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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, 1998 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: $ 422,224
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): $336,908
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. At September 10, 1998, the registrant
had 5,586,163 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............... 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................................... 7
ITEM 7. FINANCIAL STATEMENTS................................................... 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................. 11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...................... 11
ITEM 10. EXECUTIVE COMPENSATION................................................. 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................... 16
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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. became an 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.
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.
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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, 1998, 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.
3. New Products.
The Company has continued efforts to expand the product lines. For the fiscal
year 1998, 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.
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, 1998, the Company purchased 11.8% 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).
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6. Dependence on One or a Few Major Customers.
During the year ended June 30, 1998 the Company sold $84,717 (or 20.1% of total
sales) to Parke Industries (Parke) an 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, 1998, sales to two
nonaffiliated customers totaled $101,984 or 24.2% of net sales. During the year
ended June 30, 1997, the Company sold $153,000 (or 29.6% of total sales) to
Parke. Also the Company received a significant portion of its business (11.0%),
from one nonaffiliated customer.
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, 1998 and 1997. Management does not
intend to significantly increase efforts in market research and development.
11. Environmental Compliance.
The Company does not anticipate that material capital expenditures will be
required for environmental compliance or to comply with OSHA standards.
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12. Employees.
As of September 10, 1998 the Company leased three full-time employees from
Parke. In addition, during the fiscal year ended June 30, 1998, the Company
leased up to 5 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. In
September 1996, Parke Industries 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, 1998 at $2,500 per month, plus
certain operating expenses. The lease is with Parke Industries, Inc. an
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. However, a Special Meeting of the Shareholders was held on August
15, 1998 which resulted in the passing of two resolutions. First, the
shareholders approved the sale of the Company's downlight business which
constitutes substantially all of the Company's assets and operations. Secondly,
the shareholders approved a reverse split of up to one for every ten shares of
outstanding common stock. The second resolution was approved in conjunction with
the Company's management negotiations with non-affiliated companies regarding a
potential reverse merger acquisition (see Note 13 of the Company's financial
statements). However, there are no assurances that the Company will achieve
such acquisistion plans.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
The Company's common stock trades on the NASDAQ OTC Bulletin Board. The 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, Paragon
Capital Corporation, Wein Securities and Sharp Securities.
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Holders.
As of June 30, 1998, there were approximately 760 holders of record of the
Company's common stock. The transfer agent for the Company is American Stock
Transfer and Trust of New York, New York.
Dividends.
The Company has never paid any cash dividends and intends during the foreseeable
future to retain any earnings to finance the growth of its business. Future
dividend policy will be determined by the Company's Board of Directors based
upon such considerations as the Company's earnings and financial condition,
business conditions, and other factors as the Board of Directors may deem
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
As mentioned above in Item 4, SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS, a Special Meeting of the Shareholders was held on August 15,
1998 which resulted in the passing of two resolutions. First, the shareholders
approved the sale of the Company's downlight business which constitutes
substantially all of the Company's assets and operations. Secondly, the
shareholders approved a reverse split of up to one for every ten shares of
outstanding common stock. The second resolution was approved in conjunction with
the Company's management negotiations with non-affiliated companies regarding a
potential reverse merger acquisition (see Note 13 of the Company's financial
statements). Therefore, management anticipates the sale of substantially all
assets of the Company during the fiscal year ending June 30, 1999. Further, in
conjunction with this sale, management anticipates a significant reduction in
the number of its employees. The Company will most likely consist of the Board
of Directors and a part-time administrative staff. This management group will
carry out the duty of facilitating the reverse merger mentioned above (FLS).
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The Company recorded a net loss of $167,574 for the fiscal year ended June 30,
1998, a decrease of $479,884 from the net gain for the prior fiscal year ended
June 30, 1997 of $312,310. The Company decreased its working capital surplus
from $96,934 in fiscal year 1997 to a working capital deficit of $37,792 in
fiscal year 1998, a decrease of $134,726.
The Company's operations for the twelve-month period ended June 30, 1998
resulted in negative cash flows from operations of $20,933. Cash flows used in
operations decreased in fiscal year 1998 over fiscal year 1997 to $20,933 from
$294,219, a decrease of $273,286.
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
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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).
Inventories decreased from $96,720 at June 30, 1997 to $80,623 at June 30,
1998, a decrease of $16,097.
Accounts receivable, net of doubtful accounts, decreased from $68,323 at June
30, 1997 to $52,755 at June 30, 1998, a decrease of $15,568. Management
considers the decrease in accounts receivable to be a result of the decrease in
fourth quarter sales compared to the corresponding period of the prior fiscal
year.
