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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1996 Commission file number 0-15148
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SCIENTIFIC NRG, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota
(State or Other Jurisdiction of Incorporation or Organization)
2246 Lindsay Way
Glendora, California 91740
(Address of Principal Executive Offices)
41-1457271
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code: (909) 305-3322
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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 is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $544,249
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act). Unable to calculate because there have been no reported trades of shares
of the Company's common stock in the last two years.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. At November 30, 1996 the
registrant had 2,926,050 shares of common stock, no par value, issued and
outstanding.
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS.......................................... 3
ITEM 2. DESCRIPTION OF PROPERTY.......................................... 6
ITEM 3. LEGAL PROCEEDINGS................................................ 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.............. 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS............................. 7
ITEM 7. FINANCIAL STATEMENTS............................................. 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................ 12
ITEM 10. EXECUTIVE COMPENSATION........................................... 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development.
Scientific NRG, Incorporated (the "Company") designs, manufactures and
markets energy efficient lighting products utilizing the compact fluorescent
lamp technology. The Company's principal products are energy efficient, compact
fluorescent downlight fixtures, primarily for the downlight canister retrofit
market. The Company markets its products under the trade name "Scientific
Component Systems".
The Company was incorporated as NRG, Inc. in the State of Minnesota on
May 20, 1983. In April, 1986, Scientific Component Systems, Inc., a Minnesota
corporation, was merged into NRG, Inc., and the combined entity changed its name
to Scientific NRG, Incorporated in December 1986. In September 1996, the Company
entered into a Workout Agreement with certain related parties to restructure
certain outstanding debt obligations. As as part of the Workout Agreement, the
Company issued 600,000 shares of its common stock to Parke Industries, Inc. and
its affiliates. As a result, Parke Industries, Inc. is a new affiliate of the
Company. (See Management Discussion and Analysis "Subsequent Events").
The Company's executive offices and manufacturing facility are located at
2246 Lindsay Way, Glendora, California 91740, telephone number (909)305-3322.
All of the Company's operations, including management, bookkeeping,
manufacturing, assembly and warehousing are located at this facility.
Business of Issuer.
1. Principal Products.
The Company's principal product is the X-18 Series of energy-efficient
light fixtures. The X-18 Series is patented, UL-listed and available in several
configurations. The X-18 Series is available in models suitable for
downlighting, track lighting and surface-mounted illumination for retrofit
installation and new construction applications. The X-18 Series uses a
fluorescent PL Lamp developed by the Phillips Corporation. The X-18 Series
integrates one or two compact PL lamps with an energy-efficient housing in a
product designed to replace incandescent lamps.
Fluorescent PL lamps generally are more energy efficient, have a longer
life expectancy and generate less heat than typical incandescent lamps. These
qualities create cost advantages for the X-18 Series user. Because fluorescent
lamps produce approximately four times more light per watt than incandescent
lamps, PL lamps require 75% less energy to produce the same amount of light.
And, while the life expectancy of most incandescent lamps, such as the 75-watt
reflector, is 2,000 to 3,000 hours (under ideal conditions), the rated life of
PL lamps used in the X-18 Series is 10,000 hours -- approximately five times the
life expectancy of incandescent lamps. The PL
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lamps in the X-18 Series can require up to five fewer lamp changes than
incandescent lamps, thus resulting in reduced maintenance costs.
The Company has obtained a "UL listing" for the entire X-18 Series from
Underwriters Laboratories, Inc., an independent not-for-profit corporation which
tests certain products for public safety. UL listing is generally recognized and
accepted as an indication of product safety and is often required by various
governmental authorities to comply with local codes and ordinances.
The Company provides a five year replacement warranty for any defective
X-18 Series products.
2. Distribution Methods.
The current trend in the United States is toward energy efficient lighting
systems in both new construction and in retrofits. Such trend is bolstered by
the United States Department of Energy's "Green Lights Program" promotion which
further serves to draw the population's awareness to energy efficient lighting
as a method of energy conservation.
In the past, prior management relied on a network of Stocking Distributors
to market the Company's products, with the exception of large national accounts.
No significant direct end-user marketing activities were performed while the
Company was utilizing Stocking Distributors. The Company has agreements with
six manufacturer's representatives, all of whom are independent contractors, to
provide sales coverage throughout the United States and Canada. For the year
ended, June 30, 1996, the Company made direct sales and contracted with multiple
line manufacturer's representatives to distribute its products through their
networks of authorized distributors. Management's plans to only retain
manufacturer's representatives that provide a meaningful contribution to the
Company's revenues. In the future, management intends to focus a portion of its
selling efforts toward the end-user through its alliance with Parke Industries.
(See Management's Discussion and Analysis).
3. New Products.
The Company did not introduce any new products or services in fiscal 1996.
4. Competitive Business Conditions.
The general lighting business is highly competitive. Companies that sell
alternatives to the Company's products include Janmar, Lumatech, Techtron,
Enertron and Progressive Technologies, Inc. Most competitors carry a broader
product line than the Company. Janmar, a direct competitor markets a fixture
very similar to the Company's best selling product under a license agreement
from the Company which does not require payment of license fees. In addition,
major lighting fixture companies such as Hubbel, Lightolier, Juno and Halo
manufacture fixtures using the compact fluorescent lamp technology almost
exclusively in the new construction market,
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as opposed to the retrofit market. The new construction market has traditionally
constituted less than 15% of the Company's sales.
5. Raw Materials and Suppliers.
The Company fabricates the X-18 Series fixture housings and assembles its
products at its facility in Glendora, California. Key components are
manufactured by third parties from proprietary designs owned by the Company. The
Company purchases raw materials and components, mainly aluminum, steel, sockets,
wire, plastic and lenses from various sources. No significant supply problems
have been encountered in recent years and management believes that relationships
with vendors have generally been good.
6. Dependence on One or a Few Major Customers.
The Company's revenue is not dependent on one or a few major customers.
7. Patents, Trademarks, and Copyrights.
The Company currently owns five patents issued on the X-18 Series
Downlight. Two of the patents relate to the basic configuration of the X-18
Series and were issued in May, 1985 and November, 1987. Two other patents are
related to the elongated flexible connector that holds the X-18 Series Downlight
in place in retrofit applications and permits easy installation. These patents
were issued in February, 1987 and June, 1986. The fifth patent relates to the
trim ring and the cross-tube lamp configuration and was issued in May, 1990.
The Company has five trademarks registered with the U.S. Patent and
Trademark Office. These trademarks include the Company's "NRG" Multiple
Lightning Bolt Logo, "X-18", "SCS", "Scientific Component Systems" and
"Switch-It". The Company also takes appropriate steps to copyright all of its
printed materials and designs.
8. Government Approval.
No material portion of the Company's business is subject to re-negotiation
of profits or termination of contracts at the election of the Government.
9. Government Regulation.
The Company is subject to federal, state and local regulations generally
applicable to light manufacturing industries. In particular, the Company is
subject to the Federal Clean Air Act and to related state and local clean air
laws. The Company is also subject to the requirements of the Occupational Safety
and Health Act ("OSHA") and the regulations promulgated pursuant thereto.
Management believes that the Company is in full compliance with all of these
regulations.
10. Research and Development.
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The Company did not expend material amounts on research and development of
new products in the fiscal years ended June 30, 1996 and 1995. Management does
not intend to significantly increase spending on research and development in the
next 12 months.
11. Environmental Compliance.
The Company does not anticipate that material capital expenditures will be
required for environmental compliance or to comply with OSHA standards.
