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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, 1998.
/ / 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.
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(Name of Small Business Issuer as specified in its charter)
Delaware 11-1708714
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
14 Commerce Drive, Danbury, Connecticut 06810
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(Address of principal executive offices) (Zip Code)
(203) 748-7001
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
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<CAPTION>
Name of each exchange on
Title of Each Class which registered
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None None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
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(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
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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. $2,602,387
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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
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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
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DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to Fiscal Year 1995 10-KSB
Exhibits to Fiscal Year 1996 10-KSB
Exhibits to Fiscal Year 1997 10-KSB
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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.
In early 1995, the issuer's shareholders approved a resolution calling
for the re-incorporation 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.
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
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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 $439,000 and
$192,000 for fiscal years 1997 and 1998 respectively..
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. However, during the second quarter of
fiscal year 1997, 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"). 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.
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 serious technical and production problems. As a
result of the significant operating losses sustained during its attempts to
resolve these issues, the issuer ceased operations and filed for relief under
Chapter 11 of the United States Bankruptcy Code on January 22, 1998. On January
26, 1998 the issuer reopened for business on a reduced scale and under new
management. At this writing, the issuer continues to manufacture its original
product line, as well as the autotransformer and military power supply lines
purchased in the 1996 acquisition.
The issuer's primary research and development activities center on the
customization and special engineering of its products. Prior development of the
UPS/PLC product line in the 1997 fiscal year resulted in a substantial increase
to 14.8% of annual revenues or approximately $542,000 devoted to research and
development. The continuation of the same project is reflected in the fiscal
year 1998 expense of $406,000 or 15.6% of revenues. In like manner, the average
number of employees engaged in
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these efforts was six in 1997 and totaled four in 1998. Total employees at June
30, 1998 number 23.
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 the significant operating losses sustained prior to the
suspension of the UPS/PLC product line, the issuer filed for bankruptcy
protection under Chapter 11 on January 22, 1998. A plan of reorganization,
outlining the issuer's initial plans to discharge its responsibilities, was
filed by the debtor in May of 1998. Ongoing negotiations between the debtor and
its various creditor constituencies have resulted in an amended plan of
reorganization, expected to be filed by the debtor during fiscal year 2000.
Pursuant to a previous Chapter 11 filing, a plan of reorganization,
under which Venture Partners, Ltd. ("Venture Partners") as agent, 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 expired on
February 28, 1998 and was subsequently extended for an additional five year
term. Fixed annual rental payments total $186,000. The payments do not include
additional charges for real estate taxes and are subject to adjustments.
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On October 9, 1997, the issuer and its 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
were due on November 15, 1997, December 15, 1997, and December 31, 1997
respectively. Commencing January 1, 1998, all monthly rental payments were due
in accordance with the original terms of the lease. On November 15, 1997 the
issuer defaulted on the letter agreement for nonpayment of rent. As of this
date, the issuer is current on all post-petition payments due under the existing
lease agreement. In an effort to control costs, the issuer has determined that a
smaller facility would adequately house the current production needs, and has
retained a local real estate brokerage firm to sublet the existing facility.
The issuer formerly leased 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 expired on February 28, 1998 and provided for fixed
annual rental payments, which equal $48,573 for the fiscal year ending June 30,
1997 and $33,238 for the fiscal year ending June 30, 1998. The payments included
base year taxes and common area maintenance charges. At expiration, the issuer
was in both monetary and non-monetary default of this lease.
ITEM. 3 LEGAL PROCEEDINGS
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 subsequently negotiated the terms of a forbearance agreement, which
called for weekly progress payments of principal and interest at 8%. At this
writing the issuer is in default of this forbearance agreement, and the
remaining balance has been classified as a prepetition liability subject to
compromise.
In August 1997, an advertising service provider, initiated a collection
action for money damages for advertising services performed in the amount of
$34,500. The plaintiff subsequently withdrew their complaint.
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
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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, Prophet
Information Services, Inc. of Palo Alto, California.
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Fiscal years ended
June 30, 1997 and 1998 1997 1998
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High Low High Low
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1st Quarter $0.50 $0.50 $0.75 $0.75
2nd Quarter 1.75 1.75 0.60 0.60
3rd Quarter 1.50 1.38 0.50 0.15
4th Quarter 0.75 0.75 0.50 0.15
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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 1997 and 1998, the issuer's monetary and
non-monetary resources were significantly directed toward the development and
production of a new line of uninterruptible power supplies and power line
conditioners. Repeated attempts by the issuer to resolve the technical and
manufacturing problems persistent in the new product line remained unsuccessful.
As a result, the issuer could not generate the sales necessary to meet its
existing financial obligations. Employees of the issuer were furloughed in
December 1997 and all production operations ceased. On January 15, 1998 Fred G.
Basso resigned his position as President of the issuer. On January 22, 1998 the
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issuer, and its wholly owned subsidiary, PDIXF Acquisition Corporation, filed
petitions of relief under Chapter 11 of the United States Bankruptcy Code.
In the Chapter 11 case, substantially all liabilities as of the date of
the Filing are subject to resolution under a plan of reorganization to be voted
upon by the Debtors' creditors and stockholders and confirmed by the Bankruptcy
Court. Schedules have been filed by the Debtors with the Bankruptcy Court
setting forth the assets and liabilities of the Debtors as of the Filing as
shown by the Debtors' accounting records. Differences between amounts shown by
the Debtors and claims filed by creditors will be investigated and reconciled.
The amount and settlement terms for such disputed liabilities are subject to
allowance by the Bankruptcy Court. Ultimately the adjustment of the total
liabilities of the Debtors remains subject to a Bankruptcy Court approved plan
of reorganization, and, accordingly, the amount of such liabilities is not
presently determinable.
Under the Bankruptcy Code, the Debtors may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition contracts, subject to Bankruptcy
Court approval. The Debtors continue to review leases and contracts, as well as
other operational changes, and cannot presently determine or reasonably estimate
the ultimate outcome of, or liability resulting from, this review. Claims
secured against the Debtors' assets ("secured claims") also are stayed, although
the holders of such claims have the right to move the Court for relief from the
stay. Secured claims are secured primarily by liens on the Debtor's machinery,
equipment and accounts receivable.
On January 26, 1998 the issuer re-opened for business as
Debtor-in-Possession under new management. Since that time, the issuer has been
in the sole business of manufacturing its three remaining product lines:
military power supply products, variable autotransformers, and laboratory power
supplies. A small group of approximately twenty employees were gradually
recalled to work. Claims for wage arrearages were paid to those returning
employees up to the $4,000 maximum per employee permitted by law.
On May 12, 1998 the issuer filed a Plan of Reorganization (the "Plan")
with the Office of the U.S. Trustee. The plan is a proposal of Power Designs
Inc., and PDIXF Acquisition Corporation to their Creditors and holders of Equity
Interests. The Plan is the product of discussions with the Debtors' senior
secured creditor, Inverness, which has agreed to support the Plan. The Plan
undertakes to resolve all secured claims, administrative claims, priority
claims, unsecured claims and equity interests. The Debtors believe that the
distributions to be made, pursuant to the terms of this Plan, will produce for
Creditors not less than they would receive if the Debtors' cases were converted
to cases under Chapter 7 of the Code, the Debtors' assets liquidated and
appropriate distributions therein were made as required by the Code.