During the year ended June 30, 1998, the Company's accounts payable increased
$13,227, from $27,018 at June 30, 1997 to $40,245 at June 30, 1997. Management
has been successful in establishing normal credit terms with vendors. At June
30, 1998 the accounts payable are within these terms. Therefore, the increase
from the prior fiscal year is attributable to the increase in credit from
vendors.
There were no material commitments for capital expenditures as of September 15,
1998.
On January 27, 1997, the related party debt and accrued interest totaling
$573,556, 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 $382,369, (see "Other
Information" below and Note 11 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 for proceeds totaling
$289,000, net of issuance costs of $10,000 (see Note 5 to the Company's
financial statements). The offering closed March 31, 1997.
During fiscal 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 8 to the Company's financial statements) and an
administrative services agreement (see Note 7 to the Company's financial
statements).
During fiscal 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 to the Company's
financial statements). 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 fiscal 1998, these services were rendered and were
accordingly amortized to expense during fiscal 1998. 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 1998 Compared to Fiscal Year 1997.
Total sales of the Company during the twelve months ended June 30, 1998 were
$422,224. Total sales decreased $95,459, or 18.4% from sales in fiscal 1997. The
sales decrease is attributable to a significant slow down in the lighting
industry. The lighting industry is experiencing a slow down created by the
uncertainty surrounding the effects of utility deregulation. Under deregulation,
utilities are contacting end users to discuss all aspects of an end users energy
policy. This includes direct energy cost, power quality, energy conservation
measures such as lighting, and HVAC. These discussions have created confusion in
the marketplace and end users are putting projects on hold while analyzing all
their options.
During the fiscal year ended June 30, 1998, gross profit from operations
decreased from $172,893 to $80,648, a decrease of $92,245, or 53.4%. Management
attributes this decrease to the decrease in sales mentioned above. Selling,
general and administrative expenses for the twelve months ended June 30, 1998
decreased $97,386, from $359,786 in fiscal 1997 to $262,400 in fiscal 1998.
Management attributes this improvements to management's ability to implement
more efficient systems including manufacturing, inventory control and
administration, throughout the Company in fiscal 1998.
The Company recognized a net loss of $167,574 (or $.04 per share) for the fiscal
year ended June 30, 1998, as compared to a net gain of $312,310, or $.10 per
share for the fiscal year ended June 30, 1997. Management generally attributes
this difference to the Company's reduced sales in fiscal 1998 and the
recognition of an extraordinary gain totaling $557,994 in fiscal 1997, (see Note
11 to the Company's financial statements).
Other Information.
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.
As mentioned above in Item 4, SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS, a Special Meeting of the Shareholders was held on August 15,
1998 which resulted in the passing of two resolutions. First, the shareholders
approved the sale of the Company's downlight business which constitutes
substantially all of the Company's assets and operations. Secondly, the
shareholders approved a reverse split of up to one for every ten shares of
outstanding common stock. The second resolution was approved in conjunction with
the Company's management negotiations with non-affiliated companies regarding a
potential reverse merger acquisition (see Note 13 of the Company's financial
statements). Therefore, management anticipates the sale of substantially all
assets of the Company during the fiscal year ending June 30, 1999. Further, in
conjunction with this sale, management anticipates a significant reduction in
the number of its employees. The Company will most likely consist of the Board
of Directors and a part-time administrative staff. This management group will
carry out the duty of facilitating the reverse merger mentioned above (FLS).
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,
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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. 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.
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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 fiscal 1998 and 1997, the Company's management negotiated with most of
the Company's vendors in an effort to reduce amounts owed on delinquent debts,
and as a result, the Company recognized $14,978 and $81,946, respectively, in
cancellation of indebtedness income (the difference in the amount payable prior
to negotiation and post negotiation). Such amounts have been reflected as
extraordinary items in the accompanying statement of operations.
During fiscal 1998 and 1997, the Company recognized extraordinary gains on
various retirements of debt. Such extraordinary gains consist of the following:
1997 1998
------- -------
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 14,978 81,946
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Total $14,978 $557,994
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ITEM 7. FINANCIAL STATEMENTS.
The Company's audited balance sheet as of June 30, 1998 and audited statements
of income, cash flows and changes in stockholders equity (deficit) for each of
the years in the two-year period ended June 30,1998 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.
Oliver K. Washburn (Director,Treasurer), 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.
Daniel W. Parke, (Director, Chief Executive Officer), 43, previous 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 10, 1998, Parke Industries 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), 44, the CFO of Parke Industries since
1993. Prior to joining Parke Industries, 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), 56, the Secretary of Parke Industries, Inc. since
1992. Mrs. Miller also acts as director of Human Resources for Parke Industries.
Her duties also include compliance with multi-state lien laws, bonding,
insurance, and licenses.
