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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, 1999.
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended__________
Commission File No. 0-1921
POWER DESIGNS INC.
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(Name of Small Business Issuer as specified in its charter)
DELAWARE 11-1708714
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
14 COMMERCE DRIVE, DANBURY, CONNECTICUT 06810
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(Address of principal executive offices) (Zip Code)
(203) 748-7001
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
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 No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.______
State issuer's revenues for its most recent fiscal year. $2,875,686
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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_________
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 exclusively in the
design and manufacture of electronically controlled power sources used in the
operation of electronic equipment and mechanical instruments. The power sources
produced by the issuer 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, industry, scientific research, and
electro-medical organizations for such applications as computers, data
processors, video and sound communications media, nuclear biological and medical
research, nuclear power generation, and other facilities where disturbances in
the primary power source for these systems may affect their accuracy and
performance. These power sources or conditioners are connected between the
primary source, which may be a commercial power line, battery, diesel, gasoline
or steam-driven generator, and the system being powered, to stabilize, eliminate
surges or transient changes, or convert the input voltages and currents to other
voltage or current levels required by the system.
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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 industries, as well as organizations conducting scientific
research and electro-medical entities. The issuer's customers include private
companies, government agencies, and educational institutions, both within and
outside of the United States. International sales approximated $29,000 and
$192,000 for fiscal years 1999 and 1998 respectively.
There are approximately five hundred companies in the country who
manufacture one or more competitive products. To differentiate itself, the
issuer strives to maintain a reputation for excellent quality and reliability.
No one customer of the issuer accounts for ten percent or more of the issuer's
business. However, various governmental agencies and military departments
aggregated together comprise approximately 17% of sales, or $496,000, during
fiscal 1999.
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.
In prior fiscal years the issuer had begun efforts to develop a new
family of high voltage products and other new products, although development has
been retarded by lack of working capital. However, during the second quarter of
fiscal year 1997, the issuer's wholly-owned subsidiary, PDIXF Acquisition Corp.,
purchased the significant assets and assumed certain liabilities of two
divisions of Penril DataComm Networks, Inc ("Penril"). The purchased assets
comprise a line of uninterruptible power supply/power line conditioners
("UPS/PLC"), an autotransformer business and a military grade switching power
supply line.
An unacceptable level of product failures in the early shipments of the
UPS/PLC product line, required the issuer to suspend product distribution and
initiate efforts to resolve serious technical and production problems. As a
result of the significant operating losses sustained during its attempts to
resolve these issues, the issuer ceased operations and filed for relief under
Chapter 11 of the United States Bankruptcy Code on January 22, 1998. On January
26, 1998 the issuer reopened for business on a reduced scale and under new
management. At this writing, the issuer continues to manufacture its original
product line, as well as the autotransformer and military power supply lines.
The issuer's primary research and development activities center on the
customization and special engineering of its products. Prior development of the
UPS/PLC product line in the 1997 fiscal year resulted in a substantial increase
to 14.8% of annual revenues or approximately $542,000 devoted to research and
development. The continuation of the same project is reflected in the fiscal
year 1998 expense of approximately $406,000 or 15.6% of revenues. The absence
of this project in fiscal 1999 resulted in approximately $108,000 of
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expense or 3.8% of revenues. The average number of employees engaged in these
efforts was four in 1998 and totaled two in 1999. Total employees at June 30,
1999 number 26.
The business is not seasonal although there are historical
peaks during the second and fourth quarters, September-December and April-June.
The issuer's principal competitive advantage has been product reliability and
quality and it has been able to compete with other suppliers, notwithstanding
the fact that the number of competitors is large and generally in a state of
flux.
The issuer holds a license pursuant to a Purchase Agreement dated March
30, 1993 with GENRAD Inc. for the Trademark "Variac". The issuer is also the
holder of the Trademarks and Tradenames "Technipower" and "Constant Power". The
issuer is not dependent on any other material patents, trademarks, licenses or
other agreements held or with third parties.
As described above and in Item 6 - Management's Discussion of Financial
Condition and Results of Operations, the issuer has experienced significant
financial and operating difficulties.
BANKRUPTCY PROCEEDINGS
Due to the significant operating losses sustained prior to the
suspension of the UPS/PLC product line, the issuer filed for bankruptcy
protection under Chapter 11 on January 22, 1998. A plan of reorganization,
outlining the issuer's initial plans to discharge its responsibilities, was
filed by the debtor in May of 1998. Ongoing negotiations between the debtor and
its various creditor constituencies have resulted in an amended plan of
reorganization, which was filed by the debtor on November 24, 1999. A
confirmation hearing on the amended plan of reorganization has been continued
to March 21, 2000, although it may be continued from time to time by the
court.
Pursuant to a previous Chapter 11 filing, a plan of reorganization,
under which Venture Partners, Ltd. ("Venture Partners") as agent, supplied
capital to the issuer, was confirmed by the bankruptcy court in January 1994.
Additional information as to the bankruptcy proceedings is found at
Item 6 - "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Bankruptcy Proceedings."
ITEM 2. PROPERTIES/FACILITIES
The issuer currently leases 30,000 square feet of office and
manufacturing space located at 14 Commerce Drive, Danbury, Connecticut. The
issuer moved to the space in October, 1996 as a result of the acquisition of the
Penril assets and a consolidation of its operations. The lease expired on
February 28, 1998 and was subsequently extended for an additional five-year
term. Fixed annual rental payments total $186,600. These
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payments do not include additional 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 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.
ITEM. 3 LEGAL PROCEEDINGS
In August 1997, a material supplier of the issuer, filed a claim for
monies owed for goods and services provided in the amount of $144,281. The
parties subsequently negotiated the terms of a forbearance agreement, which
called for weekly progress payments of principal and interest at 8%. At this
writing the issuer is in default of this forbearance agreement, and the
remaining balance has been classified as a prepetition liability subject to
compromise.
In August 1997, an advertising service provider, initiated a collection
action for money damages for advertising services performed in the amount of
$34,500. The plaintiff subsequently withdrew their complaint.
No other litigation was pending as of the end of the fiscal year.
ITEM. 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fiscal year covered by this report
to a vote of security holders, through the solicitation of proxies, or
otherwise.
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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, 1998 AND 1999 1998 1999
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HIGH LOW HIGH LOW
---- ---- ----- -----
<S> <C> <C> <C> <C>
1st Quarter $0.75 $0.75 $0.062 $0.062
2nd Quarter 0.60 0.60 0.031 0.031
3rd Quarter 0.50 0.15 0.10 0.10
4th Quarter 0.50 0.15 0.08 0.08
</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.
ITEM. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANKRUPTCY PROCEEDINGS
During the fiscal years 1997 and 1998, the issuer's monetary and
non-monetary resources were significantly directed toward the development and
production of a new line of uninterruptible power supplies and power line
conditioners. Repeated attempts by the issuer to resolve the technical and
manufacturing problems persistent in the new product line remained unsuccessful.
As a result, the issuer could not generate the sales necessary to meet its
existing financial obligations. Employees of the issuer were furloughed in
December 1997 and all production operations ceased. On January 15, 1998 Fred G.
Basso resigned his position as President of the issuer. On January 22, 1998 the
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issuer, and its wholly owned subsidiary, PDIXF Acquisition Corporation, filed
petitions of relief under Chapter 11 of the United States Bankruptcy Code.
In the Chapter 11 case, substantially all liabilities as of the date of
the Filing are subject to resolution under a plan of reorganization to be voted
upon by the Debtors' creditors and stockholders and confirmed by the Bankruptcy
Court. Schedules have been filed by the Debtors with the Bankruptcy Court
setting forth the assets and liabilities of the Debtors as of the Filing as
shown by the Debtors' accounting records. Differences between amounts shown by
the Debtors and claims filed by creditors will be investigated and reconciled.
The amount and settlement terms for such disputed liabilities are subject to
allowance by the Bankruptcy Court. Ultimately the adjustment of the total
liabilities of the Debtors remains subject to a Bankruptcy Court approved plan
of reorganization, and, accordingly, the amount of such liabilities is not
presently determinable.
Under the Bankruptcy Code, the Debtors may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition contracts, subject to Bankruptcy
Court approval. The Debtors continue to review leases and contracts, as well as
other operational changes, and cannot presently determine or reasonably estimate
the ultimate outcome of, or liability resulting from, this review. Claims
secured against the Debtors' assets ("secured claims") also are stayed, although
the holders of such claims have the right to move the Court for relief from the
stay. Secured claims are secured primarily by liens on the Debtor's machinery,
equipment and accounts receivable.
On January 26, 1998 the issuer re-opened for business as
Debtor-in-Possession under new management. Since that time, the issuer has been
in the sole business of manufacturing its three remaining product lines:
military power supply products, variable autotransformers, and laboratory power
supplies. A small group of approximately twenty employees were gradually
recalled to work. Claims for wage arrearages were paid to those returning
employees up to the $4,000 maximum per employee permitted by law.
On May 12, 1998 the issuer filed a Plan of Reorganization (the "Plan")
with the Office of the U.S. Trustee. 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,
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.
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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
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 of reorganization has been
continued to March 21, 2000, although it may be continued from time to time by
the court. 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.
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CURRENT DEVELOPMENTS
During the first quarter of fiscal 1997, the issuer agreed to purchase
the assets of two subsidiaries of Penril DataComm Networks, Inc. (n/k/a Hayes
Corporation). That acquisition was consummated on October 11, 1996, and reported
on a Form 8-K dated October 28, 1996. Total consideration, which was determined
through arms-length negotiations, consisted of approximately $4.4 million in
cash and notes payable. In November 1996, the issuer consolidated its managerial
and manufacturing operations at the former Penril site in Connecticut.
Once relocated, the issuer's manufacturing and engineering efforts were
primarily directed toward the development and manufacture of an innovative line
of uninterruptible power supply/power line conditioners purchased as part of the
Penril acquisition. A considerable investment of the issuer's financial
resources was made in material, machinery and personnel. The issuer's inability
to resolve the technical problems, which plagued the UPS/PLC product line,
resulted in numerous product failures both in the field and in the factory.
Consequently product sales fell well below management's original projections,
and the issuer suffered significant operating losses during these periods. As a
result of these losses, the issuer was unable to meet its current financial
obligations, as well as required debt repayments.
In an effort to conserve working capital, the issuer began a series of
workforce reductions commencing in the first quarter of fiscal 1998. These
reductions were completed during January 1998 when the remaining employees were
furloughed, and Fred G. Basso, President of the issuer, resigned his position.
The issuer filed petitions of relief under Chapter 11 of the United States
Bankruptcy Act on January 22, 1998. Additional information as to the bankruptcy
proceedings is found at Item 6 - "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Bankruptcy proceedings."
On January 26, 1998 the issuer, as Debtors-in-Possession, resumed
operations on a limited scale. Pursuant to a court order, the issuer retained
The Vantage Partners LLC, a management consulting firm, who, together with
Melvin A. Becker, Vice President of Operations, comprise existing senior
management. Approximately twenty employees were recalled to work in the
production of the three remaining product lines. Since that time, management's
efforts have been concentrated in the following areas: restoring customer
relationships, streamlining operating costs, improving manufacturing quality and
material procurement efficiencies, and re-establishing credit availability with
vendors and suppliers.
Since the initial months following the Filing, product offerings have
been confined to three historical families of products: military grade power
supplies, variable autotransformers, and linear switching power supply products.
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
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increased shipping levels and a concentrated effort on credit and collection
issues with all customers. Marketing efforts have been increased in the areas of
product literature development, internet advertisement, and sales representative
solicitation. Despite a plateau during the third fiscal quarter of 1999, both
military and commercial orders for product have continued to exhibit stable
levels of predictability. Open sales orders at June 30, 1999 total $464,514.
Subsequent periods saw continued efforts in the areas of order procurement and
customer satisfaction, and have resulted in open sales orders at January 31,
2000 of $503,518 and shipments in excess of the monthly average.
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 1998, the products had
been examined, findings documented, and a design modification conceptualized.
Although it is the intention of management to preserve 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.
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
$1.95 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 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 sublet tenant for the
issuer's existing rented facility. Once a sublet 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 sublease transactions have as yet been
consummated.
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In addition to various advertising measures and additions to its
internal sales force, the issuer has likewise retained the services of outside
sales consultants and manufacturer's representatives in an effort to expand the
customer base and increase product revenue. To date, six manufacturer's sales
representatives have been contracted to sell product in the following domestic
regions: New England Region, Sunbelt Region, Central Region, Southwest Region,
Caribbean Rim Region, and Western Region. Negotiations are pending with
representatives in three additional U.S. regions. Contemporaneously, a new
homepage has been uploaded to the Internet domain, wwwh.powerdesignshh.com. This
website currently displays the entire linear, military and autotransformer
product lines. While these efforts are focused on generating increased 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, and work is currently underway on the triple output products. Once
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.
LIQUIDITY AND CAPITAL RESOURCES.
In connection with the Penril acquisition, the issuer simultaneously
obtained significant additional outside financing, totaling approximately
$6,400,000. The financing consisted of three primary components: a private
placement of debt and equity securities and Common Stock purchase warrants for
approximately $1,360,000 to six individuals and a limited partnership; advances
on revolving notes payable to Inverness in the amount of $2,290,000, and a Term
Note payable to Penril of $2,750,000 due on December 31, 1996. As part of the
acquisition and financing, the issuer also created a class of Preferred Stock,
$.01 par value, which had been authorized by vote of the shareholders in fiscal
year 1995. Shares of the Preferred Stock were included with the securities
placed with the six individuals and a limited partnership.
Subsequent to the Penril acquisition, the resources and personnel of
the issuer were deployed in the investigation and resolution of a number of
manufacturing and production problems encountered in the manufacturing of the
UPS/PLC product lines. These problems resulted in extremely low manufacturing
yields evidenced by the gross profit (loss) at June 30, 1997 of ($366,138). To
correct these problems, significant operating funds were expended over the
course of the remainder of fiscal year 1997, resulting in a net loss for the
year of ($5,126,630). In order to finance these operating expenditures,
Inverness Corporation amended its revolving credit facilities with the issuer on
November 27, 1996, December 31, 1996, and March 1, 1997 to increase the maximum
availability under this vehicle from $2,500,000 initially to $8,000,000.
To combat significant shortages in working capital, the issuer was
required to enter into additional loans, which were issued as part of a private
placement offering of $100,000 units. These units comprise Bridge Notes ("Bridge
Notes") and Common
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Stock purchase warrants, which commenced on March 21, 1997 and was completed on
July 31, 1997. For each unit purchased, the bridge lenders received a promissory
note for $100,000 due no later than July 31, 1998 and 40,000 warrants to acquire
shares of the issuer's Common Stock for $0.25 per share subject to adjustment.
The obligations outstanding of $1,653,500 at June 30, 1999 and 1998 represent
the total amount raised through the offering.
In addition to the loans described above, the issuer has received two
unsecured loans in the aggregate amount of $300,000 payable to two investors, as
well as additional unsecured loans in the amount of $313,000 payable to four
affiliates on terms similar to those of the Bridge Notes.
Following the Chapter 11 filing in January of 1998 pursuant to a court
order, the issuer, as debtor-in-possession, entered into a financing agreement
with Venture Partners Ltd., as agent, to borrow working capital, up to a maximum
of $400,000. The terms of this agreement call for interest at 20% and a term of
120 days. This debt is collateralized firstly by the machinery and equipment of
the issuer, and secondarily by its accounts receivable. A total of $245,000 is
presently outstanding on this loan. As of this date the term of the note has
expired placing the borrower in default. At this time, no demand for repayment
has been received by the issuer.
Similarly, in February of 1998 the issuer, pursuant to a court
order, entered into a receivable factoring agreement with Porter Capital
Corporation ("Porter"), whereby trade receivables are sold to Porter at 94%
of face value. A 4% and 2% rebate is returned to the issuer if the receivable
is collected within 60 and 90 days respectively. Fees to Porter include a
minimum of 2% of the face amount of the receivables factored, and an annual
interest rate of prime on the outstanding amount advanced. Collateral for
this obligation comprises the factored receivables, with a secondary lien on
the machinery and equipment of the issuer. In September of 1998 the before
mentioned agreement was modified to a minimum fee of 2.5% for receivables
collected within 60 days and an additional 1% for each additional 15 days
outstanding to a maximum of 90 days. At June 30, 1999 advances under this
factoring agreement totaled $129,203, with a total of $0 outstanding since
October 31, 1999.
At this writing the issuer has liquidated $78,655 of its pre-petition
labor arrearages. As of this date the only remaining pre-petition labor
arrearage is that of certain former officers, as well as accrued vacation wages
for all former employees that did not return to work. During this time period
the issuer was in discussions with the U.S. Department of Labor regarding this
matter. The amended Plan of Reorganization addresses the liquidation of the
priority portion of these pre-petition liabilities over a period of eight
months.
The issuer hopes to be able to supply a greater percentage of its
working capital needs through improved operating cash flow during the 2000 and
2001 fiscal years. This improved operating cash flow is predicated upon a
stabilized core product manufacturing process and increased revenue for fiscal
2000 of which there can be no assurance. Nevertheless, the issuer expects that
it will be in need of additional financing in future
13
<PAGE>
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; however, to date no permanent financing has been executed. 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, 1999 the issuer currently has a net stockholders' deficit
of approximately $16,000,000, meaning that amounts owed to its creditors exceed
the issuer's assets.
As a result of the issuer's net loss position, no provision has been
made for income taxes. Approximately $13,380,000 of net operating loss
carryforwards remain available to reduce future federal and state taxable
income, which expire in 2000 through 2014. 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.
The issuer has proceeded with implementing and executing a Year 2000
compliance plan with the objective of having all of their significant business
systems, including those that affect facilities and manufacturing activities,
functioning properly with respect to the Year 2000 issue before January 1, 2000.
The issuer has assessed their internal processes and systems, and believes that
sales, administration, and general operations are substantially Year 2000
compliant. Prior to purchasing any new equipment or software, it is the issuer's
policy to ensure that the specifications include Year 2000 compliance. Because
no specific instance of material Year 2000 non-compliance has been discovered to
date, the issuer has not adopted a contingency plan to deal with Year 2000
issues.
Based upon the level of Year 2000 compliance to date, the issuer does
not expect the total costs of the Year 2000 review and compliance to have a
material adverse effect on the business or financial results. The issuer may
have to spend a material amount to develop and implement a contingency plan
during 2000, if the issuer finds that a material supplier or other third party
upon whom the issuer relies will face business interruptions as a result of Year
2000 issues.
Based upon the review of the Year 2000 issues to date, the issuer has
not experienced, and does not anticipate any significant interruption of normal
internal operations. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the issuer's results of operations, liquidity
14
<PAGE>
and financial condition. The issuer believes that, at this writing, the
possibility of significant interruptions of normal operations is minimal.
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, 1998 to June 30, 1999. Current assets decreased by approximately
7.6% over fiscal year 1998 to $1,233,761. This decrease, which is primarily
attributable to inventories and accounts receivable, is the direct result of
the heightened collection efforts on receivables and conservative purchasing
of raw material during fiscal year 1999. There were no material changes in
prepaid assets or cash over fiscal year 1998. However, equipment and
leasehold improvements decreased from $538,098 to $395,372. 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 8% to $17,769,193 over fiscal year 1998.
98% of the increase in total liabilities represents additional accrued and
unpaid interest on secured, pre-petition liabilities. Liabilities subject to
compromise of $16,970,032 at June 30, 1999 represent those pre-petition claims,
which will be impaired under the proposed plan of reorganization. In the case of
this issuer, all remaining pre-petition claims have been classified as
liabilities subject to compromise.
Total stockholders' deficit increased by 10.8% to $15,975,123 over
fiscal year 1998. This increase is generated solely by operating losses incurred
in the current fiscal year of $1,560,176. Common stock, preferred stock, and
additional paid-in capital remain unchanged from June 30, 1998. During fiscal
year 1998, 40,000 common stock purchase warrants were issued to certain
unsecured investors in conjunction with the execution of various notes payable
to those investors. These warrants are exercisable at $0.25 per share. Due to
the proposed impairment of all existing equity interests in the issuer, no value
has been assigned to these warrants.
RESULTS OF OPERATIONS
The issuer's sales during fiscal 1999 increased by 10.5% over fiscal
year 1998, to $2,875,686 while its gross profit (loss) increased by 200% over
the same period. The seriously low manufacturing yields, as well as the
inventory obsolescence generated by the now-defunct UPS/PLC product line are the
key factors inherent in the fiscal 1998 loss. In like manner product revenues,
which averaged approximately $216,000 per month in fiscal year 1998, included
UPS/PLC sales in the seven months immediately preceding the Chapter 11 filing.
Post-petition sales have averaged approximately $247,000 per month in core
product shipments only.
