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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from June 1 to June 30, 1998
Commission file number 0-14973
UNICO, INC.
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(Exact name of Registrant as specified in its charter)
New Mexico 85-0270072
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(State of Incorporation) (IRS Employer ID No.)
2925 Bayview Drive, Fremont, CA 94538
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 510/770-3990
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Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of exchange on which registered
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$0.20 par value common stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes[X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB [ ]
State issuer's revenues for its most recent fiscal year: $ 24,638,000
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State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)
As of September 30, 1998, the Registrant had 7,539,418 shares of common
stock outstanding, excluding 3,699 treasury shares. 4,525,756 shares of
the common, restricted by Rule 144, were held by affiliates who controlled
more than 5% of the outstanding common. Of the remaining shares,
2,058,450 are restricted by Rule 144. The balance of 955,212 non-
restricted shares would have an aggregate value of $1,880,574 if
transacted at the average of the bid (1 13/16) and asked (2 1/8) prices at
market close on September 30, 1998 (or the day when shares traded
immediately before).
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis of
reasonable assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No N/A
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: September 30, 1998
As of September 30, 1998, the Registrant had 7,539,418 shares of the
Registrant's $0.20 par value common stock outstanding, excluding 3,699
shares held by the Registrant for resale (see Item 5 of this Form 10-
KSB).
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DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g. Part I, Part II, etc.)
into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). The list of documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal
year ended December 24, 1990).
Documents incorporated by reference:
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(1) pursuant to Section 13 or 15(d) of the Securities Act of 1934
Transitional Small Business Disclosure Format (check one):
Yes No X
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INDEX
TO REPORT ON FORM 10-KSB
UNICO, INC.
Item in Form 10-KSB Page
PART I
Item 1. Description of business 1
Item 2. Description of property 4
Item 3. Legal proceedings 5
Item 4. Submission of matters to a vote of security
Holders 5
PART II
Item 5. Market for common equity and related
stockholder matters 5
Item 6. Management's discussion and analysis or
plan of operations 8
Item 7. Financial statements 14
Item 8. Changes in and disagreements with accountants
on accounting and financial disclosure 43
PART III
Item 9. Directors, executive officers, promoters and
Control persons; compliance with Section (16)
of the Exchange Act 44
Item 10. Executive compensation 47
Item 11. Security ownership of certain beneficial owners
and Management 48
Item 12. Certain relationships and related transactions 48
Item 13. Exhibits and reports on Form 8-K 49
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Profile
On June 30, 1998, the Registrant (the Company) completed the acquisition of
all outstanding shares of Paradise Innovations, Inc. (formerly known as
Starlicon International corporation) by issuing 5,476,190 new shares of
common stock and 5,476 new shares of convertible preferred stock. The
Company accounted for this acquisition as a reverse acquisition. The new
shares are owned by Paradise Innovations, Inc.'s (Paradise) former
stockholders. The terms "Old Unico" will be used to refer to Unico, Inc.
prior to the June 30, 1998 acquisition.
Starlicon International Corporation (Starlicon) was incorporated under the
laws of the State of California on October 3, 1996. On July 31, 1997,
Starlicon acquired certain assets, including the Paradise trademark, owned by
the Relialogic Technologies Corporation, a subsidiary of Osicom Technologies,
Inc. On August 4, 1998, Starlicon changed its name to Paradise Innovations,
Inc. in order to obtain better brand recognition and to facilitate future
acquisitions. Throughout this Form 10-KSB, the Company's Starlicon subsidiary
will be referred to as Paradise.
On February 21, 1998, Old Unico entered into a Stock Purchase Agreement (the
Agreement) with Starlicon Group, Inc. (SGI) to acquire 100% of the
outstanding stock of privately-held Paradise. The acquisition was ultimately
completed pursuant to a Novation Agreement (see Form 8-K filed on July 14,
1998). Under the terms of the Novation Agreement, the Company issued
5,476,190 shares of $0.20 par value restricted Common Stock and 5,476 shares
of Series A Convertible Preferred Stock to the shareholders of SGI in
exchange for 100% of the outstanding stock of Paradise.
As part of the Novation Agreement, all of Old Unico's assets not owned by
Intermountain Refining Co., Inc. (IRC) were transferred to IRC in satisfaction
of certain inter-company obligations and as a contribution to IRC's capital.
IRC is operated and managed at the sole discretion of IRC's management with a
nominee holding Old Unico's proxy to vote IRC's shares.
As a result of the acquisition, the Company has two operating entities in
unrelated industries, Paradise and IRC. IRC was incorporated as a New Mexico
corporation in July 1985. It conducts three categories of business:
petroleum product refining and processing, electrical energy production and
natural gas production(1).
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(1) IRC and "Old Unico" are more fully disclosed in Note 18 of Item 7.
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Through its wholly-owned subsidiary Paradise, the Company markets computer
memory chips, central processing units and other computer components. The
Company also markets a proprietary line of computer peripherals under the
Paradise trademarked brand name. The products marketed include internet
products, multimedia products, video adapter cards and communication products
including modems. Paradise's customer base includes private label computer
manufacturers and major technology distributors, such as Tech Data, Ingram
Micro, D&H Distributing, Almo Distributing, Comark and SED.
Paradise sources from suppliers in Asia and the U.S. for chips (memory and
CPU) and for component products. The Company resells the chip products and
incorporates the component products into products it assembles. Despite
buying in large quantities from certain suppliers, the Company does not
believe it is dependent on any single supplier. It currently changes the
volumes and suppliers depending on a variety of factors, such as price,
availability and timeliness of shipping. Should one supplier be unable to
conduct business with the Company, it could source from many other suppliers.
For the fiscal year ended June 30, 1998, the Company's largest customers were:
------------------------------------------------------------------------
Customer Sales (000) % of Sales
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Liuski $7,313 29.7%
Amax 2,402 9.8
SED 2,167 8.8
Lucky Electronics 1,688 6.9
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The largest customers are distributors. As of June 30, 1998, the Company did
not have significant sales through the retail channel nor directly to original
equipment manufacturers (OEMs). It is currently building these channels.
As of June 30, 1998, the Company was moving away from the chip and computer
peripherals businesses, where competition is intense. In the chip business,
where products are bought and sold as in brokerage businesses, there is no
product differentiation and limited service differentiation. Competition is
essentially on price and availability. In the computer peripherals business,
there is product differentiation and brand awareness. Competition is on
product performance and brand recognition. Over the fiscal year ended June
30, 1998, there has been significant erosion of margins due to competition.
The Company intends to enhance its competitive positioning by using the
Paradise brand.
The ability to use the Paradise brand and the intended acquisition of
manufacturing entity, such as Multiwave, are intended to improve the Company's
competitive position. The Paradise brand will permit the Company to price
above other, less recognized brands. The acquisition of Multiwave will
provide the Company with the ability to design proprietary technology
products. The Company may cease to be in the chip (CPU and memory) business
and is moving to communications products, such as modems.
<R/>
Paradise employs 13 people on a full-time basis. IRC employs 3 people on a
full-time basis.
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The Company acquired the rights to the Paradise brand. The trademark is
registered in several countries in Europe and Asia with various expiration
dates. The registrations are renewable for differing periods. The Company
is in the process of changing the registration to its name. The Company has
no other licenses, patents, franchises, etc.
The Company does not require government approval to conduct any aspect of its
business, with the exception of normal federal, state and city regulation.
It does not incur nor foresee incurring material costs to comply with any
environmental laws. The Company believes it is adequately covered by
insurance for its employees, assets (including inventory), cargo, etc.
The Company has reviewed the potential impact of Year 2000 issues and
believes that the cost to replace and or modify equipment, computer hardware,
and computer software will not be material and that Year 2000 issues will not
have a material impact on the Company's ability to operate into the next
century.
Strategy
The Company shifted its focus to its newly acquired hi-tech subsidiary,
Paradise. Paradise currently has two primary business segments: marketing
and sales of proprietary computer components and peripherals, and chip
distribution.
In the marketing and sales of proprietary computer components, the Company is
re-orienting its focus to new products such as internet products and consumer
electronic products. This is part of on-going efforts to create, identify
and bring new products to market. As is typical in distribution businesses,
new products offer the highest margins and returns on investor equity.
The Company is establishing worldwide distribution and partnerships with
global manufacturing companies, either through acquisitions or through
internal efforts, to bring exciting new products to market in the very short
time frames required by the hi-tech industry. The Company is contemplating
acquisitions that fit its strategy of identifying and creating products that
can be distributed in high volumes around the world.
The Company's primary short term efforts in chip distribution are improving
operating margins. It is also contemplating discontinuing the chip trading
efforts and to brand chips it sells, improving margins. The Company is
improving internal and external management information. Improved internal
management information systems (MIS) will permit better pricing and inventory
management of the chips, critical capabilities in a market where prices
fluctuate rapidly. External MIS improvements will facilitate the sales
process, using the Internet initially for pricing and eventually for sales.
As of June 30, 1998, the Company was not designing its own products.
It sourced products designed and manufactured by other parties. The
acquisition of Multiwave will provide the Company with the capabilities for
designing and engineering its own products. Third parties, primarily
subsidiaries of Uraco Holdings, a principal former shareholder of Multiwave,
manufacture the Company's products.
<R/> 3
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The Company considers acquisitions an integral component of its growth
strategy. Opportunities that fit the Company's strategy will be considered
for acquisition, acquisition or alliance.
Sales and Customer Support
To implement its strategy of increasing sales volume and rebuilding
the Paradise brand name, the Company is augmenting its sales force and its
customer support staff. The increase in sales force has the primary purpose
of better leveraging the Company's distribution network. Management is
confident that the increased sales force can use the distribution network to
rapidly increase sales. The sales force increased by five people, at a cost
of about $250,000 per year.
The Company is increasing its technical support staff and improving its
capabilities. It believes that quality technical support is a critical
component in re-building its Paradise brand image. The costs of increasing
technical support staff is about $60,000.
<R/>
The costs of increasing both the sales and technical support staffs
will be from operating funds, reducing profitability (or increasing losses) in
the short term. Part of the costs will be offset by shifting the areas of
focus; for example, shifting sales staff or their attention away from chips
and onto Internet communications products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Fremont headquarters consists of leased warehouse and office
space. These are also the operating offices of Paradise. The lease expires
July 31, 2003 and has escalating provision for rental expenses. Minimum rent
payments due under the lease are $131,000 for year ending June 30, 1999,
$146,000 for 2000, $150,000 for 2001, $154,000 for 2002, $159,000 for 2003,
and $13,000 for 2004. Management deems the space to be adequate for the
Company's operations. Should it become necessary, it will seek additional
space for expansion.
On September 21, 1998, the Company leased a Lucent Definity telephone system
from Fidelity Leasing. Under the terms of this lease agreement, the Company
will pay $9,000 per year for three years for the installed system. At the
end of the lease term, the Company has a purchase option of one dollar. The
telephone system has the features and capacity to accommodate any growth
envisioned by the Company.
Paradise has no investments in securities or properties that are not used in
conducting its business.
All properties used by IRC in the conduct of its business are owned in fee.
There are no outstanding mortgages on any of the properties owned by IRC.