Richard O. Weed (Director), 36, is Special Project Counsel with Archer & Weed in
Newport Beach, California. Archer & Weed provides advice on capital formation,
business strategy and legal matters on a special project basis. Mr. Weed is
known for using analytical firepower, creative problem solving and resourceful
implementation to assist clients. Mr. Weed's abilities are the result of his
association with prominent law firms in California and Texas and graduate
business education. Mr. Weed received a Master of Business Administration -
International Management in 1992 from the University of Southern California,
Juris Doctor in 1987 from St. Mary's University School of Law, and Bachelor of
Business Administration - International Business in 1984 from The University of
Texas at Austin. Mr. Weed is a member of the State Bar of California and State
Bar of Texas.
John Tastad (Director), 31, former President and Owner of Energy Solutions
Incorporated (ESI), a St. Paul based energy services company with offices
nationwide. Mr. Tastad sold ESI to Northern States Power Company in 1997.
Currently, Mr. Tastad serves as President of Pulse Products, Inc., a major
manufacturers representative firm, and Funcepts, a start-up indoor family
entertainment business. Mr. Tastad holds a Bachelor of Business (Marketing) from
Bethel College.
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 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. 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.
12
<PAGE> 13
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, 1998 to that
person who, as of the applicable year ended, was the Company's Chief Executive
Officer or President. There were no officers or Directors of the Company who
received more than $100,000 of total compensation.
Table 1 Summary Compensation Table.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
- ------------- -------------------------------------------------------------------------------------
Awards Payouts
- ------------- -------------------------------------------------------------------------------------
Other Securities
Name and Annual Restricted Underlying All Other
Princial Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
($) ($) (e) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Malcolm L. Fickel 1998 N/A
(Former CEO) 1997 12,648
1996 82,400 400
- ------------- -------------------------------------------------------------------------------------
Daniel W. Parke 1998 12,000
(Former CEO) 1997 9,000
1996 N/A
- ------------- -------------------------------------------------------------------------------------
Jonathan D. Forgy 1998 48,000
(President) 1997 30,000
1996 N/A
- ------------- -------------------------------------------------------------------------------------
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARS Employees in Base Price Expiration
Name(a) Granted(#)(b) Fiscal Year(c) ($/Sh)(d) Date(e)
- ------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
CEO Daniel W. Parke 300,000 75% $0.20 9/30/05
President Jonathan D. Forgy 100,000 25% $0.20 9/30/05
</TABLE>
There were no Options/SARs exercised in the last fiscal year and there are no
Options/SARs outstanding with regard to Named Executive Officers who are
required to be included in this table.
There were no long-term incentive plan awards made by the Company in the last
fiscal year.
Compensation of Directors.
No Director receives compensation for services on the Board or for Board
meetings attended.
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.
the Company renewed the Employment Agreement for fiscal 1998. On March 25, 1997,
the Company entered into an Employment Agreement with Jonathan D. Forgy to serve
as the Company's President until June 30, 1997. The Company renewed the
Employment Agreement for fiscal 1998.
13
<PAGE> 14
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.
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, 1998 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, 1998 the Company had
4,823,423 shares of its common stock issued or issuable and outstanding.
<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)
Strategic Resource Solutions 660,000(2) 13.68
5625 Dillard Drive
Cary, NC
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
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Beneficial Ownership of Class
- --------------------------------------------------------------------------------
<S> <C> <C>
MANAGEMENT
Daniel W. Parke 420,000(3) 8.71
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
Richard O. Weed 185,000 3.84
4695 MacArthur Ct., Suite 530
Newport Beach, Ca 92660
John Tastad 40,000 .83
C/O Parke Industries
2246 Lindsay Way
Glendora, Ca 91740
ALL OFFICERS AND DIRECTORS 1,378,776 28.59
AS A GROUP - 5
- --------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Regulation 13d-3(d)(1), promulgated under the Securities
Exchange Act of 1934, a person is deemed to be the beneficial owner of a
security if he has right to acquire ownership of such security within 60
days upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person, and which are exercisable within 60 days,
will be exercised.
(2) Includes 200,000 shares issuable to Strategic Resource Solutions upon
exercise of options at $0.50 per share.
(3) Includes 300,000 shares issuable to Daniel W. Parke upon exercise of
options at $0.20 per share.
(4) Includes 100,000 shares issuable to Jonathan D. Forgy upon exercise of
options at $0.20 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 Notes 7 and 8 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 Note 7 to the
Company's financial statements).
15
<PAGE> 16
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, 1998.
Statements of Operations for the Years Ended June 30, 1998 and 1997.
