U.S. Securities and Exchange Commission
Washington D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JULY 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_________ TO ________
COMMISSION FILE NO. 0-10841
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ENERGY OPTICS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
----------------------------------------------
NEW MEXICO 85-0273340
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
29425 C.R. 561, TAVARES, FLORIDA 32778
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER (352) 742-5010
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE WHICH REGISTERED
- ------------------- --------------------------------------
COMMON STOCK, $.001 PAR VALUE OTC
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NONE
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15 (d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. (1) YES [X]
NO [ ] (2) YES [X] NO [ ]
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405
OF REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [ ]
STATE THE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR. NONE.
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE
BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN THE PAST 60
DAYS. (SEE DEFINITION OF AFFILIATE IN RULE 12B-2 OF THE EXCHANGE ACT).
AGGREGATE MARKET VALUE OF THE 534,219 SHARES (AFTER GIVING RETROACTIVE EFFECT
TO THE 1 FOR 10 REVERSE SPLIT) HELD BY NON-AFFILIATES OF THE ISSUER AS OF
NOVEMBER 14, 1997, COMPUTED BY USING THE AVERAGE OF THE ASK AND BID PRICES ON
NOVEMBER 14, 1997, OF $2.31 AND $2.19 IS AS FOLLOWS:
AVERAGE $2.25/SHARE X 534,219 SHARES = $1,201,993
THE NUMBER OF SHARES OUTSTANDING OF THE COMPANY'S COMMON STOCK AS OF NOVEMBER
14, 1997, IS 13,289,814. THERE ARE APPROXIMATELY 750 SHAREHOLDERS OF RECORD AS
OF NOVEMBER 14, L997.
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ENERGY OPTICS, INC. AND SUBSIDIARIES
FORM 10-KSB
<CAPTION>
TABLE OF CONTENTS
PART I PAGE
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Item 1. DESCRIPTION OF BUSINESS 1
Item 2. DESCRIPTION OF PROPERTY 2
Item 3. LEGAL PROCEEDINGS 3
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 3
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 3
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 3
Item 7. FINANCIAL STATEMENTS F-1 to F-15
Item 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 9
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 9
Item 10. EXECUTIVE COMPENSATION 11
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 13
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
PRIOR BUSINESS OF THE COMPANY
Energy Optics, Inc., a New Mexico corporation (NASDAQ OTC: EOPT), was organized
in 1979 and developed various proprietary and patented technologies for
industrial and consumer application. Several advanced electro-optical devices
and systems were developed including a gas well monitoring system for Phillips
Petroleum that resulted in approximately $1 million in revenue. However, when a
large German company bought the Philips subsidiary that was involved, that
revenue was eliminated. Other technologies developed but never marketed include
a system control device that allows an operator to fly in an airplane or
helicopter above a line of oil or gas platforms and remotely control valves and
instruments. Also, patents were obtained on a silverless x-ray film using
microwaves to develop picture negatives as well as a color transfer process that
permits transfer of color images directly onto fabric, walls, or billboards.
Additionally, a passive warning system for vehicle drivers and locomotive
engineers was developed that detects an operator experiencing drooping eyes,
nodding head, or open eyes that are not blinking, indicating unconsciousness.
This evolved from the Company's earlier development of a
"Pilot-Loss-of-Consciousness Alarm" for the U.S. Air Force. Further, a remote
scanning device was developed for detection and analysis of hail sent by data
packet transfer to weather reporting centers for the Atmospheric and
Oceanographic branch of the U.S. Department of Commerce.
The Company was not able to realize any substantial revenue or realize any
profit margins sufficient to maintain an active status and it was unsuccessful
in securing funding sufficient to aggressively market these devices and systems.
It also was unable to enlist the resources of a partner concern necessary to
take product development from the prototypical stage into production and then
properly promote and market its various products through distribution to the
end-user.
After becoming inactive and ceasing all initiatives to pursue funding for
production and marketing, the Company was de-listed from the NASDAQ Small Cap
listing. However, as an inactive over-the-counter stock, the Company's
principals nevertheless maintained the Corporation's books, kept the Company in
good standing and retained the Company's status as fully reporting to the
Securities and Exchange Commission.
The businesses of the acquired Companies are more fully described in Item 6
"Management Discussion and Analysis or Plan of Operation".
In order to proceed with its acquisition strategy, the Company recognized that
it had to reduce the overwhelming debt that the Company owed. A settlement
agreement was reached to eliminate the Small Business Administration debt
(including accrued interest) by a combination of cash payments, issuance of
stock and forgiveness of debt.
The remainder of the debt has been disposed of by forgiveness of some debt and
interest and an exchange for stock. (Most of this debt was to Directors of the
Company.) With a clean slate, the Company believes that it can resume its
research and development of products as well as assist its subsidiaries in
achieving profitability.
-1-
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RECENT BUSINESS ACTIVITY
In June 1997, the Company's principals began discussions with an unincorporated
business organization (UBO) that owned certain assets and that had rights to
purchase or assign purchase of certain other assets. These discussions resulted
in the Company proposing the possibility of acquiring certain assets from the
UBO or its assigns for the purpose of re-establishing the Company as a viable
business. The Company, upon further review and due diligence, was made aware of
certain specific assets owned or assignable by the UBO including technologies
that appeared compatible with those of the Company, as well as other diverse
holdings with market potential. The UBO owned a 21-acre parcel of commercial
real estate in Tavares, Florida with 78,000 square feet of warehouse space and
3,500 square feet of office space containing furniture, equipment, and fixtures.
In July 1997, management entered into negotiations with the UBO on the purchase
of assets or rights to purchase assets in exchange for common stock of the
Company. On August 20, 1997, the Company acquired certain of the UBO's business
assets including the Tavares, Florida real estate, buildings, and equipment and
controlling stock interest (help by parties related to the UBO) of a specialty
food company in a transaction totaling approximately $3.6 million. This
transaction was subsequently amended on October 10, 1997. The Company filed for
foreign corporation registration with the State of Florida and moved its
corporate offices from New Mexico to Tavares, Florida where it occupied the
offices that were purchased on August 20, 1997. It has since leased a portion of
its unused office and warehouse space to other entities.
In September and October 1997, subsequent to the fiscal period ending July 31,
1997, the Company acquired two additional business interests from the UBO, both
of which are development stage enterprises. The Company recognizes the risk
associated with development stage companies not yet generating significant
revenue. However, in performing due diligence on the businesses it acquired,
management believes that these companies are near the beginning of potentially
substantial revenue streams and can achieve profitability in the near future.
The Company's only employees at July 31, 1997, were its officers and directors
and they were not compensated. The Company had contracted some outside services.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative offices, laboratory/research facilities consisting
of approximately 300 square feet, were located in Las Cruces, New Mexico, where
all of its administrative and research activities were conducted. These
facilities were provided by Edward N. Laughlin, a principal shareholder, at no
cost to Energy Optics, Inc.
