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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, 1997 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) 305-0322
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. [ ]
State issuer's revenues for its most recent fiscal year. $ 517,683
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 August 15th, the
registrant had 4,203,423 shares of common stock, no par value, issued and
outstanding.
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TABLE OF CONTENTS
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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 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
ITEM 7. FINANCIAL STATEMENTS 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 12
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 15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 17
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development.
Scientific NRG, Incorporated (dba Scientific Components, the "Company")
designs, manufactures and markets energy efficient lighting products utilizing
compact fluorescent lamp technology primarily within the United States. The
Company's principal products are energy efficient, compact fluorescent downlight
fixtures, primarily for the downlight canister retrofit market.
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 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).
The Company's executive offices and manufacturing facility are located
at 2246 Lindsay Way, Glendora, California 91740, telephone number (909)305-0322.
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.
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The PL 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. A 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.
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, 1997, 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 has continued efforts to expand the product lines. For the
fiscal year 1997, the Company added various reflector and lense options. These
innovations were in direct response to suggestions from field representatives.
The purpose of expanding our product lines is to broaden our customer base.
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, as opposed to the retrofit market.
The new construction market has traditionally constituted less than 15% of the
Company's sales.
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5. Raw Materials and Suppliers.
The Company fabricates the X-18 Series fixture housings and assembles
its products at Parke Industries, Inc. 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. During
the year ended June 30, 1997, the Company purchased 18.9% of total purchases
from one nonaffiliated supplier. If the relationship between the Company and
this nonaffiliated supplier was altered, the future results of operations and
financial condition could be adversely impacted. The Company's management
believes that they have alternative suppliers for its products and component
parts. No significant supply problems have been encountered in recent years and
management believes that relationships with vendors have generally been good
(see Note 1 to the Company's financial statements).
6. Dependence on One or a Few Major Customers.
During the year ended June 30, 1997 the Company sold $153,000 (or
29.6% of total sales) to Parke Industries, Inc. ("Parke") a newly affiliated
company (see Note 1 and 7 of the Company's financial statements). If the
relationship between the Company and Parke was altered, the future results of
operations and financial condition could be adversely impacted. During the year
ended June 30, 1997, sales to one nonaffiliated customer totaled $57,100, or
11.0% of net sales. During the year ended June 30, 1996, the Company received a
significant portion of its business from two nonaffiliated customers. Sales to
these nonaffiliated customers totaled $67,200 and $57,700, or 12.3% and 10.6% of
total sales, respectively (see Note 1 to the Company's financial statements).
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.
The Company did not expend material amounts on research and development
of new products in the fiscal years ended June 30, 1997 and 1996. Management
intends to significantly increase efforts in market research and development of
appropriate products that match market demand with our sales delivery
capability.
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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 September 30 , 1997 the Company leased three full-time employees
from Parke. In addition, during the fiscal year ended June 30, 1997, the Company
leased up to 10 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 leased 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. In
September 1996, Parke Industries, Inc. became a new affiliate of the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
As of September 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 material 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.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
There is no active public trading market for the Company's common
stock. The only named pink sheet market makers in the Company's stock, as
reflected by the National Quotation Bureau in Jersey City, New Jersey, are
Miller - Schroeder and 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, 1997, there were approximately 784 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
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.
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 gain of $312,310 for the fiscal year ended
June 30, 1997, an increase of $798,649 over the net loss for the prior fiscal
year ended June 30, 1996 of $486,339. The Company decreased its working capital
deficit from $(256,250) in fiscal year 1996 to a surplus of $96,934 in fiscal
year 1997, an increase of $353,184.
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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 affiliation with Parke Industries.
Additionally, the Company will continue its attempts to maintain or increase its
profit margins via pricing policies, better purchasing 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.
The Company's operations for the twelve-month period ended June 30,
1997 resulted in negative cash flows from operations of $294,219. Cash flows
used in operations increased in fiscal year 1997 over fiscal year 1996 to
$294,219 from $198,385, an increase of $95,834.
In prior periods, the Company utilized a variable rate line-of-credit
obtained in 1993 from a finance Company which was secured by certain accounts
receivable, inventory and equipment of the Company and was due on demand. Terms
of the arrangement allowed the Company to borrow up to 80% of qualifying
accounts receivable, to a maximum of $150,000. This line-of-credit was paid off
on October 29,1996.
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 not-to-exceed $100,000. This
line was secured by accounts receivable and inventory and was subordinate to the
line-of-credit mentioned above. The line-of-credit was due on demand. The
Company had borrowed $100,000 as of June 30, 1996 under this line-of-credit. In
September 1996, all unpaid principal and accrued interest was restructured
pursuant to the Workout Agreement, (see Note 7 and 9 to the Company's financial
statements).
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Inventories increased from $88,635 at June 30, 1996 to $96,720 at June
30, 1997, an increase of $8,085 .
Accounts receivable, net of doubtful accounts, increased from $57,982
at June 30, 1996 to $68,323 at June 30, 1997, an increase of $10,341. Management
considers the increase in accounts receivable to be a result of the increase in
fourth quarter sales compared to the corresponding period of the prior fiscal
year.
During the year ended June 30, 1997, the Company's accounts payable
decreased $214,693, from $241,711 at June 30, 1996 to $27,018 at June 30, 1997.
Most of this decrease was attributable to two factors, the first of which was
the Company's raising of additional equity to increase working capital, (see
Note 5 to the Company's financial statements). The second factor was the
Company's management negotiating with most of the Company's vendors to reduce
amounts owed on past due debts by $81,946, (see Note 11 to the Company's
financial statements).
There were no material commitments for capital expenditures as of
September 30, 1997.
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 optimizing administration efficiencies (FLS).
Through the Company's affiliation with Parke Industries, Inc., management
anticipates an increase in sales during fiscal 1998 (FLS). While there can be no
certainty as to the sales in fiscal 1998, management intends to rely heavily on
its new affiliate for improving operating results.
On January 27, 1997, the related party debt and accrued interest
totaling $652,179, was converted to equity for 382,373 shares of common stock.