12. Employees.
As of November 30, 1996, the Company had three full-time employees. In
addition to its full time employees, during the fiscal year ended June 30, 1996,
the Company employed up to 3 part-time, non-salaried production personnel on an
hourly basis. The number of such personnel varies throughout the year, depending
on the workload. The Company believes that its labor relationships with its
employees are favorable. The Company expects the number of its employees to
remain approximately the same during the next twelve months. The Company's Chief
Executive Officer and President are also employees of Parke Industries, Inc. As
of September 1996, Parke Industries, Inc. became a new affiliate of the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
As of June 30, 1996, the Company maintained its offices and production
facilities at 2651 Dow, Tustin, California. The space contained approximately
12,000 square feet. The monthly rent was $5,408, plus certain operating
expenses. As of October 1, 1996 the Company moved its offices and production
facilities to 2246 Lindsay Way, Glendora, California ( See Management's
Discussion and Analysis). The new space contains approximately 5,000 square
feet. The space is leased through December 31, 1997 at $2,500 per month, plus
certain operating expenses. The lease is with Parke Industries, Inc., a new
affiliate of the Company.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company is a party or
to which any of the Company's properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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Market Information.
There is no active public trading market for the Company's common stock.
The only named pink sheet market maker in the Company's stock, as reflected by
the National Quotation Bureau in Jersey City, New Jersey, is Paragon Capital
Corporation. Management intends to pursue plans that will reestablish a public
trading market for the Company's common stock (FLS).
Holders.
As of June 30, 1996, there were approximately 760 holders of record of the
Company's common stock. The transfer agent for the Company is American Stock
Transfer and Trust of New York, New York.
Dividends.
The Company has never paid any cash dividends and intends during the
foreseeable future to retain any earnings to finance the growth of its business.
Future dividend policy will be determined by the Company's Board of Directors
based upon such considerations as the Company's earnings and financial
condition, business conditions, and other factors as the Board of Directors may
deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion includes "forward looking statements" ("FLS")
that represent management's assessment of future performance and its goals.
There are no assurances that the forward looking statements will be achieved.
Plan of Operation.
Over the next twelve months, the Company intends to pursue strategies that
are designed to increase revenues while controlling fixed and variable costs.
Further, the Company plans to raise additional funds in order to satisfy its
anticipated cash requirements.
The Company does not anticipate a significant increase in research and
development costs. Moreover, the Company does not anticipate any purchase or
sale of plant and equipment or a significant change in the number of its
employees.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company recorded a net loss of $486,339 for the fiscal year ended June
30, 1996, an increase of $250,963 over the net loss for the prior fiscal year
ended June 30, 1995 of $235,376. The Company decreased its working capital
deficit from $262,680 in fiscal year 1995 to $256,250
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in fiscal year 1996, a decrease of $6,430. Cash flows used in operations
increased in fiscal year 1996 over fiscal year 1995 to $207,879 from $123,120 a
decrease of $84,759.
In order to decrease losses, the Company's board of directors and
management are pursuing strategies designed to increase sales, reduce the cost
of sales, broaden the Company's customer base and introduce new products.
Anticipated higher revenue will be facilitated by the Company's plan to
continually monitor the effectiveness of its manufacturer's representatives
throughout the U.S. and Canada and through an alliance with Parke Industries.
Additionally, the Company will continue its attempts to maintain or increase its
profit margins via pricing policies, better buying of raw materials, and
maximization of efficiencies in the manufacturing process through improved
assembly techniques and product design improvements. The Company will also
continue its efforts to control general and administrative costs and expenses,
while placing additional emphasis on the effectiveness of marketing
expenditures.
Management believes its plans will be sufficient to support operations
during the year ending June 30, 1997 (FLS). Part of management's operational
strategy include plans to secure additional financing to maintain and support
anticipated operations. However, there are no assurances that such efforts to
improve operating results and secure financing will be successful. The Company
may be unable to continue operations and there can be no assurances regarding
the recoverability of assets or their values upon liquidation. Management
intends to raise $300,000 to $500,000 from a private placement of its securities
during fiscal 1997 (FLS). There can be no assurance that such plan will be
successful.
The Company's operations for the twelve-month period ended June 30, 1996
resulted in negative cash flows of $207,879. In order to facilitate the
financing of its operations during fiscal 1996, the Company borrowed $222,400
from certain related parties.
In prior periods, the Company utilized a variable rate line of credit
obtained in 1993 from a finance Company which is secured by certain accounts
receivable, inventory and equipment of the Company and is due on demand. Terms
of the arrangement allow the Company to borrow up to 80% of qualifying accounts
receivable, to a maximum of $150,000. As of June 30, 1996, the Company had
borrowed $44,220 under this line of credit. During fiscal 1996, the borrowing on
the line of credit was reduced by $37,712. The maximum amount borrowed during
the fiscal year under this line of credit was $84,501. The average daily balance
on the loan during the fiscal year was $43,638. The interest rate at June 30,
1996 was 33.76%, and the weighted average interest rate during the year was
34.35%. (See Note 4 to the Company's Financial Statements). This loan was paid
off on October 29,1996 (See Subsequent Events).
In order to further facilitate the financing of the Company's operations
in fiscal 1995, an additional variable rate line of credit with a related party
was entered into in November, 1994 in the amount of $100,000. This line is
secured by accounts receivable and inventory not used as security for the line
with the finance company above. The line of credit is due on demand. The Company
had borrowed $100,000 as of June 30, 1996 under this line of credit. The maximum
amount borrowed during the fiscal year under this line of credit was $100,000.
The average daily
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balance on the loan during the fiscal year was $100,000. The interest rate at
June 30, 1996 was 33.76%, and the weighted average interest rate during the year
was 33.76%. (See Note 5 to the Company's Financial Statements). This loan was
renegotiated on September 11,1996 (See Subsequent Events).
Inventories decreased from $165,548 at June 30, 1995 to $88,635 at June
30, 1996, a decrease of $76,913 (46.5%). During the fourth quarter, the Company
recorded a provision for loss for slow moving and obsolete inventories in excess
of $50,000 due to management's belief that such carrying values would not be
realized through future operations. Accounts receivable, net of doubtful
accounts, decreased from $128,495 at June 30, 1995 to $57,982 at June 30, 1996,
a decrease of $70,513 (54.9%). Management considers the decrease in accounts
receivable to be a result of the decrease in sales.
The Company's accounts payable increased from $224,521 at June 30, 1995 to
$241,711 at June 30, 1996. This increase of $17,190 is due primarily to the
Company's unilateral extension of payment terms with vendors due to the
Company's inability to service its obligations resulting from the significant
decline in sales.
There were no material commitments for capital expenditures as of November
30, 1996.
Management has and will continue to attempt to reduce cash needed for
operations by: increasing sales and gross profits; improving the design of the
Company's products to decrease production costs; obtaining materials from
vendors at lower prices; and extending the dates payments are made to vendors.
Through the Company's alliance with Parke Industries, Inc., management
anticipates an increase in sales during fiscal 1997 (FLS). While there can be no
certainty as to the sales in fiscal 1997, management intends to rely heavily on
its new affiliate for better operating results.
Management has renegotiated a large portion of the Company's outstanding
debt to related parties which, together with other activities and controls, will
hopefully finance operations (FLS). However, no assurance can be given that
there will not be losses from operations or that the Company will be able to
obtain sufficient financing to cover such losses.
1. Fiscal Year 1996 Compared to Fiscal Year 1995.
Total sales of the Company during the twelve months ended June 30, 1996
were $544,249. Total sales were down $612,712 or 53% from sales for the prior
twelve-month period. Since the Company did not change its sales prices in the
last year, the sales decrease is attributable to a decrease in volume caused by
manufacturers representatives not selling products due to the Company's
inability to pay their commissions in a timely manner.
Gross profit from operations during the fiscal year ended June 30, 1996
decreased from $486,723 to $126,135, a decrease of $360,588 or 74.1% from the
gross profit during the prior fiscal year. Management attributes this decrease
to the Company's decrease in sales, together
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with an increase in cost of sales. Management estimates that the Company's gross
profit margin of 23.2% during fiscal year 1996 will be increased to above 30%
during fiscal year 1997. The planned increase is based upon the Company
achieving economies of scale in purchasing, manufacturing and distribution
(FLS). There can be no assurance that such economies of scale will be achieved
during fiscal 1997.