The Company did not own nor lease any other real estate until August 20, 1997,
at which time it acquired the real estate more fully described in Item 1 and its
administrative and research activities were moved to Tavares, Florida. The
property located at 29425 CR 561, Tavares, Florida, consisting of 78,000 square
feet of warehouse space and 3,500 square feet of office space containing
furniture, equipment, and fixtures, is considered adequately maintained and
insured. While this facility is occupied primarily by the Company and its
subsidiaries, a small portion of the warehouse and office space is leased to
affiliated entities. Property taxes on the facility are estimated at $24,632
annually. The property was acquired under an agreement for deed, subject to the
payment of a non-recourse
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promissory note in the amount of $258,900, payable in equal annual installments
of $64,725, plus interest at 10% annually, due on December 31st of each calendar
year until paid in full.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company or any of its subsidiaries is
subject are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market. Since May
of 1986, it has been listed in the "pink sheets". Currently, the Company is
listed on the National Association of Securities Dealers' Electronic Bulletin
Board under the symbol EOPT. Individual systems may add other symbols for
access. The high and low bid for each of the last several quarters after giving
retroactive effect to the 1 for 10 reverse stock split is listed below:
QUARTER ENDED HIGH BID LOW BID
----------------- -------- -------
January 31, 1996 $1.60 $ .60
April 30, 1996 $1.60 $ 1.00
July 31, 1996 $1.60 $ .90
October 31, 1996 $1.00 $ 1.00
January 31, 1997 $1.10 $ 1.00
April 30, 1997 $2.00 $ 1.80
July 31, 1997 $1.60 $ .10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) PLAN OF OPERATION
As a result of its acquisitions in August, September and October 1997, the
Company has changed its narrow focus to a much broader, diverse group of
operations. These acquisitions and the Company's operating plans are summarized
as follows, and are subject to modification from time to time without notice by
decision of Management and may not reflect actual results:
LEAN PROTEIN FOODS, INC. AND SUBSIDIARY
In its August 20, 1997, transactions, the Company acquired controlling interest
in Lean Protein Foods, Inc. (LPF) which had recently purchased 100% of the
authorized stock of Wildwood Ostrich Ranch, Inc. (WWOR). LPF is a recently
formed specialty food company that has contracted with two meat plants for
processing yearling ostrich produced by WWOR. Both LPF and WWOR are development
stage enterprises. The ranch is a fully integrated facility containing a herd of
approximately 1,900 ostriches, incubation and hatching facilities, and grow-out
colony pens.
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LPF has developed a line of specialty food products utilizing highly evolved
processing technologies. Marinated and wood roasted ostrich medallions, filets,
and appetizers have been developed and are being produced for sale to specialty
food distribution companies. The ostrich hides, which are a by-product of the
livestock processing, are sold to tanners for ostrich leather which is generally
recognized as highly durable and exotic.
Management believes that it has the expertise and sufficient knowledge of the
meat and specialty food industry, affiliations with distributors, restaurants,
specialty food brokers, and retail industry specialists to provide marketing
advantages to LPF that may be unavailable to other ostrich producers. Further,
management believes that it possesses certain proprietary technological
innovations in ostrich processing and an in-depth knowledge of distribution
pathways that may provide for certain advantages in market entry timing.
LPF is focused on the specialty food segment in both food service and high-end
retail for distribution of its products. It is utilizing trade shows, trade
publications, brokerage and end-user requests for product information to advance
its products into specialty food distributors' inventories. Management is
currently in discussion with a Mexican concern that is importing ostrich
livestock into Mexico from a Texas exporter with whom management has had prior
dealings. A joint venture whereby LPF would supply the Mexican company with
product for the next two to three years while the Mexican firm develops its
livestock herd is scheduled for negotiation in late November 1997.
LPF intends to concentrate on expansion of its specialty food line into food
service and retail establishments through the remainder of 1997 and through
1998. Management believes that acceptable profit margins exist within the
specialty and game meat niche of this growth segment of the food category and
will focus on building brand identity for its WWOR products. While operation of
an agri-business is diverse in nature from the prior business of the Company,
the Company's management nevertheless believes that it has the capacity and
experience to engage in the specialty food business. Further, brand equity
appreciation can result in the value of the LPF assets being appraised in
multiples of its operating cash flow.
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CASEY HOLDINGS, INC.
On October 10, 1997, the Company concluded discussions on the acquisition of up
to 40% of the authorized stock of Casey Holdings, Inc. (CHI) in a non-binding
contract. The primary business of CHI and its subsidiaries, as a late stage
start-up company, is to provide a three-day, high adventure, total immersion
educational and space flight experience program similar to that provided by the
National Aeronautics and Space Administration (NASA) to astronauts training for
space flight. The "high adventure" segment of the travel business has
experienced significant growth over the past several years. The planned
three-day adventure, primarily targeting the corporate executive market within
the travel industry, consists of one day of realistic astronaut ground flight
training to be conducted by former NASA astronauts as well as a one-day VIP,
behind the scenes, "Gold Tour" of the NASA facility at Kennedy Space Center in
Titusville, Florida. The final day of the planned excursion is anticipated to
culminate in a three-hour flight aboard a NASA equipped DC-9 aircraft that will
perform 12 to 15 "parabolic arcs" which will allow the participants to
experience complete weightlessness. This type of flight would be identical to
those conducted by NASA to train astronauts for weightless space flight.
Management believes that this complete educational and weightless flight
experience program is the first of its type ever offered commercially to the
general public.
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To date, two of the largest travel agencies in Japan have requested, in writing,
an exclusive contract to market the $6,000 to $10,000 packages to their
corporate clients. Further, one of the largest corporate incentive travel
agencies in the United States has requested the exclusive contract for the
United States corporate client market; they anticipate the ability to place
5,000 U.S. customers within the first year. Additionally, Research Data Service
(RDS) of Tampa, Florida has projected that there exists globally a 60,000 -
70,000 customer market annually within the corporate executive market for this
type of high adventure and educational experience.
The Company expected to finalize the acquisition of CHI (or successor) later in
1997.
MICROGRAVITY AVIATION COMPANY
On October 10, 1997, the Company contracted to acquire a 20% interest in
Microgravity Aviation Company (MAC), a subsidiary of CHI that is scheduled to
operate the flight portion of the three-day package. MAC will also offer the use
of the DC-9 aircraft to the film and movie production community as a flying film
studio for producing weightless scenes for use in movies, commercials, and
corporate videos. The MAC aircraft may also be used for conducting microgravity
research performed by universities and research companies. MAC recently produced
a ten-minute video that dramatically demonstrates the range of services offered
by MAC for distribution to over 300 film and movie production companies. The
executive management and consulting staff of CHI and MAC is comprised of highly
credentialed professionals including former NASA astronauts as well as former
airline, Federal Aviation Administration (FAA), and NASA executives. The
management of MAC has executed a lease of the specially NASA equipped aircraft
and the effective operation of the company is predicated upon MAC's ability to
take possession of this aircraft. Nevertheless, management is confident that the
Company's stock interest in MAC is well represented with capable and
knowledgeable management and that the risk/reward ratio to the Company is
acceptable and balanced by the Company's other business interests.
AMERICAN MILLENNIUM CORPORATION
On October 9, 1997, the Company contracted to purchase 80% of the issued and
outstanding stock of American Millennium Corporation (AMC). This development
stage enterprise has several distinct similarities to certain of the former
businesses of the Company. Several of the commercial applications of products
developed by AMC may possibly have mutual compatibilities with certain patented
technologies developed by the Company prior to its recent purchases. AMC has
developed a monitoring device utilizing off-the-shelf technologies that are
transparent to various radio spectrum protocols. Railroad, trucking companies,
and other companies that have a need to monitor a moving shipment of high value
cargo are able, via Global Positioning Systems (GPS), to determine exactly where
the cargo shipment is including both direction and speed. The data packet
transfer from the unit to the monitoring station then provides information on
over twenty functions pertinent to the condition of the cargo. Damage loss
claims run into the millions of dollars each year to railroad companies alone.
