U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from____________to_____________
Commission file number 0-15927
COMPUTER POWER INC.
(Name of small business issuer in its charter)
New Jersey 22-1981869
(State or other jurisdiction of (I.R.S. Employer
Incorporation organization) Identification No.)
124 West Main Street, High Bridge, NJ 08829
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 908-638-8000
Securities registered pursuant to Section 12 (b) of the Exchange act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x ]
State issuer's revenues for its most recent fiscal year: $8,443,473
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock as of March 29, 1999: $349,094 The number of shares
outstanding of each of the issuer's classes of common equity, as of March 2,
1999, was 2,828,300.
Transitional Small Business Disclosure Format (check one)
Yes_______ No X
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Part I
Item 1. Business
FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Item 1 contains certain forward-looking statements regarding the Company,
its business prospects and results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward looking
statements. Factors that may affect such forward-looking results, such as, the
Company's ability to successfully develop new products for new markets;
acceptance of new products; the possibility of the Company losing a large
customer or key personnel; the Company's ability to manage growth; periodic cash
shortages; the impact of the competition on the Company's revenue; delays in the
Company's introduction of new products; and the possibility of the Company
failing to keep pace with emerging technologies.
Accordingly no assurances can be given that events or results mentioned
in any such forward-looking statements will in fact occur. When used in this
discussion, words such as "believes" and phrases such as "are expected" and
similar expressions are intended to identify forward looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully review
and consider the various disclosures made by the Company in this report and in
the Company's reports filed with the Securities and Exchange Commission.
The analysis of the Company's financial condition, capital resources
and operating results should be viewed in conjunction with the accompanying
consolidated financial statements, including the notes thereto.
General
Computer Power Inc. (the "Company", or "Registrant") designs, manufactures,
markets and services products in three distinct market categories: energy
efficient lighting, power protection systems, and emergency lighting. The
Astralite brand is focused on the energy efficient lighting market, while the
power protection business is concentrated on the power protection market and
emergency lighting market.
POWER PROTECTION SYSTEMS
Power protection systems condition and supply electrical power to computers,
electronic equipment and lighting systems when utility power fails or is
contaminated. These systems serve as a temporary bridge between the termination
of utility power and the commencement of power from generators, the restoration
of utility power, or provide time for an orderly computer system shutdown
without damage or loss of data. Products are automatically activated and provide
electrical power to the protected equipment for periods of time ranging from 10
minutes to 8 hours.
The Company concentrates on three niches of the power protection market: 1)
Emergency Lighting, 2) Custom Products, and 3) Standard Products. The Company
maintains a broad product line from 280VA single-phase up to 100 KVA three-phase
systems, and maintains a patent, which expires in the year 2000 for an energy
efficient unit.
All power protection systems contain a battery, battery charger, DC (direct
current) to AC (alternating current) inverter, and an output transformer. These
components are housed in metal cabinets with meter panels, environmental filters
and air louvers. The complete unit can be mounted on the floor, wall, table or
desk.
The Company's main focus is the emergency lighting market, where it offers a
line of power protection devices (lighting inverters) which backup lighting
fixtures. Required by fire code, all public buildings must provide for a minimum
of 90 minutes of emergency lighting. This can be accomplished via generator,
battery powered unit lights, or Inverters.
The Company's power protection equipment can be divided into four
sub-categories: double conversion, on-line uninterruptible power systems (UPS),
ferroresonant on-line uninterruptible systems (UPS), fast transfer backup power
systems, and Standard transfer backup power systems.
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The most significant difference among the four categories of power protection
systems is the market they serve and the speed at which auxiliary power is
supplied when utility power fails. The responsiveness of the system in terms of
supplying power determines the specific use or application of the system.
Double conversion, on-line systems continuously supply perfect sine wave power
to the protected load. No interruption in power occurs during the transfer from
utility power to emergency power, completely protecting the load from power
disturbances or outages. Ferroresonant on-line systems also supply uninterrupted
power, but unlike double conversion systems, there is a slight voltage and
frequency modulation during the transfer. On-line systems are used primarily for
emergency lighting applications involving High Intensity Discharge (HID) lights.
HID lights require this type of system to continue uninterrupted illumination
upon loss of utility power. In the case of standard transfer systems there is a
delay of 50 to 100 milliseconds, which is compatible with powering incandescent
and fluorescent emergency lighting.
As a result of the differences in transfer speed and modulation, fast transfer,
double-conversion and Ferroresonant on-line UPS systems are generally used to
supply auxiliary power and line conditioning to computers and sensitive
electronics in which any loss of power might damage the equipment or cause
errors and data losses. Backup power systems, having the slowest transfer speed,
are used primarily for emergency lighting systems in which the momentary loss of
power does not effect the equipment or its performance in any meaningful way.
Both double conversion and Ferroresonant on-line systems provide line
conditioning to filter and regulate utility power to clean sine wave. Backup
power systems generally offer little or no line conditioning.
ENERGY EFFICIENT LIGHTING
The lighting retrofit market is driven by demands for energy conservation and
related pollution reductions and cost savings from numerous sources including
the Federal Government, utility power companies and consumers. Numerous
enterprises, including both Fortune 500 and small start-up companies, continue
to enter the marketplace with various product offerings, ranging from energy
efficient lamp replacements to lighting dimmers and controls. Furthermore,
utility-sponsored energy management firms and contractors (DSMs and ESCOs) have
entered the marketplace offering complete turnkey services to reduce energy
consumption in commercial, industrial and public facilities. Most recently the
Environmental Protection Agency (EPA) has launched several major campaigns to
promote energy efficient lighting products. Utility power companies also
continue to promote lighting retrofit and conservation with various rebates and
cash incentives.
Capitalizing on the growing demand for energy efficient lighting products and
the development of more powerful solid-state Light Emitting Diodes (LED's) in
1993 the Registrant, under the brand name AstraLite, developed a 1.8-watt LED
illuminating light source to retrofit the high energy consuming standard
incandescent lamps used in Exit Signs. Since 1993, Astralite has expanded its
product line to include both LED retrofit kits and complete LED-based Exit
Signs. In December of 1997, in compliance with the revised UL code, the Company
introduced a new LED based retrofit kit and became the first universally listed
supplier of this product. This kit represents an advance in product design
taking advantage of new superbright LED's from Hewlett-Packard.
LED's, first developed in the 1960's, produce light by the excitation of
electrons in a semi-conductor wafer. Since that time LED technology has
increased in brightness and useful life making them a viable alternative to
incandescent applications in color specific applications such as exit signs and
traffic signals.
The key benefits of LED's when used in Exit Signs is their 93% energy savings
and extremely long life as compared to the incandescent lamp. Required by code
in public buildings, the EPA estimates that over 100 million exit signs in use
today, and this could translate to significant energy savings for customers who
decide to convert to this new solid-state lighting technology.
PRODUCT PRICES AND REVENUES
The retail product price ranges are as follows: (a) energy efficient lighting
$25-$175; (b) power protection systems $150-90,000; (c) line conditioning
equipment $1,750-$22,000; (d) battery chargers $1,730-$4,600; and (e) emergency
lighting equipment $2,800-$90,000.
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MANUFACTURING AND SUPPLY
Power Protection and Astralite products are manufactured to customer's orders in
the Company's High Bridge, New Jersey facility. To a limited extent, the
Registrant purchases fully assembled UPS systems from two sources for resale in
its distribution network. Sub-assemblies for the solid-state light emitting
diode retrofit kits are manufactured outside the United States with final
assembly at High Bridge.
The Company is a highly integrated manufacturer of power protection products and
accordingly, except for batteries, produces nearly all major components of its
products from raw materials. The Company also custom designs and fabricates
components such as chassis, transformers, cable connections, printed circuit
boards, cabinets and other devices. It assembles, inspects and tests its
products at various stages of assembly and each finished product undergoes a
complete test prior to shipment.
