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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, 2000.
|_| 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
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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:
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
(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 X No
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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. $3,303,129
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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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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. 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 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 function by taking electric current from batteries or commercial
power lines and converting it into controlled voltages or currents for the
operation 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 military, industrial, 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 power source, which may be a commercial power line, battery, diesel,
gasoline or steam-driven generator, and the system being powered, to stabilize,
eliminate surges or transient changes, or convert the input voltages and
currents to other voltage or current levels required by the system.
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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 military and industrial applications, 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
were $308,250 and $29,150 for fiscal years 2000 and 1999 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. However, various governmental agencies and military departments
aggregated together comprise approximately 24% and 17% of sales, or $806,000 and
$496,000 during fiscal years 2000 and 1999 respectively.
Although the issuer is attempting to expand its business in "off the
shelf" products, 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 basis.
During the second quarter of fiscal year 1997, the issuer's wholly-owned
subsidiary, PDIXF Acquisition Corporation, acquired three product lines from
Penril DataComm Networks, Inc ("Penril"): a line of uninterruptible power
supply/power line conditioners ("UPS/PLC"), an autotransformer business and a
military grade switching power supply line.
As a result of the significant operating losses sustained during its
attempts to manufacture and market the UPS/PLC product technology, 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 of laboratory power
supplies, as well as the autotransformer and military power supply lines.
The issuer's primary research and development activities center on the
customization and special engineering of its products. The absence of any
significant new development projects in fiscal 1999 and 2000 resulted in
approximately $108,000 of research and development expense or 3.8% of revenues
in fiscal 1999, and $66,000 or 2.0% of revenues in fiscal 2000. The average
number of employees engaged in these efforts was two in 1999 and one in 2000.
Total employees at June 30, 2000 number 29.
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. It
has attempted to
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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 first and second amended plans of
reorganization, which were filed by the debtor in November 1999 and August 2000.
A confirmation hearing on the second amended plan of reorganization has been
continued from time to time by the court. Although numerous creditor objections
to the plan of reorganization have been resolved, a final confirmation date has
not yet been established.
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 $186,600. These payments are in addition to charges for
real estate taxes and are subject to adjustments.
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 requirements, and has, together with the lessor, retained a local
real estate brokerage firm to re-lease or sublet the existing facility. Although
a smaller facility adequate to the issuer's needs has been identified, a viable
replacement tenant for the present location has not been located.
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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.
No other litigation was pending as of the end of the fiscal year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fiscal year covered by this report to a
vote of security holders, through the solicitation of proxies, or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded over the counter in the United States.
The shares are not currently quoted regularly on any information service. The
approximate number of record holders of the securities is 752.
The following table sets forth, for the periods indicated, the quarterly
high and low representative bid quotations for the issuer's Common Stock as
reported by the online archival information service, FinancialWeb.com, Inc.
<TABLE>
<CAPTION>
Fiscal years ended
June 30, 1999 and 2000 1999 2000
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HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $0.062 $0.062 $0.08 $0.08
2nd Quarter 0.031 0.031 0.08 0.08
3rd Quarter 0.10 0.10 0.06 0.06
4th Quarter 0.08 0.08 0.10 0.10
</TABLE>
No cash dividends on shares of Common Stock have been declared by the issuer for
the two most recent fiscal years, nor in any subsequent interim period for which
financial statements are required to be presented. In accordance with certain of
its debt agreements, the issuer is restricted from paying dividends to owners of
the issuer's Common Stock.
To the best of the issuer's knowledge, there has been no active market in
the stock for the last two years.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BANKRUPTCY PROCEEDINGS
On January 22, 1998 the 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 have been 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 and equity interests of the Debtors remains subject to a Bankruptcy
Court approved plan of reorganization, and, accordingly, the amount of such
liabilities is not presently determinable. If the existing plan of
reorganization is approved, as presently amended, existing equity interests will
be extinguished for no consideration.
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 inventory,
equipment and accounts receivable.
On January 26, 1998 the issuer re-opened for business as
Debtor-in-Possession under new management. A small group of approximately twenty
employees were gradually recalled to work. Claims for wage arrearages were paid
to all present and former 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. Once filed, the Plan continued as the
subject of negotiation between the issuer and various creditor committee
constituencies. An amended plan of reorganization, containing the results of
these discussions, was filed by the issuer on November 24, 1999. 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,
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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 amended Plan provides for substantive consolidation of
the two co-debtors as well as six classes of claims and equity interests,
described as follows:
1. Class 1, the allowed secured claims of Inverness Corporation, shall receive a
secured note in the amount of $1,800,000 with interest at 10% annually and
approximately 998,000 shares of common stock in the reorganized corporation.
2. Class 2, the allowed claim of Hayes Corporation, shall receive an unsecured
note in the amount of $150,000 with interest at 10% annually and a prorata
number of shares of common stock in the reorganized corporation, as discussed
in item 4 below.