At the time of conversion the Company was offering shares at $0.50 per share
through a private placement. The Company recorded the debt conversion during the
quarter ended March 31, 1997 as an issuance of common stock for $191,187 and
recognized the difference between the carrying value of the debt in such stock
issuance as an extraordinary gain on relief of indebtedness totaling $460,992,
(see "Other Information" below and Note 10 to the Company's financial
Statements).
Additionally, in connection with a private placement, the Company sold
and issued 598,000 shares of common stock at $0.50 per share. The offering
closed March 31, 1997. At March 31, 1997 the Company had subscriptions
receivable of $71,500. These subscriptions were paid in full in April 1997. The
proceeds will be used for working capital. Further, the Company issued 25,000
shares in connection with legal services rendered and 20,000 shares in
connection with future legal services. Additionally the Company issued 80,000
shares for eight months of services to be rendered under the administrative
services agreement. These shares were exempt from registration under Section
4(2) of the Securities Act, (see Note 5 to the Company's financial
statements).
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1. Fiscal Year 1997 Compared to Fiscal Year 1996.
Total sales of the Company during the twelve months ended June 30, 1997
were $517,683. Total sales decreased $26,566, or 4.9% from sales in fiscal 1996.
The sales decrease is attributable to a significant decrease in first quarter
volume caused by manufacturers representatives not selling products due to the
Company's inability to pay their commissions in a timely manner. At June 30,
1997, all payables including commissions are within terms.
During the fiscal year ended June 30, 1997, gross profit from
operations increased from $126,135 to $172,893, an increase of $46,758, or
37.1%. Selling, general and administrative expenses for the twelve months ended
June 30, 1997 decreased $150,568, from $510,354 in fiscal 1996 to $359,786 in
fiscal 1997. Management attributes these improvements to managements ability to
implement more efficient systems, including manufacturing, inventory control and
administration, throughout the Company in fiscal 1997.
The Company recognized net income of $312,310 or $0.10 per share for
the fiscal year ended June 30, 1997, as compared to a net loss of $486,339, or
$(.23) per share for the fiscal year ended June 30, 1996. Management generally
attributes this difference to the Company's reduced overhead, reduced interest
expense and the recognition of an extraordinary gain totaling $557,994 in fiscal
1997, (see Note 12 to the Company's financial statements).
Other Information
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 the
Company's common stock.
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 Parke. The Company's
new chief executive officer was given a salary of $12,000 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 $48,000 per year 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 $0.50 per share to Parke, which is also controlled by the
Company's 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 and increased to $652,179 due to additional
borrowings and accrued interest through September 10, 1996. A gain totaling
$93,679 resulted from this agreement, which was deferred in accordance with
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring." Subsequently as a result of the debt
for equity swap agreements, such gain was recognized.
The restructured notes payable to related parties totaling $558,500
(the "Notes") accrued interest at 8% per annum and became 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 was obtained, 25%
of all subsequent net income was to be used for repayment of the Notes. The
Notes were 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 were secured, subject to the security interest of any
new senior secured debt, by all of the assets of the Company.
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In addition, the Notes became due and payable immediately from the proceeds, if
any, from a secondary offering of securities, that would net the Company more
than $1,500,000, if the Company issued more than 3,000,001 shares of its common
stock in a single transaction. Effective January 27, 1997, all such notes and
the corresponding accrued interest totaling $558,500 and $15,056, respectively,
were canceled in accordance with the debt for equity swap agreement (see below).
The Workout Agreement provided for the issuance of 600,000 shares of
common stock of the Company to Parke and/or its affiliates at $0.10 per share on
September 11, 1996. The purchase price consisted of $40,000 in cash and $20,000
for future administrative support at the rate of $5,000 per month from Parke.
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 were 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. During the year ended June 30, 1997, the Company incurred approximately
$4,200 of interest expense pursuant to these notes. As of June 30, 1997, all
such notes and related accrued interest have been repaid.
On September 19, 1996, the Company issued 140,000 shares of the
Company's common stock of the Company at $0.20 per share for the payment of
legal services rendered in connection with the Workout Agreement. The value of
such shares totals $28,000, all of which has been expensed during the year ended
June 30, 1997.
Effective January 31, 1997, the Company entered into four debt for
equity swap agreements (the DESAS) with previous officers and directors of the
Company. Pursuant to the DESAS, the Company issued 382,273 shares of the
Company's common stock valued at $191,187 in exchange for all of the then
outstanding Notes and accrued interest totaling $573,556. The resulting gain
totaling $382,369 has been reflected in the accompanying statement of operations
as an extraordinary item.
During the year ended June 30, 1997, the Company's management
negotiated with most of the Company's vendors in an effort to reduce amounts
owed on delinquent debts. As a result of management negotiations, the Company
recognized $81,946 in cancellation of indebtedness income (the difference in the
amount payable prior to negotiation and post negotiation). Such amount has been
reflected as an extraordinary item in the accompanying statement of operations.
During the year ended June 30, 1997, the Company recognized an
extraordinary gain on various retirements of debt. Such extraordinary gain
consists of the following:
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Recognition of workout agreement deferred gain resulting from debt for equity swap $ 93,679
Recognition of gain from debt for equity swap 382,369
Recognition of gain from cancellation of indebtedness 81,946
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$557,994
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ITEM 7. FINANCIAL STATEMENTS.
The Company's audited balance sheet as of June 30, 1997 and audited
statements of income, cash flows and changes in stockholders equity for each of
the years in the two-year period ended June 30,1997 are attached hereto as pages
F-1 through F-22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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 K. 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 September 30, 1997, Parke Industries, Inc. held
shares of stock representing a 10.94% interest in the Company. Mr. Parke holds a
Bachelor of Business Administration from Azusa Pacific University.
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Jonathan D. Forgy, (Director, President), 42, the CFO of Parke
Industries, Inc. since 1993. 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. 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 K. 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, 1997,
the following persons, who during the fiscal year, were either directors,
officers or greater than 10% shareholders, failed to file on a timely basis
certain reports required by Section 16(a) of the Securities Exchange Act of
1934. Malcolm L. Fickel made a late filing of Form 4 on or about September 30,
1997 that disclosed 2 transactions that were not reported on a timely basis.
