<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended June 30, 1997.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended
Commission File No. 0-1921
POWER DESIGNS INC.
(Name of Small Business Issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-1708714
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
14 COMMERCE DRIVE, DANBURY, CONNECTICUT 06810
(Address of principal executive offices) (Zip Code)
</TABLE>
(203) 748-7001
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes / / No /X/
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year. $3,622,236
The aggregate market value of the voting stock held by non-affiliates of the
issuer cannot be estimated because there is no active market for the stock.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE LAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Sections 12, 13 and 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding or each of the issuer's classes of
common equity, as of the latest practicable date.
2,391,493 as of November 4, 1997
Transitional Small Business Issuer Format (check one): Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to Fiscal Year 1995 10-KSB
Exhibits to Fiscal Year 1996 10-KSB
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Power Designs, Inc., the small business issuer making this report, was
organized on July 7, 1952 under the laws of the State of New York. The issuer's
Common Stock, $.0001 par value ("Common Stock") is registered under Section
12(g) of the Securities Exchange Act of 1934, as amended. Late in fiscal year
1995, the issuer amended its certificate of incorporation to change the par
value of its common shares from $.01 per share to $.0001 per share. This change
is reflected in the audited consolidated financial statements accompanying this
Form 10-KSB. In October 1996 the issuer created a new class of Class A
Convertible Preferred Stock ("Preferred Stock") with a par value of $.01 per
share. As of this writing, this class of Preferred Stock remains restricted and
unregistered by the issuer.
Since its inception the issuer has been engaged exclusively in the design
and manufacture of electronically controlled power sources used in the operation
of electronic equipment and mechanical instruments. The power sources produced
by the issuer are connected to primary sources such as commercial power lines
and serve to correct, modify or condition the source of power where instability
and electrical noises may adversely affect the proper functioning of the end
equipment.
The issuer purchases certain raw materials, components and subassemblies
included in the issuer's products from a limited group of qualified suppliers
and does not maintain long-term supply contracts with any of its key suppliers.
The disruption or termination of these sources could have a material adverse
effect on the issuer's business and results of operations. While the issuer is
aware of alternative suppliers for these products, there can be no assurance
that any supplier could be replaced in a timely manner.
The equipment is used by industry, scientific research, and electro-medical
organizations for such applications as computers, data processors, video and
sound communications media, nuclear biological and medical research, nuclear
power generation, and other facilities where disturbances in the primary power
source for these systems may affect their accuracy and performance. These power
sources or conditioners are connected between the primary source, which may be a
commercial power line, battery, diesel, gasoline or steam-driven generator, and
the system being powered, to stabilize, eliminate surges or transient changes,
or convert the input voltages and currents to other voltage or current levels
required by the system.
The principal market for the issuer's products is users or manufacturers who
incorporate the products into their equipment. The equipment is used in various
industries, as well as organizations conducting scientific research and
electro-medical entities. The issuer's customers include private companies,
government agencies, and educational institutions, both within and outside of
the United States. International sales approximate $440,000 for fiscal year
1997, or approximately 12% of total sales for the year.
There are approximately five hundred companies in the country who
manufacture one or more competitive products. To differentiate itself, the
issuer strives to maintain a reputation for excellent quality and reliability.
No one customer of the issuer accounts for ten percent or more of the issuer's
business.
The issuer is attempting to expand its business in "off the shelf" products,
but it continues to fabricate power supplies and power systems to specific
customer specifications. Off the shelf products are usually purchased on an "as
needed" basis and dollar backlog is usually quite small compared with the
issuer's annual revenues. Custom fabrication is usually contracted on a
scheduled annual or semi-annual basis.
In prior fiscal years the issuer had begun efforts to develop a new family
of high voltage products and other new products, although development has been
retarded by lack of working capital. During the second quarter of fiscal year
1997, the issuer purchased assets employed in the manufacture of three new
product lines. Future increases in sales and profits are dependent upon the
marketing of a proprietary line
1
<PAGE>
of uninterruptible power supplies/power line conditioner ("UPS/PLC") products.
This product line provides the customer with the ability to service varying
power requirements with a single product.
An unacceptable level of product failures in the early shipments of the
UPS/PLC product line, required the issuer to suspend product distribution and
initiate efforts to resolve any technical and production problems. At this time
management is exploring the alternative of contracting for an outsourced
manufacturing resource to allow for active, higher volume production of the
UPS/PLC product line to resume.
The issuer's primary research and development activities center on the
customization and special engineering of its products. During fiscal years 1996
and 1995, it devoted approximately 5% percent of its annual revenues for these
purposes, or approximately $35,000. About two employees, on the average, over
these two fiscal years have been engaged in these efforts. Recent developments
in the 1997 fiscal year have included a substantial increase to 14.8% of annual
revenues or $540,000 devoted to research and development. In like manner, the
average number of employees engaged in these efforts during fiscal year 1997 is
increased to six. Total employees at June 30, 1997 number 64.
Historically, the issuer has had only one line of business as stated above
and there are no material environmental effects. In October, 1996 the issuer's
wholly-owned subsidiary, PDIXF Acquisition Corp., purchased the significant
assets and assumed certain liabilities of two divisions of Penril DataComm
Networks, Inc ("Penril"). This acquisition was reported on a Form 8-K dated
October 28, 1996. The purchased assets comprise a line of uninterruptible power
supply/power line conditioners ("UPS/PLC"), an autotransformer business and a
military grade switching power supply line.
The business is not seasonal although there are historical peaks during the
second and fourth quarters, September-December and April-June. The issuer's
principal competitive advantage has been product reliability and quality and it
has been able to compete with other suppliers, notwithstanding the fact that the
number of competitors is large and generally in a state of flux.
The issuer holds a license pursuant to a Purchase Agreement dated March 30,
1993 with GENRAD Inc. for the Trademark "Variac". The issuer is also the holder
of the Trademarks and Tradenames "Technipower" and "Constant Power". The issuer
is not dependent on any other material patents, trademarks, licenses or other
agreements held or with third parties.
As described above and in Item 6 -- Management's Discussion of Financial
Condition and Results of Operations, the issuer has experienced significant
financial and operating difficulties.
BANKRUPTCY PROCEEDINGS
Due to declining orders as a result of the reductions its customers suffered
in the volume of defense aerospace contracts, the issuer filed for bankruptcy
protection under Chapter 11 on October 16, 1992. A plan of reorganization, under
which Venture Partners, Ltd. ("Venture Partners") supplied capital to the
issuer, was confirmed by the bankruptcy court in January 1994.
Additional information as to the bankruptcy proceedings is found at Item 6
- -- "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Bankruptcy Proceedings."
ITEM 2. PROPERTIES/FACILITIES
The issuer currently leases 30,000 square feet of office and manufacturing
space located at 14 Commerce Drive, Danbury, Connecticut. The issuer moved to
the space in October, 1996 as a result of the acquisition of the Penril assets
and a consolidation of its operations. The lease runs through February 28, 1998
and provides for fixed annual rental payments of $147,600. The payments include
real estate taxes and are subject to adjustments.
2
<PAGE>
On October 9, 1997, the issuer and its lessor, M&M Realty, executed a letter
agreement modifying the required payment dates for minimum rent due through
December 31, 1997. Rent for the months of October, November and December, 1997
are due on November 15, 1997, December 15, 1997, and December 31, 1997
respectively. Commencing January 1, 1998, all monthly rental payments shall be
due in accordance with the original terms of the lease. As of this date, the
issuer is in compliance with all terms of the letter agreement.
The issuer also currently leases 6,850 square feet of office and
manufacturing space located at 250 Executive Drive, Edgewood, New York. The
issuer moved to the space in early 1993 because it was well adapted to its needs
and size, and ceased operations in this location during the second quarter of
fiscal 1997. The lease runs through February 28, 1998 and provides for fixed
annual rental payments, which equal $48,573 for the fiscal year ending June 30,
1997. The payments include base year taxes and common area maintenance charges
and are subject to adjustments.
The issuer is currently in default under the lease due to its non-payment of
minimum rent and other charges, its failure to maintain adequate insurance and
its assignment, pursuant to the bankruptcy settlement described in Item 6 below,
of more than 30% of the outstanding shares of its Common Stock. Under the terms
of the lease, such assignment of the shares was deemed an assignment of the
lease. At this time, the lessor has not taken steps to exercise its rights
pursuant to the lease agreement.
ITEM. 3 LEGAL PROCEEDINGS
In September 1996, the issuer paid $185,000 in an out-of-court arrangement
to settle a lawsuit brought by two former directors of the issuer. The payment
relieved a debt of $146,875 owed to a company controlled by the two former
directors, plus accrued interest (see Item 6 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources").
In August 1997, a material supplier of the issuer, filed a claim for monies
owed for goods and services provided in the amount of $144,281. The parties have
recently negotiated the terms of a forbearance agreement, which will stay the
litigation during the settlement discussions, which are ongoing. There can be no
assurance, however, that this litigation will be settled.
In August 1997, an advertising services company with whom the issuer does
business initiated a collection action for money damages for advertising
services performed in the amount of $34,500. Management of the issuer is
presently contesting the liability. There can be no assurance, however, that
this litigation will be settled.
No other litigation was pending as of the end of the fiscal year.
ITEM. 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fiscal year covered by this report to a
vote of security holders, through the solicitation of proxies, or otherwise.
PART II
ITEM. 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded over the counter in the United States. The
shares are not currently quoted regularly on any information service. The
approximate number of record holders of the securities is 752.
The following table sets forth, for the periods indicated, the quarterly
high and low representative bid quotations for the issuer's Common Stock as
reported by America Online's archival information service,
3
<PAGE>
Prophet Information Services, Inc. of Palo Alto, California. Similar quotation
information for fiscal year 1996 is not available, and is therefore not
presented in this table.
<TABLE>
<CAPTION>
1997
FISCAL YEAR ENDED --------------------
JUNE 30, 1997 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................. $ 0.50 $ 0.50
2nd Quarter.................................................................. 1.75 1.75
3rd Quarter.................................................................. 1.50 1.38
4th Quarter.................................................................. 0.75 0.75
</TABLE>
No cash dividends on shares of Common Stock have been declared by the issuer for
the two most recent fiscal years, nor in any subsequent interim period for which
financial statements are required to be presented. In accordance with certain of
its debt agreements, the issuer is restricted from paying dividends to owners of
the issuer's Common Stock.
During fiscal year 1997, quarterly cash dividends in the amount of 8% per
share per annum of Preferred Stock were accrued at December 31, 1996, March 31,
1997, and June 30, 1997.
To the best of the issuer's knowledge, there has been no active market in
the stock for the last two years.
ITEM. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BANKRUPTCY PROCEEDINGS.
During fiscal years 1992 and 1993, the issuer's business contracted, in
large part as the result of reductions in the volume of defense aerospace
contracts, which reduced its customers' activities. The issuer could not readily
decrease production costs and overhead to match diminished revenues, because it
was required to pay cash for most material purchases, and its reduced purchase
volume resulted in increased per-unit prices for supplies. Consequently, no
investments in sales and marketing were made during this period, thus reducing
the issuer's order flow and backlog by 20% from June 30, 1991 to June 30, 1992.
Venture Partners as agent offered to supply capital, and a plan of
reorganization was confirmed by the bankruptcy court in June 1994. Pursuant to
the plan of reorganization, on April 27, 1994 the issuer entered into a Funding
Agreement with Venture Partners as agent under which Venture Partners as agent
lent $130,500, evidenced by a note secured by deposits, credits and property of
the issuer, to the issuer at a variable interest rate equal to 9% per year above
prime rate. Venture Partners as agent subsequently converted $25,000 of the debt
into equity representing 149,468 shares of Common Stock. Approximately $45,600
of the principal amount was payable in monthly installments from June 1995
through May 1997 and with the remaining principal being due at the June 1, 1997
maturity of the note. Venture Partners as agent had waived the issuer's failure
to comply with a property insurance covenant for prior periods through the
fiscal year ending June 30, 1996. This note was repaid in full on October 11,
1996. The net proceeds from the Funding Agreement were applied to the bankruptcy
distributions required upon confirmation.