Location of freight is an ongoing logistical challenge for railroad companies.
This system allows the transporter to identify a problem before possible
irreparable damage or loss occurs as well as the ability to receive real time
data transferred on the actual location of the cargo. AMC is in the process of
completing a successful rolling test with Union Pacific Railroad (UPR) and has
agreed to furnish additional UPR refrigerated railcars with the device. UPR
maintains approximately 35,000 miles of track and has over 8,000 refrigerated
railcars that could benefit from utilization of this monitoring
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service. Not only is revenue available in hardware sales of the unit itself, but
also in recurring monthly residual income from data packet transfer charges
between the railcar and monitoring station. A detailed record of conditions
aboard a specific shipment can then be furnished on disk to the customer filing
a damage claim as proof of existing conditions during the time that the shipment
is in a transporter's possession.
Additionally, AMC has entered into a reseller agreement with Orbcomm who has
successfully launched the first two of its expected 26 to 28 low earth orbit
(LEO) satellites scheduled to be in orbit by fall of 1998. Orbcomm currently
receives 500-600 inquiries for reseller applications per month according to a
company spokesperson. AMC is one of approximately thirty companies chosen by
Orbcomm as resellers to date. Since the Orbcomm LEO's are launched from a
Pegasus rocket from underneath the wing of a McDonnell Douglas DC-10, launch
costs are which is considerably less expensive than a ground based launch.
Therefore, AMC anticipates the ability to offer highly competitive data
transmission services. This should allow AMC to globally expand its monitoring
service to a wide range of applications including remote oil and gas wells and
offshore platforms, as well as truck fleets and ocean going cargo ships and
individual containers aboard those vessels. The Orbcomm reseller contract will
also allow for AMC's utilization of satellite transponder space to offer other
competitively priced wireless communications services.
AMC has other proprietary products that are under sensitive requirements of
nondisclosure by the party negotiating purchase of the devices. When
appropriate, AMC will release details of that joint venture proposal. The
Company believes that the 80% acquisition of AMC should add considerable value
that would be reflected in consolidated financial statements for the Company as
revenues and possible near-future earnings by AMC begin to accrue. AMC has
heretofore operated its business with moderate overhead requirements and it
represents a minimal ongoing cost to the Company relative to the revenue
potential achievable over the next six months.
COMPANY EXPANSION INTO DIVERSE BUSINESS
Management has also identified other existing opportunities whereby it may be
able to acquire substantial interest in or controlling interest of certain
business entities that, in the opinion of management, represent potentially
viable and undervalued assets. As noted previously in Item 1 "Prior Business of
the Company", Energy Optics, Inc. has heretofore positioned itself as a highly
technical and narrowly focused developer of specific technologies. Having
previously been less than successful within such a narrow technical scope of
business activity, management believes that expansion of the Company's business
into more diverse operations may allow for a greater, more diverse balance and
substantial appreciation of the Company's business which management believes is
in the best interests of the shareholders. The Company has retained the services
of Tatum CFO Partners, LP (TATUM), to provide financial oversight of its
business interests. In management's opinion, TATUM is a qualified consortium of
accountants, CPA's, and former chief financial officers (CFOs) from a wide
spectrum of small and large corporations. TATUM provides financial analysis,
accounting services, and hands-on financial oversight for numerous other
unrelated companies, as well.
Additionally, the Company's management either has on staff, or has access to, a
diverse group of professionals and consultants who have extensive backgrounds in
wireless technology, aerospace, engineering, agri-business, food processing,
public relations and marketing, or other fields of expertise relative to the
operation of the recently acquired companies and the Company's former business.
By
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the end of the next fiscal year, the Company and its subsidiaries anticipate
employing 50-60 people in their operations. The Company has noted a significant
and developing trend in start-up business ventures, which have been formed by
experienced principals with accomplished professional backgrounds in various
fields. In certain cases, their management has identified significant market
opportunities, has performed research and development, and has test marketed
their products or services in order to validate the findings of market studies
indicating a viable and potentially profitable market for those particular
products or services. Management believes that its ability to provide ancillary
support to these ventures that have various needs outside of their core business
expertise, by providing them with accounting services, financial oversight,
technical support, capital formation, marketing and public relations, should
result in the negation of duplicity, a lowering of overhead to each company, and
an increase in efficiency at the operational level. Management has, to date,
contacted for acquisitions wherein there existed mutual consent that broad
financial oversight and/or direct operational control of the Company needed to
be put in place thereby enhancing the ability of the company being acquired to
concentrate on its primary product or service.
MANAGEMENT'S GOALS AND OBJECTIVES
Management will seek to identify companies that have developed substantial niche
or broad market products with significant expected revenue and profit potential.
Compatibility with the Company's present initiatives or the ability to be
integrated into the Company's asset portfolio as the result of management's
ability to provide appropriate technical, financial, and marketing support are
among the criteria used to evaluate the suitability of a potential acquisition
candidate.
The goal of management is to provide a centralized infrastructure of support
systems, appropriate and unique to each particular business. By utilizing the
Company's management and base of consultants and experts, as well as the
financial and analytical oversight provided by TATUM, the Company believes it
can achieve profitability.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has had a liquidity problem. In order to maintain the Company's
viability, the Company has issued restricted stock in exchange for equity
capital and also to reduce debt. Additionally, the Company has postponed payment
and relied on the Officers of the Company to serve with no salary, and to
personally pay expenses of the Company. Forgiveness of debt has also helped the
Company to continue prior to the August 20, 1997, transactions.
The fiscal years ended July 31, 1997 and 1996, reflected no operating income.
The income for 1997 was $318,980 or $.37 per share as contrasted with a loss of
$36,025 or $.05 per share the previous year. During the current fiscal year,
common shares outstanding increased from 7,808,152 in 1996 to 8,778,694 in 1997.
This increase and related forgiveness of debt were responsible for the
difference of income and loss as well as the reduction of current liabilities
from $425,737 in 1996, to $9,397 a year later. The per share data included above
has been presented after giving retroactive effect to the 1 for 10 share reverse
stock split consummated on August 18, 1997.
ITEM 7. FINANCIAL STATEMENTS
Begin on next page.
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CONTENTS
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INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Deficiency in Assets F-5
Consolidated Statements of Cash Flows F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-15
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Dohan and Company 7700 North Kendall Drive, #204
Certified Public Accountants
Miami, Florida 33156-7564
A Professional Association Telephone: (305) 274-1366
Facsimile: (305) 274-1366
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Energy Optics, Inc.
