U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal years ended January 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________ to _______ .
Commission File No. 2-90328
SLS Industries, Inc.
(Name of small business issuer in its charter)
Nevada 77-0002526
(State of incorporation) (IRS Employer Id No.)
7223 Parkway Drive Suite 103, Hanover, MD 21076
(Address of Principal Executive Offices) (Zip Code)
(410) 712-4155
Issuer's Telephone Number
Securities registered under 12(b) of the Exchange Act: None
Securities registered under 12(g) of the Exchange Act: Common
Stock, with par value $0.001 per share
Check whether the issuer (1) filed all reports to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period of that the Registrant was required
to file such report(s), and (2) has been subject to such filing
requirement for the past 90 days. Yes No X
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 Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year 1998 $1,787.
The aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock
sold or the average bid and asked prices of such stock, as of a
March 3, 1998 was $4,797,710.
As of January 31, 1998, number of shares of Common Stock,
outstanding was 15,563,346.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part 1
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
SLS Industries, Inc., a Nevada Corporation (the "Company") is
principally engaged in the design, development and marketing of
electronic transformers for the lighting industry. The
technologies developed by and/or owned by the Company are
proprietary in nature. The products have been developed for use
in industrial, and commercial lighting applications and will be
marketed under the name UNIDIM?.
The Company's principal executive offices are at 7223 Parkway
Drive, Suite 103, Hanover, MD 21076, and its telephone number is
(410) 712-4155.
HISTORICAL BUSINESS DEVELOPMENTS
The Company was incorporated in Nevada on September 14, 1983
under the name Photo Acoustic Technology, Inc. ("PAT") by Mantosh
Chawla and Majid Amini to design, develop, manufacture and market
surface quality inspection systems. On July 12, 1994, PAT
acquired all of the outstanding shares of capital stock of
Paradigm Industries, Inc., ("Paradigm") a privately held
corporation organized under the laws of the state of Maryland, in
exchange for 40,638,121 shares of Common Stock of PAT. As a
result of the merger, Paradigm became a wholly owned subsidiary
of PAT. On August 3, 1995, the Board of directors authorized the
change of the Company's name from PAT to SLS Industries, Inc., a
Nevada Corporation. Effective January 15, 1996, Paradigm's name
was changed to SLS Industries, Inc., a Maryland Corporation. The
Company's Maryland subsidiary operates under the name Scientific
Lighting Solutions. On February 24. 1995, pursuant to the Share
Exchange Agreement dated May 12, 1994, Mantosh Chawla and Majid
Amini elected to remove the former business of the Company into a
separate business venture. Photo Acoustic Technology, Inc. then
became a holding company, with the sole asset being a 100%
interest Paradigm Industries, Inc.
Paradigm was founded in 1993 in Baltimore, Maryland without the
express purpose of designing energy efficient power supplies for
the lighting industry. The Company's three founders were Ronald
E. Spire, R. Richard Saxby and Richard B. Pazornik. Messrs.
Spire and Pazornik are still actively engaged in the day to day
operation of the Company. Mr. Saxby resigned from the active
participation in the Company when Research and Development
activity was shifted from his control to the Company's East Coast
operations.
On the 17th day of November, 1995, the Company reduced the
number of shares outstanding through a 1 for twenty reverse split
of the common stock.
On the 17th day of September 1996, the Company completed a
private placement which raised $1,054,750 in exchange for the
issuance of 5,273,750 shares of common stock.
BUSINESS STRATEGY
The Company seeks to develop and market energy efficient power
transformers for use in the commercial and industrial lighting
and marketing of light-weight, energy-efficient electronic power
marketplace, and seeks to become the leader in the development
supplies for industrial and commercial lighting. The Company
hopes that its products will advance the use of High Intensity
Discharge ("HID") lighting and that the Company will play a
leading role in the growth of new applications for the fiberoptic
lighting industry.
By the year 2001, the Company hopes to become recognized as a
high-quality developer and manufacturer of electronic
transformers for industrial and commercial lighting and for
fiberoptic lighting. The Company hopes to develop and
successfully market its first line of light weight, energy
efficient, dimmable HID ballasts for Metal Halide and High
Pressure Sodium ("HPS") lighting and the associated fiber optics
lighting during the first half of 1998. Through its ongoing
commitment to research & development, the Company also hopes to
be a leader in the miniaturization of these products. The
Company may also seek to diversify through the acquisition of
small, yet profitable lighting related companies. There can be
no assurances that the Company will be successful in implementing
all or any aspects of its proposed business strategy.
The Commercial Lighting Industry
Lighting There are many different sources of manufactured light,
all with varying applications, performance characteristics and
efficiencies. The following chart compares the maximum
efficiencies based upon light output of various manufactured
light sources available:
Light Source Lumen Output Watts to Produce Relative
per Watt <F1> 10,000 Lumens Efficiency
Incandescent 24 417 1
Tungsten Halogen 25 400 1.043
Mercury Vapor 63 158 2.639
Fluorescent 100 100 4.170
Metal Halide 125 80 5.213
High Pressure Sodium 140 72 5.792
Low Pressure Sodium 200 50 8.340
<F1>
Philips Lighting, "The Benefits of Better Lighting," Philips
Lighting Company, August, 1989.
</F1>
Typically, the higher the lumen output per watt, the higher the
lamps efficiency is said to be. Compared to standard
incandescent lighting, the relative efficiency of Metal Halide
and HPS lighting is five to six times greater, making HID
generally more efficient and a better choice in the industrial
marketplace.
The lighting required for different tasks varies greatly and is
described using four criteria: the amount of light required, the
balance of light required, glare and color rendering, and color
temperature. The amount of light necessary to perform specific
tasks varies greatly with the task. The amount of light is
measured in foot-candles. The greater the detail of the work, the
greater the foot-candles required to light the given area.
Therefore, working a detailed operation requires greater foot-
candles, then would be necessary in a romantic restaurant
setting.
The light must be properly distributed over the intended area to
provide visual comfort. Improper distribution of light may cause
restlessness and may not provide proper three-dimensional
impression for the viewer. Thus, in many lighting applications,
such as museums, gymnasia, and retail, having the proper lighting
balance is very important. In several of these applications, HID
lighting is the preferred mode of lighting. HID provides a broad
distribution of light over a given area, making it appropriate in
larger retail stores and shopping malls, warehouses, gymnasia,
industrial highbay settings and for use in street lighting.
Unnecessary glare typically results in visual discomfort and eye
fatigue, which may include blurred vision, headaches and nausea.
Glare is often caused by unshielded light, such as an unshaded
fixture or sunlight. Any source of light may result in glare.
Proper use of diffusers can help to eliminate unwanted glare.
The color of objects will vary depending upon the light under
which an object is viewed. The color rendering of the several
types of lamps varies greatly and may vary significantly within
in the same lamp family. Therefore, it is important to utilize
the correct type of lighting in each application to avoid
discomfort and to enable to viewers to properly see the intended
objects. Color rendering is measured by the Color Rendering
Index (CRI) with a value of 100 being assigned to incandescent
and halogen lamps. Higher CRI levels cause the eye to perceive
an increased illumination level, even as the actual lumen output
is less. For example, a 250 watt Low Pressure Sodium lamp
generates 50,000 lumens with a CRI of 0-18, whereas a 250 watt
Metal Halide lamp puts out only 31,250 lumens with a CRI of 65-
92. However due to its significantly higher CRI (78.5 on
average), the typical observer would perceive there is greater
light generated by the Metal Halide lamp. However, the actual
amount of light is based on the lumen output in a given area and
not the CRI. Both characteristics are important factors in
determining the appropriate lighting for specific applications.