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 4a, the allowed unsecured claims of Power Designs Inc., together with
the allowed claim of Hayes Corporation, shall receive approximately 1,002,000
shares of common stock in the reorganized corporation. The allowed unsecured
claims of Power Designs, Inc. shall also receive an annual conditional
payment equal to 10% of one-half of the face amount of their allowed claim,
payable to the extent that the issuer's free cash flow is greater than
$400,000. Class 4b, the allowed unsecured claims of PDIXF Acquisition
Corporation, shall receive 5% of the amount of their allowed claims in full
satisfaction of their claims.
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.
In addition, the amended plan provides terms for the cash payment of all
administrative and priority tax claims, an increase in the number of corporate
directors from six to seven, and certain amendments to the certificate of
incorporation, which will reflect certain restrictions on the transfer of common
shares for a period of two years from the effective date of the plan. Such
restrictions are intended to prevent any acquisition, which could result in the
disallowance or limitation of the issuer's federal income tax net operating loss
carryforwards
A Second Amended Plan of Reorganization for Power Designs, Inc. and PDIXF
Acquisition Corporation was filed with the Office of the U.S. Trustee on
August 22,
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2000. This amendment modifies repayment terms for allowed federal and state
employee and tax claims, and modifies certain releases and indemnification
granted to third party affiliates of the issuer.
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, 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."
A confirmation hearing on the amended plan has been continued from time to
time by the court. A final confirmation date has yet to be established by the
court, pending the resolution of remaining plan objections. If the amended plan
is confirmed, existing equity interests will be extinguished for no
consideration. Should the amended plan not be confirmed, there is significant
probability that the case may be converted to a Chapter 7 case. In the instance
of a conversion to a Chapter 7 liquidation, there is little likelihood of any
value remaining to satisfy the existing equity interests of the Debtors.
CURRENT DEVELOPMENTS
During fiscal year 2000 the issuer, as Debtors-in-Possession, have
continued 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, continue to comprise
existing senior management. Approximately twenty nine individuals are presently
employed 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.
The company has successfully resolved issues of material procurement with
key suppliers and reinstated deteriorating relationships with distributors and
customers. Liquidity has been improved by increased shipping levels and a
concentrated effort on credit and collection issues with all customers. Despite
increased marketing efforts in the areas of product literature development,
internet advertisement, and sales representative solicitation, a general decline
in military spending has resulted in a reduction in product orders during the
third and fourth fiscal quarters of 2000. At this writing, both military and
commercial orders for product fail to exhibit stable levels of predictability.
Open sales orders at June 30, 2000 total $235,371.
To combat a declining flow of new orders for military product, the issuer
has initiated steps to expand the sale of its off-the-shelf autotransformer and
laboratory power supply products. In addition to various advertising measures
and several additions to its internal sales force, the issuer has likewise
retained the services of various outside sales consultants and manufacturer's
representatives in an effort to expand the customer base
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and increase product revenue. At this writing, four manufacturer's sales
representatives are contracted to sell product in the following domestic
regions: Sunbelt Region, Mid Atlantic Region, Southwest Region, and Caribbean
Rim Region. Negotiations continue with representatives in additional U.S.
regions. Contemporaneously, a new homepage has been uploaded to the Internet
domain, www.powerdesigns.com. This website currently displays an overview of the
linear, military and autotransformer product lines. While these efforts are
focused on generating increased commercial order levels, there are, however, no
assurances that the issuer will be able to effectuate these measures, or that
such measures will produce the desired results.
Coupled with overhead cost containment measures, the issuer has also
initiated an engineering effort to redesign certain products in its linear power
supply family. The update of the precision, low voltage power supplies has been
completed. More recently, the re-engineering of the single, dual and triple
output power sources has also been finalized. These new designs should prove
easier and more cost effective to manufacture, as well as provide a greater
range of product features and reliability. To date, orders for this family of
products continue to languish below the issuer's expectations. Current
initiatives to expand the market share include competitive product analysis and
re-pricing, coupled with a redirection of product from the distribution channel
to direct customer sales.
In an effort to preserve prior investments made in the proprietary UPS/PLC
product technology, the issuer also retained an original member of the
engineering staff, who was instrumental 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 1999, the products had
been examined, findings documented, and a design modification conceptualized.
Although it is the intention of management to preserve and explore the
technology for a potential development and/or licensing joint venture in the
future, there can be no assurances that such a joint venture partner can be
located, or that such an endeavor can be profitably consummated.
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").
Continuing discussions between the debtors and the various creditor
representatives resulted in the filing of an amended plan on November 24, 1999
and a second amended plan in August 2000. The amended 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
certain unsecured creditors. Approximately $1.8 million of secured debt is
proposed to remain post-confirmation and will bear interest at 10% annually.
Administrative claims, priority tax claims, and employee priority claims will be
paid in accordance with the terms negotiated with the claimants, or in certain
cases, those provided by law. Certain unsecured claims of PDIXF Acquisition
Corporation will receive a 5% cash settlement in full satisfaction of their
outstanding claims. All remaining claims will be deemed unsecured non-priority
claims, and their
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holders will receive a proportionate number of common shares in the reorganized
corporation.