In summation, the Plan provides for substantive consolidation of the
two co-debtors as well as six classes of claims and equity interests, described
as follows:
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1. Class 1, the allowed secured claims of Inverness Corporation, shall receive
a secured note in the amount of $2,100,000 with interest at 10% annually
and approximately 577,400 shares of common stock in the reorganized
corporation.
2. Class 2, the allowed claim of Hayes Corporation, shall receive a secured
note in the amount of $600,000 with interest at 10% annually and
approximately 123,800 shares of common stock in the reorganized
corporation.
3. Class 3, the allowed employee priority claims, shall receive the full
amount of their allowed employee priority claim in eight equal monthly
payments together with interest at 7%.
4. Class 4, the allowed unsecured claims, shall receive approximately
1,298,800 shares of common stock in the reorganized corporation.
5. Class 5, the equity interests in Power Designs, Inc., shall be
deemed cancelled as of the effective date of the Plan.
6. Class 6, the equity interests in PDIXF Acquisition Corporation,
shall be deemed cancelled as of the effective date of the Plan.
Funding of the payments, required under the Plan, will be made from cash
accumulated by the issuer from the petition date to the effective date, the
proceeds available under the working capital note, and other sources of
commercial financing as may be available at the time of confirmation. Additional
information as to the financing arrangements is found at Item 6 - "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and capital resources."
As filed, the Plan is currently the subject of negotiation between the
issuer and various creditor committee constituencies. It is anticipated that an
amended plan of reorganization, containing the results of these discussions,
will be filed by the issuer during fiscal year 2000.
CURRENT DEVELOPMENTS
Subsequent to the end of fiscal 1996, the issuer agreed to purchase the
assets of two subsidiaries of Penril DataComm Networks, Inc. (n/k/a Hayes
Corporation). That acquisition was consummated on October 11, 1996, and reported
on a Form 8-K dated October 28, 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. After the transaction was
completed, the issuer consolidated its managerial and manufacturing operations
at the former Penril site in Connecticut. This move was completed on November 5,
1996.
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Contemporaneous with the acquisition, the issuer received additional
financing of about $6.4 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 years 1997 and 1998, the issuer's manufacturing and
engineering efforts were primarily directed toward the development and
manufacture of an innovative line of uninterruptible power supply/power line
conditioners purchased as part of the Penril acquisition. A considerable
investment of the issuer's financial resources was made in material, machinery
and personnel. To finance this investment, the issuer raised working capital
through a combination of additional, secured revolving debt of approximately
$4.7 million and unsecured bridge instruments of approximately $2.3 million. The
issuer's inability to resolve the technical problems, which plagued the UPS/PLC
product line, resulted in numerous product failures both in the field and in the
factory. Consequently product sales fell well below management's original
projections, and the issuer suffered significant operating losses during these
periods. As a result of these losses, the issuer was unable to meet its current
financial obligations, as well as the debt repayments, which were required under
the Penril Term Note and other notes.
In an effort to conserve working capital, the issuer began a series of
workforce reductions commencing in the first quarter of fiscal 1998. During
December 1997 the remaining employees were furloughed. Fred G. Basso, President
of the issuer, resigned his position on January 15, 1998, and the issuer filed
petitions of relief under Chapter 11 of the United States Bankruptcy Act on
January 22, 1998. 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."
On January 26, 1998 the issuer, as Debtors-in-Possession, resumed
operations on a limited scale. Pursuant to a court order, the issuer retained
The Vantage Partners LLC, a management consulting firm, who, together with
Melvin A. Becker, Vice President of Operations, comprise existing senior
management. Approximately twenty employees were recalled to work in the
production of the three remaining product lines. Since that time, management's
efforts have been concentrated in the following areas: restoring customer
relationships, streamlining operating costs, improving manufacturing quality and
material procurement efficiencies, and re-establishing credit availability with
vendors and suppliers.
In an effort to preserve prior investments made in the proprietary
UPS/PLC product technology, the issuer also recalled to work an original member
of the engineering staff, who was integral to the development of the technology.
This individual was charged by the issuer with the task of examining and
redesigning the product to yield one with optimal manufacturing costs, and
minimal field product failure. By the end of fiscal year 1998, the products had
been examined, findings documented, and a design modification conceptualized.
Although it is the intention of management to prepare the technology for a
potential development and/or licensing joint venture in the
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future, there can be no assurances that such a joint venture partner can be
located, or that such an endeavor can be profitably consummated.
To provide working capital during the reorganization period, the
issuer, pursuant to court order, entered into two financing agreements with
outside parties (see Item 6 - "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Liquidity and capital resources"). These
agreements are collateralized by the accounts receivable and machinery and
equipment of the issuer.
In May of 1998, the issuer filed a Plan of Reorganization with the
Office of the U.S. Trustee (see Item 6 - "Management's Discussion and Analysis
of Financial Conditions and Results of Operations - Bankruptcy proceedings").
The Plan provides for the cancellation of all existing equity interests, and the
issuance of 2,000,000 new common shares to be divided among Inverness
Corporation, Hayes Corporation, and the unsecured creditors. Approximately $2.7
million of secured debt is proposed to remain post-confirmation and will bear
interest at 10% annually. Employee priority claims will be paid in installments
to the limit provided by law. All remaining claims will be deemed unsecured
non-priority claims, and their holders will receive a proportionate number of
common shares in the reorganized corporation. At this writing, the Plan as filed
is the subject of continuing discussions between the debtors and the various
creditor representatives. It is anticipated that these discussions will result
in an amended plan of reorganization, which will be filed by the debtors in a
subsequent period.
Subsequent to the end of fiscal 1998, the issuer engaged the services
of a local real estate broker to locate a smaller facility, suitable for
manufacturing the current product offerings. The broker also has been retained
to solicit a sublet tenant for the issuer's existing rented facility. In
addition to various cost-saving measures, the issuer has likewise retained the
services of outside sales consultants and manufacturer's representatives in an
effort to expand the customer base and increase product revenue. There are,
however, no assurances that the issuer will be able to effectuate these
measures, or that such measures will produce the desired results.
LIQUIDITY AND CAPITAL RESOURCES.
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.
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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 $8,000,000.
As a result of the UPS/PLC product failures created by the
manufacturing problems described above, the issuer experienced significant
shortages in working capital. To combat these shortages, 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 $1,653,500 at June 30,
1998 represent the total amount raised through the offering.
In addition to the loans described above, the issuer has received two
unsecured loans in the aggregate amount of $300,000 payable to two investors, as
well as additional unsecured loans in the amount of $313,000 payable to four
affiliates on terms similar to those of the Bridge Notes.
Following the Chapter 11 filing in January of 1998 pursuant to a court
order, the issuer, as debtor-in-possession, entered into a financing agreement
with Venture Partners Ltd., as agent, to borrow working capital, up to a maximum
of $400,000. The terms of this agreement call for interest at 20% and a term of
120 days. This debt is collateralized firstly by the machinery and equipment of
the issuer, and secondarily by its accounts receivable. A total of $245,000 is
presently outstanding on this loan. As of this date the term of the note has
expired placing the borrower in default. At this time, no demand for repayment
has been received by the issuer.
Similarly, in February of 1998 the issuer, pursuant to a court order,
entered into a receivable factoring agreement with Porter Capital Corporation
("Porter"), whereby trade receivables are sold to Porter at 94% of face value. A
4% and 2% rebate is returned to the issuer if the receivable is collected within
60 and 90 days respectively. Fees to Porter include a minimum of 2% of the face
amount of the receivables factored, and an annual interest rate of prime on the
outstanding amount advanced. Collateral for this obligation comprises the
factored receivables, with a secondary lien on the machinery and equipment of
the issuer. In September of 1998 the before mentioned agreement was modified to
a minimum fee of 2.5% for receivables collected within 60 days and an additional
1% for each additional 15 days outstanding to a maximum of 90 days.