The chart which follows details the CRI for the various light
sources currently available:
Light Source CRI
Incandescent/Halogen 100
Metal Halide (clear/coated) 65-92
Fluorescent - High Lumen T12 75-85+
Fluorescent - T8 75-85+
White High Pressure Sodium 80-84
Fluorescent - T10 80
"Deluxe" High Pressure Sodium 65
Fluorescent - Cool White T12 62
Fluorescent - Warm White T12 53
Mercury Vapor (clear/coated) 22-52
High Pressure Sodium 25
Low Pressure sodium 0-18
Different light sources are given a Color Temperature based upon
whether the light perceived by the eye is cool or warm. Warmer
lights are generally preferred in environments requiring lower
illuminance, such as restaurants. Cooler lights are generally
preferred in environments requiring higher illuminance, such as
hospital operating theaters. The temperature rating is called
Kelvins, with a temperature of 3500K designated as neutral. The
following chart shows the spectrum of temperatures for different
natural and manufactured light sources.
Light Source Degrees K Temperature
Northlight/Blue Sky 9,000 Cold
Overcast Sky 6,500-7,500
DDaylight Fluorescen 6,400
Mercury Vapor 5,900
Summer Sunlight 5,600
Daylight 5,000K
Metal Halide 4,500
Cool White Fluorescent 4,250 Cool
Tri-phosphor Fluorescent 3,000-4,100 Neutral 3,500
Halogen Incandescent 3,000 Warm
40 Watt Incandescent 2,500
High Pressure Sodium 2,000
Candle 1,800
HID Lighting HID is one segment of the commercial lighting
industry. HID technology uses arc discharge lighting with high
power factor density for the light producing elements. It
differs from incandescent lighting in which a filament is heated
thereby emitting a glow of light, or fluorescent lighting in
which gas is excited within a tube. HID lighting includes High
Pressure Sodium (HPS), Metal Halide and Mercury Vapor Lamps. SLS
has developed a complete family of light weight, energy
efficient, electronic HID ballasts used in both HPS and Metal and
high efficiency. HPS fixtures are appropriate for applications
requiring long lamp life and high efficiencies with where color
rendering (CRI) is not an important factor. Such applications
may include street lighting, outdoor lighting, industrial,
horticultural, and security lighting. A major application for
HPS lighting is in mutli-level garages. Metal Halide lighting is
appropriate in areas where high efficiency and good color
rendering are important. Applications for Metal Halide include
highlighting architecture, bridges and monuments, sports
lighting, street lighting, auto lots, surface parking lots,
indoor high-bay settings and commercial lighting.
Lighting Industry The Lighting Industry represents a large
segment of the US economy. Based upon the US Industrial Outlook,
1994-Electric Lighting and Wiring Equipment, the value of all
domestic lighting related shipments in 1993 totaled in excess of
$6 billion, with annual growth projected at seven percent through
1994. From SLS's position, its products straddle both the
Lighting and the Power Transformer Industries. On the basis of
1991 statistics taken from the Current Industrial Report ("CIR")
MQ36C(92)-5 and based upon U.S. Census Bureau Information for
1991 relating to SIC 36123, the Power Transformer Industry
totaled almost $1.2 billion in domestic sales, not including
exports.
Year Overall ($mill) Comm & Indstr ($mill) Outdoor ($mill)
1988 5325.4 2094.8 987.8
1989 5912.6 2316.7 1021.4
1990 5870.8 2379.7 1061.5
1991 5577.8 2293.4 1053.9
1992 5978.7 2221.2 1158.6
1993 6495.9 2340.8 1229.3
1994 7054.8 2500 1310
1995 (est.) 7568.3 2725 1425
2000 (projection)9360 3365 1800
The lighting marketplace has been undergoing rapid changes over
the past five years, and is expected to continue to change
because of the pressures placed on the industry to develop more
energy-efficient lighting products. Increasing costs of power
generation and increasing consumption of energy are factors which
the Company believes are driving the change in the industry.
Existing HID ballast technology is based on magnetic core/coil
products developed in the 1960's. SLS has developed the ETL
safety listed line of high frequency electronic ballast for HID
applications.
Electronic HID Transformers Like fluorescent lighting ballasts,
in order to ignite and maintain the lamp HID lighting requires a
change in the line current to enable the lamp to emit and
maintain its light output. This is the purpose of the ballast in
both types of lighting. The HID ballast provides the following
operational functions for the lamp:
- - Provide the proper starting voltage
- - Regulate the lamp starting and operating current
- - Transform the supply voltage to the open-circuit voltage
required by the lamp for reignition during each half cycle
operation.
The Company's electronic ballast is one of the first to replace
magnetic core/coil technology with electronic components to
create a light weight, energy efficient ballast for these
applications.
Based upon the Government's information contained in CIR
MQ3629C(92)-5, electronic fluorescent ballasts make up the
fastest growing segment of the Power Transformer Industry. Total
sales in 1986 were less than $12 million, but grew over 22 times
by 1992 to exceed $270 million.<F2> Over the past several years,
growth in the ballast market has been primarily due to the
increased application of the electronic ballast in the
fluorescent marketplace. It is the Company's concept to
establish and mirror that same type of growth for the HID segment
of the marketplace. Just as the electronic fluorescent ballast
has come to be the standard for the industry, the Company
believes that its product line will also be the standard in HID
ballast innovation.
<F2>
Electronic ballasts have only been available for fluorescent
lighting. No electronic ballasts have been available for HID
lighting.
</F2>
The current technology used in HID ballasts is based upon the
magnetic core and coil technology of the 1960's. These ballasts
use a significant amount of energy to "excite" the lamp and
continue to draw ever increasing amounts of power during their
operational lives. SLS believes that there exists a substantial
need in the market to bring HID ballast technology into the
twenty-first century, by creating a lightweight, energy
efficient, electronic HID ballast. Unlike the traditional core
and coil ballast, the electronic ballast draws a consistent
amount of power over its life and delivers a consistent power
supply to the lamp, thereby helping to maintain a more constant
output from the lamp. Total Harmonic Distortion (THD) is
reduced, thereby limiting interference with other building
operating systems, and a higher Power Factor is achieved, thereby
making the ballast operate with greater efficiency over a
core/coil ballast. The UNIDIM ballast also offers continuous
dimming from 100% down to 50% for Metal Halide lamps and to 40%
for HPS lamps.
Magnetic ballasts used in HID applications are extremely heavy
and cumbersome. As a result of the significant weight factor of
the magnetic ballasts, fixtures had to be designed to support and
sustain the weight of not only the lamp and its housing, but to
primarily support the weight of the ballast. Designing fixtures
with sufficient structural support is extremely costly. Because
SLS's ballasts are significantly lighter in weight (up to 70%),
the structural design and the manufacture of fixtures can be
simplified. These changes could permit lighting designers to
develop new, exciting state-of-the-art light fixtures, with
better performance specifications.
The electronic ballast replaces the components of a core/coil
ballast with appropriate electronic technologies, such as
capacitors, resistors, and in some instances with integrated
circuits. Electronic ballasts for HID applications operate at
very high frequency, which causes less lamp flicker and reduces
lamp noise. Electronic technology also causes the ballast to run
significantly cooler than traditional core/coil ballasts. Even
after hours of continuous operation, an electronic HID ballast
feels warm to the touch, whereas a core/coil ballast cannot be
touched. Core/coil ballasts typically operate at 75 to 80*
centigrade (167-176* Fahrenheit). The cooler operating
environment, may also serve to reduce the operating extremes
under which the lamp must perform.
The Company's electronic HID ballast have all been designed to
operate at less than 10% THD. In addition, Metal Halide and HPS
core/coil ballasts also require a capacitor and ignitor. SLS
electronic ballast couples these components into the design,
thereby eliminating the need for three separate components. The
overall weight of SLS products is dramatically reduced over what
is currently available. For example a 400 watt SLS Metal Halide
ballast weighs approximately 6.6 pounds, whereas a typical
core/coil ballast for the same wattage may weigh up to 26 pounds,
without the ignitor.