Jonathan D. Forgy made a late filing of Form 5 on or about October 14, 1997 that
disclosed 2 transactions that were not reported on a timely basis. Daniel W.
Parke and Parke Industries, Inc. made a late filing of Form 5 on or about
October 14, 1997 that disclosed 5 transactions that were not reported on a
timely basis. Oliver K. Washburn made a late filing of Form 5 on or about
October 14, 1997 that disclosed 1 transaction that was not reported on a timely
basis.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued by the
Company during each of the years in the three-year period ended June 30, 1997 to
that person who, as of the applicable year ended, 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> <C> <C> <C> <C> <C>
Malcolm L. Fickel 1997 12,648
(Former,Chief Exec. 1996 82,400 400
Officer) 1995 92,000
Daniel W. Parke 1997 9,000
(Chief Exec. 1996 0
Officer) 1995 0
Jonathan D. Forgy 1997 30,000
(President) 1996 0
1995 0
</TABLE>
13
<PAGE> 14
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Name (a) Number of Percent of Total Exercise or Expiration
Securities Options/SARs Base Price Date (e)
Underlying Granted to ($/Sh) (d)
Options/SARs Employees in
Granted (#) (b) Fiscal Year (c)
- ---------------------------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
CEO Daniel W. Parke 300,000 50% $.50 9/30/05
President Jonathan D. Forgy 100,000 17% $.50 9/30/97
</TABLE>
There were no Options/SARs exercised in the last fiscal year and the
Options/SARs outstanding with regard to the above named executive officers are
all exercisable at the present time.
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.
Employment Contracts, Termination Of Employment And Change Of Control
Arrangements.
On March 25, 1997, the Company entered into an Employment Agreement
with Daniel W. Parke to serve as the Company's Chief Executive Officer until
June 30, 1997. It is anticipated that the Company will renew the Employment
Agreement for fiscal 1998. On March 25, 1997, the Company entered into an
Employment Agrement with Jonathan D. Forgy to serve as the Company's President
until June 30, 1997. It is anticipated that the Company will renew the
Employment Agreement for fiscal 1998.
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 at a rate of $75 per hour.
14
<PAGE> 15
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 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 June 30, 1997 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 June 30, 1997 the Company had
4,823,423 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)
Malcolm L. Fickel 462,063 9.58
c/o Scientific NRG, Inc.
2246 Lindsay Way
Glendora, Ca 91740
CEDE & Co. 360,502 7.47
PO Box 20
Bolling Green Station
New York, NY 10274
MANAGEMENT
Daniel W. Parke 1,080,000 (2)(3) 22.39
2246 Lindsay Way
Glendora, Ca 91740
Oliver K. Washburn 538,776 11.17
c/o Scientific NRG, Inc.
2246 Lindsay Way
Glendora, Ca 91740
Jonathan D. Forgy 195,000 (4) 4.04
2246 Lindsay Way
Glendora, Ca 91740
ALL OFFICERS AND DIRECTORS 1,813,776 37.60
AS A GROUP - 3
</TABLE>
15
<PAGE> 16
(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 460,000 shares issued to Parke Industries and 200,000 shares
issuable to Parke Industries upon exercise of options at $0.50 per share.
(3) Includes 300,000 shares issuable to Daniel W. Parke upon exercise of options
at $0.50 per share.
(4) Includes 100,000 shares issuable to Jonathan D. Forgy upon exercise of
options at $0.50 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the last two years the Company did not enter into any
transactions that require disclosure under Item 404 of Regulation S-B except the
following:
1. Oliver K. Washburn, a director and greater than 10% shareholder
had loaned the Company a total of $258,500 during fiscal 1995,
1996 and 1997. This indebtedness was restructured as part of the
Workout Agreement dated September 11, 1996. (See Note 9 to the
Company's financial statements.)
2. During the year ended June 30, 1997 the Company entered into
various transactions with related parties all of which have been
previously mentioned in this report. These disclosures included
the following:
(a) The Workout Agreement and subsequent Debt Restructure (see
Item 6, Management's Discussion and Analysis "Other
Information").
(b) Transactions with the Daniel W. Parke, Jonathan D. Forgy
and Malcolm L. Fickel (see Item 9, Directors, Executive
Officers And Control Persons; also see Item 10 Executive
Compensation).
(c) Transactions with Parke Industries, Inc. (see Item 6,
Management's Discussion and Analysis "Other Information").
16
<PAGE> 17
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, 1997.
Statements of Operations for the Years Ended June 30, 1997 and 1996.
Statements of Stockholders' Equity (Deficit) for the Years Ended June
30, 1997 and 1996.
Statements of Cash Flows for the Years Ended June 30, 1997 and 1996.
Notes to Financial Statements.
(2) Financial Data Schedule.
None. (3)
Exhibits.
The following exhibits are incorporated herein by reference from 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, as amended.
3.1 Articles of Incorporation as in effect on the date hereof
(including Amendment thereto effective December 28, 1988).
3.3 Bylaws. and reverse side thereof (see also Exhibits 3.1 and 3.3).
4.1 Specimen of Issued and Outstanding Restricted Share Certificate
4.6 Incentive Stock Option Plan.
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.
17
<PAGE> 18
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.
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.
18
<PAGE> 19
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.
10.53 Promissory Note Payable to Oliver Washburn, November 13, 1995.
10.54 Promissory Note Payable to Oliver Washburn, April 26, 1996.
10.55 Promissory Note Payable to Oliver Washburn, July 18, 1996.
10.56 Workout Agreement dated August 30, 1996.
10.57 Secured Promissory Note to Malcolm L. Fikel, September 11, 1996.
10.58 Secured Promissory Note to Oliver K. Washburn, September 11,
1996.
10.59 Subordinated Cash Flow Promissory Note to Oliver K. Washburn,
September 30, 1996.