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At this writing the issuer has liquidated $78,655 of its pre-petition
labor arrearages. As of this date the only remaining pre-petition labor
arrearage is that of certain former officers, as well as accrued vacation wages
for all former employees that did not return to work. During this time period
the issuer was in discussions with the U.S. Department of Labor regarding this
matter. The Plan of Reorganization addresses the liquidation of the priority
portion of these pre-petition liabilities over a period of eight months.
The issuer hopes to be able to supply a greater percentage of its
working capital needs through improved operating cash flow during the 1999 and
2000 fiscal years. This improved operating cash flow is predicated upon a
stabilized core product manufacturing process and increased revenue for fiscal
2000 of which there can be no assurance. Nevertheless, the issuer expects that
it will be in need of additional financing in future post Chapter 11
confirmation periods. In an effort to reduce expenses, the issuer is in the
process of preparing financial projections for presentation to commercial
lenders. It is the intent of management to replace the current
debtor-in-possession financing with less costly, conventional financing
arrangements.
At June 30, 1998 the issuer currently has a net stockholders' deficit
of approximately $14,400,000, meaning that amounts owed to its creditors exceed
the issuer's assets.
As a result of the issuer's net loss position, no provision has been
made for income taxes. Approximately $12,870,000 of net operating loss
carryforwards remain available to reduce future federal and state taxable
income, which expire in 1999 through 2013. 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,
including changes resulting from a Chapter 11 plan confirmation, could result in
a limitation in the use of these net operating loss carryforwards.
The issuer is in the process of implementing and executing a Year 2000
compliance plan with the objective of having all of their significant business
systems, including those that affect facilities and manufacturing activities,
functioning properly with respect to the Year 2000 issue before January 1, 2000.
The issuer has assessed their internal processes and systems, and believes that
sales, administration, and general operations are substantially Year 2000
compliant. Prior to purchasing any new equipment or software, it is the issuer's
policy to ensure that the specifications include Year 2000 compliance.
As part of this assessment, significant service providers, vendors,
suppliers, and customers that are believed to be critical to business operations
after January 1, 2000, have been identified and steps are being undertaken in an
attempt to reasonably ascertain their stage of Year 2000 readiness. The issuer
intends to complete this inquiry and assessment of the Year 2000 readiness of
the systems and products of these third parties
11
<PAGE>
by late 1999. However, due to the need to devote management and financial
resources to other operational matters, the issuer has not as yet completed this
inquiry and assessment.
To minimize potential disruptions, the issuer intends to adopt a
contingency plan, if deemed necessary, to address any issues raised during the
planned assessment in 1999. Because no specific instance of material Year 2000
non-compliance has been discovered to date, the issuer has not adopted a
contingency plan to deal with Year 2000 issues.
Based upon the internal investigation to date, the issuer does not
expect the total costs of the Year 2000 review and compliance to have a material
adverse effect on the business or financial results. The issuer may have to
spend a material amount to develop and implement a contingency plan during 1999,
if the issuer finds that a material supplier or other third party upon whom the
issuer relies will face business interruptions as a result of Year 2000 issues.
Based upon the review of the Year 2000 issues to date, the issuer does
not anticipate significant interruption of normal internal operations. The
failure to correct a material Year 2000 problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the issuer's results of
operations, liquidity and financial condition. The issuer believes that, with
the completion of its Year 2000 assessment as scheduled, the possibility of
significant interruptions of normal operations should be minimized.
FINANCIAL CONDITION
The inventory obsolescence and the reduction in shipping levels
resulting from the discontinuance of the UPS/PLC production account for many
of the substantial changes in assets and liabilities from June 30, 1997 to
June 30, 1998. Current assets decreased by approximately 49% over fiscal year
1997 to $1,335,885. This decrease, which is primarily attributable to
inventories and accounts receivable, is the direct result of the volume
decreases created by the return to core product manufacturing only. There
were no material changes in prepaid assets or cash over fiscal year 1997.
However, equipment and leasehold improvements decreased from $735,398 to
$538,098. This decrease is primarily attributable to a reclassification of
certain leased manufacturing equipment to other assets. This equipment was
integral in the manufacture of the discontinued products and was removed from
service at the time of the Chapter 11 filing. The ultimate disposition of
this machinery will be a matter determined at Plan confirmation. Goodwill of
$2,867,415 at June 30, 1997 represents the excess of the purchase
consideration paid to Penril, over the value of the net assets acquired.
During the second quarter of fiscal 1998, management reviewed the future net
cash flows related to goodwill, and determined that there is no continuing
fair value associated with this asset. As such it is carried at zero value at
June 30, 1998.
Total liabilities increased by 34% to $16,453,843 over fiscal year
1997. $3.5 million of the $4.1 million increase in total liabilities represents
additional notes payable, accounts payable and accrued expenses incurred to fund
the significant operating losses incurred in the pre-petition period. The
remainder of the increase over June 30, 1997
12
<PAGE>
represents those trade payables and accrued liabilities incurred from filing
through June 30, 1998, as well as the outstanding balance on the
post-petition working capital note of $245,000 and $253,327 of advances under
a factoring agreement. Liabilities subject to compromise of $15,675,036 at
June 30, 1998 represent those pre-petition claims, which will be impaired
under the proposed plan of reorganization. In the case of this issuer, all
remaining pre-petition claims have been classified as liabilities subject to
compromise.
Total stockholders' deficit increased by 150% to $14,414,947 over
fiscal year 1997. This increase is generated solely by operating losses incurred
in the current fiscal year of $8,649,067. Common stock, preferred stock, and
additional paid-in capital remain unchanged from June 30, 1997. During fiscal
year 1998, 40,000 common stock purchase warrants were issued to certain
unsecured investors in conjunction with the execution of various notes payable
to those investors. These warrants are exercisable at $0.25 per share. Due to
the proposed impairment of all existing equity interests in the issuer, no value
has been assigned to these warrants.
RESULTS OF OPERATIONS
The issuer's sales during fiscal 1998 decreased by 28% over fiscal year
1997, to $2,602,387 while its gross loss increased by 201% over the same period.
The seriously low manufacturing yields, as well as the inventory obsolescence
generated by the now-defunct UPS/PLC product line are the key factors inherent
in this loss. In like manner product revenues which averaged approximately
$300,000 per month in fiscal year 1997, were nearly negligible in the months
immediately preceding the Chapter 11 filing. Post-petition sales have averaged
approximately $260,000 per month in core product shipments.
Operating expenses increased by approximately 36%, to $5,370,159 for
fiscal year 1998. The significant component in this total is a one-time
amortization expense related to the goodwill impairment of $2,870,432. Net of
this transaction, operating expenses were $2,499,726 for the year, a decrease
from $3,924,927 in fiscal year 1997. This decrease is the result of the major
reductions in workforce, overhead, and research and development costs following
the Chapter 11 filing in mid-fiscal 1998. The issuer's ever-increasing reliance
on debt financing in 1998 over 1997, and thereby accounted for substantial
growth in interest expense of 111% over the prior year. Consistent with
generally accepted accounting principles, the issuer has continued to accrue
unpaid interest on $9.2 million of secured debt in the post-petition period.