Products
The Company is principally engaged in the design, development,
and marketing of electronic ballasts for the lighting industry.
The design of the Company's products are proprietary in nature
and are used primarily to light HID Lamps. These lamps are found
extensively in retail stores, shopping malls, commercial office
buildings, outdoor street lighting, industrial high bay lighting,
gymnasia and athletic field lighting and parking facilities (both
high rise and lot type parking). The Company's line of
electronic HID ballasts are significantly lighter in weight than
traditional magnetic ballasts used for the same purposes. In
addition, the Company's electronic ballasts are expected to
provide greater energy efficiency than currently available
alternatives.
The Company has developed electronic ballasts for two different
types of HID lamps, Metal Halide and HPS, as well as for use in
related fiberoptic fixtures. Lamps for these fixtures come in a
variety of wattages and are used in a variety of lighting
applications. The Company believes that it's technology can be
applied to a complete range of wattages of HID lamps. Fiberoptic
fixtures are typically used in artistic and commercial lighting
displays, such as architectural or accent lighting.
At present the Company's 150-250 watt MH ballasts are in the
second production run with units being sold for specific
applications and as samples to potential customers. The 300-400
watt ballast is in the prototype stage and will be submitted for
safety agency testing during 1999. Safety agency testing was
completed for the 150-250 watt models in November 1997 with the
first product approvals and a second approval being received in
late 1998 for a second line of 150-250 watt models. It is the
Company's intent to eventually offer ballasts which will operate
lamps ranging in size from 35 watt through 1,000 watts running
off Alternating or Direct Current and with dimming and other
specialized characteristics.
Because of the technical advancement from magnetic core/coil to
electronics, it is expected that the Company's products will
offer its HID customers and end users up to 25% greater energy
efficiency, a significant savings in the weight of the ballasts
(and in turn the lighting fixture), greater consistency or
performance over the life of the ballast (and in turn the
lighting fixture). The Company hopes to eventually design its
products with a smaller footprint, which will permit fixture
designers to reduce the size of the fixture and to experiment
with bold designs for HID fixtures. Fiberoptic applications will
also be able to take advantage of the lighter weight and the
dimmablitly features of these products as well as the reduced
heat generation and smaller footprint.
In addition, through continued commitment to the development of
new energy efficient products the Company hopes to continually
introduce new, energy efficient power supply products to the
marketplace.
In an effort to achieve the market objectives for an energy
efficient, electronic HID ballast, the Company has identified
several milestones which must be realized prior to introduction
of the product to the marketplace:
- - design and submit patent applications for the technologic
advancement which allows production of energy efficient,
electronic HID ballasts
- - develop and demonstrate prototypes of the energy efficient,
electronic HID ballasts
- - enter into strategic alliances for the commercialization of
the products with OEM Fixture manufacturers
- - have products safety certified for the United States and
Canada
- - schedule a field test for the products to determine their
capability, commercial applications and versatility.
The Company has successfully completed the first second and
fourth milestones noted above and currently is having the 150-250
watt electronic Metal Halide ballast tested by several OEM
manufacturers for performance and verification of product
specifications following which the Company believes that it will
enter in several alliances with OEM manufacturers. The Company
is developing several test sites for its products in and around
the Baltimore area.
The Company introduced its early prototypes of the electronic HID
ballasts at Lightfair International '94 '95 '96 and '97
(Lightfair). At Lightfair 98, rather than being on the show
floor, SLS opted to lease a suite and invite potential customers
to the suite. This proved very successful, in that we were able
to target many customers and meet with them one-on-one. SLS
intends to use this same strategy in future shows. Lightfair is
one of the industry's premier trade shows. Lightfair is co-
sponsored by the International Association of Lighting Designers
(IALD) and the Illuminating Engineering Society of North America
(IESNA). In addition, the Company displayed prototypes of its
energy efficient, HID ballasts at smaller shows as a precursor to
Lightfair. The trade shows have generated significant interest
from potential customers that can be grouped into the following
arenas:
- - Original Equipment Manufacturers (OEMs)
- - Government, including federal, state and municipal governments
- - Retrofit Marketplace
On the basis of the response from show attendees, show management
personnel, and other exhibitors at Lightfair, the Company
believes that it is the only company in the industry developing
a complete line of electronic HID ballasts. Several other
companies have limited range of ballast wattages, but the Company
does not believe that any competitor is developing a complete HID
line of ballasts covering standard wattages. The Company believes
that it will have a significant market advantage, as the
overwhelming majority of end users in all target groups will
require a full range of wattages and dimming capability to meet
their HID lighting needs.
Manufacturing and Raw Materials
Ballast production will be undertaken by subcontractors, as there
is an overabundance of high quality electronic assemblers in the
North America. This will alleviate the need to acquire costly
manufacturing equipment. The small scale production runs have
been subcontracted to Niche Electronics Corporation (NICHE)
located approximately 90 minutes from SLS technology center.
This contract was awarded on a competitive basis with several
companies competing for this award. By using subcontractors, the
Company has a distinct advantage of not having to invest
significant sums of capital in a manufacturing operation, but
even more importantly, provides the ability to contract with high
quality manufacturers with proven Quality Assurance programs,
thereby reducing the risk of manufacturing errors. NICHE has
built the second production run of 200 units and will continue to
build all runs of less than 500 units. SLS has selected
Sigmatron to manufacture it's large scale production runs of 500
units or more. Sigmatron is headquartered in Chicago and
operates electronic assembly houses in Mexico. This will allow
the Company to produce large scale quantities at very favorable
labor rates.
The manufacturing process used is primarily automatic insertion
based on through-hole technology. Key factors in the
manufacturing process are limiting the number of hand inserted
devices and maintaining quality control over components and
production.
Current design uses commercially available components except for
transformers and the housings. The Company has procured the
components for initial runs and has established favorable
pricing with component vendors. Vendors have been asked to kit
parts in order to take advantage of decreased costs which further
reduce acquisition costs to the Company. The Company is also
actively discussing the creation of proprietary ICs for future
products, with two of the major semi-conductor companies.
Competition
As the Company is among the first to have developed a complete
line of energy efficient electronic HID ballasts, there is little
competition from similar products. However, there are several
major companies that offer traditional magnetic HID ballasts.
Based on our research, these companies may be in the process of
developing electronic ballasts that will compete with the
Company. However, both the enormity of the marketplace and the
fact that these companies are not nearly ready to introduce their
own electronic HID ballasts to the marketplace will allow for
this future competition and should allow for profitability of the
Company. Several ballast manufacturers have developed single
electronic ballasts for specific lamps, however none of these
companies have been able to develop a complete line of HID
ballasts and are not likely to be able to do so in the relative
short term.
The Company believes that the principle criteria for competition
in the market for energy efficient, electronic HID ballasts will
be time to market. As this is a premium product line, cost
competitiveness, while an issue, will be minimal, especially in
the retrofit market. The advantages of increased efficiency,
reduced weight, quiet operation and especially the ambient
dimming capabilities provide an economic payback which more than
offsets the products premium price point. Many applications
provide an economic payback in under 12 months, with substantial
energy savings accruing to the end user over the extended life of
the ballast.
Research & Development
Since the Company's inception, virtually all of the Company's
activities have been focused on research and development ("R&D").
The Company anticipates continued R&D to develop smaller, lighter
and even more efficient electronic ballasts for the lighting
industry over the next five years.
The first 150-250 watt Metal Halide and HPS ballast product line
received ETL safety testing approval in late November 1997. The
second 150-250 watt product line received ETL safety approval in
mid 1998. The Company expects to submit the 300-400 watt version
of the ballast for safety testing during mid-1999.