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. Simultaneously, the landlord of the
issuer has proposed a highly suitable 15,000 square foot facility available for
lease in the current industrial park. The broker, in conjunction with the
landlord of the issuer, has been enlisted to solicit a new or sublet tenant for
the issuer's existing rented facility. Once a tenant has been signed for the
existing facility, a possible relocation to the smaller facility may be
negotiated with the landlord. Although the existing facility continues to be
presented to the marketplace, no new lease transactions have as yet been
consummated.
LIQUIDITY AND CAPITAL RESOURCES.
Following the Chapter 11 filing in January of 1998 pursuant to a court
order, the issuer, as debtors-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. In September
1999 the issuer discontinued receivables factoring with Porter Capital.
At this writing the issuer has repaid $110,194 of its pre-petition labor
arrearages and related payroll taxes (up to the individual limited permitted by
law). In addition, approximately $104,000 of administrative legal costs pursuant
to the Chapter 11 proceeding, and approved by the U.S. Trustee, have been
liquidated with the proceeds of the issuer's operating cash flow.
The issuer hopes to be able to supply a greater percentage of its working
capital needs through improved operating cash flow during the 2001 and 2002
fiscal years. This improved operating cash flow is predicated upon a stabilized
core product manufacturing process and increased revenue for fiscal 2001 of
which there can be no assurance.
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Nevertheless, the issuer expects that it will be in need of additional financing
in future post Chapter 11 confirmation periods. In an effort to procure such
financing, the issuer has prepared financial projections, and has retained an
independent appraiser to value the machinery and inventory collateral. These
documents have been presented to various prospective lenders for their review.
Although several preliminary loan proposals are being entertained by the issuer,
no permanent financing has been secured. It is the issuer's intent to pay its
obligations pursuant to the amended plan of reorganization, as well as to
replace the current debtor-in-possession financing with less costly,
conventional financing arrangements. The issuer estimates that it needs to
obtain approximately $700,000 in additional financing to be able to meet its
operating cash flows and the obligations subsequent to confirmation of the plan
of reorganization.
At June 30, 2000 the issuer currently has a net stockholders' deficit of
approximately $17,300,000, meaning that amounts owed to its creditors exceed the
issuer's assets.
As a result of the issuer's net loss, no provision has been made for
income taxes. Approximately $16,300,000 of net operating loss carryforwards
remain available to reduce future federal and state taxable income, which expire
in 2001 through 2019. 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 and/or reductions of debt,
including changes resulting from a Chapter 11 plan confirmation, could result in
a limitation or reduction in the use of these net operating loss carryforwards.
FINANCIAL CONDITION
Stable operations and the staying of liabilities inherent in a Chapter 11,
account for the minor fluctuations in assets and liabilities from June 30, 1999
to June 30, 2000. Current assets increased by approximately 12.6% over fiscal
year 1999 to $1,388,743. This increase, which is primarily attributable to
inventories and accounts receivable, is the direct result of the increased
volume of manufacturing and sales during fiscal year 2000. There were no
material changes in prepaid assets or cash over fiscal year 1999. However,
equipment and leasehold improvements decreased from $395,372 to $268,178. This
decrease is primarily attributable to normal depreciation of existing assets.
Other assets represent equipment, which 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.
Total liabilities increased by 7.9% to $19,170,712 over fiscal year 1999,
due primarily to the increase in additional accrued and unpaid interest on
secured, pre-petition liabilities. Conversely, total current liabilities
decreased from $799,161 in fiscal 1999 to $734,605 at June 30, 2000, primarily
due to the elimination of all advances under a factoring agreement. Liabilities
subject to compromise of $18,436,107 at June 30, 2000 represent those
pre-petition claims, which will be impaired under the proposed plan of
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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 8.5% to $17,335,976 over fiscal
year 1999. This increase is generated solely by operating losses incurred in the
current fiscal year of $1,360,853. Common stock, preferred stock, and additional
paid-in capital remain unchanged from June 30, 1999.
RESULTS OF OPERATIONS
The issuer's sales during fiscal 2000 increased by 14.9% over fiscal year
1999, to $3,303,129 while its gross profit increased by 21.5% over the same
period. An increase in military sales of approximately $500,000 over the prior
year, as well as the comparatively high gross profit margins inherent in the
military power supply product line are the key factors contributing to the
fiscal 2000 improvement. Fiscal 2000 post-petition sales averaged approximately
$275,000 per month in core product shipments, as compared with $240,000 per
month in fiscal 1999.
Operating expenses increased by approximately 8.4% to $1,026,048 for
fiscal year 2000. Modest expense growth, primarily in the areas of sales and
marketing resources account for the majority of this increase. Other income and
expense decreased from $1,645,965 in 1999 to $1,545,547 in 2000. The decrease in
factor interest expense due to the repayment of outstanding advances early in
the fiscal year, comprises the majority of the change in other income and
expense. $76,152 of reorganization items in 1999 represent legal and court costs
associated with the bankruptcy proceeding. Comparable legal and court expenses
in 2000 total $136,383. As a result of all of the changes described above, the
net loss for fiscal 2000 of approximately $1.36 million modestly trailed the
fiscal 1999 net loss of approximately $1.56 million.