Tavares, Florida
We have audited the accompanying consolidated balance sheet of Energy Optics,
Inc. and subsidiaries as of July 31, 1997, and the related consolidated
statements of income, deficiency in assets and cash flows for the year 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 audit. The financial statements of Energy Optics, Inc.
as of July 31, 1996 (as restated), were audited by other auditors whose report
dated October 11, 1996, on those statements included an explanatory paragraph
that described the possibility that the Company might not be able to continue in
business as discussed in Note 9 to the financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Energy
Optics, Inc. and subsidiaries as of July 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, and has a deficiency in assets that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 9. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Dohan and Company, PA
Certified Public Accountants
Miami, Florida
September 19, 1997, except as to Note 10,
which is November 14, 1997
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ENERGY OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==========================================================================================================
(RESTATED
NOTE 8)
JULY 31, 1997 1996
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ASSETS
CURRENT ASSETS
Cash $ 536 $ 465
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TOTAL ASSETS $ 536 $ 465
===========================================================================================================
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES
Note payable - Small Business Administration (Note 2) $ - $ 152,561
Accounts payable - 7,991
Interest payable, unrelated parties (Note 2) - 30,792
Accrued expenses and other liabilities 7,897 -
Notes payable to officers/stockholders (Note 7) 1,500 190,425
Due to officers/stockholders (Note 7) - 43,968
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,397 425,737
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CONTINGENCIES (NOTES 9 AND 10)
DEFICIENCY IN ASSETS (NOTES 5, 7 AND 10)
Common stock, $.001 par value, 25,000,000 shares authorized,
shares issued and outstanding 877,869 in 1997 and 780,815 in 1996 878 781
Additional paid-in capital 4,068,284 3,970,950
Deficit (4,078,023) (4,397,003)
- -----------------------------------------------------------------------------------------------------------
TOTAL DEFICIENCY IN ASSETS (8,861) (425,272)
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS $ 536 $ 465
===========================================================================================================
SEE ACCOMPANYING NOTES.
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ENERGY OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
===========================================================================================================
(RESTATED
NOTE 8)
JULY 31, 1997 1996
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REVENUES $ - $ -
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Amortization - 7,007
Research and development - 1,985
Promotion - 5,097
Professional 8,886 4,036
Other general and administrative 5,483 6,798
Interest 3,869 11,102
- -----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 18,238 36,025
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEMS (18,238) (36,025)
- -----------------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEMS - GAIN ON EXTINGUISHMENT OF DEBT Small Business
Administration, net of income taxes of $47,967 (Note 2) 91,387 -
Related parties, net of income taxes of $69,025 (Note 7) 128,839 -
Tax benefit from utilization of net operating loss carryforward 116,992
- -----------------------------------------------------------------------------------------------------------
TOTAL EXTRAORDINARY ITEMS - NET GAIN ON
EXTINGUISHMENT OF DEBT 337,218 -
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 318,980 $ (36,025)
===========================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(PRIMARY AND FULLY DILUTED) 853,821 773,194
===========================================================================================================
(LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS
(PRIMARY AND FULLY DILUTED) $ (0.02) $ (0.05)
===========================================================================================================
NET INCOME (LOSS) PER COMMON SHARE
(PRIMARY AND FULLY DILUTED) $ 0.37 $ (0.05)
===========================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
-F-4-
<PAGE>
<TABLE>
<CAPTION>
ENERGY OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF DEFICIENCY IN ASSETS (AFTER GIVING RETROACTIVE EFFECT
TO A 1 FOR 10 REVERSE STOCK SPLIT ON AUGUST 18,
1997)
========================================================================================================
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED TOTAL
DESCRIPTION SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1995 $ 706,270 $ 706 $ 3,792,948 $ (4,360,978) $ (567,324)
Issuance of common stock
under option to redeem (Note 5) 20,000 20 99,980 - 100,000
Stock exchanged for debt
reduction (Note 7) 54,545 55 59,945 - 60,000
Capitalized debt (Note 7) - - 18,077 - 18,077
Net loss for the year ended
(Restated Note 8) (36,025) (36,025)
- --------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1996
(RESTATED NOTE 8) 780,815 781 3,970,950 (4,397,003) (425,272)
Stock exchanged for debt (Note 7) 95,170 95 95,076 - 95,171
Stock exchanged for
services (Note 7) 1,884 2 2,258 - 2,260
Net income for the year ended 318,980 318,980
- --------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1997 877,869 $ 878 $ 4,068,284 $ (4,078,023) $ (8,861)
========================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
-F-5-
<PAGE>
<TABLE>
<CAPTION>
ENERGY OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================================================================================
(RESTATED
NOTE 8)
FOR THE YEARS ENDED JULY 31, 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 318,980 $ (36,025)
Adjustments to reconcile net income (loss) to net
cash used provided by operating activities:
Amortization - 7,007
Forgiveness of debt (337,218) -
Increase (decrease) in liabilities:
Accounts payable (7,991) 1,876
Interest payable, unrelated parties - (7,102)
Accrued expenses and other liabilities 7,89 (5,763)
Due to officers/stockholders - 23,301
Stock exchanged for interest on note payable 3,743 -
Stock exchanged for payment of operating expenses
2,260 -
- -----------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES
(12,329) (16,706)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts
Proceeds from related parties 16,400 16,850
- -----------------------------------------------------------------------------------------------------
RECEIPTS FROM FINANCING ACTIVITIES 16,400 16,850
- -----------------------------------------------------------------------------------------------------
Disbursements
Principal payments on note payable to Small Business Administration 4,000 -
- -----------------------------------------------------------------------------------------------------
DISBURSEMENTS FROM FINANCING ACTIVITIES 4,000 -
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,400 16,850
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 71 144
CASH AND EQUIVALENTS - BEGINNING 465 321
- -----------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS - ENDING $ 536 $ 465
=====================================================================================================
SUPPLEMENTAL DISCLOSURES:
Common stock issued for settlement of debt to Small
Business Administration $ 40,000 $ -
Common stock issued in exchange for note payable to
officer/stockholder $ 55,170 $ 60,000
Capitalized debt to officer/director $ - $ 18,077
=====================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
-F-6-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Energy Optics, Inc. (EOI), a New Mexico Corporation, was organized in
1979 and has provided engineering services relating to research and
development activities for outside parties as well as internal product
development. A controlling interest (80%) of Material Sciences, Inc.
(MSI) was acquired through an EOI stock issuance in November 1993.
Quantum Research, Inc. (QRI) was incorporated in May 1994, with EOI
owning 80% and the 20%-minority shareholder in MSI owing 20%. The
initial business of MSI and QRI was to include the development and
licensing of new technical products, however, these companies have
been dormant in recent years.
Additionally, EOI owns 27.5% of International Diagnostics, Inc. (IDI),
a New Mexico corporation, which was organized to develop and market
diagnostic applications in science, medicine and industry. Edward N.
Laughlin, president, director and major stockholder of EOI, controls
47% of the outstanding stock of IDI. IDI has not engaged in any
business activities since the assets of IDI were charged-off in July
31, 1993.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Energy
Optics, Inc. and its subsidiaries, Material Sciences, Inc. and Quantum
Research, Inc. All significant intercompany transactions and balances
of Energy Optics and subsidiaries (the Company) have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers
all liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements are stated at cost. Depreciation
of equipment and leasehold improvements are provided over estimated
useful lives ranging from five years to seven years, using
straight-line and declining balance methods.
