SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 0-12595
MicroENERGY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 36-3262274
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
350 Randy Road
Carol Stream, Illinois 60188
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (630) 653-5900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series A Cumulative Preferred Stock
Class A Preferred Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirement for the past 90
days.
Yes X No
EXHIBIT INDEX IS AT PAGE 43
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant. The aggregate market value shall be
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 60 days prior to the date of filing. (See definition of
affiliate in Rule 405).
On September 8, 1997, the bid and ask prices for the Registrant's
Common Stock, $.01 par value, on the OTC Bulletin Board Market, were
$0.75 and $0.94 per share; for the Series A Cumulative Preferred
Stock, on the NASDAQ Small Cap Market, were $1.94 and $2.25 per share.
Based upon the average of the bid and ask price quoted for the two
securities, the aggregate market value, as of September 8, 1997 of the
two securities, held by non-affiliates was $1,371,836. The prices
referred to represent prices between dealers and do not include retail
mark-up, mark-down, or commissions. They do not represent actual
transactions. "Non-affiliates" includes all shareholders of the
Registrant other than its officers, directors and owners of more than
ten percent of its outstanding Common Stock.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
As of September 8, 1997, there were outstanding 2,018,809
shares of Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1 BUSINESS
MicroENERGY, Inc., was incorporated in Delaware on
November 30, 1983. The Company designs and manufactures high-
frequency power supplies and DC-to-DC converters for OEM customers
who are engaged in the telecommunications, computer, and
instrumentation segments of the electronics industry. The
Company currently offers single and multiple output switching
power supplies and DC-to-DC converters in the power output range
of 25 watts to 800 watts. All of the Company's products are
customized to satisfy the unique requirements of each customer's
application.
A power supply is a component of electrically-powered
products which converts alternating current ("AC"), the
generally-available form of electricity, into direct current
("DC"), which is required for electronic circuits to function. A
DC-to-DC converter converts direct current of one value into
direct current of another value. The power supply or converter
regulates the DC voltage to a constant so as to make the
performance of electronic circuits predictable. A conventional
linear power supply regulates the DC output by throwing-off
excess input power as heat. A switching power supply regulates
the DC output by briefly turning off the input power when the
voltage becomes excessive. In this way the switching power
supply saves energy and operates more efficiently than a linear
power supply.
Because of emerging technology, the size and growth of
the market, and the unique design requirements of each customer,
the market is fragmented. There are approximately 300 companies
which identify switching power supplies in their product line
portfolio, and no company dominates the market. Switchers are
divided in two basic market categories: standardized switchers
and custom designs. The Company competes only in the
custom-design market at this time. In that market the principal
method of competing is by emphasis on design ability,
manufacturing quality, and timely delivery. Regarding the
manufacturing quality, the Company in August 1995, subjected its
quality system to audit, and at that time achieved ISO 9001
registration.
MicroENERGY's product/market strategy began with the
development of AC-to-DC products in the 75 to 300 watt output
range. Later in 1984 the Company added DC-to-DC converters to
its product line. The switching frequencies at which the
transformers operate range from 80 Khz-250 Khz depending on the
application. The generic product series are modifiable to meet a
wide variety of specific customer requirements.
The Company's Research and Development effort is
located in Longwood Florida. The Company's research and
development efforts include advancing the state-of-the-art in the
deign of power supplies, meeting current customers technological
requirements and the methods employed in manufacturing such power
supplies. For the immediate future, the Company's research and
development will continue to focus on these items. During the
fiscal year ended June 30, 1997 the Company spent $1,266,011 on
Company-sponsored research and development. During the fiscal
years ended June 30, 1996 and 1995, the Company spent $1,174,322
and $949,002 on Company-sponsored research and development.
The Company has no material patents, but does rely on trade
secret protection.
The Company principally markets its products through
independent manufacturers representatives. At the present time,
the Company's products are offered by nine representatives, whose
territories include all or part of thirty-five states. In fiscal
1997 the Company had three customers who were each responsible
for over 10% of the Company's sales. These customers accounted
for approximately 36%, 12% and 10% of the total sales. However,
the first major customer is comprised of four autonomous
purchasing units. If considered separately, one unit would be
considered a major customer with 17% of total sales. The
principal goal of the Company's marketing efforts continues to be
to expand the customer base, so as to make the Company less
dependent on a small group of customers.
In the fiscal year ended June 30, 1997, export sales
amounted to approximately 41% of the Company's total revenues,
compared to 48% in 1996 and 36% in 1995. All export sales are
denominated in U.S. currency. Due to the custom nature of the
products exported and the time involved in developing these
products, short-term foreign currency fluctuations have no
adverse impact. Any long-term strengthening of the dollar may
have an adverse impact on the Company's revenues.
As of September 10, 1997, MicroENERGY had a backlog of
released orders of $5.5 million. These orders constitute a firm
commitment to take delivery of the Company's product. Delivery
of products and receipt of revenues from these production orders
will extend well into the current fiscal year. MicroENERGY had a
backlog of released orders of $6.0 million, in the prior year.
The raw materials for the Company's products are
primarily standardized components which are readily available
from an adequate number of suppliers. Those raw materials which
must be customized for the Company are also readily available
from a number of qualified component manufacturers. Currently,
the Company has two vendors from which it purchases more than 10%
of its total purchases. Purchases from these two vendors
approximate 16.4% and 14.9% of total purchases. While the
material is readily available, a change in these suppliers could
cause a delay in manufacturing. During fiscal 1989, the Company
acquired all of the capital stock of Tru-Way, Inc., an Illinois
corporation engaged in the business of manufacturing fabricated
metal parts used in the Company's principal product.
The Company currently has 201 full-time employees
(including 157 production employees), two of whom are officers of
the Company. During the remainder of fiscal 1998 the Company
expects no substantial increases in the Company's non-direct
labor force.
The company expects no negative effect from current
environmental laws or regulations.
Item 2 PROPERTY
The Company currently has five locations. The
Company's general offices are located in a 3,150 square foot
office facility in Carol Stream, IL. The lease on this facility
terminates December 31, 1997. The Company's manufacturing
operations are located in a leased facility in Quincy, Illinois
and an owned facility in Memphis, Missouri. The total space in
Quincy is 59,555 square feet, and 9,600 square feet in Memphis
Missouri. The lease on the Quincy facility terminates August 31,
2001. The Quincy and Memphis facilities are located in a good
labor market and are large enough to meet the expected capacity
requirements of the Company for the foreseeable future. The
Longwood Florida facility, which contains the Research and
Development center is a 10,129 square foot leased facility. The
term of the lease expires June 30, 2002. The metal fabrication
business conducted by the Company's subsidiary, Tru-Way, Inc., is
located in a 10,800 square foot facility in Northlake, Illinois.
The lease on this facility terminates on July 30, 1998. The
lessor of the Northlake facility is ARQUBE. ARQUBE is a
partnership of the Company's two officers. See "Item 13 -
Certain Relationships and Related Transactions."
Item 3 LEGAL PROCEEDINGS
Not Applicable.
Item 4 SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not Applicable.
<PAGE>
PART II
Item 5 MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Company's Common Stock is traded in the over-the-
counter market and is on the OTC Bulletin Board. The market
price ranges during the quarterly periods from July 1, 1995
through June 30, 1997,(restated for the 1-for-360 split as of May
7, 1996) as reported by the OTC Bulletin Board, were as follows:
Common Stock Par Value .01
Fiscal 1997 Fiscal 1996
High Low High Low
Quarter Ended Bid Bid Bid Bid
September 30 $4.50 $2.75 $16.20 $ .90
December 31 2.75 2.00 18.00 1.80
March 31 2.25 1.13 8.10 .36
June 30 2.50 1.13 7.20 4.00
The Company's Series A Cumulative Preferred Stock is
traded on the NASDAQ SmallCap Market and is on the NASDAQ. The
stock began trading on July 11, 1996, the market price ranges
during the quarterly periods from July 11, 1996 through June 30,
1997, as reported by NASDAQ, were as follows:
Series A Cumulative Preferred Stock
Fiscal 1997
High Low
Quarter Ended Bid Bid
September 30 $10.00 $6.38
December 31 7.88 2.63
March 31 5.50 3.25
June 30 5.63 2.13
The foregoing quotations represent prices between
dealers and do not include retail mark-up, mark-down, or
commissions, and may not necessarily represent actual
transactions.
The closing high bid and low asked prices of Common
Stock on September 8, 1997 as reported by OTC Bulletin Board,
were $0.75 and $0.94, respectively. The closing high bid and low
asked prices of the Series A Preferred Stock on September 8,
1997, as reported by the SmallCap Market of NASDAQ were $1.94 and
$2.25, respectively.
On September 8, 1997 the number of shareholders of
record of the Common Stock was 3,054 and the number of
shareholders of record of the Series A Cumulative Preferred Stock
was 10. Based upon information provided by the recordholders of
the Series A Preferred Stock, the Company believes that there are
at least 300 holders of the Series A Preferred Stock, and all
such stock is held in street name accounts.
No dividends have been paid by the Company on the
Common Stock. For the foreseeable future the Company intends that
it will not pay any dividends on the Common Stock. The Series A
Cumulative Preferred Stock includes a dividend which is
cumulative from the date of issuance and is payable semi-annually
at a rate of 8% per annum. The Company, at is sole discretion
may pay each dividend in either cash or in shares of Common Stock
valued at the average closing bid price for the ten days
preceding the record date for the dividend or in a combination of
cash and Common Stock. Dividends were paid January 1, 1997, and
July 1, 1997. Both dividends were paid in Common Stock. For the
two dividend periods, the Company issued 104,230 shares and
96,140 shares of the Common Stock, par value $.01.