Throughout its post-Chapter 11 filing 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
11 filing. The issuer's inability to manufacture a functional UPS/PLC product,
as well as many prior years of working capital shortages which strangled core
product shipments, have 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, a more comprehensive domestic distribution channel, and a direct
sales force effort for laboratory products are all means by which the issuer
plans to continue to enhance sales volumes in future periods.
The most important general economic trend during fiscal year 2000 was the
continued strength of the national economy, reflected in significant
improvements in the major capital markets. In addition, the advent and
subsequent rapid growth of the internet as an advertising and marketing medium,
has opened many new possibilities for
13
<PAGE>
reaching yet untapped segments of what is, in many ways, a mature market.
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
Attached hereto and made a part of this filing is the audited consolidated
balance sheets and related consolidated statements of operations, stockholders'
deficit, and cash flows of the issuer for its fiscal years ended June 30, 2000
and June 30, 1999.
The report of McGladrey & Pullen, LLP, dated August 28, 2000 on the
issuer's 2000 consolidated financial statements is attached hereto and made part
of this filing.
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None to report during the two fiscal years covered by this report.
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, 2000 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 has
a Bachelor's Degree in Electrical Engineering from Boston University.
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 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
holds a Bachelor's Degree in Electrical Engineering from the University of
Connecticut.
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. 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
15
<PAGE>
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 the 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 in Economics 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. 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.
ROBERT S. DORFMAN. Mr. Dorfman will become a Director upon the
confirmation of the issuer's bankruptcy case. He is founder, owner and President
of The Robert S. Dorfman Company which specializes in arranging financing for
corporate clients, and also acts as a Manager of Crescent Capital. He is also
the principal and President of Dorfman Securities, a registered NASD
broker-dealer. Mr. Dorfman holds a Bachelor of Arts degree from Tufts University
and a Master of Business Administration degree from Boston University.
EXECUTIVE OFFICERS OF THE ISSUER
As of June 30, 2000 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, 1998, 1999 and 2000. No employee's annual salary and bonus
exceeded $100,000 for those fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
STOCK
NAME YEAR PRINCIPAL POSITION SALARY ($) OPTIONS
<S> <C> <C> <C> <C>
Melvin A. Becker 2000 Vice President, October 9, 1996-present 90,000
1999 President Jan 1, 1984-October 9, 1996 92,037
1998 97,192
</TABLE>
16
<PAGE>
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. On January 1,
1999 Mr. Becker's salary was increased to $90,000 annually.
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) in Fiscal Year Price$/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>
</TABLE>
(a) No stock options were exercised or outstanding during the fiscal year
covered by this report.
The Company has no pension plan covering executives, and currently
provides no benefits to executives other than life insurance coverage equivalent
to 100% of annual salary and health insurance.
17
<PAGE>
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) 159,468(12)(15) 6.6
P.O. Drawer 9
Kensington, Connecticut 06037
Equitas, L.P. 273,189(11) 10.3
2000 Glen Echo Road
Suite 101
Nashville, Tennessee 37215
Edward Benjamin(2) 125,400(14) 5.0
Thomas O'Grady(2) 136,308 5.7
David H. Smith II(2) 176,308 7.2
Jeri Fink(2) 283,503 11.8
Sandra Roth(2) 146,503 6.1
Jonathan D. Betts(2)(7) 2,528,959(8)(13)(shared) 68.4
18
<PAGE>
Melvin A. Becker(2) 13,263 0.6
Gary M. Laskowski (2)(7) 2,538,859(9)(13)(shared) 68.6
All Directors and Executive Officers 2,552,222 69.0
as a Group
</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.
(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.
19
<PAGE>
(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
159,468 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 273,189 shares of Common Stock underlying warrants which are
currently exercisable.
(12) Includes 10,000 shares of Common Stock underlying 5,000 warrants which are
currently exercisable by Bril Corp. Profit Sharing Plan and Trust and
5,000 warrants which are currently exercisable by Bril Corp. Money
Purchase Plan.
(13) Includes 1,297,163 shares of Common Stock underlying warrants which are
currently exercisable by Inverness, 5,000 shares of Common Stock
underlying warrants which are currently excercisable by Bril Corp. Profit
Sharing Plan and Trust, and 5,000 shares of Common Stock underlying
warrants which are currently exercisable by Bril Corp. Money Purchase
Plan.
(14) Includes 125,400 shares of Common Stock underlying warrants which are
currently exercisable.
(15) 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.
20
<PAGE>
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) Inverness has also entered into certain Revolving Loan Agreements with the
issuer commencing on October 11, 1996 and December 31, 1996, and later
amended on November 27, 1996, March 20, 1997. The notes under these
Agreements provide for 18% annual interest and, as of June 30, 1998,
provided for a maximum credit line of $8,000,000, secured by substantially
all the assets of the issuer.