Operating expenses decreased by approximately 82%, to $946,503 for
fiscal year 1999. The significant component in the prior year total is a
one-time amortization
15
<PAGE>
expense related to the goodwill impairment of $2,870,432. Net of this
transaction, operating expenses were $2,460,901 for the prior year, with a
decrease of $1,514,398 in fiscal year 1999. This decrease is the result of
the major reductions in workforce, overhead, and research and development
costs following the Chapter 11 filing in mid-fiscal 1998. Other income and
expense decreased from $2,095,773 in 1998 to $1,645,965 in 1999. Consistent
with generally accepted accounting principles, the issuer has continued to
accrue unpaid interest on $9.2 million of secured debt in the post-petition
period. However interest on approximately $2.3 million of unsecured debt has
been stayed since the January 1998 Chapter 11 filing. This decrease in
interest expense comprises the majority of the change in other income and
expense. $117,525 of reorganization items in 1998 represent legal and court
costs associated with the bankruptcy proceeding. Comparable legal and court
expenses in 1999 total $76,152. As a result of all of the changes described
above, the net loss for fiscal 1998 of approximately $8.6 million
significantly exceeded the fiscal 1999 net loss of approximately $1.5 million.
Throughout the second half of fiscal year 1998 and in subsequent
periods, the issuer has expended considerable time and effort in repairing and
reactivating many customer relationships, which suffered a decline during the
months prior to the Chapter 11 filing. The issuer's inability to manufacture a
functional UPS/PLC product, as well as the working capital shortages which
strangled core product shipments, shifted many customers to search for an
alternative supplier of power protection products. Since January 22, 1998 the
issuer has been actively interviewing and communicating with prior customers to
better assess their product needs, and to institute operational measures to
insure on-time delivery of goods. At this writing, new manufacturer
representation in the field, redesigned product literature, and internet
advertising are all means by which the issuer plans to continue to enhance sales
volumes in future periods.
The most important general economic trend during fiscal year 1999 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 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
16
<PAGE>
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, 1999 and June 30, 1998.
The report of McGladrey & Pullen, LLP, dated December 23, 1999 on the
issuer's 1999 consolidated financial statements is attached hereto and made part
of this filing.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None to report in last two fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
17
<PAGE>
The Board of Directors as of June 30, 1999 consisted of six directors.
All directors of the issuer presently serve until resignation or until the next
annual shareholders' meeting.
JONATHAN D. BETTS. Mr. Betts has served as Chairman of the Board of the
issuer since November 1996. Mr. Betts is principal and founder of Venture
Partners, a private investment bank, and Inverness Corporation, a private
commercial finance Company, founded in 1986 and 1993, respectively. Mr. Betts,
Venture Partners and Inverness Corporation are affiliates of Millenia Capital
Holdings, LLC ("Millenia"), the largest stockholder of the issuer. Mr. Betts
served as a member of the consulting operation of Technology Transitions
Incorporated, a venture capital firm, from November 1985 to December 1986 and as
Regional Sales Manager for Medical Electronics Corporation, a critical care
medical instrumentation manufacturer, from June 1983 to September 1985. Mr.
Betts has a Bachelor's Degree in Electrical Engineering from Boston University.
MELVIN BECKER. Mr. Becker has served as a Vice President of the issuer
since November 1996. Mr. Becker has served as a Director of the issuer since
1984, and served as President of the issuer from January 1984 to November 1996,
and as Vice President in charge of Manufacturing of the issuer from 1971 to
1979. Mr. Becker served as Vice President of Operations and as Executive
Assistant to the President at Ferranti-Venus, a manufacturer of DC power
supplies from March 1979 to December 1983. Mr. Becker holds a Bachelor's Degree
in Electrical Engineering from the University of Miami.
GARY M. LASKOWSKI. Mr. Laskowski has served as a Director of the issuer
since April 1994. Mr. Laskowski is a principal and founder of Venture Partners,
a private investment bank, and Inverness Corporation, a private commercial
finance Company, founded in 1986 and 1993, respectively. Mr. Laskowski, Venture
Partners and Inverness Corporation are affiliates of Millenia. Mr. Laskowski
served as a member of the consulting operation of Technology Transitions
Incorporated, a venture capital firm, from March 1985 to January 1986 and served
in a number of posts, including Vice President, Marketing, for Canberra
Industries, Inc., a supplier of data acquisition and analysis systems, from 1976
to 1984. Mr. Laskowski holds a Bachelor's Degree in Electrical Engineering from
the University of Connecticut.
ROBERT R. SPARACINO. Mr. Sparacino was appointed as a Director of the
issuer on October 7, 1997. Mr. Sparacino has served as President of Sparacino
Associates, a management and venture capital consulting firm specializing in
high technology businesses since 1982, as a Director and Vice Chairman of
Tristar Corporation since 1992 and as a Director of Concurrent Computer
Corporation, a computer equipment manufacturer, from November, 1994 until
November, 1997. Additionally, Mr. Sparacino has served in executive management
positions with Xerox Corporation and General Motors Corporation. Mr. Sparacino
holds a Doctoral Degree in Instrumentation from the Massachusetts Institute of
Technology.
18
<PAGE>
RAYMOND E. JOSLIN. Mr. Joslin was appointed as a Director of the issuer
on October 7, 1997. Mr. Joslin currently serves as a Director, and as Vice
President and Group Head of the Entertainment & Syndication Group, of Hearst
Corporation. Mr. Joslin is also a Founding Director and Co-Chairman of
Hearst/ABC Video Services, and serves as a Founding Director and Co-Chairman of
each of 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. From 1984 to 1994 Mr. LeRoy served as Senior Vice
President of First Union National Bank of Tennessee, where he managed commercial
banking. Mr. LeRoy is a Director of HLM Design, Inc., an architectural and
engineering firm and Laure Beverage Company, Inc., a consumer beverage company.
Mr. LeRoy holds a Bachelor of Arts degree from the University of North Carolina
in Chapel Hill.
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 was formerly Managing Director-Business Development
for Advest, Inc., a regional investment bank and brokerage firm and also held
positions as Vice President of Corporate Finance at Berg & Co., and as a Banking
Officer at National Westminster Bank, USA. 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, 1999 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 and 1999. No other employee's annual salary and bonus
exceeded $100,000 for the fiscal year.
19
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
STOCK
NAME YEAR PRINCIPAL POSITION SALARY ($) OPTIONS
<S> <C> <C> <C> <C>
Melvin A. Becker 1999 Vice President, October 9, 1996-present 92,037
1998 President, Jan 1, 1984-October 9, 1996 97,192
1997 100,698 0
Fred G. Basso 1998 President, May 6, 1997-January 15, 1998 81,216 0
1997 18,847 150,000
</TABLE>
In fiscal year 1995, the issuer adopted the Employee Incentive Stock
Option Program (the "Option Program"), which provides for the issuance of up to
the lesser of 24% of the fully diluted issued and outstanding Common Stock or
1,000,000 shares of Common Stock through the grant of incentive and
non-qualified stock options. Stock options under the Option Program are to be
issued by action of the Board of Directors or its Compensation Committee (the
"Administrator").
On October 9, 1996, the issuer entered into a three-year contract with
Mr. Becker, under which he assumed the duties of Vice President for a base
salary of $100,000 per annum. 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.
Fred G. Basso assumed the office of President of the issuer on May
6, 1997. His compensation consists of an annual cash salary of $140,000, and
options for the purchase of 150,000 shares of Common Stock at a price of
$.875 per share. Mr. Basso resigned his position with the issuer on January
15, 1998 prior to the Chapter 11 filing. Upon his resignation, all options to
purchase shares of Common Stock expired. Subject to the terms of his
employment contract, Mr. Basso has an allowed unsecured pre-petition claim
against the issuer for $70,000 in severance compensation
As of June 30, 1999, and subsequent to the end of the fiscal year, none
of the above-mentioned options have been exercised.
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) In Fiscal Year (Price$/Sh) Date
- ---- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
</TABLE>
(a) No stock options were issued during the fiscal year covered by this
report
20
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
At FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Melvin A. Becker 0 0 0/0 $0/$0
H. Rudolf Zeidler 0 0 0/0 $0/$0
Fred G. Basso(a) 0 0 0/0 $0/$0
</TABLE>
(a) In accordance with the Employment Agreement executed between the issuer and
Fred G. Basso, all options denoted, expired upon the date of employment contract
termination.
The Company has no pension plan covering executives and currently
provides no benefits to executives other than life insurance coverage of 100% of
annual salary and health insurance.
ITEM 11. OWNERSHIP OF SECURITIES BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth (i) those entities and individuals known
to the issuer to be the beneficial owners of more than 5% of the issuer's Common
Stock, (ii) beneficial ownership of the issuer's Common Stock by each director
and the Chief Executive Officer and the Named Executive Officer of the issuer
and (iii) beneficial ownership of the issuer's Common Stock by all directors and
executive officers of the issuer as a group. Unless otherwise indicated, each of
the stockholders has sole voting and dispositive power with respect to the
Common Stock beneficially owned by such stockholder.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF OWNERSHIP OF
TITLE OF CLASS BENEFICIAL OWNER (SHARES) CLASS
- -------------- -------------------- --------- ------------
<S> <C> <C> <C>
Common Stock Millenia Capital Holdings, LLC(4) 1,072,028 44.8
P.O. Drawer 9
Kensington, Connecticut 06037
Inverness Corporation(5) 1,297,163(10) 35.2
1224 Mill Street, Bldg. A
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
East Berlin, Connecticut 06023
Bril Corp.(6) 149,468(15) 6.2
P.O. Drawer 9
Kensington, Connecticut 06037
Equitas, L.P. 263,189(11) 9.9
200 Glen Echo Road
Suite 101
Nashville, Tennessee 37215
Thomas O'Grady(2) 125,323 5.2
David H. Smith II(2) 125,323 5.2
Jeri Fink(2) 283,503 11.8
Sandra Roth(2) 146,503 6.1
Jonathan D. Betts(2)(7) 2,518,959 63.7
(8)(13)(14)
(shared)
Melvin A. Becker(2) 134,871(12) 5.4
Gary M. Laskowski (2)(7) 2,528,859 64.0
(9)(13)(14)
(shared)
All Directors and Executive Officers 2,663,830 65.1
as a Group
</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.
22
<PAGE>
(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.
(6) The executive officers of Bril Corp. ("Bril") are Gary M. Laskowski and
Jonathan D. Betts, each of whom is a director of the issuer. The
concurrence of both Mr. Laskowski and Mr. Betts is necessary to direct the
voting of securities owned by Bril and the disposition of such shares
requires the consent of both remaining shareholders of Bril, Deborah
Laskowski, the spouse of Mr. Laskowski, and Kathleen Betts, the spouse of
Mr. Betts. Accordingly, Mr. Laskowski and Mr. Betts may be deemed the
beneficial owners of shares of Common Stock owned by Bril.
(7) Mr. Betts and Mr. Laskowski share voting power over the 1,297,163 and
149,468 shares of Common Stock currently owned by (or underlying options
immediately exercisable by) Inverness and Bril, respectively. See Notes 5
and 6, above. In addition, Mr. Betts and Mr. Laskowski are trustees and
beneficiaries of a retirement plan that owns 200 shares of Common Stock.
(8) Includes 100 additional shares of Common Stock owned individually of record
and beneficially by Mr. Betts, and includes 1,072,028 shares of Common
Stock owned by Millenia as to which Mr. Betts disclaims beneficial
ownership.
(9) Includes 10,000 additional shares of Common Stock owned individually of
record and beneficially by Mr. Laskowski, and includes 1,072,028 shares of
Common Stock owned by Millenia as to which Mr. Laskowski disclaims
beneficial ownership.
23
<PAGE>
(10) Includes 1,297,163 shares of Common Stock underlying warrants which are
currently exercisable.
(11) Includes 263,189 shares of Common Stock underlying warrants which are
currently exercisable.
(12) Includes 121,608 shares of Common Stock underlying options which are
currently exercisable.
(13) Includes 1,297,163 shares of Common Stock underlying warrants which are
currently exercisable by Inverness.
(14) Excludes 50,000 shares of Common Stock underlying options issued pursuant
to the current Option Plan which are subject to approval by the
stockholders at the Annual Meeting of stockholders.
(15) Includes 26,291 and 24,700 shares of Common Stock previously owned by Bril
and transferred to Gary Laskowski as Trustee for Bril Corp. Profit Sharing
Plan and Trust and Gary Laskowski as Trustee for Bril Corp. Money Purchase
Plan, respectively, on September 15, 1997.
.ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jonathan D. Betts and Gary M. Laskowski, directors of the issuer, are
officers of Venture Partners, Ltd., and of Inverness Corporation, both of which
have provided capital to the issuer under several loan agreements:
(a) The issuer has entered into an agreement with Venture Partners whereby
Venture Partners is paid a minimum of $10,600 per month, plus expenses, for
various consulting services provided to the issuer. The issuer is not
committed to pay Venture Partners under this agreement for future periods.
During the years ended June 30, 1999 and 1998 the issuer incurred
approximately $0 and $112,000 of expenses under this agreement, and for
services provided outside of the agreement.
(b) 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.
During the year ended June 30, 1997, the issuer paid $100,000 in fees to
Inverness in connection with these loan agreements.
(c) 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, 1999, obligations under these leases were
approximately $142,872, and the cost and
24
<PAGE>
accumulated amortization of equipment under capital leases was $174,762 and
$31,890, respectively.
(d) 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, 1999 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, 1999 the issuer had approximately $6,000 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 1999 MAY BE OBTAINED FREE
OF CHARGE BY SENDING A REQUEST IN WRITING TO:
INVESTOR RELATIONS
POWER DESIGNS, INC.
14 COMMERCE DRIVE
DANBURY, CT 06810
25
<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, 1999 and 1998
Consolidated Statements of Operations - Years Ended
June 30, 1999 and 1998
Consolidated Statements of Stockholders' Deficit - Years Ended
June 30, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended
June 30, 1999 and 1998
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) Plan of Reorganization
(INCORPORATED BY REFERENCE TO EXHIBIT
26
<PAGE>
10(i) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1994)
(ii) Final Decree
(INCORPORATED BY REFERENCE TO EXHIBIT
10(ii) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1994)
(iii) Employee Incentive Stock Option Program
(INCORPORATED BY REFERENCE TO EXHIBIT
10(vi) TO FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1995)
(iv) 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)
(v) Amended Plan of Reorganization for Power Designs, Inc. and PDIXF
Acquisition Corporation
(vi) Disclosure Statement for the Amended Plan of Reorganization for Power
Designs, Inc. and PDIXF Acquisition Corporation
27
<PAGE>
(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.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 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
29
<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
30
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1999
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-3
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-5
Consolidated statements of operations F-6
Consolidated statements of stockholders' deficit F-7
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-9
- --------------------------------------------------------------------------------
F-2
<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, 1999
and 1998, 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, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company and its Subsidiary filed for reorganization
under Chapter 11 of the United States Bankruptcy Code in January 1998. The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In particular, such
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business. The eventual outcome of these matters is not presently
determinable.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, on
January 22, 1998, the Company filed for relief under Chapter 11 of the United
States Bankruptcy Code and has sustained recurring losses from operations. These
matters raise substantial doubt about the
F-3
<PAGE>
Company's ability to continue as a going concern. Management's plans concerning
these matters are also discussed in Note 1. In the event a plan of
reorganization is accepted, continuation of the business thereafter is dependent
on the Company's ability to achieve sufficient cash flow to meet its
restructured debt obligations. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.
New Haven, Connecticut
December 23, 1999
F-4
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------------------------
ASSETS (Note 11)
<S> <C> <C>
Current Assets
Cash $ 53,395 $ 41,362
Accounts receivable, less allowance for doubtful accounts
of $21,625 in 1998 (Note 12) 425,289 493,595
Inventories (Note 6) 710,874 766,438
Prepaid expenses 44,203 34,490
----------------------------
TOTAL CURRENT ASSETS 1,233,761 1,335,885
----------------------------
Equipment and Leasehold Improvements, net (Notes 7 and 12) 395,372 538,098
Other Assets 164,937 164,913
----------------------------
$ 1,794,070 $ 2,038,896
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable (Note 11) $ 245,000 $ 245,000
Advances under factoring agreement (Note 12) 129,203 253,327
Accounts payable 138,423 91,503
Accrued expenses 149,757 111,585
Accrued legal fees 132,751 73,365
Accrued interest 4,027 4,027
----------------------------
TOTAL CURRENT LIABILITIES 799,161 778,807
Liabilities subject to compromise (Note 13) 16,970,032 15,675,036
----------------------------
17,769,193 16,453,843
----------------------------
Commitments and Contingencies (Notes 3, 4, 9, 15, 16, 17 and 18)
Stockholders' Deficit
Common stock, $.0001 par value, 10,000,000 shares authorized,
2,391,493 shares issued and outstanding at June 30, 1999
and 1998 (Notes 11 and 15) 240 240
Preferred stock, $.01 par value, 1,000,000 shares authorized;
316,743 shares issued and outstanding at June 30, 1999
and 1998 (Notes 11 and 15) 3,167 3,167
Additional paid-in capital (Note 15) 1,382,807 1,382,807
Accumulated deficit (17,361,337) (15,801,161)
----------------------------
(15,975,123) (14,414,947)
----------------------------
$ 1,794,070 $ 2,038,896
============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Net Sales $ 2,875,686 $ 2,602,387
Cost of Sales 1,767,242 3,706,823
--------------------------
GROSS PROFIT (LOSS) 1,108,444 (1,104,436)
--------------------------
Operating Expenses
Selling, general and administrative expenses 802,311 1,804,202
Research and development 108,883 406,260
Depreciation and amortization 35,309 3,120,871
--------------------------
946,503 5,331,333
--------------------------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) AND
REORGANIZATION ITEMS 161,941 (6,435,769)
Other Income (Expense)
Investment income 3,601 2,438
Interest expense (contractual interest $1,778,949 in 1999,
$2,149,585 in 1998) (Note 19) (1,552,299) (2,059,385)
Other (97,267) (38,826)
--------------------------
(1,645,965) (2,095,773)
--------------------------
LOSS BEFORE REORGANIZATION ITEMS (1,484,024) (8,531,542)
Reorganization Items (Note 14) 76,152 117,525
--------------------------
NET LOSS $(1,560,176) $(8,649,067)
==========================
Weighted average number of common shares outstanding 2,391,493 2,391,493
==========================
Net loss per common share $ (0.65) $ (3.62)
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------------------------------------------------------------
Additional
Shares Par Shares Par Paid-In Accumulated
Issued Value Issued Value Capital Deficit
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,391,493 $ 240 316,743 $ 3,167 $ 1,382,807 $ (7,152,094)
Net loss -- -- -- -- -- (8,649,067)
------------------------------------------------------------------------
Balance, June 30, 1998 2,391,493 240 316,743 3,167 1,382,807 (15,801,161)
Net loss -- -- -- -- -- (1,560,176)
------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 2,391,493 $ 240 316,743 $ 3,167 S 1,382,807 $(17,361,337)
========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 199 8
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,560,176) $(8,649,067)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 151,315 3,252,781
Provision for bad debts -- 125,539
Amortization of debt discount -- 289,000
Reorganization items 76,152 117,525
Changes in operating assets and liabilities:
Decrease in accounts receivable 68,306 110,007
Decrease in inventories 55,564 1,125,809
Increase in prepaid expenses (9,713) (32,967)
(Increase) decrease in other assets (24) 53,571
Increase in accounts payable and accrued expenses 1,380,087 1,704,864
Increase in payables related to reorganization -- 86,461
---------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES BEFORE
REORGANIZATION ITEMS 161,511 (1,816,477)
---------------------------
Reorganization items paid (16,766) (8,621)
---------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 144,745 (1,825,098)
---------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (8,588) (29,992)
---------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,588) (29,992)
---------------------------
Cash Flows From Financing Activities
Payment of deferred financing costs -- (25,000)
Principal payments on capital lease obligations -- (24,756)
Net increase in revolving loans payable -- 1,178,912
Proceeds from notes payable -- 578,000
Principal payments on notes payable -- (72,930)
Net advances (payments) under factoring agreement (124,124) 253,327
---------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (124,124) 1,887,553
---------------------------
NET INCREASE IN CASH 12,033 32,463
Cash, beginning of year 41,362 8,899
---------------------------
Cash, end of year $ 53,395 $ 41,362
===========================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 54,651 $ 820,244
===========================
Cash payments for income taxes $ 500 $ 639
===========================
Supplemental Schedule of Noncash Investing and Financing Activities
Capital lease obligations incurred for equipment $ -- $ 88,996
===========================
Reclassification of idle equipment $ -- $ 142,872
===========================
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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. The
consummation of this plan for the Company will require the requisite vote of
impaired creditors under the Code and confirmation of the plan by the court.