Currently he Company maintains a research facility at its
Hanover, MD offices. The Company's R&D activities are
implemented and supervised by W.J.J. Hoge, VP-Engineering and
Operations (See "Management". In addition to Mr. Hoge three
other Electrical Engineers are on the staff which operates a R&D
facility in Hanover, MD which employs 2.5 equivalent full time
engineers.
In response to demonstrated needs of our market, the Company's
products are being designed to include both dimming and non-
dimming models. Models are currently available which include
power factor correction circuits, which permit continuous
operation during both brown out and power surge condition over an
input voltage range of 90v through 310v. The UNIDIM ballasts are
being designed to permit the end user a greater ability to reduce
and control the use of energy and thereby decrease variable
overhead costs dramatically. Large lighting consumers, such as
stadia, commercial real estate companies, institutions and other
larger users of energy will be provide with the flexibility of
continuous and seamless dimming of the lamps to as low as 40%.
Market & Sales
The Company anticipates that the majority of its sales will be
sold to Original Equipment Manufacturers ("OEM"). The Company is
currently discussing entering into semi-exclusive contracts with
two or three of the major HID fixture OEMs. These companies
would have the semi-exclusive right to the Company's products
for their markets. The Company is actively discussing these
agreements with three of the largest 5 manufacturers in the
United States. The Company has submitted proposals valued at
more than $8.6 million in gross sales of specialized products.
To the extent that the Company enters into the semi-exclusive
agreements noted above, the Company may be dependent upon a few
buyers for the majority of the sales of its products. The loss
of one or more of those buyers could have materially adverse
impact on the Company's financial condition.
For sales relating to the retrofit market, the Company may
contract directly with retrofitters. Alternatively, the Company
may make direct sales to end-users of the Company's ballasts,
particularly where a high sales volume might be involved, such as
municipalities or other government entities.
The ballasts for fiber optic applications will be sold direct to
the OEMs, due to the small number of firms competing in the fiber
optic market.
The Company maintains it's primary sales office in Hanover, MD
and is headed by Charles N. Osher, Exec. VP Sales and Marketing
and a west coast sales office staffed by Ronald Spire. See
"Management".
Because of electronic HID ballast's similarities to the
revolution which occurred in the electronic fluorescent
marketplace, our sales strategy will mirror the growth of the
electronic ballast in the fluorescent lighting arena. A
continued selling factor will be working with local public
utilities to have electronic ballasts for HID lighting included
in the various rebates programs.
The Company's marketing strategy incorporates plans to sell our
light weight, energy efficient, dimmable, electronic HID ballasts
through several channels. Direct sales will be handled through
experienced manufacturer's representatives. Major OEM sales will
be handled internally. Initial coverage for sales will focus on
the Northeast, Mid-Atlantic and Southern California markets.
Coverage will be extended throughout the country gradually, in
order to ensure product availability and performance.
Employees
The Company currently has four full-time and three engineers and
one mechanical design engineer employed on a part-time basis.
The Company intends to expand its R&D head count by employing two
more full time electrical engineers and a full time engineering
technician by mid 1999.
Intellectual Property & Patents
The Company believes that the technology to be utilized in the
UNIDIM products is proprietary in nature. The Company intends to
file appropriate patent applications to protect the technology
and will continue to protect technologies developed in the
future.
The Company had filed patent applications in India and the United
States for the technology developed in it former laboratory in
Pune, India. This technology also related to electronic ballasts
for use in HID lighting. The Company has ceased operations at
the Pune site and is not actively pursuing the patents for the
technology developed therefrom, after discussions with counsel.
The Company believes that the current technology developed in its
Hanover laboratory is distinct and based upon different
engineering principles than the theory used in the Pune models so
as to merit a separate filing.
Certain Risks Relating to the Company
Highly Speculative Venture. The Company will introduce new
products of its own development or acquisition into the
marketplace and there is no guarantee of the acceptance of these
products in the marketplace. The introduction of any new product
to market is highly speculative in nature.
Dependence on Key Personnel. The Company's future success
depends on a large part in the continued service of its key
management personnel. The Company is particularly dependent on
the skills and contributions of W.J.J. Hoge, the Company's senior
technical VP, who could die or become disabled, or otherwise
unavailable or who may voluntarily terminate employment with the
Company at any time and whose departure or unavailability would
have a material adverse effect in the Company's business. The
Company will institute "key person" life insurance policies on
its key personnel. There can be no assurance that the Company's
current employees will continue to work for the Company or that
the Company will be able to obtain the services of additional
personnel necessary for the Company's growth.
Capital Needs, Uncertainty of Additional Funding. The Company
anticipates that it will require additional financing in order to
satisfy its capital requirements for the immediate future. To
the extent that the additional funds are generated, together with
existing resources, are insufficient to fund the Company's
activities, the Company will likely need to raise additional
funds through public or private financing and there can be no
assurance that the Company will be able to raise additional
funds. The Company may also seek additional financing if market
conditions are favorable. If additional funds are raised through
the issuance of equity securities, the percentage ownership of
then current stockholders of the Company will be reduced and such
equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be
available or that, if available, it will be available on terms
favorable to the Company or its stockholders. If adequate funds
are not available to satisfy capital requirements, the Company
may be required to curtail its operations significantly or to
obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material
rights.
Limited Operating History. The Company is a development stage
company and has limited operating history upon which an
evaluation of its prospects can be made. The likelihood of the
Company's success must be considered in light of the numerous
risks, expenses, difficulties, complications and delays typically
encountered in connection with the growth and expansion of a new
business.
Changing Technology. The ballast technology developed by SLS
represents a change in the current available technology.
Therefore, there can be no guarantee that the product will gain
market acceptance. In addition, other companies may develop
similar products which would compete directly with the Company's
ballasts. There can be no guarantee that the Company's products
will remain state-of-the-art and that new products developed and
sold by others will not make the Company's products obsolete.
Product Liability. SLS has obtained Liability Insurance and will
continue such coverage if available at a reasonable cost.
However, future increases in insurance premiums could make it
prohibitive for us to maintain adequate insurance coverage. A
large damage award against SLS, not adequately covered by
insurance, would adversely affect our financial position.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's leases its executive offices located at 7223
Parkway Drive, Suite 103, Hanover Maryland 21076. The Company
also occupies sales space in Los Angeles, California. Gross
Rental payments are $1,179 per month. The Lease for the Hanover
facility extends through February 1999. It is likely that the
Company will continue to occupy these facilities and should
expansion be necessary, additional space is available adjoining
the current leased site.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation and has
favorably settled all prior matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company's shareholders held on
September 23, 1994, the following persons were elected as
directors: Mantosh Chawla, Majid Amini, R. Richard Saxby and
Ronald E. Spire and Richard B. Pazornik. Messrs. Chawla and Amini
were to serve on the Board until they elected to remove the
original Photo Acoustic Technology business unit from the
Company. Mr. Saxby resigned from the active participation in the
Company when R&D activity was shifted from his control to the
Company's East Coast operations.
The Shareholders also voted in favor of instituting a change in
the name of the Company from Photo Acoustic Technology, Inc. to
SLS Industries, Inc. The Board of Directors intended to
effectuate this name change prior to completion of Fiscal Year
1996.
No other matters have been submitted to a vote of the
shareholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The number of shareholders of the Company's common stock as of
January 13, 1998, is approximately 750. The Company has not paid
any dividends and does not foresee paying any dividends in the
near future.