In accordance with the terms of the bankruptcy decree, unsecured creditors
agreed to accept 20% of the amount due to them for pre-petition claims (5% upon
emerging from bankruptcy and the remainder over a period of three years). Many
creditors of the issuer failed to file a claim with the court for their amounts
due. The issuer also owed liabilities to certain related parties and employees,
who waived these debts. The total cancellation of debt net of costs was
$369,807. The remaining amount due to these unsecured creditors, in addition to
other amounts and interest due to various taxing authorities, is currently due
and payable in the amount of $102,126 as of June 30, 1997. As of that date these
amounts were in default due the issuer's failure to make all required payments.
See Consolidated Financial Report, Note 9.
4
<PAGE>
Pursuant to the plan of reorganization, as of April 27, 1994 the issuer
issued 810,716 restricted shares of Common Stock to Venture Partners, or about
40% of the issuer's then-outstanding shares, for a total price of $1,000.
Venture Partners also purchased 407,240 shares of Common Stock from two
shareholders for nominal consideration. Venture Partners thus acquired control
of the issuer through its direct beneficial ownership of 60.1% of the Common
Stock.
In addition, a director of Venture Partners, Gary M. Laskowski, purchased
10,000 shares of Common Stock for $2,500 in an isolated transaction. Mr.
Laskowski and Mr. Jonathan Betts, also a director of Venture Partners and the
issuer, are also trustees and beneficiaries of a retirement plan that purchased
200 shares of Common Stock, for which it paid approximately $34.00 in an
isolated transaction. Finally, as noted above, on June 22, 1995 Venture Partners
as agent converted $25,000 of the issuer's outstanding debt into equity
representing 149,468 shares of Common Stock.
During the year ended June 30, 1996, Venture Partners transferred the
810,716 restricted shares of Common Stock, plus an additional 261,312
unrestricted shares of Common Stock, to its affiliate Millenia Capital Holding
LLC. Venture Partners also transferred 145,928 shares of Common Stock to four
investors in consideration for loans previously made to the issuer. Subsequent
to the end of the fiscal year, Venture Partners sold its remaining 149,468
shares to its affiliate BRIL Corporation for $25,000.
After the bankruptcy filing, the issuer was able to conclude a voluntary
foreclosure action with the mortgage holder on the property it owned and
occupied and move to a smaller, less costly facility. It also reduced personnel
in its production, engineering and office areas, and devoted more attention to
expediting shipments to reduce working capital needs for inventory finance and
improving quality and response to customers.
CURRENT DEVELOPMENTS
During fiscal year 1997 the issuer concluded its search for suitable
acquisition candidates. Subsequent to the end of fiscal 1996, the issuer agreed
to purchase the assets of two subsidiaries of Penril DataComm Networks, Inc.
That acquisition was consummated on October 11, 1996, and reported on a Form 8-K
dated October 28, 1996. After the transaction was completed, the issuer also
began taking steps to wind down operations at its Long Island headquarters, so
that it could consolidate its managerial and manufacturing operations at the
former Penril site in Connecticut. This move was completed on November 5, 1996.
Total consideration, which was determined through arms-length negotiations,
consisted of $1,694,085 in cash, a $2,750,000 Term Note, a royalty equal to 2%
of power protection sales during the period from July 1, 1997 through June 30,
2001, and various assumed liabilities related to the Business, valued at
approximately $837,400. The Term Note carried annual interest at 2% above prime
rate, and a maturity date of December 31, 1996. The principal amount of the Term
Note was not repaid when due, thereby placing the issuer in default. On March
10, 1997 the issuer and Penril executed a forbearance agreement (the
"Forbearance Agreement"), which required the issuer to make payments of $50,000
per week totaling $200,000 prior to March 21, 1997, a payment of $500,000 on or
before April 14, 1997, and a balloon payment equal to the remainder due on or
before May 31, 1997. All payments required under the Forbearance Agreement prior
to April 29, 1997 were made in full.
On April 29, 1997, the issuer and Penril entered into a modification
agreement (the "Modification Agreement"), which created a new payment schedule
under the Forbearance Agreement. The Modification Agreement required the issuer
to pay Penril $400,000 on April 30, 1997, $50,000 on each of May 5, May 12 and
May 19, 1997, $300,000 on May 30, 1997, and the remainder due under the Term
Note on July 31, 1997.
Penril subsequently agreed to permit the issuer to make payments of
$100,000, $50,000, $75,000 and $75,000 on May 30, 1997, June 4, 1997, June 10,
1997 and June 20, 1997, respectively, in lieu of the $300,000 payment due on May
30, 1997. As of June 10, 1997, the issuer was current on its obligations under
5
<PAGE>
the terms of the Forbearance Agreement, as modified. Subsequent to June 10, 1997
the issuer remained current on interest amounts due to Penril, but was unable to
repay the $1,000,000 outstanding obligation on July 31, 1997. As a result, the
issuer has commenced negotiations with Penril concerning the amount and due date
on the remainder of the Term Note.
As is discussed in more detail in "Liquidity and Capital Resources" below,
at the same time as the acquisition the issuer received additional financing of
about $6.2 million. As part of the acquisition and financing, the issuer also
created a class of Preferred Stock, $.01 par value, which had been authorized by
vote of the shareholders in fiscal year 1995.
During fiscal year 1997, the issuer's manufacturing and engineering
departments found an unacceptable level of failures in UPS/PLC products being
shipped. The issuer immediately suspended shipments of the new products and
initiated efforts to resolve any engineering problems. This effort, which lasted
over five months, resulted in substantial improvements in product reliability
and manufacturability.
Since June 30, 1997, the issuer has been actively interviewing and surveying
possible turnkey contract manufacturing vendors for these products in view of
the issuer's lack of expertise in building higher volume production quantities
of any product. It is expected that volume production will begin to be available
from the outside sources late in the second quarter of fiscal year 1998.
In early 1995, the issuer's shareholders had approved a resolution calling
for the reincorporation of the issuer under Delaware law, by merging the issuer
into a Delaware corporation also named Power Designs, Inc. This merger was
completed on August 8, 1997 upon approval by the New York State Department of
State, Division of Corporations.
LIQUIDITY AND CAPITAL RESOURCES.
Beginning in fiscal year 1995, Venture Partners arranged for the issuer to
obtain additional capital through a Revolving Loan Agreement with a Venture
Partners affiliate, Inverness Corporation ("Inverness"). The note under the Loan
Agreement provided for 15% annual interest and, as of July 1, 1995, a credit
line of $200,000. The maximum credit line was raised to $700,000 as of June 30,
1996, at which point the issuer in fact owed $834,097. Accordingly, the credit
line was again raised after the end of the fiscal year, to $1,200,000. On
October 11, 1996, the note was repaid in full.
During fiscal year 1995 the issuer issued two debentures. The first, to
MarTek for $146,875, was due on June 30, 1995 and carried interest of 10% per
annum. This debt remained outstanding as of June 30, 1996, but in July 1996 the
issuer agreed to an out-of-court arrangement with MarTek (see item 3 -- "Legal
Proceedings") which relieved the debt and accrued interest totaling $185,000.
This liability was repaid in full in September 1996.
The second debenture was issued for approximately $36,000 to four
stockholders. On September 15, 1995, this amount was converted into 215,235
shares of Common Stock.
In connection with the Penril acquisition, the issuer simultaneously
obtained significant additional outside financing, totaling approximately
$6,400,000. The financing consisted of three primary components: a private
placement of debt and equity securities and Common Stock purchase warrants for
approximately $1,360,000 to six individuals and a limited partnership; advances
on revolving notes payable to Inverness in the amount of $2,290,000, and a Term
Note payable to Penril of $2,750,000 due on December 31, 1996. As part of the
acquisition and financing, the issuer also created a class of Preferred Stock,
$.01 par value, which had been authorized by vote of the shareholders in fiscal
year 1995. Shares of the Preferred Stock were included with the securities
placed with the six individuals and a limited partnership. The financing
permitted the issuer to pay in full several outstanding debts, including the
loan of $130,500 from Venture Partners as agent and $1,640,075 of principal and
interest owed under the Revolving Loan Agreement with Inverness.
6
<PAGE>
Subsequent to the Penril acquisition, the resources and personnel of the
issuer were deployed in the investigation and resolution of a number of
manufacturing and production problems encountered in the manufacturing of the
UPS/PLC product lines. These problems resulted in extremely low manufacturing
yields evidenced by the gross profit (loss) at June 30, 1997 of ($366,138). To
correct these problems, significant operating funds were expended over the
course of the remainder of fiscal year 1997, resulting in a net loss for the
year of ($5,126,630). In order to finance these operating expenditures,
Inverness Corporation amended its revolving credit facilities with the issuer on
November 27, 1996, December 31, 1996, and March 1, 1997 to increase the maximum
availability under this vehicle from $2,500,000 initially to $6,000,000.
Although the issuer is in violation of certain covenants contained in the loan
agreements, Inverness Corporation has not exercised its rights to immediately
demand payment as a result of these covenant violations.
As a result of the UPS/PLC product failures created by the manufacturing
problems described above, the issuer experienced delays in the shipment of its
primary product line. These delays resulted in net sales for the year, which
were insufficient to cover operating costs. This reduced revenue stream, coupled
with limited availability under the revolving credit facility, left the issuer
unable to repay the Penril obligation when due. To meet this obligation, at
least in part, the issuer was required to enter into additional loans, which
were issued as part of a private placement offering of $100,000 units. These
units comprise Bridge Notes ("Bridge Notes") and Common Stock purchase warrants,
which commenced on March 21, 1997 and was completed on July 31, 1997. For each
unit purchased, the bridge lenders received a promissory note for $100,000 due
no later than July 31, 1998 and 40,000 warrants to acquire shares of the
issuer's Common Stock for $0.25 per share subject to adjustment. The obligations
outstanding of $1,364,500 at June 30, 1997 represent the total amount raised
through the offering of $1,653,500, less $289,000 allocated to the warrants and
recorded as additional paid in capital. The $289,000 discount resulting from
this allocation will be amortized over the lives of the Bridge Notes.
In addition to the loans described above, the issuer has executed two short
term notes in the aggregate amount of $300,000 payable to two investors. The
issuer has accrued interest on these obligations at 10%, and expects to repay
the principal and all accrued interest on these obligations when due.
Despite the additional financing obtained by the issuer, significant
operating losses sustained throughout the year have restricted the issuer's cash
flow to the point where it could not meet all of its current obligations when
due. On April 29, 1997, the issuer and Penril entered into a modification
agreement (see "Current Developments") which created a new payment schedule
under the Forbearance Agreement. Pursuant to this modification, the issuer was
required to repay the outstanding balance due on the seller financing
($1,000,000 at June 30, 1997), on July 31, 1997. Because the issuer was unable
to make this repayment when required, the issuer is in default of the
Forbearance Agreement, as modified, and has commenced negotiations with Penril
concerning the amount and due date on the remainder of the Term Note.
Lastly, it should be noted that the issuer is also in default for
non-payment of interest, on the secured term notes in the amount of $1,087,415
issued to the preferred shareholders. Accrued and unpaid interest at June 30,
1997 was approximately $7,150. The investors have not taken any available
actions to accelerate and demand payment on these obligations.
The issuer hopes to be able to supply a greater percentage of its working
capital needs through improved operating cash flow during the 1998 fiscal year.