General, administrative and selling costs for the twelve months ended June
30, 1996 decreased by $135,999, from $646,353 to $510,354. The decrease is a
result of staff reductions due to decreased sales volume.
The Company realized net loss of $486,339 or $.23 per share for the fiscal
year ended June 30, 1996, compared to a net loss of $235,376, or $.11 per share,
for the fiscal year ended June 30, 1995, a difference of $250,963. Management
attributes the difference to decreased sales, decreased gross profit margins on
its products, and the inability to reduce costs and expenses commensurate with
such decline in sales. Management anticipates that sales will increase, gross
profit margins will be improved, and general, administrative and selling costs
will be a lower percentage of sales in fiscal 1997 (FLS).
Subsequent Events.
On September 11, 1996, the board of directors of the Company approved a
formal Workout Agreement (hereinafter referred to as the "Workout Agreement")
which provided a method to [1] restructure outside of bankruptcy existing debt
payable to certain related parties, [2] provide for a change in the Company's
officers and directors, and [3] issue additional notes payable and additional
shares of common stock of the Company in order to finance operations.
On September 11, 1996, two of the Company' s Board of Directors, one of
which was the Company's chief executive officer and the other which was the
Company's chief financial officer, resigned from their positions with the
Company. The board of directors then entered into a one year consulting contract
with the former chief executive officer beginning September 12, 1996, that
provides for services to be rendered to the Company, at management's request, at
the rate of $75 per hour. Two new directors were appointed, one of which was
named as the Company's chief executive officer and the other of which was named
as the Company's president. The two new officers and directors are affiliates of
Parke Industries, Inc. The Company's new chief executive officer was given a
salary of $12 per year and options to purchase 300,000 shares of common stock
exercisable at $0.50 per share. The Company's new president was given a salary
of $24,000 per year, later raised to $48,000, and options to purchase 100,000
shares of common stock exercisable at $0.50 per share. In addition, the Company
granted options to purchase 200,000 shares of common stock exercisable at $.50
per share to Parke Industries, Inc., an affiliated company controlled by new
management.
Effective September 11, 1996, certain outstanding debt obligations to
these related parties were reduced to an aggregate principal amount of $558,500.
These related party obligations totaled $630,067, including accrued interest of
$100,308, at June 30, 1996 (See Note 5 to the
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Company's Financial Statements). Moreover, the outstanding debt obligations to
the related parties had increased to $652,179 by September 10, 1996 due to
additional borrowings and accrued interest.
The restructured notes payable, to related parties totaling $558, 500 (the
"Notes"), accrue interest at 8% per annum and are payable, both in principal and
interest, provided that the Company reports $250,000 in cumulative net income
subsequent to September 11, 1996. Once such net income is obtained, 25% of the
subsequent net income is to be used for repayment of the Notes. It is the belief
of the Company's management that such cumulative net income will not be achieved
in fiscal 1997. The Notes are subordinated to any debt with a bona fide
financial institution designated as senior secured debt by the company or any
new loans from any of the parties thereto and are secured, subject to any new
senior secured debt or any new loans from any of the parties thereto, by all of
the assets of the Company. In addition, the Notes will become due and payable
immediately from the proceeds, if any, from a secondary offering of securities,
that nets the Company more than $1,500,000 or if the Company issues more than
3,000,001 shares of its common stock in a single transaction.
The Workout Agreement provided for the issuance of 600,000 shares of
common stock of the Company to the newly affiliated company and/or its
affiliates at $0.10 per share on September 11, 1996. The purchase price
consisted of $20,000 for future administrative services at the rate of $5,000
per month for four months from the newly affiliated company and $40,000 in cash.
The Workout Agreement provided for the issuance of 20,000 shares of common
stock to the Company's former chief executive officer to fulfill the Company's
obligation under his service contract. Such shares were valued at $0.10 per
share and will be charged to operations in fiscal 1997. The Workout Agreement
also provided for the issuance of notes payable to certain related parties
totaling $60,000 due on or about January 10, 1997, together with interest at 15%
per annum, and secured by all of the assets of the Company. On September 19,
1996, the Company issued 140,000 shares of no par value common stock of the
Company at $.20 per share for the payment of legal services rendered in
connection with the Workout Agreement. The value of such shares totals $28,000,
of which $l0,000 was expensed is fiscal 1996 and $18,000 will be expensed in
fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS.
The Company's audited balance sheet as of June 30, 1996 and audited
statements of income, cash flows and changes in stockholders deficit for each of
the two fiscal years preceding the date of the audited balance sheet, are
attached hereto as pages F-1 through F-21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Malcolm L. Fickel, (Chairman of the Board of Directors and Chief Executive
Officer/President), 67, became a director of the Company on October 11, 1989. On
March 28, 1990, he was appointed President and Chief Executive Officer of the
Company. Mr. Fickel is also President of MLF & Associates, Inc., a private
management consulting firm specializing in consulting, marketing, customer
relations, mergers, acquisitions and assessments for large corporations.
Oliver Washburn (Director), 70, is the former President and co-owner of
Washburn Laboratories, Inc., a St. Paul-based manufacturer of advertising
specialty products from which he retired in 1984. Mr. Washburn holds a Bachelor
of Mechanical Engineering degree from the University of Minnesota.
Thomas C. Moceri, (Treasurer, Secretary and Director), 55, was elected to
the Board of Directors on May 8, 1992 and was appointed to the offices of
Secretary and Treasurer of the Company. He is a Certified Public Accountant and
sole proprietor of an accounting firm. He specializes in accounting and tax
services for businesses. Mr. Moceri holds a Bachelor of Business Administration
degree from the University of Michigan.
In connection with the Workout Agreement, Messrs. Fickel and Moceri
resigned their positions on September 11, 1996. Messrs. Parke and Forgy were
named as interim directors and were subsequently elected directors by
shareholder vote on October 24, 1996. The directors elected on October 24,
1996 were Oliver K. Washburn, Daniel W. Parke, and Jonathan D. Forgy. The
directors appointed the following persons to serve as officers of the Company
for the remainder of fiscal 1997.
Daniel W. Parke, (Director, Chief Executive Officer), 41, owner of
Parke Industries, Inc. Parke manages annual sales of over $20 million of
energy efficient lighting products and services. Parke has eight divisions
covering the United States and is considered a leader in marketing energy
efficient products and solutions since 1984. As of October 21, 1996, Parke
Industries, Inc. held shares of stock representing a 10.25% interest in the
Company. Mr. Parke holds a Bachelor of Business Administration from Azusa
Pacific University.
Jonathan D. Forgy, (Director, President), 42, the CFO of Parke
Industries, Inc. since 1993. As of October 21, 1996, Parke Industries, Inc.
held shares of stock representing a 10.25% interest in the Company. Prior to
joining Parke Industries, Inc., Mr. Forgy was a tax partner in a CPA firm.
Mr. Forgy's experience includes over 15 years of business consulting along
with practical experience in the delivery of energy efficient solutions. Mr.
Forgy holds a dual Bachelor of Business (Accounting and Finance) and a M.S.
in Taxation from Golden Gate University.
Tami Miller, (Secretary), 55, the Secretary of Parke Industries, Inc.
since 1992. Mrs.
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Miller also acts as director of Human Resources for Parke Industries, Inc.. Her
duties also include compliance with multi-state lien laws, bonding, insurance,
and licenses.
Oliver Washburn (Director, Treasurer), was appointed as Treasurer.
Under Section 16(a) of Securities Exchange Act of 1934, the Company's
directors, executive officers and greater than 10% shareholders are required to
file reports regarding their ownership of the Company's shares with the
Securities and Exchange Commission. During the fiscal year ended June 30, 1996,
no such reports were required.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued by the
Company during the three fiscal years ended June 30, 1996 to that person who, as
of June 30, 1996, was the Company's Chief Executive Officer/President. There
were no Officers or Directors of the Company who received more than $100,000 of
total compensation.