10.60 Debt For Equity Swap Agreement.
10.61 Administrative Services Agreement.
10.62 Non-Qualified Stock Option Agreement.
10.63 Employment Agreement with Jonathan D. Forgy.
10.64 Employment Agreement with Daniel W. Parke.
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).
19
<PAGE> 20
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, 1997.
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: October 13, 1997
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.
Signatures Title Date
- ---------- ----- ----
/s/ Daniel W. Parke (1) (2) (3) October 13, 1997
- ----------------------------
Daniel W. Parke
/s/ Oliver K. Washburn (3) (5) October 13, 1997
- ----------------------------
Oliver K. Washburn
/s/ Jonathan D. Forgy (3) (4) October 13, 1997
- ----------------------------
Jonathan D. Forgy
(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.
21
<PAGE> 22
SCIENTIFIC NRG, INC.
FINANCIAL STATEMENTS
As of June 30, 1997 and
For Each Of The Years In The Two-Year
Period Ended June 30, 1997
with
INDEPENDENT AUDITORS' REPORT THEREON
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report..............................................................................F-2
Financial Statements:
Balance Sheet as of June 30, 1997....................................................................F-3
Statements of Operations for each of the years in the two-year period ended June
30, 1997.............................................................................................F-4
Statements of Stockholders' Equity (Deficit) for each of the years in the two-year
period ended June 30, 1997...........................................................................F-5
Statements of Cash Flows for each of the years in the two-year period ended June
30, 1997.............................................................................................F-6 and F-7
Notes to Financial Statements........................................................................F-8
</TABLE>
F-1
<PAGE> 24
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, 1997, and the
related statements of operations, stockholders' equity (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, 1997, 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 had significant declines in sales and has
incurred losses from operations in the two-year period ended June 30, 1997.
These conditions, among others, raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 1. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
CORBIN & WERTZ
Irvine, California
August 15, 1997
F-2
<PAGE> 25
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 35,300
Accounts receivable, net of allowance for doubtful
accounts of $9,658 68,323
Inventories (Notes 2 and 13) 96,720
-----------
Total current assets 200,343
Property and equipment, net of accumulated
depreciation of $13,397 (Notes 3 and 8) 4,877
-----------
$ 205,220
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 27,018
Accrued compensation 21,700
Other accrued expenses 39,713
Current obligations under capital leases (Note 8) 14,978
-----------
Total current liabilities 103,409
-----------
Commitments and contingencies (Note 8)
Stockholders' equity (Notes 5, 7, 9 and 10):
Common stock, no par value; 40,000,000 shares authorized;
4,203,423 shares issued and outstanding 3,516,607
Additional paid-in capital 11,970
Accumulated deficit (3,426,766)
-----------
Total stockholders' equity 101,811
-----------
$ 205,220
===========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-3
<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, 1997
<TABLE>
<CAPTION>
1997 1996
---------------- ------------------
<S> <C> <C>
Net sales $ 517,683 $ 544,249
Cost of sales (Note 13) 344,790 418,114
---------- -----------
Gross profit 172,893 126,135
Selling, general and administrative expenses (Note 7) 359,786 510,354
---------- -----------
Loss from operations (186,893) (384,219)
---------- -----------
Other income (expense)
Loss on retirement of fixed assets (22,252) -
Interest expense (Notes 4, 7, 8 and 9) (35,739) (101,320)
---------- -----------
(57,991) (101,320)
---------- -----------
Loss from continuing operations before provision
for taxes and extraordinary gain (244,884) (485,539)
Provision for taxes (Note 6) 800 800
---------- -----------
Loss from continuing operations before
extraordinary gain (245,684) (486,339)
Extraordinary gain, net of income
taxes of none (Note 12) 557,994 -
---------- -----------
Net income (loss) $ 312,310 $ (486,339)
========== ===========
Net income (loss) per common share
Loss from continuing operations $ (0.07) $ (0.23)
Extraordinary gain (Note 12) 0.17 --
---------- -----------
$ 0.10 $ (0.23)
========== ===========
Weighted average number of shares outstanding 3,222,305 2,114,050
========== ===========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-4
<PAGE> 27
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
--------------- ---------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1995 $ 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 60,000 12,000 - - 12,000
5)
Common stock issued in connection with
services rendered by a related party
(Note 5) 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)
Common stock issued to a newly affiliated
company for cash and services rendered
in connection with a workout agreement
(see Notes 5, 7 and 9) 600,000 60,000 - - 60,000
Common stock issued to related parties
for cash (Notes 5 and 7) 156,000 39,000 - - 39,000
Common stock issued in connection with
services rendered by related parties
(Notes 5 and 7) 301,000 96,500 - - 96,500
Common stock issued in connection with
services not yet rendered by related
parties (Notes 5 and 7) - (30,100) - - (30,100)
Common stock issued in connection with
debt for equity swap agreements
(Notes 5 and 10) 382,373 191,187 - - 191,187
Common stock issued in connection with a
private placement offering, net of
offering costs totaling $10,000
(Note 5) 598,000 289,000 - - 289,000
Fair value of options granted (Note 5) - - 11,970 - 11,970
Net income - - - 312,310 312,310
----------- ----------- -------- ------------ ----------
Balances, June 30, 1997 $ 4,203,423 $ 3,516,607 $ 11,970 $ (3,426,766) $ 101,811
=========== =========== ======== ============ ==========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-5
<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, 1997
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 312,310 $ (486,339)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 4,312 12,256
Provision for doubtful accounts - 10,596
Loss on retirement of property and equipment 22,252 -
Common stock issued for interest in connection with
issuance of a note payable to related party - 12,000
Common stock issued for services - 400
Fair value of options granted 11,970 -
Extraordinary gain (557,994) -
Changes in operating assets and liabilities:
Trade receivables (10,341) 59,917
Inventories (8,085) 76,913
Prepaid expenses and other 2,364 2,800
Accounts payable, accrued compensation and other
current liabilities (71,007) 38,270
Accrued service contract payable to related party - 15,625
Accrued interest to related parties - 59,177
---------- -----------
Net cash used in operating activities (294,219) (198,385)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (5,000) -
Net change in other deposits 4,809 -
---------- -----------
Net cash used in investing activities (191) -
---------- -----------
Cash flows from financing activities:
Net payments on line-of-credit (44,220) (37,712)
Borrowings on notes payable to related parties 70,000 222,400
Principal payments on notes payable to related parties (63,900) -
Principal payments on capital lease obligations (170) (5,902)
Common stock issued for cash to related parties 79,000 -
Common stock issued in connection with
private placement 289,000 -
---------- -----------
Net cash provided by financing activities 329,710 178,786
---------- -----------
</TABLE>
Continued
F-6
<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, 1997
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Net change in cash 35,300 (19,599)
Cash at beginning of year - 19,599
---------- -----------
Cash at end of year $ 35,300 $ -
========== ===========
Supplemental disclosure of cash flow information
Cash paid during year for:
Interest $ 5,827 $ 31,407
========== ===========
Income taxes $ 800 $ -
========== ===========
Supplemental disclosure of non-cash investing and
financing activities -
</TABLE>
See Notes to the financial statements for certain non-cash transactions entered
into in fiscal 1997 and fiscal 1996.