The Company generally purchases materials and supplies according to written
purchase orders. Blanket purchase orders are limited usually to larger usage
items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.
MAINTENANCE AND SERVICE
The Registrant offers warranties on all its products, including parts and labor,
which range from one year to twenty-five years prorated depending upon product
type. Products sold by the Company, but manufactured by others, are covered by
Company and original manufacturer's standard warranty and service agreements.
The Registrant performs warranty and repair service on products through its
factory service center at its New Jersey factory, when required or at customer
site. These services are performed pursuant to a written service contract or
upon specific order. Services on its products sold abroad are handled by various
third party agents. For 1998 and 1997 the Registrant had field service expenses
of approximately $600,000, and $614,000, respectively.
SALES AND MARKETING
The Company distributes its power protection and emergency lighting products in
the United States and abroad through a network of sales representatives,
distributors, and exporters to end-users and original equipment manufacturers.
For domestic power protection and emergency lighting product sales, the Company
utilizes electrical wholesale distributors and approximately 40 sales
representative companies. In the overseas market, the Company relies on
approximately 15 distributor/representative companies and approximately 10
exporters to sell its products. In addition, the Registrant makes sales directly
to individual end-users and original equipment manufacturers on certain
products. No single customer accounted for more than 13% of the Company's net
sales for 1998.
The Registrant's relationship with its sales representatives is specified by a
written contract, terminable on 90 days notice. The contract provides for
exclusive territorial and product representation and commissions payable to
representatives on their sales from 3% up to 20% depending on terms and
conditions. The sales representatives do not purchase for their own account and
generally will represent other non-competitive products. The top 10
representatives accounted for an estimated 15% of the Company's net sales for
1998.
The Company markets its Astralite products directly through a select group of
lighting and electrical distributors who focus on energy conservation and
long-life lighting. Marketing efforts are directed to plant and facility
managers, and energy managers responsible for industrial, commercial, and public
buildings such as schools, hospitals, and shopping malls. Astralite maintains
sales offices in High Bridge, NJ. In addition, certain Astralite products are
sold to original equipment manufacturers.
Astralite products are usually discounted to distributors from 20% to 50% from
list, depending on the product and quantity sold. No individual distributor
accounted for more than 2% of the Company's net sales for 1998. The Company
intends to de-emphasis Astralite in the future and is currently seeking to sell
the Astralite line
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CUSTOMERS
The Registrant sells its products to numerous customers, ranging in size from
small companies to large Fortune 500 corporations. Its customers are end-users,
original equipment manufacturers, system integrators, and distributors. Many of
the Company's customers are repeat purchasers. None of the Company's customers
represent more than 13% of revenues in 1998 and 10% of revenues in 1997. The
Company's Astralite and UPS businesses are generally not seasonal, however, the
emergency lighting business (approximately 58% of net sales) parallels
construction industry cycles.
INTERNATIONAL OPERATIONS
The Registrant's international activities account for approximately 2%, 3%, and
6% of its net sales for 1998, 1997, and 1996 respectively.
BACKLOG
As of December 31, 1998 the Registrant's backlog was approximately $432,000,
represented by firm customer orders, as compared with a backlog of approximately
$533,000 as of December 31, 1997. Most orders are generally subject to
cancellation. However, in certain cases, particularly in regard to orders for
custom products, there are penalty provisions for cancellations.
ENGINEERING
The Registrant maintains an engineering staff whose functions include the
improvement of existing products, modification of products to meet customer
needs and the engineering, research and development of new products and
applications. There are presently seven individuals employed at the Registrant's
High Bridge, New Jersey location. Engineering and research and development
expenses were approximately $393,000 in 1998, and $506,000 in 1997.
The Registrant intends to continue its research and development activities and
considers these efforts vital to its future business development. It anticipates
significant expansion of such efforts primarily directed toward the development
of new power protection products and applications, the improvement of existing
products, and cost reductions.
COMPETITION
In all its product lines, the Company faces intense competition from numerous
domestic and foreign manufacturers of varying sizes, including large Japanese
and European companies. In the Registrant's opinion, companies with which it
competes are American Power Conversion, Sola, Exide, Deltec, Best Energy
Systems, Dualite, ProLight and others. Many of its competitors are owned by
larger companies and have greater financial, technical and marketing resources
than the Registrant.
The degree of competition and the particular competitor may vary depending on
the product line/model and application involved. Accordingly, the Company will
compete with certain companies in the sales of its products for computers and
personal computers and with others in the emergency lighting or energy efficient
retrofit fields. For all its products, the Company generally competes on the
basis of price, product performance, features and delivery schedules. The
Company endeavors to position and sell its products at competitive prices in the
market place.
RESEARCH AND DEVELOPMENT
In 1998 the Company designed a new, UL approved, interruptible power supply unit
that incorporates the latest in electronic components and will enhance the
manufacturing process by allowing the Company to build the units in components.
This unit will be manufactured in modules using a cell manufacturing process
that should provide manufacturing economies.
GOVERNMENT REGULATION
The Registrant has not experienced and does not anticipate any material effect
of existing or probable government regulations on its business.
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Item 2. Property and Facilities
The Registrant leases a building of approximately 60,000 square feet in High
Bridge, New Jersey for its manufacturing facilities and executive offices
expiring December 31, 1999. Annual rent over the remaining term of the lease is
$237,000 per year. The Registrant is also responsible for local property taxes,
insurance premiums, and other related expenses. At the end of the lease term, at
its option, the Company must either purchase the building or renew the lease for
additional ten- (10) years at no increase in rent. One of the two landlords is
an affiliate of the Company.
Item 3. Legal Proceedings
To the best of its knowledge, there are no material legal proceedings to which
the Registrant is a party or to which its property is subject.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted in 1998.
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Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The principal market for the Registrant's shares of Common Stock, par value $.01
per share, is the over-the-counter market. The Registrant's Common Stock is
quoted on the OTC Bulletin Board under the symbol CUWR.
The high and low closing bid and asking prices concerning such securities, on a
quarterly basis, as furnished by the National Quotation Bureau for the period
beginning January 1, 1997 are as follows:
Common Stock (CUWR)
CALENDAR PERIOD HIGH AND LOW BID HIGH AND LOW ASK
1/01/97 to 03/31/97 $.312 $.2500 $.5000 $.25000
04/01/97 to 06/30/97 .12500 .12500 .25000 .25000
07/01/97 to 09/30/97 .12500 .12500 .25000 .25000
10/01/97 to 12/31/97 .37500 .12500 .50000 .21875
1/01/98 to 03/31/98 .37500 .18750 .50000 .31250
04/01/98 to 06/30/98 .18750 .18750 .37500 .25000
07/01/98 to 09/30/98 .18750 .12500 .25000 .18750
10/01/98 to 12/31/98 .25000 .09375 .93750 .31250
Quotations represent prices between dealers, do not include retail mark-ups,
markdowns or commissions and do not necessarily represent actual transactions.
As of March 2, 1998 there were129 shareholders of record. Based on prior
information from nominee holders, the Company believes the number of beneficial
owners of its common stock exceed 600.
The Registrant has not paid any cash dividends on its Common Stock and does not
intend to do so in the near future.
Item 6. Management's Discussion and Analysis
REVENUES
Revenues for 1998 were approximately $8,443,000 versus approximately $9,538,000
in 1997, representing a decrease of approximately $1,094,000 or 11% below 1997.
Power protection sales were up slightly (1%) compared to the prior year.
Astralite product sales were down approximately $1,363,000 or 32%, mainly due to
lower retrofit kit sales. Retrofit kit sales were adversely impacted by a UL
code change that went into effect during the third quarter of 1997. In December
1997, the Company completed development for a new higher intensity kits and
became the first manufacturer to obtain a UL listing that meets the new code
requirements. However sales of the new product were lower than anticipated due
higher average pricing resulting from increased costs to meet the UL approval.