Table 1 Summary Compensation Table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
OTHER RESTRICTED
----- ----------
Name and ANNUAL STOCK OPTIONS LTIP ALL OTHER
- -------- ------ ----- ------- ---- ---------
Principal YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
- --------- ---- ------ ----- ------------ ------ ---- ------- ------------
Position ($) ($) ($) ($) ($) ($) ($)
- --------
<S> <C> <C> <C>
Malcolm L. Fickel 1996 82,400 $400
(Chief Executive 1995 92,000
Officer/President)
</TABLE>
There were no Option/SAR grants made by the Company in the last fiscal
year.
There were no Options/SARs exercised in the last fiscal year and there are
no Options/SARs outstanding with regard to Named Executive Officers who are
required to be included in this table.
There were no long-term incentive plan awards made by the Company in the
last fiscal year.
Compensation Of Directors.
No Director receives compensation for services on the Board or for Board
meetings attended.
13
<PAGE> 14
Employment Contracts, Termination Of Employment And Change Of Control
Arrangements.
On April 1, 1990, the Company entered into a service contract with Mr.
Fickel to provide certain services to the Company at a contract rate of $6,250
per month. This rate was increased to $8,000 per month effective September 1,
1994. The contract expires three years from the date written notice of
termination is tendered by either the Company or Mr. Fickel. As of September 11,
1996, Mr. Fickel as part of the Workout Agreement, renegotiated his consulting
agreement into an hourly fee basis agreement.
Amounts under this contract during the last three years have been as
follows:
<TABLE>
<CAPTION>
Fiscal Year Deferred
Ended June 30, Paid in Cash Paid in Stock Compensation Total
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1996 $82,400 $400 $0 $82,800
1995 $92,000 $0 $0 $92,000
1994 $47,375 $0 $27,625 $75,000
</TABLE>
As of June 30, 1996, the Company owed Mr. Fickel an aggregate amount of
$175,500 in deferred compensation under this agreement. This amount bears
interest at a rate of 8%. Such amount was renegotiated as part of the Workout
Agreement.
REPORT ON REPRICING OF OPTIONS/SARS.
The Company did not adjust or amend the exercise price of any stock
warrants or SARs previously awarded to a any Executive Officers during the last
fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table, based upon figures obtained from the Company's
transfer agent, sets forth certain information as of July 1, 1996 relating to
the beneficial ownership of the Company's common stock by (i) all persons known
by the Company to beneficially own more than 5% of the outstanding shares of the
Company's stock, (ii) each director of the Company and (iii) all officers and
directors of the Company as a group. As of July 1, 1996 the Company had
2,166,050 shares of its common stock issued or issuable and outstanding, as
adjusted for the 1 for 5 reverse stock split approved on October 24, 1996.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Beneficial Ownership of Class
- --------------------------------------------------------------------------------
<S> <C> <C>
BENEFICIAL OWNERS OF
5% OR MORE OF COMMON STOCK (1)
CEDE & Co. 211,850 9.80
PO Box 20
Bolling Green Station
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C> <C>
New York, NY 10274
Kray & Co 142,781 8.47
440 S. LaSalle St.
Chicago, IL 60605
Peter Kreft 129,286 5.86
24 Cellini
Laguna Hills, CA 92656
MANAGEMENT
Oliver K. Washburn 371,039 16.82
c/o Scientific NRG, Inc.
2651 Dow Avenue
Tustin, CA 92680
Malcolm L. Fickel 321,908 14.50
c/o Scientific NRG, Inc.
2651 Dow Avenue
Tustin, CA 92680
Thomas C. Moceri 89,072(2) 4.04
c/o Scientific NRG, Inc.
2651 Dow Avenue
Tustin, CA 92680
ALL OFFICERS AND DIRECTORS 782,019 35.45
AS A GROUP - 3
- --------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Regulation 13d-3(d)(1), promulgated under the Securities
Exchange Act of 1934, a person is deemed to be the beneficial owner of a
security if he has right to acquire ownership of such security within 60
days upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person, and which are exercisable within 60 days,
will be exercised.
(2) Includes 20,000 shares issuable to Individual Retirement Account of
William T. Moceri upon exercise of warrants at $.50 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In November, 1994, the Company entered into a $100,000 variable rate note
agreement with an Individual Retirement Account owned by William T. Moceri,
brother of Thomas C. Moceri, Director, Treasurer and Secretary of the Company.
In addition to the financing arrangement, the Company issued warrants to the
Individual Retirement Account to purchase 20,000 shares of the Company's common
stock, exercisable at the estimated fair market value of $0.50 per share. (See
Note 5 and Note 7 to the Company's financial statements.). Thomas C. Moceri has
no direct or indirect financial interest in this Individual Retirement Account.
During fiscal years 1996 and 1995, the Company borrowed an aggregate of
$218,000 and 35,759 from Oliver K. Washburn and Thomas C. Moceri, respectively.
All the notes were due on
15
<PAGE> 16
demand and bore interest at rates ranging from 8% to 12% per annum. Subsequent
to June 30, 1996, these notes were restructured. (See Management's Discussion
and Analysis "Subsequent Events").
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Form 10-KSB
(1) Financial Statements
Included in Part II of this report:
Report of Independent Certified Public Accountants.
Balance Sheet as of June 30, 1996.
Statements of Operations for the Years Ended June 30, 1996 and 1995.
Statements of Stockholders' Deficit for the Years Ended June 30, 1996 and
1995.
Statements of Cash Flows for the Years Ended June 30, 1996 and 1995.
Notes to Financial Statements.
(2) Financial Data Schedule.
None.
(3) Exhibits.
Exhibits filed concurrently with this report (and referenced in the
Exhibit Index) have eleven asterisks in the left margin, and are hereby
incorporated herein by this reference.
Exhibits previously filed with the Company's quarterly report on Form 10-Q
for the quarterly period ended March 31, 1996 have ten asterisks in the left
margin, and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's quarterly report on Form 10-Q
for the quarterly period ended September 30, 1995 have nine asterisks in the
left margin, and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's quarterly report on Form 10-K
for the fiscal year ended June 30, 1995 have eight asterisks in the left margin,
and are hereby incorporated herein by this reference.
16
<PAGE> 17
Exhibits previously filed with the Company's quarterly report on Form 10-Q
for the quarterly period ended December 31, 1994 have seven asterisks in the
left margin, and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1994 have six asterisks in the left margin,
and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1993 have five asterisks in the left margin,
and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's quarterly report on Form 10-Q
for the quarterly period ended March 31, 1993 have four asterisks in the left
margin, and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1992 have three asterisks in the left margin,
and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1991 have two asterisks in the left margin,
and are hereby incorporated herein by this reference.
Exhibits previously filed with the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1989 have one asterisk in the left margin,
and are hereby incorporated herein by this reference.
Finally, all Exhibits previously filed with the Securities and Exchange
Commission as part of the Company's initial Form 10 filing on or about November
12, 1986 or in other reports filed pursuant to the Securities Exchange Act of
1934 have no asterisk in the left margin, and are hereby incorporated herein by
this reference.
** 3.1 Articles of Incorporation as in effect on the date hereof (including
Amendment thereto effective December 28, 1988).
** 3.3 Bylaws.
4.1 Specimen of Issued and Outstanding Restricted Share Certificate and
reverse side thereof (see also Exhibits 3.1 and 3.3).
4.6 Incentive Stock Option Plan.
17
<PAGE> 18
10.7 Agreement (assigning patent rights).
10.8 Agreement Between Scientific Component Systems, Inc. and NRG,
Inc., June 29, 1983.
10.9 Agreement, July, 1983 (assigning patent rights, with Exhibit 10.7 as
exhibit).
10.10 Assignment of Patent Rights from Scientific Component Systems,
Inc. to NRG, Inc., April 20, 1984.
10.11 Assignment of Patent Rights from Rhett McNair and James Helling to
NRG, Inc., April 20, 1984.
10.12 Assignment of Patent Rights from Rhett McNair, James Helling,
William R. Ingles and Gerald L. Fullerton to NRG, Inc., April 20, 1984.