Item 6 SELECTED FINANCIAL DATA
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Operating Summary June 30, 1997 June 30,1996 June 30, 1995
<TABLE>
<S> <C> <C> <C>
Sales................. $15,683,520 $14,386,323 $14,588,844
Interest and Other Income.. 509 2,335 1,240
Total Income....... 15,684,029 14,388,658 14,590,084
Cost of Manufacturing and
Facility................ 12,272,184 11,912,736 11,566,567
Research and Development... 1,266,011 1,174,322 949,002
Selling General and
Administrative........... 1,706,863 1,528,880 1,491,590
Interest and Other Expense. 343,839 420,773 333,031
Total Expenses..... 15,588,897 15,036,711 14,340,190
Net Earnings/(loss) before
Extraordinary item....... 95,132 (648,053) 249,894
Extraordinary item-gain on
debt restructuring....... -- 1,000,495 --
Net Earnings/(loss)........ $ 95,132 $ 352,442 $ 249,894
=========== =========== =========
Per Share Calculation
Preferred stock dividends (346,922) -- --
Net Earnings/(Loss) available
to common shareholders $ (251,790) $ 352,442 $ 249,894
Net Earnings (Loss) Per Share:
Before Extraordinary item.. $ (.49) $ (1.80) $ .79
Extraordinary item......... -- 2.78 --
Total Per Share............ $ (.49) $ .98 $ .79
========== ======== ========
Weighted Average Number of
Shares Outstanding...... 510,386 360,088 316,768
</TABLE>
At At At
Balance Sheet Summary June 30, 1997 June 30 1996 June 30, 1995
<TABLE>
<S> <C> <C> <C>
Working Capital (Deficit).. $ 3,904,354 $ (1,604,125) $ 443,359
Total Assets.............. 9,346,179 7,279,355 6,148,531
Capitalized Lease.......... 407,899 682,170 581,161
Long-Term Debt............ 3,873,622 874,475 3,514,009
Total Liabilities......... 6,857,050 7,516,593 7,143,821
Preferred Stock............ 2,605,282 -- --
Shareholders' Equity (Deficit) 2,489,129 (237,238) (995,290)
</TABLE>
Item 6 SELECTED FINANCIAL DATA (cont)
Fiscal Year Fiscal Year
Ended Ended
Operating Summary June 30, 1994 June 30, 1993
<TABLE>
<S> <C> <C>
Sales..................... $12,771,067 $15,886,279
Interest and Other Income.. 999 3,161
Total Income....... 12,772,066 15,889,440
Cost of Manufacturing and
Facility................ 10,054,423 12,474,737
Research and Development... 920,391 1,246,965
Selling General and
Administrative.......... 1,369,834 1,731,297
Interest and Other Expense 222,573 395,635
Total Expenses..... 12,567,221 15,848,634
Net Earnings/(loss) before
Extraordinary item....... 204,845 40,806
Extraordinary item-gain on
debt restructuring....... -- --
Net Earnings/(loss)........ $ 204,845 $ 40,806
=========== ===========
Per Share Calculation
Preferred stock dividends -- --
Net Earnings/(Loss) available
to common shareholders 204,845 40,806
Net Earnings (Loss) Per Share:
Before Extraordinary item.. $ .64 $ .13
Extraordinary item......... -- --
Total Per Share............ $ .64 $ .13
Weighted Average Number of ========== ============
Shares Outstanding....... 319,754 318,180
</TABLE>
At At
Balance Sheet Summary June 30, 1994 June 30, 1993
<TABLE>
<S> <C> <C>
Working Capital............ $ 273,353 $ 411,845
Total Assets............... 6,301,874 6,089,900
Capitalized Lease.......... 767,053 232,234
Long-Term Debt............. 3,954,150 3,945,068
Total Liabilities.......... 7,641,249 7,665,434
Preferred Stock............ -- --
Shareholders' Equity (Deficit) (1,339,374) (1,575,534)
</TABLE>
<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Year ended June 30, 1997 vs. Year ended June 30, 1996
Net sales for the fiscal year ended June 30, 1997 were
$15,683,520, or approximately 9% higher than the $14,386,323
recorded in fiscal 1996. The $1.3 million increase was mainly due
to sales of new products which had been developed the prior
fiscal year. The Companies backlog of released orders is
slightly behind the prior year period. However, the Company
expects a modest increase in revenues in the coming fiscal year
as it is completing development work on some new products that
are scheduled for release in the second half of the fiscal year.
Net Earnings, exclusive of preferred dividends for the
fiscal year ended June 30, 1997, were $95,132 as compared to
$352,442 for the prior year period. The prior year period net
earnings included an extraordinary gain resulting from debt
restructuring of $1.0 million. When this item is removed for
comparison purposes the Company showed a positive swing totaling
$743,185 on the sales increase of $1.3 million ($95,132 profit
versus $648,053 loss before extraordinary item).
The primary reason for the improvement in operational
results from 1996 to 1997 was a decrease in Manufacturing costs
to 78.2% of revenues as compared to 82.8% the prior year. This
decrease was primarily due to increased productivity as a result
of new manufacturing equipment, lower material acquisition costs
in the semi-conductor marketplace and improved product mix. The
Company expects these costs to remain at approximately this level
for the coming fiscal year.
In the non-direct cost areas, Research & Development
increased $91,869 to $1,266,011 but declined as a percentage of
revenue to 8.1% versus the prior year of 8.2%. The Company will
continue its commitment to Research & Development as the Company
expects to realize additional revenue as a result of R & D
dollars spent on both new programs and existing customer
programs. Selling, General & Administrative increased to 10.9%
of sales as compared to 10.6% the prior year. The Company does
not expect significant increases in the indirect cost areas of
the Company
Interest costs of $343,330 were comparable to the prior
year period. The Company had anticipated reduced interest
expenses as it paid down debt with the proceeds of its public
offering of securities in 1996. However, the productivity
advantages of investing in new equipment became apparent (as
evidenced by the Company's improved gross margin), so the Company
maintained its debt level in order to purchase new equipment.
For the immediate future, the Company expects its interest
expense to increase slightly in the next fiscal year.
There were no significant changes in the type of
expenses incurred by the Company in fiscal 1997 versus fiscal
1996.
Year ended June 30, 1996 vs. Year ended June 30, 1995
Net sales for the fiscal year ended June 30,1996 were
$14,386,323, or flat as compared to sales of $14,588,844 in
fiscal 1995. By the fourth quarter of fiscal 1996, however, the
Company had made significant increases in fixed costs from the
1995 level in anticipation of substantially increased sales.
This led to a significant disparity between revenues and costs in
the fourth quarter of 1996, as the greater part of the
anticipated sales did not begin to materialize until after June
30, 1996. The sales increase was delayed primarily due to the
delay in completion of the Company's public offering from its
planned closing date in April until its actual closing date in
July, 1996. Certain of the Company's customers delayed placing
firm orders until the offering completed to assure themselves of
the Company's ability to deliver products. Other sales were
delayed by the Company's inability to satisfy its debts to raw
materials vendors until the offering was completed, which led to
shortages in materials and consequent delays in production in the
fourth quarter of 1996.
Although Management was aware that the level of sales
in the fourth quarter of fiscal 1996 did not justify the level of
fixed costs being carried, Management decided not to reduce its
fixed costs, as such a tactic could put future revenues at risk.
There resulted a loss from operations for the 1996 fiscal year of
$648,053, compared to earnings from operations of $249,894 in
fiscal 1995. Management believes, however, that with the
offering now completed and several major customer buying programs
now being initiated, its decision to sustain the Company's
operational capacity at the level necessary for the new programs
has positioned the Company well for an expansion of business over
the next few years.
Profits for the fiscal year ended June 30, 1996, were
$352,442 as compared to $249,894 for the prior year period. The
increase was the direct result of a extraordinary gain of $1
million on a debt compromise with one of the Company's major
debtholders. The debtholder agreed to accept payment of
$1,332,000 for a debt with a remaining balance of $2,332,000. The
amount was paid at the time of the offering closing in July,
1996, subsequent to the fiscal year end. The prior terms of the
note had the $2.3 million being paid out in monthly payments
until December 31, 2001.
Manufacturing costs increased to 82.8% of revenues as
compared to 79.3% the prior year. This increase was primarily
due to product mix, and the effect of the lower than anticipated
sales in the fiscal fourth quarter. In the non-direct cost
areas, Research & Development increased by $225,000 or 24%. The
reason for the increase was the investment in the development of
new programs for both existing customers and new customers. The
Company expects revenue to grow as a result of these new
programs. This is evident in the growth of the customer backlog
to $6 million currently as compared to $4 million the prior
year. Sales & marketing declined by $120,000 as the Company
directed the resources to its R&D portion of the business.
Interest cost increased by $10,000 to $342,000 over the
prior year.
Liquidity and Capital Resources
Year ended June 30, 1997 vs. Year ended June 30, 1996
At June 30, 1997, the Company had working capital of
$3,904,354, as compared to a negative working capital of
$1,604,125 at the end of the prior fiscal year.
On July 16, 1996, (the first month of the fiscal year)
the Company successfully completed a public offering of 494,500
shares of Series A Cumulative Preferred Stock, at $7.00 per
share, and 247,250 Redeemable Class A Warrants for Series A
Preferred Stock, at $ .10 per warrant. The Company obtained
approximately $2.6 million of net proceeds from this offering.
The Series A Cumulative Preferred Stock has an 8% annual
dividend which is cumulative from the date of issue, payable
semi-annually in cash or common stock, at the sole discretion of
the Company. The dividends payable January 1, 1997 and July 1,
1997 were both paid with common stock, resulting in the issuance
of a total of $200,370 shares of common stock.
The Company at the time of the Preferred Stock
offering began a new banking relationship with Marquette National
Bank. The new relationship included a revolving line of credit,
with a maturity date of November, 1998. The amount available on
the line is dependent on predetermined formulas relative to
accounts receivable and inventories, of up to $3,000,000. At the
end of the fiscal year there was $514,000 available on the line.
At the end of the fiscal year, the Company had to fund its self
insured medical plan with an additional $400,000 to cover claims.