IRC owns an interest in and operates 19 producing natural gas wells located
in Southwestern Kansas. Developed proven reserves are estimated at 2,839
MMCF gross and 2,121 MMCF net to IRC's interest as of June 30, 1998. No
reserve estimates have been filed with any Federal authorities or agencies.
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IRC owns a 7,000 square foot office building in Farmington, New Mexico.
Approximately 33 percent of the office building is utilized by IRC for its
corporate office, tenants are leasing another 55 percent, while the rest is
currently vacant and offered for lease to others.
IRC owns a petroleum refinery located on approximately 21 acres of fee-owned
land in Fredonia, Arizona. Facilities include: a 4,000 barrel per day crude
and vacuum distillation unit, a 3,000 kilowatt co-generation plant, boilers,
cooling towers, offices, shops, control and electrical buildings, loading
racks, storage tanks and associated ancillary facilities. In addition, the
plant contains a reforming unit which is not currently employed in the
refining operation.
IRC's investments are further described in Note 18 to Item 7 - Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Other than collection actions or other actions arising in the ordinary course
of the Company's business, no material legal proceedings to which the Company
is a party or of which any of its property is subject are pending or known to
be contemplated, and the Company knows of no legal proceedings pending or
threatened, or judgment against any director or officer of the Company in his
or her capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by security holders in the fourth quarter
covered by this Form 10-KSB.
In the next shareholder meeting planned, matters submitted to a vote by
security holders will be the election of directors and consideration of an
employee benefit plan for management and key employees and a stock option
plan for outside directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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Calendar High Low
Quarter Ended Price Price
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Dec 96 3 1/2 2
Mar 97 2 1/2 1 3/4
Jun 97 2 15/16 1 3/4
Sep 97 2 1/8 1 1/2
Dec 97 1 1/2 1
Mar 98 3 1/4 1 7/32
Jun 98 3 1
Sep 98 3 1 1/4
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Source: Nasdaq Online
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The Company's common stock is traded on the Nasdaq SmallCap Market under the
symbol "UNRC". The price range of the shares is reflected in the table
above. The Company's present policy is to retain its earnings to finance
future growth. The Company has no intention to declare or pay cash
dividends. The common shares have a par value of $0.20. At September 30,
1998, the Company estimates that there were approximately 502 shareholders,
258 of record and the balance in street name. There were approximately 428
round lot (100 or more shares) shareholders.
The Series A preferred stock has a par value of $0.01. It provides non-
cumulative dividends, if such are declared by the Company's Board of
Directors. The Series A preferred stock has both dividend and liquidation
preference over the company's common stock.
The Company was advised by Nasdaq on September 30, 1998 that in the opinion
of Nasdaq staff, based on the staff's review of the Company's public filings,
the Company does not fit the criteria for listing of its common stock on the
Nasdaq SmallCap Market. The Company believes that further discussions with
Nasdaq may assist in clarifying certain issues that have been raised.
Accordingly, it is seeking a review of the staff's findings. The Company was
advised by Nasdaq that trading in its securities on the Nasdaq SmallCap
Market will continue during the pendency of the review of the staff's
findings. Should delisting from the Nasdaq SmallCap Market occur, the
Company would seek to have its shares traded on the Nasdaq Bulletin Board
market.
The Company's management believes it can satisfactorily address most of the
issues raised by Nasdaq. As to any issues it cannot immediately address, the
Company believes it can develop a plan to satisfy Nasdaq's requirements and
it intends to submit such plan to Nasdaq during the review process. The
Company is optimistic that any such plans submitted to Nasdaq will be
sufficient to allow it to continue its listing on the Nasdaq SmallCap Market,
pending execution of the plan, but there can be no assurance that Nasdaq will
allow the Company's continued listing.
The acquisition of Paradise Innovations, Inc. by Unico, Inc. was governed by a
Stock Purchase Agreement dated November 30, 1997 and a Novation Agreement
dated June 26, 1998. Both will be collectively referred to as the "Novation
Agreement". Under the Novation Agreement, the assets of Old Unico (Unico
prior to the acquisition) were transferred to Intermountain Refining Co., Inc.
(IRC), a wholly owned subsidiary of Unico, as contribution to capital and
settlement of debts.
Under the Novation Agreement, Unico granted a proxy to vote its shares in IRC
to IRC's attorney. As such, Unico cannot elect IRC's board members nor vote
its shares; it has no control over IRC's assets and therefore cannot
consolidate IRC. IRC is operated and managed at the sole discretion of IRC's
board of directors and management (Messrs. William Hagler and Rick Hurt, the
former CEO and Controller of Old Unico, respectively).
<R/>
Upon the occurrence of certain events relating to Unico seeking and obtaining
a new listing with Nasdaq, but no sooner than November 30, 1998 and no later
than April 1, 1999, IRC may, at its management's sole discretion, consider a
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transaction involving IRC's stock, assets or business prospects. However, if
as of November 30, 1998, the Company has not commenced the listing
application process as required by the Novation Agreement then, as of
December 1, 1998, the directors of IRC may, in their sole discretion,
consider such transaction.
The Company was advised by Nasdaq, after the September 30, 1998 notice, that
pursuing the review process would be more effective than commencing a new
listing application at this time. The Company, in order to satisfy the terms
of the Novation Agreement, may or may not file a new listing application to
be prosecuted simultaneously with the review process.
In the event such a transaction contemplates a distribution of IRC's stock or
assets to holders of shares of Unico Common Stock, such distribution would be
at the Record Date and as defined below. The Record Date to determine which
holders of shares of Unico common stocks shall be entitled to the distribution
is the earliest applicable date of November 30, 1998 or April 1, 1999.
All shareholders of record on the Record Date shall be entitled to
participate, pro rata, in any such distribution except those shareholders
acquiring shares through and as a result of the Stock Purchase Agreement, as
modified by the Novation Agreement, and holders of shares issued by Unico
between June 1, 1998 and the Record Date. Unico shareholders who became so as
a result of the Unico acquisition of Paradise are not entitled to a
distribution of IRC's shares as per the Novation Agreement.
<R/>
If it is subsequently determined by counsel to IRC or Unico that approval of
the New Unico shareholders is required to effect any such distribution, the
Record Date for determining the shareholders entitled to vote shall be the
Record Date. For purposes of such vote, the shareholders receiving shares
pursuant to the Stock Purchase agreement as modified by the Novation
Agreement and all shares issued between June 1, 1998 and the Record Date by
Unico will be voted by proxy in favor of such distribution or at the
discretion of the IRC Board of Directors.
The Company has not determined whether the different rights held by the
holders of the common stock as a result of the Novation Agreement should
constitute different classes of common stock. The Company will endeavor to
make this determination with the assistance of appropriate counsel. If so
determined, the Company will take necessary steps for the separation of the
common stock into appropriate distinct classes.
The Stock Purchase Agreement and the Novation Agreement (attached as Exhibits
2.1 and 2.2 respectively to the Form 8-K filed on July 14, 1998) provided
that the Series A Preferred Shares have a "$400 par value". During the
course of preparation of the audited financial statements and this Form 10-K,
the Company has become aware the $400 par value designation may have been in
error. The Company believes that this $400 par value designation may have
been intended only to give a stated value of $400 for dividend and liquidation
preferences and not a true par value. Once the Company evaluates this and
other issues related to this par value further, the Company may seek
appropriate measures to remedy the possible error.
7
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The Company issued unregistered shares to effect the June 30, 1998
acquisition. It issued 5,476,190 shares of common and 5,476 shares of
preferred to Paradise stockholders on June 30, 1998, in exchange for their
holdings of Paradise shares. It issued 547,619 shares of common to Azemuth,
Inc., a firm controlled by an affiliate of the Company for consulting
services in connection with the acquisition.
The preferred stock can be converted to 1,000 shares of common. Pursuant to
the Novation Agreement, the initial date for conversion of preferred stock to
common is January 1, 1999. No more than 1,825 shares of preferred can be
converted between January 1 and May 31, 1999. No more than 3,650 shares of
preferred in total can be converted between June 1 and August 31, 1999. All
shares can be converted as of September 1, 1999.
The Company believes it is exempt for issuing this restricted stock in con-
nection with the acquisition under Section 4(2) of the Securities Act of 1933.
On September 14, 1998, the Company issued and registered 390,000 shares of
common stock with which it paid consultants for various services.
The Company has authorized 50 million shares of the $0.20 par value common
stock and 8 million shares of $0.01 par value preferred stock. The Company
holds 3,699 shares of common as treasury stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Disclaimer
The discussion and analysis below contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities
Exchange Act of 1934 and Section 21E of the Securities Exchange Act of 1934.
Actual results could differ materially from those projected in the forward
looking statements as a result of the risk factors set forth under "Certain
Factors That May Affect Future Performance" and elsewhere in this report.
Net Sales and Gross Margins
Paradise's net sales for the year ended June 30, 1998 were $24.6 million
yielding a gross margin of $409,000 or 1.7%. The low margin is in part a
result of the market segment focus. Prior to June 30, 1998, 92% of sales
were of chips (memory and CPU) where the Company has traditionally obtained
gross margins of around 2%. Since June 30, 1998, the sales mix has been
closer to 50% in chips and 50% in branded components, where gross margins,
net of co-op advertisement and other discounts are about 8%.
Efforts are underway to improve gross margins for both chips and components. A
management process is being launched where gross margins are reviewed weekly.
Sales volumes in July, August and September, 1998 increased significantly for
two reasons. First, sales through the Company's distribution network
increased. Management believes that the Company's distribution network has a
far greater capacity than is currently being utilized. The augmented sales
force discussed under Item 1 above will be able to more effectively use this
capacity.
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Second, the Company identified product lines with good market acceptance.
For example, the Company introduced the new V.90 Lucent 56K b.p.s. modem
which was responsible for a significant portion of sales volume. Sales of
modems increased over the three periods discussed. For the year ended June
30, 1998, it accounted for 80% of sales, and for the year ended June 30, 1997
it accounted for 75%. As described elsewhere herein, Multiwave is launching
new products with which it intends to diversify the source of its revenues.
<R/>
Management has identified other products, in the market segments of internet
communications and personal digital information systems, it plans to
introduce to its customers at the COMDEX trade show to be marketed beginning
in the second or third quarters of the current fiscal year.
Operating Results
Sales increased $9,580,000 from 1997 to 1998 or by 63.6%. Annualizing 1997's
sales accounts for $5,019,000 of this increase. $1,356,000 of the increase
is due to including Old Paradise's (Paradise before it merged operations with
Starlicon which changed its name to Paradise) sales for the 11 months ending
June 30, 1998. The remaining $3,205,000 increase is a result of increased
monthly sales, representing a 16.0% increase over 1997's annualized sales.
Gross margins as a percentage of sales did not vary significantly from 1997
to 1998. Operating expenses increased by $741,000 or 349.5% from 1997 to
1998. $289,000 of this increase was due to Paradise's increased expenses and
$452,000 to Old Paradise's expenses from August 1, 1997. Annualizing
Paradise's 1997 expenses accounts for $71,000 of the increase. $126,000 of
the increase is due to increased headcount at Paradise from 9 to 14 from 1997
to 1998. Rent expenses increased by $33,000 due to higher occupancy charges
at the same premises. Paradise had $24,000 in trademark amortization in 1998
which it did not have in 1997 which is included in the $452,000. There were
no other individually significant items which increased from 1997 to 1998.