See independent auditors' report and
accompanying notes to financial statements
F-7
<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, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
- -----------------------------------------------------
Organization and Nature of Operations
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.
As further discussed in Note 9, the Company's Board of Directors approved a
workout agreement (the "Workout Agreement") which provided for a change in
certain officers and directors, the restructure of certain related party debt
and a source of additional working capital. During the year ended June 30, 1997,
the Company relocated its operations to a new facility in Glendora, California,
which is owned and operated by a newly affiliated company, Parke Industries,
Inc. ("Parke") (see Note 7). The Company and Parke, which operates in the
commercial lighting industry, also share certain officers and directors.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the two year period ended June
30, 1997, the Company has had significant declines in sales. During the years
ended June 30, 1997 and 1996, the Company has incurred losses from continuing
operations of $245,684 and $486,339 and has used net cash in operating
activities of $294,219 and $198,385, respectively. These conditions, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. During the year ended June 30, 1997, the Company adopted a
Workout Agreement (see Note 9) which provided for, among other things, new
management, new officers and directors, the restructure of existing debt and
obligations payable to related parties, the issuance of $60,000 of short-term
notes payable to related parties and the sale of additional shares of the
Company's common stock to Parke. New management intends to obtain additional
debt, 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 Parke (see Note
7) to better enable the Company to generate liquidity through operations.
However, there are no assurances that the Company will achieve these plans. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Continued
F-8
<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, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED
- ----------------------------------------------------------------
Risks, Uncertainties and Concentrations
The Company's operations are 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.
The Company provides credit in the normal course of business to customers
throughout the United States. The Company performs credit evaluations on new
customers with significant orders. The Company does not obtain collateral with
which to secure its accounts receivables. The Company maintains reserves for
potential credit losses based upon the Company's historical experience related
to credit losses.
During the year ended June 30, 1997, the Company received a significant portion
of its business from Parke (see Note 7) and one nonaffiliated customer. During
the year ended June 30, 1997, sales to the nonaffiliated customer totaled
$57,100, or 11.0% of net sales. As of June 30, 1997, no amounts were due from
this nonaffiliated customer. During the year ended June 30, 1996, the Company
received a significant portion of its business from two nonaffiliated customers.
During the year ended June 30, 1996, sales to these nonaffiliated customers
totaled $67,200 and $57,700, or 12.3% and 10.6% of total sales, respectively. As
of June 30, 1996, amounts due from these nonaffiliated customers included in
accounts receivable totaled $0 and $8,400, or 0.0% and 14.5% of accounts
receivable, respectively. As of June 30, 1996, another nonaffiliated customer
accounted for $12,300 of accounts receivable, or 21.2% of accounts receivable.
If the relationship between the Company and Parke was altered, the future
results of operations and financial condition could be adversely impacted.
During the year ended June 30, 1997, the Company purchased a substantial portion
of its raw materials from one nonaffiliated supplier. During the year ended June
30, 1997, purchases from this supplier totaled $48,100, or 18.9% of total
purchases. As of June 30, 1997, amounts due to this supplier included in
accounts payable totaled $2,500, or 9.3% of total accounts payable. During the
year ended June 30, 1996, the Company purchased a substantial portion of its raw
materials from two nonaffiliated suppliers. During the year ended June 30, 1996,
purchases from these nonaffiliated suppliers totaled $49,200 and $45,100, or
12.9% and 11.8% of total purchases, respectively. As of June 30, 1996, amounts
due to these nonaffiliated suppliers included in accounts payable totaled
$22,200 and $41,100, or 9.2% and 17.0% of accounts payable, respectively. If the
relationship between the Company and these suppliers was altered, the future
results of operations and financial condition could be adversely impacted. The
Company's management believes that they have alternative suppliers for its
products and component parts.
Continued
F-9
<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, 1997
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 provisions for slow moving and obsolete
inventories and warranty obligations. 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
accounts receivable and accounts payable. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of June 30,
1997.
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 are manufactured based on customer specifications. Accordingly,
should design requirements change significantly or customer orders be canceled
or decline, the ultimate net realizable value of such products could be less
than the carrying value of such amounts. As of June 30, 1997, management
believes that inventories are carried at their net realizable value.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from five to seven years. Maintenance and repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Continued
F-10
<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, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED
- ----------------------------------------------------------------
Warranty Obligation
The Company provides, by a current charge to income, an amount it estimates will
be needed to cover future warranty obligations for products sold during the
year. The Company grants warranties on certain lighting product for a period of
five years commencing from the time of sale. The provision for estimated
warranty costs is periodically adjusted to reflect actual experience. Estimated
reserves for product warranty for the years presented have not been significant
and accordingly, no provision for such warranties have been include in the
accompanying financial statements.
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 common stock equivalent information has been retroactively
adjusted to reflect the 1 for 5 reverse stock split for all periods presented.