Statements of Stockholders' Equity (Deficit) for the Years Ended
June 30, 1998 and 1997.
Statements of Cash Flows for the Years Ended June 30, 1998 and 1997.
Notes to Financial Statements.
(2) Financial Data Schedule.
(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.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation as in effect on the date hereof (including
Amendment thereto effective December 28, 1988).
3.3 Bylaws.
4.1 Specimen of 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.
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.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.40 Stock Purchase Agreement Between the Company and Oliver K. Washburn,
April 30, 1993.
10.41 Stock Purchase Agreement Between the Company and Peter C. Kreft, April
30, 1993.
10.42 Stock Purchase Agreement Between the Company and Thomas C. Moceri, April
30, 1993.
10.43 Financing Agreement Between the Company and Pre-Banc Business Credit,
Inc., May 21, 1993.
10.44 Addendum to Consulting Agreement between the Company and Malcolm L.
Fickel, June 30, 1993.
10.45 Leasing Agreement Between the Company and Autocar Leasing Company,
September 9, 1993.
10.46 Stock Warrant Agreement Between the Company and Eddie R. Fischer,
September 9, 1993.
10.47 Note and Revolving Loan Agreement Between the Company and William T.
Moceri, IRA, November 15, 1994.
10.48 Promissory Note Payable to Thomas C. Moceri, Trustee, Thomas C. Moceri
Profit Sharing Plan, September 28, 1994.
10.49 Promissory Note Payable to Oliver Washburn, March 7, 1995.
10.50 Promissory Note Payable to Oliver Washburn, March 7, 1995.
10.51 General Release Agreement Between the Company and Peter Kreft, June 9,
1995.
10.52 Promissory Note Payable to Oliver Washburn, September 14, 1995.
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.
27.1 Financial Data Schedule.
28.2 Patent No. 4,520,436 (X-18 Series Downlight).
28.4 Patent No. 4,595,969 (Lamp Mounting Apparatus and Method).
28.5 Patent No. 4,641,228 (Lamp Mounting Apparatus and Method).
28.6 Patent No. 4,700,110 (Lamp Switching).
28.7 Patent No. 4,704,664 (Lamp Apparatus).
28.8 Trademarks Registered (Lightning Bolt Logo, Scientific NRG Component
Systems, SCS, X-18) and Notice of Publication of Trademark, "Switchit".
28.9 Patent No. 4,922,393 (Lamp Apparatus).
</TABLE>
(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, 1998.
17
<PAGE> 18
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: September 25, 1998
SCIENTIFIC NRG, INCORPORATED,
a Minnesota Corporation
By: /s/ Jonathan D. Forgy
--------------------------
Name: Jonathan D. Forgy
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Jonathan D. Forgy (1)(2) September 25, 1998
- --------------------------
Jonathan D. Forgy
/s/ Oliver K. Washburn (1)(3) September 25, 1998
- ----------------------------
Oliver K. Washburn
/s/ Richard O. Weed (1) September 25, 1998
- -------------------------
Richard O. Weed
</TABLE>
- ----------------
(1) Director of the registrant.
(2) President of the registrant.
(3) Treasurer of the registrant.
18
<PAGE> 19
SCIENTIFIC NRG, INC.
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
WITH
INDEPENDENT AUDITORS' REPORT THEREON
<PAGE> 20
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<S> <C>
Independent Auditors' Report...........................................................F-2
Financial Statements:
Balance Sheet as of June 30,
1998...........................................................................F-3
Statements of Operations for each of the years in the two-year period
ended June 30, 1998............................................................F-4
Statements of Stockholders' Equity (Deficit) for each of the years in
the two-year period ended June 30, 1998........................................F-5
Statements of Cash Flows for each of the years in the two-year period
ended June 30, 1998....................................................F-6 and F-7
Notes to Financial
Statements............................................................F-8 and F-22
</TABLE>
F-1
<PAGE> 21
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, 1998, 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 the Company as of June 30,
1998, 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 minimal sales and has incurred losses
from operations in the two-year period ended June 30, 1998. 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 3, 1998, except for Notes 1
and 13, as to which the date is
August 15, 1998
F-2
<PAGE> 22
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 14,367
Accounts receivable, net of allowance
for doubtful accounts of $9,658 52,755
Inventories 80,623
Prepaid expenses 1,708
--------------
Total current assets 149,453
Property and equipment, net 2,129
--------------
$ 151,582
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 40,245
Accrued compensation 45,000
Other accrued expenses 102,000
--------------
Total current liabilities 187,245
--------------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value; 40,000,000 shares authorized;
4,203,423 shares issued and outstanding 3,546,707
Additional paid-in capital 11,970
Accumulated deficit (3,594,340)
--------------
Total stockholders' deficit (35,663)
--------------
$ 151,582
==============
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-3
<PAGE> 23
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net sales $ 422,224 $ 517,683
Cost of sales 341,576 344,790