In November 1990, the Company's stock was delisted from the
Philadelphia Stock Exchange due to the Company's inability to
meet the exchanges "total assets" requirement. The stock is
still listed on the NASDAQ Bulletin Board.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Note on Forward Looking Statements
Some of the information presented in this report constitutes
forward looking statements within the meaning of the Private
Securities Litigation Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions within
the bounds of its knowledge of its business and operations, there
can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause
actual results to differ from expectations include timing of
orders received from customers; the gain or loss of significant
customers; changes in the mix of products sold; changes in the
cost and availability of parts and supplies; new product
development activities; competition and changes in demand for the
Company's products; and other factors which may impact operations
and manufacturing. For additional information concerning these
and other important factors which may cause the Company's actual
results to differ materially from expectations and underlying
assumptions, please refer to "Certain Risks Relating to the
Company."
General
The Company is in the development and marketing stage and has
been primarily engaged in research and development activities
with the objective of developing and commercializing its
electronic HID Ballast products. Since the date of the merger,
the Company has generated only minimal income from interest .
The Company has not generated revenues from the sale of its
electronic HID ballasts. Since the merger, the Company has
funded its R&D activities from the proceeds of its initial
capitalization, bridge financing obtained in December 1995 which
raised $125,000, and a private placement of stock completed in
September 1996 which raised $1,054,750 million. The Company has
continued to explore opportunities to generate additional working
capital to fund its continuing R&D activities. However, the
Company's efforts have been adversely affected by the lack of a
completed product ready for market introduction and by the
Company's lack of compliance with its reporting obligations under
the Securities Exchange Act of 1934, as amended , among other
factors.
Results of Operations
Historical Business. Prior to the merger, the Company had
generated, from February 1, 1993 through January 31, 1994
revenues of $373,464, with a net loss before taxes and
extraordinary items of $267,602. However, the business
activities from which such revenues were generated were disposed
of by the Company on February 24, 1995. See "Discontinued
Operations" in the notes to financial statements. The balance of
this report is based upon the Companies continuing business
operations unless indicted.
Continuing operations. Since the date of the merger, the Company
has only generated $23,560 of revenues from interest income and
has not generated any revenues from product sales. Based upon
the Company's expectation of receiving its first production
contract and the continued development of new products, and the
Company's expectations that ongoing marketing efforts will be
successful, the Company expects that revenues from product sales
will commence in the first quarter of calendar year 1998.
The Company's operating expenses aggregated $300,494, $266,145
and $564,664 in fiscal years ended January 31, 1995, 1996 and
1997 respectively, consisting primarily of R&D expenses,
marketing, general and administrative expenses and interest
expenses as described below.
R&D expenses were $31,763 and $107,906 in the fiscal years ended
January 31, 1997 and 1998 respectively. The increase in R&D
expenses from 1997 to 1998 was the result of moving the R&D
operations in-house and the availability of funds. Future R&D
expenses for FY 1999 will be significantly higher due to the
availability of funds and the increase of on site staff.
Marketing and general and administrative ("G&A") expenses were
$526,318 and $579,348 in fiscal years ended January 31, 1997 and
1998, respectively. In 1997, marketing and G&A expenses consisted
primarily of salaries, office expense repayment of short term
debt and related costs of raising capital. In 1998, marketing and
G&A expenses consisted primarily of salaries, office expense and
related costs of raising capital. The increase from 1997 to 1998
in marketing and G&A expense was primarily attributable to
increased G&A expense costs and paying off of overdue accounts
payable.
Interest expense was incurred in fiscal 1997 and 1998 of $6,583
and $244 respectively, and was primarily related to short term
financing and interest in Accounts Payable.
As a result of the absence of revenues (other than minimal
amounts) and the continued increases in operating expenses,
including substantial expenditures on R&D, the Company had a pre-
tax loss of $542,891 and $685,711 in fiscal 1997 and 1998
respectively. The increase in the pre-tax loss from 1997 to 1998
was primarily attributable to expanded efforts for product
development and the repayment of debt and past due accounts.
The absence of pre-tax income has resulted in the Company not
having to pay any Federal or State income taxes in fiscal 1997
and 1998. In addition, the Company's operations have resulted in
certain net operating loss carry-forwards and tax credits which,
subject to significant limitations, may be utilized to offset a
limited portion of the Company's future Federal Income Taxes, if
the Company is able to generate taxable income in future years.
See Note G of the Notes to Consolidated Financial Statements
included in Item 7.
In Fiscal 1997, the Company had a net loss of $542,891, or $0.071
per share, based upon 7,661,956 weighted average shares
outstanding. In Fiscal 1998, the Company had a net loss of
$685,711, or $0.045 per share, based upon 15,209,298 weighted
average shares outstanding. The changes in the number of shares
outstanding was a result of the taking on of the bridge financing
and other efforts to raise capital and the payment of past
salaries to personnel via payment in restricted common stock.
Discontinued Operations
In 1994, the Company merged with Paradigm and the Company's
historical business was subsequently disposed of in a transaction
with prior management. As a condition of the Share Exchange
Agreement, prior management had the right to remove the
historical business of the Company. The results of the Company's
prior business operations are reflected as "Discontinued
Operations" in the Company's financial statements.
In fiscal 1995 (the last year of reported activity for such
discontinued operations), the Company had a loss from
discontinued business operations, net of income taxes of $61,164
and received a gain from disposal of assets and liabilities of
$26,969. The disposal of the operation was completed in fiscal
1995.
Liquidity, Capital Resources and Financial Condition
At January 31, 1998, the Company had cash and cash equivalents of
$5,647, as compared to $332,163 at January 31, 1997. The
decrease in cash from 1997 to 1998 was primarily attributable to
continued R&D and operating expenses associated with the
development of products. A private placement was completed in
September 1996, in which the Company raised $1,054,750. No
affiliate of the Company received any fees from the private
placement. The Company issued 5,273,750 shares of 144 restricted
common stock in exchange for the funds.
The Company did not generate cash from operations, but did
generate interest income of $1,787 during the fiscal year ending
January 31, 1998. Net Cash provided by financing activities was
$172,360 for the fiscal year ended January 31, 1998. In 1997,
net cash provided by financing activities consisted of proceeds
of $1,054,750 from the issuance of stock in a private placement,
offset by repayment and retirement of the bridge loans of
$125,000 plus accumulated interest and repayment of cash advances
to officers of $20,424.
The Company had cash of $5,647 at January 31, 1998, as compared
to $332,163 at January 31, 1997. The decrease to $5,647 was
primarily as a result of continuing expenditures for ongoing
operations, including R&D.
Monthly overheard including salaries, rent and utilities are
$27,000. Ron Spire, Richard Pazornik, John Hoge have employment
contracts with SLS, wherein they are paid semi-monthly the sums
of $3,896, $3,896 and $2,750 respectively. Charles Osher, works
for the company under a consulting agreement, wherein Eclipse
Technologies, Inc. is paid $6,000 per month for Mr. Osher's
services. Costs of leasing lab equipment amount to $600 per
month.
The Company submitted the first line of products for safety
testing to ETL and UL laboratories In July 1997. Final safety
testing approval was received for the first line of 150-250 watt
Metal Halide Ballasts in late November 1997, with a second line
of 150 -250 watt ballasts approved in mid 1998.
The Company is currently attempting to raise up to $2,500,000 of
new capital to finance continued R&D and to move from a totally
R&D environment into manufacturing and marketing of the Company's
products.
The Company's current level of working capital together with the
Company's current stockholders' deficit, raise substantial doubt
about the Company's ability to continue as a going concern.
Should the investment capital be forthcoming the Company's
operations will be funded for a considerable period and should be
sufficient to move the Company into the manufacturing and sales
stages.