This improved operating cash flow is predicated upon a stabilized UPS/PLC
manufacturing process and increased revenue for fiscal 1998 of which there can
be no assurance. Nevertheless, the issuer expects that it will be in need of
additional financing through offerings of debt or equity and is exploring
certain alternatives to that end. The issuer has entered into a letter of intent
with an underwriter pursuant to which, the issuer proposes to undertake a public
offering of Common Stock. Such an offering is pending stockholder approval of a
proposal to authorize an additional 10,000,000 shares of Common Stock and an
additional 4,000,000 shares of Preferred Stock, as well as a
7
<PAGE>
proposed eight-for-one reverse stock split. The terms and conditions of this
offering have not been finalized. Furthermore, to provide immediate financing
the issuer has recently undertaken a similar additional private offering of
units. Depending on market conditions, the issuer may decide at any time not to
proceed with the above-referenced public offering.
The issuer currently has a net stockholders' deficit of approximately
$5,800,000, meaning that amounts owed to its creditors, including without
limitation Inverness Corporation, exceed the issuer's assets.
As a result of the issuer's net loss position, no provision has been made
for income taxes. Approximately $4,200,000 of net operating loss carryforwards
remain available to reduce future federal and state taxable income, which expire
in 1998 through 2012. There is no certainty that the issuer will have taxable
income during the expiration period in order to realize the benefit of these
carryforward amounts. As a result, the issuer has recorded a valuation allowance
equal to the entire amount of the related deferred tax asset, as well as all
other deferred tax assets. Also changes in ownership could result in the
limitation in the use of these net operating loss carryforwards.
FINANCIAL CONDITION
The acquisition of the Penril net assets and the significant operating
losses incurred by the issuer subsequent to that acquisition, account for many
of the substantial changes in assets and liabilities from June 30, 1996 to June
30, 1997. Current assets increased by approximately 1,166% over fiscal year 1996
to $2,631,810. This increase, which is primarily attributable to inventories and
accounts receivable, is the direct result of the volume increases created by the
Penril asset acquisition. There were no material changes in prepaid assets or
cash over fiscal year 1996. In like manner, equipment and leasehold improvements
increased from $4,497 to $735,398. This increase solely comprises the
manufacturing equipment and office fixtures acquired from Penril, as well as
approximately $222,000 of leasehold improvements and equipment additions made
prior to the close of the fiscal year. Goodwill represents the excess of the
purchase consideration paid to Penril, over the value of the net assets
acquired, and deferred financing costs relate to the various debt agreements
entered into during the year as described below. The acquisition deposit was
reduced to $0 upon the closing of the Penril acquisitions.
Total liabilities increased by 652% to $12,266,650 over fiscal year 1996.
Notes payable of approximately $9.6 million to affiliated companies, preferred
shareholders, sellers of assets acquired and others, were incurred directly to
fund the acquisition of the Penril net assets, as well as a portion of the
significant operating losses of approximately $5.1 million during the year ended
June 30, 1997. Accounts payable and other accrued liabilities increased in
aggregate, by 495% over fiscal year 1996. This increase was created by the
operating volume increases resulting from the Penril acquisition, and the
substantial cash constraints experienced by the issuer during fiscal year 1997.
Accrued interest expense increased by 368% due to the increase in notes payable
mentioned above. Accrued warranty expenses of $275,000 represent a liability
assumed from Penril to refurbish defective product units, in addition to a
number of inventoried parts requiring rework. Payables related to the prior
bankruptcy reorganization decreased by 60% during fiscal year 1997, as
installment payments to Class V and VI creditors were made.
Total stockholders' deficit increased by 378% to $5,765,880 over fiscal year
1996. This increase is generated by operating losses incurred in the current
fiscal year of $5,126,630, offset by an increase in Preferred Stock and
additional paid in capital of $565,242. Preferred Stock was increased by the par
value of an issuance of Class A Convertible Preferred Stock. Additional paid in
capital exhibited the following additions during fiscal year 1997: the Preferred
Stock excess over par value of $261,687, net of accrued dividends of $15,612;
Common Stock purchase warrants valued at $7,000 granted to preferred
shareholders; Common Stock purchase warrants valued at $20,000 granted to
Inverness Corporation, in conjunction with certain loans made by Inverness to
the issuer; and Common Stock purchase warrants valued at $289,000 granted to
certain investors in conjunction with the sale of notes payable.
8
<PAGE>
RESULTS OF OPERATIONS
The issuer's sales during fiscal 1997 increased by 529% over fiscal year
1996, to $3,622,236 while its gross profit (loss) decreased by 614% over the
same period. The increased operational volumes, which resulted from the
acquisition of the three Penril lines of business, are the major factor which
account for the increase in sales. In like manner, operating expenses increased
by approximately 889%, as the issuer proceeded to invest significantly in new
marketing and engineering efforts, and additional depreciation and amortization
expenses were recognized from equipment and intangible assets obtained in the
Penril asset acquisition. The issuer's reliance on debt financing accounted for
a substantial increase in interest expense of 580% over the prior year. The loss
from the abandoned acquisition of $126,052 in fiscal 1996 was a one-time
occurrence and therefore no similar loss was incurred in fiscal 1997. As a
result of all of the changes described above, the net loss for fiscal 1997 of
approximately $5.1 million significantly exceeded the fiscal 1996 net loss of
approximately $574,000.
Through the first half of fiscal year 1997, the issuer expended considerable
funds and effort in resolving the remaining production problems that had been
identified in early shipments of product. Since June 30, 1997 the issuer has
been actively interviewing and surveying possible turnkey contract manufacturing
vendors for these products in view of the issuer's lack of expertise in building
higher volume production quantities of any product. It is expected that volume
production will be available from the outside sources beginning late in the
second quarter of fiscal year 1998.
The most important general economic trend during fiscal year 1997 was the
continued strength of the national economy, reflected in significant
improvements in the major capital markets. That strength has increased investor
confidence, which permitted the issuer to obtain necessary debt and equity
financing to continue as a going concern through June 30, 1997.
Certain statements contained in this Item 6 regarding matters that are not
historical facts, including, among others, statements regarding the future
adequacy of the issuer's working capital, its ability to raise capital through
debt or equity offerings, its ability to maintain or improve its present cash
flow, are "forward-looking statements". Such forward-looking statements involve
risks and uncertainties which may cause the actual results, performance or
achievements of the issuer to be materially different from any future results,
performance or achievements, express or implied by such forward-looking
statements.
These forward-looking statements are identified by their use of forms of
such terms and phrases as "expects," "intends," "goals," "estimates,"
"projects," "plans," "anticipates," "should," "future," "believes," and
"scheduled". The variables which may cause differences include, but are not
limited to, the following: general economic and business conditions;
competition; success of operating initiatives; operating costs; advertising and
promotional efforts; the existence or absence of adverse publicity; changes in
business strategy or development plans; the ability to retain management;
availability, terms and deployment of capital; business abilities and judgement
of personnel; availability of qualified personnel; labor and employee benefit
costs; availability and costs of raw materials and supplies; and changes in, or
failure to comply with, government regulations. Although the issuer believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this filing
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the issuer or any
other person that the objectives and expectations of the issuer will be
achieved.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and made a part of this filing is the audited consolidated
balance sheet and related consolidated statements of operations, stockholders'
deficit, and cash flows of the issuer for its fiscal years ended June 30, 1997
and June 30, 1996.
9
<PAGE>
The report of McGladrey & Pullen, LLP, dated October 3, 1997 on the issuer's
1997 consolidated financial statements is attached hereto and made part of this
filing.
The report of Kostin, Ruffkess and Company, LLC, dated November 8, 1996 on
the issuer's 1996 consolidated financial statements is attached hereto and made
part of this filing.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Through the end of fiscal year 1996, the firm of Kostin, Ruffkess & Company,
LLC, ("Kostin") of West Hartford, Connecticut served as the issuer's independent
accountants. In order to facilitate the issuer's contemplated public and private
offerings of equity and debt, the Board of Directors determined that it would be
desirable to retain an accounting firm with a presence in New York City. To the
issuer's knowledge, at the time Kostin, Ruffkess & Company, LLC, was dismissed
from its capacity as the issuer's independent accountants, there were no
disagreements that would have been referred to in their report on the issuer's
financial statements. Kostin's report on the consolidated financial statements
of the issuer for the year ended 1996 included an explanatory paragraph which
expressed substantial doubt about the ability of the issuer to continue as a
going concern.
On March 19, 1997, the issuer's Board of Directors recommended the
appointment of McGladrey & Pullen, LLP, of 555 Fifth Avenue, New York, New York
as auditors for the issuer for fiscal year 1997. The issuer or persons on its
behalf have not consulted McGladrey & Pullen, LLP, regarding the application of
accounting principles to a specific completed or contemplated transaction or the
type of audit opinion that might be rendered on the issuer's financial
statements, or regarding the subject matter of a disagreement or reportable
event with the former independent accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Board of Directors as of June 30, 1997 consisted of six directors. All
directors of the issuer presently serve until resignation or until the next
annual shareholders' meeting.
JONATHAN D. BETTS. Mr. Betts has served as Chairman of the Board of the
issuer since November 1996. Mr. Betts is principal and founder of Venture
Partners, a private investment bank, and Inverness Corporation, a private
commercial finance Company, founded in 1986 and 1993, respectively. Mr. Betts,
Venture Partners and Inverness Corporation are affiliates of Millenia Capital
Holdings, LLC ("Millenia"), the largest stockholder of the issuer. Mr. Betts
served as a member of the consulting operation of Technology Transitions
Incorporated, a venture capital firm, from November 1985 to December 1986 and as
Regional Sales Manager for Medical Electronics Corporation, a critical care
medical instrumentation manufacturer, from June 1983 to September 1985. Mr.
Betts has a Bachelor's Degree in Electrical Engineering from Boston University.
FRED G. BASSO. Mr. Basso has served as President of the issuer since May 6,
1997 and as a Director of the issuer since June 5, 1997. From 1994 to 1997, Mr.
Basso served as President and Chief Executive Officer of AFP Transformers, Inc.,
a manufacturer of transformers, and from 1993 to 1994 as General Manager of
Magnetek Electric, Inc., a manufacturer of large power transformers. Mr. Basso
also served as President of Schenck Trebel Corporation, a manufacturer of
dynamic balancing equipment, from 1986 to 1992. Mr. Basso holds a Master's
Degree in Business Administration from New York University and a Bachelor's
Degree in Management Engineering from Rensselaer Polytechnic Institute.
MELVIN BECKER. Mr. Becker has served as a Vice President of the issuer
since November 1996. Mr. Becker has served as a Director of the issuer since
1984, and served as President of the issuer from January 1984 to November 1996,
and as Vice President in charge of Manufacturing of the issuer from 1971
10
<PAGE>
to 1979. Mr. Becker served as Vice President of Operations and as Executive
Assistant to the President at Ferranti-Venus, a manufacturer of DC power
supplies from March 1979 to December 1983. Mr. Becker holds a Bachelor's Degree
in Electrical Engineering from the University of Miami.
GARY M. LASKOWSKI. Mr. Laskowski has served as a Director of the issuer
since April 1994. Mr. Laskowski is a principal and founder of Venture Partners,
a private investment bank, and Inverness Corporation, a private commercial
finance Company, founded in 1986 and 1993, respectively. Mr. Laskowski, Venture
Partners and Inverness Corporation are affiliates of Millenia. Mr. Laskowski
served as a member of the consulting operation of Technology Transitions
Incorporated, a venture capital firm, from March 1985 to January 1986 and served
in a number of posts, including Vice President, Marketing, for Canberra
Industries, Inc., a supplier of data acquisition and analysis systems, from 1976
to 1984. Mr. Laskowski holds a Bachelor's Degree in Electrical Engineering from
the University of Connecticut.
SAMUEL F. OCCHIPINTI. Mr. Occhipinti has served as a Director of the issuer
since April 1994. Mr. Occhipinti served as Exective Vice President of EAC
Acquisition Corporation, an electronics manufacturer, from December 1996 to May
1997. Mr. Occhipinti served as Chief Financial Officer of I2 Technology, Inc.,
an electronics manufacturer, from June 1994 to December 1996, and was Chief
Financial Officer of Imaging Technology, Inc., an electronics manufacturer, from
February 1993 to June 1994. Mr. Occhipinti served as a consultant for Imaging
Technology, Inc. from December 1991 to January 1993 and as Chief Financial
Officer of AOI Systems, a manufacturer of optical testing systems, from August
1990 to November 1991. Mr. Occhipinti holds a Bachelor's Degree from Boston
College.