------------- --------------
Gross profit 80,648 172,893
Selling, general and administrative expenses 262,400 359,786
------------- --------------
Loss from operations (181,752) (186,893)
------------- --------------
Other income (expense)
Loss on retirement of fixed assets - (22,252)
Interest expense - (35,739)
------------- --------------
- (57,991)
------------- --------------
Loss from continuing operations before provision
for taxes and extraordinary gain (181,752) (244,884)
Provision for taxes 800 800
------------ -------------
Loss from continuing operations before
extraordinary gain (182,552) (245,684)
Extraordinary gain, net of income
taxes of none 14,978 557,994
------------- --------------
Net income (loss) $ (167,574) $ 312,310
============= ==============
Net income (loss) per common share
Loss from continuing operations $ (0.04) $ (0.07)
Extraordinary gain 0.00 0.17
------------- --------------
$ (0.04) $ 0.10
============= ==============
Weighted average number of shares outstanding 4,203,423 3,222,305
============= ==============
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-4
<PAGE> 24
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, 1998
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Accumulated Stockholders'
Shares Amount Paid-in Capital Deficit Equity (Deficit)
--------- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
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 600,000 60,000 - - 60,000
Common stock issued to related parties for cash 156,000 39,000 - - 39,000
Common stock issued in connection with services
rendered by related parties 301,000 96,500 - - 96,500
Common stock issued in connection with services
not yet rendered by related parties - (30,100) - - (30,100)
Common stock issued in connection with debt for
equity swap agreements 382,373 191,187 - - 191,187
Common stock issued in connection with a
private placement offering, net of offering costs
totaling $10,000 598,000 289,000 - - 289,000
Fair value of options granted - - 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
Services rendered in connection with common
stock issued to a related party in fiscal 1997 - 30,100 - - 30,100
Net loss - - - (167,574) (167,574)
--------- ---------- ------- ----------- --------
Balances, June 30, 1998 4,203,423 $3,546,707 $11,970 $(3,594,340) $(35,663)
========= ========== ======= =========== ========
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-5
<PAGE> 25
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows used in operating activities:
Net income (loss) $ (167,574) $ 312,310
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Bad debt expense 4,198 -
Depreciation 2,748 4,312
Loss on retirement of property and equipment - 22,252
Fair value of options granted - 11,970
Services rendered in connection with common
stock issued to a related party in fiscal 1997 30,100 -
Extraordinary gain (14,978) (557,994)
Changes in operating assets and liabilities:
Trade receivables 11,370 (10,341)
Inventories 16,097 (8,085)
Prepaid expenses and other (1,708) 2,364
Accounts payable, accrued compensation
and other accrued expenses 98,814 (71,007)
------------ -------------
Net cash used in operating activities (20,933) (294,219)
------------ -------------
Cash flows used in 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 provided by financing activities:
Net payments on line-of-credit - (44,220)
Borrowings on notes payable to related parties - 70,000
Principal payments on notes payable to related parties - (63,900)
Principal payments on capital lease obligations - (170)
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
------------ -------------
</TABLE>
See independent auditors' report and
accompanying notes to financial statements
F-6
<PAGE> 26
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, 1998
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net change in cash (20,933) 35,300
Cash at beginning of year 35,300 -
------------ -------------
Cash at end of year $ 14,367 $ 35,300
============ =============
Supplemental disclosure of cash flow information -
Cash paid during year for:
Interest $ - $ 5,827
============ =============
Income taxes $ 800 $ 800
============ =============
</TABLE>
Supplemental disclosure of non-cash investing and financing activities -
See Notes to financial statements for certain non-cash transactions entered
into in fiscal 1998 and fiscal 1997.
See independent auditors' report and
accompanying notes to financial statements
F-7
<PAGE> 27
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
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 8, 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 fiscal 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, 1998, the Company has had minimal sales. During fiscal 1998 and 1997, the
Company has incurred losses from continuing operations before extraordinary
gains of $182,552 and $245,684 and has used net cash in operating activities of
$20,933 and $294,219, respectively. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Subsequent to fiscal 1998 (August 15, 1998), the Company's stockholders approved
the sale of the Company's downlight business, which constitutes substantially
all of the Company's assets. Additionally, the Company's management is in
negotiations with a non-affiliated company regarding a potential reverse merger
acquisition (see Note 13). 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.