10.13 Agreement Assigning Patent Rights from Scientific Component
Systems, Inc., to NRG, Inc., April 20, 1984.
** 10.14 Assignment with Possibility of Reverter of Patent Rights from Rhett
McNair to NRG, Inc., January 21, 1986.
10.20 Form of Warrant Certificate.
*** 10.27 New Lease for Company Headquarters in Tustin, California.
* 10.28 Royalty Agreement with Rhett McNair.
* 10.29 Consulting Agreement with MLF & Associates, Inc., April 1, 1990.
*** 10.30 Promissory Note Payable to Oliver Washburn and Extension Thereto.
*** 10.31 Promissory Note Payable to Malcolm Fickel and Extension Thereto.
*** 10.32 Promissory Note Payable to Malcolm Fickel and Extension Thereto.
*** 10.33 Promissory Note Payable to Malcolm Fickel and Extension Thereto.
*** 10.34 Promissory Note Payable to Malcolm Fickel and Extension Thereto.
*** 10.35 Deferred Compensation Agreement Between the Company and Malcolm
Fickel.
*** 10.36 Line of Credit Agreement with Bank.
18
<PAGE> 19
*** 10.37 Promissory Note Payable to Peter C. Kreft.
**** 10.38 Stock Purchase Agreement Between the Company and MLF &
Associates, Inc. Retirement Trust, April 30, 1993.
**** 10.39 Stock Purchase Agreement Between the Company and Malcolm L.
Fickel, April 30, 1993.
**** 10.40 Stock Purchase Agreement Between the Company and Oliver K.
Washburn, April 30, 1993.
**** 10.41 Stock Purchase Agreement Between the Company and Peter C. Kreft,
April 30, 1993.
**** 10.42 Stock Purchase Agreement Between the Company and Thomas C.
Moceri, April 30, 1993.
***** 10.43 Financing Agreement Between the Company and Pre-Banc Business
Credit, Inc., May 21, 1993.
***** 10.44 Addendum to Consulting Agreement between the Company and Malcolm
L. Fickel, June 30, 1993.
***** 10.45 Leasing Agreement Between the Company and Autocar Leasing
Company, September 9, 1993.
***** 10.46 Stock Warrant Agreement Between the Company and Eddie R. Fischer,
September 9, 1993.
*******10.47 Note and Revolving Loan Agreement Between the Company and
William T. Moceri, IRA, November 15, 1994.
********10.48 Promissory Note Payable to Thomas C. Moceri, Trustee, Thomas C.
Moceri Profit Sharing Plan, September 28, 1994.
********10.49 Promissory Note Payable to Oliver Washburn, March 7, 1995.
********10.50 Promissory Note Payable to Oliver Washburn, March 7, 1995.
********10.51 General Release Agreement Between the Company and Peter Kreft,
June 9, 1995.
*********10.52 Promissory Note Payable to Oliver Washburn, September 14, 1995.
19
<PAGE> 20
**********10.53 Promissory Note Payable to Oliver Washburn, November 13, 1995.
**********10.52 Promissory Note Payable to Oliver Washburn, April 26, 1996.
28.2 Patent No. 4,520,436 (X-18 Series Downlight).
** 28.4 Patent No. 4,595,969 (Lamp Mounting Apparatus and Method).
** 28.5 Patent No. 4,641,228 (Lamp Mounting Apparatus and Method).
** 28.6 Patent No. 4,700,110 (Lamp Switching).
** 28.7 Patent No. 4,704,664 (Lamp Apparatus).
** 28.8 Trademarks Registered (Lightning Bolt Logo, Scientific NRG
Component Systems, SCS, X-18) and Notice of Publication of Trademark,
"Switchit".
******28.9 Patent No. 4,922,393 (Lamp Apparatus).
(b) Reports on Form 8-K
There were no reports of Form 8-K filed during the fourth quarter of the
year ended June 30, 1996.
20
<PAGE> 21
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.
Date: December 16, 1996
SCIENTIFIC NRG, INCORPORATED,
a Minnesota Corporation
By: /s/ Daniel W. Parke
-------------------
Name: Daniel W. Parke
Title: Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Daniel W. Parke (1) (2) (3) December 16, 1996
-------------------
Daniel W. Parke
/s/ Oliver K. Washburn (3) (5) December 16, 1996
----------------------
Oliver K. Washburn
/s/ Jonathan D. Forgy (3) (4) December 16, 1996
---------------------
Jonathan D. Forgy
</TABLE>
(1) Chairman of the Board of the registrant.
(2) Chief Executive Officer of the registrant.
(3) Director of the registrant.
(4) President of the registrant.
(5) Treasurer of the registrant.
(6) Secretary of the registrant.
21
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report...............................................F-2
Financial Statements:
Balance Sheet as of June 30, 1996 .......................................F-4
Statements of Operations for each of
the years in the two-year period ended
June 30, 1996 ...........................................................F-5
Statements of Stockholders' Deficit for
each of the years in the two-year period
ended June 30, 1996......................................................F-6
Statements of Cash Flows for each of the
years in the two-year period ended June
30, 1996 ................................................................F-7
Notes to Financial Statements............................................F-9
F-1
<PAGE> 23
Independent Auditors' Report
Board of Directors
Scientific NRG, Incorporated (dba Scientific
Component Systems)
We have audited the accompanying balance sheet of Scientific NRG, Incorporated
(dba Scientific Component Systems) (the "Company") as of June 30, 1996, and the
related statements of operations, stockholders' deficit and cash flows for each
of the years in the two-year period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scientific NRG, Incorporated
(dba Scientific Component Systems) as of June 30, 1996, and the results of its
operations and its cash flows for each of the years in the two-year period then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 1 to the
financial statements, the Company has suffered significant decreases in sales
and recurring losses from operations, and as of June 30, 1996, has substantial
stockholders' and working capital deficits. These conditions, among others,
raise substantial doubt as to the Company's ability to continue as a going
concern. As further discussed in Notes 1 and 9 to the financial statements, in
September 1996, the Board of Directors of
F-2
<PAGE> 24
the Company approved a Workout Agreement. The Workout Agreement provides for
certain changes in the directors and officers of the Company, provides for the
restructuring of certain obligations due related parties and provides for the
raising of working capital through the issuance of notes payable and common
stock. The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ CORBIN & WERTZ
------------------------------
CORBIN & WERTZ
Irvine, California
October 30, 1996
F-3
<PAGE> 25
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
BALANCE SHEET
June 30, 1996
<TABLE>
<S> <C>
ASSETS (Notes 4, 5 and 9)
Current assets:
Trade receivables, less allowance for
doubtful accounts of $9,812 $ 57,982
Inventories (Notes 2 and 10) 88,635
Prepaid expenses and other 2,364
-----------
Total current assets 148,981
Property and equipment, net of accumulated
depreciation of $117,115 (Notes 3 and 6) 26,441
Deposits 4,809
-----------
$ 180,231
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ 9,494
Line of credit (Notes 4 and 9) 44,220
Accounts payable 241,711
Accrued compensation 58,161
Current obligations under capital leases (Note 6) 6,059
Other 45,586
-----------
Total current liabilities 405,231
Obligations under capital leases, less current
portion (Note 6) 9,089
Notes payable to related parties (Notes 5 and 9) 358,159
Accrued interest to related parties (Notes 5 and 9) 100,308
Accrued service contract payable to related
party (Notes 5 and 9) 175,500
-----------
Total liabilities 1,048,287
-----------
Commitments and contingencies (Notes 6 and 9)
Stockholders' deficit (Notes 1, 7 and 9):
Common stock, no par value; 40,000,000 shares
authorized; 2,166,050 shares issued and
outstanding 2,871,020
Accumulated deficit (3,739,076)
-----------
Total stockholders' deficit (868,056)
-----------
$ 180,231
===========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-4
<PAGE> 26
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF OPERATIONS
For Each Of The Years In The Two-Year
Period Ended June 30, 1996
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 544,249 $ 1,156,961
Cost of sales (Note 10) 418,114 670,238
----------- -----------
Gross profit 126,135 486,723
General, administrative and selling
expenses (Note 6) 510,354 646,353
----------- -----------
Operating loss (384,219) (159,630)
Interest expense (Notes 4 and 5) 101,320 74,946
----------- -----------
Loss before income tax provision (485,539) (234,576)
Income tax provision (Note 8) 800 800
----------- -----------
Net loss $ (486,339) $ (235,376)
=========== ===========
Net loss per common share (Note 1) $ (0.23) $ (0.11)
=========== ===========
Weighted average number of shares
outstanding (Note 1) 2,114,050 2,104,050
=========== ===========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-5
<PAGE> 27
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF STOCKHOLDERS' DEFICIT
For Each Of The Years In The Two-Year
Period Ended June 30, 1996
<TABLE>
<CAPTION>
Common Stock