The United States Trustee for the Bridgeport District of Connecticut has
appointed Official Committees ("Committees") of Unsecured Creditors and Equity
Security Holders for the Chapter 11 case. The role of the Committees includes,
among other things: (a) consultation with the Debtors concerning the
administration of the Chapter 11 case; (b) investigation of the acts, conduct,
assets, liabilities, financial condition and operations of the Debtors, and the
desirability of the continuation of their business and other relevant matters;
and (c) participation in the formulation of a plan of reorganization. In
discharging these responsibilities, the Committees have standing to raise issues
with the Bankruptcy Court relating to the business of the Debtors and the
conduct and course of the Chapter 11 case. The Debtors are required to pay
certain expenses of the Committees, including professional fees, to the extent
allowed by the Bankruptcy Court.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court approval.
The Debtors continue to review leases and contracts, as well as other
operational changes, and cannot presently determine or reasonably estimate the
ultimate outcome of, or liability resulting from, this review. Claims secured
against the Debtors' assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the Court for relief from the
stay. Secured claims are secured primarily by liens on
F-9
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
the Debtors' machinery, equipment and accounts receivable.
The consolidated financial statements of the Company have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
contemplates continuity of operations, realization of assets and the liquidation
of liabilities and commitments in the normal course of business. The Filing,
related circumstances and the losses from operations, raise substantial doubt
about its ability to continue as a going concern. The appropriateness of using
the going concern basis is dependent upon, among other things, confirmation of a
plan of reorganization, future profitable operations, and the ability to
generate sufficient cash from operations and financing sources to meet
obligations. As a result of the Filing and related circumstances, however, such
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the consolidated financial statements. Further, a
plan of reorganization could materially change the amounts reported in the
consolidated financial statements. The consolidated financial statements do not
include any adjustments relating to a recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
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 they need 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, 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
F-10
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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. During the period from
October 1996 until January 1998, the Company's principal product was an
innovative, proprietary uninterruptible power supply/power line conditioning
("UPS/PLC") product capable of servicing widely divergent power supply sources
worldwide. The Company's principal products now include variable
auto-transformers, switching and linear power supplies for use in military and
laboratory applications, and regulated linear direct current power supplies.
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.
Certain significant estimates include the allowance for slow-moving and obsolete
inventory, accrued warranty expenses and required provisions for impairment of
long-lived assets and certain intangible assets. These estimates are susceptible
to change in the near term, and these changes could be significant.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Power Designs,
Inc. and its wholly-owned subsidiary, PDIXF Acquisition Corp. ("PDIXF"). 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 significant
activities after product shipment.
INVENTORIES
F-11
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Inventories are stated at the lower of average cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed principally by the straight-line method over the estimated useful lives
of the respective assets, ranging from three to seven years. Improvements to
leased property are depreciated over the lesser of the life of the lease or life
of the improvements. Depreciation expense on assets acquired under capital
leases is included with depreciation expense on owned assets.
INTANGIBLE ASSETS
During the second quarter of 1998, management of the Company reviewed the
recoverability of recorded goodwill and wrote off the balance as there was
estimated to be no continuing fair value associated with the intangible asset.
Amortization in the amount of $2,870,432 was charged against operations for the
year ended June 30, 1998.
OTHER ASSETS
Other assets consist primarily of equipment that was taken out of service and
idle at June 30, 199 9 and 1998. This equipment is being leased under capital
leases with Inverness (See Note 9).
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.
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
F-12
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
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 11 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, 1999 and
1998, common stock equivalents have been excluded from the computation of the
net loss per share because inclusion of such equivalents is antidilutive.
RECLASSIFICATIONS
Certain items on the consolidated statement of operations as of June 30, 1998
have been reclassified with no effect on net loss, to be consistent with the
classifications adopted for June 30, 1999.
F-13
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 3. BUSINESS COMBINATION
In conjunction with the purchase of the assets of two divisions, Technipower,
Inc. and Constant Power, Inc., from Penril DataComm Networks, Inc on October 11,
1996, the Company entered into an agreement which provides that a portion of the
purchase price would be paid in the form of a royalty, computed as 2% of
quarterly sales of certain products, from September 30, 1997 to June 30, 2001.
As of June 30, 1999, the Company has not had any material sales of products
under this agreement.
Note 4. MAJOR CUSTOMER
Net sales for the year ended June 30, 1999 include sales to various gover
nmental agencies and military departments which aggregated together were
approximately $496,000 (approximately 17% of sales). Accounts receivable from
these agencies and departments at June 30, 1999 were approximately $76,000.
There were no major customers during the year ended June 30, 1998.
Note 5. 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 6. INVENTORIES
At June 30, 1999 and 1998, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Raw materials $ 712,412 $ 780,131
Work in process 139,854 142,284
Finished goods 23,608 24,023
Allowance for slow-moving and
obsolete inventory (165,000) (180,000)
----------------------
$ 710,874 $ 766,438
======================
</TABLE>
F-14
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, 1999 and 1998, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Leasehold improvements $ 92,610 $ 92,610
Machinery and equipment 730,049 721,460
Furniture and fixtures 6,720 6,720
----------------------
829,379 820,790
Less accumulated depreciation (434,007) (282,692)
----------------------
$ 395,372 $ 538,098
======================
</TABLE>
As of June 30, 1999 and 1998, 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.
Note 8. 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,
1999 and 1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,365,200 $ 4,904,000
Allowance for doubtful accounts -- 8,700
Inventory 192,000 --
Warranty accrual 4,000 80,800
Property and equipment 33,700 --
Interest accrual 848,500 309,000
Other accruals 21,900 23,500
---------------------------
Gross deferred tax assets 6,465,300 5,326,000
Less valuation allowance 6,465,300 5,222,500
---------------------------
Net deferred tax assets -- 103,500
</TABLE>
F-15
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Property and equipment -- (19,100)
Inventory -- (84,400)
---------------------------
$ -- $ --
===========================
</TABLE>
For the years ended June 30, 1999 and 1998, tax benefits recognized for net
operating losses incurred were offset by equal increases to the valuation
allowance for deferred taxes, resulting in no income tax expense or benefit
reflected on the Statement of Operations.
As of June 30, 1999, the Company had net operating loss carryforwards of
approximately $13,380,000 available to reduce future federal and state taxable
income, which expire as follows:
<TABLE>
<CAPTION>
Expiration Amount
---------- -----------
<S> <C>
2000 $ 10,000
2001 10,000
2002 10,000
2003 10,000
2004 10,000
2005 10,000
2006 10,000
2007 10,000
2008 10,000
2009 55,000
2010 529,000
2011 549,000
2012 3,140,000
2013 7,866,000
2014 1,151,000
-----------
$13,380,000
===========
</TABLE>
Changes in ownership or debt discharge could result in a reduction or limitation
on the use of these net operating loss carryforwards.
Note 9. 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
F-16
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
property taxes, and insurance. Future minimum lease payments under operating
leases are as follows:
<TABLE>
<CAPTION>
Operating
Period Ending June 30, Leases
---------------------- --------------
<S> <C>
2000 $ 186,600
2001 186,600
2002 186,600
2003 124,400
2004
--------------
$ 684,200
==============
</TABLE>
During the year ended June 30, 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, 1999 and 1998.
Total rent expense charged to operations under operating leases was
approximately $208,000 for the years ended June 30, 1999 and 1998.
Note 10. 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 twenty percent of
the amount due to them for pre-petition claims (five percent upon emerging from
bankruptcy and the remaining 15% over a period of three years).
The amounts due to these unsecured creditors, as well as other amounts due to
various taxing authorities, are due and payable with interest, at June 30, 1999
and 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------
<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>
F-17
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
At June 30, 1999 and 1998, the Company was in default due to its failing to make
all appropriate payments as required by the bankruptcy court. The amounts at
June 30, 1999 and 1998 are shown as liabilities subject to compromise in the
consolidated balance sheet.
Note 11. NOTES PAYABLE
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
NOTES PAYABLE CLASSIFIED AS LIABILITIES SUBJECT TO COMPROMISE
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 (see
Note 3), 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.
F-18
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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.
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 the Asset Purchase (see Note 3) was
initially due in full on December 31, 1996, however the Company was unable to
pay the obligation in full at that time. The Company subsequently entered into a
series of forbearance agreements with the Seller, however, on July 31, 1997, the
Company was unable to make the payments required and the Company is now in
violation of the forbearance agreement. The note has been classified as
liabilities subject to compromise.
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. Upon issuance of these loans, $289,000 was
allocated to warrants and fully amortized during fiscal year 1998. The
obligations outstanding of $1,653,500 at June 30, 1999 and 1998 have been
classified as liabilities subject to compromise.
UNSECURED SHORT TERM NOTES
These notes were issued to various investors. For each note issued, the lender
received a specified number of warrants to acquire shares of the Company stock
for $.25 per share. At June 30, 1998, there was no fair value associated with
these warrants, thus no amount was allocated to the warrants.
F-19
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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, 1999 and 1998, $245,000 was
outstanding under this loan agreement. As of this date, the term of the note has
expired placing the Company in default. At this time, no demand for repayment
has been received by the Company.
Note 12. 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 balance sheets. In addition, advances under
this agreement are included in the accompanying balance sheets.
Note 13. 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-20
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Liabilities subject to compromise are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------
<S> <C> <C>
Accounts payable, trade $ 2,394,099 $ 2,344,828
Accrued expenses 2,885,007(2) 1,639,282(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
----------------------------
$16,970,032 $15,675,036
============================
</TABLE>
(1) Includes accrued interest at January 22, 1998 and accrued
interest on secured obligations from January 22, 1998 to June
30, 1998.
(2) Includes accrued interest at January 22, 1998 and accrued
interest on secured obligations from January 22, 1998 to June
30, 1999.
As a result of the Chapter 11 filing, no principal or interest payments will be
made on most prepetition debt without Court approval or until a plan of
reorganization providing for the repayment terms has been confirmed by the Court
and becomes effective. Interest on prepetition unsecured obligations has not
been accrued after the Petition Date. Contractual interest expense of $90,200
and $226,650 was not recorded on certain unsecured pre-petition debt for the
period January 22, 1998 (filing date) through June 30, 1998 and the year ended
June 30, 1999, respectively.
Note 14. 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>
1999 1998
----------------------
<S> <C> <C>
Reorganization items
Professional fees $ 60,152 $105,940
U.S. trustee fees 16,000 8,000
Other -- 3,585
----------------------
$ 76,152 $117,525
======================
</TABLE>
F-21
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 15. 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-22
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 16. 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 issued during the year ended June 30, 1999 and 1998. As
such, net loss as reported is the same as the pro forma amount required to be
disclosed.
F-23
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan at June 30, 1999 and
1998, 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, 1997 573,958 536,764 $0.38
Canceled -- (260,781) 0.61
Granted
Exercised -- -- --
---------------------------------
Balance, June 30, 1998 573,958 275,983 $0.16
Canceled -- (275,983) 0.16
Granted -- -- --
Exercised -- -- --
---------------------------------
BALANCE, JUNE 30, 1999 573,958 -- $--
=================================
</TABLE>
There were no options granted or exercised during the years ended June 30, 1999
and 1998.
STOCK WARRANTS
During the year ended June 30, 1998, in conjunction with the sale of certain
notes to various investors, the Company issued 40,000 common stock purchase
warrants ("warrants") which are exercisable at $.25 per share. Due to the
significant financial difficulties and bankruptcy proceedings of the Company,
there was no fair value associated with these warrants, thus no amount was
allocated to the warrants.
F-24
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
The following table summarizes warrants outstanding at June 30, 1999 and 1998,
and the changes in warrants during the years then ended:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Number of Exercise
Reserved Shares Price
-----------------------------------
<S> <C> <C> <C>
Balance, June 30, 1997 2,375,312 2,375,312 $0.36
Canceled
Granted 40,000 40,000 0.25
Exercised
-----------------------------------
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
===================================
</TABLE>
A further summary of warrants outstanding at June 30, 1999, 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 2.5 $.36 2,415,312 $.36
</TABLE>
NOTE 17. 401(K) PLAN
The Company maintains a 401(k) profit sharing plan for the benefit of
substantially all its employees who meet certain minimum eligibility
requirements and who elect to participate. Under the terms of the Plan,
participants can contribute up to 15% of their pay to the extent permitted by
law. The Company may make matching contributions to the Plan equal to 50% of the
employees' annual contributions, as well as discretionary non-matching
contributions, however the annual matching contribution is limited to 13% of
participant compensation. Participants are immediately vested in their
contribution. There were no contributions to the Plan during the years ended
June 30, 1999 and 1998.
F-25
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 18. 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, 1999 and 1998, the Company was in default of this forbearance
agreement and the remaining obligation of $133,944 has been classified as
liabilities subject to compromise.
Note 19. RELATED PARTY TRANSACTIONS
The Company entered into an agreement, which has no specified expiration date,
with Venture Partners whereby Venture Partners is paid a minimum of $10,600 per
month, plus expenses, for various consulting services provided to the Company.
The Company is not committed to pay Venture Partners under this agreement for
future periods. In January 1998, Venture Partners ceased providing consulting
services to the Company under this agreement. During the year ended June 30,
1998, the Company incurred approximately $112,000 of expenses of which $15,000
was paid during the year ended June 30, 1998 under this agreement and for
services provided outside of the agreement.
At June 30, 1999 and 1998, advances due from a member of senior management
approximated $6,000 and are included in accounts receivable in the balance
sheet.
As outlined in Notes 5, 9 and 11 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 $1,337,709 and $1,354,678 for the years ended June 30, 1999 and
1998, respectively.
F-26
<PAGE>
POWER DESIGNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Note 20. ENTERPRISE WIDE DISCLOSURES
The following table presents revenues from external cusomters for each of the
Company's groups of products for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Military power supplies $1,457,302 $1,036,528
Variable auto transformers 743,862 927,073
Linear power supplies 426,150 398,302
Service support 248,372 89,602
UPS/PLC products -- 150,882
------------------------------
$2,875,686 $2,602,387
==============================
</TABLE>
Sales to foreign customers were approximately $29,150 and $192,000 for the years
ended June 30, 1999 and 1998, respectively. All other revenues were to customers
in the United States. All long-lived assets are in the United States.
See Note 4 for information related to a major customer.
F-27
<PAGE>
Exhibit 99(v)
UNITED STATES BANKRUPTCY COURT
DISTRICT OF CONNECTICUT
BRIDGEPORT DIVISION
IN RE: CHAPTER 11
)
POWER DESIGNS, INC. AND ) CASE NOS. 98-50117
PDIXF ACQUISITION CORPORATION ) 98-50118
) JOINTLY ADMINISTERED
)
DEBTORS-IN-POSSESSION ) NOVEMBER _______, 1999
AMENDED PLAN OF REORGANIZATION FOR
POWER DESIGNS, INC. AND PDIXF ACQUISITION CORPORATION
1. INTRODUCTION
This Plan is the proposal of PDI and PDIXF to their Creditors and the
holders of Equity Interests. The Plan is the product of discussions with the
Debtors' senior secured creditor, Inverness, and with the PDI and PDIXF
creditor's committees, all of which have agreed to support the Plan. The Plan
undertakes to resolve all secured claims, administrative claims, priority
claims, unsecured claims and equity interests. The Debtors believe that the
distributions to be made, pursuant to the terms of this Plan, will produce for
Creditors not less than they would receive if the Debtors' cases were converted
to cases under Chapter 7 of the Code, the Debtors' assets liquidated and
appropriate distributions therein were made as required by the Code.
1
<PAGE>
2. DEFINITIONS
The following terms, when used in this Plan shall, unless the context
otherwise requires, have the following meanings:
2.1 ADMINISTRATIVE CLAIM. Means a claim for payment of an
administrative expense of a kind specified in Section 503(b) of the Code and
referred to in Section 507(a)(1) of the Code, including, without limitation, the
actual and necessary costs and expenses incurred after the commencement of the
Chapter 11 cases of preserving the estate and operating the business of the
Debtors, including wages, salaries or commissions for services, compensation for
legal and other services and reimbursement of expenses awarded under Section
330(a) or 331 of the Code, and all fees and charges assessed against the estates
under Chapter 123 of Title 28, United States Code.
2.2 ALLOWED. When used in connection with any type of "Claim" or
"Equity Interest", means: (a) a Claim or Equity Interest, proof of which was
timely filed pursuant to the Orders of the Bankruptcy Court establishing the
applicable "bar dates" for the filing of Claims against the Debtors, and, as to
which no timely objection to allowance has been interposed within the applicable
period of limitation fixed by the Plan, the Bankruptcy Code, the Bankruptcy
Rules or the Bankruptcy Court, or as to any such timely objection a Final Order
of allowance has been entered; (b) a Claim or Equity Interest allowed by a Final
Order; (c) a Claim or Equity Interest
2
<PAGE>
listed in either of the Debtor's Schedules filed in connection with the Chapter
11 Cases and not identified as contingent, unliquidated or disputed; (d) a Claim
or Equity Interest which is fixed and agreed to in amount in writing between the
Debtors and any Claimant and allowed by a Final Order or (e) any Claim which is
deemed an Allowed Claim pursuant to the provisions of this Plan.
2.3 ALLOWED EMPLOYEE PRIORITY CLAIMS. Means an Allowed Claim of a
current or former employee of either of the Debtors which is entitled to the
priority in payment under Section 507(a)(3) and (4) of the Code. Any Allowed
Claim of a current or former employee not entitled to priority in payment under
Section 507(a)(3) and (4) of the Code shall be considered an Allowed Unsecured
Claim.
2.4 ALLOWED SECURED CLAIM OF INVERNESS. Means the Allowed Secured Claim
of Inverness in the amount of $1,800,000.
2.5 ALLOWED SECURED CLAIM. Means an Allowed Claim arising on or before
the Petition Date (January 22, 1998) that is secured by a valid Lien on property
of either of the Debtors which is not void or voidable under any state or
federal law, including any provision of the Code or an Allowed Claim for which
the holder asserts a setoff under Section 553 of the Code, to the extent of the
value (which is either agreed to by either of the Debtor pursuant to this Plan,
or in the absence of an agreement, has been determined in accordance with
Section 506(a) or 1111(b) of the Code) of the interest of the holder of such
Allowed Claim in either of the Debtors property,
3
<PAGE>
or an Allowed Claim that is treated as an Allowed Secured Claim pursuant to this
Plan. That portion of such Allowed Claim exceeding the value of security held
therefor shall be an Allowed Unsecured Claim.
2.6 ALLOWED UNSECURED CLAIM. Means an Allowed Claim which is not an
Allowed Secured Claim, an Allowed Employee Priority Claim or a Priority Tax
Claim.
2.7 BANKRUPTCY COURT. Means the United States Bankruptcy Court for the
District of Connecticut, or such other Court as may hereafter have jurisdiction
over the Debtors' pending bankruptcy cases.
2.8 BRIDGE NOTEHOLDERS means the holders of the Subordinated Bridge
Notes, including Raymond Joslin ($200,000), David Hale Smith II Charitable
Remainder Trust ($50,000), Interim Advantage Fund ($50,000), Bruce MacDonald
($300,000), Ian R. Kahn ($25,000), Dr. Justin Wernick ($40,000), Edward Benjamin
MD Money Purchase Pension Plan ($67,000), Dr. Edward Benjamin ($246,500), Alan
N. Parnes ($50,000), Lee H. Silverstein ($25,000), Tri Ventures ($50,000), Alan
Napack ($50,000), Michael Zuckerman and Hillary Davis ($50,000), Crescent
Capital Company LLC ($50,000), Steven Grapstein ($100,000), Ray Ingleby
($100,000), Marshall Manley ($100,000), Curran Partners ($100,000), John D.
Shepherd ($100,000), and Phyllis and Howard Silverman ($200,000) or their
respective assignees.
2.9 CASH. Means currency of the United States of America, or checks
payable in
4
<PAGE>
immediately available funds of such currency.
2.10 CLAIM. Has the meaning set forth in Section 101(5) of the Code.
2.11 CLASS. Means Claims or Equity Interests which are substantially
similar to the other Claims or Equity Interests in such Class as classified
pursuant to the Plan.
2.12 CODE. Means the United States Bankruptcy Code, 11 U.S.C. section
101 et seq., and all amendments thereto which are applicable to the case.
2.13 CONFIRMATION. Means the entry by the Bankruptcy Court of an order
confirming the Plan in accordance with Chapter 11 of the Code.
2.14 CONFIRMATION ORDER. Means the order entered by the Bankruptcy
Court confirming the Plan in accordance with Chapter 11 of the Code.
2.15 CONSOLIDATION MOTION means the motion for substantive
consolidation of PDI and PDIXF filed by the Debtors and the Official Committee
of Unsecured Creditors for PDI on or about April 20, 1998.
2.16 CONSUMMATION. Means the accomplishments of all things provided
for in this Plan to occur on the Effective Date.
2.17 DEBTORS OR DEBTORS IN POSSESSION. Means PDI and its wholly-owned
subsidiary, PDIXF.