Cost of sales consists of the actual cost of the goods, wages and salary of
the warehouse personnel, inbound freight expenses, and, if not borne by the
customer, outbound freight expenses. Typically, the customer pays for the
outbound freight expenses.
The table below compares the Company's operating results from 1997 to 1998
(dollars in thousands).
9
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Nine Months Twelve Months
Ended Ended
June 30, 1997 June 30, 1998
----------------- -----------------
<R/>
Net sales $ 15,058 100.0% $ 24,638 100.0%
Cost of goods sold 14,844 98.6 24,229 98.3
--------- ------ --------- ------
Gross profit 214 1.4 409 1.7
--------- ------ --------- ------
Salaries and wages 128 0.9 498 2.0
Rent 17 0.1 50 0.2
Trademark amortization 24 0.1
Other expenses 67 0.4 381 1.6
--------- ------ --------- ------
212 1.4 953 3.9
--------- ------ --------- ------
Operating income (loss) 2 0.0 (544) (2.2)
Interest income 2 0.0 8 0.0
--------- ------ --------- ------
Net income (loss) $ 4 0.0% $ (536) (2.2%)
========= ====== ========= ======
Financial Position
Accounts receivable increased by $313,000 or 43.4% from 1997 to 1998.
$145,000 of this increase is due to Paradise's sales, $168,000 from Old
Paradise's sales. Days sales in receivables went from 13 to 15 from 1997 to
1998, all of which increase was due to including Old Paradise's sales which
have a slower turnover rate. Inventories increased by $421,000 or 3,238%
from 1997 to 1998. $417,000 of this increase is due to the inclusion of Old
Paradise's inventories in 1998.
In general, prices invariably decrease over time due to competition.
Increases in sales are due to increase in volume of existing and new products.
<R/>
Working Capital, Liquidity and Capital Resources
At June 30, 1998, net working capital was 10% of total assets. While the
Company's business is working capital intensive, management is attempting to
reduce working capital requirements and the Company's financing costs. A
program to review accounts receivable and payable terms was launched. The
Company expects that the results of this effort will show in the second
fiscal quarter. This effort is critical to enable the high growth that
management envisions for the Company in the current fiscal year.
In September, the Company signed an agreement with Silicon Valley Bank (SVB)
to sell its accounts receivable from time-to-time to SVB. The terms of these
sales are 1.5% per month for receivables from OEM/End User customers and
1.25% for receivables from Distributor/Reseller customers, plus a 0.5%
service fee.
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The amount of receivables sold is limited to $800,000 in receivables sold and
outstanding at any time. The Company believes that this agreement will
provide liquidity while it reviews its accounts receivable and payable terms.
The Company is planning a privately placement to obtain equity capitalization
in its second fiscal quarter. The Company has initiated conversations with
financial institutions to assist in this transaction. The funds raised, if
any, will be used for working capital, capital improvements, and to increase
its capital resources for possible future acquisitions.
The Company has approached banks to obtain asset-based lines of credit. It
anticipates that the growth in operations targeted by the Company will
require financing above normal operating requirements. The Company is
attempting to ensure that this financing will be available for the growth
envisioned.
The Company believes that its cash balances and available credit are
sufficient to meet anticipated operating requirements for the foreseeable
future (12 months). There can be no assurance that additional capital beyond
the amounts currently forecasted by the Company will not be required nor that
any such required additional capital will be available on reasonable terms, if
at all.
The Company needs to finance growth in sales and make improvements in
computers and software. Its total working capital requirements for the 1999
fiscal year is about $2 million.
The Company has no source of additional required working capital other than
profits in the normal course of business and the line with Silicon Valley Bank
disclosed above. The Company may attempt to borrow additional amounts but no
assurance can be given that it will establish new banking relations.
The Company has not made any commitments for capital expenditures.
<R/>
The Multiwave Acquisition
The Company signed a letter of intent to acquire all outstanding shares of
Multiwave Innovation Pte, Ltd. (Multiwave), a Singapore company. Multiwave
is an engineering company with a focus on research and development with
operations in Singapore, China, and the U.S. The acquisition will provide
the Company's distribution subsidiary, Paradise, with rapid access to new and
exciting products. Multiwave is a pioneer in the design, development,
production, and marketing of high performance multimedia and Internet related
products for brand name sales or OEM contracts. Its products are modem
cards, sound cards, and various other multimedia upgrade kits and
accessories. It markets products on a transcontinental scale with sales in
Japan, Australia, Malaysia, Korea, Hong Kong, and Europe, North America and
Latin America.
Multiwave's largest shareholders are NatSteel Electronics Ltd. (NatSteel), a
publicly listed company on the Singapore Stock Exchange with contract
manufacturing operations in Singapore, Malaysia, Indonesia, Hungary, China
and Mexico, and Uraco Holdings Ltd. (Uraco), a publicly listed company on the
Singapore Stock Exchange that is a precision manufacturer of disk drives and
11
<PAGE>
semiconductor equipment components. NatSteel and Uraco will become
significant owners of the Company's common shares following the completion of
the acquisition.
The acquisition would enable the Company to design its own products and have
them manufactured at the location closest to the market. This ability would
reduce the time to market for new products, a key requirement imposed by the
markets for hi-tech products.
Should the acquisition take place, the Company's reach will be extended
worldwide for both sourcing and marketing. The potential acquisition will
open lower cost sources for component parts in Asia and give the Company a
worldwide reach for its Paradise branded products. This will be a
significant capability for the Company as the Paradise brand is recognized
worldwide. The Company's management expects an improvement in margins as a
result of both improved sourcing and marketing. If and when completed, the
acquisition with Multiwave will add about 70 employees to the Company's
staff, about 50 of whom will be located in the Singapore subsidiary of the
Company.
Certain Factors That May Affect Future Performance
The Company's future performance may be affected by a number of factors
described below and in other parts of this Form 10-KSB, which should be
considered in evaluating the Company and its business.
The Company's future operating results may vary significantly from period to
period as a result of these factors. The Company's revenues depend on
products sold, customer satisfaction and support, timing of sales, timing of
new product introductions by the Company and by its competitors, product
cycle maturation, price competition and decline, availability of components,
design of new products, changes in product or distribution channel mix, the
level of inventory carried by the Company and its distributors and retail
customers, product returns, co-op advertising programs and price protection
agreements with its customers.
Gross margins depend on the same factors as revenues, as well as some other
factors: the availability and cost of components, component price change,
end-of-life inventory write downs and distribution channel mix. Technology
content is also a major factor influencing gross margins. Margins typically
are higher for products with high technology content than products with lower
technology. Thus, design and new product introduction are critical factors
impacting the Company's gross margins.
Perhaps most importantly, the Company's revenues and gross margins are highly
impacted by product life cycles, where margins are higher for newer products
and decline with increased competition and diminishing market excitement.
The Company's hi-tech market is characterized by frequent new product
introductions and rapid product obsolescence. The Company depends on new
product introduction in short time frames. Despite its strategy to enable a
short time frame to market, there is no assurance that the Company will be
successful in its execution nor that successful execution will assure high
margins.
12
<PAGE>
Management and staff impact the success of the Company's performance, in the
present and the future. The Company is located in the heart of Silicon
Valley, in the San Jose, California region where many hi-tech companies are
located. Competition for key personnel is intense, particularly in this
area. There is no assurance that the Company will be successful in attracting
and retaining such key personnel, despite the Employee Benefit Plan its
management is implementing.
Many factors are beyond the Company's control. Price levels and unit volumes
are often determined by competition, consumer preferences and general
economic conditions. In the hi-tech industry, frequently a new technology is
introduced which causes existing technologies, perhaps those on which the
Company is dependent, to become obsolete.
The Company's stock price has been subject to wide fluctuations to date and
may be subject to even wider fluctuations in the future. All the factors
discussed in this section and elsewhere in this Form 10-KSB will influence
the Company's stock price. Moreover, the stock market, particularly the
technology sector, has been subject to very high levels of volatility in
1998's third calendar quarter.
The Company does not endorse nor accept responsibility for estimates and
recommendations made by stock analysts.
Accounting Treatment of the June 30, 1998 Acquisition
On September 24, 1998, the Company's board of directors changed its fiscal
year to end on June 30. (See Form 8-K filed October 6, 1998.)
The Company believes the June 30, 1998 acquisition should be recorded as a
reverse merger. It considers the company resulting from the acquisition a
new company, beginning July 1, 1998 (following the end of its previous fiscal
year).
Continuity in the reporting of its financial statements is provided by Old
Unico's Form 10-K for the year ending February 28, 1998, its Form 10-Q for
the quarter ending May 31, 1998, and this Form 10-KSB. Old Unico is
discussed in Note 18 to the Financial Statements, below. The four-month
period from March 1 to June 30, 1998 is covered, providing financial
statement continuity.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
UNICO, INC.
FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
TABLE OF CONTENTS
Independent Accountants' Report 15
Balance Sheets 16-17
Statements of Operations 18
Statements of Stockholders' Equity 19
Statements of Cash Flows 20
Notes to Financial Statements 21-43
14
<PAGE>
Independent Accountants' Report
Weinbaum & Yalamanchi
The Stockholders
Unico, Inc.
We audited the accompanying balance sheets of Unico, Inc. (Unico) as of
June 30, 1997 and 1998 and the related statements of operations and
stockholders' equity and cash flows for the nine months and year then ended.
These financial statements are the responsibility of Unico's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. "Old" Unico's financial statements, summarized in Note 18
were audited by other auditors through February 28, 1998 whose May 14, 1998
report expressed an unqualified opinion on them.
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 that the financial statements are free of
material misstatement. An audit also 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly in all material respects, Unico's financial position as of June 30,
1997 and 1998 and the results of its operations and cash flows for the nine
months and year then ended in conformity with generally accepted accounting
principles.
/s/ Weinbaum & Yalamanchi
Weinbaum & Yalamanchi
Los Angeles, California
September 9, 1998 (Except for Note 11 for which the date is October 8, 1998.)
15
<PAGE>
UNICO, INC.
Balance Sheets
June 30, 1997 and 1998
ASSETS
(Dollars In Thousands)
1997 1998
Current Assets
Cash $ $ 30
Accounts receivable, less $30 and $84
allowances for doubtful accounts and
returns, allowances and discounts in 1998 721 1,034
Inventories (Note 12) 13 434
Prepaid expenses 9 4
------- --------
Total current assets 743 1,502
------- --------
Property and Equipment
Furniture and equipment 10 38
Leasehold improvements 9 25
------- --------
19 63
Accumulated depreciation 1 11
------- --------
18 52
------- --------
Trademark, less $24
accumulated amortization 106
Due from Luna 14
Due from Hwang 17
Hwang note (Note 6) 116
Old Unico Investment (Note 18) 3,163
------- --------
3,416
------- --------
$ 761 $ 4,970
======= ========
The accompanying notes are an integral
part of these financial statements.
16
<PAGE>
UNICO, INC.
Balance Sheets
June 30, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars In Thousands)
1997 1998
Current Liabilities
Bank overdrafts $ 48 $ 211
Accounts payable 109 433
Deferred revenues (Note 5) 210
Due RTC (Note 5) 32
Due Yin (Note 13) 100
Accrued payroll 25
--------- --------
Total current liabilities 157 1,011
--------- --------
Commitments and contingencies
(Notes 5, 8, 10, 11 and 18)
Stockholders' Equity (Notes 6, 7, 9 and 10) 604 3,959
--------- -------
$ 761 $ 4,970
========= =======
The accompanying notes are an integral
part of these financial statements.