F-8
<PAGE> 28
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
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 technological changes can have an
adverse effect on product lives. The Company's sales activity has not allowed
for either the development of new products or significant marketing activities.
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. Although the Company expects to collect amounts due, actual
collections may differ.
During fiscal 1998, the Company received a significant portion of its business
from Parke (see Note 7) and two nonaffiliated customers. During fiscal 1998,
sales to the nonaffiliated customers totaled 12.9% and 11.3% of net sales,
respectively. As of June 30, 1998, amounts due from these nonaffiliated
customers totaled 1.1% and 39.8% of accounts receivable, respectively. During
fiscal 1997, the Company received a significant portion of its business from
Parke and one nonaffiliated customer. During fiscal 1997, sales to one
nonaffiliated customer totaled 11.0% of net sales. If the relationship between
the Company and Parke was altered, the future results of operations and
financial condition could be adversely impacted.
During fiscal 1998 and 1997, the Company purchased a substantial portion of its
raw materials from one nonaffiliated supplier. During fiscal 1998 and 1997,
purchases from this supplier totaled 11.8% and 18.9% of total purchases,
respectively. As of June 30, 1998, amounts due to this supplier totaled 6.4% of
total accounts payable. 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.
F-9
<PAGE> 29
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
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,
1998.
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, 1998, 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.
F-10
<PAGE> 30
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
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 included 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.
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.
Stock Based Compensation
- ------------------------
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.
F-11
<PAGE> 31
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED
- ----------------------------------------------------------------
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.
On August 15, 1998 (see Note 13), the Company's stockholders approved a reverse
stock split of up to one for every ten shares of outstanding common stock. To
date, the specific reverse split has yet to be determined. As a result, the
share and option information disclosed in the accompanying financial statements
does not reflect the effect of such reverse split.
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 fiscal 1998 and 1997 as their
effect would be antidilutive.
In fiscal 1998, the Company adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards 128 ("SFAS 128"), "Earnings per
Share," which was effective for financial statements issued for periods ending
after December 15, 1997. Management determined that the adoption of SFAS 128 did
not effect net income (loss) per common share as previously disclosed for fiscal
1997.
Reclassifications
- -----------------
Certain amounts in the accompanying 1998 financial statements have been
reclassified to conform to the 1997 presentation.
F-12
<PAGE> 32
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 2 - INVENTORIES
- --------------------
Inventories are comprised of the following as of June 30, 1998:
<TABLE>
<S> <C>
Raw materials $ 72,094
Finished goods 8,529
-------------
$ 80,623
==============
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following as of June 30, 1998:
<TABLE>
<S> <C>
Furniture and fixtures $ 6,751
Machinery and equipment 11,523
-------------
18,274
Accumulated depreciation (16,145)
-------------
$ 2,129
==============
</TABLE>
During fiscal 1998 and 1997, depreciation expense totaled $2,748 and $4,312,
respectively.
NOTE 4 - LINE-OF-CREDIT
- -----------------------
The Company had a line-of-credit with a finance company which was paid in full
and terminated in fiscal 1997. 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 fiscal 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 8) and an administrative service agreement (see Note 7).
F-13
<PAGE> 33
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
During fiscal 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 fiscal 1998,
these services were rendered and were accordingly amortized to expense during
fiscal 1998.
During fiscal 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 9).
During fiscal 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.
Common Stock Purchase Warrants and Options
- ------------------------------------------
The following is an activity schedule of common stock purchase warrants and
options during fiscal 1997 and 1998:
<TABLE>
<CAPTION>
Options/Warrants
Options/Warrants Price
----------------- ------------------
<S> <C> <C> <C>
Outstanding & Exercisable, June 30, 1996 40,000 $0.50
Granted 600,000 $0.20 - $0.50
Expired (Note 7) (20,000) $0.50
-----------
Outstanding & Exercisable, June 30, 1997 620,000 $0.20 - $0.50
Granted -
Expired -
-----------
Outstanding & Exercisable, June 30, 1998 620,000 $0.20 - $0.50
===========
</TABLE>
F-14
<PAGE> 34
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
During fiscal 1997, the Company issued 200,000 nonqualified stock options to
Parke in conjunction with the Workout Agreement (see Note 8). 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 fiscal 1997, the Company entered into employment agreements with two of
the Company's officers and directors (see Note 8). Pursuant to these employment
agreements, the Company issued 400,000 nonqualified stock options at an exercise
price of $0.50 per share. On June 25, 1998, the Company entered into two new
employment agreements with these same officers and directors. Pursuant to these
new employment agreements, the Company reduced the exercise price of the 400,000
nonqualified stock options (see above) to $0.20 per share, which exceeded the
fair market value of the Company's stock on such date. The activity schedule
above has been adjusted to reflect this change. Such options are exercisable in
whole or in part immediately and expire in September 2001.