$406,525 of reorganization items represent legal and court costs associated with
the bankruptcy proceeding, as well as a $289,000 write off of the common stock
purchase warrants which were issued as part of the Bridge Notes completed in
July 1997. As a result of all of the changes described above, the net loss for
fiscal 1998 of approximately $8.6 million significantly exceeded the fiscal 1997
net loss of approximately $5.1 million.
Throughout the second half of fiscal year 1998 and in subsequent
periods, the issuer has expended considerable time and effort in repairing and
reactivating many customer relationships, which suffered a decline during the
months prior to the Chapter
13
<PAGE>
11 filing. The issuer's inability to manufacture a functional UPS/PLC product,
as well as the working capital shortages which strangled core product shipments,
shifted many customers to search for an alternative supplier of power protection
products. Since January 22, 1998 the issuer has been actively interviewing and
communicating with prior customers to better assess their product needs, and to
institute operational measures to insure on-time delivery of goods. At this
writing, new manufacturer representation in the field, redesigned product
literature, and internet advertising are all means by which the issuer plans to
enhance sales volumes in future periods.
The most important general economic trend during fiscal year 1998 was
the continued strength of the national economy, reflected in significant
improvements in the major capital markets. However a growing decline in domestic
government spending for defense programs is expected to continue to impact the
demand for military grade power supply products. Although it is the intention of
the issuer to replace these retiring customers with newly developed industrial
and commercial uses for these products, there is no certainty that these
objectives will be attained.
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
14
<PAGE>
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, 1998 and June 30, 1997.
The report of McGladrey & Pullen, LLP, dated May 14, 1999 on the
issuer's 1998 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. To the issuer's knowledge, at
the time of this writing, there were no disagreements that would have been
referred to in their report on the issuer's financial statements.
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, 1998 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
15
<PAGE>
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 served as President of the issuer since May 6,
1997 and as a Director of the issuer since June 5, 1997 until his resignation on
January 15, 1998. 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 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 served as a Director of the issuer
from April 1994 until his resignation in September 1997. 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 served as a Director of the issuer
from April 1995 until his resignation in September 1997. Mr. McCullough has
served as
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<PAGE>
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.
ROBERT R. SPARACINO. Mr. Sparacino was appointed as a Director of the
issuer on October 7, 1997. Mr. Sparacino has served as President of Sparacino
Associates, a management and venture capital consulting firm specializing in
high technology businesses since 1982, as a Director and Vice Chairman of
Tristar Corporation since 1992 and as a Director of Concurrent Computer
Corporation, a computer equipment manufacturer, from November, 1994 until
November, 1997. Additionally, Mr. Sparacino has served in executive management
positions with Xerox Corporation and General Motors Corporation. Mr. Sparacino
holds a Doctoral Degree in Instrumentation from the Massachusetts Institute of
Technology.
RAYMOND E. JOSLIN. Mr. Joslin was appointed as a Director of the issuer
on October 7, 1997. Mr. Joslin currently serves as a Director, and as Vice
President and Group Head of the Entertainment & Syndication Group, of Hearst
Corporation. Mr. Joslin is also a Founding Director and Co-Chairman of
Hearst/ABC Video Services, and serves as a Founding Director and Co-Chairman of
each of A&E Networks (which includes the History Channel) and Lifetime
Television, which are 75% and 100% owned by Hearst/ABC Video Services,
respectively. Mr. Joslin attended the Carnegie Institute of Technology and
Harvard Business School and holds a Bachelor's Degree from Trinity College.
SHANNON LEROY. Mr. LeRoy was appointed as a Director of the issuer on
October 7, 1997. Mr. LeRoy currently serves as President of Tennessee Business
Investment, Inc., the general partner of Equitas, L.P., a licensed Small
Business Investment Company. From 1984 to 1994 Mr. LeRoy served a Senior Vice
President of First Union National Bank of Tennessee, where he managed commercial
banking. Mr. LeRoy is a Director of HLM Design, Inc., an architectural and
engineering firm and Laure Beverage Company, Inc., a consumer beverage company.
Mr. LeRoy holds a Bachelor of Arts degree from the University of North Carolina
in Chapel Hill.
EXECUTIVE OFFICERS OF THE ISSUER
As of June 30, 1998 there were no other executive officers, 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
years ended June 30, 1997 and 1998. No other employee's annual salary and bonus
exceeded $100,000 for the fiscal year.
17
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
STOCK
NAME YEAR PRINCIPAL POSITION SALARY ($) OPTIONS
<S> <C> <C> <C> <C>
Melvin A. Becker 1997 Vice President, October 9, 1996-present 100,698 0
President, Jan 1, 1984-October 9, 1996
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-January 15, 1998 18,847 150,000
1998 81,216 0
</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. Prior to the Chapter 11 filing, Mr. Becker's
employment was terminated by the issuer on January 6, 1998. On January 19, 1998
Mr. Becker was rehired by the issuer at an annual salary of $80,000 per year.
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, 1998 $55,500 remains in accrued and unpaid salary expense related
to Mr. Zeidler. The issuer has classified this an allowed unsecured pre-petition
liability.
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
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<PAGE>
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.
Prior to the Chapter 11 filing, Mr. Epps's employment was terminated by the
issuer on January 9, 1998. Mr. Epps was rehired by the issuer on March 30, 1998
in a non-officer capacity at an annual salary of $78,000 per year. Mr. Epps
subsequently resigned his position in Feburary 1999. Pursuant to his contract
termination Mr. Epps has an allowed unsecured pre-petition claim against the
issuer for $55,500 in severance compensation.
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. Mr. Basso resigned his position with the issuer on January 15,
1998 prior to the Chapter 11 filing. Subject to the terms of his employment
contract, Mr. Basso has an allowed unsecured pre-petition claim against the
issuer for $70,000 in severance compensation
As of June 30, 1998, and subsequent to the end of the fiscal year, none
of the above-mentioned options have been exercised.
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) in Fiscal Year (Price$/Sh) Date
- ---- ----------- -------------- ----------- ----
<S> <C> <C> <C> <C>
</TABLE>
(a) No stock options were issued during the fiscal year covered by this
report
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 $0/$0
H. Rudolf Zeidler 0 0 73,125/0 $0/$0
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Fred G. Basso(a) 0 0 0/0 $0/$0
</TABLE>
(a) In accordance with the Employment Agreement executed between the issuer and
Fred G. Basso, the options denoted, expired upon the date of employment contract
termination.
The Company has no pension plan covering executives and currently
provides no benefits to executives other than life insurance coverage of 100% 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.
<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(16) 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
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
Jeri Fink(2) 283,503 11.8
Sandra Roth(2) 146,503 6.1
Jonathan D. Betts(2)(7) 2,518,959 63.7
(8)(13)(14)
(shared)
Fred G. Basso(2) 0
Melvin A. Becker(2) 134,871(12) 5.4
Gary M. Laskowski (2)(7) 2,528,859 64.0
(9)(13)(14)
(shared)
All Directors and Executive Officers 2,663,830 65.1
as a Group(15)
</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 both Ms. Laskowski and Ms. Betts. Both, Mr.
Laskowski and Mr. Betts disclaim beneficial ownership of shares of Common
Stock owned by Millenia.
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<PAGE>
(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.
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<PAGE>
(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) 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.