2.18 DIRECTOR LOANHOLDERS. Means the loans made by certain PDI
directors or related
5
<PAGE>
companies during October and December, 1997, including Equitas ($50,000), Robert
Sparacino ($213,000), Bril Profit Sharing Plan ($25,000), and Bril Money
Purchase Plan ($25,000).
2.19 DISALLOWED CLAIM. Means any Claim or portion thereof:
(a) which is scheduled or proof of which is filed and an
objection thereto has been sustained by a Final Order; or
(b) which is scheduled as disputed, contingent or unliquidated
and as to which either (i) no proof of claim has been timely
filed, or (ii) proof of which has been timely filed and an
objection thereto has been sustained by a Final Order.
2.20 DISPUTED CLAIM. Means any Claim which is scheduled or proof of
which is filed and against which an objection to the allowance thereof has been
interposed, which objection has not been determined by a Final Order, except for
any Claim which is deemed an Allowed Claim by the provisions of this Plan.
2.21 EFFECTIVE DATE. Means the first business day occurring after the
20th day after the entry of the Confirmation Order or as such other date that
the Bankruptcy Court shall set forth in the Confirmation Order.
2.22 EQUITY INTEREST(S). Means the issued and outstanding common stock
of PDI and any warrants, options or other contract to purchase or acquire such
common stock as of the Petition
6
<PAGE>
Date.
2.23 FINAL ORDER. Means an order or judgment of the Bankruptcy Court
which has not been reversed or stayed as modified or amended, as to which no
appeal is pending, and as to which the time to appeal and to seek to appeal has
expired.
2.24 HAYES. Means Hayes Corporation f/k/a Access Beyond, Inc. as
successor in interest to Access Beyond, Inc., RDCAN Corp. (formerly Technipower,
Inc.) and Intist (formerly Constant Power, Inc.), which holds a Disputed Claim
against the Debtor that is unsecured within the meaning of Code section 506.
2.25 INVERNESS PERCENTAGE. Means that percentage equal to 49.9%.
2.26 INVERNESS SECURED NOTE. Means that certain Secured Promissory Note
in the original principal amount equal to $1,800,000.00. The Inverness Secured
Note shall have a two year term commencing with the Effective Date and shall
provide for monthly payments of interest only at the rate of 10% per annum for
each month during the term thereof with payment in full on the second
anniversary of the Effective Date. The Inverness Secured Note shall be secured
by Lien upon all of the assets of Reorganized PDI provided such Lien shall be
junior and subordinate only to the Lien authorized herein to secure the Working
Capital Note.
2.27 LIEN. Means any charge against or interest in property to secure
payment of a debt or performance of an obligation and includes, without
limitation, any judicial lien, security
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interest, mortgage, deed of trust and statutory lien as defined in Section 101
of the Code.
2.28 NOTEHOLDERS. Means the holders of the Subordinated Notes including
Equitas L.P. ($700,000), Lois Horn ($140,000), Antoinette Rose ($160,000),
Thomas O'Grady ($29,215.38), Davis H. Smith, II ($29,215.38), Dennis and Terri
Nesta ($16,000), and Bruce MacDonald ($12,984.62) or their respective assignees.
2.29 PDI. Means Power Designs, Inc., a Delaware corporation and the
debtor in Case No. 98-50117.
2.30 PDIXF. Means PDIXF Acquisition Corporation, a New York corporation
and the debtor in Case No. 98-50118.
2.31 PETITION DATE. Means January 22, 1998, the date on which the
Debtors filed their petitions commencing their respective Chapter 11 cases.
2.32 PLAN. Means this Plan of Reorganization for Power Designs, Inc.
and PDIXF Acquisition Corporation, as may be amended from time to time.
2.33 PRIORITY TAX CLAIM. Means an Allowed Claim which is entitled to
priority pursuant to Section 507(a)(7) of the Code.
2.34 PRO RATA SHARE. Means the proportion that an Allowed Claim in a
particular Class bears to the aggregate amount of all Allowed Claims in such
Class, calculated in accordance with the provisions of this Plan.
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2.35 REORGANIZED PDI. Means Power Designs, Inc., a Delaware corporation
on and after the Effective Date.
2.36 REORGANIZED PDI COMMON STOCK. Means 2,000,000 shares of the common
stock of Reorganized PDI to be issued pursuant to this Plan.
2.37 SUBORDINATED BRIDGE NOTES. Means those certain Subordinated
Promissory Notes of PDI in the allowed aggregate original principal amount of
$1,953,500.00 and bearing interest at the rate of 10% per annum, as listed in
Section 2.8 hereof.
2.38 SUBORDINATED NOTES. Means those certain Subordinated Promissory
Notes of PDI dated October 9, 1996 in the allowed aggregate original principal
amount of $1,087,415.38 as listed in Section 2.28 hereof.
2.40 WORKING CAPITAL NOTE. Means that certain Revolving Credit
Agreement in the original principal amount of up to $800,000. The Working
Capital Note shall bear interest at the best rate available to Reorganized PDI
on the Effective Date. The Working Capital Note may be secured by a first Lien
on all of Reorganized PDI's assets.
3. ADMINISTRATIVE AND TAX PRIORITY CLAIMS
3.1 ADMINISTRATIVE CLAIMS. All post-petition payables and other
ordinary course expenses will be paid in the ordinary course of business as
agreed between the respective vendors
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and the Debtors and/or Reorganized PDI. All other Administrative Claims, which
have not been paid prior to the Effective Date shall be paid in full in Cash on
the Effective Date (or, if later, the date on which any such Administrative
Claim is allowed by a Final Order of the Bankruptcy Court), or upon such terms
as otherwise agreed between the Debtors and the holder of such Administrative
Claim. Administrative Claims include claims of professionals employed by order
of the Bankruptcy Court, all post-petition financing of the Debtors approved by
the Court prior to Confirmation (with all accrued interest), certain
post-petition employee claims and any unpaid fees due under 28 U.S.C. section
1930. Professionals employed pursuant to Sections 327 and 1102 of the Bankruptcy
Code, and any other person who may be entitled to reimbursement of expenses or
allowance of fees pursuant to Sections 503(b)(2) through 503(b)(6) of the Code,
shall file final applications for allowance and payment of compensation and
expenses not later than twenty (20) days after the Effective Date. Each such
professional or person shall be paid, in Cash, the full amount awarded to such
professional or person by the Bankruptcy Court after notice and a hearing,
within 10 days after the date on which an Order allowing such claims, fees
and/or disbursements becomes a Final Order.
3.2 PRIORITY TAX CLAIMS. Allowed Priority Tax Claims shall be paid by
Reorganized PDI in its sole discretion in Cash and in full on the Effective Date
or in equal quarterly payments beginning on April 1, 2000 and continuing
thereafter for twenty (20) additional quarters
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(payments shall be made on January 1, April 1, July 1 and October 1). The
deferred payments on Allowed Priority Tax Claims shall bear interest at the rate
of seven (7%) percent per annum. The Debtors are not aware of any significant
Allowed Priority Tax Claims. Claims asserted by various taxing authorities for
periods prior to PDI's first bankruptcy proceeding are not considered Allowed
Priority Tax Claims but shall, upon Confirmation, be conclusively deemed Allowed
Unsecured Claims and will be treated as Allowed Unsecured Claims.
4. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS
All Claims against and Equity Interests in the Debtor, of whatever
nature, whether or not scheduled, liquidated or unliquidated, absolute or
contingent, including all Claims arising from transactions with either of the
Debtors and all equity interests arising from the ownership of the stock of
either of the Debtors, whether resulting in an Allowed Claim or not, shall be
bound by the provisions of this Plan. The Claims and Equity Interests are
classified as follows:
4.1 CLASS 1. The Allowed Secured Claims of Inverness.
CLASS 1A. Allowed Secured Claim of Inverness against PDI.
CLASS 1B. Allowed Secured Claim of Inverness against PDIXF.
4.2 CLASS 2. The Allowed Claims of Hayes.
CLASS 2A. The Allowed Claim of Hayes against PDI.
CLASS 2B. The Allowed Claim of Hayes against PDIXF.
4.3 CLASS 3. Allowed Employee Priority Claims.
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4.4 CLASS 4. Allowed Unsecured Claims.
CLASS 4A. Allowed Unsecured Claims against PDI.
CLASS 4B. Allowed Unsecured Claims against PDIXF
4.5 CLASS 5. Allowed Equity Interests in PDI.
4.6 CLASS 6. Allowed Equity Interest in PDIXF.
5. IDENTIFICATION OF IMPAIRED CLASSES OF CLAIMS AND EQUITY INTERESTS
5.1 IMPAIRED CLASSES OF CLAIMS. All Classes of Claims are impaired
under the Plan.
5.2 IMPAIRED CLASSES OF EQUITY INTERESTS. All Classes of Equity
Interests are impaired.
5.3 IMPAIRMENT CONTROVERSIES. If a controversy arises as to whether any
Claim or Equity Interest, or any Class of Claims or of Equity Interests, are
impaired under the Plan, the Bankruptcy Court shall, after notice and a hearing,
determine such controversies.
5.4 SPECIAL NOTE CONCERNING VOTING ON PLAN. If the Consolidation Motion
is granted prior to Confirmation voting on the Plan will be conducted by
combining the subclasses within each class. For example, Class 1A and Class 1B
will be considered a single Class: Class 1. On the other hand, if the
Consolidation Motion is not granted prior to Confirmation, each subclass will be
considered a separate class for voting purposes. For example, Class 4A and Class
4B will be considered separate and distinct classes for voting purposes.
6. TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
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6.1 CLASS 1 (INCLUDING CLASS 1A AND CLASS 1B). On the Effective Date,
Inverness shall receive in satisfaction of its Allowed Secured Claims the
following:
a) the Inverness Secured Note; and
b) that number of shares of Reorganized PDI Common Stock equal to
2,000,000 x .499.
6.2 CLASS 2 (INCLUDING CLASS 2A AND 2B). On the Effective Date, all
claims of Hayes shall be deemed settled, compromised and allowed in the amount
of $150,000.00 and Hayes shall receive in satisfaction of its claims the
following: (a) the Hayes Unsecured Note in a principal amount of $150,000, with
a two year term, with interest-only payable until maturity at an interest rate
of 10% per annum, which shall be subordinate to the Working Capital Note and the
Inverness Secured Note, and (b) shares of Reorganized PDI Common Stock, the
number of said Shares to be determined by the inclusion of Hayes in Class 4A,
with an imputed Allowed Claim in said Class of $150,000, solely for purposes of
determining the number of shares but not for purposes of the conditional payment
referred to in Section 6.4 of the Plan.
6.3 CLASS 3. Holders of Allowed Employee Priority Claims shall receive
the full amount of their Allowed Employee Priority Claims in eight (8) equal
monthly payments, together with interest at the rate of seven (7%) percent per
annum.
6.4 CLASS 4 (INCLUDING CLASS 4A AND CLASS 4B). Subject to Section 10.2
of the Plan, on the Effective Date, (i) the holders of Allowed Claims in Class
4A shall receive their Pro Rata
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Share of that number of shares of Reorganized PDI Common Stock equal to 50.1% of
2,000,000 and, except with respect to Hayes, an annual conditional payment equal
to 10% of one-half of the face amount of their Allowed Claims, payable (without
interest) only to the extent that Reorganized PDI's free cash flow (net income,
plus depreciation, plus amortization, less capital expenses) is greater than
$400,000.00 in any fiscal year unless there is a payment default on the
Inverness Secured Note, in which event the conditional payment may not be made
until the default is cured. For purposes hereof, "capital expenses" shall not be
deemed to include the purchase of any equipment that involves either lease or
other purchase financing for which the Company's cash flow is only reduced by
future monthly payments. If Reorganized PDI's free cash flow in excess of
$400,000 in any fiscal year is insufficient to make the conditional payment,
then such conditional payment shall be accrued. No conditional payment or
accrual, however, shall occur within six months after the Effective Date, nor
shall a conditional payment amount ever be accrued which exceeds 20% of one-half
of the face amount of such Allowed Claims. To the extent that the accrued
conditional payment would exceed 20% of one-half of the face amount of such
Allowed Claims, entitlement to such amount shall be waived. The terms and
conditions of the conditional payment and its termination events are more fully
set forth on EXHIBIT 6.4A, attached hereto and made a part hereof ("Conditional
Distribution Agreement"); and ii) on the Effective Date, the holders of Allowed
Claims in Class 4B shall receive 5% of the amount of their
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Allowed Claims in complete and full satisfaction of their claims.
Confirmation of this Plan and the issuance of Class 4A Stock to holders
of Allowed Claims in Class 4A as provided herein shall be deemed consent to the
terms and conditions of the Conditional Distribution Agreement attached hereto,
which Conditional Distribution Agreement shall immediately become effective upon
the Effective Date hereof without the need for execution thereof by any or all
of the parties thereto and without the need for any further action with respect
thereto.
6.5 CLASS 5. All Equity Interests in Power Design, Inc. shall be deemed
cancelled as of the Effective Date and holders of such Equity Interests shall
not receive any distribution on account of such Equity Interests.
6.6 CLASS 6. All Equity Interests in PDIXF Acquisition Corporation
shall be deemed cancelled as of the Effective Date and holders of such Equity
Interests shall not receive any distribution on account of such Equity
Interests.
7. PROVISIONS RELATING TO CORPORATE STRUCTURE OF REORGANIZED PDI
7.1 MERGER. On the Effective Date, PDIXF shall be authorized to merge,
and shall merge, into PDI which shall be the corporation surviving the merger
("MERGER"). The name of the surviving corporation shall be Power Designs Inc.,
or such other name as may be selected by
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the Debtors on or before the Confirmation Date. The Merger shall be in
accordance with the applicable laws of the States of New York and Delaware
(except as may be affected by this Plan or by bankruptcy law), this Plan and
that certain Plan and Agreement of Merger substantially attached hereto as
EXHIBIT 7.1 and made a part hereof. Confirmation of this Plan shall be deemed
consent by all parties to the Plan and Agreement of Merger to the terms thereof
without necessitating any further action with respect to same.
7.2 PROHIBITION AGAINST THE ISSUANCE OF NON-VOTING EQUITY SECURITIES.
On the Effective Date, the Certificate of Incorporation of Reorganized PDI will
be amended to include, among other things, provisions prohibiting the issuance
of non-voting equity securities, increasing the number of authorized shares and
authorizing the Board to issue shares and to designate classes of preferred
stock with such rights and privileges as the Board may determine ("Amended
Certificate"). The Amended Certificate shall be in form substantially as
attached hereto as EXHIBIT 7.2 and made a part hereof.
7.3 NEW BOARD OF DIRECTORS. On the Effective Date, all directors of PDI
then remaining in office shall be deemed to have resigned. The new Board
thereupon will be reconstituted to consist of seven members and shall consist,
upon the effectiveness of the Merger, of the designees set forth below. The fact
that any designee has or has had a business relationship with the PDI shall not,
in and of itself, disqualify the selection of that person to be a member of the
initial
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board. Notwithstanding anything to the contrary in the Certificate of
Incorporation or By-laws or Delaware law, but subject to the terms of that
certain Shareholders Agreement defined below, the initial board of directors of
Reorganized PDI shall serve for a period of not more than two years following
the Effective Date. Any vacancies arising on the board prior to the expiration
of two years following the Effective Date, shall be filled by the same designee
group that initially appointed the board member whose position was being
vacated, all in accordance with the Shareholders Agreement. Thereafter, the
board of directors of Reorganized PDI shall be elected in accordance with the
Amended Certificate and Delaware law, provided, however, that during the term of
the Shareholders Agreement, the number of directors can only be increased upon
the unanimous consent of all directors.
MANAGEMENT DESIGNEE.
(1) Initially, Melvin Becker Vice President of Operations until
a Chief Executive Officer ("CEO") is retained by Reorganized
PDI and thereafter the CEO shall be the Management Designee.
INVERNESS DESIGNEES.
(2) Two persons designated by Inverness.
NOTEHOLDERS' DESIGNEE.
(1) Shannon LeRoy.
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BRIDGE NOTEHOLDERS' DESIGNEES.
(2) Raymond E. Joslin and Robert Dorfman.
DIRECTOR LOANHOLDERS' DESIGNEE.
(1) Robert Sparacino.
A shareholders voting agreement in form as set forth on EXHIBIT 7.3
attached hereto and made a part hereof ("Shareholders Agreement") will require
each to vote their shares to elect as a director the designee(s) of each party
to the Shareholders Agreement. Confirmation of the Plan shall be deemed consent
to the terms of the Shareholders Agreement attached hereto and such Shareholders
Agreement shall immediately become effective upon the Effective Date hereof
without the need for execution thereof by any or all of the parties thereto and
without the need for any further action with respect thereto.
7.4 POST CONFIRMATION MANAGEMENT. Anthony Intino serving as Chief
Financial Officer & General Manager and Melvin Becker as Vice President of
Operation and Secretary shall continue to serve as the senior management of
Reorganized PDI until such time as the Board retains a permanent Chief Executive
or Operating Officer and a Chief Financial Officer.
7.5 REORGANIZED PDI COMMON STOCK. The Reorganized PDI Common Stock will
be issued as of the Effective Date. As of the Effective Date, there shall be
2,000,000 issued and outstanding shares of Reorganized Common Stock, $0.01 par
value per share. Each share of
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Reorganized PDI Common Stock shall be entitled to one vote with respect to all
elections and matters.
7.6 DIVIDENDS; LIQUIDATION. All shares of Reorganized PDI Common Stock
will be entitled: (a) to share equally in dividends from funds legally available
therefor when, as, and if declared by the Board; and (b) to share equally in the
assets available for distribution to shareholders upon liquidation or
dissolution of Reorganized PDI, whether voluntary or involuntary. Holders of the
Reorganized PDI Common Stock shall have no preemptive rights to acquire shares
of Reorganized PDI Common Stock except as set forth in the Shareholders
Agreement. Shares of the Reorganized PDI Common Stock, when issued, will be
deemed duly and validly issued, fully-paid and nonassessable.
7.7 EXEMPTION FROM REGISTRATION. Pursuant to Section 1145 of the Code,
all Reorganized PDI Common Stock issued under the Plan will be exempt from state
and federal laws requiring registration of securities. Except with respect to a
person that is an "underwriter" within the meaning of Section 1145 of the
Bankruptcy Code, the distribution of Reorganized PDI Common Stock will be deemed
to be a "public offering" which is not subject to the registration or prospectus
delivery requirements contained in Section 5 of the Securities Act of 1933, as
amended ("SECURITIES ACT").
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7.8 RESTRICTIONS ON TRANSFER OF REORGANIZED PDI COMMON STOCK. The
Reorganized PDI Certificate of Incorporation will be amended to reflect certain
restrictions on the transfer of Reorganized PDI Common Stock. The Amended
Certificate of Incorporation will provide that no person or entity may acquire
any shares of capital stock of Reorganized PDI, other than pursuant to this
Plan, if, at the date of such acquisition, such person or entity is, or would be
after giving effect to any such proposed acquisition, either directly,
indirectly or by attribution, either (a) one of the 10 largest holders of
Reorganized PDI capital stock, or (b) a holder of five percent or more of
Reorganized PDI issued and outstanding capital stock. The restrictions imposed
with regard to the right of certain stockholders to acquire capital stock shall
be effective until the first business day following the second anniversary of
the Effective Date. All certificates representing Reorganized PDI Common Stock
will bear the legend described in Section 7.10 below.
7.9 REVIEW OF PROPOSED TRANSACTIONS. The restrictions on the
transferability are intended to prevent any acquisition which could result in
the disallowance or limitation of Reorganized PDI's federal income tax net
operating loss carryovers and other tax attributes, unless such acquisition is
approved by the Board upon review of the proposed transaction. Any such review
will be at the sole cost and expense of the proposed transferor regardless of
whether the Board approves the proposed transfer. Any purported transfer not
approved by the Board will be void and ineffective.
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7.10 REQUIRED LEGEND. All certificates evidencing ownership of shares
of Reorganized PDI Common Stock, shall bear a conspicuous legend substantially
as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and are
issued pursuant to an exemption provided by 11 U.S.C. Section
1145 under an order confirming the Amended Plan of
Reorganization for Power Designs, Inc. and PDIXF Acquisition
Corporation ("Plan") in cases entitled IN RE POWER DESIGNS INC.,
DEBTOR, Case No. 98-50117, and IN RE PDIXF ACQUISITION
CORPORATION, DEBTOR, Case No. 98-50118, jointly administered, in
the United States Bankruptcy Court for District of Connecticut.
These securities are subject to certain provisions of the
company's Certificate of Incorporation which provide, INTER
ALIA, restrictions (a) limiting the transferability of, and (b)
affecting the voting rights relating to, such securities.
Photocopies of such Plan and Certificate of Incorporation have
been deposited with the company at its principal office, and the
company will furnish a copy thereof to the record holder of
these securities without charge upon written request to the
company at its principal place of business. The holder of this
certificate is also referred to 11 U.S.C. Section 1145(b) and
(c) for guidance as to the sale of these securities."