----------------------- Accumulated Stockholders'
Shares Amount Deficit Deficit
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, July 1, 1994 (Note 1) 2,104,050 $2,858,620 $(3,017,361) $(158,741)
Net loss -- -- (235,376) (235,376)
--------- ---------- ----------- ---------
Balances, June 30, 1995 (Note 1) 2,104,050 2,858,620 (3,252,737) (394,117)
Common stock issued for interest
in connection with the issuance
of a note payable to related
party (Note 7) 60,000 12,000 -- 12,000
Common stock issued in connection
with services rendered by a
related party (Note 7) 2,000 400 -- 400
Net loss -- -- (486,339) (486,339)
--------- ---------- ----------- ---------
Balances, June 30, 1996 2,166,050 $2,871,020 $(3,739,076) $(868,056)
========= ========== =========== =========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-6
<PAGE> 28
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF CASH FLOWS
For Each Of The Years In The Two-Year
Period Ended June 30, 1996
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(486,339) $(235,376)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 12,256 12,384
Provision for doubtful accounts 10,596 6,627
Common stock issued for interest
in connection with the issuance
of a note payable to related
party (Note 7) 12,000 --
Common stock issued for services
(Note 7) 400 --
Changes in operating assets and
liabilities:
Trade receivables 59,917 4,670
Inventories 76,913 9,311
Prepaid expenses and other 2,800 (1,765)
Accounts payable, accrued
compensation, and other
current liabilities 28,776 59,971
Accrued service contract payable
to related party (Notes 5 and 9) 15,625 --
Accrued interest to related
parties (Notes 5 and 9) 59,177 21,058
--------- ---------
Net cash used in operating activities (207,879) (123,120)
--------- ---------
Cash flows from financing activities:
Cash overdraft 9,494 --
Net borrowings (payments) on line of
credit (Note 4) (37,712) 5,998
Borrowings on notes payable to
related parties (Notes 5 and 9) 222,400 128,000
Principal payments on capital lease
obligations (Note 6) (5,902) (11,617)
--------- ---------
Net cash provided by financing
activities 188,280 122,381
--------- ---------
Net decrease in cash (19,599) (739)
Cash at beginning of year 19,599 20,338
--------- ---------
Cash at end of year $ -- $ 19,599
========= =========
</TABLE>
Continued
F-7
<PAGE> 29
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Supplemental disclosure of cash
flow information -
Cash paid during the year for:
Interest $31,407 $59,125
======= =======
Income taxes $ -- $ --
======= =======
</TABLE>
Supplemental disclosure of non-cash investing and financing
activities -
See Note 7 for certain non-cash transactions entered into in fiscal 1996.
See independent auditors' report and
accompanying notes to financial statements
F-8
<PAGE> 30
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization
Scientific NRG, Incorporated (dba Scientific Component Systems) (the "Company")
was incorporated in the state of Minnesota in 1983. The Company designs,
manufactures and markets custom energy efficient lighting products utilizing
compact fluorescent lamp technology primarily within the United States. The
principal products are energy efficient, compact fluorescent downlight fixtures,
primarily for the downlight canister retrofit market. The Company does business
under the name Scientific Component Systems.
The Company's business is subject to new innovations in custom, low energy
retrofit lighting products. Significant technology changes can have an adverse
effect on product lives. Design and development of new products, and adequate
marketing and distribution techniques are important elements to achieve
profitability in this industry segment.
As further discussed in Note 9, in September 1996, the Company's Board of
Directors approved a workout agreement (the "Workout Agreement") which provided
for a change in certain officers and directors, the restructuring of certain
related party debt and the raising of working capital. The Company also
relocated its manufacturing operations and administrative offices to a facility
which is operated by a newly affiliated company. The Company has certain
officers, directors and stockholders which are also officers, directors and
stockholders of the newly affiliated company. The newly affiliated company
operates in the commercial lighting industry.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the years ended June 30, 1996
and 1995, the Company has had significant declines in sales and has incurred net
losses of $486,339 and $235,376, respectively, and as of June 30, 1996 has a
stockholders' deficit of $868,056 and current liabilities in excess of current
assets (working capital deficit) of $256,250. These conditions, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Subsequent to June 30, 1996, the
Continued
F-9
<PAGE> 31
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued
Company adopted the Workout Agreement which provides for: new management,
officers and directors; for the restructure of existing debt and obligations
payable to related parties; for the issuance of notes payable to related parties
raising $60,000 in cash; and the sale of additional shares of the Company's
common stock to the newly affiliated Company and/or its affiliates, raising
$60,000 in cash and services (see Note 9). In addition, new management intends
to obtain additional debt and equity capital, increase sales levels sufficient
to meet its current cost structure through increased marketing and distribution
activities, and reduce administrative costs through shared overhead arrangements
with a new affiliate to better enable the Company to generate liquidity through
operations. The Company is dependent on the new affiliate for continued
operational and financial support for a period in excess of one year. There are
no assurances that the new management's plans will be attained. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Concentrations of Credit Risk
The Company provides credit in the normal course of business to customers
throughout the United States. During fiscal year 1996, two customers accounted
for approximately 12% and 11%, respectively, of net sales, and during fiscal
year 1995, one customer accounted for approximately 23% of net sales. At June
30, 1996, two customers accounted for approximately 18% and 12%, respectively,
of trade receivables. The Company performs credit evaluations on new customers
with significant orders. The Company does not obtain collateral with which to
secure its trade receivables. The Company maintains reserves for potential
credit losses based upon the Company's historical experience related to credit
losses.
During fiscal year 1996, two of the Company's vendors accounted for
approximately 12% each, of its inventory purchases, and during fiscal year 1995,
one vendor accounted for approximately 14% of the Company's inventory purchases.
At June 30, 1996, one vendor accounted for approximately 16% of accounts
payable. Management of the Company believes that they have alternative suppliers
for its products and component parts.
Continued
F-10
<PAGE> 32
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued
Use of Estimates in the Preparation of Financial Statements
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 the 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.
Significant estimates made by management are, among others, provisions for
losses on accounts receivable and for slow moving and obsolete inventories, and
the classification of the payables to related parties as non-current liabilities
on the accompanying balance sheet (see Notes 5 and 9). Actual results could
materially differ from those estimates.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis on the
accompanying balance sheet. The Company's financial instruments consist of trade
receivables, accounts payable, a line of credit, notes and interest payable to
related parties and accrued service contract payable to related party. The
carrying amounts of the Company's financial instruments generally approximate
their fair values at June 30, 1996. The notes payable to related parties and the
accrued service contract payable to related party do not have readily
determinable market values (see Notes 5 and 9).
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Costs include materials, direct
labor, and an allocable portion of direct and indirect manufacturing overhead.
The Company operates in an industry in which its products are subject to design
changes and manufactured based on customer specifications. Accordingly, should
design requirements change significantly or customer orders be canceled, the
ultimate net realizable value of such products could be less than the carrying
value of such amounts. At June 30, 1996, management believes that inventories
are carried at their net realizable value.