PAUL A. MCCULLOUGH. Mr. McCullough has served as a Director of the issuer
since April 1995. Mr. McCullough has served as President of Madison Asset
Management, a financial advisory firm, since August 1995. Mr. McCullough served
as Marketing Director for Pension Parameters Inc., a pension administrator, from
August 1992 to August 1995, and as Marketing Director for Consolidated Capital
Partners, Inc., a financial services company, from June 1985 to August 1992.
- ------------------------------
(a) Samuel F. Occhipinti and Paul A. McCullough resigned in September 1997.
(b) Robert Sparacino, Raymond Joslin, and Shannon LeRoy were appointed to the
Board of Directors in October 1997.
EXECUTIVE OFFICERS OF THE ISSUER
As of June 30, 1997 there was one executive officer, Phillip H.R. Epps,
other than the directors identified as such above (see Item 10 -- "Executive
Compensation").
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by certain executive
officers of the issuer for services in all capacities for the fiscal year ended
June 30, 1997. No other employee's annual salary and bonus exceeded $100,000 for
the fiscal year.
11
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
STOCK
NAME YEAR PRINCIPAL POSITION SALARY ($) OPTIONS
- ------------------------------------ --------- -------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Melvin A. Becker.................... 1997 President, Jan 1, 1984-October 9, 1996 100,698 0
Vice President, October 9, 1996-present
1996 88,354 0
1995 95,446 121,608
H. Rudolf Zeidler................... 1997 President, October 9, 1996-May 6, 1997 96,091 73,125
Fred G. Basso....................... 1997 President, May 6, 1997-present 18,847 150,000
</TABLE>
In fiscal year 1995, the issuer adopted the Employee Incentive Stock Option
Program (the "Option Program"), which provides for the issuance of up to the
lesser of 24% of the fully diluted issued and outstanding Common Stock or
1,000,000 shares of Common Stock through the grant of incentive and non-
qualified stock options. Stock options under the Option Program are to be issued
by action of the Board of Directors or its Compensation Committee (the
"Administrator").
On October 9, 1996, the issuer entered into a three-year contract with Mr.
Becker, under which he assumed the duties of Vice President for a base salary of
$100,000 per annum.
Also on October 9, 1996, the issuer hired a former officer of Constant
Power, Inc., H. Rudolf Zeidler, to become President and Chief Executive Officer
at $130,000 per annum. Mr. Zeidler was also granted 73,125 stock options, all of
which carry an exercise price of $.25 per share and expire in March, 1998. Mr.
Zeidler's options are exercisable for a total of 73,125 share of Common Stock
through March 6, 1998. In March 1997, the Board of Directors of the issuer
elected to exercise its right to terminate Mr. Zeidler's employment agreement
with the issuer without cause, pursuant to the terms contained therein. Mr.
Zeidler continued to serve as President of the issuer as an employee-at-will
until May 6, 1997 when Fred G. Basso assumed the duties of President. On August
19, 1997, the severance terms of Mr. Zeidler's employment agreement, which call
for nine months of regular salary and benefits continuation, went into effect.
As of June 30, 1997 $97,500 remains in accrued and unpaid salary expense related
to Mr. Zeidler.
Also on October 9, 1996, the issuer hired a former officer of Constant
Power, Inc., Phillip H.R. Epps, to become Vice President of Engineering at
$111,000 per annum. Mr. Epps was also granted stock options, all of which carry
an exercise price of $.25 per share and expire on October 1, 2001. Mr. Epps's
options are exercisable for a total of 81,250 shares of Common Stock: 20,313 are
exercisable as of October 1, 1997, 28,437 on October 1, 1998 and the remaining
32,500 on October 1, 1999.
Fred G. Basso assumed the office of President of the issuer on May 6, 1997.
His compensation consists of an annual cash salary of $140,000, and options for
the purchase of 150,000 shares of Common Stock at a price of $.875 per share. Of
such options 45,000 will become exercisable on April 1, 1998; 45,000 on April 1,
1999 and 60,000 on April 1, 2000. All options shall expire on April 1, 2002.
As of June 30, 1997, and subsequent to the end of the fiscal year, none of
the above-mentioned options have been exercised.
12
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR (PRICE$/SH) DATE
- ----------------------------------------------------- ------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Melvin A. Becker..................................... 0
H. Rudolf Zeidler.................................... 73,125 12.9% $ 0.25 March 6, 1998
H. Rudolf Zeidler(a)................................. 102,375 18.1% $ 0.25 March 6, 1997
H. Rudolf Zeidler(a)................................. 117,000 20.6% $ 0.25 March 6, 1997
Fred G. Basso........................................ 45,000 7.9% $ 0.875 April 1, 2003
Fred G. Basso........................................ 45,000 7.9% $ 0.875 April 1, 2004
Fred G. Basso........................................ 60,000 10.6% $ 0.875 April 1, 2005
</TABLE>
- ------------------------
(a) In accordance with the Employment Agreement executed between the issuer and
H. Rudolf Zeidler, the options denoted, expired upon the date of employment
contract termination.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------ --------------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Melvin A. Becker...................................... 0 0 121,608/0 $ 76,005/$0
H. Rudolf Zeidler..................................... 0 0 73,125/0 $ 36,563/$0
Fred G. Basso......................................... 0 0 0/150,000 $0/$0
</TABLE>
The Company has no pension plan covering executives and currently provides
no benefits to executives other than life insurance coverage of 150% of annual
salary and health insurance.
ITEM 11. OWNERSHIP OF SECURITIES BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth (i) those entities and individuals known to
the issuer to be the beneficial owners of more than 5% of the issuer's Common
Stock, (ii) beneficial ownership of the issuer's Common Stock by each director
and the Chief Executive Officer and the Named Executive Officer of the issuer
and (iii) beneficial ownership of the issuer's Common Stock by all directors and
executive officers of the issuer as a group. Unless otherwise indicated, each of
the stockholders has sole voting and dispositive power with respect to the
Common Stock beneficially owned by such stockholder.
13
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF OWNERSHIP OF
TITLE OF CLASS BENEFICIAL OWNER (SHARES) CLASS
- -------------------------------------------------------------------------------- ------------ -----
<S> <C> <C> <C>
Common Stock Millenia Capital Holdings, LLC(4) 1,072,028 44.8
P.O. Drawer 9
Kensington, Connecticut 06037
Inverness Corporation(5) 1,297,163(10) 35.2
1224 Mill Street, Bldg. A
East Berlin, Connecticut 06023
Bril Corp.(6) 149,468(17) 6.2
P.O. Drawer 9
Kensington, Connecticut 06037
Equitas, L.P. 263,189(11) 9.9
200 Glen Echo Road
Suite 101
Nashville, Tennessee 37215
Thomas O'Grady(2) 125,323 5.2
David H. Smith II(2) 125,323 5.2
Jeri Fink(2) 283,503 11.8
Sandra Roth(2) 146,503 6.1
Jonathan D. Betts(2)(7) 2,518,959(8)(13)(14)(shared) 63.7
Fred G. Basso(2) 0
Melvin A. Becker(2) 134,871(12) 5.4
Gary M. Laskowski (2)(7) 2,528,859(9)(13)(14)(shared) 64.0
Phillip H.R. Epps 20,313(15) 0.8
All Directors and Executive Officers as a Group(16) 2,684,143 65.6
</TABLE>
- ------------------------
(1) For purposes of the above table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after such date; for purposes of computing
the percentage of outstanding shares held by each person or group on a given
date, such shares are deemed to be outstanding, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
generally determined by voting power and/or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the issuer believes that the persons named
in the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) The address for the referenced person is c/o Jonathan D. Betts, Chairman,
Power Designs, Inc., 14 Commerce Drive, Danbury, Connecticut 06810.
(3) Individual percentages have been rounded to the nearest .1%.
(4) The member-managers of Millenia Capital Holdings ("Millenia") are Deborah
Laskowski and Kathleen Betts, the spouses of Gary M. Laskowski and Jonathan
D. Betts, respectively, each of whom is a director of the issuer. The
concurrence of both Ms. Laskowski and Ms. Betts is necessary to direct the
voting of securities owned by Millenia and the disposition of such shares
requires the consent of
14
<PAGE>
both Ms. Laskowski and Ms. Betts. Both, Mr. Laskowski and Mr. Betts disclaim
beneficial ownership of shares of Common Stock owned by Millenia.
(5) The executive officers of Inverness Corporation ("Inverness") are Gary M.
Laskowski and Jonathan D. Betts, each of whom is a director of the issuer.
The concurrence of both Mr. Laskowski and Mr. Betts is necessary to direct
the voting of securities owned by Inverness and the disposition of such
shares requires the consent of both remaining shareholders of Inverness,
Deborah Laskowski, the spouse of Mr. Laskowski, and Kathleen Betts, the
spouse of Mr. Betts. Accordingly, Mr. Laskowski and Mr. Betts may be deemed
the beneficial owners of shares of Common Stock owned by Inverness.
(6) The executive officers of Bril Corp. ("Bril") are Gary M. Laskowski and
Jonathan D. Betts, each of whom is a director of the issuer. The concurrence
of both Mr. Laskowski and Mr. Betts is necessary to direct the voting of
securities owned by Bril and the disposition of such shares requires the
consent of both remaining shareholders of Bril, Deborah Laskowski, the
spouse of Mr. Laskowski, and Kathleen Betts, the spouse of Mr. Betts.
Accordingly, Mr. Laskowski and Mr. Betts may be deemed the beneficial owners
of shares of Common Stock owned by Bril.
(7) Mr. Betts and Mr. Laskowski share voting power over the 1,297,163 and
149,468 shares of Common Stock currently owned by (or underlying options
immediately exercisable by) Inverness and Bril, respectively. See Notes 5
and 6, above. In addition, Mr. Betts and Mr. Laskowski are trustees and
beneficiaries of a retirement plan that owns 200 shares of Common Stock.
(8) Includes 100 additional shares of Common Stock owned individually of record
and beneficially by Mr. Betts, and includes 1,072,028 shares of Common Stock
owned by Millenia as to which Mr. Betts disclaims beneficial ownership.
(9) Includes 10,000 additional shares of Common Stock owned individually of
record and beneficially by Mr. Laskowski, and includes 1,072,028 shares of
Common Stock owned by Millenia as to which Mr. Laskowski disclaims
beneficial ownership.
(10) Includes 1,297,163 shares of Common Stock underlying warrants which are
currently exercisable.
(11) Includes 263,189 shares of Common Stock underlying warrants which are
currently exercisable.
(12) Includes 121,608 shares of Common Stock underlying options which are
currently exercisable.
(13) Includes 1,297,163 shares of Common Stock underlying warrants which are
currently exercisable by Inverness.
(14) Excludes 50,000 shares of Common Stock underlying options issued pursuant
to the current Option Plan which are subject to approval by the stockholders
at the Annual Meeting of stockholders.
(15) Includes 20,313 shares of Common Stock underlying options which are
currently exercisable.
(16) Each of Millenia, Mr. Betts, Mr. Laskowski, and Mr. Becker (the last three
all directors of the issuer), failed once during fiscal year 1996 to make a
timely report under Section 16(a) of the Securities Exchange Act of 1934
(the "Exchange Act") as to a transaction involving Common Stock owned by it
or him. Late reports for them were filed in November of 1996.
(17) Includes 26,291 and 24,700 shares of Common Stock previously owned by Bril
and transferred to Gary Laskowski as Trustee for Bril Corp. Profit Sharing
Plan and Trust and Gary Laskowski as Trustee for Bril Corp. Money Purchase
Plan, respectively, on September 15, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jonathan D. Betts and Gary M. Laskowski, directors of the issuer, are
officers of Venture Partners, Ltd., and of Inverness Corporation, both of which
have provided capital to the issuer under several loan agreements:
15
<PAGE>
(a) The 1994 plan of reorganization included a note payable to Venture Partners
as agent, which required monthly payments of principal of $1,900 from June
30, 1995 through May 31, 1997, and a single balloon payment of $84,900 at
June 30, 1997. This note was repaid in full on October 11, 1996.
