19. Counterparts. This Agreement may be executed in several counterparts
and all so executed shall constitute one Agreement, binding on all the parties
hereto even though all the parties are not signatories to the original or the
same counterpart.
N WITNESS WHEREOF, the parties have executed this agreement as of the date first
set forth above.
EMPLOYER
ELGIN TECHNOLGIES, INC.
/s/ Michael Smith
- - -------------------------------------
By: Michael Smith
Its: Interim Chief Executive Officer
EMPLOYEE
JONATHAN SCOTT HARRIS
/s/ Jonathan Scott Harris
- - -------------------------------------
9
<PAGE>
EXHIBIT A-1
The Elgin Master Light Ballast System
Market Potential and Economic Uncertainty
Henry Lee
Joe Cavicchi
June 8, 1998
----------------------------------
THE ECONOMICS RESOURCE GROUP, INC.
One Mifflin Place
Cambridge, MA 02138
(617) 491-4900
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Elgin MLBS 2
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I INTRODUCTION
The Elgin Master Light Ballast System (MLBS) is a highly efficient fluorescent
lighting ballast system that delivers considerable operating cost savings and
high quality features when compared against any currently available fluorescent
light ballast. In conjunction with the imminent introduction of the MLBS in the
marketplace, Mason Cabot and Elgin Corporation have asked The Economics Resource
Group, Inc. to evaluate three critical questions: i) What is the size of the
market that the MLBS could potentially capture both nationally as well as within
selected states?(1), ii) What is the value of the MLBS in light of the size and
location of the markets?, and iii) What will be the effects of electric industry
restructuring on the MLBS markets?
These questions are of significance to Elgin because the markets in which the
MLBS will be introduced have historically been heavily influenced by both
federal and state government. Heretofore, a substantial portion of the demand
for efficient fluorescent lighting ballasts has been driven by government and
state mandated demand side management (DSM) and energy efficiency programs. The
proliferation of these programs has resulted in the investment of substantial
monies directed toward the replacement of antiquated, inefficient fluorescent
lighting and ballast systems, as well as incandescent lighting systems.
At the same time, electricity industry restructuring is creating an exciting new
opportunity for the MLBS. Although many federal and state programs will
continue, the introduction of competition amongst suppliers of electricity is
establishing a landscape where the savvy electricity marketer or utility
subsidiary is bundling a variety of products in order to offer the lowest costs
to a consumer. An important component of such an "electricity package" will be
simple, easy to install, energy efficient products that allow a marketer to
boast energy savings for the consumer and as a result offer the consumer a lower
energy price.
The following three sections of this report examine respectively the size of the
current and future markets available to the MLBS, the potential MLBS sales
volume and value, and how electricity industry restructuring is changing
electricity
- - ----------
(1) The states of New Jersey, Pennsylvania, Maryland, Ohio, Wisconsin and
California are studied in detail in this report.
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markets in states and regions. First we analyze the potential market share that
the MLBS could capture in the commercial lighting retrofit and new commercial
building construction markets. We have purposely biased our analysis to err on
the conservative size by focussing only on the commercial lighting sector.
Second we evaluate, from the perspective of a potential purchaser of the MLBS,
the financial performance of the product. Within this framework the potential
sales value of the MLBS to its patent holders is established. Finally we discuss
the current state of electricity industry restructuring, and how it will impact
the introduction of the MLBS, with a particular focus on New Jersey,
Pennsylvania, Maryland, Ohio, Wisconsin and California.
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II MAGNITUDE OF THE MASTER LIGHT BALLAST SYSTEM MARKET
The market potential for the MLBS is enormous. Since 1985, shipments of
electronic ballasts have grown to more than 35 million units or greater than 45%
of the total domestically produced ballasts shipped to the U.S. commercial
sector. Possessed with a finely tuned strategy, the MLBS stands poised to
capture some of this vast market.
Two markets are of most interest to distributors of the MLBS: 1) the fluorescent
lighting retrofit market, and 2) the new construction market. The retrofit
lighting market, driven by state and federal energy conservation programs,
offers substantial distribution potential. Nationally half of the existing
commercial buildings illuminated with fluorescent lights, or some 23 billion
square feet, employ ballasts that are less efficient than the MLBS. Of these 23
billion square feet, more than 40% continue to use the least efficient ballast
systems, sold in the U.S. prior to 1991.
The new commercial building construction market also offers substantial market
opportunity for the MLBS. Each year some 2 billion square feet of new commercial
building space is constructed, and most of this space will be lighted with
fluorescent lamps. The combination of these two markets provide a sales
potential of 150 million MLBS units.(2)
II.A Background
The MLBS is a new technology for providing the power and control required to
properly and efficiently illuminate fluorescent light bulbs. The MLBS replaces
the conventional fixture configuration--where one ballast is necessary for every
two fluorescent bulbs--with an electronic ballast system that combines a 16 or
32 fixture power supply with individual fixture "drivers".(3) Although
electronic ballasts have
- - ----------
(2) Although the MLBS is a "system," in order to simplify our discussion we have
chosen to express sales potential in number of units where a unit corresponds to
a single ballast.
(3) See Logic Laboratories, Inc., June 13, 1997, "Background and Technology
Primer" for a detailed discussion of fluorescent lights, ballast technologies
and the MLBS.
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been manufactured for more than ten years, the MLBS is more efficient than any
other electronic ballast system on the market.
The difference between the high efficiency magnetic and electronic ballasts is
described by their names: Electronic ballasts eliminate the need for a magnet by
using electronic circuitry to control the voltage and electrical current, while
high efficiency magnetic ballasts are optimally designed core-coil type
ballasts. Electronic ballasts reduce electricity consumption 20-25% when
compared with the older core-coil design, and high efficiency magnetic ballasts
reduce electricity consumption 10-15%. The MLBS represents a major improvement
over existing electronic ballasts, using as much as 40% less energy than the
core-coil design (see Table 1).(4)
Table 1:
Modern Ballast Electricity Savings in Comparison to Core-Coil Type
Ballasts
================================================================================
Ballast Type Savings Compared to Core-Coil Type Ballast
- - --------------------------------------------------------------------------------
High-Efficiency Magnetic 10-15%
Electronic 20-25%
MLBS 35-40%
================================================================================
Source: LBNL Lighting Report; Logic Laboratories, Inc., 6/13/97 "Background and
Technology Primer"
Currently there are three types of fluorescent light ballast technologies
available in the market: 1) high efficiency magnetic, 2) hybrid, and 3)
electronic. Hybrid ballasts account for a very small share of the market, and we
have ignored them in our analysis. Figure 1 shows the quantities and types of
ballasts shipped to the U.S. commercial sector since 1977.(5) Sales of magnetic
core-coil ballasts to the U.S. Commercial sector declined precipitously over the
three year period 1988-1991, primarily as a result of the implementation of
federal and state efficiency standards. Both high efficiency magnetic and
electronic ballast sales skyrocketed during this period, but as Figure 1 shows
electronic ballasts have begun to capture
- - ----------
(4) See Logic Laboratories, Inc., June 13, 1997, "Background and Technology
Primer."
(5) The Bureau of the Census reports the shipments of ballasts to the U.S.
commercial sector. We assume that these shipments represent total sales and that
the majority of ballasts are installed in the year they are shipped.
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an ever increasing larger share of the market. Today electronic ballasts control
over 45% percent of the U.S. commercial market.
Figure 1:
Shipments of Domestically Produced Ballasts to the U.S. Commercial
Sector
[GRAPHIC OMITTED]
Source: Bureau of the Census MQ36C; Lawrence Berkeley National Laboratory
Lighting Market Sourcebook for the U.S., December 1997.
II.B MLBS Markets
The primary target market considered in this report for the MLBS is the
commercial building sector. More than 77% of existing US commercial floorspace
is lit by fluorescent light fixtures and commercial buildings are the dominant
users of fluorescent lighting (see Figure 2).(6)
- - ----------
(6) Although industrial facilities rely on fluorescent lamps, the total
floorspace attributed to industrial facilities is approximately 25% of that of
commercial buildings. Further, numerous detailed data sources are available
describing commercial building characteristics, as opposed to industrial
building characteristics. Therefore, this analysis has not incorporated
industrial facilities and as a
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Figure 2:
Percent of Commercial Floorspace by Lighting Type in 1995
[GRAPHIC OMITTED]
Source: EIA, 1995 Commercial Building Energy Consumption Survey.
With the focus narrowed to commercial buildings two significant potential
outlets for the MLBS emerge; new commercial building construction or
rehabilitation and retrofitting of existing fluorescent lighting systems. Each
of these markets holds substantial potential for the MLBS, but each has unique
characteristics that require separate analysis. In the case of new construction,
the MLBS will be competing against existing electronic ballast technology. In
this situation an investor will apply an up-front cost test that may or may not
adequately take into account long term operational savings. In the case of
retrofits the MLBS will be competing in a market where a significant proportion
of existing buildings have already been retrofitted, narrowing the potential
breadth of this market. These two
- - --------------------------------------------------------------------------------
result our findings should be viewed as very conservative estimates. We have
also not studied the potential for the MLBS to serve the residential lighting
market.
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market opportunities have different attributes over both the short and long
term. The following sections develop an estimate of the potential magnitude of
each of these markets.
II.B.1 Energy Conservation Retrofits
Lighting retrofits associated with energy conservation projects represent the
largest market opportunity for the MLBS. Energy conservation projects have
driven the adoption of newer, more efficient ballast technologies during the
previous ten years.
Figure 3 shows nationwide trends in investor owned utilities' expenditures for
demand side management and energy conservation programs. This figure
Figure 3:
Demand Side Management/Energy Conservation Program Expenditures
[GRAPHIC OMITTED]
Source: EIA Annual Energy Review and Personal Communication with the EIA.
clearly explains why high efficiency magnetic and electronic ballast sales took
off in the early 90s: Growth in energy conservation program expenditures
coincides exactly with the increase in ballast sales. Prior to these programs,
the majority of
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ballast sales were driven by new building construction and rehabilitation. Once
the DSM programs commenced in earnest, ballast sales boomed as existing
commercial and industrial building stock began to retrofit its lighting.
The prominent role that energy conservation programs have played in driving the
demand for efficient ballasts is of major importance when analyzing the future
retrofit market for the MLBS. Energy conservation programs target existing
inefficient buildings and typically use incentives to persuade building owners
to implement conservation measures. Given that the stock of existing buildings
was finite when these programs were conceived, it is imperative to consider how
many commercial buildings have been retrofitted since the programs' inception in
order to determine the remaining size of the retrofit market.
Figure 4 shows the percentage of commercial floorspace with energy efficient
ballasts by census division as reported in the ETA Commercial Building Energy
Consumption Survey (CBECS).(7) These data show that the Northeast and the
Pacific currently have more floorspace with energy efficient ballasts than other
parts of the country and that 48% of the total floorspace in the United States
is lighted by these ballasts. Figure 4 clearly demonstrates the importance of
recognizing the extent to which existing commercial building floorspace
currently uses energy efficient ballasts. Unfortunately these data reveal
percentages by census division, and we are looking for data at the state level.