Net Income (Loss) Per Common Share
Net income (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 and options (see Note 5), were
not included in the per share calculations for the years ended June 30, 1997 and
1996 as their effect would be antidilutive.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards 128 ("SFAS 128"), "Earnings per Share," which is effective
for financial statements issued for periods ending after December 15, 1997.
Management has determined that the adoption of SFAS 128 would not have a
material effect on the net loss per share as currently disclosed.
Continued
F-11
<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, 1997
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.
Reclassifications
Certain amounts in the accompanying 1997 financial statements have been
reclassified to conform to the 1996 presentation.
NOTE 2 - INVENTORIES
- --------------------
Inventories are comprised of the following as of June 30, 1997:
Raw materials $ 92,165
Finished goods 4,555
----------
$ 96,720
==========
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following as of June 30, 1997:
Furniture and fixtures $ 6,751
Machinery and equipment 11,523
----------
18,274
Less accumulated depreciation
and amortization (13,397)
----------
$ 4,877
==========
During the years ended June 30, 1997 and 1996, depreciation and amortization
expenses totaled $4,312 and $12,256, respectively.
Continued
F-12
<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, 1997
NOTE 4 - LINE-OF-CREDIT
- -----------------------
The Company had a line-of-credit with a finance company which was paid in full
and terminated in October 1996. The line-of-credit was collateralized by certain
accounts receivable, inventories and equipment of the Company. Pursuant to the
line-of-credit agreement, the Company was allowed to borrow up to 80% of
qualifying accounts receivable not-to-exceed $150,000.
NOTE 5 - STOCKHOLDERS' EQUITY
- -----------------------------
Issuances of Common Stock
During the year ended June 30, 1996, the Company issued 60,000 shares of common
stock valued at $0.20 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 $0.20 per share
to the Company's chief executive officer for services rendered.
During the year ended June 30, 1997, the Company issued 600,000 shares of common
stock valued at $0.10 per share to Parke for cash and services rendered pursuant
to the Workout Agreement (see Note 9) and an administrative service agreement
(see Note 7).
During the year ended June 30, 1997, the Company sold 156,000 shares of common
stock to related parties. Such shares were valued at $0.25 per share totaling
$39,000. The Company also issued 301,000 shares of common stock to related
parties for rent, legal and other general and administrative services (see Note
7). Such shares were valued at $0.10 to $0.50 per share totaling $96,500, of
which $30,100 related to services not yet rendered as of June 30, 1997.
During the year ended June 30, 1997, the Company issued 382,373 shares of common
stock valued at $0.50 per share to previous officers and directors of the
Company pursuant to debt for equity swap agreements (see Note 10).
During the year ended June 30, 1997, the Company initiated a private placement
for the sale of up to 800,000 shares (minimum of 30,000 shares) of the Company's
common stock at $0.50 per share. The termination date of the private placement
was on or before March 31, 1997. As of that date, the Company had sold 598,000
shares of common stock totaling $289,000, net of issuance costs totaling
$10,000.
Continued
F-13
<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, 1997
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
Common Stock Purchase Warrants and Options
Common stock purchase warrants and options consist of the following as of the
fiscal years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Options/Warrants Options/Warrants Price
---------------- ----------------------
<S> <C> <C> <C>
Outstanding & Exercisable, June 30, 1995 $ 50,000 $0.50 to $1.25
Granted --
Expired (10,000) $1.25
--------
Outstanding & Exercisable, June 30, 1996 40,000 $0.50
Granted 600,000 $0.50
Expired (Note 7) (20,000) $0.50
--------
Outstanding & Exercisable, June 30, 1997 $620,000 $0.50
========
</TABLE>
During the year ended June 30, 1997, the Company issued 200,000 nonqualified
stock options to Parke in conjunction with the Workout Agreement (see Note 9).
Such stock options are exercisable in whole or in part immediately at an
exercise price of $0.50 and expire on June 30, 1999.
During the year ended June 30, 1997, the Company entered into employment
agreements with two of the Company's officers and directors (see Note 9).
Pursuant to these employment agreements, the Company issued 400,000 nonqualified
stock options at an exercise price of $0.50 per share. Such options are
exercisable in whole or in part immediately and expire on June 30, 1999.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB 25.
Continued
F-14
<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, 1997
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
Currently, there is no significant market for trading of the Company's common
stock. The Board of Directors has generally used the pricing of cash stock sales
at or near the date of the transaction or the value of the consideration
received, whichever is more readily determinable, to estimate the fair value of
its common stock issued for non-cash transactions. As of June 30, 1997, the
Board of Directors has assigned an estimated fair market value for the Company's
common stock of $0.50 per share.
During the year ended June 30, 1997 and in accordance with SFAS 123, the Company
recorded non-cash compensation expense totaling $11,970 related to 200,000 stock
options granted to Parke. During the year ended June 30, 1997 and in accordance
with APB 25, no non-cash compensation expense has been reflected in the
accompanying financial statements for the 400,000 stock options granted to the
officers and directors (as discussed above).
Pro forma information regarding net income is required by SFAS 123, and has been
determined as if the Company had accounted for its 400,000 employee stock
options issued in 1997 under the fair value method pursuant to SFAS 123, rather
than the method pursuant to APB 25 as discussed herein. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions: stock price of $0.50 per share; risk-free
interest rates ranging from 5.8% to 6.0% (depending on expected term of option);
dividend yields of 0.0%; volatility factors of the expected market price of the
Company' s common stock of 0.0% (due to no significant market for trading of the
Company's common stock, volatility has been assessed at 0.0%; the result of
excluding volatility in estimating an option's value is an amount commonly
termed minimum value); and expected terms ranging from one to two years.
The Black-Scholes valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Continued
F-15
<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, 1997
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:
PRO FORMA NET INCOME:
<TABLE>
<S> <C>
Net income, as reported $312,310
Additional compensation expense under SFAS 123 (21,600)
--------
Pro forma net income $290,710
========
Pro forma net income per share $ 0.09
========
</TABLE>
Limitations on Dividends
Pursuant to various state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its stockholders
as a result of an accumulated deficit as of June 30, 1997.