8. MEANS FOR FUNDING OF THE PLAN
8.1 FUNDING OF PAYMENTS REQUIRED UNDER THE PLAN. The payments
required under the Plan will be made from Cash accumulated by Debtors from
the Petition Date to the Effective Date and the proceeds available under the
Working Capital Note.
9. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
9.1 GENERAL TREATMENT. All executory contracts and unexpired leases
of PDI or PDIXF shall be assumed by Reorganized PDI upon entry of the
Confirmation Order unless specifically
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rejected by order entered on or prior to the Confirmation Date or unless a
motion to reject any such executory contract or unexpired lease is pending
before the Bankruptcy Court on the Confirmation Date.
9.2 BAR TO REJECTION DAMAGES. If the rejection of an executory contract
or unexpired lease by either of the Debtors results in damages to the other
party or parties to such contract or lease, a Claim for such damages, if not
previously evidenced by a filed proof of Claim or barred by a Final Order, shall
be forever barred and shall not be enforceable against the Debtors or
Reorganized PDI, or their properties or agents, successors, or assigns, unless a
proof of Claim relating thereto is filed with the Bankruptcy Court within thirty
(30) days after the later of (i) the entry of a Final Order authorizing such
rejection and (ii) the Confirmation Date, or within such shorter period as may
be ordered by the Bankruptcy Court.
9.3 CURE OF DEFAULTS FOR EXECUTORY CONTRACTS AND UNEXPIRED LEASES. Each
executory contract and unexpired lease to be assumed pursuant to the Plan shall
be reinstated and rendered unimpaired in accordance with sections 1124(2) and
365(b)(1) of the Code. In connection therewith, Reorganized PDI obligated on
each such contract and lease to be assumed pursuant to the Plan shall cure or
provide adequate assurance that it will cure any monetary default (other than of
the kind specified in section 365(b)(2) of the Bankruptcy Code), by payment of
the default amount in Cash on the Effective Date or on such other terms as the
parties to such executory
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contract or unexpired lease may otherwise agree, compensate, or provide adequate
assurance that the Reorganized PDI will promptly compensate, parties to such
contract or lease for any actual pecuniary loss to such parties resulting from
such default and provide adequate assurance of future performance under such
contract or lease. In the event of a dispute regarding: (i) the amount of any
cure payments, (ii) the ability of Reorganized PDI or any of its assignees to
provide "adequate assurance of future performance" (within the meaning of
section 365 of the Bankruptcy Code) under the contract or lease to be assumed,
or (iii) any other matter pertaining to assumption, the cure payments or
performance required by section 365(b)(1) of the Bankruptcy Code shall be made
following the entry of a Final Order resolving the dispute and approving the
assumption.
10. PROVISIONS GOVERNING DISTRIBUTIONS
10.1 PAYMENTS. Except as otherwise provided in this Plan or ordered by
the Court, all payments required under the Plan to Creditors in all Classes will
be made on Effective Date of Plan.
10.2 ENFORCEMENT OR WAIVER OF CONTRACTUAL SUBORDINATION RIGHTS. The
Subordinated Notes and the Subordinated Bridge Notes are contractually either
fully or partially subordinate to Claims held by Inverness. Pursuant to
Section 510(b) of the Code, contractual subordination agreements are
enforceable in a bankruptcy proceeding. Nonetheless, Inverness has agreed to
waive enforcement of its rights of subordination as to the holder of any
Claim that is contractually
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subordinated to Inverness PROVIDED that the class of which such holder is a
member votes to accept this Plan.
10.3 FRACTIONAL SHARES. Fractional shares of Reorganized PDI Common
Stock shall not be issued or distributed. If the holder of an Allowed Claim
would receive a fraction of a share of Reorganized PDI Common Stock, the Stock
Transfer Agent shall attempt to round the number of shares issued to all such
holders up or down to the nearest whole number; PROVIDED, that the Stock
Transfer Agent shall in no event deliver certificates representing more than
2,000,000 shares of Reorganized PDI Common Stock. Any shares of Reorganized PDI
Common Stock which remain unissued as a result of such rounding shall become the
property of Reorganized PDI and shall be cancelled.
10.4 UNCLAIMED DISTRIBUTIONS.
a. ESCHEAT TO DEBTOR. Monies sent by checks issued by or on behalf of
the Debtors or Reorganized PDI, or stock certificates or documents evidencing
equity interests in the Reorganized PDI, sent to holders of Allowed Claims or
other parties in interest pursuant to this Plan shall permanently and
irrevocably escheat to Reorganized PDI and shall not be honored if (i) such
checks are NOT negotiated within ninety (90) days after issuance by the Debtors
or Reorganized PDI or (ii) stock certificate(s) or other documents evidencing
equity interests in the Reorganized PDI are returned as undeliverable. Upon the
expiration of such ninety day period,
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the Debtors' and Reorganized PDI's obligation and liability to any holder of an
Allowed Claim or other party in interest whose check from the Debtors or
Reorganized PDI is not negotiated during such period or whose stock
certificate(s) or other documents evidencing equity interests in the Reorganized
PDI are returned as undeliverable, shall be deemed satisfied in full and the
Debtors and Reorganized PDI and their respective attorneys, agents, employees,
directors and officers shall be forever released and discharged from any
liability or obligation whatsoever to that creditor or party in interest. For
purposes of this section, a check, stock certificate or other document
evidencing an equity interest in the Reorganized PDI shall be conclusively
deemed appropriately delivered to a creditor or party in interest if it is sent
by first class, postage prepaid, mail to the address of that creditor or party
in interest as set forth on the Debtors' schedules, the proof of claim register
in the above-captioned cases, or the Debtors' books and records.
b. AFTER DISTRIBUTIONS BECOME UNDELIVERABLE. Undeliverable cash and
stock in Reorganized PDI shall not be entitled to any interest, dividends or
other accruals of any kind. In such cases, any property held for distribution on
account of such claims until the expiration of the ninety (90) day period set
forth herein shall be property of the Reorganized PDI, free and clear of any
restrictions thereon. The Reorganized PDI shall not be required to attempt to
locate any holder of an Allowed Claim.
11. PROCEDURES FOR RESOLVING AND TREATING CONTESTED AND CONTINGENT
CLAIMS AND EQUITY INTERESTS
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11.1 ALLOWANCE OF INVERNESS CLAIMS. Pursuant to Section 1123(b)(3)(A)
and Rule 9019 of the Rules of Bankruptcy Procedure, this Plan shall constitute a
compromise and settlement of all claims of or on behalf of the Debtors against
Inverness and all persons acting on its behalf. Inverness shall be deemed to
have an Allowed Claim of $7,259,019.02 as of the Petition. A portion of
Inverness' Allowed Claim will be considered an Allowed Secured Claim. The
balance of Inverness' Allowed Claim not treated as an Allowed Secured Claim will
be deemed an Allowed Unsecured Claim, but shall not be treated in Class 4.
11.2 OBJECTION DEADLINE. As soon as practicable, but in no event later
than thirty days after the Confirmation Date, objections to Disputed Claims
shall be filed with the Bankruptcy Court and served upon the Holders of each of
the Disputed Claims.
11.3 RESPONSIBILITY FOR OBJECTION TO DISPUTED CLAIMS AND PROSECUTION OF
OBJECTIONS. Reorganized PDI shall have the exclusive responsibility for
objecting to Claims following the Confirmation Date. On and after the
Confirmation Date, except as the Bankruptcy Court may otherwise order, the
filing, litigation, settlement, or withdrawal of all objections to Disputed
Claims shall be the responsibility of Reorganized PDI.
11.4 NO DISTRIBUTIONS PENDING ALLOWANCE. Notwithstanding any other
provision of the Plan, no payments or distributions shall be made with respect
to a Disputed Claim unless and until all objections to such Disputed Claim have
been determined by Final Order.
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11.5 DISTRIBUTION AFTER ALLOWANCE. Payments and distributions from
Reorganized PDI to each Holder of a Disputed Claim, to the extent that it
ultimately becomes an Allowed Claim, shall be made in accordance with the
provisions of the Plan governing the Class of Claims to which the Disputed Claim
belongs. As soon as practicable after the date the order of judgment of the
Bankruptcy Court allowing such Claim becomes a Final Order, but in no event
later than thirty (30) days after such Claim becomes an Allowed Claim, any Cash
or other consideration that would have been distributed in respect of the
Disputed Claim had it been an Allowed Claim at the Effective Date shall be
distributed, without interest, to the Holder of such Claim.
11.6 TREATMENT OF CONTINGENT CLAIMS. Until such time as a Contingent
Claim becomes fixed and absolute, such Claim shall be treated as a Disputed
Claim for purposes related to estimations, allocations, and distributions under
the Plan.
12. RELEASE, INDEMNIFICATION AND EXCULPATION
12.1 RELEASE AND INJUNCTION. Upon Confirmation, The Debtor, the
Creditors' Committees, Inverness, and Venture Partners, Ltd. And their
respective present and former officers, directors, employees, professionals,
representatives, shareholders and agents and such persons' or entities' heirs,
representatives, administrators, successors and assigns (hereinafter,
collectively, the "Releasees") shall, without the execution or delivery of any
further documents, be absolutely, unconditionally and fully released from any
and all claims, debts, demands,
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damages, costs, offsets, expenses, obligations, liabilities, losses, actions,
causes of actions, and/or suits of whatever kind, nature or type, arising at law
or equity, by statute or otherwise, whether known or unknown, choate or
inchoate, suspected or unsuspected, or whether having arisen, accrued or matured
or hereafter to arise, accrue or mature, which any person or entity or any one
or more of them ever had, now has, claims to have, or hereafter can, shall or
may for any reason have or assert against the Releasees, or any one or more of
them, arising out of any matter or event at or prior to such time and relating
in any way to the Debtors, the Debtors' businesses, the Debtors' liabilities,
loans to the Debtors, or the Chapter 11 Cases, or the actions, failure to act,
omission, conduct, duties, responsibilities, decisions, receipt of money,
conduct or behavior of any one or more of the Releasees in connection with the
Chapter 11 Cases, the Debtors, the Debtors' businesses, the Debtors'
liabilities, or loans to the Debtors. The filing, assertion, prosecution, or
continuation of prosecution of any such matter against any one or more of the
Releasees shall, without any further order of the Court, be prohibited and
enjoined upon Confirmation.
12.2 INDEMNIFICATION. The Debtors' officers, directors, employees,
professionals, representatives and other agents shall be entitled to be
exonerated and indemnified from time to time by the Debtors and/or the Estates
against any and all losses, claims, causes, liabilities, and reasonable and
necessary expenses relating thereto, arising out of or in connection with the
28
<PAGE>
Debtors', the Debtors' businesses, loans to the Debtors, the Debtors'
liabilities, property of the Estates, the affairs of the Estates, or their
performance of duties hereunder except those resulting from their own gross
negligence or willful misconduct.
12.3 EXCULPATION. Neither the Debtors nor any of their respective
officers, directors, employees, professionals, representatives or other agents
shall have or incur any liabilities to the Estates, to Claimants or to any other
person or entity for any act or omission in connection with or arising out of
the administration, implementation or consummation of the Plan or the cash or
other property, including securities, to be distributed under the Plan except
for willful misconduct or gross negligence. Such persons and entities shall in
all respects be entitled to rely upon the advice of counsel, accountants and/or
other professional persons with respect to their rights, duties and
responsibilities but shall not be liable for their failure to seek such advice.
In no event shall the Debtors or their officers, directors, employees,
professionals, representatives or other agents bear any liability or
responsibility for the acts or omissions of any Disburses.
13. JURISDICTION
13.1 CONTINUING JURISDICTION. The Bankruptcy Court shall retain and
have exclusive jurisdiction over the Debtors' Chapter 11 cases for purposes (a)
through (i) below:
(a) To determine any and all objections to and proceedings involving
the allowance, estimation, classification, and subordination of Claims or Equity
Interests;
29
<PAGE>
(b) To determine any and all applications for allowances of
compensation and reimbursement of expenses and any other fees and expenses
authorized to be paid or reimbursed under the Code or the Plan;
(c) To determine any application pending on the Effective Date for the
rejection or assumption of executory contracts or unexpired leases or for the
assumption and assignment, as the case may be, of executory contracts or
unexpired leases to which either of the Debtors' is a party or with respect to
which either of the Debtors' may be liable, and to hear and determine, and if
need be, to liquidate, any and all claims arising therefrom;
(d) To determine any and all applications, adversary proceedings, and
contested or litigated matters that may be pending on the Effective Date;
(e) To consider any modifications of the Plan, remedy any defect or
omission or reconcile any inconsistency on any Order of the Bankruptcy Court,
including the Confirmation Order, to the extent authorized by the Code;
(f) To determine all controversies, suits, and disputes that may arise
in connection with the interpretation, enforcement, or consummation of the Plan
or obligations arising thereunder;
(g) To consider and act on the compromise and settlement of any Claim
against or cause of action by or against either of the Debtors' bankruptcy
estate;
30
<PAGE>
(h) To issue such orders in aid of execution of the Plan to the extent
authorized by Section 1142 of the Code; and
(i) To determine such other matters as may be set forth in the
Confirmation Order or which may arise in connection with the Plan or the
Confirmation Order.
14. MODIFICATION.
14.1 MODIFICATION OF PLAN. The Plan may be modified at any time after
Confirmation and before its substantial Consummation, provided that the Plan, as
modified, meets the requirements of Sections 1122 and 1123 of the Code, and the
Bankruptcy Court, after notice and a hearing, confirms the Plan, as modified,
under Section 1129 of the Code. A holder of a Claim or Equity Interest that has
accepted or rejected the Plan shall be deemed to have accepted or rejected, as
the case may be, such Plan as modified, unless, within the time fixed by the
Bankruptcy Court, such holder changes its previous acceptance or rejection by a
writing filed with the Bankruptcy Court.
15. DISCHARGE.
15.1 DISCHARGE AND REVERSION OF PROPERTY.
(a) Pursuant to Section 1141(b) of the Code and, except as otherwise
dealt with in this Plan, Confirmation of the Plan vests all of the property of
each of the Debtors' estates in Reorganized PDI.
31
<PAGE>
(b) Pursuant to Section 1141(c) of the Code, on the Effective Date of
the Plan, the property dealt with by the Plan shall become free and clear of all
liens, claims, encumbrances, and interests of creditors, except as otherwise
provided for in the Plan or the Confirmation Order.
15.2 DISCHARGE OF THE DEBTORS. Except as otherwise provided in the
Plan, all consideration distributed under the Plan shall be in exchange for and
in complete satisfaction, discharge, and release of all claims of any nature
whatsoever against either of the Debtors; and except as otherwise provided
herein, upon the Effective Date, each of the Debtors shall be deemed discharged
and released (but only to the extent permitted by Section 1141 of the Code,
including specifically Section 1141(d)(3)) from any and all claims, including
but not limited to, demands and liabilities that arose before the Effective
Date, and all debts of the kind specified in Sections 502(g), 502(h), or 502(i)
of the Code, whether or not (a) a proof of claim based upon such debt is filed
or deemed filed under Section 501 of the Code; (b) a claim based upon such debt
is allowed under Section 502 of the Code; or (c) the holder of a claim based
upon such debt has accepted the Plan. Except as provided herein, the
Confirmation Order shall be a judicial determination of discharge of all
liabilities of each of the Debtors. As provided in Section 524 of the Code, such
discharge shall void any judgment against either of the Debtors at any time
obtained to the extent it relates to a claim discharged, and operate as an
injunction against the prosecution of any action against either of the Debtors
or its property to the extent it relates to a
32
<PAGE>
claim discharged.
15.3 DISCHARGE OF CLAIMS. Except as otherwise provided herein or in the
Confirmation Order, the rights afforded in this Plan and the payments and
distributions to be made hereunder shall be in complete exchange for, and in
full satisfaction, discharge and release of all existing debts and claims of any
kind, nature or description whatsoever against either of the Debtors or against
its bankruptcy estate, assets or properties; and upon the Effective Date, all
existing claims against either of the Debtors shall be deemed to be satisfied,
discharged, and released in full; and all holders of claims shall be forever
barred and precluded from asserting against Reorganized PDI or its assets or
properties based upon any act or omission.
16. PROVISIONS TO INVOKE CRAMDOWN PROCEEDINGS AND/OR SECTION 506
HEARING, IF NECESSARY
16.1 CRAMDOWN. If all of the applicable requirements of Section 1129(a)
of the Code, other than subparagraph 8, are found to have been met with respect
to the Plan, the Debtors will seek Confirmation pursuant to Section 1129(b) of
the Code. For purposes of seeking Confirmation under the cramdown provisions of
the Code, the Debtors reserve the right to modify or vary the treatment of the
claims of any rejecting Class so as to comply with the requirements of Section
1129(b) of the Code.
17. GENERAL PROVISIONS
17.1 POST-CONFIRMATION ACTIONS. Nothing herein contained shall prevent
the Debtors from
33
<PAGE>
taking such action as may be necessary to enforce any rights or prosecute any
cause of action existing on its behalf, which may not have been heretofore
enforced or prosecuted.
17.2 RULES OF CONSTRUCTION. Unless otherwise specified, all references
to the single shall include the plural and vice versa. The headings in the Plan
are for convenience of reference only and shall not limit or otherwise effect
the provisions of the Plan. Words and terms defined in Section 101 of the Code
shall have the same meaning when used in the Plan, unless a different definition
is given in the Plan. The Rules of Construction contained in Section 102 of the
Code shall apply to the construction of the Plan.
17.3 GOVERNING LAW. Unless an applicable rule of law or procedure is
supplied by federal law (including the Bankruptcy Code and the Bankruptcy Rules)
or the Delaware General Corporation Law, the internal laws of the State of
Connecticut shall govern the construction and implementation of the Plan and any
agreements, documents, and instruments executed in connection with the Plan,
except as may otherwise be provided in such agreements, documents, and
instruments.
17.4 FILING OF ADDITIONAL DOCUMENTS. On or before the conclusion of the
Confirmation Hearing, the Debtors shall file with the Bankruptcy Court such
agreements and other documents as may be necessary or appropriate to effectuate
and further evidence the terms and conditions of the Plan.
34
<PAGE>
17.5 SEVERABILITY. Should any provision in the Plan be determined to be
unenforceable, such determination shall in no way limit or affect the
enforceability and operative effect of any other provisions of the Plan.
17.6 NOTICES. All notices, requests, or demands for payments provided
for in the Plan shall be in writing and shall be deemed to have been given when
personally delivered by hand, or deposited in any general or branch post office
of the United States postal service, or received by telex or telecopier;
notices, requests and demands for payments shall be addressed and sent, postage
prepaid, or delivered as follows:
(a) in the case of notices, requests, or demands for payments to
the Debtors or the Reorganized PDI, at 14 Commerce Drive, Danbury,
Connecticut, Attn: Chief Financial Officer, and at any other address
designated by the Debtors by notice to each Holder of an Allowed
Claim.
(b) in the case of notices to Holders of Claims or Equity
Interests, at the last known address according to Reorganized PDI
books and records, or at any other address designated by a Holder of a
Claim or Interest, by notice to Reorganized PDI; PROVIDED, HOWEVER,
any notice of change of address shall be effective only upon receipt.
35
<PAGE>
Respectfully submitted this _____ day of _______________ , 1999.
POWER DESIGNS, INC. and
PDIXF ACQUISITION CORPORATION
By:
-------------------------------------
James Berman, Esq.
Zeisler & Zeisler, P.C.
558 Clinton Avenue
Bridgeport, CT 06605
(203) 368-4234
Attorneys for Power Designs, Inc. and
PDIXF Acquisition Corporation
36
<PAGE>
Exhibit 99(vi)
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF CONNECTICUT
In re: ) CHAPTER 11
)
POWER DESIGNS, INC. and ) CASE NOS. 98-50117 & 98-50118
PDIXF ACQUISITION CORPORATION ) (JOINTLY ADMINISTERED)
)
)
DEBTORS-IN-POSSESSION )
AMENDED DISCLOSURE STATEMENT FOR THE
AMENDED PLAN OF REORGANIZATION FOR POWER
DESIGNS, INC. AND PDIXF ACQUISITION CORPORATION
-----------------------------------------------
1. INTRODUCTION
This is the Disclosure Statement(1) for the Amended Plan of
Reorganization for Power Designs, Inc. and PDIXF Acquisition Corporation (the
"Plan") proposed by Power Designs, Inc. and PDIXF Acquisition Corporation
(referred to hereinafter individually as "PDI" and "PDIXF" respectively, and
collectively referred to as the "Debtors"). The Debtors submit this Disclosure
Statement for the Amended Plan of Reorganization for Power Designs, Inc. and
PDIXF Acquisition Corporation (the "Disclosure Statement") pursuant to Section
1125 of the United States Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ. (the
"Code"). This Disclosure Statement is to be used
- --------
(1) Unless otherwise defined herein, capitalized terms used herein have the
meanings ascribed to such terms in the Plan. PDI has also filed its annual and
various periodic reports required by the SEC, including 10K, 10Q and 8K Reports.