PATENT RIGHT COSTS AND RELATED AMORTIZATION
Costs for patent rights including patent application costs were
recorded at cost. Patent right costs and prior patent costs were
amortized over periods approximating seventeen years using the
straight-line method. During the year ended July 31, 1996, the Company
charged-off all remaining patent application costs attributable to a
driver fatigue indicator and alarm as amortization expense.
INCOME TAXES
Income taxes are computed under the provisions of the Financial
Accounting Standards Board (FASB) Statement No. 109, Accounting for
Income Taxes. The Companies file separate, not consolidated income tax
returns with its subsidiaries. MSI filed a final income tax return for
the year ended December 31, 1995. QRI has not filed tax returns and
has had no significant activity.
-F-7-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT TAX AND RESEARCH TAX CREDITS
Investment tax and research tax credits are recognized as a reduction
of the provision for income taxes in the year in which utilized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
NET INCOME (LOSS) PER SHARE
Income (loss) per share of common stock is based on the weighted
average number of shares and common share equivalents (if dilutive)
outstanding during each period. Available stock options at July 31,
1997 and 1996, were anti-dilutive and not considered common stock
equivalents for purposes of computing income or loss per common share
(see Note 6). Outstanding common shares were retroactively adjusted to
give the effect to the 1 for 10 reverse stock split more fully
described in Note 10.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts in the prior year financial statements have been
reclassified for comparative purposes to conform to the presentation
of the current year financial statements.
NOTE 2. BORROWINGS
The note payable to the Small Business Administration (SBA), which
matured February 1995, provided for annual interest at 8% and was
secured by cash, accounts receivable, inventories, equipment, and
patents. Lacking working capital to repay the note, in August 1996,
the Company made an offer to the SBA to compromise the outstanding
debt.
In October 1996, the SBA accepted the offer to compromise the
outstanding debt in the amount of $152,561 plus interest of $30,792,
for $4,000 plus 40,000 restricted shares of the Company's common stock
in full satisfaction of the debt. The balance in excess of the market
value of the stock issued and payment made in the aggregate amount of
$139,354 has been recognized as a gain on extinguishment of debt and
is included in the income statement for the year ended July 31, 1997,
as an extraordinary item, net of related income taxes.
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial assets and note payable
to officer/stockholder at July 31, 1997, approximate fair value due to
the short maturity of the instruments.
-F-8-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 4. INCOME TAXES
Deferred income taxes (benefits) are provided for certain income and
expenses which are recognized in different periods for tax and
financial reporting purposes. Sources of temporary differences and the
resulting assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 CURRENT 1997
DEFERRED TAX PERIOD DEFERRED TAX
ASSETS CHANGES ASSETS
------------- ----------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 3,684,926 ($915,887) $ 2,769,059
Applicable tax rate 34% 34% 34%
------------- ----------- ------------
1,252,875 ( 311,401) 941,480
Investment credit carryforwards 14,326 ( 8,986) 5,340
Research credit carryforwards 61,799 ( 44,256) 17,543
------------- ----------- ------------
1,329,000 ( 364,643) 964,363
Valuation allowance ( 1,329,000) 364,643 ( 964,363)
------------- ----------- ------------
$ - $ - $ -
============= =========== ============
Statement of Financial Accounting Standards No. 109 requires the use
of an asset and liability method of accounting for income taxes.
Statement No. 109 provides for the recognition and measurement of
deferred income tax benefits based on the likelihood of their
realization in future years. A valuation allowance has been
established since it is likely that a portion of the deferred income
tax benefits will not be realized.
Differences in pretax accounting losses and income tax losses are
attributable to the following for the years ending July 31, 1997 and
1996:
1997 1996
------------- -------------
Debt forgiveness $ - $ 18,077
Nondeductible expenses for income tax reporting - 2,716
------------- -------------
$ - $ 20,793
============= =============
</TABLE>
-F-9-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 4. INCOME TAXES (CONTINUED)
At July 31, 1997, the Company has, for income tax reporting purposes,
unused credits and operating loss carryforwards, which may be applied
against future income and income tax that expire as follows:
NET
YEAR INVESTMENT RESEARCH OPERATING
EXPIRING CREDIT CREDIT LOSS
-------- ----------- --------- -----------
1998 $ 417 $ - $ 696,127
1999 1,087 - 149,587
2000 3,836 - -
2001 - - 415,478
2003 - 2,070 236,398
2004 - 3,080 184,928
2005 - 12,393 63,564
2006 - - 199,030
2007 - - 332,429
2008 - - 394,641
2009 - - 38,252
2010 - - 24,086
2011 - - 34,539
----------- --------- -----------
$ 5,340 $ 17,543 $ 2,769,059
=========== ========= ===========
There were ownership changes in the Company subsequent to year-end
(see Note 10), as defined in Section 382 of the Internal Revenue Code.
These changes will materially limit the Company's net operating loss
carryforwards based upon the change in control.
NOTE 5. COMMON STOCK
During the year ended July 31, 1996, the shareholders of the Company
approved the increase of the Company's authorized common stock from
10,000,000 shares to 25,000,000 shares. The Company has since filed
with the State of New Mexico amended articles of incorporation
identifying such increase.
In October 1996, the Company issued 40,000 restricted shares of common
stock at $3.71 per share to the SBA to satisfy a note payable in the
amount of $148,561, plus accrued and unpaid interest on the note in
the amount of $30,792 (See Note 2). The Company also issued 55,171
restricted shares of common stock at $3.80 per share to officers and
stockholders of the Company to satisfy $210,422 of notes payable plus
accrued interest of $3,869 (See Note 8). The Company issued 1,884
shares of common stock as payment for $2,260 of patent costs.
The Company contracted with a corporate minority shareholder to
provide promotional services and marketing counsel as well as
management, public relations and marketing services to MSI and QRI
(See Note 7). The president of this corporate minority shareholder
also serves as president of MSI and QRI.
As more fully described in Note 10, on August 18, 1997, the Company
reverse split its common stock 1 share for 10 shares. These
consolidated financial statements reflect the retroactive effect of
the reverse stock split.
-F-10-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 6. STOCK OPTIONS
The Company had granted to Edward N. Laughlin, president, director and
majority shareholder, stock options in return for advancing working
capital to the Company and providing prior year bank loan guarantees.
At July 31, 1997, there are 16,500 shares under option at an exercise
price of $2.50 per share which expire April 5, 1999.
In connection with the issuance of 19,608 shares of common stock to
Mr. Laughlin during the year ended July 31, 1995, the Company granted
an option to purchase an additional 19,608 shares of common stock of
which 2,941 shares could be purchased at $6.80 per share which expired
in August 1996, and 16,667 shares could be purchased at $1.90 per
share which expired in November 1996.
NOTE 7. RELATED PARTY TRANSACTIONS
Notes payable to officers/stockholders consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Note payable - Edward N. Laughlin $ 1,500 $ 185,675
Note payable - Molesworth and Associates - 3,000
Note payable - Steven Ward - 1,750
----------- ----------
$ 1,500 $ 190,425
=========== ==========
</TABLE>
Notes payable to officers/stockholders, were unsecured, due on demand
and provided for annual interest at 8%. In October 1996, the Company
issued restricted shares its common stock in partial settlement of
notes payable to Edward N. Laughlin, Molesworth and Associates, Inc.