(b) 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, 2000, 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.
(c) 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, 2000 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.
At the year ended June 30, 2000 the issuer had approximately $4,500 in
outstanding advances 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 2000 MAY BE OBTAINED
FREE OF CHARGE BY SENDING A REQUEST IN WRITING TO:
INVESTOR RELATIONS
POWER DESIGNS, INC.
14 COMMERCE DRIVE
DANBURY, CT 06810
21
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit
Number Description
------ -----------
FINANCIAL STATEMENTS
Independent Auditor's Report
Consolidated Balance Sheets - June 30, 2000 and 1999
Consolidated Statements of Operations - Years Ended June 30, 2000 and
1999
Consolidated Statements of Stockholders' Deficit - Years Ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended June 30, 2000 and
1999
Notes to Consolidated Financial Statements
(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)
(10) MATERIAL CONTRACTS
(i) Employee Incentive Stock Option Program
(INCORPORATED BY REFERENCE TO EXHIBIT
10(vi) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1995)
(ii) 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)
22
<PAGE>
(iii) Disclosure Statement for the 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)
(iv) Amended Plan of Reorganization for Power Designs, Inc. and PDIXF
Acquisition Corporation
(INCORPORATED BY REFERENCE TO EXHIBIT
10(v) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1999)
(v) Disclosure Statement for the Amended Plan of Reorganization for
Power Designs, Inc. and PDIXF Acquisition Corporation
(INCORPORATED BY REFERENCE TO EXHIBIT
10(vi) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1999)
(vi) Second Amended Plan of Reorganization for Power Designs, Inc. and
PDIXF Acquisition Corporation
(27) FINANCIAL DATA SCHEDULES
(i) Financial Data Schedules
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the fiscal year covered
by this report.
23
<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: September 28, 2000 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
24
<PAGE>
By: /s/ Robert R. Sparacino
--------------------------------
Robert R. Sparacino,
Director
By: /s/ Raymond E. Joslin
--------------------------------
Raymond E. Joslin,
Director
By: /s/ Shannon LeRoy
--------------------------------
Shannon LeRoy,
Director
25
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 2000
<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-7
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Power Designs, Inc.
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, 2000
and 1999, 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, 2000 and 1999, 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 (amended
on November 24, 1999 and August 21, 2000). 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, on
January 22, 1998, the Company filed for relief under Chapter 11 of the United
States Bankruptcy Code and has a
<PAGE>
substantial stockholders' deficit. These matters raise substantial doubt
about the 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
August 28, 2000
F-2
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
ASSETS (Note 10)
Current Assets
Cash $ 47,307 $ 53,395
Accounts receivable (Note 3) 466,748 425,289
Inventories (Note 5) 822,564 710,874
Prepaid expenses 52,124 44,203
------------ ------------
TOTAL CURRENT ASSETS 1,388,743 1,233,761
------------ ------------
Equipment and Leasehold Improvements, net (Notes 6 and 11) 268,178 395,372
Other Assets (Note 6) 177,815 164,937
------------ ------------
$ 1,834,736 $ 1,794,070
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable (Note 10) $ 245,000 $ 245,000
Advances under factoring agreement (Note 11) -- 129,203
Accounts payable 187,192 138,423
Accrued expenses 132,392 149,757
Accrued legal fees 165,994 132,751
Accrued interest 4,027 4,027
------------ ------------
TOTAL CURRENT LIABILITIES 734,605 799,161
Liabilities Subject to Compromise (Note 12) 18,436,107 16,970,032
------------ ------------
19,170,712 17,769,193
------------ ------------
Commitments and Contingencies (Note 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, 2000
and 1999 (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, 2000
and 1999 (Notes 10 and 14) 3,167 3,167
Additional paid-in capital (Note 14) 1,382,807 1,382,807
Accumulated deficit (18,722,190) (17,361,337)
------------ ------------
(17,335,976) (15,975,123)
------------ ------------
$ 1,834,736 $ 1,794,070
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Sales (Note 3) $ 3,303,129 $ 2,875,686
Cost of Sales (Note 4) 1,956,004 1,767,242
----------- -----------
GROSS PROFIT 1,347,125 1,108,444
----------- -----------
Operating Expenses
Selling, general and administrative expenses 959,290 837,620
Research and development 66,758 108,883
----------- -----------
1,026,048 946,503
----------- -----------
INCOME BEFORE OTHER INCOME (EXPENSE) AND
REORGANIZATION ITEMS 321,077 161,941
Other Income (Expense)
Investment income 2,416 3,601
Interest expense (contractual interest $1,764,293 in
2000, $1,778,949 in 1999) (Note 18) (1,537,643) (1,552,299)
Other (10,320) (97,267)
----------- -----------
(1,545,547) (1,645,965)
----------- -----------
LOSS BEFORE REORGANIZATION ITEMS (1,224,470) (1,484,024)
Reorganization Items (Note 13) 136,383 76,152
----------- -----------
NET LOSS $(1,360,853) $(1,560,176)
=========== ===========
Weighted average number of common shares outstanding 2,391,493 2,391,493
=========== ===========
Net loss per common share $ (0.57) $ (0.65)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Additional
Shares Par Shares Par Paid-In Accumulated
Issued Value Issued Value Capital Deficit Total
--------- ------ ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 2,391,493 $ 240 316,743 $ 3,167 $ 1,382,807 $(15,801,161) $(14,414,947)
Net loss -- -- -- -- -- (1,560,176) (1,560,176)
--------- ------ ------- ------- ------------ ------------ ------------
Balance, June 30, 1999 2,391,493 240 316,743 3,167 1,382,807 (17,361,337) (15,975,123)
Net loss -- -- -- -- -- (1,360,853) (1,360,853)