17
<PAGE>
UNICO, INC.
Statements of Operations
Nine Months Ended June 30, 1997 and Year Ended June 30, 1998
(Dollars In Thousands)
1997 1998
Net sales (Note 4) $ 15,058 $ 24,638
Cost of goods sold (Note 12) 14,844 24,229
--------- ----------
Gross profit 214 409
--------- ----------
Salaries and wages 128 498
Rent 17 50
Trademark amortization (Note 5) 24
Other expenses 67 381
--------- ----------
212 953
--------- ----------
Operating income (loss) 2 (544)
Interest income (Note 6) 2 8
--------- ----------
Net income (loss) (Note 16) $ 4 $ (536)
========= ==========
Basic earnings (loss) per share $ 0.0004 ($ 0.0489)
========= ==========
Average shares used in computation 10,952,190 10,952,190
The accompanying notes are an integral
part of these financial statements.
18
<PAGE>
UNICO. INC.
Statements of Stockholders' Equity (continued)
Nine Months Ended June 30, 1997 and Year Ended June 30, 1998
(Dollars In Thousands)
Total
Dollar Amounts New Old Add'l Opera- Stock-
-------------- Common Common Paid-In ting holders'
Par Par Capital Result Equity
--------------------------------------------------
Balance October 3, 1996 $ 0 $ 0 $ 0 $ 0 $ 0
Common stock issued 1,095 (495) 600
Net income 4 4
--------------------------------------------------
Balance June 30, 1997 1,095 0 (495) 4 604
--------------------------------------------------
SGI capital contribution 588 588
Luna payable contribution 100 100
Stockholder contribution 40 40
Net loss (536) (536)
--------------------------------------------------
Balance June 30, 1998 1,095 0 233 (532) 796
--------------------------------------------------
Old common outstanding 225 1,744 1,969
New common issued 110 848 958
Warrants issued 236 236
--------------------------------------------------
Balance June 30, 1998 $1,205 $225 $3,061 $(532) $3,959
==================================================
Share Amounts
------------- New Old
Common Common Preferred
--------------------------------------------------
Balance October 3, 1996 0 0 0
Stock Issued 5,476,190 5,476(1)
Old Common Outstanding 1,125,609
--------------------------------------------------
Balance June 30, 1997 5,476,190 1,125,609 5,476
Stock Issued 547,619 0 0
--------------------------------------------------
Balance June 30, 1998 6,023,809 1,125,609 5,476
==================================================
Unico has 8 million shares of $0.01 par value preferred stock authorized and
50 million shares of $0.20 par value common stock authorized. Old common
stock is net of 3,699 shares of Treasury stock.
(1) The impact on the Company's equity of the par value from the issuance of
the $0.01 preferred stock is not material.
The accompanying notes are an integral
part of these financial statements.
19
<PAGE>
UNICO, INC.
Statements of Cash Flows
Nine Months Ended June 30, 1997 and Year Ended June 30, 1998
(Dollars In Thousands)
1997 1998
Operating cash flows (Notes 5 and 9)
Net income (loss) $ 4 $ (536)
Depreciation and amortization 1 30
Receivables change (721) (313)
Inventory change (13) (70)
Prepaid expenses change (9) 66
Accounts payable change 109 (28)
Deferred revenues change 65
Accrued payroll change 25
---------- ----------
Cash used by operations (629) (761)
---------- ----------
Investing cash flows (Notes 5, 9 and 10)
Property acquisitions 19 1
Luna advance 14
Other assets 4
Paradise cash acquired (42)
---------- ----------
Cash used (provided) by investing activities 19 (23)
---------- ----------
Financing cash flows (Notes 5, 6, 7, 9 and 10)
Common stock issued 600 0
RTC receivables collected 588
Yin advance 100
Shareholders' capital contribution 40
Reduction in due RTC (123)
Bank overdrafts 48 163
---------- ----------
Cash provided by financing activities 648 768
---------- ----------
Change in cash Nil 30
Cash - beginning of period Nil Nil
---------- ----------
Cash - end of period $ Nil $ 30
========== ==========
The accompanying notes are an integral
part of these financial statements.
20
<PAGE>
UNICO, INC.
Notes To Financial Statements
June 30, 1997 and 1998
NOTE 1. Accounting Policies and Operations
Basis of Presentation - The financial statements include the assets and
liabilities of Paradise Innovations, Inc. (Paradise), a California
Corporation. Paradise was incorporated on October 3, 1996. These financial
statements also include Old Paradise's assets, liabilities and operations
(Note 5) from August 1, 1997. All dollar amounts are in thousands. Unico's
old operations, held by Intermountain Refining Corp. (IRC) are included in
the investment in Old Unico (Note 18). The Company accounts for this
investment at cost as it cannot use IRC's assets for corporate purposes, has
no control over IRC's operations nor board of directors.
The acquisition of Paradise Innovations, Inc. by Unico, Inc. was governed by a
stock purchase agreement dated November 30, 1997 modified by a "Novation
Agreement" dated June 26, 1998. These will be collectively referred to as the
Novation Agreement. Under the Novation Agreement, Unico's shares of IRC would
be held by IRC's attorneys and would be voted in accordance to IRC's board's
instructions. Since Unico cannot vote its shares in IRC, it does not
"control" IRC. Thus, IRC is not consolidated as it does not satisfy the
requirement of control for consolidation. Nevertheless, as Unico owns the
shares, IRC is considered a wholly owned subsidiary.
<R/>
Business Description - Paradise markets computer memory chips, central
processing units and other basic computer components. The Company also
markets a proprietary line of computer peripherals under the Paradise brand
name. Some of the products marketed include PC video conferencing products,
video adapter cards, multimedia products and modems. Paradise's customer
base includes private label computer manufacturers and major technology
distributors, such as Tech Data, Ingram Micro, D&H, Almo, Comark and SED.
IRC, incorporated under the laws of the State of New Mexico in July 1985, is
wholly-owned by Unico. In conjunction with Unico's acquisition of Starlicon
during 1998, Unico transferred all of its operating resources to IRC. IRC is
managed by previous officers and directors of Unico. IRC's resources are
segmented into three categories of business: petroleum product refining and
processing, electrical energy production and natural gas production.
Additionally, until August 31, 1997, Intermountain Chemical, Inc., a now
dissolved subsidiary of Unico, managed and operated a methanol production
facility, owned by others, in Commerce City, Colorado. The facility was sold
as of September 1, 1997 and its associated operations were classified as
discontinued operations in the financial statements of Old Unico, (Note 18).
Refining - IRC's refinery is capable of processing low-cost, heavy crude oil
and other low gravity refined products into diesel fuel, fuel oils, and
asphalt that have traditionally been marketed on a wholesale basis in the
intermountain region. Approximately 6 years ago, IRC experienced a sharp
reduction in the availability of crude oil from it's traditional sources and
has not operated the refinery for several years. IRC is presently exploring
alternative sources of raw materials and is hopeful that a long term solution
21
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 1. Accounting Policies and Operations (continued)
to the supply shortage can be resolved. IRC periodically provides certain
asphalt terminalling services wherein IRC receives fees and reimbursement of
certain operating expenses directly related to the service provided.
Co-Generation - IRC's co-generation plant is capable of producing up to 3,000
kilowatts of electrical energy that has been sold to electric companies in
the local area. When in operation, the plant produces all electricity and a
portion of the steam used in the refining process thereby contributing some
savings in refinery operating costs.
The generators are not presently in
full operation but are occasionally maintained and used by third parties <R/>.
They are available for use if needed for operation of the refinery or if an
electrical energy market is developed in the area. No impairment is
recognized nor assessed.
Natural Gas Production - IRC owns an interest in and operates 19 natural gas
wells located in the Hugoton basin in Southwestern Kansas. Natural gas and
helium produced is sold, under exclusive contract, to K.N. Energy, of
Lakewood, Colorado.
IRC's business is further described in Note 18.
Property and Equipment - Paradise's property and equipment are recorded at
cost. Depreciation and amortization are recorded by the straight-line method
over the related assets' estimated useful lives. Capitalized costs carrying
value is reviewed annually.
Accounts Receivable - Paradise records an allowance for doubtful accounts to
reduce receivables to net realizable value. Paradise does not require
collateral from its customers. Paradise's customers include wholesalers and
value added retailers. Paradise's four largest June 30, 1998 customer
receivables and July and August 1998 cash collections were:
Customer Balance Collections
July August
A $395 $395 $0
B 239 163 76
C 173 142 22
D 105 29 1
Revenue Recognition - Revenue is recognized when products are shipped.
Paradise records an allowance for returns, allowances and discounts when
sales are recorded.
Inventories - Inventories are valued at the lower of cost, first-in, first-
out method, or market.
22
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 1. Accounting Policies and Operations (continued)
Trademark - The trademark is amortized over five years by the straight-line
method. Its carrying value is reviewed annually.
Advertising - Paradise expenses advertising as incurred.
Accounting Estimates - Preparing 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
financial statement date and the reported amounts of revenue and expense
during the reported periods. Actual results could differ from those
estimates.
Fair Value of Financial Instruments - Accounts receivable, cash, accounts
payable and accrued expenses carrying value approximates fair value because
of the short-term maturity of those instruments. The Hwang note (Note 6) is
believed to be at fair value. Unico's investment in IRC (Note 18) is carried
at cost which may differ from market value.
Income Taxes - Paradise will file a consolidated tax return for 1998 with
Starlicon Group, Inc. (SGI), Paradise's holding company (Note 9). The 1998
tax disclosures were computed as if Paradise filed a separate company tax
return.
Cash - Cash includes short-term instruments with original maturities of 90
days or less.
Service Contracts - Service contracts are amortized by the straight-line
method over the related contract term.
Earnings per Share - Earnings (loss) per common share is computed as if Unico
had issued 5,476,190 of its 6,023,809 common shares issued to acquire Old
Unico on October 3, 1996 and they had been continuously outstanding. The
5,476 shares of Unico preferred were converted to 5,476,000 shares of Unico
common for purposes of this calculation and were also treated as if they had
been continuously outstanding from October 3, 1996. No operations of Old
Unico (Note 18) are included in the calculation as Old Unico is carried at
cost.
NOTE 2. Relialogic Technology Inc.(RTC) Advance
On June 9, 1997 RTC advanced Paradise $50, which Paradise repaid on June 18.
NOTE 3. Supplemental Cash Flow Disclosures
Interest paid and received and taxes paid were not material for the periods.
The statement of cash flows excludes the effects of Unico's acquisition of
Old Paradise (Note 5) and Old Unico (Note 18).