This amount will be refunded to the company by the reinsurers
during the first fiscal quarter of 1998. This amount is included
in the Current Assets of the balance sheet. But for this, the
Company would have had in excess of $900,000 available on its
revolving line of credit. In addition to the line of credit, at
the time of the offering closing in July 1996, the Company also
obtained a five year term note of $800,000, refinancing its
existing fixed assets. Later in the fiscal year, the Company
negotiated and obtained two additional four year term loans
totaling $750,000 for the purpose of obtaining new equipment.
The Company's ending accounts receivable balance at
June 30, 1997 was $2,122,302 as compared to $1,601,989 at June
30, 1996. The increase was due primarily to the increased sales
level in the fiscal fourth quarter as compared to the prior year.
The Company has not currently experienced any significant losses
from Bad Debts and has maintained Bad Debt reserves of $45,000
and $50,000 for the years ended June 30, 1997 and June 30, 1996.
Inventories increased by $703,768 to $4,068,524. The
Company increased inventory levels to enhance customer service by
lowering lead times for product delivery. The Company has
finished good levels approximately 40% higher than those
maintained at the end of last year. The Company also increased
its work-in-process levels by approximately 30% to improve
product cycle time for its customers.
The Company spent $1.1 millon on equipment purchases
to update its manufacturing equipment and increase capacity. As
noted above, the Company financed these purchases with four year
term loans totaling $750,000 from its primary lender.
The Companies Accounts Payable declined by $340,000 as
the Company made a concerted effort to become more current with
its material suppliers.
The Company expects that available borrowings from
the new asset based line of credit and the new term loans when
combined with the cash flow expected from current operations will
be sufficient to service the Company's debt and fund operations
for the following fiscal year.
<PAGE>
Item 8 FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements: Page
Report of Independent Auditors. . . . . . . . . . . . . . 12
Consolidated Balance Sheets at June 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Operations for the
three years ended June 30, 1997. . . . . . . . . . . . . 14
Consolidated Statements of Changes in Stock-
holders' Equity for the three years ended
June 30, 1997. . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Cash Flows for the
three years ended June 30, 1997. . . . . . . . . . . . . 16
Notes to Consolidated Financial Statements. . . . . . . . 18
<PAGE>
SELDEN FOX and ASSOCIATES, LTD.
A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
619 ENTERPRISE DRIVE
OAK BROOK, ILLINOIS 60521-8835
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Shareholders of MicroENERGY, Inc.
We have audited the accompanying consolidated balance
sheet of MICROENERGY, INC. AND SUBSIDIARY as of June 30, 1997
and 1996, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for the
years ended June 30, 1997, 1996 and 1995. 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 audits to obtain reasonable assurance about
whether the financial statements are free of material misstate-
ment. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of MicroENERGY, Inc. and Subsidiary at
June 30, 1997 and 1996, and the results of their operations and
cash flows for the years ended June 30, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
Selden, Fox and Associates, Ltd.
Certified Public Accountants
August 29, 1997
MicroENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1997 and 1996
ASSETS 1997 1996
<TABLE>
<S> <C> <C>
Current assets:
Cash $ 110,086 $ 19,615
Accounts receivable 2,122,302 1,601,989
Inventories 4,068,524 3,364,846
Other current assets 586,870 51,543
Total current assets 6,887,782 5,037,993
Property and equipment 6,225,214 5,113,120
Accumulated depreciation (3,869,092) (3,201,43)
2,356,122 1,911,688
Other assets, net 102,275 329,674
$ 9,346,179 $ 7,279,355
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ - $ 1,875,373
Current portion of long-term
obligations 948,326 2,341,020
Accounts payable 1,579,539 1,918,524
Cash overdraft 82,055 70,883
Amounts due related parties - 127,750
Accrued expenses 373,508 308,568
Total current liabilities 2,983,428 6,642,118
Long-term obligations 3,873,622 874,475
Total liabilities 6,857,050 7,516,593
Commitments
Stockholders' equity (deficit):
8% cumulative Series A preferred stock,
4,000,000 shares authorized, 494,500
shares issued in 1997 2,605,282 -
Common stock, $.01 par value - 4,000,000
shares authorized; 2,021,847 shares
issued in 1997 and 421,477 shares
issued in 1996 20,218 4,215
Additional paid-in capital 6,423,535 5,842,616
Accumulated deficit (5,255,99) (5,004,208)
Unearned restricted stock compensation (1,347,55) (1,401,550)
Preferred stock subscription - 250,000
Preferred stock warrants 112,725 88,000
Common stock purchase warrants 75 75
Treasury stock, at cost, 683,159 shares ( 16,386) ( 16,386)
Unrealized loss on marketable securities ( 52,772 ) -
Total stockholders' equity (deficit) 2,489,129 ( 237,238)
$ 9,346,179 $ 7,279,355
</TABLE>
See accompanying notes.
<PAGE>
MicroENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
<TABLE>
<S> <C> <C> <C>
Net sales $ 15,683,520 $ 14,386,323 $ 14,588,844
Expenses:
Facility, preproduction
and production 12,272,184 11,912,736 11,566,567
Research and development 1,266,011 1,174,322 949,002
Selling and marketing 390,528 375,099 494,392
General and administrative 1,316,335 1,153,781 997,198
15,245,058 14,615,938 14,007,159
Operating income (loss) 438,462 ( 229,615) 581,685
Interest expense, net 343,330 341,578 331,791
Foreign investment loss - 76,860 -
Income (loss) before
extraordinary item 95,132 ( 648,053) 249,894
Extraordinary item - gain on
debt restructuring - 1,000,495 -
Net income $ 95,132 $ 352,442 $ 249,894
For earnings per share
calculation:
Net income $ 95,132 $ 352,442 $ 249,894
Preferred stock dividends ( 346,922) - -
Net income (loss)
available to common
stockholders $ ( 251,790) $ 352,442 $ 249,894
Net income (loss) per common
share:
Before extraordinary item$ ( .4933) $ ( 1.7997) $ .7889
Extraordinary item - 2.7785 -
Total $ ( .4933) $ .9788 $ .7889
Weighted average number
of shares of common
stock outstanding 510,386 360,088 316,768
</TABLE>
See accompanying notes.
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1997, 1996 and 1995
Additional
Common Paid-in Accumulated
Stock Capital Deficit
<TABLE>
<S> <C> <C> <C>
Net balance at June 30, 1994 $ 114,111 $5,678,919 $(5,606,544)
Amortization of restricted
stock award - - -
Cancellation of 150,000 shares (150) - -
Net income - - 249,894
Change in unrealized gain on
investment - - -
Net balance at June 30, 1995 113,961 5,678,919 (5,356,650)
Restate for 1 for 360 reverse
stock split (110,795) 110,795 (5,356,650)
Net balance at June 30, 1995,
as restated 3,166 5,789,714 (5,356,650)
Amortization of restricted
stock awards - - -
Proceeds from preferred stock
subscription - - -
Issuance of 880,000 preferred
stock warrants @ $.10 - - -
Exercise of common stock Class
D warrants 972 42,779 -
Exercise of employee stock
options 21 7,679 -
Exercise of nonemployee stock
options 56 2,444 -
Net income - - 352,442
Change in unrealized gain on
investment - - -
Net balance at June 30, 1996 4,215 5,842,616 (5,004,208)
Amortization of restricted
stock awards - - -
Proceeds from issuance of
494,500 shares of preferred
stock - - -
Proceeds from issuance of
247,250 preferred stock
warrants @ $.10 - - -
Conversion of 350,000
preferred shares to
1,400,000 common shares 14,000 236,000 -
Preferred stock dividend of
200,370 common shares 2,003 344,919 (346,922)
Net income - - 95,132
Change in unrealized loss
on investment - - -
Net balance at June 30, 1997 $ 20,218 $6,423,535 $(5,255,998)
</TABLE>
(CON T)
See accompanying notes.
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1997, 1996 and 1995
Unearned Common
Restricted Preferred Preferred Stock
Stock Stock/ Stock Purchase
Compensation Subscription Warrants Warrants
<TABLE>
<S> <C> <C> <C> <C>
Net balance at June 30, 1994 $(1,509,550) - - 75
Amortization of restricted
stock award 54,000 - - -
Cancellation of 150,000 shares - - - -
Net income - - - -
Change in unrealized gain on
investment - - - -
Net balance at June 30, 1995 (1,455,550) - - 75
Restate for 1 for 360 reverse
stock split - - - -
Net balance at June 30, 1995,
as restated (1,455,550) - - 75
Amortization of restricted
stock awards 54,000 - - -
Proceeds from preferred stock
subscription - 250,000 - -
Issuance of 880,000 preferred
stock warrants @ $.10 - - 88,000 -
Exercise of common stock Class
D warrants - - - -
Exercise of employee stock
options - - - -
Exercise of nonemployee stock
options - - - -
Net income - - - -
Change in unrealized gain on
investment - - - -
Net balance at June 30, 1996 (1,401,550) 250,000 88,000 75
Amortization of restricted
stock awards 54,000 - - -
Proceeds from issuance of
494,500 shares of preferred
stock - 2,605,282 - -
Proceeds from issuance of
247,250 preferred stock
warrants @ $.10 - - 24,725 -
Conversion of 350,000
preferred shares to
1,400,000 common shares - (250,000) - -
Preferred stock dividend of
200,370 common shares - - - -
Net income - - - -
Change in unrealized loss
on investment - - - -
Net balance at June 30, 1997 $(1,347,550) $2,605,282 $ 112,725 $ 75
</TABLE>
(CON'T)
See accompanying notes.