(16) 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:
(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 years ended June 30, 1997 and 1998 the issuer incurred
approximately $189,000 and $111,000 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
23
<PAGE>
November 27, 1996, March 20, 1997. The notes under these Agreements provide
for 18% annual interest and, as of June 30, 1998, provided for a maximum
credit line of $8,000,000, 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, 1998, obligations under these leases were
approximately $142,872, and the cost and accumulated amortization of
equipment under capital leases was $174,762 and $31,890, respectively.
(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.
(h) The issuer, pursuant to a court order entered into a financing agreement
with Venture Partners Ltd., as agent, to borrow working capital up to a
maximum of $400,000. The terms of this agreement call for interest at 20%
and a term of 120 days. The debt is collateralized firstly by the machinery
and equipment of the issuer, and secondarily by its accounts receivable. At
June 30, 1998 the term of the note had expired, placing the issuer in
default. At this time, no demand for repayment has been received by the
issuer.
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 at June 30, 1997.
During the years ended June 30, 1997 and 1998, the issuer advanced
$5,000 and $3,500 respectively 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.
A COPY OF THIS REPORT ON FORM 10-KSB FOR FISCAL YEAR 1998 MAY BE OBTAINED
FREE OF CHARGE BY SENDING A REQUEST IN WRITING TO:
INVESTOR RELATIONS
POWER DESIGNS, INC.
14 COMMERCE DRIVE
DANBURY, CT 06810
24
<PAGE>
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
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C>
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)
(v) 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>
26
<PAGE>
<TABLE>
<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
(INCORPORATED BY REFERENCE TO EXHIBIT
10(XI) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1996)
(xii) Fourth Amendment Agreement to
Revolving Loan Agreement
(INCORPORATED BY REFERENCE TO EXHIBIT
10(XII) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1996)
(xiii) Fifth Amendment Agreement to
Revolving Loan Agreement
(INCORPORATED BY REFERENCE TO EXHIBIT
10(XIII) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1996)
(xiv) Settlement Agreement among Theodore
D. Moskowitz, Esq., Cycle Transformer
Corp., Power Designs Inc., et al.
(INCORPORATED BY REFERENCE TO EXHIBIT
10(XIV) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1996)
(xv) Plan of Reorganization for Power Designs, Inc. and PDIXF
Acquisition Corporation
(INCORPORATED BY REFERENCE TO EXHIBIT
10(XV) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1998)
</TABLE>
(B) REPORTS ON FORM 8-K
On February 9, 1998, the issuer filed a Form 8-K with the Securities
and Exchange Commission reporting the following items:
Item 5. Other Events - This item denotes the resignation of Fred G.
Basso as President of the issuer. This item also denotes that effective
January 22, 1998, the
27
<PAGE>
issuer and its wholly-owned subsidiary, PDIXF Acquisition Corporation,
filed voluntary petitions in bankruptcy under Chapter 11 of the United
States Bankruptcy Act.
No other reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
28
<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: August 13, 1999 POWER DESIGNS, INC.
Danbury, Connecticut (Registrant)
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
29
<PAGE>
By: /s/ Raymond E. Joslin
-------------------------------
Raymond E. Joslin,
Director
By: /s/ Shannon LeRoy
-------------------------------
Shannon LeRoy,
Director
30
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1998
F-1
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT F-1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' deficit F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-8
- --------------------------------------------------------------------------------
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Power Designs, Inc. and Subsidiary
Danbury, Connecticut
We have audited the accompanying consolidated balance sheets of Power Designs,
Inc. and Subsidiary (Debtor-in-Possession) (the "Company") as of June 30, 1998
and 1997, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Power Designs, Inc.
and Subsidiary (Debtor-in-Possession) as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company and its Subsidiary filed for reorganization
under Chapter 11 of the United States Bankruptcy Code in January 1998. The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In particular, such
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business. The eventual outcome of these matters is not presently
determinable.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has had recurring losses from operations and on January 22, 1998, the
Company filed for relief under Chapter 11 of the United States Bankruptcy Code.
These matters raise substantial doubt about the
F-3
<PAGE>
Company's ability to continue as a going concern. Management's plans concerning
these matters are also discussed in Note 1. In the event a plan of
reorganization is accepted, continuation of the business thereafter is dependent
on the Company's ability to achieve sufficient cash flow to meet its
restructured debt obligations. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.
New Haven, Connecticut
May 14, 1999
F-4
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
ASSETS (Note 10)
Current Assets
Cash $ 41,362 $ 8,899
Accounts receivable, less allowance for doubtful accounts
of $21,625 in 1998; $290,000 in 1997 493,595 729,141
Inventories (Note 5) 766,438 1,892,247
Prepaid expenses 34,490 1,523
--------------------------------
TOTAL CURRENT ASSETS 1,335,885 2,631,810
--------------------------------
Equipment and Leasehold Improvements, net (Note 6) 538,098 735,398
--------------------------------
Other Assets
Goodwill, less accumulated amortization of $3,020,447 in 1998;
$150,015 in 1997 (Note 2) -- 2,867,415
Deferred financing costs -- 190,535
Other assets 164,913 75,612
--------------------------------
164,913 3,133,562
--------------------------------
TOTAL ASSETS $ 2,038,896 $ 6,500,770
--------------------------------
--------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable (Note 10):
Debtor in possession facility $ 245,000 --
Affiliated companies -- 5,879,571
Preferred shareholders -- 1,087,415
Seller of assets acquired (Note 3) -- 1,000,000
Others -- 1,664,500
Current portion of capital lease obligations (Note 8) -- 38,950
Advances under factoring agreement 253,327 --
Accounts payable 91,503 1,613,015
Accrued expenses 184,950 413,794
Accrued interest 4,027 152,597
Accrued warranty expenses -- 275,000
Payables related to reorganization including accrued
interest (Note 9) -- 102,126
----------------------------------
TOTAL CURRENT LIABILITIES 778,807 12,226,968
----------------------------------
Long-Term Liabilities
Capital Lease Obligations, less current portion -- 39,682
Liabilities subject to compromise (Note 12) 15,675,036 --
----------------------------------
15,675,036 39,682
----------------------------------
TOTAL LIABILITIES 16,453,843 12,266,650
----------------------------------
Commitments and Contingencies (Notes 3, 8, 14, 15, 16 and 17)
Stockholders' Deficit
Common stock, $.0001 par value, 10,000,000 shares authorized, 2,391,493
shares issued and outstanding at June 30, 1998
and 1997 (Notes 10 and 14) 240 240
Preferred stock, $.01 par value, 1,000,000 shares authorized;
316,743 shares issued and outstanding at June 30, 1998
and 1997 (Notes 10 and 14) 3,167 3,167
Additional paid-in capital (Note 14) 1,382,807 1,382,807
Accumulated deficit (15,801,161) (7,152,094)
----------------------------------
TOTAL STOCKHOLDERS' DEFICIT (14,414,947) (5,765,880)
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,038,896 $ 6,500,770
----------------------------------
----------------------------------
</TABLE>
F-6
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Net Sales $ 2,602,387 $ 3,622,236
Cost of Sales 3,706,823 3,988,374
----------------------------------
GROSS LOSS (1,104,436) (366,138)
----------------------------------
Operating Expenses
Selling, general and administrative expenses 1,843,028 3,111,596
Research and development 406,260 542,198
Depreciation and amortization 3,120,871 271,133
----------------------------------
5,370,159 3,924,927
----------------------------------
NET LOSS BEFORE OTHER INCOME (EXPENSE) AND
REORGANIZATION ITEMS (6,474,595) (4,291,065)
Other Income (Expense)
Investment income 2,438 5,136
Interest expense (contractual interest 1998 $1,860,585) (Note 18) (1,770,385) (840,701)
----------------------------------
OTHER EXPENSE (1,767,947) (835,565)
----------------------------------
NET LOSS BEFORE REORGANIZATION ITEMS (8,242,542) (5,126,630)
Reorganization Items (Note 13) 406,525 --
----------------------------------
NET LOSS $ (8,649,067) $ (5,126,630)
----------------------------------