This information is available to any person upon request.
-1-
<PAGE>
in connection with the solicitation of acceptances of the Plan. A copy of the
Plan is attached hereto as Exhibit A.
2. NOTICE TO HOLDERS OF CLAIMS
The purpose of this Disclosure Statement is to enable you, as a
Creditor whose Claim is impaired, to make an informed decision in exercising
your right to accept or reject the Plan.
THIS DISCLOSURE STATEMENT CONTAINS IMPORTANT INFORMATION THAT MAY BEAR UPON YOUR
DECISION TO ACCEPT OR REJECT THE PLAN OF REORGANIZATION PROPOSED BY THE DEBTORS.
PLEASE READ THIS DOCUMENT WITH CARE.
After notice and a hearing, the Bankruptcy Court entered an order
pursuant to Section 1125 of the Code approving this Disclosure Statement as
containing information of a kind, and in sufficient detail, adequate to enable a
hypothetical, reasonable investor typical of the solicited Classes of Claims to
make an informed judgment with respect to the acceptance or rejection of the
Plan.
APPROVAL OF THIS DISCLOSURE STATEMENT BY THE BANKRUPTCY COURT DOES NOT
CONSTITUTE A DETERMINATION BY THE BANKRUPTCY COURT OF THE FAIRNESS OR MERITS
OF THE PLAN OR OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED
IN THIS DISCLOSURE STATEMENT.
Each holder of a Claim entitled to vote to accept or reject the Plan
should read the Disclosure Statement and the Plan in their entirety before
voting. No solicitation of votes to accept or reject the Plan may be made except
pursuant to this Disclosure Statement and Section 1125 of
-2-
<PAGE>
the Code.
If you do not vote to accept the Plan, you may still be bound by the
Plan.
TO BE SURE YOUR BALLOT IS COUNTED, YOUR BALLOT MUST BE RECEIVED BY
DEBTORS' COUNSEL NO LATER THAN 5:00 P.M., ON THE DATE SET BY THE BANKRUPTCY
COURT. WHEN YOU RETURN YOUR BALLOT, YOU SHOULD INDICATE ON THE BALLOT FORM THE
CLASS OR CLASSES IN WHICH YOUR CLAIMS ARE CLASSIFIED AND DESIGNATE THE DEBTOR
AGAINST WHICH YOU ARE MAKING YOUR CLAIM BY MARKING THE APPROPRIATE SPACE
PROVIDED ON YOUR BALLOT FOR SUCH PURPOSE. For detailed voting instructions and
the names and addresses of the persons you may contact if you have questions
regarding the voting procedures, see "Voting Procedures and Requirements -
Parties-In-Interest Entitled to Vote."
Pursuant to Section 1128(a) of the Code, the Bankruptcy Court has
scheduled a hearing to consider Confirmation of the Plan (the "Confirmation
Hearing") in the Bankruptcy Court at 915 Lafayette Boulevard, Bridgeport,
Connecticut, on the date and time set forth in the order approving this
disclosure statement..
3. HISTORY OF THE DEBTORS AND EVENTS LEADING UP TO CHAPTER 11 CASE
3.1 GENERAL INFORMATION ABOUT THE DEBTORS.
-3-
<PAGE>
PDI was organized on July 7, 1952 under the laws of the State of New
York. PDI was subsequently reincorporated in Delaware in August of 1997. PDI's
common stock, $.0001 par value (the "Old PDI Common Stock") is registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended. The PDI Common
Stock is traded on the NASDAQ Bulletin Board. In October 1996 PDI created a new
class of Class A Convertible Preferred Stock (the "Old PDI Preferred Stock")
with a par value of $.01 per share. Since its inception, PDI has been engaged in
the design and manufacture of electronically controlled power sources and other
electronic devices used in the operation of electronic equipment. The power
supplies produced by the Debtors are connected to primary sources, such as
commercial power lines, and serve to transform, rectify, regulate or condition
the source of power. The equipment manufactured by the Debtors is used by
industry, scientific research and medical equipment manufacturers for such
applications as lab research, radar systems, data gathering, well logging and
general computers based applications, as well as in other related areas. The
Debtors' new product line (the "UPS Product") is specifically designed to
provide constant, high reliability output voltage and frequency under varied and
severe input power condition, including total elimination of the input power
source. The Debtors' customers include private companies, government agencies
and educational institutions, both within and outside of the United States.
There are approximately five hundred companies in the country who
manufacture one or
-4-
<PAGE>
more competitive products. To differentiate itself, the Debtors strive to
maintain a reputation for
-5-
<PAGE>
excellent quality and reliability. No one customer of the Debtors accounts for
ten percent or more of the Debtors' business.
3.2 VENTURE PARTNERS RETAINED TO ASSIST PDI IN NEGOTIATIONS WITH
TRADE CREDITORS AND IRS.
Venture Partners Ltd. ("VPL") is a Connecticut corporation engaged in
investment banking and management consulting services. Gary Laskowski and
Jonathan Betts are officers and directors of VPL. In October 1991 PDI engaged
VPL to assist PDI in negotiating an out of court workout with the Internal
Revenue Service ("IRS") and PDI's trade creditors and to provide necessary
working capital to ensure the continued viability of PDI. PDI paid VPL a fee of
$10,000.00 for this engagement. VPL was successful in negotiating an out of
court workout with PDI's trade creditors. However, after nearly a year of
discussions with the IRS, VPL was unable to negotiate a settlement with the IRS.
Thereafter, on October 16, 1992, PDI filed for protection under Chapter 11 of
the Bankruptcy Code in the Eastern District of New York as Case No.892-85769-478
(the "First PDI Bankruptcy").
3.3 THE FIRST PDI BANKRUPTCY PROCEEDING.
At the commencement of the First PDI Bankruptcy, the primary shareholders of the
Old PDI Common Stock consisted of the following persons: Sandra Roth (23.66%),
Melvin Becker (23.67%) and Jeri Fink (23.67%). The balance of the Old PDI Common
Stock, approximately
-6-
<PAGE>
29%, was widely held by approximately 900 persons.
During the First PDIF Bankruptcy, the court authorized Melvin Becker, a
director and principal shareholder of PDI (or his designee), to provide up to
$100,000.00 of post-petition financing to PDI. Pursuant to this order, VPL, as
Becker's designee, provided $60,000.00 of post-petition financing to PDI. On
June 7, 1993, a subsequent motion authorizing VPL to provide $250,000.00 in
post-petition financing was filed in June, 1993, but later withdrawn. On June
30, 1993, PDI filed its Amended Plan of Reorganization (the "First PDI Plan").
3.4 CONFIRMATION AND EXIT FINANCING.
The First PDI Plan was confirmed on January 31, 1994. Upon the
consummation of the First PDI Plan, VPL arranged for a $130,500 loan to be made
to PDI and for the factoring of PDI's accounts. The loan was provided by VPL, as
agent for four individuals, David Smith, Bruce MacDonald, Thomas O'Grady and Sam
Occhipinti as Trustee for his father-in-law (the "Term Note"). The Term Note
provided for interest only during the first year and thereafter principal
payments of $1,900 per month with a balloon payment of $84,900 due on June 1,
1997. The Term Note was secured by a lien on substantially all of the assets of
PDI. The Term Note was paid off in October 1996. The factoring was provided by
Inverness, a commercial finance company controlled by Laskowski and Betts. The
factoring arrangement with Inverness continued until the time of the Penril
Acquisition when the factoring
-7-
<PAGE>
-8-
<PAGE>
arrangement was terminated and replaced by various revolving credit agreements
with Inverness.
3.5 EQUITY OWNERSHIP OF PDI UPON CONSUMMATION OF THE FIRST PDI
PLAN.
As provided in the First PDI Plan, the then holders of the Old PDI
Common Stock retained their equity interests in PDI albeit subject to the
dilution resulting from the issuance of 810,716 shares (40%) of Old PDI Common
Stock to VPL. VPL also acquired 407,240 additional shares of Old PDI Common
Stock from Mr. Becker and Ms. Roth. As a result of these transactions, VPL held
approximately sixty percent (60%) of the Old PDI Common Stock. VPL has
transferred all of its holdings in PDI as follows:
<TABLE>
<CAPTION>
- ------------------------------- -----------------------------------------------------------------
DATE OF TRANSFER AMOUNT AND IDENTITY OF TRANSFEREE
- ------------------------------- -----------------------------------------------------------------
<S> <C>
09/30/95 1,072,028 shares to Millenia Capital Holdings LLC ("Millenia")
- ------------------------------- -----------------------------------------------------------------
09/30/95 145,928 (36,482 shares to each of MacDonald and Occhipinti, and
50,637 to each of Smith and O'Grady)
- ------------------------------- -----------------------------------------------------------------
09/15/97 149,468 shares to Bril Corp. for $25,000
- ------------------------------- -----------------------------------------------------------------
</TABLE>
Millenia is a Connecticut limited liability company affiliated with Laskowski
and Betts. Bril Corp. is a Connecticut corporation owned in part by Laskowski
and Betts.
-9-
<PAGE>
3.6 POST CONSUMMATION LOANS FROM INVERNESS - FIRST REVOLVING LOAN
AGREEMENT WITH INVERNESS.
On January 16, 1995, Inverness and PDI entered into a Revolving Loan
Agreement wherein Inverness agreed to provide a $100,000 line of credit to PDI
(the "First Revolving Loan"). The First Revolving Loan was in addition to the
factoring being provided by Inverness. The First Revolving Loan was secured by a
Lien on substantially all of PDI's assets. The First Revolving Loan was amended
on a number of occasions as follows:
<TABLE>
<CAPTION>
---------------------------- ----------------------------- ------------------------------
INCREASE IN EXTENSION OF
DATE OF AMENDMENT LOAN AMOUNT TO: DUE DATE TO:
---------------------------- ----------------------------- ------------------------------
<S> <C> <C>
05/31/95 $200,000 12/29/95
---------------------------- ----------------------------- ------------------------------
08/31/95 275,000 -
---------------------------- ----------------------------- ------------------------------
12/14/95 300,000 03/29/96
---------------------------- ----------------------------- ------------------------------
01/29/96 400,000 04/30/96
---------------------------- ----------------------------- ------------------------------
06/20/96 700,000 12/30/96
---------------------------- ----------------------------- ------------------------------
07/29/96 1,200,000 -
---------------------------- ----------------------------- ------------------------------
09/18/96 1,500,000 -
---------------------------- ----------------------------- ------------------------------
</TABLE>
The balance due under the First Revolving Loan, $1,418,556.92, was paid on
October 15, 1996 from the proceeds of financing obtained in connection with the
Penril Acquisition.
-10-
<PAGE>
3.7 PENRIL ACQUISITION.
On October 11, 1996, PDIXF Acquisition Corp., as purchaser, and the
wholly owned subsidiary of PDI, entered into an Asset Purchase Agreement with
Technipower, Inc. ("TPI"), Constant Power, Inc. ("CPI"), and Penril Datacomm
Networks, Inc. ("Penril"), the parent company to TPI and CPI (collectively, TPI,
CPI and Penril are referred to as the "Seller"), to acquire all of the assets
employed in "Variac" auto-transformers, the "Mil Spec" power supply and the
UPS/PLC AC power protection businesses conducted by TPI and CPI. The assets
purchased included machinery, equipment, inventories, accounts, intangible
assets and technology. The purchase price for the assets was approximately
$4,400,000, of which a portion, $1,694,085, was paid in cash and the balance,
$2,750,000, was paid by the issuance of a short-term promissory note to the
Seller. PDIXF also assumed certain liabilities, principally trade debt, in the
amount of approximately $575,500.00 and employee accrued vacation of
approximately $69,000.00. Additionally, PDIXF agreed to pay the Seller a two
percent (2%) royalty on all sales of UPS/PLC products for the period from
September 30, 1997 through June 30, 2001. The Seller is also referred to
hereinafter as "Hayes." PDIXF claims substantial offsets against Hayes, thereby
substantially reducing the net amount of the Seller Note, as defined
hereinafter.
-11-
<PAGE>
3.8 FINANCING THE PENRIL ACQUISITION AND RETIREMENT OF EXISTING
DEBT.
The acquisition of the assets from TPI and CPI, related working capital
needs associated therewith and the retirement of existing indebtedness was
financed through three primary sources: seller financing, additional borrowing
from Inverness and the issuance by PDI of subordinated promissory notes.
(a). SELLER FINANCING.
As part of the purchase, PDIXF executed a promissory note payable to
TPI and CPI jointly in the original principal amount of $2,750,000 (the "Seller
Note"). The Seller Note was payable in full on December 31, 1996. Interest was
payable at "Prime Rate" plus two percent (2%). The Seller Note was guaranteed by
PDI and secured by a second lien on PDIXF's assets, subject to substantial
offsets claimed by PDIXF.
(b). INVERNESS LOANS TO PDI AND PDIXF.
Inverness and PDI entered into a Loan Agreement and Revolving Credit
Note in the original principal amount of $1,000,000 (the "PDI Note"). The PDI
Note was due and payable in full on April 1, 1998 unless demand was made sooner.
The PDI Note provided for interest at the rate of eighteen percent (18%) per
annum. On November 27, 1996, the borrowing limit under the PDI Note was
increased to $1,500,000. The PDI Note was secured by a lien on all of PDI's
assets. Additionally, Inverness and PDIXF entered into a Loan
-12-
<PAGE>
Agreement and Revolving Credit Note in the original principal balance of
$1,500,000 (the "PDIXF Note"). The PDIXF Note was also due April 1, 1998 unless
demand was made sooner. The PDIXF Note provided for interest at the rate of
eighteen (18%) percent per annum. The PDIXF Note was secured by a first lien on
all of PDIXF's assets. During the fiscal year ending June 30, 1997, the Debtors
paid Inverness fees totaling $100,000 in connection with it various loan
agreements.
(c). SUBORDINATED PROMISSORY NOTES.
In October, 1996, PDI also issued Subordinated Promissory Notes (the
"PDI Subordinated Notes") as follows:
<TABLE>
<CAPTION>
------------------------------ --------------------------------------------
ORIGINAL PRINCIPAL AMOUNT
------------------------------ --------------------------------------------
<S> <C>
Equitas L.P. $700,000.00
------------------------------ --------------------------------------------
Lois Horn 140,000.00
------------------------------ --------------------------------------------
Antoinette Rose 160,000.00
------------------------------ --------------------------------------------
Thomas O'Grady 29,215.38
------------------------------ --------------------------------------------
David H. Smith II 29,215.38
------------------------------ --------------------------------------------
Bruce MacDonald 12,984.62
------------------------------ --------------------------------------------
Dennis
and Terri Nesta 16,000.00
------------------------------ --------------------------------------------
------------------------------ --------------------------------------------
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
------------------------------ --------------------------------------------
<S> <C>
Total $1,087,415.83
------------------------------ --------------------------------------------
</TABLE>
(Collectively, the above listed individuals are referred to as
"Sub-Noteholders"). The PDI Subordinated Notes provided for quarterly interest
payments at the rate of eight percent (8%) per annum. The PDI Subordinated Notes
were due October 31, 2001. Additionally, the Sub-Noteholders acquired 316,743
shares of Old PDI Preferred Stock and warrants to acquire 416,749 shares of Old
PDI Common Stock for aggregate consideration of $271,853.02.
The seller financing, the Inverness loans and PDI Subordinated Notes
totaled approximately $6,609,000 in aggregate. The proceeds of these financings
were used to satisfy the purchase price of approximately $4,400,000, retire
existing indebtedness of $1,490,000, pay costs and expenses associated with the
acquisition of $260,000, including $147,950 paid to VPL, and provide general
working capital.
3.9 DEFAULT ON THE SELLER NOTE.
The principal amount of the Seller Note was not repaid when due
(December 31, 1996), thereby placing PDIXF in default. On March 10, 1997 the
Debtors and Hayes executed a forbearance agreement (the "Forbearance
Agreement"), which required the Debtors to make payments of $50,000 per week
totaling $200,000 prior to March 21, 1997, a payment of $500,000 on or before
April 14, 1997, and a balloon payment equal to the remainder due
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<PAGE>
on or before May 31, 1997. All payments required under the Forbearance Agreement
prior to April 29, 1997 were made in full.
On April 29, 1997, the Debtors and Hayes entered into a modification
agreement (the "Modification Agreement"), which created a new payment schedule
under the Forbearance Agreement. The Modification Agreement required the Debtors
to pay Hayes $400,000 on April 30, 1997, $50,000 on each of May 5, May 12 and
May 19, 1997, $300,000 on May 30, 1997, and the remainder due under the Term
Note on July 31, 1997.
Hayes subsequently agreed to permit the Debtors to make payments of
$100,000, $50,000, $75,000 and $75,000 on May 30, 1997, June 4, 1997, June 10,
1997 and June 20, 1997, respectively, in lieu of the $300,000 payment due on May
30, 1997. As of June 10, 1997, the Debtors were current on their obligations
under the terms of the Forbearance Agreement, as modified. Subsequent to June
10, 1997, the Debtors remained current on interest amounts due to Hayes, but
were unable to repay the $980,000 outstanding principal obligation due on July
31, 1997.
3.10 CONSULTING AGREEMENT WITH VPL. On October 8, 1996, PDI and VPL
entered into a consulting agreement whereby VPL would provide certain services
for a fee of $10,600 per month (including applicable taxes) and the
reimbursement of out-of-pocket expenses. Pursuant to this agreement, VPL has
been paid $138,246.74 ($107,255 in fees and $30,991.74
-15-
<PAGE>
in expenses). The last payment received by VPL under this agreement was $5,000
on August 5, 1997. Additionally up to the Petition Date, VPL had accrued an
additional $124,422.77.
3.11 ADDITIONAL INVERNESS LOAN.
On December 31, 1996, Inverness and PDIXF entered into a Second Loan
Agreement and Revolving Credit Note (the "Second PDIXF Note"). The Second PDIXF
was originally for $1,000,000. The amount available under the Second PDIXF Note
was increased as follows:
<TABLE>
<CAPTION>
-------------------- -----------------
DATE INCREASE TO:
-------------------- -----------------
<S> <C>
3/20/97 $2,000,000
-------------------- -----------------
6/21/97 $3,000,000
-------------------- -----------------
11/5/97 $5,000,000
-------------------- -----------------
</TABLE>
3.12 INVERNESS LEASE.
In addition to the various loans provided by Inverness to the Debtors,
Inverness entered into three (3) leases with PDIXF, each dated December 31,
1996, and covering specific items of equipment. Each lease had a term of
eighteen (18) months and provided for an automatic renewal unless there was
ninety (90) days prior written notice of cancellation before the automatic
renewal date. Collectively, the three leases provide for monthly payments during
the initial term of $14,178.03 per month and $4,369.05 per month for the renewal
period.
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The equipment being leased to PDIXF pursuant to the three (3) leases cost
Inverness approximately $175,000. Inverness has agreed to a suspension of
payments under the leases until the Debtors or Reorganized PDI makes a decision
as to whether any of the equipment will be maintained by the Debtors in
connection with the UPS products. PDI has recorded an obligation of $138,726.23
on its books.
3.13 HAMPSHIRE SECURITIES AND THE BRIDGE LOANS.
In January of 1997 PDI obtained an underwriting letter from Hampshire
Securities Corporation ("HSC") whereby HSC agreed, on a best efforts basis, to
raise a minimum of $6.0 million in a secondary offering of the old PDI Common
Stock. As part of this agreement, Hampshire also agreed to provide twenty
percent of a $3.0 million private placement (the "Bridge Loan"), the proceeds of
which would be used to pay off the Seller Note. HSC provided $925,000 of the
Bridge Loan and PDI raised $1,000,000. Substantially all of the Bridge Loan (net
of expenses) was used to reduce the Debtors' obligations under the Seller Note.
In June of 1997, in part to meet its final obligation to Hayes
($1,000,000), and in part to provide additional working capital, the Debtors
authorized the issuance of additional bridge securities in an amount of no more
than $3.0 million. HSC provided the Debtors verbal
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assurances that it would provide a substantial part of this bridge. However, in
late July, 1997, HSC declined to participate in a second bridge.
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3.14 THE DIRECTOR RELATED LOANS.
In October of 1997, Equitas ($50,000), Robert Sparacino ($100,000),
Bril Profit Sharing Plan ($25,000) and Bril Money Purchase Plan ($25,000) made
loans to PDI and in December, 1997 Mr. Sparacino loaned PDI an additional
$113,000 (collectively the "Director Loans"). The balance due on the Director
Loans as of the Petition Date was $319,398.06.