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, 1998, the
Board of Directors has assigned an estimated fair market value for the Company's
common stock of $0.10 per share.
During fiscal 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 fiscal 1998 and 1997, 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
outlined herein.
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 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 $0.10 (1998) and $0.50 (1997) 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 factor 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 of two years.
F-15
<PAGE> 35
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 5 - STOCKHOLDERS' EQUITY, CONTINUED
- ----------------------------------------
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.
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 (LOSS):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss), as reported $ (167,574) $ 312,310
Additional compensation expense under SFAS 123 - (21,600)
--------------- --------------
Pro forma net income (loss) $ (167,574) $ 290,710
=============== ==============
Pro forma net income (loss) per share $ (0.04) $ 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, 1998.
NOTE 6 - INCOME TAXES
- ---------------------
During fiscal 1998 and 1997, 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>
F-16
<PAGE> 36
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
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 fiscal 1998 and 1997, as a result of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $ (61,796) $ (83,261)
Increase (decrease) in income tax benefit
resulting from:
Extraordinary gain (Note 11) 5,093 189,718
State income tax benefit and other (8,297) 82,343
Increase (decrease) in valuation allowance 65,800 (188,000)
--------------- --------------
$ 800 $ 800
=============== ==============
</TABLE>
As of June 30, 1998, the Company has Federal and state net operating losses
("NOLs") totaling $3,497,000 and $788,000, respectively, to be offset against
future taxable income. The Federal and state NOLs expire at various date through
the year 2013 and 2003, 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 5,7,8 and 9), 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 deferred tax assets as of June 30, 1998
are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,153,000
Inventory reserve 34,000
Accrued officer salaries 18,000
Other 8,500
-------------
1,213,500
Valuation allowance (1,213,500)
-------------
$ -
=============
</TABLE>
F-17
<PAGE> 37
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 6 - INCOME TAXES, CONTINUED
- --------------------------------
During fiscal 1998 and 1997, the valuation allowance increased (decreased)
$65,800 and $(188,000), respectively.
NOTE 7 - RELATED PARTIES TRANSACTIONS
- -------------------------------------
Notes Payable
- -------------
During fiscal 1995, 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 (see Note 4). As additional consideration, the Company
issued 20,000 common stock purchase warrants to this related party at an
exercise price of $0.50 per share. During fiscal 1997, the effective interest
rate on the note payable was 12% and interest expense totaled $2,300. In
September 1996, all unpaid principal and accrued interest was restructured
pursuant to the Workout Agreement (see Note 8). Additionally, as part of this
restructuring, all common stock purchase warrants related to this note expired.
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. During fiscal 1997, all unpaid principal
and accrued interest was restructured pursuant to the Workout Agreement (see
Note 8).
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 fiscal 1997,
interest expense incurred pursuant to the Service Agreement totaled $3,800. In
fiscal 1997, all unpaid principal and accrued interest was restructured pursuant
to the Workout Agreement (see Note 8).
F-18
<PAGE> 38
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 7 - RELATED PARTIES TRANSACTIONS, CONTINUED
- ------------------------------------------------
Transactions with Parke
- -----------------------
During fiscal 1998 and 1997, the Company sold $84,717 and $153,000 (or 20.1% and
29.6% of net sales) to Parke, respectively, of which $28,000 remained in Parke's
ending inventory at June 30, 1998.
During fiscal 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, expired on
December 31, 1997. In conjunction with the second agreement, Parke provided 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 (see Note 5). On January 15, 1998, the Company entered into another
administrative services agreement with Parke. Pursuant to this agreement,
effective January 1, 1998, Parke is to provide the Company with certain general
administrative services valued at $2,500 per month totaling $30,000 through
December 31, 1998 (expiration date of the agreement). During fiscal 1998 and
1997, the Company incurred $45,000 and $50,000, respectively, 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 fiscal 1998 and 1997, the Company incurred approximately $179,500
and $150,500, respectively, in payroll and other general administrative expenses
(exclusive of the service agreements mentioned above), of which $64,000 remains
unpaid as of June 30, 1998.
See Notes 5, 8 and 9 for additional discussion of related party transactions.
NOTE 8 - 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.
F-19
<PAGE> 39
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 8 - WORKOUT AGREEMENT, CONTINUED
- -------------------------------------
On September 11, 1996, two of the Company's Board of Directors, one of which was
the Company's chief executive officer and the other of which was the Company's
chief financial officer, resigned from their positions with the Company.
Management then entered into a one year consulting contract with the former
chief executive officer beginning September 12, 1996, that provided 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 9 and 11), 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. 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 9).