----------------------------------
Weighted average number of common shares outstanding $ 2,391,493 $ 2,391,493
----------------------------------
----------------------------------
Net loss per common share $ (3.62) $ (2.14)
----------------------------------
----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------------------------------------------------------------
Additional
Shares Par Shares Par Paid-In Accumulated
Issued Value Issued Value Capital Deficit
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Net loss -- -- -- -- -- (8,649,067)
---------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 2,391,493 $ 240 316,743 $ 3,167 $1,382,807 $(15,801,161)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (8,649,067) $ (5,126,630)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,252,781 356,533
Provision for bad debts 125,539 262,268
Fees paid through issuance of common stock warrants -- 20,000
Reorganization items 406,525 --
Changes in operating assets and liabilities, net of assets acquired in
business combination:
Decrease (increase) in accounts receivable 110,007 (376,014)
Decrease (increase) in inventories 1,125,809 (316,533)
Increase in prepaid expenses (32,967) (1,523)
Decrease in acquisition deposit -- 190,000
Decrease (increase) in other assets 53,571 (42,204)
Increase in accounts payable and accrued expenses 1,704,864 1,442,532
Increase (decrease) in payables related to reorganization 86,461 (159,529)
-------------------------------
NET CASH USED IN OPERATING ACTIVITIES BEFORE
REORGANIZATION ITEMS (1,816,477) (3,751,100)
-------------------------------
Reorganization items
Reorganization items paid (8,621) --
-------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,825,098) (3,751,100)
Cash Flows From Investing Activities
Purchase of property and equipment (29,992) (222,397)
Payments related to assets acquired -- (1,946,559)
-------------------------------
NET CASH USED IN INVESTING ACTIVITIES (29,992) (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 (25,000) (294,791)
Net decrease in advances from affiliates -- (71,251)
Principal payments on capital lease obligations (24,756) (7,134)
Net increase in revolving loans payable 1,178,912 5,002,544
Proceeds from notes payable 578,000 2,794,845
Principal payments on notes payable (72,930) (2,040,500)
Advances under factoring agreement 253,327 --
-------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,887,553 5,928,955
-------------------------------
NET INCREASE IN CASH 32,463 8,899
Cash and cash equivalents, beginning of year 8,899 --
-------------------------------
Cash and cash equivalents, end of year $ 41,362 $ 8,899
-------------------------------
-------------------------------
</TABLE>
F-9
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 820,244 $ 720,677
-------------------------------
-------------------------------
Cash payments for income taxes $ 639 $ 976
-------------------------------
-------------------------------
Supplemental Schedule of Noncash Investing and Financing Activities
Capital lease obligations incurred for equipment $ 88,996 $ 85,766
-------------------------------
-------------------------------
Note payable issued in business combination $ -- $ 2,750,000
-------------------------------
-------------------------------
Reclassification of idle equipment $ 142,872 $ --
-------------------------------
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Note 1. CHAPTER 11 PROCEEDINGS AND BASIS OF FINANCIAL STATEMENTS PRESENTATION
F-11
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
On January 22, 1998, Power Designs, Inc. and Subsidiary (the "Debtors" or the
"Company") filed voluntary petitions (the "Filing") for relief under Chapter 11
of the United States Bankruptcy Code ("Chapter 11"). The Debtors are presently
operating their business as debtors-in-possession subject to the jurisdiction of
the U.S. Bankruptcy Court for the Bridgeport District of Connecticut (the
"Bankruptcy Court").
In the Chapter 11 case, substantially all liabilities as of the date of the
Filing are subject to resolution under a plan of reorganization to be voted upon
by the Debtors' creditors and stockholders and confirmed by the Bankruptcy
Court. Amended and restated schedules were filed by the Debtors with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the date of the Filing as shown by the Debtors' accounting records. The
Bankruptcy Court fixed June 8, 1998 as the last date by which creditors of the
Debtors could file proofs of claim for claims that arose prior to the Filing.
The Debtors are in the process of reconciling differences between amounts shown
by the Debtors and claims filed by creditors. The amount and settlement terms
for such disputed liabilities are subject to allowance by the Bankruptcy Court.
Ultimately, the adjustment of the total liabilities of the Debtors remains
subject to a Bankruptcy Court approved plan of reorganization and, accordingly,
the amount of such liabilities is not determinable. In May 1998, the Debtor
filed a plan of reorganization with the Bankruptcy Court. The consummation of
this plan for the Company will require the requisite vote of impaired
creditors under the Code and confirmation of the plan by the court.
The United States Trustee for the Bridgeport District of Connecticut has
appointed Official Committees ("Committees") of Unsecured Creditors and Equity
Security Holders for the Chapter 11 case. The role of the Committees includes,
among other things: (a) consultation with the Debtors concerning the
administration of the Chapter 11 case; (b) investigation of the acts, conduct,
assets, liabilities, financial condition and operations of the Debtors, and the
desirability of the continuation of their business and other relevant matters;
and (c) participation in the formulation of a plan of reorganization. In
discharging these responsibilities, the Committees have standing to raise issues
with the Bankruptcy Court relating to the business of the Debtors and the
conduct and course of the Chapter 11 case. The Debtors are required to pay
certain expenses of the Committees, including professional fees, to the extent
allowed by the Bankruptcy Court.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court approval.
The Debtors continue to review leases and contracts, as well as other
operational changes, and cannot presently determine or reasonably estimate the
ultimate outcome of, or liability resulting from, this review. Claims secured
against the Debtors' assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the Court for relief from the
stay. Secured claims are secured primarily by liens on
F-12
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
the Debtors' machinery, equipment and accounts receivable.
The consolidated financial statements of the Company have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
contemplates continuity of operations, realization of assets and the liquidation
of liabilities and commitments in the normal course of business. The Filing,
related circumstances and the losses from operations, raise substantial doubt
about its ability to continue as a going concern. The appropriateness of using
the going concern basis is dependent upon, among other things, confirmation of a
plan of reorganization, future profitable operations, and the ability to
generate sufficient cash from operations and financing sources to meet
obligations. As a result of the Filing and related circumstances, however, such
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the consolidated financial statements. Further, a
plan of reorganization could materially change the amounts reported in the
consolidated financial statements. The consolidated financial statements do not
include any adjustments relating to a recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
Note 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
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
until January 22, 1998 was an innovative, proprietary UPS/PLC product capable of
servicing widely divergent power supply sources worldwide. The Company's
principal products now 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.
F-13
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 3). 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.
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.
F-14
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 was 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.
During the second quarter of 1998, management of the Company reviewed this
intangible asset and wrote off the balance as there is currently estimated to be
no continuing fair value associated with the intangible asset. Amortization in
the amount of $2,870,432 was charged against operations for the year ended June
30, 1998.
OTHER ASSETS
Other assets consist primarily of equipment that was taken out of service and
idle at June 30, 1998. This equipment is being leased under capital leases with
Inverness (See Note 8).
F-15
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 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.