23
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 4. Sales and Expenses
Sales and expenses included these amounts by period:
1997 1998
Sales to customer A $ 2,479 $ 7,313
Sales to customer B 1,262 2,402
Sales to customer C 1,258 1,688
Sales to customer D 1,196 2,167
Sales to Old Paradise 393
Purchases from Luna International, Inc. (Luna) 323
NOTE 5. Old Paradise Acquisition
On July 31, 1997 Paradise purchased the business and certain assets
comprising the Paradise Multimedia operations of RTC, a subsidiary of Osicom
Technologies, Inc. (Osicom). John Hwang (Hwang), a Paradise stockholder and
officer resigned his position as an RTC officer on June 30, 1998. The assets
acquired and related liabilities assumed were:
Cash $ 42
Inventory 351
Prepaid expenses 19
Hwang note (Note 6) 109
Other assets 58
Property and equipment 43
Trademark 130
-------
752
Less: Accounts payable (452)
Deferred revenues (145)
-------
$ 155
=======
The $155 sale price was paid to RTC as follows: $100 on February 23, 1998,
and $25 on April 3, 1998. The balance will be paid at $20 per month. Payments
for the assets began in February 1998 as RTC agreed to modify the conditions
of purchase, extending the terms of the payments to May 1998.
Paradise believes RTC improperly computed its deferred revenues and that it
owes RTC $70 less than RTC currently believes it is owed. The improper
computation of the deferred revenues arose from timing differences between (1)
payments by Philips to Paradise for services provided and (2) the provision of
the services to users of Paradise branded products. The Philips Technical
Services Agreement called for four annual payments to compensate for five
years of service. RTC had accounted for the deferred revenues by deferring
each payment annually and taking 1/12th into income each month. This left the
fifth year with an expense for providing services without any offsetting
revenues. The sum of the four payments should have been deferred over five
24
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 4. Sales and Expenses (cont'd)
years and taken into income at 1/60th per month to match the timing of the
services provided. The $155 sale price was arrived in this manner versus the
$225 RTC had arrived at.
Following the acquisition, Paradise collected $588 of RTC's July 31, 1997
receivables (Note 9) payable to Paradise. These receivables were initially
accounted for as a liability to RTC, above the purchase price of the Paradise
assets. On November 30, 1997, RTC, Paradise and Starlicon Group, Inc. (SGI,
then the parent company of Paradise) agreed to assume the liability as a
contribution to Paradise's capital.
<R/>
NOTE 6. Hwang Note and Shareholders' Capital Contribution
This amount is Hwang's $100 demand note to RTC dated February 29, 1996 plus
interest at 8%. Paradise recorded $7 in interest income from this note in
1998. On March 30, 1998 Hwang and other shareholders contributed $40 to
Paradise's capital.
NOTE 7. Stockholders' Equity
Paradise issued 1,000 shares of its stock for $600. In November 1997 Luna, a
company controlled by Hwang, contributed $100 of Paradise's accounts payable
to Paradise's equity. As this transaction neither provided nor used cash it
was excluded from the statement of cash flows.
NOTE 8. Operating Leases
Paradise leased its facilities on a month-to-month basis from Meret
Communications, Inc., an Osicom subsidiary. At June 30, 1998, Paradise's
operating lease commitments were $10 through June 30, 1999, for a vehicle.
NOTE 9. Starlicon Group Inc. (SGI)
In November 1997, Paradise's stockholders formed SGI as a holding company for
Paradise's common stock. SGI assumed $588 of Paradise's RTC debt as a
capital contribution to Paradise. Since the transaction neither provided nor
used cash it was excluded from the statement of cash flows.
25
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 10. Purchase of Paradise
On June 30, 1998 Unico, Inc. (Unico) purchased Paradise from SGI for
5,476,190 shares of Unico common stock and 5,476 shares of Unico convertible
preferred stock, convertible into 5,476,000 shares of Unico common stock.
Unico also issued warrants to two of its shareholders to purchase a total of
150,000 shares of Unico common at $1.40 per share expiring on December 1,
2006. Before the acquisition, 1,125,609 shares of Unico common stock were
outstanding.
Since Paradise's shareholders own the majority of Unico's shares, this
transaction is accounted for as if Paradise purchased Unico, or by reverse
acquisition accounting. Despite the transaction being a stock for stock swap
it will be recorded using purchase accounting since Paradise was not an
autonomous entity within two years before combination.
On June 30, 1998, Unico dismissed an action brought in May 1998 against SGI
and Paradise. Paradise's recorded cost for Unico's purchase was $3,163 which
consisted of $1,969 for 1,125,609 shares of Unico common issued to old Unico
shareholders valued at $1.75 per share
(the market value of the shares at
the time), $958 for 547,169 shares issued to a Paradise shareholder (for
facilitating the Unico acquisition) <R/>, plus $236 which was the estimated
value of the warrants issued assuming a risk-free interest rate of 5.5%, 0%
dividend, 100% volatility and an 8-year, 5-month life.
NOTE 11. Subsequent Events
On August 1, 1998 Unico leased premises which Paradise moved into. The lease
expires July 31, 2003 and has escalation provisions for operating expenses.
Minimum payments due under the lease are as follows by year ending June 30:
1999 $ 131
2000 146
2001 150
2002 154
2003 159
2004 13
-------
$ 753
=======
On September 4, 1998, Unico signed an agreement with Silicon Valley Bank
(SVB) wherein Unico would sell, from time-to-time, at its and SVB's
discretion, selected invoices from its accounts receivables to SVB. Terms of
the sales are 1.5% per month for receivables from OEM/End Users, and 1.25%
per month for receivables from Distributor/Resellers, plus 0.5% per month
service fee for either type of receivables during the period the receivables
are purchased and outstanding. The term of the agreement is for one year and
then from year-to-year unless terminated by either the Company or SVB at any
time.
26
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 11. Subsequent Events (Continued)
On September 14, 1998, the Company issued and registered 390,000 shares of
common stock in payment for consulting services to three individuals.
130,000 shares were issued to a major shareholder and 130,000 were to the
Company's President. The Company is currently reviewing whether this
transaction was appropriate. Stock issued to consultants and employees for
services is accounted for under APB 25 and FASB 123. Stock issued to
employees are granted pursuant to the stock option plan adopted by the board
of directors. There is no formalized policy for stock issued to consultants.
<R/>
On September 21, 1998, the Company leased a telephone system for $9 per year
for a period of three years. At the conclusion of the lease, the Company has
an option to purchase the system for one dollar.
On October 2, 1998, Osicom notified Paradise it owes $109 for various
expenses Paradise supposedly incurred while occupying Osicom's premises.
Management disputes this bill and denies any liability for the amount
claimed.
On October 8, 1998, Luna International paid the Company $14 liquidating its
debt to the Company as shown in its financial statements of June 30, 1998.
NOTE 12. Inventory
On June 30, 1998 Paradise recorded a $15 reserve for certain items it
acquired in the Old Paradise (Note 5) acquisition to reduce their carrying
value to current market value. It carries 75,000 integrated circuits
acquired in the Old Paradise acquisition at $179 which it believes it will
use in the normal course of business. On June 30, 1998 Paradise recorded a
$16 inventory valuation reserve for other items.
NOTE 13. Chan Pui Yin (Yin) Advance
On June 30, 1998 Yin advanced Paradise $100 intending to buy Paradise stock.
Paradise repaid the $100 on July 9, 1998 after deciding not to consummate the
transaction.
NOTE 14. Name Change
On August 4, 1998 Starlicon International Corporation changed its name to
Paradise Innovations, Inc.
27
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 15. Segment Information
During fiscal 1997 Paradise engaged in one business segment, distributing
computer hardware. Effective August 1, 1997 with the Old Paradise
acquisition (Note 5), Paradise began distributing proprietary products and
operating in two segments. Paradise is organized by product. At June 30,
1998 $207 of Paradise's inventory was located in Asia.
All of Unico's oil and gas related operations are held by IRC and disclosed
in Note 18.
Segment assets were as follows:
Proprietary Old
Distribution Products Unico Eliminations Total
- ------------ ----------- ------ ------------ -------
$1,018 $893 $3,163 $104 $4,970
Segment operating results were as follows:
Distri- Proprietary Elimi- Total
bution Products nations
------- ----------- ------ --------
Revenues $23,310 $ 1,356 $ 28 $24,638
Interest income 1 7 8
Depreciation 2 4 6
Amortization 0 24 24
Operating loss (94) (450) (544)
NOTE 16. Income Taxes
A reconciliation of Paradise's 1998 tax provision to that which would have
been recorded at the applicable federal rate is:
Loss as recorded $ 536
Applicable rate 35 %
---------
Computed tax benefit 188
Tax benefit not recorded (188)
---------
Tax provision $ Nil
=========
At June 30, 1998 Paradise had a net operating loss carryover (NOL) of $501
expiring 2013, the $190 benefits of which were not recorded in the financial
statements due to uncertainty as to their realizability. The only material
item giving rise to differences between the book and tax basis of Paradise's
assets is the inventory valuation reserve.
28
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 17. Pro Forma Financial Information (Unaudited)
The following pro forma financial information presents the effects of the Old
Paradise acquisition as if it occurred on June 30, 1997. The pro forma
financial information is not necessarily indicative of the results of
operations and financial position which will be attained in the future. The
pro forma information should be read in conjunction with the historical
financial statements of Paradise as reported on Form 8-K for nine months and
the year ended June 30, 1997 and 1998.
29
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 17. Pro Forma Financial Information (Unaudited, Continued)
Unico, Inc.
Pro Forma Condensed Balance Sheet
June 30, 1997
Paradise
Before Old
Assets acquisition Paradise Pro forma
----------- --------- ---------
Cash $ 42 $ 42
Accounts receivable $ 721 721
Inventories 13 351 364
Property and equipment
-net 18 43 61
Trademark 130 130
Hwang note 109 109
Other assets 9 77 86
---------------------------------------------
$ 761 $ 752 $ 1,513
=============================================
Liabilities and
Stockholders' equity
Bank overdrafts $ 48 $ $ 48
Accounts payable 109 452 561
Acquisition liability 155 155
Deferred revenues 145 145
---------------------------------------------
Total liabilities 157 752 909
---------------------------------------------
Common stock 600 600
Retained earnings 4 4
---------------------------------------------
Total stockholders'
equity 604 604
---------------------------------------------
$ 761 $ 752 $ 1,513
=============================================
30
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 17. Pro Forma Financial Information (Unaudited, continued)
These pro forma statements of operations presents the effects of the Paradise
acquisition as if it occurred on October 3, 1996.
Paradise
Before Old Pro forma
Acquisition Paradise adjustments Consolidated
----------- ---------- ----------- ------------
Revenues $ 15,058 $ 2,841 $ $ 17,899
Cost of sales 14,844 2,368 17,212
----------- ---------- ----------- ------------
Gross profit 214 473 687
Operating expenses 212 742 (267)(a) 687
----------- ---------- ----------- ------------
Operating income
(loss) 2 (269) 267 0
Other income
(charges) 2 (19)(b) (17)
----------- ---------- ----------- ------------
Net income (loss) $ 4 $ (269) $ 248 $ (17)
=========== ========== =========== ============
Basic earnings
(loss)per share $ 0.0004 ($0.0246) $0.0226 ($0.0016)
=========== ========== =========== ============
Weighted average shares outstanding 10,952,190
(a) To reverse RTC goodwill amortization and write-off. RTC had recorded a
goodwill of $400,000 when it acquired the Paradise assets in 1994 and
amortized it over seven years. The balance of goodwill in July 1997 was
$267.
<R/>
(b) To record interest on acquisition indebtedness at 11%.