There can be no assurances that the Company will be able to
obtain additional sources of capital and/or financing to increase
its working capital. There can also be no assurances that the
Company's products will generate market acceptance. As a result,
there can be no assurance that the Company will ever generate
revenues from product sales. In addition, there can be no
assurance that sufficient sales will be generated to result in
profits for the Company.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS
BALANCE SHEETS AS OF JANUARY 31, 1998 F2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JANUARY 31, 1998 F3
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1998 F4
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JANUARY 31, 1998 F5
NOTES TO FINANCIAL STATEMENTS F7
All financial schedules have been omitted because they are either
not applicable or the information is included in the notes to
financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Prior to the Share Exchange, the accounting firm of record was
Farber and Haas. Farber and Haas was dismissed as a result of
the relocation of the Company's executive offices from Westlake
Village, California to Baltimore, MD. The new auditors are
Reznick Fedder & Silverman and are located in Baltimore, MD.
Form 8-K filed contemporaneously with the March 1998 10KBS
submission to reflect this change. The change in auditors was
approved by the board of directors at a meeting held on the March
1, 1995.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS
Richard B. Pazornik, 41- President and director. Prior to
founding the original Company, he was a manager with the
International Accounting and Consulting firm of KPMG Peat Marwick
from 1988 through 1993. While at Peat Marwick, he specialized in
management consulting related to the Aerospace/Defense industry.
Among his clients were major Fortune 500 and many multi-national
corporations. Mr. Pazornik's experience relates to corporate
administration and to day-to-day management of ongoing
businesses. Prior to joining Peat Marwick, he served Allied-
Signal's Communications Division, working to support contracts
valued in excess of $150 million. Mr. Pazornik, is an attorney
and was graduated from the University of Maryland, School of Law
and Vanderbilt University where he was awarded a Bachelor of Arts
degree in Business Administration and Sociology.
Ronald E. Spire, 48 - Vice President and director. Mr. Spire's
overall responsibilities include overall marketing of the
Company's products and the identification of the strategic
business opportunities for the Company. Mr. Spire has served in
executive level position of several companies which he has
founded, including PCI Group, Syncor International and NuMed
Systems. All of these companies have either been brought public
or sold to private investor groups. Mr. Spire has been involved
in raising capital in excess of $50 million for these companies
and other ventures. Mr. Spire is an attorney, having graduated
from Southwestern University, School of Law and UCLA.
Charles N. Osher, 58 - Vice President. Mr. Osher has more than
thirty five years experience in the Lighting Industry having
handled sales for various lighting companies and has acquired the
rights to various lighting technologies. Mr. Osher has received
the certification of Certified Lighting Engineering Professional
and is the president of Eclipse Technologies, Inc. Mr. Osher has
worked to develop new products for the lighting market. He has
successfully developed Commercial Office Lighting, Inc., which in
1978 merged with Potomac Lighting Associates. Mr. Osher has had
great success in introducing both new products and new companies
to the marketplace. He holds a bachelor of Science in Business
from the University of Maryland, with post graduate training at
the University of Maryland in Construction Management and Urban
Studies.
W.J.J. Hoge, 51 - Vice President. Mr. Hoge has more than 25
years experience as an electrical engineer, having served in
director level capacities since 1982. Mr. Hoge has had overall
responsibility for the concept, the design and development for
several products which have become successful in the marketplace.
He has successfully brought several projects to fruition, ahead
of schedule and under project budgets. He has over 15 years
experience in managing engineering teams and directing related
efforts, including working with vendors to develop specific
components for various applications. He holds a Bachelor of
Engineering from Vanderbilt University and has published numerous
papers and has taught several courses in engineering.
ITEM 10. EXECUTIVE COMPENSATION
The cash compensation for service rendered in all capacities to
the Company for fiscal year ended January 31, 1998 by Mr.
Pazornik were $63,750.06, for Mr. Spire $80,316.75 and for Mr.
Hoge, $50,734.29. Salaries and bonuses accrued but not paid for
the year amounted to $28,750.02, $12,383.25 and $19,265.71 for
Mr. Pazornik, Mr. Spire and Mr. Hoge respectively. Compensation
to Charles Osher as a consultant were paid to Eclipse
Technologies in the amount of $69,000 plus expenses. Fees
Accrued in the amount of $3,000 are owed to Eclipse as of January
31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table and notes thereto set forth information
regarding ownership of SLS common stock as of January 31, 1997
(i) by each person who is known by the Company to own
beneficially more than 5% of the Company's common stock, (ii) by
each of the Company's directors who own shares, and (iii) by all
directors and officers of the Company as a group.
NAME OF BENEFICIAL NUMBER OF SHARES PERCENT OF CLASS
OWNER OWNED
William Morgan 1,876,875 14.05%
Ronald E. Spire 866,014 6.48%
Richard B. Pazornik 1,133,007 8.48%
Judith S. Pazornik 1,183,007 8.86%
Charles N. Osher 500,000 3.74%
Alex Lushtak 850,000 6.36%
WJJ Hoge 0 0.00%
All Directors and
Officers as a Group
(four Persons) 2,499,021 18.71%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Pazornik has a three year employment contract which expires
in March 2000, wherein Mr. Pazornik is to serve as President of
SLS for $85,000, subject to upward adjustment annually of 10%. In
addition, Mr. Pazornik is due a bonus of $7,500 for the Company
having received safety testing for the 150-250 watt HID ballast.
Mr. Spire has a two year Contract to serve as Executive Vice
President which expires in March 2000, wherein Mr. Spire receives
$93,500, subject to upward adjustment annually of 10%. In
addition, , Mr. Spire is due a bonus of $7,500 for the Company
having received safety testing for the 150-250 watt HID ballast.
Mr. Hoge has a three year employment contract which expires in
March 2000, wherein Mr. Hoge is to serve as VP Engineering and
Operations for $60,000, subject to upward annual adjustment of
10%. In addition, Mr. Hoge is due a bonus of $10,000 for the
Company having received safety testing for the 150-250 watt HID
ballast. Mr. Osher has a two year Contract to serve as Vice
President Marketing which expires in March 2000, wherein Mr.
Osher receives $85,000 annually.
Mr. Pazornik and Mr. Spire have on occasion loaned the Company
monies to overcome short term cash flow problem and have
personally guaranteed the amount of $9,500 for the build out of
the Company's offices in Hanover, MD.
As of the date of this submission, the Company has outstanding
salaries due employees for FY98 of $28,750.02 for Mr. Pazornik,
$12,383.25 for Mr. Spire, and $19,265.71 for Mr. Hoge.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and associated Schedules are listed in
the index to the financial statements and filed under Item 7,
Financial Statements, included elsewhere in this Form 10-KSB.
(b) Reports on Form 8-K. One report on Form 8-K was filed
contemporaneously with the filing of FY95-97 Form 10-KSB.
(c) Exhibits
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SLS INDUSTRIES, INC.
By: RICHARD B. PAZORNIK, PRESIDENT
Dated: February 17, 1999
In accordance with the Exchange Act, this report has been
signed by the following persons in the capacities and on the
dates stated.
DATE CAPACITY
RICHARD B. PAZORNIK February 17, 1999 Director
RONALD E. SPIRE February 17, 1999 Director
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SLS INDUSTRIES, INC.
JANUARY 31, 1998 AND 1997
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET AS OF JANUARY 31, 1998 4
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JANUARY 31, 1998 AND 1997 5
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997 6
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JANUARY 31, 1998 AND 1997 7
NOTES TO FINANCIAL STATEMENTS 9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
SLS Industries, Inc.
We have audited the accompanying balance sheet of SLS
Industries, Inc. as of January 31, 1998, and the related
statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the two years ended January
31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of SLS Industries, Inc. as of January 31, 1998, and the results
of its operations and its cash flows for each of the two years
ended January 31, 1998, in conformity with generally accepted
accounting principles.
Baltimore, Maryland
August 13, 1998
SLS Industries, Inc.