NET LOSS PER COMMON SHARE
The Company adopted 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 and warrants,
outstanding and which trade in a public market. The Company now presents basic
earnings (loss) per share and diluted earnings (loss) per share in its
consolidated statements of operations. Basic earnings (loss) per share amounts
are computed by dividing net income (loss) by the weighted-average number of
common shares outstanding. Diluted per-share amounts assume exercise of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share.
The Company has initially applied SFAS No. 128 for the year ended June 30, 1998
and as required by SFAS No. 128, has restated all per share information for the
prior year to conform with the June 30, 1998 presentation.
For the periods presented, there were no items which changed the net loss as
presented in the consolidated statements of operations and the amounts used to
compute basic and diluted loss per share. For the years ended June 30, 1998 and
1997, common stock equivalents have been excluded from the computation of the
net loss per share because inclusion of such equivalents is antidilutive.
F-16
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Note 3. 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.
The Asset Purchase Agreement provides that a portion of the purchase price would
be paid in the form of a royalty, computed as 2% of quarterly sales of certain
products, from July 1, 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.
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 statement of operations for the year ended June 30, 1997 only includes
operations for these divisions from October 11, 1996 to June 30, 1997.
Unaudited pro forma consolidated results of operations for the year ended June
30, 1997, as though the division had been acquired at July 1, 1996, are as
follows:
<TABLE>
<CAPTION>
1997
-----------------
<S> <C>
Sales $ 4,882,000
Net loss $ (7,075,000)
Net loss per common share $ (2.96)
</TABLE>
F-17
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 4. 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 5. INVENTORIES
At June 30, 1998 and 1997, inventories consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Raw materials $ 780,131 $ 1,503,127
Work in process 142,284 484,527
Finished goods 24,023 110,593
Allowance for slow-moving and
obsolete inventory (180,000) (206,000)
-----------------------------------
$ 766,438 $ 1,892,247
-----------------------------------
-----------------------------------
</TABLE>
Note 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, 1998 and 1997, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Leasehold improvements $ 92,610 $ 91,614
Machinery and equipment 721,460 739,759
Furniture and fixtures 6,720 6,720
--------------------------------
820,790 838,093
Less accumulated depreciation 282,692 102,695
--------------------------------
$ 538,098 $ 735,398
--------------------------------
--------------------------------
</TABLE>
F-18
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
As of June 30, 1998, the cost and accumulated amortization of equipment under
capital leases was $174,762 and $31,890, respectively.
F-19
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Note 7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,902,500 $ 1,646,600
Allowance for doubtful accounts 8,700 118,300
Inventory 634,000
Warranty accrual 80,800 112,200
Other accruals 23,500 33,300
------------------------------------
Gross deferred tax assets 5,015,500 2,544,400
Less valuation allowance 4,912,000 2,524,700
------------------------------------
Net deferred tax assets 103,500 19,700
Deferred Tax Liabilities:
Property and equipment (19,100) (19,700)
Inventory (84,400) --
------------------------------------
$ -- $ --
------------------------------------
------------------------------------
</TABLE>
For the years ended June 30, 1998 and 1997, 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.
F-20
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
As of June 30, 1998, the Company had net operating loss carryforwards of
approximately $12,870,000 available to reduce future federal and state taxable
income, which expire as follows:
<TABLE>
<CAPTION>
Expiration Amount
---------------- -----------------
<S> <C>
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
2013 8,637,000
-----------------
$ 12,870,000
-----------------
-----------------
</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.
F-21
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 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>
1999 $ 189,749 $ 186,600
2000 20,701 186,600
2001 -- 186,600
2002 -- 186,600
2003 -- 124,400
--------------- --------------
TOTAL MINIMUM LEASE PAYMENTS $ 210,450 $ 870,800
--------------
Less: amount representing interest (58%) 67,578
---------------
PRESENT VALUE OF MINIMUM
LEASE PAYMENTS $ 142,872
---------------
---------------
</TABLE>
Obligations under capital leases have been classified as liabilities subject to
compromise at June 30, 1998.
Total rent expense charged to operations under operating leases was
approximately $208,000 and $207,000 for the years ended June 30, 1998 and 1997,
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, 1998
and 1997, as follows:
F-22
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Class VI creditors (former unsecured
creditors) $ 10,960 $ 10,960
Class V creditors (taxing authorities and
union fees) 177,626 91,166
-----------------------------
$ 188,586 $ 102,126
-----------------------------
-----------------------------
</TABLE>
At June 30, 1998 and 1997, 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 at June 30, 1997 are shown as current liabilities in the consolidated
balance sheet. At June 30, 1998, the amounts are shown as liabilities subject to
compromise in the consolidated balance sheet.
Note 10. NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Demand note payable to Inverness, interest payable
monthly at 18%, secured by certain equipment. $ -- $ 42,930
Revolving loans payable to Inverness due upon demand, interest payable
monthly at 18%, secured by substantially all assets of the
Company. 7,015,553 5,836,641
Term note payable to seller of divisions acquired in September 1996 (see
Note 3), 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. 990,000 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 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. Effective interest rate of 12.1% based on
maturity date of
July 31, 1998. 1,653,500 1,364,500
</TABLE>
F-23
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Unsecured short term loans payable, due March 31, 1998,
interest at 10% 300,000 300,000
Unsecured short term notes, subordinated to Inverness Notes,
due no later than April 30, 1998, interest at 10% 313,000 --
Debtor in possession facility, interest payable monthly at
20%, secured by substantially all assets of the Company. 245,000 --
---------------------------------
11,604,468 9,631,486
Notes payable reclassified as liabilities subject to compromise 11,359,468 --
---------------------------------
$ 245,000 $ 9,631,486
---------------------------------
---------------------------------
</TABLE>
F-24
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 $8,000,000.
The Company is in violation of certain covenants contained in the loan
agreements. These loans have been classified as liabilities subject to
compromise
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 Hayes Corporation) (the
"Seller") incurred in conjunction with the Asset Purchase (see Note 3) 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. The note has been classified as
liabilities subject to compromise.
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 14). At June 30, 1998 and 1997, the Company was in
violation of certain covenants contained in the related loan agreements. These
notes have been classified as liabilities subject to compromise.
F-25
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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. During the third quarter of 1998, management wrote off the
$289,000 allocated to these warrants as there is currently estimated to be no
continuing fair value associated with the warrants. The obligations outstanding
of $1,653,500 at June 30, 1998 have been classified as liabilities subject to
compromise.
UNSECURED SHORT TERM NOTES
These notes were issued to various investors. For each note issued, the lender
received a specified number of warrants to acquire shares of the Company stock
for $.25 per share. At June 30, 1998, there was no fair value associated with
these warrants, thus no amount was allocated to the warrants.
DEBTOR IN POSSESSION FACILITY
In January 1998, pursuant to a court order, the Company, as
debtor-in-possession, entered into a financing agreement with Venture Partners
Ltd., as agent, to borrow working capital, up to a maximum of $400,000. The
terms of this agreement call for interest at 20% and a term of 120 days. This
debt is collateralized firstly by the machinery and equipment of the issuer, and
secondarily by its accounts receivable. At June 30, 1998, $245,000 was
outstanding under this loan agreement. As of this date, the term of the note has
expired placing the Company in default. At this time, no demand for repayment
has been received by the Company.