NOTE 18. Old Unico
Old Unico's assets, liabilities and operations are summarized as follows as
of February 28, 1998 and June 30, 1998 and for the two years and four months
ended June 30, 1998:
31
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, Feb 28,
1998 1998
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,134 $ 1,237
Other current assets 82 51
Notes receivable from related
parties - Note C 84 102
------------ --------
TOTAL CURRENT ASSETS 1,300 1,390
------------ --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land, buildings and improvements 434 434
Equipment 165 165
Crude oil refining equipment 1,183 1,183
Co-generation facilities - Note B 290 290
Oil and gas properties,
(successful efforts method)
- Notes D and E 895 895
------------ --------
2,967 2,967
Less accumulated depletion
and depreciation (2,005) (1,960)
------------ --------
962 1,007
------------ --------
OTHER ASSETS
Investment in Chatfield Dean - Note F 301 601
Other assets & deferred charges - Note A 176 176
------------ --------
477 777
------------ --------
$ 2,739 $ 3,174
============ ========
32
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
CONSOLIDATED CONDENSED BALANCE SHEETS, (Continued)
June 30, Feb 28,
1998 1998
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 49 $ 63
Taxes other than income taxes 3 9
Income taxes payable 25
------------ -----------
TOTAL CURRENT LIABILITIES 52 97
------------ -----------
DEFERRED TAXES 52 58
Commitments and contingencies (Note G)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value,
authorized 8,000,000 shares, none
outstanding
Common stock, $0.20 par value,
authorized 50,000,000 shares,
issued and outstanding 1,129,308
shares - Note C 226 226
Additional paid in capital 2,214 2,214
Less: Treasury stock 3,699 shares (9) (9)
Retained earnings 204 588
------------ ------------
2,635 3,019
------------ ------------
$ 2,739 $ 3,174
============ ============
33
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Four
months ended Year ended
June 30, 98 Feb 28,98 Feb 28,97
------------- --------- ---------
REVENUES
Natural gas sales $ 79 $ 216 $ 245
Electrical capacity and energy - - 215
Petroleum product sales - - 478
Rent and other income 26 20 13
------------ ----------- ------------
105 236 951
------------ ----------- ------------
COSTS AND EXPENSES
Cost of sales 55 102 677
General and administrative 135 318 293
Depletion, depreciation
and amortization 45 132 135
Investment loss (Note F) 300
Interest, net (19) (28) 7
------------ ---------- -----------
516 524 1,112
------------ ---------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (411) (288) (161)
------------ ---------- -----------
Benefit for income taxes
Current (21) (80) (39)
Deferred (6) (16) (16)
------------ ---------- -----------
(27) (96) (55)
------------ ---------- -----------
LOSS FROM CONTINUING OPERATIONS (384) (192) (106)
------------ ---------- -----------
DISCONTINUED OPERATIONS (Note C)
Income (loss) from investment in
IC Partners, Ltd. (Less applicable
income taxes of $80, and $(264) for
1998, and 1997 - 265 (620)
Loss on disposal of investment in
IC Partners, Ltd. (Less applicable
income tax credit of $(14) - (48) -
------------ ---------- -----------
NET INCOME (LOSS) $ (384) $ 25 $ (726)
============ ========== ===========
34
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consist of the following:
June 30, Feb 28,
1998 1998
--------- ---------
Cash value of life insurance contracts $ 168 $ 168
Utility and license deposits 8 8
---------- ---------
$ 176 $ 176
========== =========
NOTE B - CO-GENERATION FACILITIES
IRC installed energy co-generation facilities at its refinery and commenced
operations of the co-generation equipment in February 1986. The co-generation
facilities and certain ancillary equipment had been acquired under an
operating lease with the manufacturer of the equipment. In January 1993, the
original lease of the co-generation facilities expired and a new operating
lease was negotiated. The new lease had a term of three years with fixed
monthly lease payments of $7. As of February 29, 1996, the lease had expired
and continued on a month to month basis pending re-negotiation of the lease.
In April 1996, Old Unico acquired the generators from the lessor for $27.
In conjunction with the operation of the co-generation facilities, IRC had
entered into an agreement with a local utility company for the sale of
electrical capacity and energy. The agreement was terminated in 1997.
Revenues from the sale of electrical generating capacity and energy were
approximately $0 for the four months ended June 30, 1998, $0 in fiscal 1998,
and $215 in fiscal 1997. Rental expense under the operating lease was
approximately $7 in 1997.
NOTE C - RELATED PARTY TRANSACTIONS
Old Unico was obligated under debentures payable to an officer, director and
stockholder totaling $178 at February 28, 1997 and during the year ended
February 28, 1998. Interest expense on the debentures was $19 in 1998 and
1997. As of February 28, 1998, the debentures, along with accrued interest
of $22, were converted into 142,718 shares of Old Unico's common stock.
35
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
In conjunction with Old Unico's management of SCCLP's Commerce City, Colorado
methanol production facilities, Old Unico received certain payments and
reimbursements of payroll and related costs. All payments, with the
exception of a basic monthly management fee were based on actual costs
accrued by Old Unico. Management fees paid to Old Unico were $21 per month
from December 1995 through August 1997. Old Unico sold it's partnership
interest in SCCLP in September 1997 and no longer manages the facility.
Management fees and cost reimbursements as well as Old Unico's share of
partnership income and loss allocations are included in the accompanying
statements of operations for the years ended February 28, 1998 and 1997 as
discontinued operations. Amounts received from SCCLP for management fees and
cost reimbursements for the years ended February 28, 1998 and 1997 are as
follows:
1997 1998
---------- ------------
Direct payroll and benefits $ - $ 1,045
Management fees and overhead costs 240 466
---------- ------------
$ 240 $ 1,511
========== ============
In addition to payments received from SCCLP in conjunction with Old Unico's
management of SCCLP, Old Unico has also received cash distributions
associated with its investment in SCCLP. Old Unico received $319 in 1997
representing the estimated tax liabilities associated with taxable
partnership income allocations through February 1996. During fiscal 1998 Old
Unico received $179 representing estimated tax liabilities for operations
through August 31, 1997 and the liquidation of IC-PL
, the general partner
of SCCLP <R/>.
On November 1, 1996, IRC issued an 8%, $325 revolving line of credit to Red
Hills Manufacturing, Inc. ("RHMCO") a New Mexico Corporation controlled by
certain current and former officers and employees of IRC. The revolving line
of credit was established to facilitate the purchase of certain woodworking
equipment and to fund start-up working capital requirements of RHMCO. The
revolving credit line was scheduled to terminate on December 31, 1997 but was
extended until December 31, 1998. The credit line is secured by cash,
accounts receivable, inventories and equipment owned by RHMCO. The balance
outstanding on the revolving credit line was $84 as of June 30, 1998, and
$102 as of February 28, 1998. RHMCO is currently occupying un-utilized
building space owned by IRC in exchange for certain maintenance and
monitoring services required by IRC.
36
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE D - OIL AND GAS PROPERTIES
Kansas Gas Properties: On July 1, 1988, Old Unico acquired certain natural
gas producing properties from Methanol Production Corporation (MPC), a
privately held Denver firm. The assets, valued at $902, included an
estimated 2,850,000 Mcf, net to Old Unico's interest, of proven and developed
natural gas reserves and related production equipment located in Southwestern
Kansas. In exchange for the assets, Old Unico gave $180 in cash, issued
106,851 shares of its common stock, and incurred a $290 note payable to a
bank.
Capitalized Costs: Capitalized costs relating to oil and gas producing
activities, as of June 30 and February 28, 1998 are as follows:
June 30 Feb 28
---------- ----------
Proved gas properties $ 895 $ 895
Less accumulated depletion (553) (541)
---------- ----------
Net capitalized costs $ 342 $ 354
========== ==========
Old Unico uses the successful efforts method of accounting for the
acquisition, exploration, development and production of oil and gas
properties. Costs of acquiring undeveloped oil and gas leases are
capitalized. All development costs of proved properties are capitalized as
incurred and all exploration costs are expensed. The capitalized costs of oil
and gas wells and related equipment are amortized by the units-of-production
method based on the estimated proved oil and gas reserves.
37
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE D - OIL AND GAS PROPERTIES (Continued)
Results of Operations: Results of operations of oil and gas producing
activities, excluding overhead and interest allocations, for the four months
ended June 30, 1998 and the years ended February 28, 1998 and February 28,
1997 are as follows:
June 30, Feb 28, Feb 28,
1998 1998 1997
-------- --------- --------
Revenues
Natural gas sales $ 79 $ 216 $ 245
-------- --------- --------
Costs and Expenses
Operating costs 55 103 73
General and administrative 1 2 3
Depletion, depreciation
and amortization 12 35 34
-------- -------- --------
68 140 110
-------- -------- --------
Pre-tax income 11 76 135
Income tax expense 4 26 46
-------- -------- --------
Net income $ 7 $ 50 $ 89
======== ======== ========
NOTE E - GAS RESERVE DATA AND SUPPLEMENTAL DATA (UNAUDITED)
In accordance with Statement of Financial Accounting Standards No. 69, the
following unaudited information is presented with regard to Old Unico's
proved gas reserves. Information for gas is presented in million cubic feet
(MMcf) except where otherwise indicated in thousand cubic feet (Mcf).
Production: Old Unico's net gas production, average sales price and
production cost for the four months ended June 30, 1998 and the years ended
February 28, 1998 and February 28, 1997 are as follows:
June 30, Feb 28, Feb 28,
1998 1998 1997
--------- --------- ---------
Net gas production (Mcf) 76,699 211,528 211,723
Average sales price ($/Mcf) $ 1.0298 $ 1.0218 $ 1.1556
Average production cost ($/Mcf) $ 0.5754 $ 0.4994 $ 0.3569
38
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Reserves: On July 1, 1988 Old Unico acquired certain natural gas producing
properties, (See Note D). The gas reserves are located primarily in Western
Kansas and are based upon the Jerry R. Bergeson & Associates Petroleum
Engineers Reserve Report dated May 10, 1991 and reserve information developed
internally by Old Unico. Estimated net quantities of proved developed and
proved undeveloped gas reserves as of June 30 and February 28, 1998 are:
June 30 Feb 28
---------- ---------
(MMcf) (MMcf)
Proved developed 2,121 2,198
Proved undeveloped - -
---------- ---------
2,121 2,198
========== =========
Statement of Changes in Quantities of Proved Developed and Undeveloped Gas
Reserves for the four months ended June 30, 1998 and the years ended February
28, 1998 and February 28, 1997 are as follows:
June 30, Feb 28, Feb 28,
1998 1998 1997
-------- ------- -------
(MMcf) (MMcf) (MMcf)
Proved reserves -
beginning of period 2,198 2,422 2,634
Adjustment to reserves - (13) -
Production (77) (211) (212)
-------- -------- --------
Proved reserves - end of period 2,121 2,198 2,422
======== ======== ========
39
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE E - GAS RESERVE DATA AND SUPPLEMENTAL DATA (UNAUDITED, Continued)
The Standardized Measure of Discounted Future Net Cash Flows relating to
Proved Gas Reserves as of June 30 and February 28, 1998 are:
June 30 Feb 28
---------- ---------
Future cash inflows $ 2,184 $ 2,246
Future production costs (1,220) (1,098)
Future income tax expense (218) (278)
---------- ----------
Future net cash flow 746 870
Ten percent discount factor (293) (371)
---------- ----------
Standardized measure of discounted
future net cash flows $ 453 $ 499
========== ==========
Changes in the Standardized Measure of Discounted Future Net Cash Flows From
Proved Gas Reserve Quantities for the four months ended June 30, 1998 and the
years ended February 28, 1998 and February 28, 1997 are:
June 30, Feb 28, Feb 28,
1998 1998 1997
--------- -------- --------
Standardized measure -
beginning of period $ 499 $ 759 $ 353
Adjustment to reserves - (2) -
Sales, net of production
costs and income taxes (20) (84) (122)
Accretion of discount
(including changes in
present value due to
price changes) (26) (174) 528
-------- ------- -------
Standardized measure -
end of period $ 453 $ 499 $ 759
======== ======= =======
Developed and Undeveloped Acreage: The following summarizes Old Unico's
gross and net undeveloped and developed acreage at June 30 and February 28,
1998:
40
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE E - GAS RESERVE DATA AND SUPPLEMENTAL DATA (UNAUDITED, Continued)
June 30 February 28
------------------- -----------------
Gross Net Gross Net
----- ----- ----- -----
Developed Acreage
Kansas 11,088 9,040 11,088 9,040
Undeveloped Acreage - - - -
"Gross Acres" refers to the number of acres in which Old Unico owns a working
interest. "Net Acres" refers to the sum of the fractional working interest
owned by Old Unico in gross acres.