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1997, 1996 and 1995
Unrealized Stockholders
Treasury Gain(Loss) On Total Equity
Stock Investments (Deficit)
<TABLE>
<S> <C> <C> <C>
Net balance at June 30, 1994 $ (16,386) $ - $(1,339,375)
Amortization of restricted
stock award - - 54,000
Cancellation of 150,000 shares - - (150)
Net income - - 249,894
Change in unrealized gain on
investment - 40,341 40,341
Net balance at June 30, 1995 (16,386) 40,341 (995,290)
Restate for 1 for 360 reverse
stock split - - -
Net balance at June 30, 1995,
as restated (16,386) 40,341 (995,290)
Amortization of restricted
stock awards - - 54,000
Proceeds from preferred stock
subscription - - 250,000
Issuance of 880,000 preferred
stock warrants @ $.10 - - 88,000
Exercise of common stock Class
D warrants - - 43,751
Exercise of employee stock
options - - 7,700
Exercise of nonemployee stock
options - - 2,500
Net income - - 352,442
Change in unrealized gain on
investment - (40,341) (40,341)
Net balance at June 30, 1996 (16,386) - (237,238)
Amortization of restricted
stock awards - - 54,000
Proceeds from issuance of
494,500 shares of preferred
stock - - 2,605,282
Proceeds from issuance of
247,250 preferred stock
warrants @ $.10 - - 24,725
Conversion of 350,000
preferred shares to
1,400,000 common shares - - -
Preferred stock dividend of
200,370 common shares - - -
Net income - - 95,132
Change in unrealized loss
on investment - (52,772) (52,772)
Net balance at June 30, 1997 $ (16,386) $ (52,772) $2,489,129
</TABLE>
See accompanying notes.
MicroENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating
activities:
<TABLE>
<S> <C> <C> <C>
Net income $ 95,132 $ 352,442 $ 249,894
Adjustments to reconcile net
income to net cash from
operating activities:
Gain on debt restructuring - (1,000,495) -
Depreciation 667,660 597,099 572,481
Foreign investment loss - 76,860 -
Compensation paid in common
stock, net of forfeiture 54,000 59,301 53,850
Changes in assets and
liabilities:
Accounts receivable ( 520,313) ( 407,994) 59,624
Inventories ( 703,678) ( 652,622) ( 117,675)
Other current assets ( 535,327) 2,182 12,767
Other assets ( 2,344) 19,273 ( 33,946)
Accounts payable ( 338,985) 768,937 346,034
Cash overdraft 11,172 70,883 -
Accrued expenses ( 62,810) ( 19,888) ( 61,630)
Net cash from
operating activities (1,335,493) ( 134,022) 1,081,399
Cash flows from
investing activities:
Additions to property and
equipment (1,085,761) ( 353,944) ( 173,133)
Increase in foreign investment - - ( 59,000)
Net cash from
investing activities (1,085,761) ( 353,944) ( 232,133)
Cash flows from financing
activities:
Proceeds from preferred stock
and warrants offering 2,630,007 - -
Proceeds from stock subscription - 250,000 -
Proceeds from bridge financing - 275,000 -
(Increase) decrease in public
offering fees 176,971 ( 176,971) -
Proceeds from other stock plans - 48,650 -
Issuance of long-term obligations4,109,094 145,478 -
Payment of long-term obligations(2,528,974) ( 857,965) ( 746,193)
Net change in notes payable (1,875,373) 710,162 ( 35,638)
Net cash from
financing activities 2,511,725 394,354 ( 781,831)
Net increase (decrease)
in cash 90,471 ( 93,612) 67,435
Cash, beginning of the year 19,615 113,227 45,792
Cash, end of the year $ 110,086 $ 19,615 $ 113,227
/TABLE
<PAGE>
MicroENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont'd)
Supplemental schedule of noncash investing
and financing activities:
Capital Leases
In 1997 and 1996, the Company entered into capital leases for
certain equipment. In connection with the capital leases,
the Company recorded equipment and long-term obligations of
$26,333 and $368,660, in 1997 and 1996, respectively (see
Note 5). No capital leases were entered into during 1995.
Other Supplemental Disclosures
Actual interest payments were $337,651, $339,040 and $331,667
for the years ended June 30, 1997, 1996 and 1995, respective-
ly.
See accompanying notes.
MicroENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
MicroENERGY, Inc. (MicroENERGY) designs, manufactures and
markets high frequency power supplies which are used as
components in the electronics systems market. All of the
Company's products are customized to satisfy the unique
requirements of each customer's application.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial
statements include the accounts of MicroENERGY and its
wholly-owned subsidiary, Tru-Way, Inc. All significant
intercompany balances and transactions have been eliminated
in consolidation.
Cash and Cash Equivalents - MicroENERGY considers all short-
term deposits with initial maturities of three months or less
to be cash equivalents.
Accounts Receivable - Accounts receivable for sales to
customers are unsecured and consist of the following:
1997 1996
Accounts receivable $ 2,167,302 $ 1,651,989
Less allowance for
doubtful accounts ( 45,000) ( 50,000)
$ 2,122,302 $ 1,601,989
There were no changes to the allowance for doubtful accounts
during 1996 and 1995. For the year ended June 30, 1997, the
allowance was reduced by $5,000 due to a writeoff of an
uncollectible customer balance.
Inventories - Inventories are stated at the lower of cost
or market. Cost is determined using the first-in, first-
out method. The components of inventories are:
1997 1996
Raw materials $ 2,440,044 $ 2,368,798
Work in process 1,347,602 937,228
Finished goods 731,414 509,356
4,519,060 3,815,382
Less excess and obsolete
reserve ( 450,536) ( 450,536)
$ 4,068,524 $ 3,364,846
There were no changes to the excess and obsolete reserve
during 1997, 1996 and 1995. <PAGE>
2. Summary of Significant Accounting Policies (cont'd)
Property and Equipment - Property and equipment is stated at
cost. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets for
financial reporting purposes, and the accelerated cost
recovery method for tax reporting purposes. Expenditures for
repairs and maintenance are expensed as incurred. The
components of property and equipment are:
1997 1996
Land $ 24,500 $ 24,500
Building and improvements 72,161 72,161
Machinery and equipment 4,394,957 3,327,417
Leasehold improvements 397,678 388,963
Capitalized leases:
Building 216,780 216,780
Equipment 1,119,138 1,083,299
$ 6,225,214 $ 5,113,120
Research and Development - Expenditures for research and
development activities are charged to expense as incurred.
Income Taxes - MicroENERGY uses the asset-liability approach
of accounting for income taxes (Note 8).
Earnings Per Share - Earnings per common share (EPS) are
computed based on the weighted average number of common
shares outstanding during each period plus the dilutive
effect, if any, of outstanding common stock equivalents.
In February 1997, the Financial Accounting Standards Board
issued Statement Number 128, which establishes revised
standards for computing and presenting EPS. The statement is
effective for financial statements issued for periods ending
after December 31, 1997, including interim periods. This
standard will require restatement of all prior-period EPS
data presented.
Pervasiveness of Estimates - The preparation of financial
statements in accordance with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities and operations and the related disclosures at the
date of the financial statements and during the reporting
period. Actual results could differ from those estimates.
Certain significant estimates used in the preparation of
these financial statements include the following:
<PAGE>
2. Summary of Significant Accounting Policies (cont'd)
MicroENERGY has estimated that a $45,000 allowance for
uncollectible accounts is adequate. This conclusion is
based on the current status and age of accounts receivable.
MicroENERGY has estimated a reserve for excess and obsolete
inventory of $450,536. This conclusion is based on the
current status and age of inventories and estimates of
future orders.
As discussed in Note 3, MicroENERGY has an investment in a
foreign entity that is recorded at fair value. The
ultimate realization of this investment is based upon
future operations of the entity.
For each of the aforementioned estimates, it is reasonably
possible that the recorded amounts or related disclosures
could significantly change in the near future as new
information is available.
3. Foreign Investment
On January 14, 1994, MicroENERGY entered into a revised
agreement with MicroENERGY (India) Limited (INDIA), a
Private Limited Company registered under the Indian
Companies Act. MicroENERGY was to provide the technical
and manufacturing knowledge and training in exchange for
$150,000 to be received when certain stipulations had taken
place. The proceeds were to be used to purchase an equity
interest after the public offering of the stock of INDIA.
The public offering took place in August 1994 and the issue
was oversubscribed.
During 1995, MicroENERGY received 5,007,000 shares of stock
at a purchase price of $159,000. This investment, included
in noncurrent other assets, is classified as an available
for sale security and, accordingly, recorded at fair value.
At June 30, 1996, the fair value of this investment
declined to $82,140. During 1996, no production had taken
place. Accordingly, the $76,860 unrealized loss had been
recorded as a permanent decline in the statement of
operations. At June 30, 1997, fair value was $29,368.
Accordingly, the $52,772 unrealized loss has been recorded
as a separate component of stockholders' equity.
MicroENERGY will be paid a commission of 5% of the export
sales of INDIA or 3% of its total sales, whichever is
greater. During 1995, MicroENERGY received $74,000 of
revenue for consulting services performed for INDIA. No
commission revenue was received or recorded in 1997, 1996
or 1995.
4. Notes Payable and Long-term Obligations
Notes Payable - During 1996, MicroENERGY had a line of
credit agreement with a bank, payable on demand, at an
interest rate of prime (8.25% at June 30, 1996) plus 1.75%.
In 1995, the interest rate was at prime (9% at June 30,
1995) plus 2.5%. The weighted average interest rates for
the years ended June 30, 1996 and 1995 were 11.0% and
11.1%, respectively. The agreement permitted the Company
to borrow the lesser of defined percentages of outstanding
accounts receivable and inventory or $2,200,000. The line
of credit was secured by a primary interest in accounts
receivable and inventory and a subordinate interest in all
other assets.
On July 17, 1996, this line of credit agreement was
canceled.
Long-term Obligations - On July 17, 1996, the Company
entered into a new financing agreement with a bank, which
replaced the line of credit agreement discussed under
notes payable above. The new revolving line of credit
agreement is at an interest rate of prime (8.5% at
June 30, 1997) plus .25%. The weighted average interest
rate for 1997 was 9.18%. The agreement permits the
Company to borrow a maximum of the lesser of $3,000,000 or
the borrowing base. The borrowing base is defined as the
sum of (a) an eighty-five percent advance against eligible
receivables that are ninety days or less from the date of
invoice, and (b) a forty percent advance against eligible
inventory as defined, not to exceed $1,000,000. The line
of credit agreement is due and payable on November 1,
1998. The unused line of credit at June 30, 1997 was
$513,646. The line is secured by a primary interest in
all assets, including those owned by a related partnership
(Note 5), wherever located. This first position security
interest only pertains to those assets not pledged under
duly authorized and validly perfected purchase money
equipment leases already existing. Under these lease
scenarios, the bank's security interest would be subject
to the existing lessor's interest. In addition, two
stockholders of the Company have guaranteed the debt,
limited to $300,000 each.