Note 11. FACTORING AND LOAN AGREEMENT
In March 1998, the Company, pursuant to a court order, entered into a receivable
factoring agreement with Porter Capital Corporation ("Porter"), whereby trade
receivables are sold with recourse to Porter at 94% of face value. A 4% and 2%
rebate is returned to the issuer if the receivable is collected within 60 and 90
days respectively. Fees to Porter include a minimum of 2% of the face amount of
the receivables factored, and an annual interest rate of prime on the
outstanding amount advanced. Collateral for this obligation comprises the
factored receivables, with a secondary lien on the machinery and equipment of
the issuer. In September 1998, this agreement was modified to a minimum fee of
2.5% for receivables collected within 60 days and
F-26
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
an additional 1% for each additional 15 days outstanding to a maximum of 90
days, and an annual interest rate of prime plus 2.5% on the outstanding amount
advanced.
Note 12. LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as liabilities subject to
compromise under reorganization proceedings are identified below. The amounts
below in total may vary significantly from the stated amount of proofs of claim
that will be filed with the Court and may be subject to future adjustment
depending on Court action, further developments with respect to potential
disputed claims, determination as to the value of any collateral securing
claims, or other events.
Liabilities subject to compromise are as follows:
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Accounts payable, trade $ 2,344,828
Accrued expenses 1,639,282(1)
Obligations under capital leases 142,872
Payables related to 1994 reorganization including
accrued interest 188,586
Notes payable:
Affiliated companies 7,015,553
Preferred shareholders 1,087,415
Seller of assets acquired 990,000
Others 2,266,500
-----------------
$ 15,675,036
-----------------
-----------------
</TABLE>
(1) Includes accrued interest at January 22, 1998 and accrued
interest on secured obligations from January 22, 1998 to June
30, 1998.
As a result of the Chapter 11 filing, no principal or interest payments will be
made on most prepetition debt without Court approval or until a plan of
reorganization providing for the repayment terms has been confirmed by the Court
and becomes effective. Interest on prepetition unsecured obligations has not
been accrued after the Petition Date. Contractual interest expense of $90,200
was not recorded on certain prepetition debt for the period from January 22,
1998 through June 30, 1998.
F-27
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Note 13. REORGANIZATION ITEMS
The components of reorganization items that were directly associated with the
Company's Chapter 11 reorganization proceedings and the resulting restructuring
of its operations were as follows:
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Reorganization items
Adjustment to debt for allocation of warrants $ 289,000
Professional fees 105,940
U.S. trustee fees 8,000
Other 3,585
-----------------
$ 406,525
-----------------
-----------------
</TABLE>
Note 14. 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 15). 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.
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 and all unpaid dividends are payable upon
conversion of preferred stock to common stock, or upon liquidation of the
Company.
F-28
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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.
Note 15. 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 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.
F-29
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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>
There were no options issued during the year ended June 30, 1998. As such, net
loss as reported is the same as the pro forma amount required to be disclosed.
The fair value of each grant, used to determine the pro forma 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 2.7
Price volatility 30.0%
</TABLE>
F-30
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan at June 30, 1998 and
1997, and changes during the years then ended, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Options Exercise
Reserved Outstanding Price
--------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 573,958 121,608 $ 0.05
Canceled
Granted -- 415,156 0.48
Exercised
--------------------------------------------
Balance, June 30, 1997 573,958 536,764 $ 0.38
Canceled -- (260,781) 0.61
Granted -- -- --
Exercised -- -- --
--------------------------------------------
BALANCE, JUNE 30, 1998 573,958 275,983 $ 0.16
--------------------------------------------
--------------------------------------------
</TABLE>
At June 30, 1998 and 1997, 215,046 and 181,608 of the outstanding options were
exercisable, respectively. There were no options granted during the year ended
June 30, 1998.
A further summary of options outstanding at June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (In Years) Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .01 to $ .25 275,983 2.0 $ .16 215,046 $ .14
</TABLE>
STOCK WARRANTS
During the year ended June 30, 1998, in conjunction with the sale of certain
notes to various investors, the Company issued 40,000 common stock purchase
warrants ("warrants") which are exercisable at $.25 per share. Due to the
significant financial difficulties and bankruptcy
F-31
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
proceedings of the Company, there was no fair value associated with these
warrants, thus no amount was allocated to the 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 14), 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. During the third quarter of 1998,
management wrote off the $289,000 allocated to these warrants as there is
currently estimated to be no continuing fair value associated with the warrants.
The following table summarizes warrants outstanding at June 30, 1998 and 1997,
and the changes in warrants during the years 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
Canceled -- -- --
Granted -- 40,000 0.25
Exercised -- -- --
--------------------------------------------
BALANCE, JUNE 30, 1998 2,415,312 2,415,312 $ 0.36
--------------------------------------------
--------------------------------------------
</TABLE>
F-32
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
A further summary of warrants outstanding at June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
------------------------------------------------------ --------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (In Years) Price Exercisable Price
- ----------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
$ .25 to $ .875 2,415,312 3.5 $ .36 2,415,312 $ .36
</TABLE>
Note 16. 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 year ended June 30, 1997. There were no contributions to the Plan
during the year ended June 30, 1998.
Note 17. LITIGATION
A lawsuit has been brought against the Company by an entity seeking payment for
goods and services provided to the Company. With regards to this lawsuit, the
Company has entered into a forbearance agreement with the plaintiffs to make
weekly payments aggregating approximately $144,300 plus interest at 8%. At June
30, 1998, the Company was in default of this forbearance agreement and the
remaining obligation of $133,944 has been classified as liabilities subject to
compromise.
Note 18. RELATED PARTY TRANSACTIONS
The Company 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. In January 1998, Venture Partners ceased providing consulting
services to the Company under this agreement. During the year ended June 30,
1998, the Company incurred approximately $112,000 of expenses of which $15,000
was paid during the year ended June 30, 1998 under this agreement and for
services provided outside of the agreement.
F-33
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
At June 30, 1998 and 1997, advances due from a member of senior management
approximated $6,000 and $5,000, respectively and are 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 $1,354,678 and $553,944 for the years ended June 30, 1998 and 1997,
respectively.
F-34
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Note 19. SALES TO FOREIGN CUSTOMERS
Sales to foreign customers were approximately $192,000 and $439,000 for the
years ended June 30, 1998 and 1997, respectively.
Note 20. 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.
Note 21. EMERGING ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), becomes effective for the Company's year ending June
30, 1999. Comprehensive income, as identified by SFAS No. 130, is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements with the same prominence as the Company's
other financial statements. However, comprehensive income is not required to be
reported by a Company that does not have any items of comprehensive income other
than net income. The Company does not expect that comprehensive income will be
required to be reported because it anticipates that net income will be the only
item of comprehensive income.
F-35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 41,362
<SECURITIES> 0
<RECEIVABLES> 515,220
<ALLOWANCES> (21,625)
<INVENTORY> 766,438
<CURRENT-ASSETS> 1,335,885
<PP&E> 820,790
<DEPRECIATION> (282,692)
<TOTAL-ASSETS> 2,038,896
<CURRENT-LIABILITIES> 778,807
<BONDS> 15,675,036
0
3,167
<COMMON> 240
<OTHER-SE> (14,418,354)
<TOTAL-LIABILITY-AND-EQUITY> 2,038,896
<SALES> 2,602,387
<TOTAL-REVENUES> 2,602,387
<CGS> 3,706,823
<TOTAL-COSTS> 3,706,823
<OTHER-EXPENSES> 5,370,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,767,947
<INCOME-PRETAX> (8,242,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,242,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 406,525
<CHANGES> 0
<NET-INCOME> (8,649,067)
<EPS-BASIC> (3.62)
<EPS-DILUTED> (3.62)
</TABLE>