(Gordon Molesworth) and Steven M. Ward in the amount of 48,787 shares,
4,286 shares and 2,097 shares, respectively. The balance of the notes
payable in excess of the market value of the stock issued totaling
$159,120, including $3,869 of unpaid accrued interest, was forgiven.
This amount is included in the income statement for the year ended
July 31, 1997, as an extraordinary item "Gain on extinguishment of
debt related parties", net of related income taxes.
For the years ended July 31, 1997 and 1996, officers and stockholders
of the Company continued to advance funds to the Company. Gross
advances amounted to $14,400 and $16,600, respectively. The Company
incurred unpaid accrued interest of $224 and $127, respectively.
In October 1996, the Company and Edward N. Laughlin agreed that
$38,744 in accrued rent and other expenses would be forgiven. For the
year ended July 31, 1996, the Company had capitalized indebtedness of
the Company resulting from unpaid accrued interest in the amount of
$18,077.
The Company contracts with a corporate minority shareholder to provide
promotion services and marketing counsel, as well as management,
public relations and marketing services to MSI and QRI. The president
of this corporate minority shareholder also serves as president of MSI
and QRI. During the year ended July 31, 1996, the Company incurred
expenses of $5,097.
As described in Note 5, these expenses have been paid through the
issuance of stock. During the year ended July 31, 1996, this corporate
minority shareholder advanced QRI $250.
-F-11-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
At July 31, 1997 and 1996, advances from officers/stockholders of the
Company other than notes payable were as follows:
1997 1996
--------- ---------
Due to Edward N. Laughlin for:
Office rent and mileage reimbursement $ - $ 38,744
Due to other minority stockholders for:
Promotion expense - 5,097
Accrued interest - 127
--------- ---------
$ - $ 43,968
========= =========
NOTE 8. PRIOR PERIOD ADJUSTMENT
An excess accrual of interest was recorded on the note payable
resulting in the overstatement of accrued liabilities and interest
expense of the prior year. This overstatement has been corrected,
resulting in the following changes to accumulated deficit as of July
31, 1996, and the related Statement of Income for the year then ended:
<TABLE>
<CAPTION>
ACCUMULATED NET
DEFICIT LOSS
<S> <C> <C>
As previously reported $ 4,416,310 $ 55,332
Overstatement of accrued interest on note
payable to the Small Business Administration ( 19,307) (19,307)
------------ -----------
Adjusted balance $ 4,397,003 $ 36,025
============= ===========
</TABLE>
NOTE 9. OPERATING AND ECONOMIC CONDITIONS AND MANAGEMENT'S PLANS
The Company's consolidated financial statements for the year ended
July 31, 1997, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The
Company has suffered recurring losses before forgiveness of debt,
consequently there is an accumulated deficit at July 31, 1997, as well
as a working capital deficiency. Furthermore, liquidity conditions
have limited the ability of the Company to market its products and
services at amounts sufficient to recover its operating and
administrative costs. As a result, the Company has incurred losses
before extraordinary items of $18,238 and $36,025 for the years ending
July 31, 1997 and 1996, respectively.
In addition, the Company has used substantial working capital in its
operations. As of July 31, 1997, current liabilities exceed current
assets by $8,861. Cash used by operations of the Company for the years
ended July 31, 1997 and 1996 amounted to $12,329, and $16,706,
respectively. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets, or the amounts or classifications of liabilities that
might be necessary in the event the Company cannot continue in
existence.
Management planned for dealing with the conditions described above and
the Company pursued the acquisitions described in Note 10 "Subsequent
Events". These recent acquisitions and changes in the Company's
business may significantly affect the Company's deficiency in assets
and result in a more favorable outcome if management is successful in
implementing the changes to the Company's business.
-F-12-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 10. SUBSEQUENT EVENTS
REVERSE STOCK SPLIT
On August 18, 1997, the Board of Directors authorized a 1 for 10
reverse stock split for all of the then issued and outstanding shares
of the Company's common stock. As a result of the reverse stock split,
the Company's issued and outstanding shares of common stock were
reduced from 8,778,694 to 877,869. As a requirement of the reverse
stock split, all shares must be returned by the existing shareholders
and new shares will be issued no later than November 20, 1997. Any
fractional shares will be redeemed for a cash payment based upon the
average closing price of the Company's common stock for the immediate
week. The consolidated financial statements give retroactive effect to
this reverse stock split.
STOCK AND ASSET PURCHASE
Pursuant to a Stock and Asset Purchase Agreement, dated August 20,
1997, as amended on October 10, 1997, the Company acquired certain
assets from ABAC Services, Inc., a Nevada corporation (ABAC), American
Global Equity Services, an unincorporated business trust located in
Tavares, Florida (Ages) and three individual holders (Holders) of
common stock of Lean Protein Foods, Inc., a Delaware corporation
(LPF), in exchange for the issuance of 5,263,145 shares of the
Company's common stock. The assets were comprised of the following:
1. Real estate valued at $1,700,000, originally conveyed by
Ages to ABAC on August 1, 1997, in connection with an
agreement for deed signed on that date. The agreement for
deed provided that Ages will transfer certain real estate in
Lake County, Florida in fee simple, once ABAC provided
1,591,000 shares of the Company (Energy Optics, Inc.) as a
down payment and satisfies a promissory note in the original
principal amount of $258,900, with interest payable
quarterly at ten percent (10%) per annum. Principal payments
of $64,725 are payable in annual installments on December
31st of each calendar year. The note is without recourse to
any individual and is secured solely by the assets of ABAC.
However, in the event of default, clear title to the
property could not be obtained. The Company issued the
1,591,000 shares of its common stock to Global Investments
Ltd., Trustee, as instructed by Ages, and agreed to accept
the assignment and the financial responsibility to satisfy
the note payable. The assets were valued based upon an
independent valuation for the real estate.
2. Property and equipment valued at $88,708 was conveyed by
ABAC. As instructed by ABAC, the Company issued 634,550
shares of its common stock to the three shareholders,
officers and directors of ABAC, who were immediately named
officers and directors of the Company. The shares issued
included a portion for finding and acquiring the other
properties as described in the paragraph above.
3. A transfer of 2,800,000 shares of LPF (an 80% interest). The
total value of LPF was estimated at $2,609,800, resulting in
a value of approximately $2,087,840 being conveyed by the
Holders. The assets were valued at a negotiated amount in
the case of the common stock of LPF, whose principal asset
is its wholly-owned subsidiary, Wildwood Ostrich Ranches,
Inc. The Company issued 3,037,495 shares of its common stock
to the Holders or their assigns as a result of this portion
of the acquisition.
No affiliated relationships existed among the management or affiliates
of the Company and the management or affiliates of Ages, ABAC or the
LPF Holders at the time of acquisition.
-F-13-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 10. SUBSEQUENT EVENTS (CONTINUED)
As a result of the issuance of the 5,263,145 shares of the Company's
common stock to purchase the assets, a change in control occurred.
After the closing of the acquisition of the assets, the original
stockholders of the Company owned 877,869 shares (i.e., approximately
14% of the total issued and outstanding shares), and Global
Investments, Ltd., ABAC and the LPF Holders collectively owned
5,263,145 shares (i.e., approximately 86% of the total issued and
outstanding shares). Also upon closing the acquisition of the
assets, the original Board of Directors of the Company appointed the
new members to the Board of Directors then resigned. As a result of
the change in control and acquisition of the facility, the executive
offices of the Company were moved from Las Cruces, New Mexico to
Tavares, Florida.