The Company is subject to certain debt covenants in the
new financing agreement, as defined, relating to minimum
tangible net worth, net income, cash flow coverage, and
current ratios, and a maximum leverage ratio. In addi-
tion, the Company cannot declare or pay dividends except
for the 8% cumulative preferred stock; cannot make loans
or advances to officers, shareholders or directors; cannot
4. Notes Payable and Long-term Obligations (cont'd)
Long-term Obligations (cont'd)
grant further security interests in the bank's collateral;
cannot incur further indebtedness, except for renewals or
extensions; and must submit financial statements and
borrowing base certificates, as specified. The Company
was in violation of certain of these covenants as of
June 30, 1997 and has obtained the necessary waivers of
compliance.
The components of debt obligations are as follows:
June 30,
1997 1996
<TABLE>
<S> <C> <C>
Revolving line of credit, per above $ 2,486,354 $ -
The new financing agreement also
allows for an $800,000 term
loan. Principal payments of
$13,333, plus interest at the
prime rate plus .25%, are
payable monthly. Full payment
of amounts due is payable on
July 1, 2001. The term loan is
secured and guaranteed under the
same terms as the aforementioned
line of credit agreement, and
is subject to the same debt
covenants. 666,667 -
Two 9% notes payable to bank, with
original balances of $400,000 and
$350,000. The notes are due in
monthly principal installments of
$8,333 and $7,292, respectively,
plus interest, beginning April 1,
1997. Final payments are due
March 1, 2001. The notes are
secured and guaranteed under the
same terms as the aforementioned
line of credit agreement and are
subject to the same debt covenants. 703,125 -
(cont'd)
4. Notes Payable and Long-term Obligations (cont d)
Long-term Obligations (cont'd)
June 30,
1997 1996
3% note payable to the City of
Quincy, Illinois, due in monthly
principal and interest payments of
$4,660 through December 1, 1998.
The note is secured by a subordinate
interest in accounts receivable,
inventories and equipment. $ 81,919 $ 134,522
3% note payable to the City of
Quincy, Illinois, due in monthly
principal and interest payments
of $4,265 through December 1, 1998.
The note is secured by a subordinate
interest in accounts receivable,
inventories and equipment. 74,980 123,127
3% note payable to the City of
Quincy, Illinois, due in monthly
principal and interest payments of
$6,516 through December 1, 1998.
The note is secured by a subordinate
interest in accounts receivable,
inventories and equipment, and is
guaranteed by certain shareholders. 114,552 188,109
Note payable to bank with interest
at prime plus 2%, due in monthly
payments of $5,250 principal plus
interest through December 15,
1998. The note is secured by a
subordinate interest in accounts
receivable, inventories, and
machinery and equipment. The City
of Quincy, Illinois has guaranteed
the lesser of $230,000 or 36.5% of
the indebtedness. 99,750 157,500
Note payable to bank with interest
at prime plus 2%, due in monthly
payments of $5,000 principal plus
(cont'd)
<PAGE>
4. Notes Payable and Long-term Obligations (cont d)
Long-term Obligations (cont'd)
June 30,
1997 1996
interest. Final payment was made
in July 1996. The note was secured
by a primary interest in certain
machinery and equipment, and a
subordinate interest in accounts
receivable, inventories and all
other equipment. $ - $ 10,000
Note payable to the state of Illinois,
due in monthly payments of $19,997,
which includes interest at 9.5%
through June 1996 and then at the
prime rate. In June 1996, an agree-
ment was made to pay $70,000 at the
time of financing (Note 6), and
continue normal payments until
January 1997. The note was secured
by a subordinate interest in accounts
receivable, inventories and equipment,
and was guaranteed by certain share-
holders. - 209,864
Note payable to bank at prime plus
2%, due in monthly installments of
$3,833 principal plus interest.
Note was paid in full in July 1996.
The note was secured by a primary
interest in certain equipment, and the
assignment of certain rents and leases
paid to the Quincy landlord. - 53,772
Notes payable, acquisition of power
systems division. On September 20,
1994, the repayment terms were
renegotiated to payments of $10,000
per month through June 1, 1998,
$37,824 per month from July 1, 1998
through September 1, 2002, and $27,824
per month from October 1, 2002 through
December 1, 2002. The notes remained
(cont'd)
<PAGE>
4. Notes Payable and Long-term Obligations (cont d)
Long-term Obligations (cont'd)
June 30,
1997 1996
noninterest bearing. Amendment
dated January 31, 1996 required a
final payment of $1,332,000 in
July 1996, with $1,000,495 of debt
forgiven. Accordingly, the entire
balance was classified as current
at June 30, 1996, and the gain from
debt restructuring recorded during
1996. The notes were secured by
equipment purchased from the
creditor and a subordinate interest
in inventory and other equipment. $ - $ 1,332,000
Note payable to bank at 5%, due
in monthly principal and interest
payments of $1,200. Final balloon
payment due in December 2000. The
note is secured by real estate
located in Memphis, Missouri. 88,420 100,320
Note payable to bank at 5%, due
in monthly principal and interest
payments of $472. Final balloon
payment due in January 2001. The
note is secured by all equipment
located in Memphis, Missouri. 20,872 23,139
Note payable to bank at 9.5%, due
in monthly principal and interest
payments of $497 through February
1999. The note is secured by a
certain vehicle. 9,145 13,972
Installment contract payable at
7.95%, due in monthly principal
and interest payments of $1,160,
beginning April 13, 1997 through
March 13, 2000. The note is
secured by a certain vehicle. 34,171 -
(cont'd)
</TABLE>
<PAGE>
4. Notes Payable and Long-term Obligations (cont'd)
Long-term Obligations (cont'd)
June 30,
1997 1996
<TABLE>
<S> <C> <C>
Installment contract payable at
9.6%, due in monthly principal
and interest payments of $1,149,
beginning May 17, 1997 through
April 17, 2000. The note is
secured by a certain vehicle. $ 34,094 $ -
Bridge notes payable at 8%.
Principal and accrued interest
paid at financing closing in
July 1996 (Note 6). - 187,000
Capital lease obligations 407,899 682,170
Total debt 4,821,948 3,215,495
Less current portion ( 948,326) (2,341,020)
Long-term obligations $ 3,873,622 $ 874,475
Future maturities of debt obligations are as follows:
Year Ending
June 30, Amount
1998 $ 948,326
1999 3,098,170
2000 385,846
2001 362,940
2002 26,666
$ 4,821,948
</TABLE>
5. Leased Property
Capital Leases - MicroENERGY has capital lease arrangements
for certain property, machinery and equipment, including
certain leases for its Tru-Way manufacturing facility,
machinery and equipment that are with a partnership consisting
of officers of the Company.
The 1994 agreement for building and certain equipment is
leased from the partnership over a five year term, which
5. Leased Property (cont'd)
Capital Leases (cont'd)
expires in July 1998. Minimum monthly lease payments for the
real estate and equipment total $16,500. In addition, another
equipment lease was entered into with the partnership in
December 1993 for a three year term, with minimum monthly
lease payments of $3,025, which expired in November 1996.
Payments are continuing on an informal month to month basis.
Actual payments to the partnership totaled $362,050 in 1997
and $106,550 in 1996. At June 30, 1996, $127,750 was due to
the partnership under these lease agreements.
Property and equipment and related accumulated depreciation
under these capital leases was $1,335,918 and $814,689 at
June 30, 1997, respectively, and $1,300,079 and $588,518,
respectively, at June 30, 1996. Amortization charges related
to capitalized assets are included in depreciation expense.
Operating Leases - MicroENERGY leases its main manufacturing
facility space under a ten year operating lease, and its
office space under two five year operating leases.
Total rent expense under operating lease agreements ap-
proximated $362,070, $384,773 and $377,128 in 1997, 1996
and 1995, respectively.
Future minimum lease payments under capital and operating
leases with commitments beyond one year are as follows:
Capital Operating
Year Ending June 30, Leases Leases
1998 $ 344,663 $ 341,611
1999 95,882 320,804
2000 817 320,804
2001 - 320,804
2002 - 140,090
Total minimum lease payments 441,362 $ 1,444,113
Imputed interest ( 33,463)
$ 407,899
<PAGE>
6. Stockholders' Equity
Reverse Stock Split - Effective May 13, 1996, the Company
consummated a 1 for 360 reverse stock split. Each share of
common stock issued and outstanding immediately prior to the
reverse split date was reclassified and changed into .00278 of
a share of common stock with a new par value of .01 per share.
Prior to the reverse split date, the Company had 180,000,000
shares of common stock authorized with a par value of .001
per share. Accordingly, the weighted average number of shares
outstanding for 1995 with related per share information as
reflected in the accompanying consolidated statement of opera-
tions had been restated to reflect the 1 for 360 reverse stock
split.
In addition, all share information in the following descrip-
tions of the Company's stock plans had been restated to
reflect the 1 for 360 reverse stock split.
Restricted Stock Grant Program - The Company maintains a
restricted stock grant program. In 1990, certain key
employees received 58,333 shares of restricted stock of the
Company. The restricted stock vests ratably beginning July 1,
1993 through 2026. The restrictions lapse in the event of the
key employee's death, permanent disability or termination of
employment by the Company without good reason, or a change in
control of the Company (as defined). The total market value
of the shares awarded under the plan as of the grant date,
aggregating $1,968,750, was recorded as unearned restricted
stock award compensation and reported as a separate component
of stockholders' equity.