COST OF SALES
Cost of sales for 1998 of $6,420,742 was about 76% of net sales compared to
approximately $7,518,000 or 79% in 1997. The Company managed its direct cost,
primarily materials, at slightly improved levels to sales along with a reduction
of indirect labor.
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OPERATING AND OTHER EXPENSES
Selling expenses for 1998 were about $855,000 or about $282,000 lower than 1997.
This represented about 10% of net sales in 1998 compared to 12% in 1997. In
order to help mitigate the impact of lower Astralite sales, the Company reduced
sales salaries and commissions, along with advertising and promotions expenses.
General and administrative expenses were approximately $1,044,000 in 1998 as
compared to $1,187,000 in 1997. Administrative expenses for 1998 were lower
primarily due to a reduction in payroll and insurance expenses, and a one-time
cost reduction totaling approximately $35,000 resulting from a three year sales
tax audit completed during 1997. These decreases were partially offset by an
increase in professional fees, and allowance for bad debt.
Interest expense for 1998 totaled approximately $284,000 versus approximately
$398,000 in 1997. The primary reason for the decrease was forgiveness of
interest for approximately $140,000 from one of the debt holders as part of the
Company's ongoing debt compromise efforts. The debt forgiveness also resulted in
an extraordinary gain of approximately $165,000 which represented interest from
prior years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's investment in Total Assets was about
$2,667,000 or $40,000 less than the $2,706,000 reported at December 31, 1997.
The significant components of the change are a reduction in inventory of
$275,000 due to lower stocking days of material, was partially offset by an
increase in accounts receivable of approximately $166,000 and net increase in
fixed assets of $86,000. At December 31, 1998, the Company's Liabilities and
Stockholders' Equity declined by $40,000 and was essentially comprised of: (1)
the decrease of accrued liabilities by approximately $171,000 and the net
increase of financing activities of approximately $143,000 which was partially
offset by the increase of accounts payable of approximately $360,000.
The Company is currently negotiating with the landlord for a revision of the
building lease terms, including a reduction in rent. Presently, the Company is
making payments based on the lease, and is in arrears in rent by approximately
$39,000 as of December 31, 1998. As the market has shifted to more competition
the Company expects to modify the lease during 1999 to more favorable terms.
Should the landlord decide to terminate discussions and institute actions under
default provisions and the Company were unable to satisfy the obligations then
due, it would result in a default of the Company's asset based lending
agreement.
The Company has retained an outside consultant to assist it in raising
additional capital and in restructuring its current debt obligations. Based on
progress achieved to date, the Company anticipates a favorable outcome to the
debt restructuring initiative and is hopeful that a debt compromise with key
debt holders will be achieved during 1999.
The ability to restore Astralite sales back to historical sales levels is
doubtful. Accordingly, management has decided to focus entirely on its core
power protection business. The Company expects to diminish Astralite operations
further and will attempt to find a suitable purchaser. The Company has made
adequate reserves for such a divestiture or closure of the business line.
The Company has two raw material suppliers, one which is a related party, that
provide extended terms. As of December 31, 1998 these vendors were owed a total
of about $267,000 of which about $223,000 was outstanding as a result of those
terms.
The Company anticipates that borrowings available to it through its revolving
credit and inventory term loan during 1999 should be sufficient to cover
operating cash requirements. There is no provision in the line of credit or with
any other lending source for any material commitments; research and development,
or marketing and promotion. The Company continues to search for an additional
infusion of cash into the business from outside investors and major
stockholders.
During 1998, management focused on productivity improvement programs that were
established in its plan for the year. These plans included continuing to reduce
cost of sales and other expenses. These plans were all implemented with varying
degrees of success. However, during 1998 when it became clear that the new
Astralite product introduction planned for the year was not meeting projected
sales, the Company reduced sales expenses, primarily salaries. The Company has
continued its efforts to develop new products that will make the manufacturing
and field service activities more efficient. These initiatives have materially
lowered the break-even point for the Company. In 1998 the Company participated
in a utility company energy conservation rebate program with sales totaling
approximately $374,000. The Company does not expect this program to continue but
continues to search for similar programs.
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During 1998 the Company has purchased a year 2000 compliant enterprise resource
planning system, and will begin implementation training in the first quarter of
1999, with a go live date of second quarter 1999. The cost of compliance and its
effect on future results of operations is not anticipated to be material in any
given year.
Item 7.
Financial Statements
The information called for by this item appears at the end of this Form 10-KSB.
Item 8.
Changes In and Disagreements With Accountants On Accounting and Financial
Disclosure:
None
Item 9.
Directors and Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act
Certain information about directors, officers and other key personne
of the Registrant is contained in the following table:
Name Title Age
- ---- ----- ---
.
Lindsay Gillette3 Chairman of the Board 40
John M. Perry1 President & CEO 55
Peter Gillette2,3 Director 38
Roger Love Director 66
Clarence Wilcox2,3 Director 68
Paul Kohmescher Controller & CFO, Secretary 47
(1) Mr. Perry's employment as President, Chief Executive Officer is subject to
an employment agreement. The term of this agreement is October 1,1998 through
December 31, 2001.
(2) Member of the Audit Committee, resigned on January27,1998. (3) Resigned as a
director on January 27, 1998.
All directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualify. Executive officers hold office until
their successors are chosen and qualify, subject to earlier removal by the Board
of Directors.
Lindsay Gillette had been a Director since 1994. He was elected Chairman,
President and Chief Executive Officer in 1994 and became Chairman in June, 1996.
Mr. Gillette has also been a Managing Director of Computers and Controls Ltd., a
Trinidad & Tobago corporation since 1982. Mr. Gillette is also a Director of
Cableview Limited, Body Works Fitness & Aerobics Limited, Favorite Foods, Ltd.,
National Maintenance Training & Security Company Ltd., and NIHERST. Mr. Gillette
is a graduate of McMaster University with a bachelor's degree in Civil
Engineering.
Lindsay Gillette is a brother of Peter Gillette.
John Perry was appointed a Director in October 1998 when he assumed his
position as President, Chief Executive Officer of the Company. Prior to this
appointment, Mr. Perry was Executive Vice President at Proformix, a developer
and manufacturer of computer peripherals and a marketer of specialty software.
Mr. Perry has held executive, operations, engineering and sales positions with
multi-national firms and has been a Principal in private manufacturing
companies.
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Peter Gillette had been a Director of the Company since 1994. He also has been
technical director of Computers and Controls Ltd., since 1983. He is also a
Director of Cableview Limited, Body Works Fitness & Aerobics Limited, Pelinja
Holdings Limited, Chaguaramas Development Authority, Tourism and Industrial
Company and Trinidad & Tobago Free Trade Zones. Mr. Gillette holds a bachelor's
degree in civil engineering from Cornell University.
Roger Love was a founder of the Company in 1967. He has served as a
Director from 1972 to the present. From 1972 to 1994 Mr. Love was President of
the Company. Mr. Love is currently President and Chief Executive Officer of
Drumsurn, a telecommunications service company.
Clarence Wilcox had been a Director of the Company since 1994. He also had been
Chairman and Managing Director of Wilcox Enterprises Limited since 1978. Since
1993 he has been Chairman and Managing Director of Guymar Caribbean Limited. Mr.
Wilcox is also Deputy Chairman and Director of MEGA Insurance Company Limited,
and a Director of General Packaging Limited.
Paul Kohmescher has been employed by the company since 1997. He was promoted to
Chief Financial Officer in November 1998. Prior to joining the Company Mr.
Kohmescher held various top management positions most recently as the Executive
Director of National Kitchen and Bath Association. He holds a bachelor's degree
from Indiana University, and is presently pursuing a masters degree in business
administration at Allentown College of St. Francis de Sales.