REGISTRATION OF SHARES
The Company is in the process of completing and filing Form SB-2 with
the United States Securities and Exchange Commission for registration
and sale to the general public of 1,250,000 shares of its common
stock. The proceeds from the sale of these securities would be used to
continue funding the Company's subsidiaries' developmental efforts.
ACQUISITION OF MICROGRAVITY AVIATION COMPANY, INC.
Based upon negotiations which began in July 1997, on October 10, 1997,
the Company acquired 2,000,000 shares (valued at approximately
$531,160) representing a 20% interest in Microgravity Aviation Company
(MAC) from Harto Ltd., a 39% shareholder of the Company at that time,
in exchange for 1,000,000 shares of the Company's common stock. MAC, a
Florida corporation, is a subsidiary of Casey Holdings, Inc., (CHI)
and is scheduled to operate the flight portion of a three-day
high-adventure space-flight experience package. MAC will also offer
the use of the DC-9 aircraft to the film and movie production
community as a flying film studio for producing weightless scenes for
use in movies, commercials, and corporate videos. The MAC aircraft may
also be used for conducting microgravity research performed by
universities and research companies. The executive management and
consulting staff of CHI and MAC is comprised of highly credentialed
professionals including former NASA astronauts as well as former
airline, Federal Aviation Administration (FAA), and NASA executives.
The management of MAC has leased a specially NASA equipped aircraft
and the effective operation of the company is predicated upon MAC's
ability to take possession of this aircraft.
ACQUISITION OF AMERICAN MILLENNIUM CORPORATION
As a result of negotiations begun in July 1997, on October 9, 1997,
the Company contracted to purchase 8,000,000 shares (valued at
approximately $3,500,000) representing 80% of the issued and
outstanding stock of American Millennium Corporation (AMC), a Delaware
corporation, primarily from Global Investments, Ltd., a 30%
shareholder of the Company, in exchange for 5,100,000 shares of the
Company's common stock. The products designed by AMC have several
distinct similarities to certain of the former products developed by
the Company. Several of the commercial applications of products
developed by AMC may possibly have mutual compatibilities with certain
patented technologies developed by the Company in prior years.
Additionally, AMC has entered into a reseller agreement with Orbcomm
who has successfully launched the first two of its expected 26 to 28
low earth orbit (LEO) satellites scheduled to be in orbit by fall of
1998. AMC is one of approximately thirty companies chosen by Orbcomm
as resellers to date. Since the Orbcomm LEO's are launched from a
Pegasus rocket from underneath the wing of a McDonnell Douglas DC-10,
which is considerably less expensive than a ground based launch, AMC
anticipates the ability to offer highly competitive data transmission
services. This should allow AMC to globally expand its monitoring
service to a wide range of applications including remote oil and gas
wells and offshore platforms, as well as truck fleets and ocean going
cargo ships and individual
-F-14-
<PAGE>
ENERGY OPTICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 10. SUBSEQUENT EVENTS (CONTINUED)
containers aboard those vessels. The Orbcomm reseller contract will
also allow for AMC's utilization of satellite transponder space to
offer other competitively priced wireless communications services.
AMC has other proprietary products that are under sensitive
requirements of nondisclosure by the party negotiating purchase of the
devices.
CASEY HOLDINGS, INC.
On October 10, 1997, the Company concluded discussions with Ages on
the acquisition of up to 40% of the authorized stock of Casey
Holdings, Inc. (CHI) in a non-binding contract. The primary business
of CHI and its subsidiaries, as a late stage start-up company, is to
provide a three-day, high adventure, total immersion educational and
space flight experience program similar to that provided by the
National Aeronautics and Space Administration (NASA) to astronauts
training for space flight.
The Company expected to finalize the acquisition of CHI (or successor)
later in 1997.
STOCK ISSUED FOR SERVICES
In September 1997, the Company executed a two-year agreement with
Internet Stock Maket, Inc. (ISM) to provide to the Company, on a
non-exclusive basis, financial and investor relations services, public
relations services and corporate communications services. The
agreement provides for a fee to ISM in the amount of $60,000 per year
payable $5,000 upon execution and $5,000 the first day of each month
beginning October 1, 1997. Should the Company decide to terminate this
agreement for any reason, the Company shall give 10 days written
notice to ISM. The Company further agreed to issue to ISM warrants to
purchase 150,000 shares of common stock at $.46 per share. The
warrants were exercisable for a period of five years, and on November
7, 1997, the warrants were excercised. In accordance with the
agreement, the Company filed an S-8 registration on behalf of ISM.
On October 15, 1997, the Board of Directors authorized the issuance of
898,000 shares of common stock under a Consultant Services Plan as
compensation for consultation services in connection with new business
opportunities, promotion of the Company to the public and
professionals, personnel recruitment, acquisition opportunities,
spin-off transactions, restructuring the capitalization of the
Company, and other matters as requested. The Consultant Services Plan
is not subject to any of the provisions of the Employee Retirement
Income Security Act of 1974 and is not qualified under Sec. 401 of the
Internal Revenue Code of 1986, as amended. Form S-8 was filed with the
Securites and Exchange Commission on October 24, 1997, relative to
this offering of stock.
-F-15-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company changed auditors as reported in Form 8-K dated July 18, 1997,
subsequently amended on July 24, 1997. At a special board meeting on July 24,
1997, the Board of Directors accepted the resignation of its auditors, Mackie,
Reid & Company, P.A. (auditor) who stated that they could no longer serve as
auditors of record because of their lack of compliance with the quality review
requirements of the SEC Practice Section of the American Institute of CPAs.
In connection with its audits for the two most recent years, there have been no
disagreements between the Company and the auditor on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures.
The auditor's report on the financial statements for the past two years
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to the audit scope or accounting principles. The reports have
contained explanatory language regarding the Company's ability to continue as a
going concern.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The Executive Officers of the Company as of July 31, 1997 were as follows:
NAME TITLE/POSITION AGE
- ---- -------------- ---
Edward N. Laughlin President, Treasurer and Director 59 (1)
Steven M. Ward Director 47 (2)
Gordon Molesworth President (Quantum Research), Director 80 (1)
James Sudduth Vice President 73 (1)
(1) Resigned on August 20, 1997
(2) Resigned on August 29, 1996
Mr. Laughlin was a co-founder of the Company and had been President, Chief
Executive Officer, Treasurer and Chairman of the Board of Directors since 1979.
Mr. Laughlin retired from the U.S. Air Force in 1979 after twenty years of
military service. From 1970 to 1977, he served as a Director of MITS, Inc., the
company, which introduced an electronic calculator in 1971, and the first
personal computer (Altair I) in 1975.
-9-
<PAGE>
Mr. Molesworth founded Quantum Research Inc. and became a director of Energy
Optics, Inc. in 1995. He founded and has served as the president of Molesworth
and Associates, Inc. for more than thirty years. That company has provided
financial and technical communications counsel to more than 60 companies and has
served as technology investment consultant to many brokerage firms, banks,
mutual funds and other investor groups. He has served as a consultant to the
Company for more than a decade. After 27 years in New York City, Molesworth is
now based in Green Valley, Arizona.