Compensation expense is being amortized over the period in
which participants perform services and the restrictions on
the stock awards lapse.
Stock Purchase Warrants - Stock purchase warrants were issued
to certain officers of the Company in consideration for
personal guarantees provided on certain debt. On April 10,
1991, MicroENERGY issued Class C warrants which give certain
officers the right to convert such warrants to 56,944 shares
of common stock at an exercise price ($22.68) approximating
market value at the date of the grant. The warrants became
exercisable on April 10, 1992, and expire on April 10, 1998.
In addition, the Company entered into a contingent loan
agreement with the warrant holders, pursuant to which the
Company will lend the holders funds necessary to exercise the
<PAGE>
6. Stockholders' Equity (cont'd)
Stock Purchase Warrants (cont'd)
Class C warrants in the event that a person or group acquired
10% of the Company's common stock. None of the warrants have
been exercised to date.
On December 13, 1994, MicroENERGY issued Class D warrants,
which give certain officers the right to convert such warrants
to 97,222 shares of common stock at an exercise price of $.45,
which approximated 125% of market value at the date of the
grant. The warrants become exercisable on December 13, 1995.
During 1996, all of these warrants were exercised.
Stock Option Plans - The stockholders of MicroENERGY have
approved four Incentive Stock Option Plans (the "plans").
Options granted under these plans are intended to qualify as
"incentive stock options," as defined by the Internal Revenue
Code. Two of these plans have expired, however, options
remain outstanding under those plans. A total of 63,889
shares of common stock are reserved for issuance upon exercise
of options granted under the plans. Options for 4,611, 5,319
and 7,736 shares were outstanding at June 30, 1997, 1996 and
1995, respectively. During 1997, no options were granted or
exercised, and 708 options were canceled. During 1996, no
options were granted, 2,139 options were exercised, and 278
options were canceled. During 1995, options for 3,111 shares
were granted, no options were exercised, and 250 options were
canceled. The options have exercise prices ranging from $3.60
to $16.20, with an average price of $5.50. Options granted
under the plans are not exercisable until one year after the
date of the grant, vest ratably over a five year period, and
may only be exercised while the holder is an employee of
MicroENERGY. Options expire no later than ten years after
the date of the grant. At June 30, 1997, 54,611 shares are
exercisable.
On November 12, 1990, the Board of Directors of the Company
also approved a nonqualified stock option plan, which granted
an outside Director the option to purchase up to 5,556 shares
of common stock at an exercise price of $.45. During 1996,
all of these options were exercised.
The Company accounts for its aforementioned stock compensa-
tion plans using the intrinsic value based method. No stock
compensation transactions were entered into during 1997 or
1996.
<PAGE>
6. Stockholders' Equity (cont'd)
Preferred Stock Subscription - In January 1996, the Company
received $250,000 from certain officers of the Company as a
preferred stock subscription. The subscription was for
350,000 shares of Series A Cumulative Preferred Stock, and
were identical to the terms of the preferred stock described
below under "Securities Offering," except that the officers
have agreed to waive the semiannual dividends in excess of
$.40 per share.
In June 1997, the Board of Directors approved the conversion
of the 350,000 shares of Series A Cumulative Preferred Stock
into 1,400,000 shares of common stock.
Preferred Stock Warrants - In March 1996, the Company
obtained bridge financing from six lenders in the amount
of $275,000 in anticipation of the preferred stock public
offering. The lenders are the individuals identified in
the Prospectus as "Selling Securityholders." In exchange
for the $275,000, the Company gave the Selling Security-
holders nonnegotiable promissory notes in the aggregate
principal amount of $187,000, which were repaid in July
1996 with the proceeds from the offering, plus 880,000
Redeemable Class A Preferred Stock Warrants at $.10 per
warrant. The Redeemable Class A Warrants acquired by
the Selling Securityholders in the bridge financing are
identical to those described below under "Securities
Offering."
Securities Offering - Effective July 10, 1996, the Company
offered 494,500 shares of Series A Cumulative Preferred Stock
and 247,250 Redeemable Class A Warrants for Series A Preferred
Stock.
The Preferred Stock is currently not convertible into any
other security. Dividends on the Preferred Stock are
cumulative from the issue date, and are payable semiannually
at the rate of 8% per annum. At the Company's option, the
dividends may be paid in whole or in part, either in cash or
in shares of the Company's Common Stock valued at the average
closing bid price for the ten days preceding the dividend
payment date.
In December 1996 and June 1997, the Company declared the
preferred stock dividends to be paid with common stock. The
dividend declared in June 1997 was paid in July 1997.
<PAGE>
6. Stockholders' Equity (cont'd)
Securities Offering (cont'd)
Each Class A Warrant entitles the holder to purchase one share
of the Company's Series A Preferred Stock at an exercise price
of $7.00, subject to adjustment, from July 10, 1997 through
July 9, 2000. At any time the Class A Warrants are
exercisable, the Warrants are also subject to redemption by
the Company on not less than 30 days notice at $.01 per
Warrant, provided the closing bid price of the Preferred Stock
exceeds $9.00 per share for five consecutive trading days
ending fifteen days prior to the date notice is sent.
7. Employee Benefit Plan
The Company sponsors the MicroENERGY, Inc. Savings and
Investment Plan, a defined contribution 401(k) plan covering
all full-time employees who meet certain age and length of
service requirements. Employer matching contributions are at
the Company's sole discretion. Employer contributions
expensed for the years ended June 30, 1997, 1996 and 1995
totaled $34,731, $24,504 and $26,211, respectively.
8. Income Taxes
The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. A
valuation allowance is recognized if it is more likely than
not that a deferred tax asset will not be realized.
The following is a reconciliation of income taxes at the
federal statutory rate:
For the Year Ended
June 30,
1997 1996
Computed income taxes at the
federal statutory rate of 34% $ 32,344 $ 119,830
State taxes, net of federal benefit 14,950 19,535
Effect of graduated rates ( 265) 3,521
Permanent differences 11,991 11,525
Temporary differences for which
deferred taxes had not been
recognized 75,474 20,814
Benefit of tax loss carryforward (134,494) (175,225)
Total provision for income taxes $ - $ -
8. Income Taxes (cont'd)
For the Year Ended
June 30,
1997 1996
Provision for income taxes -
current:
Income (loss) before extra-
ordinary item $ 134,494 $ (322,195)
Extraordinary item - 497,420
Total 134,494 175,225
Benefit of tax loss carryforward (134,494) (175,225)
$ - $ -
At June 30, 1997, the cumulative net operating loss carry-
forward available to MicroENERGY for income tax purposes was
approximately $2,913,000. If not used to offset future
taxable income, the net operating loss carryforwards will
expire in various years beginning in 2000 and continuing
through 2008. In addition, the Company has investment tax
credit, research and development credit, and AMT credit
carryforwards of approximately $18,000, $203,000 and
$15,700, respectively, at June 30, 1997. If not used to
offset future taxes, the carryforwards expire in years
beginning in 1999 and continuing through 2006. A deferred
tax asset for these carryforwards of approximately
$1,348,000 at June 30, 1997 and $1,514,000 at June 30, 1996
has been offset by a valuation allowance in an equal amount.
The Company's ability to utilize the carryforwards would be
restricted upon the occurrence of an "ownership change"
within the meaning of Section 382 of the Internal Revenue
Code of 1986. Although the determination of whether an
ownership change has occurred is subject to factual and
legal uncertainties, the Company believes that an ownership
change occurred at the closing of the securities offering
as discussed in Note 6. As a result of the ownership
change, the Company will generally be permitted to utilize
net operating loss carryforwards in any year thereafter to
reduce its income to the extent that the amount of such
income does not exceed the product of (1) the fair market
value of the Company's equity at the time of the ownership
change (reduced by the amount of certain capital contribu-
tions, such as those received pursuant to this Offering),
and (2) a long-term tax-exempt rate published by the
Internal Revenue Service (5.78% for ownership changes
<PAGE>
8. Income Taxes (cont'd)
occurring in July 1996). Further, the Company's ability
to utilize its ITC, RDC and AMT carryforwards will also be
limited as a result of the ownership change in an amount
determined by reference to the Section 383 limit. As a
result, the Company does not expect to utilize its full
NOL and tax credit carryforwards to offset future taxable
income and tax liability. This limitation could have a
materially adverse effect on the Company's net income if the
Company were to generate taxable income (or tax liability)
materially in excess of the limitations.
In addition to the benefit of tax carryforward items, de-
ferred taxes are also recorded based upon temporary
differences between the financial statement basis and
tax basis of assets and liabilities.
Temporary differences as of June 30, 1997 and 1996 are as
follows:
June 30,
1997 1996
Total Deferred Total Deferred
Amount Tax Amount Tax
<TABLE>
<S> <C> <C> <C> <C>
Current:
Inventory:
Uniform capi-
talization $ 748,300 $285,600 $ 558,800 $218,800
Obsolescence
and excess
reserve 476,000 181,700 515,000 201,600
Allowance for
bad debts 45,000 17,200 50,000 19,600
Accrued expenses 118,600 45,200 93,000 36,400
Long-term:
Foreign investment 76,900 29,400 76,900 30,100
Depreciation (75,900) (29,000) (86,500) (33,900)
Capital lease 31,700 12,100 45,500 17,800
Stock benefit
plans 432,000 164,900 378,000 148,000
$1,852,600 $707,100 $1,630,700 $638,400
</TABLE>
<TABLE>
<S> <C> <C>
The deferred tax assets totaling $707,100 at June 30, 1997 and
$638,400 at June 30, 1996 have been offset by a valuation
allowance in an equal amount.
9. Significant Concentrations
Customers - Revenues are generated from sales to OEM customers
who are engaged in the telecommunications, computer, and
instrumentation segments of the electronics industry.
<PAGE>
9. Significant Concentrations (cont'd)
Customers (cont'd)
During 1997, net sales to three customers were 36%, 12% and
10%, respectively, of total net sales. However, the first
major customer is comprised of four autonomous purchasing
units. If considered separately, one unit would be considered
a major customer with 17% of total net sales.