To overcome this problem we developed a methodology to estimate the extent to
which energy conservation programs have penetrated the existing stock of
commercial buildings in specific states.(8) This methodology was used to
estimate the square footage of commercial buildings with energy efficient
ballasts in the states of interest.
- - ----------
(7) These percentages are subject to a +/- 10-15% error.
(8) See Appendix A-1 for a detailed description of the methodology.
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Figure 4:
Percent of Commercial Floorspace with Energy Efficient Ballasts by
Census Division
[GRAPHIC OMITTED]
Source: EIA, 1995 Commercial Building Consumption Survey.
The results of the application of the methodology described above are shown in
Tables 2 and 3 for each of the states considered in this study. These tables
present an estimate of the quantity of commercial floorspace in each of the
states, quantities of floorspace that use fluorescent lights, incandescent
lights and other lights (derived from Figure 1), the percentage distributions of
ballasts for the square footage lit with fluorescent lights and estimates of the
potential size of the MLBS market in each of the six states analyzed.
Table 2 shows the extent to which electronic and high efficiency ballasts have
already been installed in existing commercial buildings. This is important when
evaluating the market potential of the MLBS because the largest energy savings
occur when the MLBS replaces a core-coil ballast. Those buildings where
core-coil ballasts still are utilized represent the greatest market potential
for the MLBS in
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the short term, while efficient magnetic ballasts are the next logical target
retrofit market. The potential for the MLBS to supplant recently installed
electronic ballasts is minimal as the resulting energy savings are not large
enough to justify the investment.
Table 2:
Commercial Sector Lighting and Ballast Type by State
<TABLE>
<CAPTION>
===========================================================================================================================
Lighting Type (millions ft(2)) Ballast Type
State Total Incandescent Fluorescent Other Standard Efficient-Magnetic Electronic
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania 2,625 368 2,021 236 44.3% 49.7% 5.9%
New Jersey 2,225 312 1,713 200 44.3% 49.7% 5.9%
Maryland 1,751 245 1,348 158 48.8% 45.3% 5.9%
Ohio 2,955 414 2,275 266 55.9% 38.9% 5.2%
Wisconsin 1,153 161 887 104 55.9% 38.2% 5.9%
California 6,346 888 4,887 571 45.1% 31.3% 23.6%
- - ---------------------------------------------------------------------------------------------------------------------------
Total 17,055 2,388 13,132 1,535 47.8% 39.8% 12.4%
===========================================================================================================================
</TABLE>
Note: 1) Commercial floorspace is estimated by multiplying the total
commercial consumption of electricity (EIA, Electric Power Annual,
1997) by the average percentage of electricity consumed by lighting
(28%, commercial Building Energy Consumption Survey", EIA, 1995, see
also LBNL "Lighting Market Sourcebook," p.22) and dividing by 3.6
kwh/sq. ft/yr which is the average lighting density of commercial
buildings weighted by commercial building type. (LBNL at p.25).
2) Ballast type total percentages are weighted by fluorescent lighting
square footage.
Source: EIA, 1995 Commercial Building Energy Consumption Survey: Lighting
Efficiency Technology Report, California Energy Commission, 1997.
Table 3:
Potential MLBS Market Size
<TABLE>
<CAPTION>
==========================================================================================
Commercial Building Square Footage by Potential to Retrofit
Ballast Type (millions ft(2)) Standard, Efficient Magnetic
& Electronic Units
State Standard Efficient Magnetic Electronic (Millions of Units(1))
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania 896 1,005 120 20
New Jersey 759 852 102 17
Maryland 658 610 80 13
Ohio 1,272 886 117 23
Wisconsin 496 339 53 9
California 2,202 1,529 1,155 49
- - ------------------------------------------------------------------------------------------
Total 6,283 5,222 1,628 131
==========================================================================================
</TABLE>
Note: 1) One unit is equivalent to a single ballast used to drive one two lamp
fixture.
Source: EIA, 1995 Commercial Building Energy Consumption Survey: Lighting
Efficiency Technology Report, California Energy Commission, 1997.
Table 3 is developed by expanding a subset of the data in Table 2. For example,
in the state of Ohio, it is estimated that 43% of the 1995 quantity of
floorspace or
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1,271 million ft(2), are illuminated with fluorescent lights that use magnetic
core-coil ballasts. Similarly, Table 3 presents the amount of floorspace that
might potentially be upgraded from existing high efficiency ballasts to the
MLBS. Table 3 also shows the potential MLBS sales volumes in terms of single
ballasts. If the MLBS were to replace all the core-coil ballasts in the six
states shown, sales of 62.8 million units would be expected, assuming that 100
square feet can be effectively illuminated by a two lamp fixture.
Although this report provides estimates of the total potential retrofit market
size available for the MLBS, the actual amount of retrofit penetration that
could be achieved by the MLBS is dependent upon numerous factors. A subset of
these factors--electricity industry competition and future energy conservation
programs--are considered in this report. Other factors such as existing
competitor market penetration and name recognition, consumer knowledge of the
product and confidence in the product, marketing technique, most appropriate
production plans, etc. have not been evaluated in this report, but are also
important.
II.B.2 New Commercial Building Construction
The Energy Information Agency (ETA) indicates in its 1998 Annual Energy Outlook
that commercial building construction increased dramatically in the mid-90s,
especially in the southeast part of the country.(9) This growth is forecasted to
decline slightly between 1999-2002 and then level off. On a floorspace basis
these forecasted additions are almost 2 billion square feet in the year 1998 and
correspond to ballast sales of between 20 and 30 million units.(10) Furthermore,
these data do not include those buildings that are rehabilitated each year which
would represent an additional source of new construction. Figure 5 depicts the
EIA forecasts by census region.
- - ----------
(9) To estimate the yearly square footage of new commercial building space
additions requires the collection of data on commercial building additions.
These data are collected and compiled by the Energy Information Administration
(EIA), aggregated by census divisions, and encompass both historically observed
building additions and forecasts of future additions.
(10) The amount of square footage illuminated with one 2 bulb fluorescent light
fixture can vary from 70-100ft(2)/fixture where each fixture requires one
ballast.
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Figure 5:
New Commercial Construction by Census Division
[GRAPHIC OMITTED]
Source: EIA Annual Energy Outlook 1998, National Energy Modeling System.
We have focussed particular attention on the states of Pennsylvania, New Jersey,
Maryland, Ohio, Wisconsin and California. Therefore, estimates of new commercial
building construction by state were developed and are shown in Figure 6.(11)
California clearly projects significant commercial building additions during the
next ten years with a year 2000 market of 160 million square feet, or in terms
of potential ballast sales, approximately 2 million new ballasts. Using these
ratios, new construction in Ohio could demand as many as 500,000 new ballasts
per year while Pennsylvania may demand around 750,000 new ballasts. The
approximately
- - ----------
(11) To extend the analysis of new commercial floor space additions to
individual states required an understanding of construction activity in one
state versus another in order to disaggregate the data from the census division
level to individual state level. Because the level of construction activity is a
good measure of building construction, the ratio of state to census division
construction gross domestic product (GDP) was used to infer each state's level
of commercial building additions.
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400 million square feet of building space assumed under construction in these
six states in 1998 translates to potential sales of between 4-6 million
ballasts. New commercial building construction represents an excellent market
opportunity for the MLBS.
Figure 6:
New Commercial Construction By State
[GRAPHIC OMITTED]
Source: EIA Annual Energy Outlook 1998, National Energy Modeling System.
II.C Summary
The magnitude of the potential new construction market and the retrofit markets
for the MLBS is considerable. Clearly in the short term, both markets should be
targeted. The extent to which new construction markets will be penetrated will
depend upon how much value is placed upon attributes of the MLBS that
differentiate it from other available products. The growth in the retrofit
market is presently very large and will remain so for most of the next decade,
but the growth in this market will decrease over tine.
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In the following sections of the report, we provide an economic analysis, which
in turn allows us to value the MLBS based on the perspective of an investor
considering whether or not to install it. We also explore the potential
volatility of both the retrofit and new construction markets in conjunction with
electric industry restructuring.
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III MLBS NEW CONSTRUCTION AND RETROFIT PROJECT ECONOMIC ANALYSIS AND PRODUCT
VALUE
Our analysis finds that installation of the MLBS is desirable for either a
retrofit or new construction application. Standard project financial performance
indicators are favorable for each of the states examined. For example, project
internal rates of return are consistently 20-30 percent, even when sensitized to
incorporate pessimistic assumptions. In states such as California and New
Jersey, where commercial electricity rates are among the highest in the nation,
internal rates of return are between 30-60 percent. In all cases,
straightforward project financial analysis clearly shows that an investment in
the MLBS will pay for itself by virtue of the energy savings it provides.
At the same time it is important to recognize that competing electronic ballasts
will also produce favorable project financial results. The MLBS must be
differentiable by more than just energy savings in order to capture a
significant market share. Since the current first cost estimates of the MLBS are
higher than standard electronic ballasts manufactured by companies such as
Motorola or Advance, the MLBS features such as dimming and energy harvesting
must be exploited. The electronic ballast industry is fiercely competitive, and
the MLBS will have to overcome several barriers to gain market acceptance,
including the possibility of pricing the MLBS to match its competitors in order
to stimulate initial sales.
The MLBS offers its consumers a near term potential value of more than $250
million with the retrofit market providing the source of greatest value. The
value is simply the calculated net present value that the MLBS provides if it
were ultimately to penetrate the new construction and retrofit markets 10%. If
the penetration reached 25 percent, the value would be greater than $600
million. When marketing the MLBS, these value estimates can be used to validate
the potential worth of the product to an organization purchasing the right to
distribute the MLBS.
A simple spreadsheet economic analysis was created to evaluate the MLBS project
economics for new construction and retrofit projects as well as to estimate
product value. The primary emphasis of the analysis is to examine the economic
performance of the MLBS compared against; a probable competitor in the case of
new construction and an inefficient magnetic core-coil ballast in the case of a
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retrofit. The economics of both of these cases are sensitized for assumed
variations in the commercial price of electricity, the number of hours that
lights are assumed illuminated per year and the discount rate.(12) In each of
these sensitivity analyzes the internal rates of return (IRR), the net present
value (NPV), and the simple payback period are calculated for each type of
project and for each of our states. The results are then presented visually
through the use of tornado diagrams.(13)
The following sections describe our economic model, present the results of the
sensitivity analysis performed for each of the cases and finally show the
potential value of the MLBS.
III.A MLBS Project Economic Spreadsheet
Our simple spreadsheet employs conventional net cash flow analysis to evaluate a
proposed installation of the MLBS for a 20,000 square foot commercial building.
It can be used to study the economics of both new construction and retrofit.
The spreadsheet calculates the cost to operate a lighting system which employs
the MLBS and similarly calculates the cost to operate a competing lighting
system and then determines the operational savings achieved by installing the
MLBS. The costs are subtracted from the savings, and the resultant cash flows
are used to determine the financial indices. Using the net cash flow analysis
technique allows the later year savings realized through the installation of the
MLBS to be incorporated into a financial indicator.