No director, officer, of beneficial owner of more than ten percent of any class
of equity securities of the Registrant failed to file on a timely basis, reports
required by Section 16 (a) during the fiscal year ended December 31, 1998.
Item 10. Executive Compensation
The annual and long-term compensation for services performed in all Company
related capacities for the fiscal years ended December 31, 1996, 1997, and 1998
of those persons who were, at December 31, 1997, the President and Chief
Executive Officer, and other Officers of the Company with annual compensation of
$100,000 or greater follows:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Name and Salary Bonus Deferred
Position Year ($'s) ($'s) Compensation $'s
- -------- ---- --------------------------- ----------------
John M. Perry (1) 1998 $110,000
President & Chief
Executive Officer
Hiro Hiranandani(2) 1998 $1,000,000
President & Chief 1997 $ 75,000 $25,000
Executive Officer 1996 $ 49,418
Louis Massad(3) 1998 $0
VP Finance 1997 $0
1996 $104,500
- ----------------------------------------------------------------
(1) Appointed President & Chief Executive Officer on October 1, 1998.
(2) Appointed President & Chief Executive Officer June 28, 1996. Resigned as
an officer on September 2, 1998.
(3) Resigned effective December 31, 1996.
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Options and Grants in the Last Fiscal Year John M. Perry's employment
contract granted (1) stock options for 100,000 common shares of the Company at
an exercisable price equal to 85% of such common stock's market value at
December 31, 1999, and (2) stock options for 100,000 common shares of the
Company at an exercisable price equal to 85% of such common stock's market value
at December 31, 2000.
Number of Securities % of Total Options/
Underlying Options/ SAR's Granted to Exercise of Expiration
Name SAR's Granted Employees in Fiscal Year Base Price Date
- ---- ------------- ------------------------ ---------- ----
Les Listwa 20,000 9.0% $0.25 01/06/07
Aggregated Option Fiscal Year End Values
(There were no exercises in 1998)
Number of unexercised Options/Value of unexercised In-the-Money
Warrants at Year-end (#) Options/Warrants at Year-end
Name Exercisable/unexercisable ($'s)
Exercisable/unexercisable
John M. Perry 0/200,000 44,000
Hiro Hiranandani 377,999/0 82,400
Les Listwa 36,000/0 7,800
Repricing of Warrants
Number of Length of
Securities Market Exercise Original
Underlying Price at Price at New Option
Options/SAR's Time of Time of Exercise Term
Name Date Repriced Repricing Repricing Price Remaining
- ---- ---- --------- --------- --------- ----- ---------
Hiro 02/13/97 125,999 $0.25 $0.33 $.025 8.25 Years
Hiranandani 02/13/97 125,999 $.025 $.040 $.025 8.25 Years
02/13/97 126,001 $.025 $.040 $.025 8.25 Years
Stock Option Plan
Under the Registrant's 1996 incentive stock option plan (the "Plan"), which was
approved by Shareholders on January 6, 1997, options to purchase a maximum of
500,000 shares of the Registrant's Common Stock can be granted to officers and
other key employees. The Company also had options from a pre-1996 plan
outstanding. The terms and condition of both plans are essentially the same.
Options are intended to qualify as incentive stock options as defined in Section
422A of the Internal Revenue Code of 1954, as amended by the Tax Reform Act of
1986.
As of December 31, 1998, 281,000 shares of the Plan were outstanding of which
29,000 shares have vested. Of the pre-1996 stock option plan, 116,000 shares
remain outstanding with 113,000 shares vested.
The Plan is administered by the Board of Directors which approves the persons
that are to receive options, the number of shares that may be purchased under
each option, and the exercise price. In the event an option holder voluntarily
terminates employment, any unexercised options terminate immediately except in
cases where the termination was not for cause, the option holder dies, or the
option holder is disabled. The maximum terms of any option is ten years and the
option price per share may not be less than the fair market value of the
Registrant's shares on the date the option is granted. However, options granted
to persons owning more than 10% of the voting shares may not have a term in
excess of five years and the option price may not be less than 110% of fair
market value.
11
<PAGE>
The aggregate fair market value of the shares of the Registrant's Common Stock
(determined at the time the option is granted) with respect to which incentive
stock options are exercisable for the first time by such option holder during
any calendar year (under all such Plans) may not exceed $100,000. Options may be
granted within ten years from the effective date of the Plan.
Options granted under the Plan are not transferable other than by will or by the
laws of descent and distribution. Options granted under the Plan are protected
by anti-dilution provisions increasing the number of shares issuable thereunder
and reducing the exercise price of such options, under certain conditions. The
Plan will terminate on January 5, 2007, or on such earlier date as the Board of
Directors may determine. Any options outstanding at the termination date will
remain outstanding until it expires or is exercised in full, whichever occurs
first.
Option Grants in the Last Fiscal Year
There were 200,000 stock options granted and 169,000 stock options canceled for
individuals that left the Company pursuant to the Registrant's Plan during the
fiscal year ended December 31, 1998. Stock appreciation rights are not granted
under the Plan.
Long-term incentive plan awards
The Registrant does not have a long-term incentive plan, other than the
Incentive Stock Option Plan.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of March 3, 1999, those persons including any
"group" who is known to the Registrant to be beneficial owners of more than five
percent (5%) of the Company's common stock as well as the stock ownership of
directors and executive officers. The Company's common stock is the only equity
or voting security outstanding.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership1 Class
John M. Perry - President 250,000 8.84%
& Chief Executive Officer
124 W. Main Street
High Bridge, NJ 08829
Roger Love - Director 461,199 16.31%
124 W. Main St.
High Bridge, NJ 08829
Susan M. Larson - Director 1,000,000(2) 35.36%
c/o Public Access Lighting, LLC
13603 South Halsted Street
Riverdale, Illinois 60627
All directors and officers
as a group 1,711,199 60.50%
(1) Except as otherwise set forth herein, all shares are beneficially owned, and
the sole voting and investment power is held by the persons named. Does not give
effect to common stock reserved under the Registrant's Incentive Stock Option
Plan. (2) Public Access Lighting, LLC , purchased these Common Shares subsequent
to December 31, 1998, as part of a financing transaction, which included the
acquisition of certain Company notes and warrants; Susan M. Larson was appointed
a director of the Company on January 27, 1999 and is an equity owner of Public
Access Lighting, LLC and therefore, beneficial ownership of that entity's Common
Shares are attributable to Ms. Larson (see: footnote no. 12, " Subsequent
Events" in the attached financial statements).
12
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company owns a 20% interest in Retrofit, Ltd. ("Retrofit"), of Trinidad,
West Indies. Retrofit was established to manufacture components for the Company.
In 1996, it began manufacturing LED sub-assemblies for the Company's Astralite
business unit. The Company's entire investment in Retrofit consisted of a
license of its patented LED retrofit technology. This investment is carried at
no value. The majority interest in Retrofit is owned by certain related parties
including Messrs Lindsay Gillette and Peter Gillette, directors of the Company.
During 1998, the Company purchased approximately $38,000 of material from
Retrofit.
The Company leases its office and plant facilities from its former principal
shareholders under a noncancellable operating lease expiring in 1999. Upon the
expiration of the lease in 1999, the Company has the option to purchase the
facilities on December 31, 1999 at the then fair market value by payment of 15%
cash and the balance payable on a 30 year mortgage bearing interest at the 30
year treasury bond rate. If the Company does not exercise its option, it will be
obligated to renew the lease for an additional ten years. If the option is not
exercised, the Company is obligated to renew the lease for an additional 10 year
term without rent escalation. The annual rental is $237,000 per year with the
Company being responsible for property taxes, insurance, and other related
expenses. During 1997 and 1998, the Company recorded $237,000 as rental expense
per year.