3.15 OPERATIONS OF PDI PRIOR TO PENRIL ACQUISITION.
PDI was not profitable on a yearly basis prior to and subsequent to its
emergence from the First PDI Bankruptcy due to the low volume of its sales.
PDI's strategy was to pursue acquisitions which were consistent with the PDI
power supply businesses and which would contribute to profit and
non-manufacturing overhead. PDI evaluated a number of potential acquisitions,
one of which was pursued and abandoned due to information gleaned as part of the
PDI due diligence process. Ultimately, the acquisition of the TPI and CPI assets
occurred in October, 1996.
3.16 UPS TECHNOLOGY - THE RAMP UP - THE INVESTMENT.
The UPS/PLC product line incorporated new technology, sophisticated
control, numerous customer benefits and a large international market growing at
more than fifteen percent per year. The Debtors' acquisition of this product
line was complimentary to PDI's existing technology and provided numerous
avenues for cross selling of multiple products.
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Subsequent to the Penril acquisition, the Debtors discovered a number
of manufacturing and production problems related to the UPS/PLC product lines.
These problems became more severe as the Debtors began ramping up shipments in
early 1997. As a result of these problems, shipments were halted in early 1997.
The Debtors addressed each problem and shipments of the UPS/PLC products were
resumed in early April 1997.
In late April of 1997, the Debtors obtained certain sophisticated
automatic test equipment to allow the manufacture of higher volumes of the
UPS/PLC products. As this equipment came on line in the summer of 1997, a
number of additional problems were discovered. The Debtors stopped shipments
of its products again and devoted substantial energy and resources to solving
these reliability problems. To correct these problems, significant operating
funds were expended over the course of calendar year 1997. In order to
finance these operating expenditures, the Debtors' senior lender, Inverness,
increased its revolving credit facilities with the Debtors and the maximum
aggregate availability under its various revolving credit facility was
increased ultimately to $8,000,000. As of the Petition, Inverness was owed
$7,259,019(2) in aggregate from the Debtors.
- --------
(2) This amount excludes the Inverness Leases ($138,726.23).
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3.17 OPERATIONS OF PDI AND PDIXF COMBINED.
The Debtors were unable to raise additional funds during the late
Summer and Fall of 1997 and were, thereby, forced to make a number of reductions
in personnel and expense in multiple rounds in May, August, November and
December of 1997. The Debtors' employee base decreased from a high of 69 in
April of 1997 to approximately 30 by mid-December of 1997.
3.18 SHUT DOWN OF OPERATION.
During the last two weeks of December 1997, the Debtor's employees were
furloughed for the holidays. Debtors were unable to obtain financing to continue
operations at the expiration of the holiday furlough (approximately January 5,
1998). The Debtors decided to extend the furlough while the Debtors arranged for
the filing of their respective Chapter 11 cases. On January 22, 1998 the Debtors
filed for protection under Chapter 11. Upon commencement of the bankruptcy cases
by the Debtors, certain employees returned to work and the Debtors recommenced
operations.
4. THE BANKRUPTCY CASES
4.1 OPERATIONS POST-PETITION.
The Debtors reopened their doors upon the filing of the Chapter 11
cases. Although the Debtors had been closed for nearly three weeks, core product
customers were extremely
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pleased that the Debtors had not closed permanently. Post-petition Debtors have
focused substantially all of their efforts in meeting core product demand
(non-UPS product). The Debtors have hired back all key personnel required to
service and ship core products, in total consisting of about 25 persons.
Although initial costs associated with the Chapter 11 bankruptcy were
substantial, the Debtors posted a cash profit for February through December,
1998 and for January through September, 1999. Further, the Debtors have
initiated a program to re-establish a strong relationship with its core product
customers through customer surveys, on site visits, responsive shipments and
strong customer communications.
During the period from January 22, 1998 through April 1998, the
Debtors received new orders for core products of approximately $790,000 and
shipped in excess of $794,000 in goods. For the period from May, 1998 through
December, 1998, the Debtors received new orders for core products of
approximately $1,926,297 and shipped approximately $2,080,071 in goods. For
the period from January, 1999 through June, 1999. the Debtors received new
orders for core products of approximately $1,470,280 and shipped
approximately $1,284,722 in goods. For the period from July 1999 through
September, 1999 orders were approximately $1,091,440 and shipments exceeded
$823,611.
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The UPS/PLC technology is being maintained, at a subsistence level. The Company
is not taking any orders for the UPS/PLC products, is not shipping any UPS/PLC
products, and is evaluating various options to realize value from the UPS/PLC
products and technology.
5. FINANCIAL ANALYSIS AND LIQUIDATION ANALYSIS
5.1 FINANCIAL ANALYSIS.
CORE BUSINESS. The Debtors have a solid, high margin base business in
various power supply segments. Each of these, albeit directed at somewhat
different applications, comprise technology and knowledge which is similar.
These core product lines include:
LINEAR POWER SUPPLIES - Regulated linear DC power supplies are PDI's
original product line. There are two general classes of these products. The
first consists of supplies sold to universities, government and commercial
research facilities primarily comprising multiple output bench top products. The
second includes a host of specialized base products which can be adapted and
customized to provide OEM customers with solutions to their needs.
PDI's standard catalog product line includes all of the following:
<TABLE>
<CAPTION>
------------------------- --------------------------------- ---------------------------------------
<S> <C> <C>
AC to DC Switchers * Linears
------------------------- --------------------------------- ---------------------------------------
DC to DC UL/CSA approval Single/Multiple Output
------------------------- --------------------------------- ---------------------------------------
High/Lo
------------------------- --------------------------------- ---------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
------------------------- --------------------------------- ---------------------------------------
Voltage High Stability Low Noise
------------------------- --------------------------------- ---------------------------------------
</TABLE>
PDI also markets an innovative approach to linear technology. This
feature, called UNIPLY, is a patented wide range constant power source
technology. UNIPLY provides higher current at low voltages and higher voltage at
low currents, eliminating the need for a multitude of power supplies.
These products carry relatively high gross margins, in the 55% range,
with the cost of materials as low as 20% on selected products. The line is
mature and is generally considered a cash generator for PDI.
VARIAC AUTO TRANSFORMER - The VARIAC Autotransformer line, part of the
acquired assets, produces wire wound transformers, in the two (2) to fifty (50)
ampere range, with continuously variable output voltage control. The name
"VARIAC" is well known in the industry and has become, in the autotransformer
world, what Kleenex is to tissue paper. No other autotransformer has a similar
name recognition or reputation for reliability.
VARIAC'S product design has been proven worldwide as a superior voltage
regulator for control of motor speeds, heat output, light intensity and other
variable power needs. These products have been sold through a relatively
neglected stocking distributor network to government related sub-contractors and
US OEMs. PDIXF has no representation overseas.
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The line has lower margins and a relatively high material cost, in the
50% range. The trade name, however, is of major value in the marketplace.
COTS/MILITARY POWER SUPPLY - This line consists of Mil-Qualified AC-DC
and DC-DC, switching and linear power supplies in capacities from 5 to 450
watts. Applications range from ground base test equipment, to main frame
computers, to battery charging duty on the space shuttle. Programmable AC-DC
power supplies and sine wave inverters are also part of the line. The line is
known for its durability and ruggedness. Most of the currently active products
consist of high-margin, military replacement applications, as opposed to new
programs which require substantial new investment.
Over the course of the last four (4) years, there has been little or no
investment in this product area, resulting in a diminishing presence in the
marketplace. A major part of the Debtor's strategy involves creating products
for this market with are COTS, i.e. commercial off-the-shelf. More and more of
the previously specialized and overly engineered products which the military
purchased are now being moved into the COTS arena, thereby making the product
less specialized and more marketable into a variety of applications.
5.2 MARKET POSITION/COMPETITION.
LINEAR POWER SUPPLIES - PDI expects the market for its catalog line and
OEM power supply products to grow over the next few years primarily as a result
of an increased
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marketing and sales effort, and to a lesser degree because of the improving
economic climate. The general market for bench top products is estimated
domestically at $100 million per year, while the OEM market for the traditional
Power Designs technology is somewhat less than $500 million. Although neither of
these are high growth markets, their maturity, in conjunction with their
relatively small size, allows for high margins. With a host of smaller
competitors, there are no behemoths attempting to penetrate this segment.
It is anticipated that sales will increase to $1.0 million per year
over the next twelve months and then grow 15% to 20% per year, with demand
primarily coming from the commercial and industrial OEM areas.
The linear power supply business competes with numerous companies,
including Kepco, Hewlett Packard, Bertran and Fluke. Power Design's long history
has allowed it to nurture a very loyal mature customer base. Since the market
for these products is well established and diversified, direct competition at
current sales levels is limited. The active customer base often contacts PDI
first for customer power product needs.
VARIAC AUTO TRANSFORMER - The Autotransformer line has a well known
trademark name along with an established core of long term customers. This
market segment is very mature, and consequently, does not provide significant
growth potential with the existing product base. It is estimated that the
domestic market for VARIAC type products is approximately $50 million
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per year. The essence of the value in this line is closely related to the trade
name VARIAC. Penril's failure to invest resources in the line has been a major
contributor to its decrease in sales volume over the years. The Debtors believe
that the trade name will be a benefit not only in enhancing sales of the
autotransformer line, but also in marketing other products.
The VARIAC products operate in a relatively competitive commercial
market but have an established reputation which tends to pull product through
the channel. Since nearly all of these products are sold through distribution,
trade name awareness is very critical to sales growth. The Company intends to
substantially improve distributor and end user awareness as part of its overall
marketing campaign.
COTS/MILITARY POWER SUPPLY - The market for the ruggedized mil-spec
products has fallen with changes in military spending priorities. Although there
is a general perception in the US that nearly all programs have been reduced,
the reality is that major retrofit and upgrade programs are not seeing
significant reductions. Rather, there is a dearth of requirements for totally
new designs. Consequently, these products, which have a rich history in many of
the military's existing platforms, are in demand.
Taking these products from specialized assemblies to more commercial
specifications also provides enhanced opportunities for sales. This is the
essence of COTS. As the military
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moves more toward using readily available offerings in its applications, the
Debtors are able to use similar products in multiple market segments.
The volume of this niche is not readily definable, but is estimated to
be several hundred million dollars per year.
The thirty-seven (37) year history of this line encompasses literally
thousands of proprietary designs for which there are no satisfactory
alternatives. The military has a continual need to buy additional older systems
because of the significant reduction in military spending which occurred in the
late 1980s and the constant need for repair and spare units. This segment has
been a substantial cash generator with high margins, minimal additional
engineering and design requirements, and captive market position.
There are new opportunities for similarly rugged designs in both the
military and the commercial environment, where adverse environmental conditions
are a problem. The Company, having competed effectively in this arena in the
past, will begin a targeted approach to capture more new business in both the
military and commercial side, with an emphasis on COTS types of products, i.e.
products which are more generally considered commercial but which meet a higher
design specification criteria.
5.3 UPS/PLC. The Debtors have continued to maintain the UPS
technology. The Debtors are currently exploring various alternatives with
respect to the UPS technology
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including possible joint ventures with third parties for the manufacture and
sale of the UPS products.
5.4 LIQUIDATION ANALYSIS.
The Plan cannot be confirmed unless it is in the "best interest" of
creditors and Equity Interest holders. The "best interest" test is satisfied if
the Plan provides to each dissenting or non-voting member of each impaired class
a recovery no less than the recovery such member would receive if the Debtors
were liquidated in a hypothetical Chapter 7 liquidation case.
The Debtors have estimated the amounts that would be paid to holders of
Allowed Claims in a hypothetical Chapter 7 liquidation. The liquidation analysis
in EXHIBIT C estimates values which may be available to holders of Claims if the
Debtors' assets were sold in a hypothetical Chapter 7 liquidation. In
liquidation, no creditor or equity interest holder will receive any money except
Inverness.
6. SUBSTANTIVE CONSOLIDATION/MERGER
The Debtors believe that the combination of PDI and PDIXF provides more
overall value to the Creditors than each of the Debtors could provide as
stand-alone entities. The shared economies of sale cannot be overlooked. PDI is
responsible for approximately fifteen percent (15%) of total contribution to the
combined operation. If PDI were considered a stand-alone entity, it would have
to incur significant fixed costs and overhead to maintain its
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business. Combining the two debtors into PDI, the public company is also
important because, as a public company, the Reorganized PDI Common Stock should
trade at higher multiples than PDIXF's non-public stock.
7. DESIGNATION OF CLASSES OF CLAIMS AND EQUITY INTERESTS
All Claims against and Equity Interests in the Debtors, of whatever
nature, whether or not scheduled, liquidated or unliquidated, absolute or
contingent, including all Claims arising from transactions with either of the
Debtors and all Equity Interests arising from the ownership of the stock of
either of the Debtors, whether resulting in an Allowed Claim or not, shall be
bound by the provisions of this Plan. The Claims and Equity Interests are
classified as follows:
CLASS 1. The Allowed Secured Claims of Inverness.
CLASS 1A. Allowed Secured Claim of Inverness against PDI.
CLASS 1B. Allowed Secured Claim of Inverness against PDIXF.
CLASS 2. The Allowed Claim of Hayes.
CLASS 2A. The Allowed Claim of Hayes against PDI.
CLASS 2B. The Allowed Claim of Hayes against PDIXF.
CLASS 3. Allowed Employee Priority Claims.
CLASS 4. Allowed Unsecured Claims.
CLASS 4A. Allowed Unsecured Claims against PDI.
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CLASS 4B. Allowed Unsecured Claims against PDIXF.
CLASS 5. Allowed Equity Interests in PDI.
CLASS 6. Allowed Equity Interest in PDIXF.
8. IDENTIFICATION OF IMPAIRED CLASSES OF CLAIMS AND EQUITY INTERESTS
8.1 IMPAIRED CLASSES OF CLAIMS . All Classes of Claims are impaired
under the Plan.
8.2 IMPAIRED CLASSES OF EQUITY INTERESTS. All Classes of Equity
Interests are impaired under the Plan.
8.3 IMPAIRMENT CONTROVERSIES. If a controversy arises as to whether any
Claim or Equity Interest, or any Class of Claims or of Equity Interests, are
impaired under the Plan, the Bankruptcy Court shall, after notice and a hearing,
determine such controversies.
8.4. SPECIAL NOTE CONCERNING VOTING ON PLAN. If the Consolidation
Motion is granted prior to Confirmation, voting on the Plan will be conducted by
combining the subclasses within each class. For example, Class 1A and Class 1B
will be considered a single Class: Class 1. On the other hand, if the
Consolidation Motion is not granted prior to Confirmation, each subclass will be
considered a separate class for voting purposes. For example, Class 4A and Class
4B will be considered separate and distinct classes for voting purposes.
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9. TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
9.1 CLASS 1 (INCLUDING CLASS 1A AND CLASS 1B). Inverness has made
substantial concessions in order to facilitate the reorganization effected by
the Plan. On the Effective Date, Inverness shall receive in satisfaction of its
Allowed Secured Claims, the following:
(a) Inverness Secured Note; and
(b) that number of shares of Reorganized PDI Common Stock equal to
2,000,000 x .499 (the "Inverness Percentage").
The Inverness Secured Note shall be in the original principal amount of
$1,800,000 and provide for monthly payments of interest only, payable in arrears
at the rate of ten percent (10%) per annum for each month during the term hereof
with the outstanding principal and interest due and payable in full on the
second anniversary of the Effective Date of the Plan. The Inverness Secured Note
shall be secured by a lien on all of the assets of Reorganized PDI senior to all
other liens except any lien granted to secure the Working Capital Note.
9.2 CLASS 2 (INCLUDING CLASS 2A AND CLASS 2B). As a consequence of
undisclosed warrantee liabilities which the Debtors unknowingly assumed in the
acquisition of the UPS technology from Hayes in 1996, the Debtors have
substantial offsets to the unpaid purchase money financing which Hayes provided
as part of the acquisition. The Debtors believe that after
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deducting those offsets, the Claim of Hayes would total $150,000. Confirmation
of the Plan shall irrevocably reduce the allowed amount of the Claim of Hayes to
$150,000
On the Effective Date, Hayes shall receive in full satisfaction of its
Allowed Claims, the following:
(a) the Hayes Unsecured Note in the principal amount of $150,000
payable in two (2) years at a fixed interest rate of ten percent (10%) per
annum, with the outstanding principal and interest due and payable in full on
the second anniversary of the Effective Date of the Plan; and
(b) that number of shares of Reorganized PDI Common Stock to be
determined by the inclusion of Hayes in Class 4A, with an imputed Allowed
Unsecured Claim in said class of $150,000 (done solely for purposes of
determining the number of shares). Notwithstanding the foregoing, Hayes shall
not retain an Allowed Unsecured Claim for any other purposes, including without
limitation, the annual conditional payment to be paid to holders of Allowed
Unsecured Claims in Class 4A.
The Hayes Unsecured Note shall be subordinate to the Working Capital
Note and Inverness Secured Note.
9.3 CLASS 3. Holders of Allowed Employee Priority Claims shall
receive the full amount of their Allowed Employee Priority Claims in eight (8)
equal monthly payments, together with interest at the rate of seven percent (7%)
per annum. As of the Petition Date,
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Employee Priority Claims (including related taxes) were approximately $109,554.
A portion of this amount has been paid pursuant to an order of the Bankruptcy
Court. Currently, there is approximately $20,664 owed to the holders of Allowed
Employee Priority Claims.
9.4 CLASS 4A. Subject to Section 10.2 of the Plan, on the
Effective Date, the holders of Allowed Unsecured Claims in Class 4A shall
receive their Pro Rata Share of that number of Reorganized PDI Common Stock
equal to 50.1% of 2,000,000 shares. There will be 1,002,000 shares distributed
pro rata to the holders of Allowed Unsecured Claims.
In addition to the foregoing, except with respect to Hayes, holders of
Allowed Claims in Class 4A shall also be entitled to an annual conditional
payment equal to 10% of one-half of the face amount of their Allowed Claims,
payable (without interest) only to the extent that Reorganized PDI's free cash
flow (net income, plus depreciation, plus amortization, less capital expense,
less payments pursuant to the Plan) is greater than $400,000.00 in any fiscal
year unless there is a payment default on the Inverness Secured Note, in which
event the conditional payment may not be made until the default is cured. For
purposes hereof, "capital expenses" shall not be deemed to include the purchase
of any equipment that involves either lease or other purchase financing for
which the Company's cash flow is only reduced by future monthly payments. If
Reorganized PDI's free cash flow, as set forth above, in excess of $400,000.00
in any fiscal year, is insufficient to make the conditional payment, then such
conditional payment
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shall be accrued. No conditional payment or accrual, however, shall occur within
six (6) months after the Effective Date of the Plan, nor shall a conditional
payment ever be accrued which exceeds twenty percent (20%) of one-half of the
face amount of such Allowed Claims. To the extent that the accrued conditional
payment would exceed twenty percent (20%) of one-half of the face amount of such
Allowed Claims, entitlement to such amount in excess of twenty percent (20%) of
one-half of the face amount of such Allowed Claim shall be permanently waived.
The terms and conditions of the conditional payment and its termination events
are more fully set forth on Exhibit 6.4A of the Plan ("Conditional Distribution
Agreement").
9.5 CLASS 4B. Subject to Section 10.2 of the Plan, on the
Effective Date the holders of Allowed Claims in Class 4B shall receive a
one-time payment of five percent (5%) of the amount of their Allowed Claims in
complete and full satisfaction of their Claims.
9.6 CLASS 5. All Equity Interests in Power Design, Inc. shall be
deemed canceled as of the Effective Date and holders of such Equity Interests
shall not receive any distribution on account of such Equity Interests.
9.7 CLASS 6. All Equity Interests in PDIXF Acquisition Corporation
shall be deemed canceled as of the Effective Date and holders of such Equity
Interests shall not receive any distribution on account of such Equity
Interests.
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9.8 The Reorganized PDI reserves the right, through and including
one hundred (120) days after the Effective Date, to review and if it deems
appropriate, to object, contest or otherwise challenge any Claim against PDI
and/or PDIXF, including whether such Claim should properly be treated as a claim
of PDI and/or whether a PDIXF Claim should properly be treated as a Claim of
PDI.
CREDITORS ARE ADVISED TO REVIEW THE PLAN IN ITS ENTIRETY FOR A DETAILED
DESCRIPTION OF THE PROPOSED TREATMENT OF THE VARIOUS CLASSES IN THE PLAN.
CREDITORS ARE FURTHER URGED TO CONSULT WITH THEIR RESPECTIVE LEGAL COUNSEL AND
OTHER PROFESSIONAL ADVISORS CONCERNING THE PLAN AND ANY TAX RAMIFICATIONS TO THE
CREDITORS AS A RESULT OF THE PLAN.