As with any analysis of this type a base case must be defined and reasonable
starting assumptions must be established. The base case and primary assumptions
for our project analyses are shown in Table 4. The two most critical assumptions
in this analysis are the electricity price forecast and the number of hours that
the
- - ----------
(12) In the retrofit project additional sensitivities are explored to quantify
the extent to which MLBS electricity savings over an existing, installed ballast
affect the results, while in the new construction case additional sensitivities
are explored to quantify the extent to which higher MLBS initial installation
costs affect the results.
(13) A tornado diagram is used to capture the effects of changes in assumptions
on the attributes of interest. (in this case the attributes are IRR, NPV and
simple payback period) The diagram received its name as a result of how it is
constructed. Attribute variations resulting from changes in input assumptions
are depicted graphically as horizontal bars. The attribute value that varies the
greatest is plotted as the top horizontal bar while other horizontal bars that
depict smaller changes in the attributes are plotted beneath it to form the
shape of a tornado. See, for example, Figure 9.
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lights are illuminated. The number of hours the lights are on drives the
quantity of kilowatt hours that are saved by installing the MLBS while the
electricity price forecast defines the monetary value of the realized savings.
The number of "burn" hours for the lights was assumed to be 3400 hours in the
base case. This value is obtained from the Lawrence Berkeley National Laboratory
(LBNL) Lighting Market Sourcebook for the U.S. and represents the average
lighting hours weighted by types of commercial building floorspace. Electricity
price forecasts shown in Table 5 were developed by taking EIA Electric Power
Annual 1997 reported average state commercial electricity prices and then
decreasing them 1% per annum to account for potential price reductions
attributable to electricity industry competition.
Table 4:
Elgin MLBS Project Economic Analysis Base Case Assumptions
====================================================
New Construction
- - ----------------------------------------------------
State: (CA, PA, NJ, OH, MD, WI) OH
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Discount Rate (%) 10%
Installation Cost Premium ($/1000 ft(2)) $ 16
MLBS Cost Premium ($/1000 ft(2)) $ 59
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (W/ft(2)) 0.86
Hours of Operation 3400
====================================================
====================================================
Retrofit
- - ----------------------------------------------------
State: (CA, PA, NJ, OH, MD, WI) OH
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Discount Rate (%) 10%
Installation Cost ($/1000 ft(2)) $158
MLBS Cost ($/1000 ft(2)) $259
MLBS Electricity Demand (W/ft(2)) 0.73
Existing Ballast Electricity Demand (W/ft(2)) 1.24
Hours of Operation 3400
====================================================
Source: Elgin System Comparison and Lawrence Berkeley National Laboratory
The remaining critical assumptions are the MLBS equipment and installation
costs, electricity demanded by the lighting fixtures, quantity of fixtures
required per square foot and the discount rate. The discount rate in all cases
has been assumed to be 10%. This value is a reasonable estimate of the weighted
average cost of capital that would be faced by an organization considering
investing in a lighting system upgrade. MLBS equipment and installation costs,
square footage illuminated per fixture (100 ft(2)/fixture), and electricity
demand were obtained from Elgin Warren Power Systems.(14)
- - ----------
(14) Mark Backer, April 7, 1998, "System Comparison" Spreadsheet, Elgin Warren
Power Systems.
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Table 5:
Various State Commercial Sector Average Electricity Price Forecasts
(cents/kWh)
=================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
- - -----------------------------------------------------------------
CA 9.7 9.6 9.5 9.4 9.3 9.2 9.1 9.0 9 0 8.9
PA 8.1 8.1 8.0 7.9 7.8 7.7 7.7 7.6 7.5 7.4
NJ 10.2 10.1 10.0 9.9 9.8 9.7 9.6 9.5 9.4 9.3
MD 6.8 6.7 6.6 6.6 6.5 6.4 6.4 6.3 6.2 6.2
OH 7.4 7.4 7.3 7.2 7.2 7.1 7.0 6.9 6.9 6.8
WI 5.5 5.4 5.4 5.3 5.3 5.2 5.2 5.1 5.1 5.0
=================================================================
Note: 1) Prices calculated by taking the ratio of average commercial sector
utility revenues to kilowatt hours sold.
2) Starting values Based on EIA Electric Power Annual 1997
The assumed electricity demand for the fixtures against which the MLBS is
compared is critical as this value drives the electricity savings. In the case
of new construction, the competitive fixture is assumed to be 18% less efficient
than the MLBS and thus demands .86 W/ft(2) where the MLBS fixture demands .73
W/ft(2). In the retrofit base case the MLBS is assumed to be 59% more efficient
than an existing, antiquated inefficient magnetic core-coil ballast and in this
instance the older ballast is assumed to demand 1.24 W/ft(2).(15)
Considerable difficulty is encountered when defining the electricity demand
associated with the different fluorescent lighting systems currently in
operation. Therefore we varied the demand, using a range between 1.1 W/ft(2) and
1.35 W/ft(2). This recognizes that the MLBS will not only target the most
inefficient systems that remain in operation, but also lighting systems
installed in buildings built after the widespread availability of high
efficiency magnetic ballasts, although before electronic ballasts were widely
available. As was discussed earlier in this report, numerous older inefficient
ballast systems have already been replaced, and the MLBS will eventually be
considered as a cost effective retrofit for a building built during the 1970s or
1980s.
The new construction and retrofit case spreadsheets described above are shown in
Figures 7 and 8. The upper two bordered boxes on the spreadsheets contain the
input assumptions and the financial indices. The input assumptions are used to
calculate the electricity consumption and the lighting system costs and savings
- - ----------
(15) Given that the average weighted commercial building lighting electricity
demand calculated by the LBNL is 1.1 W/ft(2), our retrofit base case demand of
1.24 W/ft(2) assumes that the initial target market for the MLBS will be the
most inefficient lighting systems currently in operation.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 20
- - --------------------------------------------------------------------------------
Figure 7
Project Economics for the Installation of the Elgin Master
Light Ballast System -- Retrofit California
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
Input Assumptions
<S> <C>
State CA, OH, PA, CA, WI, NJ, MD
-- Selects Proper Electricity Price Forecast
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Inflation Rate (%) 3%
Discount Rate (%) 10%
Installation Cost ($/1,000 ft(2)) $ 158
MLBS Cost ($/1,000 ft(2)) $ 259
Bulb Costs ($/20,000 ft(2)) $ 680
Type of Building C "C" for Commercial or "I" for Industrial
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (w/ft(2)) 1.28 Note: Weighted average commercial building ballast
electricity demand is 1.1 W/ft(2) -- LBL
Hours of Operation 3400
- - ------------------------------------------------------------------------------------------------------
</TABLE>
- - --------------------------------------------------
Financial Performance Indices
IRR 38%
Net Present Value 12,462
Simple Payback Period 2.51
- - --------------------------------------------------
<TABLE>
<CAPTION>
===================================================================================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Annual Electricity Price (cents/kwh) 9.70 9.61 9.51 9.41 9.32 9.23 9.14 9.04 8.95
MLBS Annual Electricity Consumption (kwh) 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640
Competitor Annual Electricity Consumption 87,040 87,040 87,040 87,040 87,040 87,040 87,040 87,040 87,040
Annual Electricity Saved (kwh) 37,400 37,400 37,400 37,400 37,400 37,400 37,400 37,400 37,400
- - -----------------------------------------------------------------------------------------------------------------------------------
Costs($)
- - -----------------------------------------------
Installation Cost 3,165
MLBS Cost 5,180
Bulb Cost 680
Electricity Cost 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 9,025 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
Benefits ($)
- - -----------------------------------------------
Electricity Savings 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
Net Cash Flows (9,025) 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
===================================================================================================================================
<CAPTION>
================================================================
Year 2008
- - ----------------------------------------------------------------
<S> <C>
Average Annual Electricity Price (cents/kwh) 8.86
MLBS Annual Electricity Consumption (kwh) 49,640
Competitor Annual Electricity Consumption 87,040
Annual Electricity Saved (kwh) 37,400
- - ----------------------------------------------------------------
Costs($)
- - -----------------------------------------------
Installation Cost 3,165
MLBS Cost 5,180
Bulb Cost 680
Electricity Cost 4,400
- - ----------------------------------------------------------------
Total 9,025 4,400
Benefits ($)
- - -----------------------------------------------
Electricity Savings 3,315
- - ----------------------------------------------------------------
Total 3,315
Net Cash Flows (9,025) 3,315
================================================================
</TABLE>
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 21
- - --------------------------------------------------------------------------------
Figure 8
Project Economics for the Installation of the Elgin Master
Light Ballast System--New Construction California
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
Input Assumptions
<S> <C>
State CA, OH, PA, CA, WI, NJ, MD
-- Selects Proper Electricity Price Forecast
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Inflation Rate (%) 3%
Discount Rate (%) 10%
Installation Cost ($/1,000 ft(2)) $ 16 Premium over currently available electronic
ballast; no harvesting.
MLBS Cost ($/1,000 ft(2)) $ 59 Premium over currently available electronic
ballast.
Type of Building C "C" for Commercial or "I" for Industrial
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (w/ft(2)) 0.86 Note: Electronic ballast with ballast factor
equal to 1.28.
Hours of Operation 3400
- - ------------------------------------------------------------------------------------------------------
</TABLE>
- - --------------------------------------------------
Financial Performance Indices
IRR 56%
Net Present Value $3,585
Simple Payback Period 1.75
- - --------------------------------------------------
<TABLE>
<CAPTION>
===================================================================================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Annual Commercial Electricity Price (cents/kwh) 9.70 9.61 9.51 9.41 9.32 9.23 9.14 9.04 8.95
MLBS Annual Electricity Consumption (kwh) 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640
Competitor Annual Electricity Consumption (kwh) 58,480 58,480 58,480 58,480 58,480 58,480 58,480 58,480 58,480
Annual Electricity Saved (kwh) 8,840 8,840 8,840 8,840 8,840 8,840 8,840 8,840 8,840
- - -----------------------------------------------------------------------------------------------------------------------------------
Costs($)
- - -----------------------------------------------
Installation Cost 314
MLBS Cost 1,180
Electricity Cost 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 1,494 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
Benefits ($)
- - -----------------------------------------------
Electricity Savings 858 849 841 832 824 816 808 799 791
- - -----------------------------------------------------------------------------------------------------------------------------------
Total 858 849 841 832 824 816 808 799 791
Net Cash Flows (1,494) 858 849 841 832 824 816 808 799 791
===================================================================================================================================
<CAPTION>
================================================================
Year 2008
- - ----------------------------------------------------------------
<S> <C>
Average Annual Commercial Electricity Price (cents/kwh) 8.86
MLBS Annual Electricity Consumption (kwh) 49,640
Competitor Annual Electricity Consumption (kwh) 58,480
Annual Electricity Saved (kwh) 6,340
- - ----------------------------------------------------------------
Costs($)
- - -----------------------------------------------
Installation Cost 314
MLBS Cost 1,180
Electricity Cost 4,400
- - ----------------------------------------------------------------
Total 1,494 4,400
Benefits ($)
- - -----------------------------------------------
Electricity Savings 784
- - ----------------------------------------------------------------
Total 784
Net Cash Flows (1,494) 784
================================================================
</TABLE>
Note: 1) The costs shown as premiums represent the additional initial costs
associated with the installation of the MLBS when compared with a competing
electronic ballast supplier. See Warren Power Systems 4/7/98 Memorandum.