On June 28, 1996, Mr Hiro Hiranandani, a director and officer of the Company,
and a company controlled by Messrs Lindsay Gillette and Peter Gillette,
directors of the Company, loaned the Company $300,000 in exchange for term
notes, due July 1, 1999, bearing interest at 9-1/2% per annum, payable
quarterly. In addition, these investors received a total of 300,000 stock
subscription warrants, with an exercise price of $1.00 per share, exercisable
from July 1, 1998 through July 1, 2000. Further, as part of the compensation
package for Mr Hiranandani, the President and Chief Executive Officer, 377,999
stock subscription warrants were issued at prices ranging from $.33 to $.40 per
share, with exercise periods ranging from June 1, 1996 through June 1, 2006. The
Board of Directors repriced these stock subscription warrants to $.25 per share
on February 13, 1997.
On June 28, 1996, a director, through an affiliated entity, restructured several
notes payable into a $415,000 note payable in three years bearing interest at
9-1/2% per annum. The entity also received 100,000 stock subscription warrants
with an exercise price of $1.00 per share exercisable beginning July 1, 1998
through July 1, 2001. The Board of Directors repriced these stock subscription
warrants to $.25 per share on February 13, 1997.
During February 1997, the Company arranged additional bridge financing totaling
$280,000 from Hiro Hiranandani, a director and officer of the Company, and a
company controlled by Messrs. Lindsay Gillette and Peter Gillette, directors of
the Company. The instruments bear interest at 10% per annum and matured on
February 1, 1998. At that time the Company elected to exercise its option to
extend the notes for l year and issued 800,000 warrants at a price of $0.35 per
share in consideration for this extension. To the extent the principal of the
notes was not repaid on February 1, 1999, interest will accrue at 14% per annum,
thereafter. The warrants expire on February 1, 2006.
On April 13, 1998 the Company's Board of Directors approved the issuance of
966,079 warrants (of which 952,289 were to affiliates and a former CEO) to the
various companies and individuals who agreed to the deferral of principal and
interest related to certain debt as discussed in Note 2. The exercise price of
the warrants was the market value of the Company's stock ($0.25) on April 13,
1998. All warrants vested immediately and expire on April 13, 2003.
As of December 31, 1998, the Company had outstanding principal and interest
payable under its various note agreements with related parties and entities
totaling approximately $2,434,000. In addition, the total stock subscription
warrants outstanding as discussed above totaled 1,885,288 as of December 31,
1998. In addition, the Company owed Retrofit $106,000 for materials purchased in
the ordinary course of business.
13
<PAGE>
PART IV.
Item 13. Exhibit List and Reports on Form 8-K:
The following documents are filed as part of this Report: 1. Financial
Statements, 2. (a) Exhibits as indicated and 3.
(b) Reports filed on Form 8-K as indicated.
1. Consolidated Financial Statements:
Index to Consolidated Financial Statements
Report of Independent Auditor Consolidate Balance Sheet as of
December 31, 1998 Consolidated Statement of Operations for
each of the years in the
two-year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the years
in the two-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
two-year period ended December 31, 1998.
Notes to Consolidated Financial Statements for each of the years
in the two-year period ended December 31, 1998 and 1997.
2.(a) Exhibits:
The following list of exhibits are incorporated by reference from the
Registrant's Registration Statements on Form S-1 and S-8 filed under the
Securities Act of 1933, as amended, its Registration Statement filed on Form 8-A
and its Annual Report on Form 10-K for the fiscal year ended December 31, 1986
pursuant to the Securities Exchange Act of 1934, as amended:
Exhibit Number
1.1-Form of Underwriting Agreement
1.2-Form of Underwriter's Selling Agreement
3.1-Articles of Incorporation, as amended
3.2-By-Laws of Registrant, as amended
4.1-Specimen Common Stock Certificate of Registrant
4.2-Specimen Common Purchase Warrant
4.3-Form of Underwriter's Unit Purchase Option between Registrant and
Underwriter
4.4-Form of Warrant Agreement between Registrant and Warrant Agent,
as amended
5.0-Opinion of Rapaport and Cascone
10.1-Form of Authorized Sales
Representative Agreement between Registrant and its representatives
10.2-Form of Distributor Sales Agreement between Registrant and its distributors
10.3-Joint Venture Agreement between Registrant and Data Power Dear, C.A.
10.4-Joint Venture Agreement between Registrant and Brig. T.S. Grewal,
dated October 16, 1985
10.5-Joint Venture Agreement between Registrant and Crotan Electronics,
Ltd., dated November 5, 1986
10.6-Exchange of Stock between Registrant and Roger
Love and Doris Love, dated April 28, 1983
10.7-Real Estate Lease between and among the Registrant and Roger Love and Doris
Love, dated September 1, 1983
10.8-Real Estate Lease between and among the
Registrant and Roger Love and Doris Love, dated January 1, 1985, and
amendment
10.9-Real Estate Lease between Registrant and Jacques J. Hibbert, dated December
10, 1982
10.10-Promissory Note of Registrant issued to Roger Love, dated April
1, 1986
10.11-Promissory Note of Registrant issued to Doris Love, dated April 1,
1986
10.12-Loan Agreement between Registrant and Horizon Bank, N.A., dated March 28,
1986 and amendment dated May 1, 1986
10.13-Mortgage between and among New Jersey
Economic Development Authority and the Hunterdon County National Bank,
dated July 1, 1978
10.14-Promissory Note of Roger Love and Doris Love to Horizon Bank, N.A.,
dated March 28, 1986
10.15-Installment Sales Contract between and among Roger Love and Doris Love
and the New Jersey Economic Development Authority, dated July 1, 1978
14
<PAGE>
10.16-Assignment of Sales Contract to Horizon Bank, N.A., dated March 28, 1986
10.17-Employment Agreement between Registrant and Roger Love, dated March 1,
1976
10.18- Employment Agreement between Registrant and J. Robert Hoeffler,
dated May 1, 1986
10.19-Incentive Stock Option Plan of the Registrant, as
amended, and Form of Option Agreement
10.20-Supply Agreement between the Registrant and Superior Electric Company,
dated August 1, 1986
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-K for the fiscal year ended December 31, 1990:
2-Contract of Acquisition of Siltron Illumination, Inc.
99.1-Commitment letter of Chemical Bank, dated March 28, 1990
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1992:
10.21-Employment Agreement of Roger Love, dated January 1, 1992
10.22-Employment Agreement of Louis Massad. dated January 1, 1992
10.23-Consulting Agreement of Albert Lange, dated February 24, 1992
22.0-Subsidiaries of the Registrant.
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1993:
99.2-Commitment letter of Chemical Bank, dated March 29, 1993.
17.1-Letter of Resignation of Albert Lange from the Board of Directors,
dated September 18, 1993.
99.3-Notice of Default, dated December 16, 1993.
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1994:
10.24-$300,000 Convertible Debenture.
10.25-$700,000 Subordinated Note.
10.26-Consolidation and Modification of Lease Agreement.
10.27-Consulting and Non-Competitive Agreement with Roger Love.
10.28-Capitalization Agreement with Ready Mix (West Indies), Ltd.
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1995:
NONE
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1996:
10.29-Resignation of Lindsay Gillette;
10.30-Employment Agreement of Hiro R. Hiranandani dated June 28, 1996;
10.31-Resignation Letter of Louis Massad;
10.32-Warrants issued by Registrant to Kenneth Rind;
10.33-Debt Restructuring Agreement between Registrant and Roger Love;
10.34-Debt Restructuring Agreement between Registrant and Doris Love;
10.35-Debt Restructuring Agreement between Registrant and Ready Mix
(West Indies), Ltd. - Convertible Debenture;
10.36-Debt Restructuring Agreement between Registrant and Ready Mix
(West Indies), Ltd. - Subordinated Note;
10.37-Debt Restructuring Agreement between Registrant and SouthernTech, Ltd.;
10.38-Debt Restructuring Agreement between Registrant and SouthernTech, Ltd.;
10.39-Warrants issued by Registrant to SouthernTech, Ltd.;
10.40-Promissory Note
between Registrant and Darby & Darby;
10.41-Promissory Note between Registrant
and Hiro R. Hiranandani;
10.42-Promissory Note between Registrant and
SouthernTech, Ltd.;
10.43-Extension of Warrants previously issued by Registrant
to Rosenthal & Rosenthal;
10.44-Warrants issued by Registrant to Hiro R.