BALANCE SHEET
January 31, 1998
ASSETS
CURRENT ASSETS
Cash $5,647
Accounts receivable - other 145
Due from officer 6,194
Total current assets 11,986
PROPERTY AND EQUIPMENT, NET 21,052
OTHER ASSETS
Intangibles, net 2,089
Patent Costs 6,945
Total Assets $42,072
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes Payable $60,800
Due to officer 115,854
Due to stockholder 4,900
Accounts payable 72,693
Accrued expenses 44,198
Total current liabilities 298,445
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, Class A convertible, par
value $.001 per share 10,000,000 shares
authorized; - 0 - shares issued and
outstanding
Common stock, par value $.001 per share,
150,000,000 shares authorized; 15,563,346
shares issued and outstanding 15,563
Additional paid-in capital 1,556,500
Accumulated deficit (1,828,436)
Total stockholders' equity (deficit) (256,373)
Total liabilities and stockholders'
equity (deficit) $ 42,072
See notes to financial statements
SLS Industries, Inc.
STATEMENTS OF OPERATIONS
Years ended January 31, 1998 and 1997
1998 1997
Revenue
Other income $1,787 $21,773
Total revenue 1,787 21,773
Expenses
Research and development 107,906 31,763
Marketing, general and administrative 579,348 526,318
Interest 244 6,583
Total expenses 687,498 564,664
NET LOSS $(685,711) $(542,891)
Basic and diluted net loss
per common share $(0.045) $(0.071)
See notes to financial statement
<TABLE>
<S> <C> <C>
SLS Industries, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS" EQUITY (DEFICIT)
Years ended January 31, 1998 and 1997
Total
Additional Stockholders'
Common Stock Paid-In Accumulated Equity
Number Amount Capital Deficit (Deficit)
Balance,
January 31, 1996 7,188,759 $ 7,189 $ 286,176 $(599,834) $ (306,469)
Shares issued in
lieu of compensation
and bridge loan
financing 2,500,000 2,500 - - 2,500
Shares issued in
private placement
offering 5,273,750 5,274 1,049,476 - 1,054,750
Net loss - - - (542,891) (542,891)
Balance,
January 31, 1997 14,962,509 14,963 1,335,652 (1,142,725) 207,890
Shares issued 510,837 510 172,982 - 173,492
Shares issued
in lieu of
compensation 90,000 90 47,866 - 47,956
Net Loss - - - (685,711) (685,711)
Balance
January 31, 1998 15,563,346 $15,563 $1,566,500 $(1,828,436) $ (256,373)
</TABLE>
See notes to financial statements
<TABLE>
<S> <C> <C>
SLS Industries, Inc.
STATEMENTS OF CASH FLOWS
Years ended January 31, 1998 and 1997
1998 1997
Cash flows from operating activities
Net Loss $(685,711) $(542,891)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 8,522 5,523
Issuance of common stock in lieu of
compensation and bridge loan financing 47,956 2,500
Change in operating assets and liabilities
Decrease (increase) in accounts
receivable - other 63,763 (53,908)
Increase in patent costs (6,945) -
Increase in accounts payable 46,435 11,777
Increase (decrease) in accrued expenses 44,198 (23,284)
Decrease in accrued interest payable - (1,563)
Net cash used in operating activities (481,782) (601,846)
Cash flows from investing activities
Purchase of property and equipment (17,094) (2,243)
Net Cash used in investing activities (17,094) (2,243)
Cash flows from financing activities
Proceeds from issuance of stock 173,492 1,054,750
Borrowings under notes payable and long-term debt 27,500 -
Repayment of notes payable and long-term debt - (125,000)
Advances from officers, net (28,632) (20,424)
Net cash provided by financing activities 172,360 909,326
NET (DECREASE0) INCREASE IN CASH (326,516) 305,237
Cash, beginning of the year 332,163 26,926
Cash, end of year $ 5,647 $332,163
</TABLE>
(continued)
SLS Industries, Inc.
STATEMENTS OF CASH FLOWS
Years ended January 31, 1998 and 1997
Supplemental schedule of noncash financing activities
During 1997, 1,875,000 shares of common
stock were issued at par value ($1,875)
in lieu of compensation to various
consultants and 625,000 shares were
issued at par value ($625) to holders of
the bridge loan notes
During 1998, 50,000 shares of common stock
were issued at par value ($50) in lieu
of compensation to a consultant and
40,000 shares were issued at par value
($40) plus $47,866 of additional paid in
capital in lieu of compensation to a
communications company for financial
communication and related advisory
services.
See notes to financial statements
SLS Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1998 and 1997
NOTE A - REORGANIZATION AND MERGER
Photo Acoustic Technology, Inc. was formed on September 14, 1983,
to design, develop, manufacture and market surface quality
inspection systems. Photo Acoustic Technology, Inc.'s products
utilized advance photo-emission technology for the detection of
thin film surface contamination and thickness measurement of thin
film coatings. This business was discontinued in July 1994.
Effective July 12, 1994, Paradigm Industries, Inc., exchanged all
of its shares for 40,638,121 shares of common stock of Photo
Acoustic Technology, Inc. which represents 93.5% of the issued
and outstanding common stock of Photo Acoustic Technology, Inc.
On July 12, 1994, in conjunction with the reorganization and
recapitalization 35,738,195 shares of common stock of Photo
Acoustic Technology, Inc. were issued and the remaining 4,899,926
shares are to be issued at a future date. For accounting
purposes, the acquisition has been treated as a recapitalization
of Paradigm Industries, Inc., with Paradigm Industries, Inc. as
the acquirer (a reverse acquisition). All operations of Photo
Acoustic Technology, Inc., were discontinued and the assets and
liabilities transferred to Photo Emission Tech, Inc. There were
no operations of Paradigm Industries, Inc., prior to July 12,
1994.
Paradigm Industries, Inc., was incorporated in the State of
Maryland on October 4, 1993. Paradigm Industries, Inc. was formed
to design, manufacture and sell a series of energy efficient
electronic ballasts for High Intensity Discharge (HID) lamps which
include a full range of wattage for both Metal Halide and High
Pressure sodium lamps. Through January 31, 1998, there were no
sales of this product. Paradigm Industries, Inc. changed its name
to Photo Acoustic Technology, Inc. after the reorganization and
recapitalization, and then on January 15, 1996, changed its name
to SLS Industries, Inc.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are carried at cost. Depreciation is
provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service
lives by use of accelerated methods over five years.
Intangibles
Intangibles include start-up costs which are amortized by the
straight-line method over a sixty month period. Total accumulated
amortization at January 31, 1998 was $9,306.
Patent Costs
Patent costs include legal costs associated with developing a
patent. The costs will be amortized by the straight-line method
over a sixty month period once approved.
SLS Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
January 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development costs are expensed when incurred and
include both internal research and developments costs and payments
to third-parties by the Company.
Income Taxes
The Company records its income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the use of the asset and liability method
of accounting for income taxes. The asset and liability method
requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences
between tax basis and financial reporting basis of assets and
liabilities.
Net Loss Per Share
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Basic and diluted
earnings per share have been calculated in accordance therewith
for both 1998 and 1997. The warrants do not have a dilutive
effect because the average market price of the common stock does
not exceed the exercise price of the warrants. Net loss per
common share is based on net loss divided by the weighted average
number shares outstanding. Weighted average common shares
outstanding for 1998 and 1997, were 15,209,292 and 7,661,956,
respectively.
NOTE C - RELATED PARTY TRANSACTIONS
Due from Officer
At January 31, 1998, advances made to an officer amounted to
$4,570. The advances are non-interest bearing and payable upon
demand. In addition, an officer received a loan in the amount
$20,654, payable in monthly installments of $750. The note
receivable bears interest at a rate of 8%. The balance of the
note receivable as of January 31, 1998, was $1,564 with accrued
interest receivable of $60.