<PAGE>
Elgin MLBS 22
- - --------------------------------------------------------------------------------
shown in the lower portion of the spreadsheet. The net cash flows are then
utilized to calculate the financial indices used to evaluate the attractiveness
of an investment in the MLBS.
There are two significant differences between Figures 7 and 8 related to whether
or not new construction or retrofit projects are being analyzed. First, the
competitor's electricity demand is different in order to account for the fact
that in a retrofit analysis the existing fixture electricity demand is large.
(see above) Second, the equipment and installation costs are different because
in the case of new construction an initial expenditure for a complete system is
required whether the investor installs the MLBS or a competitor's system. In
this instance we use the additional cost of the MLBS when compared with a
competitor and compare it with the additional electricity savings the MLBS
offers over a competing electronic ballast manufacturer. Otherwise the basic
construction of the two spreadsheets is identical. These two spreadsheets were
used to generate the results and valuation presented in the following sections.
III.B Results
The project economic analysis for both the retrofit and new construction cases
was run numerous times for each of states specifically examined in this report.
In all the cases analyzed the IRRs, NPVs and simple payback periods were
calculated. For each of the analyses the results were sensitized to potential
variations in the electricity price forecasts, the number of lamp burn hours,
and the discount rate. Additionally, when analyzing the retrofit case, the
sensitivity of the economic analysis to variations in existing ballasts'
electricity demand was investigated and when analyzing the new construction
cases, the sensitivity of the economic analysis to MLBS initial costs was
investigated. The economic indices calculated in all of the cases analyzed
indicate that the MLBS is an excellent investment. The base case results, and
the results for all the sensitivities analyses defined previously, are presented
in Figures 9-14 (tornado diagrams), where each figure shows all the results for
a single state.(16)
- - ----------
(16) The tabular results used to construct the tornado diagrams are compiled in
Appendix A-2.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 23
- - --------------------------------------------------------------------------------
The interpretation of a tornado diagram may seem somewhat difficult at first,
but is in fact quite simple. The objective is to convey in a compact format how
the MLBS project financial indices change when input assumptions are varied. In
both of the cases analyzed--new construction and retrofit--four different input
assumptions were varied in order to quantify the variations' impact on project
financial performance. In both cases, electricity price forecast, discount rate,
and number of hours lights are energized were varied. In the case of new
construction we looked at different initial MLBS cost estimates and in the
retrofit case different demand projections for electricity ballasts. In total
four assumptions are varied for both new construction projects and retrofit
projects.
Figure 9 shows the results of these analyses for the state of Pennsylvania in
six tornado diagrams; the three diagrams on the left are for the retrofit case
and the three diagrams on the right are for the new construction case. In each
case we have examined how IRRs, NPVs and simple payback periods vary when input
assumptions are modified. For example, the top left diagram depicts how net
present value changes for the retrofit case when input assumptions are varied.
The center point of the diagram represents the results obtained for the base
case while the variations are presented through the use of horizontal bars. The
Case C horizontal bar shows how a +/-10% change in the number of hours the
lights in a building are energized affects the NPV. The left hand side of the
bar shows the reduction in NPV that occurs when burn hours are decreased by 10%,
while the right hand side of the bar shows how the NPV increases as the number
of burn hours is increased 10%. Each of the remaining three bars is interpreted
in exactly the same fashion where the left hand bars represent decreases in
financial performance and right hand bars represent improvements in financial
performance.
The tornado diagram not only presents the effects of variations in single
assumptions, but also permits the display of the effects of changes in several
assumptions. For example, referring once again to Figure 9, it is possible to
ascertain how much net present value will decrease if burn hours decrease and
electricity prices fall. The compounded effect of variations in each of these
two assumptions is represented by the addition of the two bars shown on the
diagram. Therefore, the NPV in this instance decreases to approximately $4,000
from an
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 24
- - --------------------------------------------------------------------------------
Pennsylvania Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $8,990 Internal Rate of Return = 31% Simple Payback Period = 3
New Construction: Net Present Value = $2,764 Internal Rate of Return = 46% Simple Payback Period = 2.09
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 25
- - --------------------------------------------------------------------------------
Maryland Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $5,951 Internal Rate of Return = 24% Simple Payback Period = 3.62
New Construction: Net Present Value = $2,046 Internal Rate of Return = 38% Simple Payback Period = 2.52
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 26
- - --------------------------------------------------------------------------------
New Jersey Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $13,547 Internal Rate of Return = 40% Simple Payback Period = 2.39
New Construction: Net Present Value = $ 3,841 Internal Rate of Return = 59% Simple Payback Period = 1.66
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 27
- - --------------------------------------------------------------------------------
Ohio Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $7,470 Internal Rate of Return = 27% Simple Payback Period = 3.28
New Construction: Net Present Value = $2,405 Internal Rate of Return = 42% Simple Payback Period = 2.28
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 28
- - --------------------------------------------------------------------------------
California Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $12,462 Internal Rate of Return = 38% Simple Payback Period = 2.51
New Construction: Net Present Value = $ 3,585 Internal Rate of Return = 56% Simple Payback Period = 1.75
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 29
- - --------------------------------------------------------------------------------
Wisconsin Tornado Diagrams
Four Sensitivity Cases
- - --------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Base Case
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retrofit: Net Present Value = $3,129 Internal Rate of Return = 18% Simple Payback Period = 4.47
New Construction: Net Present Value = $1,379 Internal Rate of Return = 29% Simple Payback Period = 3.11
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
<PAGE>
Elgin MLBS 30
- - --------------------------------------------------------------------------------
initial value of $8,990 when the effects of variations in both assumptions are
evaluated.
For both the new construction and retrofit cases there are three tornado
diagrams for each state (total of six per state) that show the effects of
assumption variations on the NPV, IRR and simple payback period. In all cases,
even when one considers assumptions that reduce the financial performance of the
MLBS, the financial indicators are favorable.
The most significant difference that emerges when one examines the six states
together is the fact that the effect of the prevailing average commercial
electricity price on the financial performance is substantial. For example, NPVs
and IRRs are much higher for the states of California and New Jersey as opposed
to Ohio and Wisconsin. This difference in financial performance is critical as
it ultimately impacts the value of the MLBS to potential owners of distribution
rights.
III.C Potential MLBS Market Share and Product Value
We have estimated the potential value of the MLBS based upon the estimated size
of the new construction and retrofit markets presented in Section II, and the
simple financial model presented in Section III.A. In both cases we have assumed
that the MLBS will achieve a market penetration of 10 percent.(17) In both cases
the financial spreadsheets shown in Figures 7 and 8 are used to calculate the
net present value of the MLBS.
The results are shown in Tables 6 and 7. The potential value of the MLBS if
adopted for use in the retrofit market is astounding. In California alone, if 10
percent of the existing commercial floorspace can be captured, the value of the
MLBS is 113 million dollars. Similar results, showing a product value of tens of
millions of dollars, are obtained for other states as well. The new construction
market also promises significant value, although the values are lower due to the
fact that the analysis compares the MLBS against a competing high efficiency
- - ----------
(17) In the case of new construction a five year period is examined, while in
the case of retrofits we assume that by 2001 the MLBS will supplant inefficient
existing ballasts currently in service in 20 percent of the floorspace that
relies on fluorescent lighting.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 31
- - --------------------------------------------------------------------------------
electronic ballast. In total, the potential value of the MLBS given our
assumptions is as high as 281 million dollars for [ILLEGIBLE] states examined.
These product valuations can be used to estimate what the value of the MLBS is
to a purchaser. In simple terms, an entity evaluating the purchase of rights to
the MLBS will make an estimate of how many MLBS units it can sell. The
distributor will then assess how the energy savings will be distributed between
the entity installing the MLBS and itself. For example, in the case of new
construction projects in California the MLBS has a net present value of
approximately 14 million dollars over a five year period, if it is installed in
ten percent of the floorspace constructed. In the early years a distributor
might provide an installation incentive by offering a building owner a reduced
cost or by negotiating some type of shared savings arrangement. By using MLBS
value estimates the distributor can determine what types of contractual
arrangements are most sensible.
Table 6
New Construction Market Size and MLBS Value Over a Five Year Period
==================================================
Market Size NPV
State (Millions ft^2) (1999 $000)
--------------------------------------------------
California 77.54 13,916
Maryland 23.84 2,439
New Jersey 25.38 4,875
Ohio 31.72 3,814
Pennsylvania 32.78 4,530
Wisconsin 16.55 1,141
==================================================
Notes: 1) Market size estimates are developed assuming a 10%
penetration rate.
2) MLBS value is NPV calculated using new construction
base case assumptions.
DRAFT
THE ECONOMICS RESOURCE GROUP. INC.
<PAGE>
Elgin MLBS 32
- - --------------------------------------------------------------------------------
Table 7
Retrofit Market Size and MLBS Value
==================================================
Market Size NPV
State (Millions ft^2) (1999 $000)
--------------------------------------------------
California 220.20 113,396
Maryland 65.78 16,176
New Jersey 75.92 42,501
Ohio 127.19 39,262
Pennsylvania 89.57 33,273
Wisconsin 49.61 6,415
==================================================
Notes: 1) 10% penetration rate assumed and inefficient
ballasts are targeted.
2) MLBS value is NPV calculated using retrofit base
case assumptions.
Distributors of the MLBS can use these and other marketing strategies. For
example, they could set a higher up-front cost for the ballast and then
guarantee the savings over a period of time. That is the seller assumes the
operating risk. Marketers who are utility subsidiaries might have to adopt
whatever arrangement is required by their state public utility commission under
a mandated demand side management program. It may be that significant
expenditures will be required in order to gain a foothold in the market prior to
having an opportunity to realize significant profits. Therefore, the potential
product values calculated in this report should be considered as upper bounds.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
<PAGE>
Elgin MLBS 33
- - --------------------------------------------------------------------------------
IV. ELECTRICITY INDUSTRY RESTRUCTURING AND MLBS MARKET POTENTIAL
Electricity industry restructuring can both positively and negatively impact the
potential sales of the MLBS. On the one hand, competition should lead to lower
prices and lower prices will erode the electricity savings benefits associated
with the installation of the MLBS. On the other hand, power marketers and
utilities will see the MLBS as an element of a total energy supply package that
can be used to capture customers. Furthermore, there is no indication that state
demand side management and energy conservation programs are going to be
eliminated. While they may receive less emphasis, some type of government
mandated program will continue in most states for the next 5-7 years. Given
these facts, we predict that electricity industry restructuring will have a net
positive impact on the marketability of the MLBS in the near term, but will
require a marketing strategy that can adapt and adjust as state and federal
regulation continue to change.
The electric industry transition from a completely regulated vertically
integrated industry, to a structure where electricity is supplied competitively,
is turning out to be slower than anticipated and somewhat disjointed. While in
48 states regulators have or are currently considering moving to retail
competition, only 12 have formerly enacted competition, and of these, nine have
built in delay mechanisms that provide significant advantages to the existing
utilities. In fact only California will have a truly competitive retail market
by the close of this year, but others are likely to emerge.(18) The pace though
is uncertain.
The profits from the retail sale of electricity to the residential and small
commercial markets are likely to be small and there is no barrier-to-entry.