--------- ------ ------- ------- ------------ ------------ ------------
BALANCE, JUNE 30, 2000 2,391,49 $ 240 316,743 $ 3,167 $ 1,382,807 $(18,722,190) $(17,335,976)
========= ====== ======= ======= ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,360,853) $(1,560,176)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 150,334 151,315
Reorganization items 136,383 76,152
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (41,459) 68,306
(Increase) decrease in inventories (111,690) 55,564
Increase in prepaid expenses (7,921) (9,713)
Increase in other assets (12,878) (24)
Increase in accounts payable and accrued expenses 1,497,479 1,380,087
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
REORGANIZATION ITEMS 249,395 161,511
Reorganization items paid (103,139) (16,766)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 146,256 144,745
----------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment (23,141) (8,588)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (23,141) (8,588)
----------- -----------
Cash Flows From Financing Activities
Net payments under factoring agreement (129,203) (124,124)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (129,203) (124,124)
----------- -----------
NET (DECREASE) INCREASE IN CASH (6,088) 12,033
Cash, beginning of year 53,395 41,362
----------- -----------
Cash, end of year $ 47,307 $ 53,395
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 49,134 $ 54,651
=========== ===========
Cash payments for income taxes $ 250 $ 500
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
NOTE 1. CHAPTER 11 PROCEEDINGS AND BASIS OF FINANCIAL STATEMENTS PRESENTATION
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. An amended plan of
reorganization was filed with the Bankruptcy Court in November 1999. A second
amended plan of reorganization was filed with the Bankruptcy Court in August
2000. 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
F-7
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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 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 substantial stockholders' deficit, raise
substantial doubt about the Company's 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.
The Company plans to supply a greater percentage of its working capital needs
through improved operating cash flows. This improved operating cash flow is
predicated upon a stabilized core product manufacturing process and increased
revenue. In addition, the Company plans to meet its obligations pursuant to the
amended plan of reorganization and debtor in possession financing with cash
accumulated by the Company at the confirmation date and funds obtained from
commercial financing arrangements. The Company estimates that it needs to obtain
approximately $700,000 in additional financing to be able to meet its operating
cash flows and obligations subsequent to confirmation of the plan of
reorganization. Currently, the Company has not obtained any additional financing
and there can be no assurances that the Company will be successful in obtaining
such financing in the future.
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is a provider of customized power supply products to both original
equipment manufacturers and end users in the electronics industry. The Company
designs, develops,
F-8
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
manufactures and markets highly regulated direct current power supplies as well
as a line of variable auto-transformers. These power supplies function by taking
electric current from batteries or commercial power lines and converting it into
controlled voltages or currents for the operation of transistorized or
micro-circuit equipment. These products are routinely used in critical
applications in industrial, commercial, nuclear monitoring, consumer and medical
diagnostic equipment. The Company's principal products include variable
auto-transformers, switching and linear power supplies for use in military and
laboratory applications, and regulated linear direct current power supplies.
Segment information is not presented since the Company's revenue is attributed
to a single reportable segment.
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Power Designs,
Inc. and its wholly-owned subsidiary, PDIXF Acquisition Corp. ("PDIXF"). All
intercompany transactions and balances have been eliminated in consolidation.
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 any
activities after product shipment.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
The Company will adopt SAB No. 101 when required in the fourth quarter of fiscal
year 2001. Management believes the adoption of SAB No. 101 will not have a
significant effect on its financial statements.
F-9
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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.
OTHER ASSETS
Other assets consist primarily of equipment that was taken out of service and
idle at June 30, 2000 and 1999. This equipment is being leased under capital
leases with Inverness (See Note 8).
ESTIMATED WARRANTY EXPENSES
The Company currently sells its products with a warranty that provides for
repairs or replacements of any defective parts for one year 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. During the year ended June 30, 1999, the
Company decreased its warranty accrual by approximately $190,000 due to facts
and circumstances known to them at that time, including the expiration of the
warranty coverage period for certain products. No significant changes in the
Company's warranty accrual estimate occurred during the year ended June 30,
2000.
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.
F-10
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
the Fair Value of Financial Instruments," requires the disclosure of the fair
value information for certain assets and liabilities, whether or not recorded in
the balance sheet, for which it is practical to estimate that value. The Company
has the following financial instruments: cash, accounts receivable, advances
under factoring agreement, accounts payable, accrued expenses and notes payable.