Hiranandani;
10.45-Warrants issued by Registrant to Albert Roth;
10.46-Lease
Modification Agreement between Registrant and Roger Love and Doris Love;
10.47-NOT USED;
15
<PAGE>
10.48-Debt Restructuring Agreement between Registrant and Hiro Hiranandani;
10.49-Promissory Note between Registrant and SouthernTech, Ltd.
The following list of exhibits are incorporated by reference from the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1997:
NONE
The following list of exhibits are incorporated by reference from Registrant's
Form 10-QSB for the quarter ended September 30, 1998:
10.51-Employment Agreement dated as of October 1, 1998, by and between the
Company and John M. Perry, appointing Mr. Perry the President and Chief
Executive Officer of the Company.
10.52- First Amendment to Employment Agreement, dated as of October 1, 1998,
by and between the Company and John M.Perry.
3.(b) Reports Filed on Form 8-K During Applicable Period: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMPUTER POWER, INC.
By:/s/John M. Perry
John M. Perry, President
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
March 31, 1999
/s/ John M. Perry
John M. Perry, President, Chief Executive Officer and Director
/s/ Paul A. Kohmescher_
Paul A. Kohmescher, Chief Financial Officer, Secretary
/s/ Roger Love
Roger Love, Director
cpi-10k.98
16
<PAGE>
Computer Power Inc. And Subsidiary
Consolidated Financial Statements As Of December 31, 1998
Together With
Report Of Independent Public Accountants
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Computer Power Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' deficit and cash flows OF Computer Power Inc. ( a New Jersey
corporation) and subsidiary for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Computer
Power Inc. and subsidiary for the year then ended December 31, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
April 9, 1998
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Computer Power Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Computer Power
Inc.(a New Jersey corporation) and subsidiary as of December 31, 1998, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Power Inc. and
subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Rosenberg Rich Baker Berman & Company
A Professional Association of Certified Public Accountants
Bridgewater, New Jersey
February 26, 1999
19
<PAGE>
COMPUTER POWER INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $63,204
Accounts receivable, less allowance of $211,485 for
doubtful accounts 1,478,937
Inventories (Note 1) 742,991
Prepaid expenses and other current assets 32,714
-------------
Total current assets 2,317,846
-------------
PROPERTY AND EQUIPMENT, at cost (Note 1):
Machinery, equipment, vehicles and furniture 1,280,783
Leasehold improvements 333,274
1,614,057
Less-Accumulated depreciation and amortization 1,265,402
-------------
348,655
-------------
$2,666,501
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes and other debt payable (Note 4) $2,337,667
Current maturities of long-term debt (Note 4) 775,694
Accounts payable 798,866
Capital leases-current maturities 53,143
Accrued liabilities 1,014,221
-------------
Total current liabilities 4,979,591 LONG-TERM LIABILITIES (Note
4)
Capital Leases excluding current maturities $85,374
Long term debt excluding current maturities 224,306
Total long-term liabilities $309,680
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' DEFICIT (Notes 4 and 6):
Preferred stock, par value $.01 per share; 2,000,000 shares authorized; none
issued Common stock, par value $.01 per share; 12,000,000 shares authorized;
2,602,700 shares issued 26,027
Capital in excess of par value 3,757,119
Accumulated deficit (6,331,228)
Treasury stock, 24,400 shares, at cost (74,688)
(2,622,770)
------------------
$2,666,501
==================
See notes to the Consolidated Financial Statements
20
<PAGE>
COMPUTER POWER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------- -------------
NET SALES $8,443,473 $9,537,967
COST OF SALES 6,420,742 7,518,306
------------- -------------
Gross profit 2,022,731 2,019,661
------------- -------------
OPERATING AND OTHER EXPENSES (Notes 4, 7 and 8):
Selling expenses 854,852 1,136,647
General and administrative expenses 1,043,689 1,186,542
Interest expense, net 283,479 390,759
------------- -------------
2,182,020 2,713,948
------------- -------------
Income (Loss) From Continuing Operations
Before Extraordinary Item $159,289) ($694,287)
Extraordinary Item (Net of Income Taxes of $0) $165,367 $0
Net Income (Loss) $6,078 ($694,287)
EARNINGS (LOSS) PER SHARE AVAILABLE TO COMMON
STOCKHOLDERS (a):
Basic EPS-
Income (Loss) From Continuing Operations ($.06) ($.27)
Extraordinary Item .06 -
Net Income (Loss) $.00 ($.27)
Weighted average common shares outstanding 2,578,300 2,578,300
(a) Diluted EPS is not presented for either period as the effect of the
inclusion of the potential shares would be antidilutive.
See notes to the Consolidated Financial Statements
21
<PAGE>
COMPUTER POWER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Capital in Total
Common Excess of Accumulated Treasury Shareholders'
Stock Par Value Deficit Stock Deficit
-------------- ---------------- ----------------- --------------- ----------------
BALANCE, December 31,
<S> <C> <C> <C> <C> <C>
1996 $26,027 $3,757,119 ($5,643,019) ($74,688) ($1,934,561)
Net loss -- 1997 0 0 (694,287) 0 (694,287)
------------ -------------- ---------------- -------------- ---------------
BALANCE, December 31,
1997 26,027 3,757,119 (6,337,306) (74,688) (2,628,848)
Net income-- 1998 0 0 6,078 0 6,078
------------ -------------- ---------------- -------------- ---------------
BALANCE, December 31,
1998 $26,027 $3,757,119 ($6,331,228) ($74,688) ($2,622,770)
============ ============== ================ ============== ===============
</TABLE>
See notes to the Consolidated Financial Statements
22
<PAGE>
COMPUTER POWER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ------------------
CASH PROVIDED BY(USED FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income(loss) $6,078 ($694,287)
Adjustments to reconcile net income (loss) to cash provided by (used for)
Operating activities-
Depreciation and amortization 65,677 59,556
Changes in assets and liabilities-
Accounts receivable, net (166,118) 42,071
Inventories 275,107 520,260
Prepaid expenses and other current assets 12,490 30,181
Accounts payable (359,569) 48,211
Accrued liabilities 171,311 93,379
Deferred revenue 0 (372,683)
--------------- ------------------
Cash provided by (used for) operating activities 4,976 (273,312)
--------------- ------------------
CASH USED FOR INVESTING ACTIVITIES :
Capital expenditures (151,986) (58,420)
--------------- ------------------
Cash used for investing activities (151,986) (58,420)
--------------- ------------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of new debt 232,914 507,527
Repayments of debt (90,000) (177,014)
--------------- ------------------
Cash provided by financing activities 142,914 330,513
--------------- ------------------
Increase (decrease) in cash (4,096) (1,219)
CASH, beginning of year 67,300 68,519
--------------- ------------------
CASH, end of year $63,204 $67,300
=============== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $145,039 $188,444
================= =================
</TABLE>
See notes to the Consolidated Financial Statements
23
<PAGE>
COMPUTER POWER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Description of Business-
Computer Power Inc. designs, manufactures, markets, and services
products in three distinct market categories: energy efficient lighting,
power protection systems and emergency lighting.
The Company has continued to incur losses and at December 31, 1998 has
a working capital deficiency and a shareholders' deficit. Management
has implemented several programs to reduce costs and to reduce the
break-even point necessary for profitable operations. Management
believes that its 1999 budget, which reflects the anticipated results
of these programs, is reasonable and attainable and will provide
sufficient cash to sustain operations during 1999. In addition, a
principal shareholder of the Company has committed to provide
additional working capital, if necessary. The Company has been
negotiating a debt compromise with its largest debt holders and hopes
to have the compromise consummated in 1999.