Mr. Sudduth had been the Company's Vice President of Marketing since 1995. After
he retired as a Vice President of International Sales and Marketing for Allis
Chalmers in 1986 and moved to Tucson, Arizona, he was associated with Spectrum
International Associates (a consulting company). He has 40 years experience
dealing with the heavy industries in the U.S. and most international markets.
In connection with the acquisition of August 20, 1997, described the above, the
officers and directors immediately resigned. New directors were elected who then
appointed the following as corporate officers:
<TABLE>
<CAPTION>
NAME TITLE/POSITION AGE
- ---- -------------- ---
<S> <C> <C>
Jacques Desroches President, Director (Resigned on September 5, 1997) N/A
Rudy De La Garza Vice-President, Director (Resigned on September 5, 1997) N/A
James C. Statham President, CEO, Director 43
Mary C. Adkins Secretary, Treasurer, Director 48
Shirley M. Harmon Director 51
</TABLE>
Mr. Statham has been associated with the food industry for over 20 years and has
gained expertise in specialty food product development and marketing, now
implementing those skills in the emerging ostrich industry. He has met with USDA
officials in Washington, DC regarding labeling and handling procedure issues,
attended several technical seminars regarding the Hazard Analysis Critical
Control Point (HACCP) program being implemented by the USDA in processing
plants, and worked with product development of marinades and spice profiles for
ostrich steaks, fillets and fajitas. He recently conducted successful field
tests with Dr. Fred Leak at the University of Florida USDA meat processing
facility.
Mr. Statham is well respected within the ostrich industry as knowledgeable in
both food chemistry and marketing and receives requests to speak to trade
groups, co-operatives and other processors on ostrich processing and marketing.
He completed the Hotel and Restaurant Administration curriculum at Florida State
University in Tallahassee, Florida and Leysin, Switzerland. He currently holds
the position of President, Chief Executive Officer and Director for the Company.
Mary C. Adkins has been employed in the financial industry for the past nineteen
years. Her main area of expertise has been in the operation and business
development of existing and new institutions. Her responsibilities have included
the establishment and monitoring of new products and the implementation of fee
schedules for maximum profit. She created and implemented policies and
procedures manuals for daily operations and personnel issues that addressed
regulatory compliance issues. Additional responsibilities included the
management, hiring, and training of new personnel.
-10-
<PAGE>
She has held numerous titles during her career that include the following:
<TABLE>
<S> <C> <C>
Assistant Branch Manager for Firstate Financial 1981-1983
Savings Operation Officer for First Federal of Seminole S&L 1983-1985
Assistant VP, Vice President/Corporate Secretary for Lochaven Federal S &L 1985-1996
</TABLE>
After leaving the financial industry, she assumed a position in operations and
investment acquisitions for a private trust. She currently holds the position of
Secretary, Treasurer and Director for the Company.
Shirley M. Harmon retired from the United States Department of Navy in 1995. She
was a civilian employee with twenty-eight years in the financial division. She
has held various positions and titles during this employment, which include the
following: Budget Analyst, and Management and Program Analyst for the Ship Parts
Control Center, financial evaluating and executing various budget programs.
Additional responsibilities included establishing and maintaining payroll
records for over 7,000 government employees throughout the United States and
overseas.
After leaving the Department of Navy, Ms. Harmon took a position with a private
trust. Her responsibilities included the establishment and maintenance of the
trust's financial records.
Her current position is as Director of the Company.
ITEM 10. EXECUTIVE COMPENSATION
A summary of compensation for all officers and directors serving for the fiscal
years ended July 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
NAME OF OFFICER CAPACITY IN FISCAL TOTAL CASH ACCRUED
OR DIRECTOR WHICH SERVED YEAR REMUNERATION NOT PAID
--------------- ------------------ ------- ------------ ---------
<S> <C> <C> <C>
Edward N. Laughlin President/Director 1997 $ 0 $ 0
1996 0 0
Steven M. Ward Director 1997 0 0
1996 0 0
James A. Sudduth Vice President 1997 0 0
1996 0 0
Gordon Molesworth President, Quantum 1997 0 0
Research & Consultant 1996 0 0
Director
</TABLE>
Total all Officers and Directors as a group (4) persons
-11-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 14, 1997, regarding
ownership control of the Company's common stock by each person who beneficially
owns 5% or more of the common stock of the Company, by each of the Company's
directors, and by all the officers and directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED * OF CLASS
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Edward N. Laughlin
1500 Rayos de Luna
Las Cruces, New Mexico 88005 260,899 1.963 %
Steven M. Ward
8101 Dogwood Lane
Montgomery, Alabama 15,141 0.114 %
Gordon R. Molesworth and
Molesworth Associates
Financial Center
81 W. Esperanza Blvd., Suite E
Green Valley, Arizona 85614 65,110 0.490 %
James A. Sudduth
6850 E. Loma Del Bribon
Tucson, Arizona 85750 2,500 0.019 %
James C. Statham
P.O. Box 211
Cedar Key, FL 32625 400,000 3.010 %
Mary C. Adkins
609 Albany Court
Longwood, FL 32779 400,000 3.010 %
Harto (Hartlo) Ltd.
Victoria House, P.O. Box 1090
The Valley, Anguilla, BWI 3,387,495 25.489 %
Shirley M. Harmon
P.O. Box 804
Wildwood, FL 34785 200,000 1.505 %
-12-
<PAGE>
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED * OF CLASS
- -----------------------------------------------------------------------------------------------
Global Investments Ltd., Trustee
Victoria House P.O. Box 1066
The Valley, Anguilla BWI 4,063,307 30.575 %
Mali-Suisse Mining Holdings, S.A.
28 Old Brompton Road, Suite 1119
London, England SW7 3DL 2,193,076 16.502 %
All Officers, Directors, and 5% Shareholders
as a Group (11 persons) 10,987,528 82.676 %
</TABLE>
* These shares reflect the 1 for 10 reverse stock split effective August 18,
1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See footnotes 5, 6, and 10 of the 1997 Consolidated Financial Statements of this
report.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
Exhibits - 27.1 Financial Data Schedule
b. Forms 8-K and 8 K/A filed during the last quarter of fiscal year 1997 are
incorporated herein by reference as follows:
(1) 8-K July 25, 1997 - changes in registrant's certifying accountant
c. Not applicable
-13-
<PAGE>
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
<TABLE>
ENERGY OPTICS, INC.
<S> <C>
DATED: November 14, 1997 By: /S/ JAMES C. STATHAM
------------------------------------------------
James C. Statham, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DATED: November 14, 1997 By: /S/ JAMES C. STATHAM
--------------------
James C. Statham, President, Director and
Chief Executive Officer
(Principal Executive Officer)
DATED: November 14, 1997 By: /S/ MARY ADKINS
---------------
Mary Adkins, Secretary, Treasurer and Director
(Principal Financial Officer)
DATED: November 14, 1997 By: /S/ SHIRLEY HARMON
------------------
Shirley Harmon, Director
</TABLE>
-14-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 536
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 536
<CURRENT-LIABILITIES> 9,397
<BONDS> 0
0
0
<COMMON> 878
<OTHER-SE> (9,739)
<TOTAL-LIABILITY-AND-EQUITY> 536
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 337,218
<CHANGES> 0
<NET-INCOME> 318,980
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