Continued
F-11
<PAGE> 33
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued
Property and Equipment
Property and equipment are recorded at cost and are depreciated over the
estimated useful lives of the assets, generally five to seven years, using the
straight-line method. Leasehold improvements are amortized over the lesser of
the estimated useful lives of the improvements or the related lease term.
Amortization expense on equipment acquired under capital lease is provided over
the lesser of the useful lives of the assets or the lease period using the
straight-line method. Total depreciation expense for the years ended June 30,
1996 and 1995 was $12,256 and $12,384, respectively.
Revenue Recognition and Sales Returns
Revenue is recognized when goods are shipped to customers. Returns are accepted
only upon the discretion of management. The Company's policy is to charge a
restocking fee for any goods returned. No allowance for sales returns has been
made due to historically insignificant amounts of returns.
Reverse Stock Split
On October 24, 1996, the Company's Board of Directors and Stockholders approved
a 1 for 5 reverse stock split to stockholders of record on October 23, 1996. All
common stock and equivalent information has been retroactively adjusted to
reflect the 1 for 5 reverse stock split for all periods presented.
Net Loss Per Common Share
Net loss per common share is computed based on the weighted average number of
shares of common stock and, if applicable, common stock equivalents outstanding
during the year, as adjusted for the 1 for 5 reverse stock split discussed
above. Common stock equivalents, which relate to shares issuable upon the
exercise of common stock purchase warrants, were not included in the per share
calculations for the years ended June 30, 1996 and 1995 as their effect would be
antidilutive.
Continued
F-12
<PAGE> 34
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
Warranty Obligation
A five-year warranty is provided on certain lighting fixtures. Estimated
reserves for product warranty for the years presented are not significant.
Reclassifications
Certain amounts in the accompanying 1995 financial statements have been
reclassified to conform to the 1996 presentation.
NOTE 2 - INVENTORIES
The components of inventories at June 30, 1996 consist of the following:
<TABLE>
<S> <C>
Raw materials $67,874
Finished goods 20,761
-------
$88,635
=======
</TABLE>
Continued
F-13
<PAGE> 35
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 3 - PROPERTY AND EQUIPMENT
The components of property and equipment at June 30, 1996 consist of the
following:
<TABLE>
<S> <C>
Leasehold improvements $ 10,923
Furniture and fixtures 25,119
Equipment 26,173
Equipment acquired under capital leases 81,341
---------
143,556
Less accumulated depreciation and
amortization (117,115)
---------
$ 26,441
=========
</TABLE>
NOTE 4 - LINE OF CREDIT
At June 30, 1996, the Company had a variable rate line of credit with a finance
company which was paid in full and terminated in October 1996. The agreement was
collateralized by certain accounts receivable, inventories and equipment of the
Company. The Company was able to borrow up to 80% of qualifying trade receivable
up to a maximum of $200,000. The effective interest rate on the line of credit
as of June 30, 1996 was 34.35% per annum with a minimum monthly interest charge
of $1,000.
NOTE 5 - RELATED PARTY TRANSACTIONS
Notes Payable
During November 1994, the Company entered into a $100,000 variable rate note
agreement with a related party that was due on demand. The agreement was
collateralized by certain inventory and accounts receivable, subordinate to the
line of credit described in Note 4 above. The effective interest rate on the
note payable as of June 30, 1996 was 34.35% with a minimum monthly interest
charge of $1,000. At June 30, 1996, the outstanding balance of the note payable
was $100,000. Interest expense for the years ended June 30, 1996 and 1995, was
$32,980 and $12,583, respectively. Accrued interest totaled $39,767 at June 30,
1996. In addition to the financing arrangement, in 1994, the Company issued
20,000 common stock purchase warrants to this related party, each with an
exercise price of $.50 per share. No value was ascribed to these warrants as the
value, if any, at the time of issuance was nominal (see Note 7). The warrants
expire the earlier of 5 years or 6 months after the termination of the note
agreement.
Continued
F-14
<PAGE> 36
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 5 - RELATED PARTY TRANSACTIONS, continued
During fiscal years 1996 and 1995, the Company borrowed an aggregate of $218,500
(see Note 7) and $35,759, respectively, from two individuals who were both
officers and stockholders of the Company, one of which is a current officer. All
notes were due on demand and bore interest at rates ranging from 8% to 12% per
annum. At June 30, 1996, the total outstanding balance of the notes payable was
$254,259. Interest expense during the years ended June 30, 1996 and 1995 was
$29,308 and $1,480, respectively. Accrued interest totaled $14,888 at June 30,
1996.
Subsequent to June 30, 1996, all notes payable to related parties were
restructured as part of the Workout Agreement (see Note 9). Due to the terms of
repayment upon the achievement of certain conditions which are not expected to
be attained in fiscal 1997, management of the Company has reflected these notes
as noncurrent liabilities in the accompanying balance sheet.
Service Contract
The Company had a service contract with its former chief executive officer to
provide certain services at $6,250 per month through August 31, 1994 and at
$8,000 per month effective September 1, 1994. The balance due pursuant to this
contract totaled $175,500 at June 30, 1996. The unpaid balance accrued interest
at 8% per annum. During the years ended June 30, 1996 and 1995, charges to
operations relating to this agreement, including interest, amounted to
approximately $95,000 and $107,000, respectively. Accrued interest totaled
$45,653 at June 30, 1996.
Subsequent to June 30, 1996, this service contract payable to related party was
restructured into a note payable as part of the Workout Agreement (see Note 9).
Due to the terms of repayment upon the achievement of certain conditions which
are not expected to be attained in fiscal 1997, management of the Company has
reflected this liability as noncurrent in the accompanying balance sheet.
Advances From New Affiliate
Notes payable to related parties in the accompanying balance sheet include
advances totaling $3,900 made by the new affiliated company (see Notes 1 and 9)
to the Company as part of the Workout Agreement.
Continued
F-15
<PAGE> 37
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Operating Lease
In September 1996, the Company did not renew its existing operating lease for
its office and production facility. The lease required effective monthly lease
payments of approximately $5,200 plus certain operating expenses. The lessor has
notified the Company that the balance due to satisfy the terms of the lease
totaled $10,400 at June 30, 1996. Such amounts have been recorded as other
current liabilities in the accompanying balance sheet.
Rent expense was approximately $55,000 and $57,000 for the years ended June 30,
1996 and 1995, respectively.
Capital Leases
The Company is the lessee of certain equipment under capital leases which expire
through September 1998. The capital leases are payable in monthly installments
and bear interest at effective rates ranging from 16% to 18% per annum. Future
annual minimum payments under the capital leases are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending
June 30,
-------------------
<S> <C>
1997 $ 8,388
1998 8,216
1999 2,054
-------
Total future annual minimum
lease payments 18,658
Less amount representing interest (3,510)
-------
Present value of future
annual minimum lease payments 15,148
Less - current portion (6,059)
-------
$ 9,089
=======
</TABLE>
Continued
F-16
<PAGE> 38
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 6 - COMMITMENTS AND CONTINGENCIES, continued
Royalty Agreement
On April 1, 1990, the Company entered into a license agreement for the
manufacture and distribution of one of the Company's product lines. The
agreement calls for a twenty-five cent ($.25) royalty payment to be made for
each unit of the product sold by the Company which encompasses one or more
patents. This agreement will continue over the remaining life of any existing or
future patents developed by the licensor.
For the years ended June 30, 1996 and 1995, royalty expense amounted to
approximately $3,000 and $7,000, respectively.
NOTE 7 - CAPITAL TRANSACTIONS
New Standard
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation", ("SFAS
123"). As permitted under SFAS 123, the Company will continue to account for
employee stock options under Accounting Principles Board Opinion No. 25 and, as
a result, the Company will be required to disclose certain proforma effects on
the results of operations. The proforma disclosure requirements required under
SFAS 123 will be effective for the Company's fiscal 1997 financial statements.
Common Stock
During fiscal year 1996, the Company issued 60,000 shares of common stock valued
at $.20 per share to a related party in connection with the issuance of a note
payable and charged operations $12,000 for interest expense. The Company also
issued 2,000 shares of common stock valued at $.20 per share to the Company's
chief executive officer for services rendered.