(b) On October 11, 1996, the issuer purchased the assets of two divisions from
Penril Datacomm Networks, Inc. In conjunction with the asset purchase, the
issuer paid to Venture Partners, Ltd. acquisition costs in the amount of
$147,950.
(c) The issuer has entered into an agreement with Venture Partners whereby
Venture Partners is paid a minimum of $10,600 per month, plus expenses, for
various consulting services provided to the issuer. The issuer is not
committed to pay Venture Partners under this agreement for future periods.
During the year ended June 30, 1997, the issuer incurred approximately
$189,000 of expenses under this agreement, and for services provided outside
of the agreement.
(d) Inverness had entered into a Revolving Loan Agreement with the issuer. The
note under the Agreement provided for 15% annual interest and, as of July 1,
1995, a credit line of $200,000. The maximum credit line was raised to
$700,000 as of June 30, 1996, at which point the issuer in fact owed
$834,097. The credit line was again raised after the end of the fiscal year,
to $1,200,000. On October 11, 1996, the note was repaid in full.
(e) Inverness has also entered into certain Revolving Loan Agreements with the
issuer commencing on October 11, 1996 and December 31, 1996, and later
amended on November 27, 1996, March 20, 1997. The notes under these
Agreements provide for 18% annual interest and, as of June 30, 1997,
provided for a maximum credit line of $6,000,000, secured by substantially
all the assets of the issuer.
During the year ended June 30, 1997, the issuer paid $100,000 in fees to
Inverness in connection with these loan agreements.
(f) The issuer leases certain equipment under capital leases with Inverness,
which include a security interest in the property maintained by the lessors.
As of June 30, 1997, obligations under these leases were approximately
$78,600, and the cost and accumulated amortization of equipment under
capital leases was $85,766 and $7,970, respectively. In addition, at June
30, 1997, the issuer was obligated to Inverness under a demand note in the
amount of $42,930 with interest payable at 18%, secured by certain
equipment.
(g) From the beginning of fiscal year 1997 through October 11, 1996, the issuer
sold its accounts receivable to Inverness at 80% of face value, under an
Agreement to Purchase Accounts dated April 27, 1994 and amended June 9,
1995.
During the year ended June 30, 1997, the issuer paid $17,500 to an affiliate
of a former director as a finder's fee for obtaining debt financing. Such fees
are included in the deferred financing costs in the balance sheet of the issuer.
During the year ended June 30, 1997, the issuer advanced $5,000 to Melvin A.
Becker, an officer and director of the issuer. This advance is included in
accounts receivable in the balance sheet of the issuer, and is to be repaid
without interest over a fixed term.
Former directors James F. Flath and Jeffrey C. Flath are the principals of
the MarTek Group ("MarTek"), which at the end of the fiscal year 1995 entered
into an acquisition agreement with the issuer and Cycle Transformer, Inc.
("Cycle"). Under the agreement MarTek agreed to transfer its right to purchase
Cycle to the issuer for $60,000. Subsequently, Jeffrey C. Flath was appointed to
the newly-created position of Chief Executive Officer of the issuer. The issuer
also issued a debenture to the Flaths in the amount of $146,875. The acquisition
of Cycle was later abandoned, and litigation ensued. Subsequent to the end of
the 1996 fiscal year, the issuer agreed to pay MarTek, the Flaths and their
representatives $185,000 in an out-of-court settlement. The full amount was paid
on September 27, 1996.
16
<PAGE>
A COPY OF THIS REPORT ON FORM 10-KSB FOR FISCAL YEAR 1997 MAY BE OBTAINED
FREE OF CHARGE BY SENDING A REQUEST IN WRITING TO:
INVESTOR RELATIONS
POWER DESIGNS, INC.
14 COMMERCE DRIVE
DANBURY, CT 06810
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE IN
CONSECUTIVELY
EXHIBIT PAGE NUMBERED COPY
- ----------- --------- ---------------
<S> <C> <C> <C>
(3)(I) CERTIFICATE OF INCORPORATION (INCORPORATED BY REFERENCE TO EXHIBIT 3(I) TO FORM
10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(3)(II) BYLAWS (INCORPORATED BY REFERENCE TO EXHIBIT 3(II) TO FORM 10-KSB FOR THE
FISCAL YEAR ENDED JUNE 30, 1995)
(4) INSTRUMENTS
(i) Commercial Term Note (INCORPORATED BY REFERENCE TO EXHIBIT 4(I) TO FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1994)
(ii) Term Loan Agreement (INCORPORATED BY REFERENCE TO EXHIBIT 4(II) TO FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1994)
(iii) 10% Debenture for $146,875.00 due June 30, 1995 (INCORPORATED BY REFERENCE TO
EXHIBIT 4(III) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(iv) 10% Debenture for $36,000.00 due June 30, 1995 (INCORPORATED BY REFERENCE TO
EXHIBIT 4(IV) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(10) MATERIAL CONTRACTS
(i) Plan of Reorganization (INCORPORATED BY REFERENCE TO EXHIBIT 10(I) TO FORM
10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1994)
(ii) Final Decree (INCORPORATED BY REFERENCE TO EXHIBIT 10(II) TO FORM 10-KSB FOR
THE FISCAL YEAR ENDED JUNE 30, 1994)
(iii) Agreement to Purchase Accounts (INCORPORATED BY REFERENCE TO EXHIBIT 10(III) TO
FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(iv) Amendment Agreement to Agreement to Purchase Accounts (INCORPORATED BY
REFERENCE TO EXHIBIT 10(IV) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30,
1995)
(iii) Security Agreement (INCORPORATED BY REFERENCE TO EXHIBIT 10(III) TO FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1994)
(vi) Employee Incentive Stock Option Program (INCORPORATED BY REFERENCE TO EXHIBIT
10(VI) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(vii) Documents related to Cycle Transformer transactions (INCORPORATED BY REFERENCE
TO EXHIBIT 10(VII)(A)-(E) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30,
1995)
(viii) Revolving Loan Agreement (INCORPORATED BY REFERENCE TO EXHIBIT 10(VIII) TO FORM
10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
(ix) Amendment Agreement to Revolving Loan Agreement (INCORPORATED BY REFERENCE TO
EXHIBIT 10(IX) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1995)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
CONSECUTIVELY
EXHIBIT PAGE NUMBERED COPY
- ----------- --------- ---------------
<S> <C> <C> <C>
(x) Second Amendment Agreement to Revolving Loan Agreement (INCORPORATED BY
REFERENCE TO EXHIBIT 10(X) TO FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30,
1995)
(xi) Third Amendment Agreement to Revolving Loan Agreement A-1
(xii) Fourth Amendment Agreement to Revolving Loan Agreement B-1
(xiii) Fifth Amendment Agreement to Revolving Loan Agreement C-1
(xiv) Settlement Agreement among Theodore D. Moskowitz, Esq., Cycle Transformer D-1
Corp., Power Designs Inc., et al.
</TABLE>
(B) REPORTS ON FORM 8-K
On March 6, 1997, the issuer filed a Form 8-K/A with the Securities and
Exchange Commission reporting the following items:
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits --This item includes Unaudited Proforma Combined Statement of
Operations For The Year Ended June 30, 1996, Unaudited Proforma Combined
Balance Sheet as of September 30, 1996, Unaudited Proforma Combined
Statement of Operations For The Three Months ended September 30, 1996, and
Notes To The Unaudited Proforma Combined Financial Statements, for Power
Designs, Inc. and the acquired Penril subsidiaries.
Due to the unavailability of audited information for the acquired Penril
subsidiaries, the March 6, 1997 Form 8-K/A comprises a partial filing only.
On May 5, 1997, the issuer filed a Form 8-K with the Securities and Exchange
Commission reporting the following items:
Item 4. Changes in Registrant's Certifying Accountants -- This item
denotes that effective May 21, 1997 the Board of Directors of the issuer
approved the dismissal of Kostin, Ruffkess & Company, LLC, as the issuer's
independent accountants, and the engagement of McGladrey & Pullen, LLP, as
the issuer's independent accountants. No subjects of disagreement or
reportable events as defined in Item 304 of Regulation S-K were included in
this filing.
Item 5. Other Events -- This item denotes the appointment of Fred G.
Basso as President, and the appointment of Anthony F. Intino, II as acting
Chief Financial Officer of the issuer.
Item 7. Financial Statements and Exhibits -- This exhibit includes a
letter from Kostin, Ruffkess & Company, LLC, the issuer's prior independent
accountants.
No other reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: November 10, 1997 POWER DESIGNS, INC.