Anyone with two or three computers can be a marketer. In many states, the
existing utility distribution company will still be the dominant retail marketer
three years hence. Competition is more likely to emerge in the large commercial
and industrial sectors, but the profit margins for retailing electrons is not
large. Where the money will be made is in the delivery of ancillary services,
such as energy efficiency equipment, micro-turbines, and advanced cable and
communication technologies. Some experts are
- - ----------
(18) Massachusetts and Rhode Island have retail markets, but incumbent utilities
are favored in the early years. Pennsylvania currently permits retail choice for
some customers, although full retail choice will not be available until the year
2000.
DRAFT
THE ECONOMICS RESOURCE GROUP, [NC.
<PAGE>
Elgin MLBS 34
- - --------------------------------------------------------------------------------
predicting that the profit margins in these ancillary areas may be 4-5 times
greater than the sale of the electricity.
Government intervention in energy conservation programs is continuing in two
guises: i) Mandated utility DSM--these mandates can stem from regulation or they
can stem from restructuring legislation or ii) Federal environmental programs
such as EPA's Green Lights. Mandated DSM dropped precipitously between 1994-1996
and will continue to fall, albeit at a slower rate. (see Figure 3) However,
overall, state and federal government mandated DSM is still a $2 billion per
year program and plays an important role in about one-third of the states. Most
states that have restructured have included provisions in their legislation
establishing a fee on the distribution wires. The proceeds from this fee are to
be used to support DSM investments.
In the next three-four years, the electric distribution companies will still be
the dominate deliverer of energy-efficient equipment, either through mandated
DSM or through marketing strategies driven by competitive pressures--with the
latter likely to get stronger over time. Even in the states which are proceeding
with retail competition, new utility subsidiaries will retain a significant
proportion of the new market. Utility subsidiaries that are, or will be
marketing electrons, will respond to the threat and onset of competition in
order to retain existing market share. However, these utility subsidiaries will
face competition for customers, and this competition will raise the value of
ancillary technologies, such as the MLBS.
The reason why is simple. Initially marketers will try to offer the lowest
priced electrons by doing a better job of buying low, but everyone is
subscribing to the same data services and will have the same electricity
purchasing options. In the next stage--which is what we see now--marketers will
try to differentiate themselves by offering more complex pricing packages. Some
will offer to take less money now and more later, others will offer different
prices at different times of the day and still others will guarantee certain
prices. But since all the players will become aware of each other's strategy,
this too will result in margins being bid down and differences eliminated.
Therefore, the only remaining source of profits is to sell ancillary
services--such as energy-savings. That is compete not on price, but on the
ability to lower bills. Hence a growing market for the MLBS.
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Important conclusions that should be drawn from the current electricity industry
restructuring are first that markets are in transition, but are transitioning to
a world that should be more favorable, as opposed co less favorable, for the
MLBS. Second, the value of the MLBS system to a retail electricity company is
positive except in those states that have limited growth, low electricity
prices, no state mandated DSM and no likelihood of retail competition in the
next five years. We believe that the subset of states that may fit this
definition is very small. Finally, there is likely to be a stronger market in
those states that adopt competition and thus ELGIN can demand more profitable
contracts in those areas than in states without competition. (while electricity
prices will go down faster in those states. this trend will be offset by the
added value of having exclusive rights to technologies, such as the MLBS)
IV.A Energy Conservation and Demand Side Management (DSM)(19)
DSM became popular as a component of state regulatory board mandated Integrated
Resource Planning (IRP) undertaken by utilities during the most recent 20 years.
As a function of this process. DSM expenditures that resulted in the reduction
of future demand faced by an electric utility, would be weighed against
investments in expensive new electricity plant capacity. In many cases it was
relatively easy to identify numerous ways in which electricity demand and
consumption could be reduced by making modest invests in energy conservation
measures and load management strategies. Table 8 provides examples of the
numerous programs available in a subset of U.S. states and identifies the
mechanisms used to encourage customers to take advantage of these programs. As
can be seen in Table 8, rebates and loans have been the primary incentive
devices employed to induce customers to make an effort to save energy. These
programs became ubiquitous during the late 1980s and continued receiving strong
support through the early 1990s.
DSM programs continue to play a role in shaping the demand for electricity, but
in recent years significant declines in program expenditures have occurred that
some attribute to the move toward electricity industry competition.(20) The EIA
has
- - ----------
(19) In this report energy conservation pro grams and load management are
collectively referred to as DSM.
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Table 8:
Examples of State Energy Conservation and Demand Side Management Programs
<TABLE>
<CAPTION>
=====================================================================================================
Demand Side Management Programs
-----------------------------------------------------------------------------------
State Load Management Fuel Switching Other
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California A, E, T A, C, P Off peak cooling
Maryland A, T, X, U, Z Curtailable rates, cool storage, custom rebates
New Jersey A, T A Cool storage
Ohio T
Pennsylvania A, T
Wisconsin W, A, R, T, Z, U W, A, C, P, G Statewide motor discounts
- - -----------------------------------------------------------------------------------------------------
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
Demand Side Management Programs
-----------------------------------------------------------------------------------
State Rebates Loans Shared Savings Grants or Giveaways
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California H, W, L, C, P, M
Maryland H, W, L, C, P, M, X H, L, P, M X
New Jersey H, W, L, P, M
Ohio H, W, L, M L, P, M
Pennsylvania
Wisconsin H, W, L, C, P, M, Y, X H, W, L, C, P, M H, W, L, C, P, M X
- - -----------------------------------------------------------------------------------------------------
Key:
A Air Conditioning R Irrigation
C Cooking T Interruptible rates
E EMS U Time of use rates
C Gas Engines W Water heating
H HVAC X Energy audits
L Lighting Y Energy-efficient appliances
M Motors Z Energy efficient new construction/design
P Industrial Process
- - -----------------------------------------------------------------------------------------------------
</TABLE>
Source: Utility Regulatory Policy in the United States and Canada, NARUC, 1996.
recently reported that: "In the search of cost savings, utilities are
reassessing approaches to energy conservation and peak load reduction. In many
cases, they are opting to discontinue or reduce the emphasis on these
programs."(21) Given that the peak demand for ballasts occurred just after the
peak spending on DSM programs was recorded, it is clear that DSM program
spending played a significant role in establishing the demand for new, high
efficiency lighting ballasts. Although
- - ----------
(20) This finding is investigated in detail in an April 10, 1998 "Report on
Electronic Ballast DSM Rebate Research," Lawrence Berkeley National Laboratory.
(21) EIA Press Release, January 7, 1998, "Demand-Side Management Programs:
Utilities Shift Focus, Reduce Spending."
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recently spending has decreased, it is likely that these reductions will level
off and we may see this trend reversed in the next decade.
For example, in the states of California, Pennsylvania and Massachusetts the new
legislation that paved the road to electricity industry restructuring includes a
non-bypassable "wires" charge that will be collected and used to establish a
fund for continued DSM. In Massachusetts and California either existing agencies
or newly formed entities will be granted the authority to administer these funds
in order to preserve the benefits associated with DSM. In most states, the
proposed restructuring legislation has many references to collecting funds to
continue DSM programs. The delivery or decision institutions will change, and
the role of government may change still further, but utility DSM programs will
still play a major role for the next 5-7 years.
Even if DSM programs continued to be scaled back this would not reduce many
utilities' interest in DSM. As mentioned earlier, utilities that continue to
distribute electricity can use DSM as a marketing tool to differentiate
themselves as a more comprehensive provider of services. At the same time, power
marketers will see DSM as an equally attractive means of luring customers away
from incumbent utilities by similarly offering comprehensive supply packages
that capitalize on DSM as a means of reducing customer load and creating
electricity savings that can be to some extent "shared" with the customer. DSM
will become part of a total energy offering where the most savvy supplier will
recognize that the name of the game will be lowering energy costs as opposed to
offering the lowest price for electrons.
IV.A.1 Other Energy Conservation Programs
The U.S. EPA launched its Green Lights Program in 1991 with the goal of
establishing a voluntary energy-efficiency program that identified opportunities
where an organization could save money while simultaneously improving the
environment. During the past 6 years the program has grown considerably, and as
of 1996, 1.3 billion square feet of building space had undergone lighting
upgrades. (retrofits) In addition more than 6 billion additional building square
footage has been dedicated to the program. Table 9 shows the impact of Green
Lights in the states considered in this report and clearly shows California has
been a leader of the Green Lights program. Given that the majority of Green
Lights participants own commercial buildings, the total quantity committed to
the program represents
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more than 10% of the CBECS recorded 1995 commercial building stock of 53.7
billion square feet. Green Lights brochures indicate that more than 10 million
energy efficient ballasts have been installed as a result of the program or more
than 12% of the yearly quantity of ballasts shipped in recent years.
Table 9
Selected State Building Square Footage Committed and Upgraded for the
EPA Green Lights Program
==================================================
Building Square Footage (millions)
State Recruited Upgraded
--------------------------------------------------
Maryland 187 42
New Jersey 186 48
Ohio 205 60
Pennsylvania 384 56
Wisconsin 122 77
California 570 166
==================================================
Also at the federal level Executive Order #12902, Energy Efficiency and Water
Conservation at Federal Facilities, has led to increased efforts at federal
facilities to reduce energy consumption by 30%.(22) The Department of Energy has
led the implementation of this program through the Federal Energy Management
Program This program is implemented by using a performance shared savings
contract where energy service companies contract with the government to reduce
energy use at federal facilities. The companies are then permitted to recover
their capital costs through the energy savings and share with the government
additional savings. This pro gram is less specific than the Green Lights
program, and there is little detailed data on its impacts to date.
IV.B Electricity Industry Restructuring
Retail electricity competition is slowly becoming a reality in the United
States. Although federal efforts to introduce an acceptable bill mandating
competition have been lethargic, many states are taking action independent of
the federal
- - ----------
(22) The Energy Policy Act of 1992 established an required energy use reduction
at federal facilities of 20%, Executive Order #12902 increased the value to 30%.
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government.(23) Of the states considered for this report, Pennsylvania,
California and Maryland have taken significant action. California is now using a
market based system for the buying and selling of electricity for all customers,
while Pennsylvania began phasing in retail choice this year. Maryland has
written regulations, but awaits the passage of enabling legislation. The other
states have been evaluating competition, but have yet to put in place the
legislation or regulations required to begin the transition process. A brief
synopsis of the electricity industry restructuring activities underway for each
of our six states is presented below.
IV.B.1 Ohio
Retail electricity competition is not coming quickly to Ohio and in the near
term markets for the MLBS are limited to existing energy conservation product
distribution channels such as energy service companies or utilities. DSM has
been declining in recent years in Ohio and an existing formal state run program
is no longer being actively implemented. Although Ohio offers a sizable retrofit
market for the MLBS, the current lack of emphasis on these programs, coupled
with the slow move toward retail competition, may hamper the rate of penetration
by the MLBS. Off-setting this trend is a recognition by some utilities that it
makes good business sense to tie up their customers before restructuring becomes
a reality and energy efficiency investment is one way to develop more robust
ties to their customers. The threat of future competition is driving utilities
to carefully evaluate how to maintain their customer base.