Principles Of Consolidation-
The consolidated financial statements include the accounts of Computer
Power Inc. (the Company) and its wholly-owned subsidiary,
Uninterruptible Power Systems, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
In addition, the Company owns a 20% interest in Retrofit, Ltd. a
company under the jurisdiction of Trinidad and Tobago, West Indies,
which is carried at no value.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories-
Inventories, which include material, labor and manufacturing
overhead costs, are stated at the lower of cost (first-in, first-out
basis) or market and consist of-
Raw material $379,845
Work in process 258,508
Finished goods 104,638
-------------
$742,991
=============
24
<PAGE>
Property and Equipment-
Property and equipment are recorded at cost. Depreciation is
recorded primarily on a straight-line basis over estimated useful lives as
follows-
Vehicles 3 years
Computer equipment under capital leases 3-5 years
Furniture and fixtures 5-7 years
Machinery and equipment 5-10 years
Leasehold improvements are amortized over the life of the lease or
their estimated useful lives, whichever is shorter.
Revenue Recognition
Sales revenue is recognized at the date of shipment to the
customer.
Advertising Costs
Advertising costs are charged to operations when incurred.
Advertising expense was approximately $110,000 and $83,000 for the
years ended December 31, 1998 and 1997, respectively.
Research and Development Costs
Research and development costs are charged to operations as
incurred and amounted to approximately $314,000 and $400,000 in 1998
and 1997, respectively.
Net Loss Per Share-
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 - "Earnings
per Share." The adoption of SFAS No. 128 requires the presentation of
Basic Earnings per Share and Diluted Earnings per Share. Basic Earnings
per Share is based on the average number of common shares outstanding
during the year. Diluted Earnings per Share is based on the average
number of common shares outstanding during the year plus the common
share equivalents related to outstanding stock options. The weighted
average number of shares used in computing basic loss per share was
2,578,300 in both 1998 and 1997. Diluted EPS is not presented for
either period as the effect of the inclusion of the potential shares
would be anti-dilutive.
(2) ACCRUED LIABILITIES
At December 31, 1998 accrued liabilities were as follows-
Accrued Interest $396,150
Accrued Warranty $207,243
Accrued Payables-Other $192,570
Accrued Wages and Salaries $101,657
Miscellaneous accrued liabilities $116,601
Total accrued liabilities $1,014,221
CAPITAL LEASES
25
<PAGE>
The Company leases certain equipment under capital leases expiring in
various years through 2001. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in the depreciation expense in 1998 and 1997.
Properties under capital leases are as follows:
December, 31
1998 1997
Telephone equipment $65,127 $65,127
Data Processing equipment $150,496 $101,303
--------
Subtotal $215,623 $166,430
Less accumulated depreciation $62,696 $100,272
-------
Total $152,927 $66,158
The following is a schedule of minimum lease payments due
under capital leases as of 12/31/98.
Year Ending, December 31,
$61,564
$58,298
$39,005
Total net minimum capital lease payments $158,867
Less amounts representing interest $ 20,350
Present value of net minimum capital lease
payments $138,517
Less current maturities of capital lease
obligations $53,143
Obligations under capital leases, excluding
current maturities $85,374
(4) DEBT:
At December 31,1998, notes and other debt payable include amounts due to
related parties and other lenders as follows-
<TABLE>
<CAPTION>
Revolving credit agreement maturing January 31, 1999, bearing
<S> <C>
interest at prime (8.5% at December 31, 1997) plus 3.5% $910,098(a)(c)
Subordinated, unsecured notes to a related entity due July 1, 1999
bearing interest at 9.5%, with quarterly interest payments 565,000(b)(e)
Term loan, bearing interest at prime (8.5% at December 31, 285,000
1998) plus 3.5%, with monthly installments of $5,000 due December 31, 2002
Subordinated, unsecured note to a related entity due February 1, 1998,
bearing interest at 10%, with quarterly interest payments 250,000(b)(d)(e)
Subordinated, unsecured note payable to a director due July 1, 1999,
bearing interest at 9.5%, with quarterly interest payments 150,000(b)(e)
Subordinated, unsecured demand note, bearing interest at 8% 96,569(b)
Subordinated, unsecured note payable due October 31, 1997
bearing interest at 10% 32,000(b)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Subordinated, unsecured note payable to a director due February 1, 1998,
<S> <C>
bearing interest at 10%, with quarterly interest payments 30,000(b)
Subordinated, unsecured notes payable to a director
due October 31, 1997 bearing interest at 10% 19,000(b)
Total notes and other debt payable $2,337,667
=================
Long-term debt consists of the following at December 31, 1998-
Subordinated note, bearing interest at prime (8.5% at December 31, 1997) plus
4%, payable in monthly installments of $19,444 plus interest
from September 1, 1997, due August 1, 2000 $700,000(b)(f)
Convertible debenture, bearing interest at 9.5%, payable in monthly
installments plus interest from July 1, 1997
until November 2000 300,000(b)(d)(f)
$1,000,000
Less- Current maturities 775,694
------------------
Long-term debt $224, 306
==================
</TABLE>
(a) The revolving credit agreement provides for maximum borrowings of
85% of eligible accounts receivable, as defined. The maximum
amount, including any amounts outstanding under the term loan, is
$2,000,000. As of December 31, 1998, approximately $287,000 of
additional borrowings were available under this agreement.
(b) The individual or company holding this note has agreed to the
deferral of all principal and interest until January 1, 1999.
(c) The revolving credit agreement, is due to mature on January 31,
1999. Warrants to purchase 100,000 shares of common stock at an
exercise price of $.40 per share which were attached to the
agreement and scheduled to expire on January 31, 1999. The
estimated value of these warrants will be recorded as interest
expense in January 1999
(d) In the event that the Company does not pay the principal and
interest on February 1, 1998, the maturity date will be extended
to February 1, 1999. In such case, the company would issue the
note holders warrants to purchase 800,000 shares of common stock
at an exercise price of $.35 per share. The estimated value of
these warrants will be recorded as interest expense in January
1999. The warrants expire on February 1, 2001. To the extent the
principal of the notes are not repaid on February 1, 1999,
interest will accrue at 14% per annum thereafter.
The company or individual holding this note agreed to interest
forgiveness for the first quarter of 1999.
(f) The company holding this note agreed to interest forgiveness for
these notes from the inception through the first quarter of 1999.
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<PAGE>
The aggregate maturities of long-term debt giving effect to the deferred
principal obligations discussed above, are as follows-
1999 $805,694
2000 284,306
2001 60,000
2002 60,000
2003 and beyond 75,000
$1,285,000
Substantially all of the Company's assets have been pledged as security
under the related debt.
(5) INCOME TAXES:
A reconciliation of the consolidated provision for income taxes in the
accompanying statements of operations to that which would be computed at
the U. S. statutory rate is as follows-
1998 1997
------------- ---------------
Tax (benefit) provision at statutory rate $21,000 ($306,000)
Provision for valuation allowance (21,000) 306,000
------------- ---------------
Income tax provision recorded in the financial
statements $0 $0
============= ===============
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The components of the deferred tax asset at December 31,
1998 are as follows-
Accrued interest $158,000
Depreciation 35,000
Reserve for slow moving inventory 64,000
Allowance for doubtful accounts 85,000
Accrued warranty costs 83,000
Accrued vacation 26,000
Operating loss carryforwards 2,589,000
----------------
3,040,000
Less- Valuation allowance (3,040,000)
----------------
Net deferred tax asset $0
================
In accordance with SFAS 109, the Company has evaluated its ability to
realize tax benefits associated with its temporary differences and
operating loss carry forwards. Based on its operating history, the
Company has provided a valuation allowance of 100% against the estimated
tax benefits associated with the operating loss carry forwards and other
temporary differences.