Common Stock Purchase Warrants
Common stock purchase warrants have been granted for periods from two to five
years at exercise prices established by the Board of Directors.
Continued
F-17
<PAGE> 39
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 7 - CAPITAL TRANSACTIONS, continued
The following table summarizes warrant transactions for each of the years in the
two-year period ended June 30, 1996:
<TABLE>
<CAPTION>
Beginning End
of year Granted Exercised Expired of year
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal 1995:
Number of shares 30,000 20,000 -- -- 50,000
========= ========= ========= ========= =========
Option price per
share (in dollars) $.50-1.25 $ .50 -- -- $.50-1.25
========= ========= ========= ========= =========
Fiscal 1996:
Number of shares 50,000 -- -- (10,000) 40,000
========= ========= ========= ========= =========
Option price per
share (in dollars) $.50-1.25 -- -- $ 1.25 $ .50
========= ========= ========= ========= =========
</TABLE>
All warrants are currently exercisable, and expire at various dates through
1999.
Subsequent to June 30, 1996, the Company issued common stock and non-qualified
common stock purchase options as part of the Workout Agreement (see Note 9).
NOTE 8 - INCOME TAXES
The provision for income taxes for the years ended June 30, 1996 and 1995,
consisted of minimum state income taxes totaling $800 for each year.
The current income tax provision differs from the amount of income tax
determined by applying the expected U.S. Federal income tax rate to pretax
income for the years ended June 30, 1996 and 1995, as a result of:
<TABLE>
<CAPTION>
1996 1995
------------------- ----------------
<S> <C> <C> <C> <C>
Computed "expected" tax
benefit $(165,083) (34)% $(79,756) (34)%
Increase (decrease) in
income tax benefit
resulting from:
State income tax benefit
and other (18,017) (4) (14,496) (6)
Increase in valuation
allowance 183,900 38 95,052 40
--------- --- -------- ---
$ 800 --% $ 800 --%
========= === ======== ===
</TABLE>
Continued
F-18
<PAGE> 40
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 8 - INCOME TAXES, continued
As of June 30, 1996, the Company had net tax operating loss carryforwards of
approximately $3,700,000 available to offset future Federal taxable income which
expire at various dates through 2011. The Company also had net tax operating
loss carryforwards of approximately $1,000,000 available to offset future
California state taxable income which expire at various dates through 2001. Due
to significant issuances of common stock subsequent to June 30, 1996, and the
proposed common stock offering for fiscal 1997, the Company may be limited,
annually, as to the use of these net operating loss carryforwards.
Significant components of the Company's net deferred tax assets and liabilities
as of June 30, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,346,000
Accrued expenses 44,000
Receivable allowance 4,000
Inventory reserves 30,000
-----------
1,424,000
Valuation allowance (1,424,000)
-----------
$ --
===========
</TABLE>
During the years ended June 30, 1996 and 1995, the valuation allowance increased
$183,900 and $95,052, respectively.
NOTE 9 - SUBSEQUENT EVENT
On September 11, 1996, the Board of Directors of the Company adopted a Workout
Agreement in order to provide for a change in the Company's management, officers
and directors, restructure existing indebtedness payable to certain related
parties, issue additional notes payable and additional shares of common stock of
the Company.
Continued
F-19
<PAGE> 41
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 9 - SUBSEQUENT EVENT, continued
On September 11, 1996, two of the Company's Board of Directors, one of which was
the Company's chief executive officer and the other of which was the Company's
chief financial officer, resigned from their positions with the Company.
Management then entered into a one year consulting contract with the former
chief executive officer beginning September 12, 1996, that provides for services
to be rendered to the Company, at management's request, at the rate of $75 per
hour. Two new directors were appointed, one of which was named as the Company's
chief executive officer and the other of which was named as the Company's
president. These two individuals are officers of the newly affiliated company.
The Company's new chief executive officer was given a salary of $12 per year and
options to purchase 300,000 shares of common stock exercisable at $.50 per
share. The Company's new president was given a salary of $48,000 per year and
options to purchase 100,000 shares of common stock exercisable at $.50 per
share. In addition, the Company granted options to purchase 200,000 shares of
common stock exercisable at $.50 per share to the new affiliated company
controlled by new management.
Effective September 11, 1996, certain outstanding debt obligations to these
related parties were reduced to an aggregate principal amount of $558,500. These
related party obligations totaled $630,067, including accrued interest of
$100,308, at June 30, 1996 (see Note 5) and increased to $652,179 due to
additional borrowings and accrued interest through September 10, 1996. In
accordance with Statement of Financial Accounting Standards No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructuring," no gains will be
recognized on the restructuring of the debt in fiscal 1997. Instead, the
effective interest rate of the restructured notes payable will be reduced for
financial statement reporting purposes.
The restructured notes payable to related parties totaling $558,500 (the
"Notes") accrue interest at 8% per annum and become payable, both in principal
and interest, upon the Company reporting $250,000 in cumulative net income
subsequent to September 30, 1996. Once such net income is obtained, 25% of all
subsequent net income is to be used for repayment of the Notes. It is the belief
of the Company's management that such cumulative net income will not be
Continued
F-20
<PAGE> 42
SCIENTIFIC NRG, INCORPORATED
dba SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Two-Year
Period Ended June 30, 1996 and 1995
NOTE 9 - SUBSEQUENT EVENT, continued
achieved in fiscal 1997 and, accordingly, such debt has been classified as
long-term in the accompanying balance sheet. The Notes are subordinated to any
debt with a bona fide financial institution designated as senior secured debt by
the Company or any new loans from any of the parties thereto and are secured,
subject to the security interest of any new senior secured debt, by all of the
assets of the Company. In addition, the Notes will become due and payable
immediately from the proceeds, if any, from a secondary offering of securities,
that nets the Company more than $1,500,000 or if the Company issues more than
3,000,001 shares of its common stock in a single transaction.
The Workout Agreement provided for the issuance of 600,000 shares of common
stock of the Company to the newly affiliated company and/or its affiliates at
$0.10 per share on September 11, 1996. The purchase price consisted of $20,000
for future administrative support at the rate of $5,000 per month for four
months from the newly affiliated company (see Note 1) and $40,000 in cash.
The Workout Agreement provided for the issuance of 20,000 shares of common stock
to the Company's former chief executive officer to fulfill the Company's
obligation under his service contract (see Note 5). Such shares were valued at
$0.10 per share and will be charged to operations in fiscal 1997.
The Workout Agreement also provided for the issuance of notes payable to certain
related parties totaling $60,000 due on or about January 10, 1997, together with
interest at 15% per annum, and secured by all of the assets of the Company. Also
see Note 4 for discussion regarding the repayment and full satisfaction of the
line of credit of the Company.
On September 19, 1996, the Company issued 140,000 shares of no par value common
stock of the Company at $.20 per share for the payment of legal services
rendered in connection with the Workout Agreement. The value of such shares
totals $28,000, of which $10,000 has been expensed is fiscal 1996 and $18,000 in
fiscal 1997.
NOTE 10 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1996, the Company recorded a provision for
loss on slow moving and obsolete inventories totaling $72,485.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR YEAR ENDED JUN-30-1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0000794929
<NAME> SCIENTIFIC NRG INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 57,982
<ALLOWANCES> 9,812
<INVENTORY> 88,635
<CURRENT-ASSETS> 148,981
<PP&E> 26,441
<DEPRECIATION> 117,115
<TOTAL-ASSETS> 180,231
<CURRENT-LIABILITIES> 405,231
<BONDS> 0
0
0
<COMMON> 2,166,050
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 180,231
<SALES> 544,249
<TOTAL-REVENUES> 544,249
<CGS> 418,114
<TOTAL-COSTS> 418,114
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,320
<INCOME-PRETAX> (485,539)
<INCOME-TAX> 800
<INCOME-CONTINUING> (486,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (486,339)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