NOTE 6 - INCOME TAXES
- ---------------------
For the years ended June 30, 1997 and 1996, the provision for income taxes
consists of the following:
<TABLE>
<CAPTION>
Federal State Total
------- ------ -----
<S> <C> <C> <C>
Current $ -- $ 800 $ 800
Deferred -- -- --
------- ------ -----
$ -- $ 800 $ 800
======= ====== =====
</TABLE>
Continued
F-16
<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, 1997
NOTE 6 - INCOME TAXES, CONTINUED
- --------------------------------
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 (loss) for the years ended June 30, 1997 and 1996, as a result of:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $ (83,261) (34)% $ (165,083) (34)%
Increase (decrease) in income tax benefit
resulting from:
Extraordinary gain (Note 12) 189,718 77 % - - %
State income tax benefit and other 82,343 (34)% (18,017) (4)%
Increase (decrease) in valuation allowance (188,000) (77)% 183,900 38 %
--------- ---- ----------- ----
$ 800 - % $ 800 - %
========= ==== =========== ====
</TABLE>
As of June 30, 1997 the Company has Federal and state net operating losses
("NOLs") totaling $3,382,000 and $674,000, respectively, to be offset against
future taxable income. The Federal and state NOLs expire at various date through
the year 2010 and 2001, respectively. The Federal and state tax codes provide
for restrictive limitations on the annual utilization of net operating loss
carryforwards to offset taxable income when the stock ownership of a company
significantly changes, as defined. In light of the Company's significant stock
activity (see Notes 5,7,9 and 10), certain of the net operating loss
carryforwards may currently, or in the foreseeable future, be subject to such
annual limitations.
Significant components of the Company's net deferred tax assets as of June 30,
1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $1,194,000
Allowance on receivables 4,200
Inventory reserve 30,000
Nonqualified stock options 5,200
Other 2,600
----------
1,236,000
Valuation allowance (1,236,000)
----------
$ --
==========
</TABLE>
Continued
F-17
<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, 1997
NOTE 6 - INCOME TAXES, CONTINUED
- --------------------------------
During the years ended June 30, 1997 and 1996, the valuation allowance increased
(decreased) $(188,000) and $183,900, respectively.
NOTE 7 - RELATED PARTIES 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 note was
collateralized by certain inventory and accounts receivable and was subordinate
to a line-of-credit (which was paid off during fiscal 1997). As additional
consideration, the Company issued 20,000 common stock purchase warrants to this
related party, each with an exercise price of $0.50 per share. Such common stock
purchase warrants expire the earlier of 5 years or 6 months after the
termination of the note agreement. During the year ended June 30, 1997, the
effective interest rate on the note payable was 12%. During the years ended June
30, 1997 and 1996, interest expense totaled $2,300 and $32,980, respectively. In
September 1996, all unpaid principal and accrued interest was restructured
pursuant to the Workout Agreement (see Note 9). As part of this restructuring,
all common stock purchase warrants related to this note have expired (see Note
5).
As of June 30, 1996, the Company had borrowed an aggregate of $218,500 and
$35,759, respectively, from two former officers, both of which are current
stockholders of the Company. All notes were due on demand and bore interest at
rates ranging from 8% to 12% per annum. In September 1996, all unpaid principal
and accrued interest was restructured pursuant to the Workout Agreement (see
Note 9).
Service Contract
The Company had a service contract (the "Service Agreement") 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. As of June
30, 1996, the balance due pursuant to the Service Agreement totaled $175,500.
The unpaid balance accrued interest at 8% per annum. During the years ended June
30, 1997 and 1996, interest expense incurred pursuant to the Service Agreement
totaled $3,800 and $13,000, respectively. In September 1996, all unpaid
principal and accrued interest was restructured pursuant to the Workout
Agreement (see Note 9).
Transactions with Parke
During the year ended June 30, 1997, the Company sold $153,000 (or 29.6% of
total sales) to Parke, of which $47,500 remained in Parke's ending inventory at
year end. As of June 30, 1997, amounts due from Parke included in accounts
receivable totaled $45,400 (or 66.5% of total accounts receivable).
Continued
F-18
<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, 1997
NOTE 7 - RELATED PARTIES TRANSACTIONS, CONTINUED
- ------------------------------------------------
During the year ended June 30, 1997, the Company entered into two administrative
services agreements with Parke. The first agreement lasted four months and
expired on December 31, 1996. Pursuant to this agreement, the Company received
certain general administrative services from Parke for common stock valued at
$20,000 (see Note 5). The second agreement, effective January 1, 1997, expires
on December 31, 1997. In conjunction with the second agreement, Parke is to
provide the Company with certain general administrative services valued at
$5,000 per month totaling $60,000 over the term of this agreement. In March
1997, the Company issued 80,000 shares of the Company's common stock valued at
$0.50 per share as consideration for services to be rendered through the
remainder of this agreement, of which $25,000 represents services not yet
rendered as of year end (see Note 5). During the year ended June 30, 1997, the
Company has incurred $50,000 of certain general and administrative expenses
pursuant to these administrative service agreements.
The Company also shares employees and other general administrative services with
Parke. During the year ended June 30, 1997, the Company incurred approximately
$150,500 in payroll and other general administrative expenses (exclusive of the
two service agreements mentioned above), of which $9,000 remains unpaid as of
year end.
See Notes 5, 9 and 10 for additional discussion of related party transactions.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Operating Lease
The Company has an operating lease for the use of certain equipment at $1,500
per quarter. During the year ended June 30, 1997, the Company stopped paying
this lease and is, therefore, in default. As of June 30, 1997, the lessor had
demanded $10,484 to satisfy the breach of this lease. Accordingly, such amount
has been included in other accrued expenses in the accompanying balance sheet.
Capital Lease
The Company is a lessee of certain equipment under a capital lease which expires
in September 1998. The capital lease is payable in monthly installments of $685
and bears interest at an effective rate of 18.8% per annum. As of June 30, 1997,
the Company has accrued $14,978 in the accompanying balance sheet with respect
to this lease.