During 1996, net sales to two customers were 40% and 13%,
respectively, of total net sales. However, the first major
customer is comprised of four autonomous purchasing units. If
considered separately, one unit would be considered a major
customer with 30% of total net sales.
During 1995, net sales to one customer were 28% of total
net sales. However, the major customer is comprised of
five autonomous purchasing units. If considered separately,
one unit would be considered a major customer with 26% of
total net sales.
Accounts receivable from these customers totaled $1,276,216
and $817,815 at June 30, 1997 and 1996, respectively.
Export Sales - During 1997, 1996 and 1995, export sales,
principally to Europe, Canada and Australia, were 41%, 48%,
and 36%, respectively, of total net sales. Of the 41% in
1997, sales to the United Kingdom and Canada were 23% and 18%,
respectively. Of the 48% in 1996, sales to the United Kingdom
and Canada were 32% and 16%, respectively.
Vendors - The Company currently buys certain production
material from two vendors. Purchases from these two companies
approximated 16.4% and 14.9% of total material purchases for
the year ended June 30, 1997 (17.7% and 12.6% for the year
ended June 30, 1996). A change in suppliers could cause a
delay in manufacturing and a possible loss of sales, which
could adversely affect operating results.
10. Fair Value of Financial Instruments
Cash, Accounts Receivable and Accounts Payable - The carrying
amounts approximate fair value.
Foreign Investment (Note 3) - The investment is recorded at
its fair value based on the quoted market price and the
foreign currency exchange rate as of the balance sheet date.
Long-term Debt - The fair value of long-term debt is estimated
by discounting expected cash flows at the rates currently
offered to the Company for debt of the same remaining
maturities, as advised by the Company's various lenders. The
carrying value of all long-term debt approximates fair value.
<PAGE>
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Name, Age
and Positions Business Experience
and Offices During past 5 Years
Held With and Principal Director
Registrant Occupations Since
Robert G. Gatza, 1983-Present: President 1983
Age 55 and Chief Executive
Chairman of the Board, Officer of MicroEnergy.
President
Robert J. Fanella, 1983-Present: Chief 1987
Age 47 Financial Officer of
Executive Vice Presi- MicroEnergy.
dent, Secretary,
Treasurer, Director
George M. Bradshaw 1983-Present: 1988
Age 51, Practicing Attorney
Director in areas of corporate
law, real estate, and
commercial law.
<PAGE>
Compliance With Section 16(a) of the Exchange Act
During the 1997 fiscal year no directors, officers or
beneficial owners of more than 10 percent of the Company's common
stock failed to file on a timely basis reports required by Section
16(a) of the Exchange Act, except that Messrs. Gatza and Fanella
each filed one Form 4 late, each reporting one transaction.
Item 11 EXECUTIVE COMPENSATION
Table I on the following page sets forth all
compensation awarded to, earned by, or paid by the Company to the
following persons for service rendered in all capacities during
each of the fiscal years ended June 30, 1997 ,1996, and 1995:
(1) the Registrant's Chief Executive Officer (CEO), and (2) each
of the other executive officers whose total salary and bonus for
the fiscal year ended June 30, 1997 exceeded $100,000.
Table II on the following page sets forth certain
information on stock options or warrants held by Officers of the
Company on June 30, 1997.
There were no stock options or warrants acquired by
the officers of the Company during the year ended June 30, 1997.
<PAGE>
</TABLE>
I. SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Option All oth
Position Year Salary Bonus Shares Comp *
<TABLE>
<S> <C> <C> <C> <C> <C>
Robert G. Gatza 1997 $381,125 -- -- $1,500
CEO 1996 $275,134 -- -- $ 750
1995 $210,001 -- -- $1,500
Robert J. Fanella 1997 $376,300 -- -- $1,500
1996 $269,112 -- -- $ 750
1995 $204,301 -- -- $1,500
* Represents Company matching contribution to 401(K) Plan
</TABLE>
II. AGGREGATED FISCAL YEAR OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal at Fiscal Year-End ($)
Year-End (#)
Robert G. Gatza 38,333 Exercisable $ 0
Robert J. Fanella 18,611 Exercisable $ 0
Compensation Plans
The Company has no compensation plans, other than 401K
and life and medical plans which are available to all employees.
Restricted Stock Grant Program
On May 19, 1989, the shareholders of the Company
adopted a Restricted Stock Grant Program (the "Program"),
pursuant to which 58,333 shares of common stock were reserved for
issuance. On July 3, 1989, the reserved shares were issued to
two "Grantees", namely Robert G. Gatza (34,722 shares)and Robert
J. Fanella (18,056 shares). Messrs. Gatza and Fanella are the
Company's officers and directors.
The shares issued under the terms of the Program are
subject to the following restrictions:
1. The shares granted under the Program cannot be
sold, assigned, pledged, transferred or hypothecated in any
manner, by operation of law or otherwise, other than by writ or
the laws of descent and distribution, and shall not be subject to
execution, attachment or similar process. This restriction shall
lapse, with respect to 3 1/3% of the number of shares granted
under the Program, and those shares will become unrestricted
stock, on the last day of the Company's 1998 fiscal year. The
restriction shall lapse with respect to each additional 3 1/3% of
such number of shares on the last day of each successive fiscal
year of the Company, until the final year which will have
13 1/3%.
2. The restriction shall also lapse as to all shares
granted to a Grantee on the first to occur of (i) the termination
of that Grantee's employment with the Company by reason of his
disability, (ii) the Grantee's death, (iii) termination of the
Grantee's employment by the Company without good reason, or (iv)
a change of control of the Company. The Program defines "Change
of Control" as an acquisition by a person or group of more than
50% of the Company's outstanding shares, a transfer of the
Company's property to an entity of which the Company does not own
at least 50%, or the election of directors constituting a
majority of the Board who have not been approved by the existing
Board.
3. Shares which have not become unrestricted under
the circumstances referred to in Item 1 or Item 2 above shall be
forfeited to the Company upon termination of the Grantee's
employment with the Company.
4. During any tax year in which a Grantee realizes
taxable income by reason of the lapse of the restrictions on the
shares granted under the Program, the Company shall pay to such
Grantee a "Gross-Up Bonus" in cash equal to the aggregate of (i)
the additional federal, state and local income taxes incurred by
Grantee as a result of realization of such taxable income, and
(ii) the federal, state and local income tax incurred by the
Grantee as a result of the Gross-Up Bonus. In no event shall the
Gross-Up Bonus exceed the aggregate of (i) the amount of the tax
deduction for which the Company receives a benefit for the tax
year of the Company beginning during the tax year of the Grantee
in which he realizes taxable income by virtue of the lapse of the
restrictions referred to in Item 1 above, and (ii) the amount of
the tax deduction for which the Company receives a benefit for
such tax year of the Company by virtue of the Gross-Up Bonus.
Incentive Stock Option Plans
On December 6, 1984 the shareholders of the Company
approved the 1984 Incentive Stock Option Plan and the 1985
Incentive Stock Option Plan for 8,333 shares; and on February
24,1992 the share holders of the Company approved the 1992
Incentive Stock Option Plan for 5,556 shares; and on May 7, 1996
the shareholders of the Company approved the 1996 Incentive Stock
Option Plan for 50,000 shares. Options granted under the Plans
are intended to qualify as "incentive stock options", as defined
in Section 422A of the Internal Revenue Code. The 1984 and 1985
plans expired with options for 5,319 shares outstanding. There
were 278 shares not granted under the expired 1984 and 1985 plans
and they will not be eligible for grant under terms of the two
plans. A total of 5,556 shares of common stock are reserved for
issuance upon exerciseof options granted under the 1992 Plan. A
total of 50,000 shares of common stock are reserved for issuance
upon exercise of options granted under the 1996 Plan. Options
for a total of 7,348 shares have been granted to employees of the
Company under the 1984 and 1985 Plans. Options for 2,736 shares
have been exercised to date at an average purchase price of
$10.16. No options have been issued to any person who is
currently an officer or director of the Company. The average
exercise price of the options which are outstanding is $5.50.
Other Compensation
The two persons who were officers of the Company during
the last fiscal year did not receive non-cash compensation
exceeding in aggregate 10 percent of their aggregate cash
compensation.
Compensation of Directors
During the fiscal year ended June 30, 1997, the
Company paid no fees or other cash compensation to directors for
service on the Board. Mr. George M. Bradshaw, a member of the
Board of Directors, received $15,955 for legal services rendered
to the Company.
<PAGE>
Item 12 SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the equity securities of
the Company beneficially owned by any person who, to the
knowledge of the Company, owned beneficially more than 5% of
either class of voting stock as of September 8, 1997, by all
directors of the Company, and by the directors and officers of
the Company as a group. The table also indicates the number of
votes to which each person would be entitled in the event of a
shareholders meeting and the percentage of the total voting power
represented thereby. None of the persons identified below owns
any securities of the Company other than the Common Stock listed
below.
Name and Amount and
Address of Nature of Percentage
Title of Beneficial Beneficial Percentage of Voting
Class Owner Ownership of Class Votes Power(1)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Robert G. 867,052 42.1% 867,052 34.0%
Stock Gatza(3) shares of
record(2)
Common Robert J. 802,480 39.4% 802,480 31.7%
Stock Fanella(3) shares of
record(2)
Common George M. 7,699 0.4% 7,699 0.3%
Stock Bradshaw(4) shares of
record
Common All officers 1,677,231 80.8% 1,677,231 65.3%
Stock and directors shares of
as a group record(2)
(3 persons)
</TABLE>
(1) In determining the percentage of outstanding
shares or the percentage of voting power, all presently
exercisable options owned by the shareholder or the group are
treated as having been exercised.
(2) Includes shares of Common Stock issued pursuant to
the Restricted Stock Grant program as follows: Robert G. Gatza-
34,722 shares, Robert J. Fanella-18,056 shares. Also includes
Class C Warrants to purchase shares of Common stock at $22.68 per
share as follows: Robert G. Gatza-38,333 shares, Robert J.