Danbury, Connecticut (Registrant)
By: /s/ FRED G. BASSO
-----------------------------------------
Fred G. Basso,
PRESIDENT
By: /s/ ANTHONY F. INTINO II
-----------------------------------------
Anthony F. Intino II,
CHIEF FINANCIAL OFFICER
By: /s/ JONATHAN D. BETTS
-----------------------------------------
Jonathan D. Betts,
CHAIRMAN OF THE BOARD
By: /s/ MELVIN A. BECKER
-----------------------------------------
Melvin A. Becker,
DIRECTOR
By: /s/ GARY M. LASKOWSKI
-----------------------------------------
Gary M. Laskowski,
DIRECTOR
By: /s/ ROBERT R. SPARACINO
-----------------------------------------
Robert R. Sparacino,
DIRECTOR
By: /s/ RAYMOND E. JOSLIN
-----------------------------------------
Raymond E. Joslin,
DIRECTOR
By: /s/ SHANNON LEROY
-----------------------------------------
Shannon LeRoy,
DIRECTOR
19
<PAGE>
To The Board of Directors
Power Designs, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Power
Designs, Inc. as of June 30, 1996 and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Power
Designs, Inc. as of June 30, 1996 and the consolidated results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
20 to the consolidated financial statements, the Company's significant operating
losses raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Kostin, Ruffkess & Company, LLC
West Hartford, Connecticut
November 8, 1996
20
<PAGE>
CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT.......................................................... F-1
FINANCIAL STATEMENTS
Consolidated balance sheets......................................................... F-2
Consolidated statements of operations............................................... F-3
Consolidated statements of stockholders' deficit.................................... F-4
Consolidated statements of cash flows............................................... F-5
Notes to consolidated financial statements.......................................... F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Power Designs, Inc. and Subsidiary
Danbury, Connecticut
We have audited the accompanying consolidated balance sheet of Power
Designs, Inc. and Subsidiary as of June 30, 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Company for the
year ended June 30, 1996 were audited by other auditors whose report, dated
November 8, 1996, on those financial statements included an explanatory
paragraph that expressed substantial doubt about the Company's ability to
continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Power
Designs, Inc. and Subsidiary as of June 30, 1997 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
20 to the consolidated financial statements, the Company is currently in default
of debt agreements and its significant losses from operations, accumulated
deficit and working capital deficiency, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 20. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
McGladrey & Pullen, LLP
New Haven, Connecticut
October 3, 1997
F-1
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS (Note 10)
Current Assets
Cash.................................................................................. $ 8,899 $ --
Accounts receivable, less allowance for doubtful accounts of $290,000 in 1997 (Note
4).................................................................................. 729,141 33,395
Inventories (Note 5).................................................................. 1,892,247 174,486
Prepaid expenses...................................................................... 1,523 --
------------- -------------
TOTAL CURRENT ASSETS.............................................................. 2,631,810 207,881
------------- -------------
Equipment and Leasehold Improvements, net (Note 6)...................................... 735,398 4,497
------------- -------------
Other Assets
Goodwill, less accumulated amortization of $150,015................................... 2,867,415 --
Deferred financing costs.............................................................. 190,535 --
Acquisition deposit................................................................... -- 190,000
Other assets.......................................................................... 75,612 25,076
------------- -------------
3,133,562 215,076
------------- -------------
TOTAL ASSETS...................................................................... $ 6,500,770 $ 427,454
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable (Note 10):
Affiliated companies................................................................ $ 5,879,571 $ 939,597
Preferred shareholders.............................................................. 1,087,415 --
Seller of assets acquired........................................................... 1,000,000 --
Others.............................................................................. 1,664,500 185,000
Loan payable--affiliate............................................................... -- 71,251
Current portion of capital lease obligations (Note 8)................................. 38,950 --
Accounts payable...................................................................... 1,613,015 40,087
Accrued expenses...................................................................... 413,794 101,783
Accrued interest...................................................................... 152,597 32,573
Accrued warranty expenses............................................................. 275,000 --
Payables related to reorganization including accrued interest (Note 9)................ 102,126 261,655
------------- -------------
TOTAL CURRENT LIABILITIES......................................................... 12,226,968 1,631,946
------------- -------------
Capital Lease Obligations, less current portion......................................... 39,682 --
------------- -------------
TOTAL LIABILITIES................................................................. 12,266,650 1,631,946
------------- -------------
Commitments and Contingencies (Notes 2, 8, 11, 12, 13, 14 and 15)
Stockholders' Deficit
Common stock, $.0001 par value, 10,000,000 shares authorized, 2,391,493 shares issued
and outstanding at June 30, 1997 and 1996 (Notes 10 and 11)......................... 240 240
Preferred stock, $.01 par value, 1,000,000 shares authorized; 316,743 shares issued
and outstanding at June 30, 1997 (Notes 10 and 11).................................. 3,167 --
Additional paid-in capital (Note 11).................................................... 1,382,807 820,732
Accumulated deficit..................................................................... (7,152,094) (2,025,464)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT....................................................... (5,765,880) (1,204,492)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....................................... $ 6,500,770 $ 427,454
------------- -------------
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Net Sales............................................................................. $ 3,622,236 $ 575,429
Cost of Sales......................................................................... 3,988,374 504,173
------------- -----------
GROSS PROFIT (LOSS)............................................................... (366,138) 71,256
------------- -----------
Operating Expenses
Selling, general and administrative expenses........................................ 3,111,596 360,131
Research and development............................................................ 542,198 35,000
Depreciation and amortization....................................................... 271,133 1,635
------------- -----------
3,924,927 396,766
------------- -----------
NET LOSS BEFORE OTHER INCOME (EXPENSE)............................................ (4,291,065) (325,510)
------------- -----------
Other Income (Expense)
Investment income................................................................... 5,136 1,627
Interest expense (Note 16).......................................................... (840,701) (123,597)
Abandoned acquisition (Note 18)..................................................... -- (126,052)
------------- -----------
OTHER EXPENSE..................................................................... (835,565) (248,022)
------------- -----------
NET LOSS.......................................................................... $ (5,126,630) $ (573,532)
------------- -----------
------------- -----------
Weighted average number of common shares outstanding.................................. 2,391,493 2,346,055
------------- -----------
------------- -----------
Net loss per common share............................................................. $ (2.14) $ (0.24)
------------- -----------
------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL
SHARES PAR SHARES PAR PAID-IN ACCUMULATED
ISSUED VALUE ISSUED VALUE CAPITAL DEFICIT
---------- --------- --------- --------- ------------- -------------
Balance, June 30, 1995.................... 2,176,259 $ 218 -- $ -- $ 784,754 $ (1,451,932)
Conversion of debt to acquire common
stock................................. 215,234 22 -- -- 35,978 --
Net loss................................ -- -- -- -- -- (573,532)
---------- --------- --------- --------- ------------- -------------
Balance, June 30, 1996.................... 2,391,493 240 -- -- 820,732 (2,025,464)
Issuance of preferred stock............. -- -- 316,743 3,167 268,687 --
Issuance of common stock warrants....... -- -- -- -- 309,000 --
Dividends on preferred stock............ -- -- -- -- (15,612) --
Net loss................................ -- -- -- -- -- (5,126,630)
---------- --------- --------- --------- ------------- -------------
BALANCE, JUNE 30, 1997.................... 2,391,493 $ 240 316,743 $ 3,167 $ 1,382,807 $ (7,152,094)
---------- --------- --------- --------- ------------- -------------
---------- --------- --------- --------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (5,126,630) $ (573,532)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 356,533 1,635
Provision for bad debts........................................................... 262,268 --
Fees paid through issuance of common stock warrants............................... 20,000 --
Changes in operating assets and liabilities, net of assets acquired in business
combination:
Increase in accounts receivable................................................. (376,014) (20,616)
(Increase) decrease in inventories.............................................. (316,533) 27,021
(Increase) decrease in prepaid expenses......................................... (1,523) 3,723
Decrease (increase) in acquisition deposit...................................... 190,000 (190,000)
(Increase) decrease in other assets............................................. (42,204) 73
Increase (decrease) in accounts payable and accrued expenses.................... 1,442,532 (5,739)
(Decrease) increase in payables related to reorganization....................... (159,529) 16,690
------------- -----------
NET CASH USED IN OPERATING ACTIVITIES......................................... (3,751,100) (740,745)
------------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment.................................................. (222,397) --
Payments related to assets acquired................................................. (1,946,559) --
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES......................................... (2,168,956) --
------------- -----------
Cash Flows From Financing Activities
Proceeds from sale of preferred stock............................................... 264,854 --
Proceeds from sale of common stock warrants......................................... 296,000 --
Payment of preferred stock dividends................................................ (15,612) --
Payment of deferred financing costs................................................. (294,791) --
Net (decrease) increase in advances from affiliates................................. (71,251) 36,860
Principal payments on capital lease obligations..................................... (7,134) --
Net increase in revolving loans payable............................................. 5,002,544 665,760
Proceeds from notes payable......................................................... 2,794,845 38,125
Principal payments on notes payable................................................. (2,040,500) --
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 5,928,955 740,745
------------- -----------
NET INCREASE IN CASH.......................................................... 8,899 --
Cash and cash equivalents, beginning of year -- --
------------- -----------
Cash and cash equivalents, end of year................................................ $ 8,899 $ --
------------- -----------
------------- -----------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest.......................................................... $ 720,677 $ 63,398
------------- -----------
------------- -----------
Cash payments for income taxes...................................................... $ 976 $ --
------------- -----------
------------- -----------
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligations incurred for equipment.................................... $ 85,766 $ --
------------- -----------
------------- -----------
Note payable issued in business combination......................................... $ 2,750,000 $ --
------------- -----------
------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Power Designs, Inc. and Subsidiary (the "Company") designs, develops,
manufactures and markets a line of industrial and military-grade uninterruptible
power supply/power line conditioning ("UPS/PLC") products and other power supply
regulating products. The Company's products protect industrial-grade process
equipment, military communications equipment, computers, engineering and
computer assisted design workstations, file servers and other local area network
components, medical instruments and other electronically sensitive devices from
damage to systems or data resulting from electrical power disturbances and/or
outages. The Company's principal product is an innovative, proprietary UPS/PLC
product capable of servicing widely divergent power supply sources worldwide.
The Company's products also include variable auto transformers, switching and
linear power supplies for use in military and laboratory applications, and
regulated linear direct current power supplies. These products are used by
industry, scientific research, and electro-medical organizations for such
applications as computers, data processors, video and sound communications
media, nuclear, biological, and medical research, nuclear power generation, and
other facilities where disturbances in the primary power source for these
systems may affect their accuracy and performance.
The principal market for these products is users or manufacturers who
incorporate the products into their equipment. Customers include private
companies, government agencies and educational institutions throughout the
United States and in various foreign countries.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
Certain significant estimates include the allowance for doubtful accounts,
allowance for slow-moving and obsolete inventory, accrued warranty expenses and
required provisions for impairment of long-lived assets and certain intangible
assets. These estimates are susceptible to change in the near term, and these
changes could be significant.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Power Designs,
Inc. and its wholly-owned subsidiary, PDIXF Acquisition Corp. ("PDIXF"). PDIXF
was organized on April 9, 1996 for the purpose of acquiring two divisions of
Penril Datacomm Networks (see Note 2). All intercompany transactions and
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of reporting the statements of cash flows, the Company
considers all cash accounts, which are not subject to withdrawal restrictions or
penalties, and all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
F-6
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
REVENUE RECOGNITION
Revenue from sales of the Company's products is recognized when the related
products are shipped because the Company is not obligated to perform significant
activities after product shipment.
INVENTORIES
Inventories are stated at the lower of average cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed principally by the straight-line method over the estimated useful lives
of the respective assets, ranging from three to seven years. Improvements to
leased property are depreciated over the lesser of the life of the lease or life
of the improvements. Depreciation expense on assets acquired under capital
leases is included with depreciation expense on owned assets.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and debt issuance costs. Goodwill
represents the excess of the purchase price over the estimated fair value of net
assets acquired and is being amortized on a straight-line basis over 15 years.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company evaluates goodwill to determine whether events or
circumstances warrant a write-down or revised estimates of useful lives. The
Company will determine a potential impairment by comparing the carrying value of
goodwill with the estimated future net undiscounted cash flows expected to
result from the use of the assets, including cash flows from disposition. Should
the sum of the expected future net cash flows be less than the carrying value,
the Company would recognize an impairment loss at that date. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value (estimated discounted future cash flows) of the goodwill.
To date, management has determined that no impairment of goodwill exists.
This estimate is susceptible to change in the near term and any changes in
projected undiscounted cash flows could have a significant effect on
management's estimate and on the Company's financial condition.
ESTIMATED WARRANTY EXPENSES
The Company sells its products with a warranty that provides for repairs or
replacements of any defective parts for periods up to two years after the sale.
At the time of the sale, the Company accrues an estimate of the cost of
providing the warranty based on prior experience.
DEFERRED TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion
F-7
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and notes payable approximate
the carrying amount because of the short maturity of those instruments.
NET LOSS PER COMMON SHARE
The net loss per common share is based on the net loss from operations and
the weighted average number of shares of Common Stock outstanding during each
year. Common stock equivalents have been excluded from the computation of the
net loss per common share because inclusion of such equivalents is antidilutive.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"), which
supersedes APB Opinion No. 15. SFAS No. 128 requires the presentation of
earnings per share by all entities that have common stock or potential common
stock such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per share amounts must initially apply SFAS No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of SFAS No. 128 would have had no effect on reported loss per
share.
RECLASSIFICATIONS
Certain 1996 financial statement amounts have been reclassified to conform
with the 1997 financial statement presentation. These reclassifications had no
effect on the 1996 net loss.
NOTE 2. BUSINESS COMBINATION
On October 11, 1996, the Company, through PDIXF, purchased the assets of two
divisions, Technipower, Inc. and Constant Power, Inc., from Penril Datacomm
Networks, Inc (the "Asset Purchase"). In conjunction with the Asset Purchase,
the Company moved its main operating facilities from New York to Connecticut,
which is where the acquired divisions were located.
A summary of the purchase payments in connection with the acquisition
follows:
<TABLE>
<S> <C>
Cash paid to seller at closing....... $ 1,694,085
Note payable to seller............... 2,750,000
Direct acquisition costs............. 252,474
-----------
$ 4,696,559
-----------
-----------
</TABLE>
Direct acquisitions costs include $147,950 paid to Venture Partners, Ltd.
("Venture Partners"), a significant stockholder and a company affiliated with
directors.
F-8
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
A portion of the purchase price will be paid in the form of a royalty,
computed as 2% of quarterly sales of certain products, from September 30, 1997
to June 30, 2001. Because of the uncertainty related to the determination of
such future sales, no amount has been recorded in the financial statements
relating to this contingent portion of the purchase price. All royalty amounts
will be recorded as an addition to the goodwill allocated at the time of
purchase, and amortization of such additional goodwill will be recorded over the
remaining life of goodwill.