Other: Old Unico held interests, at June 30 and February 28, 1998, in the
following wells, none of which are multiple completion wells:
June 30 February 28
------------------- -----------------
Gross Net Gross Net
----- ----- ----- -----
Producing gas wells 19 15.49 19 15.49
NOTE F - INVESTMENT IN CHATFIELD DEAN
On January 15, 1996 Old Unico executed a Letter of Intent with Chatfield Dean
& Co., (Chatfield) setting out the terms of a proposed acquisition, by Old
Unico, of all of the outstanding Common and Preferred stock of Chatfield. On
July 20, 1996, Old Unico and Chatfield executed a definitive acquisition
agreement. On February 10, 1997, Old Unico filed a Form S-4 with the
Securities and Exchange Commission ("SEC") and received comments on the Form
S-4 from the SEC on March 27, 1997. On May 14, 1997, the acquisition
agreement was terminated by mutual agreement of the parties. There are no
current plans to re-negotiate the acquisition agreement and the Form S-4 was
withdrawn.
41
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE F - INVESTMENT IN CHATFIELD DEAN (Continued)
Investment in Chatfield: On January 13, 1996, Old Unico acquired 50,000
shares of Chatfield Series B 7% commutative preferred stock directly from
Chatfield for $500. The shares have not been registered with the SEC and are
therefore restricted. The shares are redeemable by Chatfield upon the
occurrence of certain events for an amount equal to $10 per share, plus
unpaid accumulated dividends plus a premium ranging from $1 to $5 per share
depending upon the length of time the shares are outstanding. In addition to
the shares acquired, Old Unico received 50,000 warrants to purchase 50,000
shares of Chatfield common stock with an exercise price of $0.01 per share.
On September 12, 1997 Old Unico exercised all of the warrants and received
50,000 shares of Chatfield common stock for $1.
On March 8, 1996, Old Unico purchased 10,000 shares of Chatfield Series A 7%
cumulative, convertible preferred stock directly from Chatfield for $100.
The shares have not been registered with the SEC and are therefore
restricted. The shares are convertible into Chatfield common stock at any
time at the option of Old Unico at the ratio of 1 share for 3.33 shares of
common stock subject to certain events. The shares may be redeemed by
Chatfield for the original issue price of $1 per share plus $1 per share for
each year after issuance up to a maximum of $15 per share. During the fiscal
year ended February 28, 1997, Old Unico received $2 in dividends on this
investment. No dividends were received during the four months ended June 30,
1998 or the fiscal year ended February 28, 1998.
Both the 50,000 shares of Series B and the 10,000 shares of Series A
preferred stock were, under the now terminated acquisition agreement, to be
sold to a third party prior to closing of the acquisition. In the absence of
the agreement, Old Unico, through the assistance of Chatfield, intends to
seek a buyer for or other disposition of the shares. As the shares are not
publicly traded and there is currently no apparent market for the shares, the
liquidity of this investment is questionable. On June 30, 1998 management
recorded a $300 valuation allowance to reduce this investment to estimated
net realizable value.
NOTE G - COMMITMENTS AND CONTINGENCIES
Reservation of Common Stock: At February 28, 1998, Old Unico had 11,125
shares of common stock reserved for issuance under stock purchase warrants
outstanding. Holders of convertible debentures were issued warrants to
purchase common stock at $5.00 per share that expired on September 17, 1990.
42
<PAGE>
UNICO, INC.
Notes To Financial Statements (Continued)
June 30, 1997 and 1998
NOTE 18. Old Unico (Continued)
OLD UNICO
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
NOTE G - COMMITMENTS AND CONTINGENCIES (Continued)
In consideration to those holders that agreed to extend the maturity date of
debentures held by them, Old Unico extended the expiration date on the
associated warrants to purchase 11,125 shares of common stock, until
September 17, 1997. In conjunction with the conversion of the debentures on
February 28, 1998, Old Unico agreed to reduce the exercise price on the
warrants to $1.40 per share and extend the expiration date to December 31,
1999.
For accounting purposes, the reduction was not considered material.
<R/>
Guarantee of Debt of Others: In January 1994, Old Unico agreed to provide
credit support to Consolidated Oil and Transportation, Inc. ("COTI") in the
form of guarantees of commercial credit and stand-by letters of credit. COTI
is a marketer and transporter of heavy fuel oils and asphalt. The agreement
between the parties provided for Old Unico to obtain a collateral position
in COTI, subordinated to commercial lenders to COTI. In exchange for credit
support provided to COTI, Old Unico received a commission of 8.75% of the
gross profits of COTI. Old Unico does not have an ownership interest in
COTI. The Agreement expired on December 31, 1995 and has not been renewed.
However, Old Unico continues to be the guarantor on one account. As of the
date of this report, commitments to creditors of COTI are $1,296 under a
railcar lease agreement. The railcar lease guarantee relates to a 5-year
lease of 100 railcars and the limit of the guarantee is reduced by $648
annually as long as COTI is not in default under the terms of the lease. Old
Unico believes that COTI has sufficient working capital to satisfy its
outstanding obligations secured by the guarantee.
Environmental Matters: Old Unico has been involved in the manufacture,
storage, and sale of petroleum products since 1979, which exposes Old Unico
to potential claims for environmental remediation costs, if any, of sites
previously operated by Old Unico. Old Unico is not aware of any claims
pending for such sites.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On August 24, 1998, the Company's Board of Directors voted to engage Weinbaum
& Yalamanchi of Los Angeles, California, to act as the Company's independent
certified public accountants. In view of the stock transaction dated June
30, 1998 which in effect represented a change in control of the Company, its
management determined it best to conform its accountants to its own
accountants with whom it has an ongoing relationship. As a result, the
Company dismissed and replaced Atkinson & Co. Ltd., the former independent
certified public accountant.
43
<PAGE>
The former accountant's reports for the Company's last two fiscal years did
not contain any adverse opinion, nor disclaimer of opinion, nor were any such
reports modified as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and the former accountants
with regard to any matters which would have caused such accountants to make
reference to the subject matter thereof with their report.
The former accountants did not advise the Company regarding any of the
following: the inadequacy of internal controls, the unreliability of
management representations, the need to expand the scope of audits, the
fairness or reliability of previous audits. The Company, nor anyone on its
behalf, consulted Weinbaum & Yalamanchi regarding its views on the
application of accounting principles to a specified transaction before it was
retained.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company, their ages and positions
held in the Company are as follows:
Held
Name Age Position Since
- ------------------ ---- ---------------------- -------
John S. Hwang(1) 37 President and 1998
45541 Claret Court Director
Fremont, CA 94539
William N. Hagler 66 President 1998
603 Merino Kraal Intermountain
Farmington, NM 87401 Refining Co., Inc.
Henry Tang(2) 49 Vice President, 1998
2900 Pierce Street Finance & Operations
San Francisco, CA 94123 Secretary
Rick L. Hurt 45 Controller & Treasurer 1998
5701 Tee Drive Intermountain
Farmington, NM 87401 Refining Co., Inc.
Wing Po Szeto 48 Vice President 1998
801 Franklin Street #414 Sales, and
Oakland, CA 94607 Director
Rodger Sykes(1)(3) 42 Director 1998
1113 Foxhunt Way
San Jose, CA 95120
44
<PAGE>
Directors and Executive Officers (Continued)
Held
Name Age Position Since
- ------------------ ---- ---------------------- -------
Augustine Fung(1)(3) 35 Director 1998
Hilder Centre
2 Sung Ping Street
Hunghom, Kowloon
Hong Kong
- -----------
(1) Member of Audit Committee
(2) Appointed officer and Secretary on September 24, 1998
(3) Outside Director
The business backgrounds of the Directors and Officers of the Company follow:
John Hwang was employed by Samsung America Inc. as a manager and Vice
President of Sales and Marketing for computer and monitor products from 1984
to 1991. He was responsible for building brand name recognition for the
Samsung's monitors and computers in the United States. During his tenure,
Samsung achieved brand recognition and had annual sales of over $100 million
in monitors and $120 million in computers. Mr. Hwang was also responsible
for the successful introduction of the Samtron brand in the U.S. achieving
first-year sales of over $100 million. Mr. Hwang served as Vice President of
Sales and Marketing for Relialogic Technology Corporation (RTC). He was
responsible for establishing the Relialogic brand of computer peripherals.
Mr. Hwang also served as the Vice President of Sales and Marketing of
Builders Warehouse Association, Inc., as a result of its acquisition with
RTC. He was appointed the executive-in-charge of the Commercial and
International Sales divisions after Builders merged with Osicom Technologies,
Inc., and was instrumental in establishing distribution channels around the
world.
William N. Hagler received a B.S. degree in Industrial Engineering from North
Carolina State University in 1955. From 1955 to 1968, he was employed by
Esso Standard Oil, Cities Service Oil Co. and Riffe Petroleum Co. in various
phases of the petroleum refining and marketing industry. In July of 1968, he
became assistant to the president and later vice president of Plateau, Inc.,
of Farmington, New Mexico, a regional refining and marketing firm. His
responsibilities have included refinery management, marketing, corporate
development, economics and planning, crude oil supply, negotiation and
administration of processing arrangements, labor relations, coordination of
refinery acquisition and expansion programs, and relations with state and
federal regulatory bodies. In 1979 Mr. Hagler organized the Company and has
served as its president and as a director until June, 1998. Mr. Hagler is
Chairman, President and CEO of the Company's subsidiary, Intermountain
Refining Co., Inc. (IRC). He is a director of Saba Petroleum Company (AMEX:
SAB) and Petrominerals Corporation (Nasdaq:PTRO).