As of this date comprehensive restructuring legislation has been introduced, but
its prospects for approval in 1998 are limited. The primary basis for the bill
that has currently been introduced is a draft study produced by a Ohio
legislative study committee late in 1997. The co-chairs of the Joint Select
Committee on Electric Utility Deregulation, Senator Johnson and Representative
Mead, formally presented the report to committee members on January 6, 1998 and
subsequently introduced companion bills based on the findings of the report. It
is expected that the legislature will hold hearings on the bill during this
year's legislative session.
- - ----------
(23) During May of 1998 the White House Administration released comprehensive
draft legislation that includes a not to exceed one mil per kwh charge to be
collected from generators and partly utilized to fund energy efficiency and
conservation. Although, there continues to be no expectation that legislation
will be passed in 1998.
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but because 1998 is an election year, other issues are expected to come to the
forefront preventing action on restructuring this year. If the legislature does
not act this year, retail competition will be delayed beyond the January 1, 2000
date.
The proposed measures set a five year transition period that would close on
December 31, 2004 and during which utilities would recover any stranded costs.
During the transition period generation prices would be capped and be precluded
from rising above the current price level for firm power. There has been no
indication that a mandated rate reduction will be prescribed. New electricity
marketers will thus be able to capture market share if they can supply electrons
at a lower cost than the current firm power price. This should stimulate
marketer and utility subsidiary interest in the MLBS.
There have been no concrete indications that restructuring legislation will
mandate DSM. It appears that an organization wishing to take advantage of energy
conservation opportunities will have to independently identify potential
retrofits and approach building owners and industrial businesses outside the
purview of a state run program. Although there is significant MLBS retrofit
potential in Ohio, in the near term capturing market share will be arduous.
IV.B.2 Wisconsin
Although Wisconsin is not moving rapidly to restructure its electricity
industry, the state Public Service Commission historically has aggressively
implemented DSM programs. Given that currently there is an electricity supply
shortage in Wisconsin, DSM programs continue to figure prominently in the state
and as a result the retrofit market will be an attractive outlet for the MLBS.
Wisconsin has most recently been pre-occupied with electricity supply shortages
leading to electric system reliability concerns. The Wisconsin Public Service
Commission, as well as the state legislature, have been focussing on increasing
a generation capacity and easing transmission constraints in order to solve the
current crisis. Against this backdrop, electricity industry restructuring
legislation has been shelved and the Wisconsin Governor subsequently signed a
reliability law on April 28, 1998.
Of interest is the fact that bills restricting utility and utility affiliate
activities were debated and died in committee, although it is thought that
similar measures will be
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introduced when the next legislative session commences in 1999. These bills
would have narrowed the restricitions placed upon public utilities who engage in
activities related to the sale and service of appliances. Additionally, these
bills would have only permitted utilities to carry-out energy conservation
services on property owned by the utility or its affiliates. Ensuring that any
entity, including utility subsidiaries, that desires to deliver these services
can do so is important for the MLBS.
At the same time Wisconsin Public Service Commission staff have issued an
Enunciation of Policy and Principles focussed on maintaining or enhancing
existing levels of energy efficiency. This policy enunciation identifies an
overall initial need of $100 million per year for energy efficiency market
development efforts. This level of funding is commensurate with current levels
of expenditures made by Wisconsin utilities. This policy reaffirms the
Commission's emphasis on energy efficiency, but many of the suggestions outlined
in the enunciation will require legislative approval. The extent to which the
proposed policies are adopted has yet to be determined although we believe that
Wisconsin will continue to push DSM investments
IV.B.3 California
California is a very promising market for the MLBS. The state has completely
implemented retail competition and at the same time has preserved energy
efficiency programs. Electricity marketers have been competing for the state's
largest retail loads and a new energy conservation fund has been in place since
the beginning of 1998. In short the MLBS can be distributed through existing
energy service companies as well as become an ancillary offering that marketers
(including utility subsidiaries) can package to provide a lower cost supply. Of
the six states considered in this report, California holds the largest market
potential for the MLBS.
The California competitive electricity market began operation on April 1, 1998.
The propensity for existing residential customers to switch electricity
suppliers has been minimal at this early stage. As of March 31, 1998, utilities
had processed more than 60,000 direct service access requests filed by customers
wishing to change their electricity supplier. The exact quantity that have
switched is unknown, although various sources have indicated that only around
25,000 customers opted for a new supplier when the retail market began
operation. California Public
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Utility Commissioner Gregory Conlon has been quoted saying that on a revenue
basis customers responsible for about 13% of the total market revenues have
switched suppliers. Large commercial and industrial customers have been targeted
initially by marketers because large volumes of sales are required to ensure
reasonable profits.
In these early stages, Enron, New Energy Ventures and PG&E Energy Services have
been the most active energy service providers in California. The California
Public Utility Commission (PUC) has issued hundreds of licenses that allow
energy service providers to operate in the state, but the PUC has estimated that
currently only around 40 alternative suppliers are able to actually supply
retail electricity service. Given that under the California restructuring law
existing customers have received a 10% reduction in their electricity bills
effective January 1, 1998, and that additional reductions are envisioned once
stranded costs have been collected, it may be several years before large numbers
of smaller consumers consider switching supplier. It is likely that the numbers
of marketers and distributors that remain after 3-5 years will be on the order
of 10-12 entities, not 40-50.
In spite of the fact that customers may only sluggishly start to change
suppliers, California has put in place a system that will allow energy service
companies to provide metering, billing and information services. Creating
competition in the delivery of these services is important for an alternative
provider that wants to offer a bundle of services. Allowing energy marketers to
offer metering services will be beneficial to a marketer that hopes to package
energy conservation with electricity supply; it permits the marketer to make
savings guarantees that can be verified using the marketer's own metering
equipment. The more flexibility that exists to demonstrate the impact of
installing an energy conservation measure like the MLBS, the more easily the
product can be marketed.
Even though marketers will be free to offer any variety of energy supply,
California will continue to gather funds to support energy efficiency and
conservation efforts. The California restructuring law established a schedule of
mandatory Investor Owned Utility (IOU) contributions in order to collect a
pre-specified sum that will go to an energy conversation fund. This fund will
be administered by the California Energy Resources Commission in accordance
with legal regulations established by the state legislature. As of January 1,
1998, IOUs began collecting monies from
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customers to supply this fund. It is expected that energy conservation programs
similar to those that have existed previously will continue in the future.
IV.B.4 Pennsylvania
Pennsylvania offers the MLBS considerable market potential, DSM programs are
continuing and hearty retail electricity competition is currently unfolding.
Electricity marketers are actively vying for existing utilities' loads, as
retail pilot programs begin in earnest. DSM programs will continue and in the
future electric distribution companies (existing local utilities that retain
ownership of transmission and distribution) will design and implement programs
funding them with monies collected pursuant to the statutorily mandated
non-bypassable charge. Therefore, Pennsylvania is a desirable state in which to
focus MLBS marketing efforts.
Pennsylvania has fully embraced electricity industry restructuring and continues
to actively review IOU transition plans and determine stranded cost recovery
levels. Prior to opening up the retail market to all customers, Pennsylvania has
chosen to use extensive retail pilot programs in the early transition years.
These programs initially allow limited amounts of customers to choose an
alternative supplier. Initial response to the pilot programs has been robust and
the programs established by the IOUs have been oversubscribed. By January 1,
2000, all customers will have the Option to switch electricity supplier.
Of particular interest in Pennsylvania is the so called "shopping credit." As
part of approving individual IOU restructuring plans, the Pennsylvania Public
Utility Commission has been establishing credits that are meant to ensure that
the electricity supply market will be competitive from day one. The credit is
essentially an amount, expressed in cents/kWh that is used as a benchmark
against which alternative suppliers can base their supply offerings. If the
supplier can provide electricity at a price below the shopping credit amount,
the customer is ensured savings. The shopping credit is set high enough so that
new electricity marketers can enter the market and profit. This mechanism
benefits new entrants at the expense of existing IOUs, although it will hasten
the advent of real competition.
Pennsylvania will continue to assess a non-bypassable renewable energy
development and energy conservation program charge of 0.23 cents/kwh for the
five years starting January 1, 1998. Electric distribution companies will
collect this
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charge. Each individual Pennsylvania is required to submit a plan outlining
the types of future programs that will be implemented using the funds. After the
first five years the PUC will evaluate whether or not to continue assessing the
charge as many believe that the demand for energy efficient products will
develop without incentive programs.
IV.B.5 New Jersey
New Jersey is moving to implement electricity restructuring, but has yet to pass
legislation. Historically the state has emphasized DSM programs, and in the
short term the MLBS could target these existing programs. Once restructuring is
completed, the existing high electricity prices will create an incentive for
marketers to attempt to cut consumer prices and offer innovative services.
Comprehensive restructuring legislation has been drafted, but has yet to be
introduced as of this date. It is expected that this legislation will be debated
during the current legislative session. The New Jersey Board of Public Utilities
(BPL) has been actively reviewing restructuring issues and issued a report in
early 1997 with specific recommendations. Since that time the BPU put in place
working groups to continue evaluating restructuring issues and to review utility
filings. Initial timetables called for complete customer choice by the year
2000. Much of the groundwork to establish competition has been laid in New
Jersey, and legislative action would finalize the implementation timetable.
The BPU has proposed to continue existing incentives for and funding of
conservation, efficiency and load management programs via a non-bypassable
distribution charge placed on all customers during the transition period. The
BPU hopes to rely more on market forces to provide energy conservation services,
but in the interim will continue to monitor developments and consider
intervention as needed to ensure continuation of these programs. Continuation of
these programs ensures an outlet for the MLBS.
IV.B.6 Maryland
Maryland has been actively pursuing electricity industry restructuring, but has
yet to put in place the legislation necessary to make it reality. Maryland has
an extensive history of supporting DSM programs and plans to continue support
for these programs as part of its electricity industry restructuring. As with
the
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majority of states examined in this report, the MLBS will find that existing and
future DSM programs offer an excellent distribution outlet while impending
electricity industry restructuring will ultimately strengthen marketing
opportunities.
In late 1997, the Maryland Public Service Commission (PSC) ordered the
introduction of retail competition beginning on July 1, 2000. As part of its
order the PSC outlined a comprehensive list of restructuring issues and
proposals directed at addressing these issues. The PSC also requested that the
legislature provide guidance on legal technicalities and provide any additional
authority the PSC may require to facilitate the transition to retail
competition. Although the PSC has actively supported competition, the Maryland
legislature adjourned in April 1998 without passing any electricity reform
legislation. Thus, the actual implementation schedule is currently uncertain,
but it is expected that restructuring legislation will pass in the next
legislative session. The PSC requires additional authorization to carry out any
program of electric industry restructuring.
As is the case with the other states examined in this report, initial PSC
restructuring proposals call for continued energy conservation programs funded
through non-bypassable charges assessed upon customers by electricity
distribution companies. The collection of these monies and their subsequent
dissemination ensure a short and long term distribution opportunity for the
MLBS.
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V. CONCLUSIONS
The MLBS is poised to enter and capture a significant share of the U.S.
commercial sector ballast market throughout the United States. Existing DSM
progams continue to emphasize the replacement of old, inefficient fluorescent
lighting systems while electricity industry restructuring is only beginning to
open-up new supply outlets for energy conservation technologies. In this report
we have established that: 1) the potential MLBS market size is very large, 2)
the MLBS represents an excellent investment under most conceivable sets of
circumstances, and 3) future uncertainties associated with electricity industry
restructuring should serve to strengthen the MLBS marketing potential,not
lessen it.