A summary of the assets acquired in connection with the acquisition of the
divisions is as follows:
<TABLE>
<S> <C>
Working capital...................... $ 1,154,129
Goodwill allocated................... 3,017,430
Machinery and equipment.............. 525,000
-----------
$ 4,696,559
-----------
-----------
</TABLE>
The statements of operations only include operations for these divisions
from October 11, 1996 to June 30, 1997.
Unaudited proforma consolidated results of operations for the years ended
June 30, 1997 and 1996, as though the division had been acquired at July 1,
1995, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Sales........................................................... $ 4,882,000 $ 4,403,000
Net loss........................................................ $ (7,075,000) $ (3,985,000)
Net loss per common share....................................... $ (2.96) $ (1.67)
</TABLE>
The above amounts reflect adjustments for amortization of goodwill,
additional depreciation on revalued purchased assets, additional interest
expense, and certain production and general and administrative costs.
NOTE 3. DEPENDENCE ON SUPPLIERS
The Company purchases certain raw materials, components and subassemblies
included in the Company's products from a limited group of qualified suppliers
and does not maintain long-term supply contracts with any of its key suppliers.
The disruption or termination of these sources could have a material adverse
effect on the Company's business and results of operations. While the Company is
aware of alternative suppliers for these products, there can be no assurance
that any supplier could be replaced in a timely manner.
NOTE 4. ACCOUNTS RECEIVABLE
During the year ended June 30, 1996 and through October 11, 1996, the
Company sold its accounts receivable to Inverness Corporation ("Inverness"), a
commercial financing company, the principals of which are directors of the
Company and principals of Venture Partners, at 80% of the face value. Under the
agreement, when the account was received, the Company was entitled to the
residual (20%) less a fee to the related party of 2%, 4% or 6% if not collected
within thirty, sixty or ninety days, respectively. If the account was not
collected within ninety days, the Company was required to purchase back the
account at full face value. No significant losses were incurred related to this
arrangement.
F-9
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 5. INVENTORIES
At June 30, 1997 and 1996, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Raw materials....................................................... $ 1,503,127 $ 99,203
Work in process..................................................... 484,527 58,714
Finished goods...................................................... 110,593 16,569
Allowance for slow-moving and obsolete inventory.................... (206,000) --
------------ ----------
$ 1,892,247 $ 174,486
------------ ----------
------------ ----------
</TABLE>
NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, 1997 and 1996, equipment and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Leasehold improvements.................................................. $ 91,614 $ 2,250
Machinery and equipment................................................. 739,759 34,589
Furniture and fixtures.................................................. 6,720 8,811
---------- ---------
838,093 45,650
Less accumulated depreciation........................................... 102,695 41,153
---------- ---------
$ 735,398 $ 4,497
---------- ---------
---------- ---------
</TABLE>
As of June 30, 1997, the cost and accumulated amortization of equipment
under capital leases was $85,766 and $7,970, respectively.
NOTE 7. INCOME TAXES
The tax effects of temporary differences the give rise to significant
components of the deferred tax assets and deferred tax liabilities at June 30,
1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 1,646,600 $ 1,159,400
Allowance for doubtful accounts................................. 118,300 --
Inventory....................................................... 634,000 11,800
Warranty accrual................................................ 112,200 --
Other accruals.................................................. 33,300 --
------------ ------------
Gross deferred tax assets......................................... 2,544,400 1,171,200
Less valuation allowance.......................................... 2,524,700 1,171,200
------------ ------------
Net deferred tax assets........................................... 19,700 --
Deferred Tax Liabilities:
Property and equipment.......................................... (19,700) --
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
</TABLE>
F-10
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
For the years ended June 30, 1997 and 1996, tax benefits recognized for net
operating losses incurred were offset by equal increases to the valuation
allowance for deferred taxes, resulting in no income tax expense or benefit
reflected on the Statement of Operations.
As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,243,000 available to reduce future federal and state taxable
income, which expire as follows:
<TABLE>
<CAPTION>
EXPIRATION AMOUNT
- ---------------------------------------------------------------- ------------
<S> <C>
1998........................................................... $ 10,000
1999........................................................... 10,000
2000........................................................... 10,000
2001........................................................... 10,000
2002........................................................... 10,000
2003........................................................... 10,000
2004........................................................... 10,000
2005........................................................... 10,000
2006........................................................... 10,000
2007........................................................... 10,000
2008........................................................... 10,000
2009........................................................... 55,000
2010........................................................... 529,000
2011........................................................... 549,000
2012........................................................... 3,000,000
------------
$ 4,243,000
------------
------------
</TABLE>
Changes in ownership could result in the limitation in the use of these net
operating loss carryforwards.
NOTE 8. LEASES
The Company leases certain equipment under capital leases with Inverness,
which include a security interest in the property maintained by the lessors. In
addition, the Company has entered into operating leases for the rental of
facilities space and other property. Under the lease for the facilities space,
the Company is required to pay, among other items, all real estate and personal
property taxes, and insurance. The Company was in default of its lease for
facilities space at June 30, 1997 for failure to make all required monthly rent
payments.
In October 1997, the Company and lessor executed a letter agreement
modifying the required payment dates for minimum rent due through December 31,
1997. Rent for the months of October, November and December, 1997 are due on
November 15, 1997, December 15, 1997, and December 31, 1997 respectively.
Commencing January 1, 1998, all monthly rental payments shall be due in
accordance with the original terms of the lease.
F-11
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
PERIOD ENDING JUNE 30, LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1998.................................................................. $ 82,906 $ 111,259
1999.................................................................. 43,144 --
2000.................................................................. 20,701 --
---------- ----------
TOTAL MINIMUM LEASE PAYMENTS........................................ $ 146,751 $ 111,259
----------
----------
Less:amount representing interest ( 68 %)............................. 68,119
---------- ----------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS............................. 78,632
Less:current portion.................................................. 38,950
----------
LONG-TERM PORTION................................................... $ 39,682
----------
----------
</TABLE>
Total rent expense charged to operations under operating leases was
approximately $207,000 and $14,000 for the years ended June 30, 1997 and 1996,
respectively.
NOTE 9. REORGANIZATION
During the year ended June 30, 1994, the Company emerged from Chapter 11 of
the Federal bankruptcy court--State of New York. In accordance with the terms
set by the bankruptcy court, unsecured creditors agreed to accept twenty percent
of the amount due to them for pre-petition claims (five percent upon emerging
from bankruptcy and the remaining 15% over a period of three years). The amounts
due to these unsecured creditors, as well as other amounts due to various taxing
authorities, are due and payable with interest, at June 30, 1997 and 1996, as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Class VI creditors (former unsecured creditors)....................... $ 10,960 $ 30,620
Class V creditors (taxing authorities and union fees)................. 91,166 231,035
---------- ----------
$ 102,126 $ 261,655
---------- ----------
---------- ----------
</TABLE>
At June 30, 1997 and 1996, the Company was in default due to its failing to make
all appropriate payments as required by the bankruptcy court. As a result, the
amounts are shown as current liabilities in the consolidated balance sheet.
F-12
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 10. NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Installment note payable to Venture Partners, as agent, repaid in full October 11,
1996................................................................................ $ -- $ 105,500
Debenture payable to MarTek Group, repaid in full on September 27, 1996............... -- 185,000
Revolving loanpayable to Inverness, repaid in full October 11, 1996................... -- 834,097
Revolving loans payable to Inverness due upon demand, interest payable monthly at 18%,
secured by substantially all assets of the Company.................................. 5,836,641 --
Demand note payable to Inverness, interest payable monthly at 18%, secured by certain
equipment........................................................................... 42,930 --
Term note payable to seller of divisions acquired in September 1996 (see Note 2), due
July 31, 1997, interest payable monthly at the prime rate plus 2% (10.5% at June
30,1997), secured by all outstanding PDIXF stock, and substantially all assets of
the Company. 1,000,000 --
Term notes, subordinated to Inverness notes, payable to preferred stockholders, due
October 31, 2001, interest payable quarterly at 8%, secured by substantially all
assets of the Company............................................................... 1,087,415 --
Unsecured bridge loans, subordinated to Inverness notes, payable to various third
parties, principal and accrued interest at 10% due no later than July 31, 1998, net
of discount of $289,000.Effective interest rate of 12.1% based on maturity date of
July 31, 1998. 1,364,500 --
Unsecured short term loans payable, due March 31, 1998, interest at 10%............... 300,000 --
------------ ------------
$ 9,631,486 $ 1,124,597
------------ ------------
------------ ------------
</TABLE>
REVOLVING LOANS PAYABLE
In conjunction with the Asset Purchase and to provide working capital to the
Company, the Company entered into a series of agreements with Inverness
Corporation, which provided for total borrowings of up to $6,000,000.
F-13
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
The Company is in violation of certain covenants contained in the loan
agreements, however Inverness has not exercised its rights to immediately demand
payment as a result of these covenant violations.
During the year ended June 30, 1997, the Company paid $100,000 of fees to
Inverness in connection with these loan agreements.
TERM NOTE PAYABLE TO SELLER
The obligation to Penril Datacomm Networks (now known as Access Beyond) (the
"Seller") incurred in conjunction with the Asset Purchase (see Note 2) was
initially due in full on December 31, 1996, however the Company was unable to
pay the obligation in full at that time. The Company subsequently entered into a
series of forbearance agreements with the Seller, however, on July 31, 1997, the
Company was unable to make the payments required and the Company is now in
violation of the forbearance agreement. As of October 3, 1997, the Seller has
not taken any available actions including a demand for immediate repayment under
the agreement.
TERM NOTES
These notes were issued to various investors in conjunction with the private
placement sale of these notes, the Company's preferred stock and common stock
purchase warrants (see Note 11). At June 30, 1997, the Company was in violation
of certain covenants contained in the related loan agreements, and the Company
has failed to pay all required interest payments due on these notes, and
therefore these obligations are classified as current liabilities in the
consolidated balance sheet at June 30, 1997. The investors have not taken any
available actions to accelerate and demand payment on these obligations.
UNSECURED BRIDGE LOANS
These loans were issued as part of a private placement offering of $100,000
units comprised of these notes and common stock purchase warrants, which
commenced on March 21, 1997, and was completed on July 31, 1997. For each unit
purchased, the bridge lenders received a promissory note for $100,000 due no
later than July 31, 1998, and 40,000 warrants to acquire shares of the Company's
common stock for $.25 per share. The obligations outstanding of $1,364,500 at
June 30, 1997 represent the total amount raised through the offering of
$1,653,500, less $289,000 allocated to the warrants and recorded as additional
paid in capital. The $289,000 discount resulting from this allocation will be
amortized over the lives of the loans.
NOTE 11. CAPITAL STOCK
PREFERRED STOCK
In October 1996, in conjunction with the Asset Purchase, the Company sold to
certain investors, securities comprised of subordinated notes (see Note 10),
Class A Convertible Preferred Stock, and common stock purchase warrants (See
Note 12). A total of $1,359,269 was raised through the sale of these securities,
of which $1,087,415 was allocated to the notes, $264,854 was allocated to the
preferred stock, and $7,000 was allocated to the warrants based on the fair
value of each investment.
F-14
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
The principle features of Class A Convertible Preferred Stock are as
follows:
VOTING RIGHTS
All preferred shares are entitled to one vote per share.
DIVIDENDS
When declared by the Company's Board of Directors, a dividend of 8% per
annum on the amount at which the shares were originally issued. Dividends are
payable quarterly in arrears, all unpaid or undeclared dividends are accrued,
and all unpaid dividends are payable upon conversion of preferred stock to
common stock, or upon liquidation of the Company.
Accrued but unpaid dividends shall be forfeited upon conversion of such
shares to shares of common stock.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation of the Company, the
holders of preferred stock are entitled to receive distributions, plus in the
case of each share, accrued and unpaid dividends, before any distribution or
payment to the holders or common stock.