F-20
<PAGE> 40
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 8 - WORKOUT AGREEMENT, CONTINUED
- -------------------------------------
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 fiscal 1997, the Company incurred approximately $4,200 of interest
expense pursuant to these notes and all such notes and related accrued interest
were 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 was expensed during fiscal 1997.
NOTE 9 - 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 8) totaling $573,556. The resulting gain totaling
$382,369 has been reflected in the accompanying statement of operations as an
extraordinary item (see Note 11).
NOTE 10 - CANCELLATION OF INDEBTEDNESS
- --------------------------------------
During fiscal 1998 and 1997, the Company's management negotiated with most of
the Company's vendors in an effort to reduce amounts owed on delinquent debts,
and as a result, the Company recognized $14,978 and $81,946, respectively, in
cancellation of indebtedness income (the difference in the amount payable prior
to negotiation and post negotiation). Such amounts have been reflected as
extraordinary items in the accompanying statements of operations (see Note 11).
F-21
<PAGE> 41
SCIENTIFIC NRG, INCORPORATED
DBA SCIENTIFIC COMPONENT SYSTEMS
NOTES TO FINANCIAL STATEMENT - CONTINUED
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1998
NOTE 11 - EXTRAORDINARY GAIN ON RETIREMENTS OF DEBT
- ---------------------------------------------------
During fiscal 1998 and 1997, the Company recognized extraordinary gains on
various retirements of debt. Such extraordinary gains consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Recognition of workout agreement deferred
gain (see Note 8) resulting from a debt for equity
swap (see Note 9) $ - $ 93,679
Recognition of gain from a debt for equity
swap (see Note 9) - 382,369
Recognition of gain from cancellation of indebtedness
(see Note 10) 14,978 81,946
------------ -------------
$ 14,978 $ 557,994
============ =============
</TABLE>
NOTE 12 - FOURTH QUARTER ADJUSTMENTS
- ------------------------------------
During the fourth quarter of fiscal 1998, the Company recorded a provision for
loss on slow moving and obsolete inventories totaling $25,000.
NOTE 13 - SUBSEQUENT EVENTS
- ---------------------------
On August 15, 1998, the Company's stockholders approved the sale of the
Company's downlight business, which constitutes substantially all of the
Company's assets and operations.
On August 15, 1998, the Company's stockholders approved a reverse stock split of
up to one for every ten shares of outstanding common stock. To date, the
specific reverse split has yet to be determined. As a result, the share and
option information disclosed in the accompanying financial statements does not
reflect the effect of such reverse split.
Additionally, the Company's management is in negotiations with a non-affiliated
company regarding a potential reverse merger acquisition.
Subsequent to June 30, 1998 and through August 15, 1998, the Company issued an
additional 1,382,740 shares of common stock for past and future services. Such
shares were registered by management of the Company with the Securities and
Exchange Commission pursuant to Form S-8.
F-22
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation as in effect on the date hereof (including
Amendment thereto effective December 28, 1988).
3.3 Bylaws.
4.1 Specimen of 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.
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.
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.
27.1 Financial Data Schedule.
28.2 Patent No. 4,520,436 (X-18 Series Downlight).
28.4 Patent No. 4,595,969 (Lamp Mounting Apparatus and Method).
28.5 Patent No. 4,641,228 (Lamp Mounting Apparatus and Method).
28.6 Patent No. 4,700,110 (Lamp Switching).
28.7 Patent No. 4,704,664 (Lamp Apparatus).
28.8 Trademarks Registered (Lightning Bolt Logo, Scientific NRG Component
Systems, SCS, X-18) and Notice of Publication of Trademark, "Switchit".
28.9 Patent No. 4,922,393 (Lamp Apparatus).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FISCAL YEAR ENDED JUNE 30, 1998 AUDITED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 14,367
<SECURITIES> 0
<RECEIVABLES> 62,413
<ALLOWANCES> (9,658)
<INVENTORY> 80,623
<CURRENT-ASSETS> 149,453
<PP&E> 18,274
<DEPRECIATION> (16,145)
<TOTAL-ASSETS> 151,582
<CURRENT-LIABILITIES> 187,245
<BONDS> 0
0
0
<COMMON> 3,546,707
<OTHER-SE> (3,582,370)
<TOTAL-LIABILITY-AND-EQUITY> 151,582
<SALES> 422,224
<TOTAL-REVENUES> 422,224
<CGS> 341,576
<TOTAL-COSTS> 603,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (181,752)
<INCOME-TAX> 800
<INCOME-CONTINUING> (182,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 14,978
<CHANGES> 0
<NET-INCOME> (167,574)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