We have considered the two specific markets that will be of most interest to
distributors of the MLBS: 1) the commercial fluorescent lighting retrofit
market, and 2) the commercial building new construction market. The combination
of these two markets represent sales opportunities of more than 150 million MLBS
units. We have shown that the retrofit lighting market, driven by state and
federal energy conservation programs, offers substantial distribution potential.
Nationally half of the existing commercial buildings illuminated with
fluorescent lights, or some 23 billion square feet, employ ballasts that are
considerably less efficient than the MLBS. Of these 23 billion square feet, more
than 40% continue to use the least efficient ballast systems that were
commercially available in the U.S. prior to 1991. At the same time, the new
commercial building construction market also owners substantial market
opportunity for the MLBS. Each year some 2 billion square feet of new commercial
building space is constructed, and most of this space will be lighted with
fluorescent lights.
Through the use of economic analyses, we have established the attractiveness of
an investment in the MLBS. In each of the states examined, base case internal
rates of return are in all cases higher than 18%, and in the majority of cases
are between 20 and 50%. These results demonstrate conclusively that the MLBS is
a cost effective investment. Furthermore, when these analyses are sensitized,
the MLBS continues to be an excellent investment. We have also shown that the
potential value of the MLBS to consumers, based on its energy savings potential,
is on the order of hundreds of millions of dollars nationwide with only modest
market penetration. These types of economic results will help drive the demand
for the MLBS.
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Electricity industry restructuring is leading to shifts in who will demand
energy conserving products and how business arrangements to purchase these
products will be defined. The entrenched investor owned utility DSM program
offerings have declined recently as utilities sought to trim their costs and the
shifts in the electricity supply marketplace resulting from state restructuring
legislation take root. In the short term, these trends are reducing the demand
for energy efficient ballasts, but in the longer term there are clearly
significant quantities of fluorescent lamps that use inefficient magnetic
core-coil ballasts that are desirable retrofit targets for the MLBS. Once the
new state level energy conservation programs associated with electricity
industry restructuring take hold, demand for products like the MLBS will
increase.
The new energy supply packages that marketers, including distribution utilities
are beginning to offer will serve to enhance MLBS distribution opportunities.
The ease in which electricity marketers can enter the market will place downward
pressure on the prices of electricity and will push creative marketers to
develop energy supply packages that focus on lowering costs by combining energy
efficiency services with low cost electrons. These new developments will lead to
greater demand for the MLBS. Given that the ultimate number of electricity
marketers will decrease as the restructured electricity industry matures, Elgin
should attempt to form partnerships with those marketers who are likely to
survive, thus securing a long term outlet for its product.
Therefore we conclude that the optimal way to bring the MLBS to market is to
focus simultaneously on two outlets: In states that retain some form of
government mandated DSM--the existing electric utilities, and in those that have
committed to retail competition--electriciry marketers (we include utility
subsidiaries as well as new competitors in this category). The combination of
these two distribution outlets will maximize the visibility of the MLBS. In
other words, Elgin should develop a portfolio of customers as opposed to selling
distribution rights to one or two utilities. In all likelihood, the most
effective marketers may turn out to be utility subsidiaries, but Elgin should
attempt to stimulate competition for the right to distribute the MLBS and not
award such rights on a first come-first serve basis.
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Power Systems
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Ernest Orlando Lawrence Berkeley National Laboratory, April 10, 1998. Report on
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U. S. Code of Federal Regulations, 59 F.R. 11471, March 8, 1994. Executive Order
#12902, Energy Efficiency and Water Conservation at Federal Facilities.
Vorsatz D., L. Shown, J. Koomey, M. Moezzi, A. Denver and B. Atkinson, Ernest
Orlando Lawrence Berkeley National Laboratory, December 1997. Lighting Market
Sourcebook for the US.
Wisconsin Center for Demand-Side Research, 1995. Wisconsin's Statewide
Technical & Economic Potential.
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APPENDIX
A-1
Methodology Used to Estimate the Impact of Energy Conservation
Programs on the Fluorescent Lighting Retrofit Market
A methodology was developed to estimate the extent to which energy conservation
programs have penetrated the existing stock of commercial buildings. There are
four steps that were carried out to establish a reasonable estimate of the
extent to which existing energy conservation programs have penetrated the
existing stock of commercial buildings during the past 20 years: i) total square
footage of existing commercial buildings is determined, ii) the percentage of
square footage that currently have energy efficient ballasts is determined, iii)
an estimate of the distribution of energy efficient ballasts in existing
buildings--both electronic and high efficiency magnetic--is made, and iv) square
footage remaining to be retrofitted is estimated. In order to insure that the
results were reasonable this analysis relied on several data sources and, where
possible, the calculations were executed two different ways in order to ensure
accuracy of the results.
The primary data source for this analysis is the EIA's 1995 Commercial Buildings
Energy Consumption Survey (CBECS). This survey collects information on the
physical characteristics of commercial buildings, equipment use, conservation
features and practices, building use and occupancy patterns, and types and uses
of energy in buildings. This survey specifically asks building owners if energy
efficient ballasts are used in their building and compiles the responses in
order to create an extensive data base. Additional critical data sources are: i)
commercial building lighting use statistics compiled by the Lawrence Berkeley
National Laboratory (LBNL), ii) commercial building energy use by state compiled
by the EJA, iii) EIA's Electric Power Annual for 1997 iv) the Environmental
Protection Agency's (EPA) Green Light Program data, and v) specific energy
conservation program data compiled by individual state public utility
commissions and national organizations such as the Electric Power Research
Institute (EPRI) and the National Association of Regulatory Utility
Commissioners.
The ultimate goal of this analysis was to estimate the square footage of
commercial buildings in the states of interest that have yet to be retrofitted.
The CBECS does
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not collect data at the state Level, but instead evaluates by census division.
Figure 4 (see Section II) shows the percentage of commercial floorspace with
energy efficient ballasts by census division. In order to evaluate square
footage available in each state, additional analysis was required.
In the case of each state, commercial building square footage data was not
readily available. To surmount this problem the analysis used electricity
consumption in the commercial sector for the state as a starting point for
determining commercial building square footage in a particular state. The amount
of electricity consumed for lighting purposes is estimated by the CBECS to be
28%. This percentage multiplied by the total commercial building sector
electricity uses yields an estimate of electricity consumed for lighting only.
The LBL has calculated an average weighted energy intensity (KWh/ft^2/yr) for
lighting in commercial buildings that accounts for the different types of
commercial buildings in existence. This value of 3.6 KWh/ft^2/yr is divided into
the electricity consumption attributable to lighting to arrive at an estimate of
commercial building square footage in a particular state as of 1995. This
methodology works quite well; in the cases of California and Wisconsin
independent estimates of commercial building square footage were obtained and
differed from the calculated value by only a few percentage points.
Once the building square footage is determined it is straightforward to apply
the CBECS energy efficient ballast percentages to the square footage figures to
determine square footage yet to be retrofitted. Although this technique is
simple it does not provide any information about what the distribution of
energy efficient ballasts is in existing facilities. To estimate the percentage
of energy efficient ballasts that is electronic and the percentage that is high
efficiency magnetic required using data presented in Figure 1 which depicts how
the types of ballasts sold has varied over the last 20 years. Using these data,
and CBECS data on what percentage of existing building square footage has been
built since 1977, an estimate of percentages of magnetic core-coil, high