Continued
F-19
<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, 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES, CONTINUED
- -------------------------------------------------
Royalty Agreement
In April 1990, the Company entered into a license agreement (the "License
Agreement") with an individual (the "Licensor") to manufacture and distribute of
one of the Company's product lines. Pursuant to the License Agreement, the
Company will pay a $0.25 royalty fee for each unit sold. The License Agreement
continues over the remaining life of any existing or future patents developed by
the Licensor. During the years ended June 30, 1997 and 1996, the Company
incurred $3,600 and $3,000, respectively, of which $200 remains unpaid as of
year end.
Other Commitments
See also Note 9 for discussion of employment agreements.
NOTE 9 - WORKOUT AGREEMENT
- --------------------------
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 the Company's
common stock.
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 Parke (see Note 7). The
Company's new chief executive officer was given a salary of $12,000 per year and
options to purchase 300,000 shares (see Note 5) of common stock exercisable at
$0.50 per share. The Company's new president was given a salary of $48,000 per
year and options to purchase 100,000 shares (see Note 5) of common stock
exercisable at $0.50 per share. In addition, the Company granted options to
purchase 200,000 shares (see Note 5) of common stock exercisable at $0.50 per
share to Parke, which is also controlled by the Company's 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 7) and increased to $652,179 due to
additional borrowings and accrued interest through September 10, 1996. A gain
totaling $93,679 resulted from this agreement, which was deferred in accordance
with Statement of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructuring." Subsequently as a result of the
debt for equity swap agreements (see Notes 10 and 12), such gain was recognized.
Continued
F-20
<PAGE> 43
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, 1997
NOTE 9 - WORKOUT AGREEMENT, CONTINUED
- -------------------------------------
The restructured notes payable to related parties totaling $558,500 (the
"Notes") accrued interest at 8% per annum and became 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 was obtained, 25% of all
subsequent net income was to be used for repayment of the Notes. The Notes were
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 were secured, subject to the security interest of any new senior
secured debt, by all of the assets of the Company. In addition, the Notes became
due and payable immediately from the proceeds, if any, from a secondary offering
of securities, that would net the Company more than $1,500,000, if the Company
issued more than 3,000,001 shares of its common stock in a single transaction.
Effective January 27, 1997, all such notes and the corresponding accrued
interest totaling $558,500 and $15,056, respectively, were canceled in
accordance with the debt for equity swap agreement (see Note 10).
The Workout Agreement provided for the issuance of 600,000 shares of common
stock of the Company to Parke and/or its affiliates at $0.10 per share on
September 11, 1996. The purchase price consisted of $40,000 in cash and $20,000
for future administrative support at the rate of $5,000 per month from Parke
(see Note 7).
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 were 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.
During the year ended June 30, 1997, the Company incurred approximately $4,200
of interest expense pursuant to these notes. As of June 30, 1997, all such notes
and related accrued interest have been repaid.
On September 19, 1996, the Company issued 140,000 shares of the Company's common
stock at $0.20 per share for the payment of legal services rendered in
connection with the Workout Agreement. The value of such shares totals $28,000,
all of which has been expensed during the year ended June 30, 1997.
NOTE 10 - DEBT FOR EQUITY SWAP AGREEMENTS
- -----------------------------------------
Effective January 31, 1997, the Company entered into four debt for equity swap
agreements (the "DESAS") with previous officers and directors of the Company.
Pursuant to the DESAS, the Company issued 382,273 shares of the Company's common
stock valued at $191,187 in exchange for all of the then outstanding Notes and
accrued interest (see Note 9) totaling $573,556. The resulting gain totaling
$382,369 has been reflected in the accompanying statement of operations as an
extraordinary item (see Note 12).
Continued
F-21
<PAGE> 44
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, 1997
NOTE 11 - CANCELLATION OF INDEBTEDNESS
- --------------------------------------
During the year ended June 30, 1997, the Company's management negotiated with
most of the Company's vendors in an effort to reduce amounts owed on delinquent
debts. As a result of management negotiations, the Company recognized $81,946 in
cancellation of indebtedness income (the difference in the amount payable prior
to negotiation and post negotiation). Such amount has been reflected as an
extraordinary item in the accompanying statement of operations (see Note 12).
NOTE 12 - EXTRAORDINARY GAIN ON RETIREMENTS OF DEBT
- ---------------------------------------------------
During the year ended June 30, 1997, the Company recognized an extraordinary
gain on various retirements of debt. Such extraordinary gain consists of the
following:
<TABLE>
<S> <C>
Recognition of workout agreement deferred gain (see Note 9) resulting
from debt for equity swap (see Note 10) $ 93,679
Recognition of gain from debt for equity swap (see Note 10) 382,369
Recognition of gain from cancellation of indebtedness (see Note 11) 81,946
---------
$ 557,994
=========
</TABLE>
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
- ------------------------------------
During the fourth quarter of the year ended June 30, 1996, the Company recorded
a provision for loss on slow moving and obsolete inventories totaling $72,485.
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FISCAL YEAR ENDED JUNE 30, 1997 AUDITED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 35,300
<SECURITIES> 0
<RECEIVABLES> 77,981
<ALLOWANCES> (9,658)
<INVENTORY> 96,720
<CURRENT-ASSETS> 200,343
<PP&E> 18,274
<DEPRECIATION> (13,397)
<TOTAL-ASSETS> 205,220
<CURRENT-LIABILITIES> 103,409
<BONDS> 0
0
0
<COMMON> 3,516,607
<OTHER-SE> (3,414,796)
<TOTAL-LIABILITY-AND-EQUITY> 205,220
<SALES> 517,683
<TOTAL-REVENUES> 517,683
<CGS> 344,790
<TOTAL-COSTS> 704,576
<OTHER-EXPENSES> 22,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,739
<INCOME-PRETAX> (244,884)
<INCOME-TAX> 800
<INCOME-CONTINUING> (245,684)
<DISCONTINUED> 0
<EXTRAORDINARY> 557,994
<CHANGES> 0
<NET-INCOME> 312,310
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