The Company considers the carrying amount of these items, excluding notes
payable, to approximate the fair value because of the short period of time
between the origination of such instruments and their expected realization.
Refer to Note 10 for the fair value disclosures of notes payable.
NET LOSS PER COMMON SHARE
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.
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, 2000 and
1999, common stock equivalents have been excluded from the computation of the
net loss per share because inclusion of such equivalents is antidilutive.
NOTE 3. MAJOR CUSTOMER
Net sales for the years ended June 30, 2000 and 1999 include sales to various
governmental agencies and military departments which aggregated together were
approximately $806,000 and $496,000, respectively, (approximately 24% and 17% of
sales). Accounts receivable from these agencies and departments at June 30, 2000
and 1999 were approximately $208,000 and $76,000, respectively.
F-11
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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, 2000 and 1999, inventories consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 771,136 $ 712,412
Work in process 116,532 139,854
Finished goods 99,896 23,608
Allowance for slow-moving and
obsolete inventory (165,000) (165,000)
---------- ----------
$ 822,564 $ 710,874
========== ==========
</TABLE>
NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, 2000 and 1999, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Leasehold improvements $ 92,610 $ 92,610
Machinery and equipment 753,190 730,049
Furniture and fixtures 6,720 6,720
---------- ----------
852,520 829,379
Less accumulated depreciation (584,342) (434,007)
---------- ----------
$ 268,178 $ 395,372
========== ==========
</TABLE>
F-12
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
As of June 30, 2000 and 1999, the cost and accumulated amortization of equipment
under capital leases was $174,762 and $31,890, respectively, which are included
in other assets on the accompanying balance sheet. These assets are no longer in
use and amortization of the assets has been discontinued. The related liability
for these capital leases is included in liabilities subject to compromise (see
Note 12).
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,
2000 and 1999, are presented below:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,928,700 $ 5,365,200
Inventory 190,800 192,000
Warranty accrual 1,600 4,000
Other accruals 19,800 21,900
----------- -----------
Gross deferred tax assets 7,140,900 5,583,100
Less valuation allowance 7,121,300 5,549,400
----------- -----------
Net deferred tax assets 19,600 33,700
Deferred tax liabilities:
Property and equipment (19,600) (33,700)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
For the years ended June 30, 2000 and 1999, 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 consolidated statements of operations.
F-13
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $16,297,000 available to reduce future federal and state taxable
income, which expire as follows:
<TABLE>
<CAPTION>
Expiration Amount
---------- ------
<S> <C>
2001 $ 8,000
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 3,140,000
2013 9,449,000
2019 2,497,000
-----------
$16,297,000
===========
</TABLE>
Changes in ownership or debt discharge could result in a reduction or limitation
on 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.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Operating
Period Ending June 30, Leases
---------------------- ------
<S> <C>
2001 $ 186,600
2002 186,600
2003 124,400
---------
$ 497,600
=========
</TABLE>
F-14
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
During the years ended June 30, 2000 and 1999, there have been no payments made
on capital leases. Obligations under capital leases in the amount of $142,872
have been classified as liabilities subject to compromise at June 30, 2000 and
1999.
Total rent expense charged to operations under operating leases was
approximately $199,000 and $208,000 for the years ended June 30, 2000 and 1999,
respectively.
NOTE 9. PRIOR 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 20% of the amount
due to them for pre-petition claims (5% 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, 2000
and 1999, as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Class VI creditors (former unsecured
creditors) $ 10,960 $ 10,960
Class V creditors (taxing authorities and
union fees) 177,626 177,626
-------- --------
$188,586 $188,586
======== ========
</TABLE>
At June 30, 2000 and 1999, the Company was in default due to its failure to make
all appropriate payments as required by the bankruptcy court. The amounts at
June 30, 2000 and 1999 are shown as liabilities subject to compromise in the
consolidated balance sheets.
F-15
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
NOTE 10. NOTES PAYABLE
<TABLE>
<CAPTION>
2000 1999
---- ----
Notes payable classified as liabilities subject to compromise
-------------------------------------------------------------
<S> <C> <C>
Revolving loans payable to Inverness due upon
demand, interest payable monthly at 18%,
secured by substantially all assets of the
Company $ 7,015,553 $ 7,015,553
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
Term note payable to seller of divisions acquired in
October 1996, due July 31, 1997, interest payable
monthly at the prime rate plus 2%, secured by all
outstanding PDIXF stock, and substantially all
assets of the Company 990,000 990,000
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 1,653,500
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% 313,000 313,000
----------- -----------
$11,359,468 $11,359,468
=========== ===========
</TABLE>
Management estimates that the fair value of the above debt instruments and the
debtor in possession facility described in this footnote is approximately $2
million after giving effect to the Company's current bankruptcy filing and
current borrowing rate.
REVOLVING LOANS PAYABLE
The Company is in violation of certain covenants contained in the loan
agreements. These loans have been classified as liabilities subject to
compromise.