efficiency magnetic and electronic ballasts currently installed was developed.
In addition to this methodology, actual data on state energy conservation
programs in Wisconsin and California and EPA Green Lights data were used to both
check and attenuate the results.
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A-2
Project Financial Analyses: Tabular Results
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Project Sensitivity to Variation in Electricity Price Forecast
<TABLE>
<CAPTION>
Price Forecast Variation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
New Construction 90% 95% 98% 99% 100% 101% 102% 105% 110%
----------------------------------------------------------------------------------------------
Internal Rate California 50% 53% 55% 55% 56% 56% 57% 59% 62%
of Return Maryland 33% 35% 37% 37% 38% 38% 38% 40% 42%
New Jersey 53% 56% 58% 58% 59% 59% 60% 62% 55%
Ohio 37% 40% 41% 41% 42% 42% 43% 44% 47%
Pennsylvania 41% 44% 45% 46% 46% 47% 47% 49% 51%
Wisconsin 26% 27% 28% 29% 29% 30% 30% 31% 33%
Net Present Value California $ 3,077 $ 3,331 $ 3,483 $ 3,534 $ 3,585 $ 3,636 $ 3,686 $ 3,839 $ 4,093
Maryland $ 1,692 $ 1,869 $ 1,975 $ 2,010 $ 2,046 $ 2,081 $ 2,117 $ 2,223 $ 2,400
New Jersey $ 3,308 $ 3,575 $ 3,735 $ 3,788 $ 3,841 $ 3,895 $ 3,948 $ 4,108 $ 4,375
Ohio $ 2,015 $ 2,210 $ 2,327 $ 2,366 $ 2,405 $ 2,444 $ 2,483 $ 2,600 $ 2,795
Pennsylvania $ 2,338 $ 2,551 $ 2,679 $ 2,721 $ 2,764 $ 2,807 $ 2,849 $ 2,977 $ 3,190
Wisconsin $ 1,092 $ 1,235 $ 1,321 $ 1,350 $ 1,379 $ 1,408 $ 1,436 $ 1,522 $ 1,666
Payback Period California 1.94 1.84 1.79 1.77 1.75 1.73 1.71 1.37 1.59
Maryland 2.80 2.65 2.57 2.55 2.52 2.49 2.47 2.40 2.29
New Jersey 1.85 1.75 1.70 1.68 1.66 1.65 1.63 1.58 1.51
Ohio 2.54 2.41 2.33 2.31 2.28 2.26 2.24 2.17 2.07
Pennsylvania 2.32 2.20 2.13 2.11 2.09 2.07 2.05 1.99 1.90
Wisconsin 3.47 3.28 3.18 3.14 3.11 3.08 3.05 2.96 2.83
Retrofits
Inernal Rate of Return California 33% 36% 37% 37% 30% 38% 39% 40% 42%
Maryland 21% 22% 23% 24% 24% 24% 25% 26% 27%
New Jersey 35% 38% 39% 39% 40% 40% 41% 42% 44%
Ohio 24% 26% 27% 27% 27% 28% 28% 29% 31%
Pennsylvania 27% 29% 30% 30% 31% 31% 31% 32% 34%
Wisconsin 15% 16% 17% 17% 18% 18% 18% 19% 21%
Net Present Value California $10,313 $11,388 $12,032 $12,247 $12,462 $12,577 $12,892 $13,537 $14,611
Maryland $ 4,453 $ 5,202 $ 5,651 $ 5,801 $ 5,951 $ 6,101 $ 6,250 $ 6,700 $ 7,449
New Jersey $11,290 $12,419 $13,096 $13,322 $13,547 $13,773 $13,999 $14,676 $15,805
Ohio $ 5,821 $ 6,645 $ 7,140 $ 7,305 $ 7,470 $ 7,635 $ 7,800 $ 8,295 $ 9,120
Pennsylvania $ 7,188 $ 8,089 $ 8,629 $ 8,809 $ 8,990 $ 9,170 $ 9,350 $ 9,890 $10,791
Wisconsin $ 1,914 $ 2,522 $ 2,886 $ 3,008 $ 3,129 $ 3,251 $ 3,372 $ 3,737 $ 4,345
Payback Period California 2.79 2.64 2.56 2.53 2.51 2.48 2.45 2.39 2.28
Maryland 4.03 3.81 3.69 3.65 3.62 3.58 3.54 3.44 3.28
New Jersey 2.65 2.51 2.43 2.41 2.39 2.36 2.34 2.27 2.17
Ohio 3.65 3.45 3.35 3.31 3.28 3.24 3.21 3.12 2.97
Pennsylvania 3.34 3.16 3.06 3.03 3.00 2.97 2.94 2.85 2.72
Wisconsin 4.98 4.72 4.57 4.52 4.47 4.43 4.39 4.26 4.06
</TABLE>
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Project Sensitivity to Variation in Building Hours of Operation
<TABLE>
<CAPTION>
Hours of Operation
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Construction 3060 3230 3332 3366 3400 3434 3468 3570 3740
----------------------------------------------------------------------------------------------
Internal Rate California 50% 53% 55% 55% 56% 56% 57% 59% 62%
of Return Maryland 33% 35% 37% 37% 38% 38% 38% 40% 42%
New Jersey 53% 56% 58% 58% 59% 59% 60% 62% 65%
Ohio 37% 40% 41% 41% 42% 42% 43% 44% 47%
Pennsylvania 41% 44% 45% 46% 46% 47% 47% 49% 51%
Wisconsin 26% 27% 28% 29% 29% 30% 30% 31% 33%
Net Present Value California $ 3,077 $ 3,331 $ 3,483 $ 3,534 $ 3,585 $ 3,636 $ 3,686 $ 3,839 $ 4,093
Maryland $ 1,692 $ 1,869 $ 1,975 $ 2,010 $ 2,046 $ 2,081 $ 2,117 $ 2,223 $ 2,400
New Jersey $ 3,308 $ 3,575 $ 3,735 $ 3,788 $ 3,841 $ 3,895 $ 3,948 $ 4,108 $ 4,375
Ohio $ 2,015 $ 2,210 $ 2,327 $ 2,366 $ 2,405 $ 2,444 $ 2,483 $ 2,600 $ 2,795
Pennsylvania $ 2,338 $ 2,551 $ 2,679 $ 2,721 $ 2,764 $ 2,807 $ 2,849 $ 2,977 $ 3,190
Wisconsin $ 1,092 $ 1,235 $ 1,321 $ 1,350 $ 1,379 $ 1,408 $ 1,436 $ 1,522 $ 1,666
Payback Period California 1.94 1.84 1.79 1.77 1.75 1.73 1.71 1.67 1.59
Maryland 2.80 2.65 2.57 2.55 2.52 2.49 2.47 2.40 2.29
New Jersey 1.85 1.75 1.70 1.68 1.66 1.65 1.63 1.58 1.51
Ohio 2.54 2.41 2.33 2.31 2.28 2.26 2.24 2.17 2.07
Pennsylvania 2.32 2.20 2.13 2.11 2.09 2.07 2.05 1.99 1.90
Wisconsin 3.47 3.28 3.18 3.14 3.11 3.08 3.05 2.96 2.83
Retrofits
Internal Rate California 33% 36% 37% 37% 38% 38% 39% 40% 42%
of Return Maryland 21% 22% 23% 24% 24% 24% 25% 26% 27%
New Jersey 35% 38% 39% 39% 40% 40% 41% 42% 44%
Ohio 24% 26% 27% 27% 27% 28% 28% 29% 31%
Pennsylvania 27% 29% 30% 30% 31% 31% 31% 32% 34%
Wisconsin 15% 16% 17% 17% 18% 18% 18% 19% 21%
Net Present Value California $10,313 $11,388 $12,032 $12,247 $12,462 $12,677 $12,892 $13,537 $ 4,611
Maryland $ 4,453 $ 5,202 $ 5,651 $ 5,801 $ 5,951 $ 6,101 $ 6,250 $ 6,700 $ 7,449
New Jersey $11,290 $12,419 $13,096 $13,322 $13,547 $13,773 $13,999 $14,676 $15,805
Ohio $ 5,821 $ 6,645 $ 7,140 $ 7,305 $ 7,470 $ 7,635 $ 7,800 $ 8,295 $ 9,120
Pennsylvania $ 7,188 $ 8,089 $ 8,629 $ 8,809 $ 8,990 $ 9,170 $ 9,350 $ 9,890 $10,791
Wisconsin $ 1,914 $ 2,522 $ 2,886 $ 3,008 $ 3,129 $ 3,251 $ 3,372 $ 3,737 $ 4,345
Payback Period California 2.79 2.64 2.56 2.53 2.51 2.48 2.46 2.39 2.28
Maryland 4.03 3.81 3.69 3.65 3.62 3.58 3.54 3.44 3.28
New Jersey 2.65 2.51 2.43 2.41 2.39 2.36 2.34 2.27 2.17
Ohio 3.65 3.45 3.35 3.31 3.28 3.24 3.21 3.12 2.97
Pennsylvania 3.34 3.16 3.06 3.03 3.00 2.97 2.94 2.85 2.72
Wisconsin 4.98 4.72 4.57 4.52 4.47 4.43 4.39 4.26 4.06
</TABLE>
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Project Sensitivity to Variation in Discount Rate
Discount Rate Variation
---------------------------------------
New Construction 20% 15% 10% 6%
---------------------------------------
Internal Rate of Return California 56% 55% 56% 56%
Maryland 38% 38% 38% 38%
New Jersey 59% 59% 59% 59%
Ohio 42% 42% 42% 42%
Pennsylvania 46% 46% 46% 46%
Wisconsin 29% 29% 29% 29%
Net Present Value California $ 1,994 $2,668 $ 3,585 $ 4,571
Maryland $ 937 $1,407 $ 2,046 $ 2,733
New Jersey $ 2,170 $2,379 $ 3,841 $ 4,878
Ohio $ 1,184 $1,701 $ 2,405 $ 3,162
Pennsylvania $ 1,430 $1,996 $ 2,764 $ 3,591
Wisconsin $ 479 $ 861 $ 1,379 $ 1,937
Payback Period California 1.75 1.75 1.75 1.75
Maryland 2.52 2.52 2.52 2.52
New Jersey 1.66 1.66 1.66 1.66
Ohio 2.28 2.28 2.28 2.28
Pennsylvania 2.09 2.09 2.09 2.09
Wisconsin 3.11 3.11 3.11 3.11
Retrofits
Internal Rate of Return California 38% 38% 38% 38%
Maryland 24% 24% 24% 24%
New Jersey 40% 40% 40% 40%
Ohio 27% 27% 27% 27%
Pennsylvania 31% 31% 31% 31%
Wisconsin 18% 18% 18% 18%
Net Present Value California $ 5,732 $8,585 $12,462 $16,637
Maryland $ 1,260 $3,249 $ 5,951 $ 8,860
New Jersey $ 6,477 $9,475 $13,547 $17,933
Ohio $ 2,303 $4,494 $ 7,470 $10,675
Pennsylvania $ 3,347 $5,739 $ 8,990 $12,489
Wisconsin $ 678 $ 936 $ 3,129 $ 5,491
Payback Period California 2.51 2.51 2.51 2.51
Maryland 3.52 3.62 3.62 3.62
New Jersey 2.39 2.39 2.39 2.39
Ohio 3.28 3.28 3.28 3.28
Pennsylvania 3.00 3.00 3.00 3.00
Wisconsin 4.47 4.47 4.47 4.47
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THE ECONOMICS RESOURCE GROUP, INC.
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Project Sensitivity to Variation in Existing Ballasts' Electricity Demand
<TABLE>
<CAPTION>
Variation in Existing Ballasts' Electricity Demand
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
Retrofits 1.15 1.22 1.25 1.27 1.28 1.29 1.31 1.34 1.41
---------------------------------------------------------------------------------------------
Internal Rate of Reform California 27% 33% 36% 37% 38% 39% 40% 43% 48%
Maryland 16% 20% 23% 23% 24% 25% 26% 28% 32%
New Jersey 29% 25% 38% 39% 40% 41% 42% 45% 53%
Ohio 19% 23% 26% 27% 27% 28% 29% 31% 35%
Pennsylvania 22% 26% 29% 30% 31% 31% 32% 35% 39%
Wisconsin 11% 14% 16% 17% 18% 18% 19% 21% 24%
Net Present Value California $7,462 $ 9,962 $11,462 $11,962 $12,462 $12,962 $13,462 $14,963 $17,463
Maryland $2,466 $ 4,208 $ 5,254 $ 5,602 $ 5,951 $ 6,299 $ 6,648 $ 7,694 $ 9,436
New Jersey $8,294 $10,921 $12,497 $13,022 $13,547 $14,073 $14,598 $16,174 $18,801
Ohio $3,631 $ 5,551 $ 6,702 $ 7,086 $ 7,470 $ 7,854 $ 8,238 $ 9,390 $11,309
Pennsylvania $4,797 $ 6,893 $ 8,151 $ 8,570 $ 8,990 $ 9,409 $ 9,828 $11,086 $13,182
Wisconsin $ 301 $ 1,715 $ 2,564 $ 2,847 $ 3,129 $ 3,412 $ 3,695 $ 4,544 $ 5,958
Payback Period California 3.28 2.84 2.63 2.57 2.51 2.45 2.39 2.24 2.03
Maryland 4.74 4.10 3.80 3.70 3.62 3.53 3.45 3.23 2.92
New Jersey 3.12 2.70 2.50 2.44 2.39 2.33 2.28 2.13 1.93
Ohio 4.29 3.72 3.44 3.36 3.28 3.20 3.13 2.93 2.55
Pennsylvania 3.92 3.40 3.15 3.07 3.00 2.93 2.86 2.68 2.42
Wisconsin 5.87 5.08 4.70 4.58 4.47 4.37 4.27 4.00 3.61
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the interim
financial statements of Elgin Technologies, Inc. and Subsidiaries as at and for
the nine months December 31, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 250,697
<SECURITIES> 0
<RECEIVABLES> 1,376,102
<ALLOWANCES> 0
<INVENTORY> 740,002
<CURRENT-ASSETS> 2,550,987
<PP&E> 144,000
<DEPRECIATION> 128,000
<TOTAL-ASSETS> 2,651,571
<CURRENT-LIABILITIES> 13,142,565
<BONDS> 0
0
0
<COMMON> 16,723
<OTHER-SE> (10,507,717)
<TOTAL-LIABILITY-AND-EQUITY> 2,651,571
<SALES> 5,427,379
<TOTAL-REVENUES> 5,427,379
<CGS> 5,881,131
<TOTAL-COSTS> 2,658,664
<OTHER-EXPENSES> 160,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 694,146
<INCOME-PRETAX> (3,897,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,897,502)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