Fanella-18,611.
(3) The business address of Messrs. Gatza and Fanella
is c/o MicroENERGY, Inc., 350 Randy Road, Carol Stream, Illinois
60188.
(4) The business address of Messr. Bradshaw is c/o
Huck, Bouma, Martin, Charlton, & Bradshaw P.C., 1755 S.
Naperville Rd., Suite 200, Wheaton, Illinois 60187.
Item 13 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Transactions Relating to Tru-Way, Inc.
On December 30, 1988, Robert Gatza and Robert Fanella,
who are directors and officers of the Company, (together referred
to as the "Partners") formed an Illinois Partnership called
ARQUBE. Under the terms of their partnership agreement, the
ownership interest of the Partners in ARQUBE is as follows:
Robert Gatza - 66 2/3%
Robert Fanella - 33 1/3%
ARQUBE was formed for the purpose of acquiring the
land and fixed assets owned by Tru-Way, Inc. an Illinois
corporation engaged in the business of manufacturing fabricated
metal parts used in the Company's principal product. The assets
purchased by ARQUBE included all the machinery and equipment and
an industrial building in Stone Park, Illinois. The total
purchase price was $350,000. ARQUBE obtained a loan for the
amount of $350,000 and the loan was personally guaranteed by the
Partners. The land and industrial building were placed in trust
and also secure ARQUBE's obligation.
Subsequent to ARQUBE's acquisition of Tru-Way's land
and fixed assets, the Company purchased all of the outstanding
shares of stock of Tru-Way, Inc.
On July 22, 1993 the Stone Park facility was sold
and a larger facility in Northlake, Illinois (10,800 square feet
versus 5,100 square feet) was purchased. At this date the
operations of Tru-Way were consolidated into this larger
facility, the July 1, 1990 lease between ARQUBE and Tru-Way was
terminated and new leases for the facility and equipment were
entered into. The lease for the facility is for a five year
period, with monthly rental payments of $4,500, and the equipment
lease is for a five year period, with monthly payments of
$12,000. The two leases expire July 30, 1998.
On December 1, 1993, a lease for additional metal
fabricating equipment was entered into. The terms of this lease
were $3,025 per month, for a period of three years. The lease
expired November 30, 1996 and the Company now leases the
equipment on a month to month basis at the same rental rate.
The Company has recorded the original two leases as
capital leases. The Company believes that the terms of these
leases are equivalent to those available in arms-length
transactions.
Transactions Relating to Debt Compromise
In January, 1996 the Company reached agreement with
its major creditor to compromise a long-term debt of $2,332,000
by the immediate payment of $1,332,000. The compromise was
intended to improve the Company's financial condition, and to
increase the net worth of the Company sufficiently that upon the
completion of the Series A Preferred Stock Offering the Company
was eligible to have the securities sold in that Offering listed
on the NASDAQ SmallCap Market.
In order to obtain the funds needed to finance the
debt compromise, the Company sold 350,000 shares of Series A
Cumulative Preferred Stock in equal parts to Messrs. Gatza and
Fanella in exchange for their cash payment of $250,000 and their
agreement to give personal guarantees on a loan of $800,000. The
Series A Cumulative Preferred Stock issued to Messrs. Gatza and
Fanella is identical to that which was sold in the offering.
Messrs. Gatza and Fanella agreed, however, that while they held
the Series A Cumulative Preferred Stock they would waive the
semi-annual dividends in excess of $.40 per share (the Series A
preferred Stock pays $.56 per share).
In June of 1997, the Board of Directors approved the
conversion of the 350,000 shares of Series A Cumulative Preferred
Stock, held by Messrs. Gatza and Fanella, into 1,400,000 shares
of Common Stock, par value $.01. The exchange ratio was
determined on the basis of the relative equity value of the two
securities and a measure of the value of seven years of dividends
on the Series A Cumulative Preferred Stock. The Company thereby
eliminated the annual dividend obligation on those preferred
shares.
<PAGE>
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial statements and financial statement schedules
(a) The Financial Statements of MicroENERGY, Inc. and
the Independent Auditors' Report of Selden, Fox and
Associates, Ltd. are set forth in the index to Item
8.
(b) Financial Statement Schedules: The supplemental
financial information listed in the index to Item 8
is filed as part of this 10-K and should be read in
conjunction with the financial statements.
Schedules not included with this additional
information have been omitted either because they
are not applicable or because the required
information is shown in the financial statements or
notes thereto.
(b) 8-K Reports -none filed
(c) Exhibits:
3(a) Certificate of Incorporation, as amended has
been filed as an Exhibit to the Company's S-18 Registration
Statement dated February 2, 1984 and is incorporated by reference
herein as an exhibit hereto.
3(a)(1) Certificate of Amendment to Certificate of
Incorporation dated February 12, 1987 - has been filed as an
Exhibit to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1987 and is incorporated by reference as an
exhibit hereto.
3(a)(2) Certificate of Amendment to Certificate of
Incorporation dated December 20, 1990 - filed as an exhibit to
the Company's Annual Report on form 10k for the fiscal year ended
June 30,1991 and is incorporated by reference as an exhibit
hereto.
3(a)(3) Certificate of Amendment to Certificate of
Incorporation dated May 13, 1996 and Certificate of Correction
dated June 3, 1996- filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-1835) and incorporated
herein by reference.
3(a)(4) Certificate of Designation of Series A
Preferred Stock, dated July 11, 1996- filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-1835) and
incorporated herein by reference.
3(b) By-laws, as amended, have been filed as an
Exhibit to the Company's Annual Report on Form 10K for the fiscal
year ended June 30, 1984 and are incorporated by reference as an
exhibit hereto.
10(a) Lease for premises at 350 Randy Road, Carol
Steam, Illinois have been filed as an Exhibit to the Company's
Annual Report on form 10K for the fiscal year ended June 30,
1993, and are incorporated by reference as an exhibit hereto.
10(b) 1992 Incentive Stock Option Plan- filed with
the Company's proxy materials used in connection with the Annual
Meeting on February 24, 1992 and incorporated herein by
reference.
10(c) 1996 Incentive Stock Option Plan- filed with
the Company's proxy materials used in connection with the Special
Meeting of shareholders on April 23, 1996 and incorporated herein
by reference.
10(d) 1985 Incentive Stock Option Plan - filed with
the Form 10K for fiscal year ended June 30, 1984 and incorporated
herein by reference.
10(e) Lease dated August 20, 1986 for premises in
Quincy, Illinois filed as an Exhibit to the Company's Report on
Form 10K for the year ended June 30, 1986 and incorporated by
reference as an exhibit hereto.
10(e)(1) Amendment to Lease for
premises in Quincy, Illinois- filed with the Form 10K for fiscal
year ended June 30, 1993 and incorporated herein by reference.
10(f) Loan and Development Agreement with Promissory
Note dated August 20, 1986 between the Company and the City of
Quincy, Illinois filed as an Exhibit to the Company's Report on
Form 10K for the year ended June 30, 1986 and incorporated by
reference as an exhibit hereto.
10(g) Promissory Note and Collateral Security
Agreement dated August 20, 1986 between the Company and Boatmen's
Bank of Quincy filed as an Exhibit to the Company's Report on
Form 10K for the year ended June 30, 1986 and incorporated by
reference as an exhibit hereto.
10(h) Credit Agreement between the Company and
Boatmen's Bank of Quincy - has been filed as an Exhibit to the
Company's Annual Report on Form 10K for the fiscal year ended
June 30, 1988 and is incorporated by reference as an exhibit
hereto.
10(i) Restricted Stock Grant Program - filed with the
Company's proxy materials used in connection with the Annual
Meeting on May 19, 1989 and is incorporated herein by reference.
10(j). Omitted
10(k). 1991 financing documents related to the State
of Illinois, City of Quincy, and Comerica Bank - filed as an
exhibit to the Company's Annual Report on Form 10k for the fiscal
year ended June 30,1991 and is incorporated by reference as an
exhibit hereto.
10(k)(1). 1994 and 1995 amendments to
financing documents related to the 1991 State of Illinois and the
City of Quincy loan agreements. -filed as an exhibit to the
Company's Annual Report on Form 10K for the fiscal year ended
June 30, 1995 and is incorporated by reference as an exhibit
hereto.
10(l). Class C Warrants for 20,500,000 shares of
common stock issued to Robert G. Gatza and Robert J.Fanella in
return for personal guarantees on certain of the Company's debt-
filed with the Company's proxy materials used in connection with
the Annual Meeting on February 24,1992 and is incorporated herein
by reference.
10(m). Employment agreements dated February 1, 1996,
with Robert G. Gatza and Robert J. Fanella- filed as an exhibit
to the Company's Registration Statement on Form S-1 (333-1835)
and incorporated herein by reference.
10(n). Commercial Loan and Security Agreement with
Promissory Notes, dated July 17, 1996, between the Company and
Marquette National Bank.- filed herewith
10(o). Lease for premises, from ARQUBE, at Northlake,
IL; Tru-Way facility- filed with Form 10K for fiscal year ended
June 30, 1993, and incorporated herein by reference.
10(p). Equipment Lease, from ARQUBE, for Tru-Way
operations- filed with the form 10K for fiscal year ended June
30, 1993, and incorporated herein by reference.
10(q) Omitted
(22) Subsidiaries - Tru-Way, Inc., an Illinois
corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MicroENERGY, INC.
(Registrant)
By /s/ Robert G. Gatza
Robert G. Gatza
President
Date: September 26, 1997
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.
/s/ Robert G. Gatza
Robert G. Gatza
President (Principal Executive Officer), Director
Date: September 26, 1997
/s/ Robert J. Fanella
Robert J. Fanella
Treasurer (Principal Financial Officer)
(Principal Accounting Officer), Director
Date: September 26, 1997
/s/ George M. Bradshaw
George M. Bradshaw
Director
Date: September 26, 1997