F-16
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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. The Company is in violation of certain covenants contained in
the related loan agreements. These notes have been classified as liabilities
subject to compromise.
TERM NOTE PAYABLE TO SELLER
The obligation to Penril Datacomm Networks (now known as Hayes Corporation) (the
"Seller") incurred in conjunction with an asset purchase 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.
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. These loans 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. These notes have been classified as liabilities subject to
compromise.
F-17
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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, 2000 and 1999, $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 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. As this arrangement
does not meet the criteria of a sale, receivables sold with recourse to Porter
are included in the accompanying consolidated balance sheets. In addition,
advances under this agreement are included in the accompanying consolidated
balance sheets.
In September 1999, the Company discontinued receivable factoring with Porter.
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.
F-18
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
Liabilities subject to compromise are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Accounts payable, trade $ 2,394,099 $ 2,394,099
Accrued expenses 4,351,082(2) 2,885,007(1)
Obligations under capital leases 142,872 142,872
Payables related to 1994 reorganization
including accrued interest 188,586 188,586
Notes payable:
Affiliated companies 7,015,553 7,015,553
Preferred shareholders 1,087,415 1,087,415
Seller of assets acquired 990,000 990,000
Others 2,266,500 2,266,500
----------- -----------
$18,436,107 $16,970,032
=========== ===========
</TABLE>
(1) Includes accrued interest at January 22, 1998 and accrued interest on
secured obligations from January 22, 1998 to June 30, 1999.
(2) Includes accrued interest at January 22, 1998 and accrued interest on
secured obligations from January 22, 1998 to June 30, 2000.
As a result of the Chapter 11 filing, no principal or interest payments will be
made on most pre-petition 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 pre-petition unsecured obligations has not
been accrued after the Petition Date. Contractual interest expense of $226,650
was not recorded on certain unsecured pre-petition debt for the years ended June
30, 2000 and 1999.
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>
2000 1999
---- ----
<S> <C> <C>
Reorganization items
Professional fees $120,383 $ 60,152
U.S. trustee fees 16,000 16,000
-------- --------
$136,383 $ 76,152
======== ========
</TABLE>
F-19
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
NOTE 14. CAPITAL STOCK
PREFERRED STOCK
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.
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.
F-20
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
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.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("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.
There were no options granted during the years ended June 30, 2000 and 1999. As
such, net loss as reported is the same as the pro forma amount required to be
disclosed.
F-21
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan at June 30, 2000 and
1999, 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, 1998 573,958 275,983 $ 0.16
Canceled -- (275,983) 0.16
Granted -- -- --
Exercised -- -- --
-------- -------- --------
Balance, June 30, 1999 573,958 -- $ --
Canceled -- -- --
Granted -- -- --
Exercised -- -- --
-------- -------- --------
BALANCE, JUNE 30, 2000 573,958 -- $ --
======== ======== ========
</TABLE>
There were no options granted or exercised during the years ended June 30, 2000
and 1999.
There were no options outstanding at June 30, 2000 and 1999.
STOCK WARRANTS
The following table summarizes warrants outstanding at June 30, 2000 and 1999,
and the changes in warrants during the years then ended:
<TABLE>
<CAPTION>
Weighted
Average
Shares Warrants Exercise
Reserved Outstanding Price
-------- ----------- --------
<S> <C> <C> <C>
Balance, June 30, 1998 2,415,312 2,415,312 $ 0.36
Canceled -- -- --
Granted -- -- --
Exercised -- -- --
--------- --------- --------
Balance, June 30, 1999 2,415,312 2,415,312 0.36
Canceled -- -- --
Granted -- -- --
Exercised -- -- --
--------- --------- --------
BALANCE, JUNE 30, 2000 2,415,312 2,415,312 $ 0.36
========= ========= ========
</TABLE>
F-22
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
A further summary of warrants outstanding at June 30, 2000, 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 1.5 $.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 25% 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. There were no contributions to the Plan during the years ended
June 30, 2000 and 1999.
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 on the liability of approximately $144,300 plus interest at 8%.
At June 30, 2000 and 1999, 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
At June 30, 2000 and 1999, advances due from a member of senior management
approximated $4,500 and $6,000, respectively, and are included in accounts
receivable in the balance sheet.
F-23
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
As outlined in Notes 8 and 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 $1,326,657 and $1,337,709 for the years ended June 30, 2000 and
1999, respectively.
NOTE 19. ENTERPRISE WIDE DISCLOSURES
The following table presents revenues from external customers for each of the
Company's groups of products for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Military power supplies $ 1,970,539 $ 1,457,302
Variable auto transformers 798,034 743,862
Linear power supplies 433,938 426,150
Service support 100,618 248,372
----------- -----------
$ 3,303,129 $ 2,875,686
=========== ===========
</TABLE>
Sales to foreign customers were $308,250 and $29,150 for the years ended June
30, 2000 and 1999, respectively. All other revenues were to customers in the
United States. All long-lived assets are in the United States.
See Note 3 for information related to a major customer.
F-24