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Henry Tang received an A.B. degree in Economics and Political Science from
the University of California at Berkeley in 1972 and a MBA in finance from
the Stern School of Business at New York University in 1982. From 1972 to
1980, he worked in urban planning, with a specialty in transportation
planning, working both in Brazil and the U.S. In 1982, he worked for General
Mills, Inc. on the staff of the CFO, developing and implementing a new
management information system for five subsidiary companies in Europe. From
1984 to 1991, he worked for Citibank in both treasury management consulting
and in capital markets, where he originated auction preferred stock. From
1991 to 1996, he then advised companies on operational and strategic issues
such as Levi Strauss & Co. and McKesson & Co. He was the CFO of a startup
managed health care company, Preferred Health Care of California. From 1996
to 1998, Mr. Tang was a senior strategic planner for Visa International. He
joined the Company in August of 1998 and was appointed Secretary of the
corporation on September 24, 1998.
Rick L. Hurt received a BBA degree in Accounting from the University of New
Mexico in 1979. From 1979 to 1982, he was employed as a staff accountant and
later as a senior accountant by the accounting firm of Fox & Company in its
Albuquerque, New Mexico, offices. From 1982 until March of 1985 he was
employed as chief accountant for the law firm of Davis and Davis in Austin,
Texas. Mr. Hurt is certified as a public accountant in the states of New
Mexico and Texas. Mr. Hurt joined the Company as Assistant Controller in
March of 1985, and became its Controller, Secretary, Treasurer, and a
Director on May 20, 1985. Mr. Hurt resigned as a Director in 1998.
Mr. Wing Po Szeto received an engineering degree from the Kong Man
Professional Engineering Academy in Kong Man, China in 1969. In 1996, he
joined Paradise as Vice President, Sales and Marketing, where he and his
staff is responsible for the purchasing and sales memory and CPU chips.
Prior to Paradise, Mr. Szeto was a sales representative for Comptech
Resources (USA), Inc. where he established and developed new customer
relations. Prior to Comptech, he was the Managing Director for Coover
International (H.K.) in Hong Kong where he opened new markets for the
company's products and ran day-to-day operations of the company. He started
several new companies in China and ran them. Mr. Szeto managed a staff of
over 100 employees.
Dr. Rodger W. Sykes received his EE Bachelors degree and Device Physics Ph.D.
from Durham Univeristy. He joined Texas Instruments Ltd. (T.I.) in the U.K.
initially in an engineering role, moving on to engineering management,
marketing and later business general management. During his years with T.I.
he spent time in various parts of Europe and Asia. Born and educated in the
U.K., Dr. Sykes moved to the U.S. in 1990. He is currently Marketing and
Business Development Director for the Windows Systems IC
(Integrated
Circuits) <R/> business unit of Philips Semiconductors in Mountain View,
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California. He moved to Philips Semiconductors in 1994 initially as Strategic
Product Marketing Director for the standard
IC division, and later as
General Manager of the Paradise Multimedia business unit. Prior to joining
Philips, Dr. Sykes was worldwide application specific integrated circuits
(ASIC) business manager at T.I. in Dallas, Texas. With a total of over
seventeen years experience in the semiconductor industry, he has broad
expertise in integrated circuit design, manufacturing, operations,
applications, marketing and general business management. Dr. Sykes was
appointed to Unico's board of directors in 1998.
Mr. Augustine Fung is a Director of Icon Systems, Ltd. where he is
responsible for developing and manufacturing point of sale terminals. Mr.
Fung also markets terminals to China, Taiwan and Hong Kong. Prior to Icon,
he was a director of Spectra Systems, Ltd., marketing to China. Mr. Fung
received his Honour Diploma in Marketing from Lingnan College, Hong Kong, in
1985.
There are no family relationships between and among the officers and
directors of the Company. All officers and directors conform to the
requirements made by Regulation S-K under Item 401.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
remuneration paid by the Company for the three most recent fiscal years
ending June 30, 1998.
Name and Annual Compensation
Principal ---------------------------------------------
Position Year Salary Bonus Other
- --------- ----- --------- ------ ------
John Hwang 1998 0 $0 $0(1)
President 1997 0 0 0(1)
1996 0 0 0(1)
William Hagler 1998 101,163 0 0
President 1997 99,827 0 0
IRC 1996 96,740 0 1,441(2)
- ---------
(1) Mr. Hwang joined the Company as President on July 1, 1998.
(2) Includes discretionary employer 401(k) contributions totaling $2,222 for
all officers including $1,441 for Mr. Hagler during 1996. There were no
401(k) contributions during 1997 and 1998.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial owners of more than 5% of the outstanding common stock of the
Registrant are as follows:
Name and Address Amount and Percentage
of Nature of of
Beneficial Owner Beneficial Ownership Ownership(1)
- ----------------- -------------------- ------------
William N. Hagler 560,397 shares common 7.43%
603 Merino Kraal of record and beneficially
Farmington, NM 87401
John Hwang 827,500 shares common 10.98%
45541 Claret Court 710 shares preferred
Fremont CA 94539 of record and beneficially
Kelvin Li 697,500 shares common 9.25%
1803 Napa Court 710 shares preferred
Fremont, CA 94539 of record and beneficially
Maurer Trust & Carol Maurer(3)1,065,240 shares common 14.13%
264 S. La Cienega Blvd. 710 shares preferred
Beverly Hills, CA 90221 of record and beneficially
Ike Suri 1,375,119 shares common 18.24%
1601 N. Sepulveda Blvd. 710 shares preferred
Suite 243 of record and beneficially(2)
Manhattan Beach, CA 90266
(1) Percentage of ownership based on voting rights associated with 7,539,418
(excluding 3,699 held by Registrant for resale) common shares and 5,474
Series A Preferred shares issued and outstanding.
(2) Holdings attributed to Mr. Suri consist of shares issued to two Companies
of which Mr. Suri is the owner or holds a controlling interest, and to him.
Shares issued to the two entities include 697,500 common shares and 710
Series A Preferred shares to Corinthian Partners, and 547,619 common shares
to Azemuth, Inc. Both companies report the same address as that shown for
Mr. Suri. 130,000 common shares were issued to Mr. Suri personally in
accordance to a consulting contract.
(3) Ms. Carol Maurer is the trustee of the Maurer Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 9, 1997, Relialogic Technology Corporation advanced Paradise $50,000
which Paradise repaid on June 18, 1997. During the nine months ended June
30, 1997, Paradise sold $393,000 in products to RTC and purchased $323,000 in
products from Luna International, Inc.
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<PAGE>
In conjunction with the Paradise acquisition, the Company assumed a $100,000
note by John Hwang to Osicom. On March 30, 1998 certain stockholders
contributed $40,000 to the Company's capital.
In November 1997, Luna International, Inc. contributed $100,000 to the
Company's capital.
In November 1997, Starlicon Group Inc. assumed $588,000 of the Company's debt
to Osicom. The Company recorded this as a contribution to capital.
In September 1997, the Company issued and registered 390,000 shares for
payment of consulting services. 130,000 shares were paid to Mr. John Hwang,
President of the Company. 130,000 shares were paid to Mr. Ike Suri, a major
shareholder.
On November 1, 1996, IRC issued an 8%, $325 revolving line of credit to Red
Hills Manufacturing, Inc. ("RHMCO") a New Mexico Corporation controlled by
certain current and former officers and employees of IRC. The revolving line
of credit was established to facilitate the purchase of certain woodworking
equipment and to fund start-up working capital requirements of RHMCO. The
revolving credit line was scheduled to terminate on December 31, 1997 but was
extended until December 31, 1998. The credit line is secured by cash,
accounts receivable, inventories and equipment owned by RHMCO. The balance
outstanding on the revolving credit line was $84 as of June 30, 1998, and
$102 as of February 28, 1998. RHMCO is currently occupying un-utilized
building space owned by IRC in exchange for certain maintenance and
monitoring services required by IRC.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Exhibit
- -------
2.1 Stock Purchase Agreement dated November 30, 1997, filed on July 14,
1998 on Form 8-K.
2.2 Novation Agreement dated June 26, 1998, filed on July 14, 1998 on
Form 8-K.
3.0 Articles of Incorporation and bylaws are incorporated by reference to
the Company's registration statement on Form 10 filed September 9,
1986 and amendments thereto filed on July 29, 1994 on Form 8-K.
4.1 Instruments defining the rights of security holders including
Indentures are incorporated by reference to the Company's
registration statement on Form 10 filed September 9, 1986.
4.2 Instrument defining rights of holders of Series A preferred stock.
4.3 Warrant issued to William N. Hagler
4.4 Warrant issued to Rick L. Hurt
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Exhibit (Continued)
- -------
10.1 401(k) profit sharing plan adopted effective March 1, 1993 for
employees of IRC is incorporated by reference to the Company's Form
10-K filed for the year ended February 28, 1995.
10.2 Other IRC material contracts are incorporated by reference to the
Company's Form 8-K filed on June 13, 1990.
10.3 Lease for premises at 2925 Bayview Drive, Fremont, CA (P)
10.4 Lease for telephone equipment (P)
10.5 Contract with Silicon Valley Bank (P)
10.6 Service contracts are incorporated by reference to Form S-8 filed on
September 14, 1998.
11.0 Statement regarding computation of per share earnings in Form 10-K
filed on June 15, 1998.
13.1 Form 10-K filed on June 15, 1998 incorporated by reference
13.2 Form 10-Q filed on July 15, 1998 incorporated by reference
16.0 Form 8-K filed August 27, 1998 incorporated by reference
21.0 (a) Intermountain Refining Co., Inc. incorporated under the laws of
the State of New Mexico in 1984.
(b) Paradise Innovations, Inc. incorporated under the laws of the
State of California on October 3, 1996
23.0 Consent from Weinbaum & Yalamanchi, the Company's independent
accountants in the form of their report dated September 9, 1998 in
Item 7 of this Form 10-KSB
27.0 Financial data schedule pursuant to Item 601(c) of Regulation S-B in
Item 7 of this Form 10-KSB
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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.
(Registrant) Unico, Inc.
---------------------------------------------------------------
By (Signature and Title) /s/ Ike Suri
---------------------------------------------------
Ike Suri
Chief Executive Officer
Date November 1, 1999
-----------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By (Signature and Title) /s/ Ike Suri
---------------------------------------------------
Ike Suri
Chief Financial Officer
By (Signature and Title) /s/ Rodger Sykes
---------------------------------------------------
Rodger Sykes
Director and Member of Audit Committee
By (Signature and Title) /s/ Augustine Fung
---------------------------------------------------
Augustine Fung
Director and Member of Audit Committee
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Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Exchange Act By Non-reporting Issuers
(a) Except to the extent that the materials enumerated in (1) and/or (2)
below are specifically incorporated into this Form by reference (in which
case, see rule 12b-23(b)), every issuer which files an annual report on this
Form under Section 15(d) of the Exchange Act shall furnish the Commission for
its information, at the time of filing its report on this Form, four copies
of the following:
(1) Any annual report to security holders covering the Registrant's last
fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting material
sent to more than ten of the Registrant's security holders with respect
to any annual or other meeting of security holders.
(b) The Commission will not consider the material to be "filed" or subject to
the liabilities of Section 18 of the Exchange Act, except if the issuer
specifically incorporates it in its annual report on this Form by reference.
(c) If no such annual report or proxy material has been sent to security
holders, a statement to that effect shall be included under this caption. If
such report or proxy material is to be furnished to security holders
subsequent to the filing of the annual report on this Form, the Registrant
shall so state under this caption and shall furnish copies of such material
to the Commission when it is sent to security holders.
No annual report or proxy material has been sent to security holders.
52