CONVERSION
The holders of each share of Preferred Stock have the right to convert their
shares of preferred stock into shares of common stock at the conversion ratio of
$.875 per share, which prices are subject to adjustment from time to time.
However, each share of preferred stock shall be automatically converted into
common stock upon the closing of a $10 million public offering of common stock.
If such public offering is between $5 million and $10 million, then conversion
will occur only if approved by greater than 50% of the preferred stockholders.
COMMON STOCK
In accordance with covenants contained in certain debt agreements, the
Company is restricted from paying dividends to owners of the Company's common
stock.
During June 1995, the Board of Directors changed the par value of the
Company's common stock from $.10 per share to $.0001 per share, which resulted
in a decrease in the carrying value of the common stock of $217,408 and an
identical increase in paid-in capital.
On September 15, 1995, Venture Partners transferred 810,716 restricted
shares of common stock, plus an additional 261,312 unrestricted shares of common
stock, to its affiliate Millenia Capital Holding, LLC.
NOTE 12. STOCK OPTION AND WARRANT PLANS
STOCK OPTION PLAN
Pursuant to the Company's stock option plan, incentive stock options are
generally granted at prices equal to or greater than the fair market value of
the Company's stock at the date of grant, and are exercisable at the date of
grant unless otherwise stated. In addition, non-qualified options are granted at
a price determined by the Company's stock option committee, which may be less
than market value, in which
F-15
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
case an expense equal to the difference between the option price and market
value is recognized. The exercise period for both the incentive and
non-qualified stock options generally cannot exceed ten years.
Also, under this Plan, the Company may grant shares of restricted stock to
employees, the restrictions and price of such shares to be paid by the
employees, if any, are determined at the time of grant.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), on July 1, 1996.
SFAS No. 123 established new standards for stock-based compensation plans under
which employees receive shares of stock or other equity instruments, such as
stock options, of the employer. This Statement established a fair value based
method of expense recognition for stock-based compensation plans and encouraged,
but did not require, entities to adopt that method in place of existing
generally accepted accounting principles. As permitted by SFAS No. 123, for
options granted where the exercise price at date of grant is equal to or exceeds
the fair market value of the Company's stock, the Company has elected to
continue under existing generally accepted accounting principles and to account
for the options granted under APB Opinion No. 25, and accordingly, no
compensation cost has been recognized in the statements of operations for grants
under the option plan. Had compensation cost for the stock option plan been
recognized based on the grant date fair values of awards, the method described
in SFAS No. 123, the reported net loss for the year ended June 30, 1997 would
have been increased to the pro forma amounts shown below:
<TABLE>
<S> <C>
Net loss:
Pro forma...................................................... $(5,133,130)
-----------
-----------
As reported.................................................... $(5,126,630)
-----------
-----------
Net loss per share:
Pro forma...................................................... $ (2.15)
-----------
-----------
As reported.................................................... $ (2.14)
-----------
-----------
</TABLE>
The fair value of each grant, used to determine the proforma net loss above,
is estimated at the grant date using the fair value option-pricing model with
the following weighted average assumptions for grants awarded during the year
ended June 30, 1997:
<TABLE>
<S> <C>
Dividend rate......................................................... 0.0%
Risk free interest rate............................................... 6.0%
Weighted average expected lives, in years............................. 2.70
Price volatility...................................................... 30.0%
</TABLE>
F-16
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
A summary of the status of the Company's stock option plan at June 30, 1997
and 1996, and changes during the years ended on those dates, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTIONS EXERCISE
RESERVED OUTSTANDING PRICE
--------- ----------- ---------
<S> <C> <C> <C>
Balance, June 30, 1995.................................... 522,302 121,608 $ .05
Canceled................................................ -- $ --
Granted................................................. -- $ --
Exercised............................................... -- $ --
--------- ----------- ---------
Balance, June 30, 1996.................................... 573,958 121,608 $ .05
Canceled................................................ -- $ --
Granted................................................. 415,156 $ .48
Exercised............................................... -- $ --
--------- ----------- ---------
Balance, June 30, 1997.................................. 573,958 536,764 $ .38
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
At June 30, 1997 and 1996, 181,608 and 101,340 of the outstanding options
were exercisable, respectively. The weighted-average grant date fair value per
option of options granted during the year ended June 30, 1997 was $.02.
A further summary of options outstanding at June 30, 1997, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ----------------- ------------- ----------- -------------
$ .01 to $.875 536,764 4.5 $ .38 181,608 $ .12
</TABLE>
STOCK WARRANTS
In October 1996, in conjunction with certain loans made by Inverness to the
Company, the Company issued 1,297,163 common stock purchase warrants
("warrants") with a fair value of $20,000 to Inverness, which are exercisable at
$.25 per share. Also, the Company issued 416,749 warrants, with an exercise
price of $.875 per share, to certain investors in conjunction with the sale of
preferred stock and subordinated notes payable (see Note 11), and $7,000 of the
total proceeds received from such sale was allocated to the warrants and
recorded as additional paid in capital. In addition, the Company issued 661,400
warrants, with an exercise price of $.25 per share, to certain investors in
conjunction with the sale of notes payable (see Note 10), and $289,000 of the
total proceeds received from such sale was allocated to the warrants and
recorded as additional paid in capital.
There were no warrants issued or outstanding as of and for the year ended
June 30, 1996.
F-17
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
The following table summarizes warrants outstanding at June 30, 1997, and
the changes in warrants during the year then ended:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES NUMBER OF EXERCISE
RESERVED SHARES PRICE
---------- ---------- -----------
<S> <C> <C> <C>
Balance, June 30, 1996................................... -- $ --
Canceled................................................. -- $ --
Granted.................................................. 2,375,312 $ 0.36
Exercised................................................ -- $ --
---------- ---------- -----
BALANCE, JUNE 30, 1997................................... 2,375,312 2,375,312 $ 0.36
---------- ---------- -----
---------- ---------- -----
A further summary of warrants outstanding at June 30,
1997, is as follows:
</TABLE>
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ----------------- ------------- -------------- -----------
$ .25 to $.875 2,375,312 4.4 $ .36 1,713,912 $ .40
</TABLE>
NOTE 13. 401(k) PLAN
The Company maintains a 401(k) profit sharing plan for the benefit of
substantially all its employees who meet certain minimum eligibility
requirements and who elect to participate. Under the terms of the Plan,
participants can contribute up to 15% of their pay to the extent permitted by
law. The Company may make matching contributions to the Plan equal to 50% of the
employees' annual contributions, as well as discretionary non-matching
contributions, however the annual matching contribution is limited to 13% of
participant compensation. Participants are immediately vested in their
contribution. Company contributions vest at the rate of 20% per year after one
year of service. Company contributions to the Plan were approximately $25,000
during the period ended June 30, 1997. No contributions were made in fiscal
1996.
NOTE 14. COMMITMENTS
The Company has entered into employment agreements with certain officers of
the Company. The agreements are for up to three years with one year optional
renewal periods and provide a base salary and certain benefits which are
specified in each agreement.
NOTE 15. LITIGATION
Two lawsuits have been brought against the Company by entities seeking
payment for goods and services provided to the Company. The first lawsuit seeks
payment of approximately $144,300, and the Company has recorded a liability for
approximately $86,600 for goods and services received as of June 30, 1997. The
second lawsuit seeks payment of $34,500, and the Company has recorded a
liability for the entire amount claimed as of June 30, 1997.
F-18
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 16. RELATED PARTY TRANSACTIONS
The Company has entered into an agreement, which has no specified expiration
date, with Venture Partners whereby Venture Partners is paid a minimum of
$10,600 per month, plus expenses, for various consulting services provided to
the Company. The Company is not committed to pay Venture Partners under this
agreement for future periods. During the year ended June 30, 1997, the Company
incurred approximately $189,000 of expenses under this agreement and for
services provided outside of the agreement.
During the year ended June 30, 1997, the Company paid $17,500 to a director
as a finder's fee for obtaining debt financing. Such fees are included in
deferred financing costs in the balance sheet.
During the year ended June 30, 1997, the Company advanced $5,000 to a member
of senior management, which is included in accounts receivable in the balance
sheet.
As outlined in Note 10 to the consolidated financial statements, the Company
has various lending agreements with Venture Partners and Inverness whose
principals are also directors of the Company. Interest expense incurred on these
loans totaled $553,944 and $92,220 for the years ended June 30, 1997 and 1996,
respectively.
NOTE 17. SALES TO FOREIGN CUSTOMERS
Sales to foreign customers were approximately $439,000 for the year ended
June 30, 1997. Sales to foreign customers for the year ended June 30, 1996 were
not significant.
NOTE 18. ABANDONED ACQUISITION
During the year ended June 30, 1995, the Company entered into an acquisition
agreement with Cycle Transformer, Inc. ("Cycle") and the MarTek Group
("MarTek"), under which MarTek agreed to transfer its right to purchase Cycle to
the Company for $60,000. The Company negotiated for a capital infusion from
Cycle and MarTek in the amount of $146,875. Power Designs advanced a total of
approximately $76,000 to Cycle prior to June 30, 1995. This transaction was
never fully consummated, and litigation ensued. On July 31, 1996, the Company
agreed to pay Cycle, MarTek and the representative of MarTek $185,000 in an
out-of-court settlement and this amount was paid on September 27, 1996.
Additionally, the Company reimbursed an affiliate for advances made to Cycle on
behalf of the Company for approximately $82,000 and incurred legal costs of
approximately $25,000. The abandoned acquisition of $202,445 ($126,052 in 1996
and $76,393 in 1995) represents the losses incurred relative to these
transactions including reimbursement of costs claimed by MarTek of approximately
$19,000.
NOTE 19. REINCORPORATION
On April 20, 1995, the stockholders approved a resolution calling for the
reincorporation of the Company under Delaware law by merging the Company into a
Delaware corporation also named Power Designs, Inc. On August 8, 1997, the
merger was approved by the New York State Department of State, Division of
Corporations.
F-19
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 20. LIQUIDITY AND GOING CONCERN UNCERTAINTIES
An unacceptable level of product failures, resulting from significant
manufacturing problems, in the early shipments of the UPS/PLC product line
required the Company to temporarily suspend production and distribution of this
primary product during the current fiscal year. As a result, the Company has
experienced significant financial difficulties including incurring significant
operating losses which have resulted in a significant working capital deficiency
and a significant accumulated deficit as of June 30, 1997. In addition, the
Company is in default of several debt agreements (see Note 10) and is in need of
additional financing to fund operations.
The Company's plans with regard to these difficulties include instituting
processes that can streamline operations, and raising additional debt and
capital financing. Operating plans include contracting for an outsourced
manufacturing resource to allow for active production of the UPS/PLC product
line to resume, and allow for a higher volume of production. The Company is also
reassessing its pricing strategies for many of its products. Operating costs are
being closely monitored and temporary staffing reductions have been made to
reduce operating expenses. In order to address the Company's financing
requirements, the Company is planning for an infusion of additional temporary
bridge financing during 1997, and raising new equity capital in early 1998.
However, there can be no assurances that the Company will be able to obtain such
additional debt and equity financing, or be successful at streamlining and
improving operating results.
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,899
<SECURITIES> 0
<RECEIVABLES> 1,019,141
<ALLOWANCES> (290,000)
<INVENTORY> 1,892,247
<CURRENT-ASSETS> 2,631,810
<PP&E> 838,093
<DEPRECIATION> (102,695)
<TOTAL-ASSETS> 6,500,770
<CURRENT-LIABILITIES> 12,226,968
<BONDS> 39,682
0
3,167
<COMMON> 240
<OTHER-SE> (5,769,287)
<TOTAL-LIABILITY-AND-EQUITY> 6,500,770
<SALES> 3,622,236
<TOTAL-REVENUES> 3,622,236
<CGS> 3,988,374
<TOTAL-COSTS> 3,988,374
<OTHER-EXPENSES> 3,924,927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835,565
<INCOME-PRETAX> (5,126,630)
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,126,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,126,630
<EPS-PRIMARY> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