Due to Officer
At January 31, 1998, the Company owed an officer $115,854. These
advances are non-interest bearing and due on demand.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 31,
1998:
Office furniture $10,021
Machinery and equipment 8,811
Office equipment 20,882
39,714
Less accumulated depreciation 18,662
Property and equipment, net $21,052
NOTE E - NOTES PAYABLE
The Company has notes payable to W. Zimmerman, M. Bein and B.
Pauley in the amounts of $33,300, $22,500 and $5,000,
respectively. These notes are non interest bearing and due on
demand. In February 1998, $16,230 shares were issued to B.
Pauley for the $5,000 due him at January 31, 1998.
In connection with the private placement offering described in
Note H, the Company issued notes totaling $125,000 for bridge loan
financing. Each bridge loan unit is an unsecured note payable,
bearing 10% interest and due upon the earlier of the receipt of
$1,000,000 from a private placement, another financing, or a
financing of any other means. Each note for $50,000 included
10,000 shares of Class A, convertible preferred stock, each share
is convertible into ten shares of common stock and 10,000 Class A
warrants to purchase shares of Class A, convertible preferred
stock at a strike price of $3.00 per share. The warrants are
exercisable ninety (90) days from the date of the bridge loan
offering and expire four (4) years from date of offering. The
bridge loan financing was repaid on July 22, 1996.
NOTE F - STOCK OPTIONS AND WARRANTS
Stock Options
On May 6, 1998, the Company entered into an agreement with GFC
Communications Corp. (GFC) concerning financial communication and
related advisory services. Along with various consideration given
to GFC by the Company, the Company granted GFC options to purchase
350,000 shares of the Company's common stock. During the year
certain of these options expired and the balance outstanding at
January 31, 1998 is as follows:
Balance Balance
Expiration January Shares January
Date Shares Price 31, 1997 Expired 31, 1998
9/97 100,000 $ .50 - 100,000 -
11/97 50,000 $ .75 - 50,000 -
1/98 50,000 $1.00 - 50,000 -
2/98 25,000 $1.00 - - 25,000
4/98 50,000 $1.50 - - 50,000
5/98 75,000 $1.50 - - 75,000
350,000 - 200,000 150,000
Warrants
During 1996, in connection with the bridge loan financing, the
Company issued 25,000 Class A warrants which enabled the holder to
purchase one share of the Company's Class A, Convertible Preferred
Stock at a strike price of $3.00 per share. As of January 31,
1998 and 1997, no warrants had been exercised.
During the year, warrants were canceled and the balance
outstanding at January 31, 1998 is as follows:
Balance Balance
Expiration January Shares January
Date Shares Price 31, 1997 Cancelled 31, 1998
3/01/01 100,000 $1.25 100,000 100,000 -
2/29/00 10,000 $3.00 10,000 - 10,000
2/29/00 10,000 $3.00 10,000 - 10,000
2/29/00 5,000 $3.00 5,000 - 5,000
125,000 125,000 100,000 25,000
NOTE G - INCOME TAXES
The Company has net operating loss (NOL) carryforwards of
approximately $1,700,000 for Federal income tax purposes, which
are available to offset future taxable income through 2009. Due
to the reorganization and recapitalization, the ability to utilize
approximately $1,000,000 of the NOL is limited by the Internal
Revenue Code, therefore, deferred income taxes have been
calculated assuming no benefit from this net operating loss
carryforward will be realized.
The Company also has available, approximately $4,000 and $40,000
in investment tax credits and research and development credits,
respectively, to offset future Federal income taxes. The combined
credits expire in fiscal years 1999 ($2,000), 2000 ($22,000), 2003
($8,000), 2004 ($4,000) and 2007 ($8,000).
The components of deferred tax assets at January 31, 1998 is as
follows:
Investment tax and research and development credits $44,000
Less valuation allowance 44,000
$ -
NOTE H - PRIVATE PLACEMENT
On February 29, 1996, the Company signed an agreement for private
placement financing. The private placement offering, included,
offering 500,000 shares of its Series A, Convertible Preferred
Shares at $2.00 per share. Each share is convertible into ten
shares of common stock. All funds raised were deposited into an
escrow account, set up by the Company for the financial consulting
services rendered. The Company pays a fee consisting of a maximum
of $130,000 payable as monies are received on a pro-rata basis
($.13 per each $1.00 paid into the escrow account). Also, as part
of the agreement, the Company issued 1,175,000 shares of common
stock to the private placement agent as additional compensation.
This stock was issued on January 31, 1997. The private placement
raised approximately $1,054,750.
The private placement agent also earned one warrant for every five
shares of Series A, Convertible Preferred Shares issued (100,000
warrants). Each warrant was exercisable for a period of five
years, beginning February 29, 1996, and each warrant entitled the
holder to purchase one share of common stock for $1.25. As of
January 31, 1998, these warrants have been canceled.
NOTE I - CONSULTING AGREEMENTS
On February 2, 1996, the Company entered into an agreement with
Lighting Control, Inc. (LCI) to complete the design and
development of the Company's electronic ballasts for high
intensity discharge lamps. In consideration for providing such
services the Company shall pay LCI an amount equal to the actual
cost of providing such services or $30,000 whichever is less. The
amount charged to operations for years ending January 31, 1998 and
1997 was $12,391 and $20,796, respectively.
On March 13, 1996, the Company entered into an agreement with
Eclipse Technology, Inc. (Eclipse) to provide expertise in the
development of new products, sales, distribution and manufacture.
The president of Eclipse currently sits as a SLS Industries, Inc.
member of the Company's Board of Directors. In consideration for
providing such services, Eclipse shall be entitled to receive a
monthly minimum fee equal to $3,000 with additional commissions
earned based on the following:
Gross Sales Percent
$1 - $1,000,000 3%
$1,000,001 - $5,000,000 2.5%
Over $5,000,000 1%
Additionally, the first $3,000 of any commissions earned will be
offset by the monthly minimum fee payable. Effective February 1,
1997, the agreement with Eclipse was amended to increase monthly
minimum fee to $6,000, plus reimbursable expenses. The amount
charged to operations for years ending January 31, 1998 and 1997
was $76,205 and $32,379, respectively. As of January 31, 1998,
$10,591 remains unpaid. Also during the 1997 fiscal year the
Company issued 500,000 shares common stock to the president of
Eclipse Technology, Inc., who sits as a member of the Company's
Board of Directors, for services rendered in lieu of compensation.
NOTE J - CAPITAL STOCK
Of the 15,563,346 shares of common stock outstanding at January
31, 1998, 13,180,405 shares are restricted under Rule 144 of the
Securities Act of 1934.
NOTE K - LEASE
On February 14, 1997, the Company entered into a two year lease
agreement for office space. The Company shall pay $1,179 on a
monthly basis for the period of March 1, 1997 through February 28,
1999, and pay one month's rent as a security deposit. The
agreement also includes an escalation clause for real estate taxes
and a provision which includes a payment for common area
maintenance costs.
NOTES TO FINANCIAL STATEMENTS
January 31, 1998 and 1997
NOTE L - COMMITMENT AND CONTINGENCIES
The Company has terminated the services of its prior legal
counsel. At January 31, 1998, the Company is disputing the amount
which the former counsel indicates is due them of approximately
$40,000. This amount has not been accrued at January 31, 1998.
The Company has not filed its federal or state tax returns since
1994 and could be subject to penalties for late filing.
The Company is being sued for a breach of contract claim wherein
the plaintiff has alleged the Company owes $38,870 to the
plaintiff. The Company has denied the allegations. The Company's
legal counsel has not determined the likelihood of an unfavorable
outcome.