At December 31, 1998, the Company has operating loss carry forwards of
approximately $6,472,000 for income tax return purposes that are
available to offset future taxable income through 2009.
(6) SHAREHOLDERS' EQUITY:
28
<PAGE>
Stock Options-
Under the Company's pre-1996 stock option plan, options for the
purchase of up to 500,000 common shares could be granted to officers
and other key employees at prices no less than the fair market value of
the shares on the date of grant. The plan gave the Company the right to
repurchase the options at a price equal to the difference between the
exercise price and market price of the shares at the date the employee
elects to exercise the options. All options have a term of ten years
and are exercisable in equal installments over the five-year period
beginning from the date of grant.
On January 6, 1997, the Company's stockholders approved a 1996 stock
option plan with the same terms and conditions as the pre-1996 plan. On
that date 195,000 options were granted at a price of $.25 per share. On
November 18, 1997 30,000 additional options were granted at a price of
$.125 per share. As of December 31, 1998, 219,000 shares of the
Company's authorized but unissued common stock were reserved for the
potential issuance of stock options.
A summary of the activity in options under the stock option plans are
as follows-
1998 1997
------------ -----------
Number of shares under stock option plans-
Outstanding at beginning of year 366,000 233,000
Granted 200,000 225,000
Exercised 0 0
Canceled (169,000) (92,000)
Outstanding at end of year 397,000 366,000
============= =========
Available for grant at end of year 219,000 340,000
Exercisable at end of year 142,000 156,000
Weighted average exercise price-
Granted $.19 $.23
Exercised - -
Canceled .33 .29
Outstanding at end of year .32 .32
Exercisable at end of year .36 .40
Weighted average fair value of options granted
during the period $.22 $.21
John M. Perry's employment contract grants him stock options to purchase 100,000
common shares of the Company at an exercisable price equal to 85% of such common
stock's market value at December 31, 2000.
John M. Perry's employment contract grants him stock options to purchase 100,000
common shares of the Company at an exercisable price equal to 85% of such common
stock's market value at December 31, 2001.
29
<PAGE>
Number of Securities.
Options Outstanding
-------------------------------------------------------------------------------
Weighted Average Weighted
Number Outstanding Remaining Average
Range of Exercise Prices December 31, 1998 Contractual Life Exercise Price
- ------------------------ ------------------- --------------- ---------------
$.125-.25 281,000 9.4 years $.19
$.251-.40 116,000 2.3 years $.40
Options Exercisable
---------------------------------------------------
Number Outstanding Weighted Average
Range of Exercise Prices At December 31, 1998 Exercise Price
- ------------------------ ----------------------- ----------------------
$.25-$.40 142,000 $.36
Warrants-
On June 21, 1996, 778,000 warrants to purchase shares of the Company's
common stock were granted to two members of the Board of Directors at
varying prices ranging from $.33 to $1.00. In addition, 25,000 warrants
to purchase shares of the Company's common stock were granted to an
outside shareholder for consulting services at an exercise price of
$1.00. On February 13, 1997, all warrants issued subsequent to and
including June 1, 1996 were repriced to $.25 per share. On April 13,
1998 the Company's Board of Directors approved the issuance of 966,079
warrants to the various companies and individuals who agreed to the
deferral of principal and interest related to certain debt as discussed
in Note 4. The exercise price of the warrants was the market value of
the Company's stock on April 13, 1998, $0.25. All warrants vest
immediately and expire on April 13, 2003.
Pro Forma Information-
The Company maintains an Incentive Stock Option Plan (the "Plan") which
reserves shares of the Company's common stock for issuance to Company
officers, key employees and other eligible persons as determined by the
Board of Directors, In 1996, the Company adopted the disclosure only
provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation." Accordingly, no
compensation cost has been recognized for the plan. Had compensation
expense for the warrants and the options which vested in 1998 and 1997
under the Company's plan been determined based on the fair value at the
grant date commensurate with the provisions of SFAS No. 123, the
Company's net loss per share for 1998 and 1997, respectively, would
have been increased to the pro forma amounts indicated below-
1998 1997
------------------ -------------------
Net income (loss)-
As reported $6,078 ($694,000)
Pro forma ($250,459) ($969,000)
Basic earnings (loss)per share-
As reported $.00 ($.27)
Pro forma ($.10) (0.38)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions for grants in 1998 and 1997,
30
<PAGE>
respectively: dividend yield of 0% and 0%; expected volatility of
161%, and 149%; risk-free interest rate of 4.5% and 6% and expected
lives of 5 and 10 years.
The prices of the options granted pursuant to the Plan will not be less
than 100% of the fair market value of the shares on the date of grant.
No award will be exercisable after 10 years from the date of grant.
Grants will vest at the rate of 20% per year starting the year after
the original grant date.
(7) COMMITMENTS AND CONTINGENCIES:
(A) The Company has the option to purchase the building on December 31,
1999 at the then fair market value by payment of 15% cash and the balance
payable on a 30 year mortgage bearing interest at the 30 year treasury
bond rate. The Company rents its office and plant facilities from its
former principal shareholders under a noncancellable operating lease
expiring in 1999. Property taxes, insurance and other related expenses
are paid by the Company. Upon the expiration of the lease in 1999, the
Company has the option to purchase the facilities. If the Company does
not exercise its option, it will be obligated to renew the lease for an
additional ten years.
The minimum annual rentals under the terms of the lease were as follows
as of December 31, 1999.
1999 237,000
Rental expense amounted to $237,000 in both 1998 and 1997.
During 1998, the Company purchased approximately $38,000 of material
from Retrofit, a company in which two directors of the Company
own a majority interest. At December 31, 1998, approximately
$107,000 was payable to Retrofit.
(8) BENEFIT PLAN:
The Company maintains a 401(k) plan which covers all eligible employees.
Participants may elect to contribute up to 20% of their annual
compensation, as defined, not to exceed the applicable limitations under
the Internal Revenue Code. The Company provides a matching contribution
of 25% of participant contributions, up to a maximum of 8% of the
participant's compensation. Total 401(k) expense was $15,000 and $19,000
for the years ended December 31, 1998 and 1997, respectively.
(9) MAJOR CUSTOMERS
For the year ended December 31, 1998, the customer had a major
customer, sales to which represented approximately 13% of the Company's
revenues. The company had an accounts receivable balance due from this
customer of approximately $186,000 at December 31, 1998. The loss of
this customer would have a materially adverse affect on the Company.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt, and capitalized lease obligations:
The carrying amount approximates fair value because of the short term
maturity of these instruments.
31
<PAGE>
Limitations
Fair value estimates are made at the specific point in time,
based on relevant information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and therefore cannot
be determined with precision.
Changes in assumptions could significantly affect the estimates.
EXTRA ORDINARY ITEM
During 1998 the Company received forgiveness of interest from a major
debt holder. The recaptured amount from the period prior to 1998,
approximately $166,000,was classified as an extraordinary item.
(12) SUBSEQUENT EVENT:
On January 27, 199, Public Access Lighting, LLC, an Illinois limited
liability company ("PAL") purchased certain Company notes, warrants and
490,000 shares of the Company's Common Stock from Mantilla, Ltd. and
Southerntech, Inc., two foreign corporations controlled by Lindsay Gillette,
in a private transaction. Thereafter, on February 11, 1999, PAL purchased
additional Company notes, warrants and 510,000 shares of the Company's
Common Stock from RMC Limited and Readymix (West Indies) Limited, two
corporations controlled by Trinidad Cement Limited, in a second private
transaction. In connection with these transactions, on January 27, 1999,
Lindsay Gillette, Peter Gillette and Clarence Wilcox resigned as directors
of the Company's Board of Directors and Susan M. Larson, PAL's President,
was appointed a member of the Board.
32
<PAGE>