10. ADMINISTRATIVE AND PRIORITY TAX CLAIMS
The following section summarizes the treatment of administrative and
priority tax claims:
(a.) ADMINISTRATIVE CLAIMS. Administrative Claims, which have not been
paid prior to the Effective Date shall be paid in full in Cash on the Effective
Date (or, if later, the date on which any such Administrative Claim is allowed
by a Final Order of the Bankruptcy Court), or upon such terms as otherwise
agreed between the Debtors or Reorganized PDI and the holder of such
Administrative Claim. Administrative Claims include claims of professionals
employed by order
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of the Bankruptcy Court, certain post-petition employee claims and any unpaid
fees due under 28 U.S.C. section 1930. Professionals employed pursuant to
Sections 327 and 1102 of the Bankruptcy Code, and any other person who may be
entitled to reimbursement of expenses or allowance of fees pursuant to Sections
503(b)(2) through 503(b)(6) of the Code, shall file final applications for
allowance and payment of compensation and expenses not later than twenty (20)
days after the Effective Date. Each such professional or person shall be paid,
in Cash, the full amount awarded to such professional or person by the
Bankruptcy Court after notice and a hearing, within 10 days after the date on
which an Order allowing such claims, fees and/or disbursements becomes a Final
Order. All post petition payables and other ordinary course expenses will be
paid in the ordinary course of business as agreed between the Reorganized PDI
and the vendor.
(B) POSTPETITION DIRECTOR LOANS. All postpetition financing of PDI
and/or PDIXF approved by the Court prior to confirmation shall be paid, in cash,
the full amount, including any accrued interest, on the Effective Date.
(C) PRIORITY TAX CLAIMS. Allowed Priority Tax Claims shall be paid by
Reorganized PDI in its sole discretion in Cash and in full on the Effective Date
or in equal quarterly payments beginning on April 1, 2000 and continuing
thereafter for twenty (20) additional quarters (payments shall be made on
January 1, April 1, July 1 and October 1). The deferred payments on Allowed
Priority Tax Claims shall bear interest at a fixed rate of seven percent (7%)
per annum.
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Currently there is approximately $15,946 owed to the holders of Allowed Priority
Tax Claims. Claims asserted by various taxing authorities for periods prior to
the First PDI Bankruptcy are not considered Allowed Priority Tax Claims but
shall be conclusively deemed Unsecured Claims and will be treated as Allowed
Unsecured Claims.
11. MEANS FOR EXECUTION AND IMPLEMENTATION
11.1 FUNDING OF PAYMENTS REQUIRED UNDER THE PLAN. The payments
required under the Plan will be made from Cash accumulated by Debtors from the
Petition Date to the Effective Date and the proceeds available under the Working
Capital Note.
12. SECURITIES LAW CONSEQUENCES
12.1 SECURITIES LAW CONSEQUENCES.
The issuance of the Reorganized PDI Common Stock under the Plan raises
certain securities law issues under the Bankruptcy Code and Federal and State
securities laws, which are discussed in this section. This section should not be
considered applicable to all situations. Creditors should consult their own
securities advisors to discuss their particular facts and circumstances with
respect to the transfer of the Reorganized PDI Common Stock.
12.2 INITIAL ISSUANCE OF REORGANIZED PDI COMMON STOCK.
Section 1145 of the Code provides that the securities registration
and/or qualification requirements of federal and state securities laws do not
apply to the offer or sale of stock,
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warrants or other securities by a debtor or its successor if the offer or sale
occurs under a plan of reorganization and the securities are transferred in
exchange (or principally in exchange) for a Claim against or Equity Interest in
the Debtors. Accordingly, the initial issuance of the Reorganized PDI Common
Stock will be exempt from the registration and/or qualification requirements of
federal and state law under Section 1145 of the Code.
Reorganized PDI will succeed to PDI's reporting obligations under the
Exchange Act by virtue of its being a "successor issuer" (within the meaning of
SEC Rule 12(g)3 under the Exchange Act) with more than 300 shareholders of
record. Although Reorganized PDI remains registered under the Exchange Act by
virtue of the number of holders of Reorganized PDI Common Stock, and thereby
fulfills the "Current Public Information" requirements of SEC Rule 144(c), the
holders of Reorganized PDI Common Stock will nevertheless remain subject to the
restrictions on transfer set forth in the New Charter until and unless the New
Charter is amended to eliminate such restrictions.
12.3 RESALE OF REORGANIZED PDI COMMON STOCK.
Until and unless the New Charter is amended to provide otherwise, any
resale of the Reorganized PDI Common Stock will be subject to the restrictions
on transferability contained in the New Charter.
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Any person who is not an "underwriter" under Section 1145 of the
Bankruptcy Code or an "affiliate" under SEC Rule 144 and who resells Reorganized
PDI Common Stock need not comply with the registration requirements of the
Securities Act or seek an exemption therefrom, although such person remains
subject to the restrictions on transfer imposed by the New Charter until and
unless it is amended to provide otherwise. The term "underwriter", as used in
Section 1145, includes four categories of persons, which are referred to herein
as "controlling persons", "accumulators", "distributors" and "syndicators." The
treatment of the four types of underwriters, and the treatment of "dealers," are
discussed below:
(a) CONTROLLING PERSONS.
"CONTROLLING PERSONS" are persons who, after the Effective
Date, have the power, whether direct or indirect and whether formal or informal,
to control the management and policies of Reorganized PDI. Whether a person has
such power is a question of fact which depends on certain factors, including the
person's equity in Reorganized PDI relative to other equity holders, and whether
the person, acting alone or in concert with others, has a contractual or other
relationship giving that person power over management policies and decisions.
If any stockholder's ownership percentage of Reorganized PDI
Common Stock calculated in this manner is between one percent (1%) and ten
percent (10%), that stockholder may be deemed to be in a control relationship
with Reorganized PDI, depending upon the facts
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and circumstances of its particular situation. Any such stockholder should seek
the advice of its own counsel before reselling any Reorganized PDI Common Stock.
To the best of the Debtors' knowledge, the only person who will hold greater
than ten percent (10%) of the Reorganized PDI Common Stock is Inverness, which
will hold approximately 49.9%. Controlling persons are permitted to resell or
otherwise dispose of Reorganized PDI Common Stock only by complying with the
registration requirements of the Securities Act and State "blue sky" laws or an
exemption therefrom.
(b) ACCUMULATORS AND DISTRIBUTORS
"ACCUMULATORS" are persons who purchase Claims against the
Debtors with a view to distribution of any Reorganized PDI Common Stock to be
received under the Plan in exchange for the Claim purchased by the Accumulator.
"DISTRIBUTORS" are persons who offer to sell Reorganized PDI Common Stock for
the holders of Reorganized PDI Common Stock. In prior bankruptcy cases, the SEC
staff has taken the position that resales by accumulators and distributors of
securities distributed under a plan are exempt from the registration
requirements of the Securities Act if made in "ordinary trading transactions."
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(c) SYNDICATORS
"SYNDICATORS" are persons who offer to buy Reorganized PDI
Common Stock from the holders with a view to distribution, under an agreement
made in connection with the Plan, upon consummation of the Plan or with the
offer or sale of Reorganized PDI Common Stock under the Plan. The Debtors are
not aware of any arrangements for the resale of Reorganized PDI Common Stock
which would make any person a Syndicator.
(d) DEALERS
"DEALERS" are persons who engage either for all or part of
their time, directly or indirectly, as agents, brokers, or principals, in the
business of offering, buying, selling or otherwise dealing or trading in
securities. If the Reorganized PDI Common Stock becomes publicly traded after
the Effective Date, Section 4(3) of the Securities Act will exempt transactions
in the Reorganized PDI Common Stock by Dealers taking place more than 40 days
after the Effective Date.
EACH RECIPIENT OF REORGANIZED PDI COMMON STOCK SHOULD SATISFY ITSELF
THROUGH CONSULTATION WITH ITS OWN LEGAL ADVISORS AS TO WHETHER OR NOT RESALES OR
OTHER TRANSACTIONS IN REORGANIZED PDI COMMON STOCK ARE LAWFUL UNDER FEDERAL AND
STATE SECURITIES LAWS.
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THE DEBTORS HAVE NOT SOUGHT A "NO-ACTION" LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION WITH RESPECT TO ANY
MATTER DISCUSSED HEREIN.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THE STATEMENTS CONTAINED HEREIN.
12.4 REPORTING; LISTING.
After the Merger, Reorganized PDI will continue to be publicly traded
on NASDAQ Bulletin Board, and bid and ask price quotations with respect to sales
of the Reorganized PDI Common Stock in the public market will be available.
However, because of the restrictions on transferability found in the New
Charter, private sales of the Reorganized PDI Common Stock will also be
restricted.
As long as the Reorganized PDI Common Stock is held of record by at
least 300 persons, Reorganized PDI will be required to register the Reorganized
PDI Common Stock under Section 12(g) of the Exchange Act and comply with the
reporting requirements of the Exchange Act. Under those requirements,
Reorganized PDI will file with the SEC annual reports on SEC Form 10-K,
quarterly reports on SEC Form 10-Q, current reports on SEC Form 8-K proxy
statements
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conforming to SEC Schedule 14A, and various other reports required by applicable
laws and regulations.
In addition, registration under the Exchange Act will mean that
Reorganized PDI will be required to meet the "Current Public Information"
requirements of SEC Rule 144(c), in order to make the exemption from
registration under SEC Rule 144 available to certain holders of Reorganized PDI
Common Stock who will be subject to restrictions on transfer imposed by the New
Charter.
13. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
(a) GENERAL ASSUMPTION AND ASSIGNMENT. All executory contracts and
unexpired leases of PDI or PDIXF shall be assumed by Reorganized PDI upon entry
of the Confirmation Order unless specifically rejected by order entered on or
prior to the Confirmation Date or unless a motion to reject any such executory
contract or unexpired lease is pending before the Bankruptcy Court on the
Confirmation Date.
(b) BAR TO REJECTION DAMAGES. If the rejection of an executory contract
or unexpired lease by either of the Debtors results in damages to the other
party or parties to such contract or lease, a Claim for such damages, if not
previously evidenced by a filed proof of Claim or barred by a Final Order, shall
be forever barred and shall not be enforceable against the Debtors or
Reorganized PDI, or their properties or agents, successors, or assigns, unless a
proof of Claim
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relating thereto is filed with the Bankruptcy Court within thirty
(30) days after the later of (i) the entry of a Final Order authorizing such
rejection and (ii) the Confirmation Date, or within such shorter period as may
be ordered by the Bankruptcy Court.
(c) CURE OF DEFAULTS FOR EXECUTORY CONTRACTS AND UNEXPIRED LEASES. Each
executory contract and unexpired lease to be assumed pursuant to the Plan shall
be reinstated and rendered unimpaired in accordance with sections 1124(2) and
365(b)(1) of the Code. In connection therewith, Reorganized PDI obligated on
each such contract and lease to be assumed pursuant to the Plan shall cure or
provide adequate assurance that it will cure any monetary default (other than of
the kind specified in section 365(b)(2) of the Bankruptcy Code), by payment of
the default amount in Cash on the Effective Date or on such other terms as the
parties to such executory contract or unexpired lease may otherwise agree,
compensate, or provide adequate assurance that the Reorganized PDI will promptly
compensate, parties to such contract or lease for any actual pecuniary loss to
such parties resulting from such default and provide adequate assurance of
future performance under such contract or lease. In the event of a dispute
regarding: (i) the amount of any cure payments, (ii) the ability of Reorganized
PDI or any of its assignees to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption, the cure payments or performance required by section 365(b)(1) of
the
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Bankruptcy Code shall be made following the entry of a Final Order resolving the
dispute and approving the assumption.
14. FEDERAL TAX CONSEQUENCES
14.1 INTRODUCTION. The following discussion is a summary of certain
of the more significant Federal Income tax consequences of the Plan to the
Debtors and holders of Claims and Equity Interests. This discussion does not
address the particular Federal Income Tax consequences that may be relevant to
certain types of taxpayers subject to special treatment under the Federal Income
Tax laws (such as Life Insurance companies, tax-exempt organizations and
taxpayers who are not citizens or residents of the United States), nor does it
discuss any aspect of state, local, foreign or other tax laws that may be
applicable to particular taxpayers. The tax consequences to holders of Claims
and Equity Interests may vary based on the individual circumstances of each
holder. Moreover, the tax consequences of certain aspects of the Plan are
uncertain due to the lack of applicable legal precedent and the possibility of
changes in the law. No ruling has been sought or obtained from the Internal
Revenue Service with respect to any of the tax aspects of the Plan, and no
opinion of counsel has been requested or obtained by the proponents with respect
to any such aspects. There can be no assurance that the Internal Revenue Service
will not challenge any or all of the tax consequences of the Plan, or that such
a challenge, if asserted, would not be sustained. Accordingly, each holder of a
Claim or Equity
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Interest treated by the Plan is strongly urged to consult with its own tax
advisor regarding the federal, state and local tax consequences of the Plan.
14.2. TAX CONSEQUENCES TO THE DEBTOR.
(a) CURRENT TAX ATTRIBUTES. The Debtors have substantial net operating
loss carryovers ("NOLS") which may, in whole or part, be available to offset
future income of Reorganized PDI. Other tax attributes of the Debtors which may
exist, such as capital/loss carryovers and tax credit carryovers, are not
material. The Plan contemplates that those tax attributes including NOLs, to the
extent that they exist, will be preserved in Reorganized PDI.
The Debtors estimate that, as of September 30, 1999, the NOLs
reportable on its federal income tax return (before giving effect to the Plan
and any transactions contemplated thereby) should aggregate approximately
$12,870,000.
Although the Debtors believe these estimates to be accurate,
the amounts may be subject to review and disallowance upon audit by the IRS.
(b) DISCHARGE OF INDEBTEDNESS. Under the Tax Code, a taxpayer must
generally include in gross income the amount of any discharged indebtedness
realized during the taxable year, except to the extent that the payment of such
indebtedness would have given rise to a deduction. However, Tax Code Section 108
provides that, in a case under Chapter 11 of the Bankruptcy Code, where the
discharge of indebtedness is granted by the Bankruptcy Court or
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pursuant to a plan approved by the Court, the amount of discharged indebtedness
which would otherwise have been required to be included in the taxpayer's income
will be applied instead to reduce certain tax attributes of the taxpayer, in the
following order: NOLs; general business credit carryovers; capital loss
carryovers; the basis of the taxpayer in depreciable property; and foreign tax
credit carryovers. The satisfaction of Allowed Claims in Class 4A (Allowed
Unsecured Claims against PDI) in exchange for the right to receive shares of
Reorganized PDI will not result in discharge of indebtedness income but
Reorganized PDI will be required to reduce its tax attributes by the difference
between the amount of total claims in Class 4 less the fair market value of the
Reorganized PDI Common Stock being exchanged with the holders of Allowed Class
4A Claims.
(c) UTILIZATION OF TAX ATTRIBUTES.
(i) TAX CODE SECTION 382. Section 382 of the Internal Revenue
Code of 1986, as amended (Title 26, United States Code) ("TAX CODE"),
establishes rules governing the availability of a corporation's NOLs after
significant changes in the ownership of the corporation's stock. Tax Code
Section 382 provides that following an ownership change (defined below) in a
corporation having NOLs (a "LOSS CORPORATION"), the amount of the loss
corporation's annual taxable income that may be offset by its NOLs cannot exceed
an amount equal to the value of the loss corporation immediately before the
ownership change multiplied by
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the long-term tax-exempt rate, which is published monthly by the IRS. Because
NOLs expire if not utilized within fifteen (15) years, such an annual limitation
could have the effect of eliminating a significant portion of a loss
corporation's NOL.
An "ownership change" within the meaning of Tax Code Section
382 ("OWNERSHIP CHANGE") occurs when the percentage of outstanding stock
(determined on the basis of value) owned by one or more holders of at least five
percent (5%) of such stock has increased by more than 50 percentage points from
the lowest percentage of stock that was owned by such 5% shareholders at any
time during the applicable "testing period." The testing period ordinarily is
the three-year period which immediately precedes the date of testing. A person
may be a 5% shareholder either directly through ownership of stock or other
interest in a loss corporation or individually through ownership of stock or
interests in other entities. In general, all shareholders holding less than 5%
of the value of the loss corporation's stock are treated in the aggregate as a
single 5% shareholder.
An Ownership Change can occur as a result of, among other things, the
purchase or sale of stock or options by a 5% shareholder, the issuance of stock
or options (whether or not any particular shareholder holds 5% of the value of
the loss corporation), or the redemption of stock or options by the loss
corporation. For the purpose of determining whether an Ownership Change has
occurred, options and instruments or rights that are similar to options, such as
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warrants and contingent rights to acquire stock, are deemed to have been
exercised if such exercise would result in an Ownership Change.
Section 382 provides that, following an ownership change with
respect to a "loss corporation" such as the Company, unless the Bankruptcy
Exception (described below) applies, the amount of post-ownership change annual
taxable income of the loss corporation that can be offset by the loss
corporation's pre-ownership change NOL carryovers generally cannot exceed an
amount equal to the value of the equity of the loss corporation immediately
after the ownership change (subject to various adjustments) multiplied by a
prescribed long-term tax exempt rate (the "Annual Limitation").
An exception (the "Bankruptcy Exception") to the general rules
imposing a limitation on the ability to utilize losses after an ownership change
is set forth in Section 382(1)(5) of the Tax Code. The Bankruptcy Exception
applies if, immediately after an ownership change, shareholders and qualified
creditors of the old loss corporation (E.G., the Company) own at least 50% of
the stock of the new loss corporation (E.G., the Company post-Restructuring).
Qualified creditors include creditors who held their claim at least 18 months
before the filing of the chapter 11 case (or, if claims are held by the public,
certain public creditors), ordinary course of business trade creditors and
creditors who provided working capital financing.
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If the Bankruptcy Exception applies (and no election is made
by the loss corporation for such exception not to apply), the amount of
pre-change NOL carryovers of the old loss corporation that may be carried to a
post-change year are required to be reduced by the amount of the deductions for
interest (including OID) paid or accrued on the indebtedness which was converted
into stock pursuant to the chapter 11 case during (i) any taxable year ending
during the three-year period preceding the taxable year in which the ownership
change occurs or (ii) the portion of the taxable year ending on the change date,
but only to the extent that such deductions generated an NOL for such year or
other period. Moreover, if the Bankruptcy Exception applies (and no election is
made for such exception not to apply), and a second ownership change occurs
within a two-year period, the Annual Limitation following the second ownership
change will be zero.
Based on its analysis of the transactions that will occur on
the Effective Date, the Debtors intend to take the position that the Bankruptcy
Exception will apply to the ownership change that the Debtors believe will occur
as a result of the Plan. Moreover, assuming the Bankruptcy Exception does apply,
the Company does not intend to elect for it not to apply. Accordingly, the
Company believes that it will have in excess of $5,500,000 in NOLs available
(after taking into account the reductions described above) not subject to an
Annual Limitation.
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To minimize the risk that future trading or transfers of
shares of Reorganized PDI will result in an Ownership Change within the first
two years following, the Plan imposes certain restrictions on the
transferability of shares of Reorganized PDI Common Stock to be issued pursuant
to the Plan. Although these restrictions on transferability will reduce the risk
that an Ownership Change will occur for two years following the Effective Date,
there can be no assurance that such an Ownership Change will not occur. Even
with stock transfer restrictions in place, an Ownership Change could occur for
various reasons including, among other things, changes in the ownership of stock
(or other direct or indirect ownership interests) of entities which are holders
of Reorganized PDI Common Stock.
(ii) TAX CODE SECTION 269. Notwithstanding a loss
corporation's compliance with the rules described above, the IRS is authorized
under Tax Code Section 269 to disallow any deduction, credit or other allowance
(such as the use of NOLs) if control of a corporation was acquired principally
for tax avoidance purposes. Under Tax Code Section 269, "CONTROL" is regarded as
the ownership of stock possessing at least 50% of the total combined voting
power or value of all classes of outstanding stock of the corporation.
The existence of a principal tax avoidance motive by persons
acquiring control of a corporation is primarily a question of fact. Moreover,
Tax Code Section 269 gives the IRS considerable power to challenge transactions
involving NOLs. The Plan, however, does not
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contemplate or provide for the acquisition by a person or entity of "control" of
Reorganized PDI (within the meaning of Tax Code Section 269) as a result of the
confirmation of the Plan and the incorporation of Reorganized PDI.
Should a person or entity subsequently acquire control of
Reorganized PDI, there can be no assurance that the IRS will not later challenge
the utilization by Reorganized PDI of the NOLs preserved by the Plan on the
basis of Tax Code Section 269. There also is no guarantee that any such
challenge, if asserted, would not be sustained.
(d) TAX CONSEQUENCES OF THE MERGER. For federal income tax purposes,
the Merger of PDIXF into PDI pursuant to the Plan will constitute a
"reorganization" within the meaning of Tax Code Section 368(a)(I)(F). As such,
no gain or loss will be recognized by PDIXF or Reorganized PDI. Further, the
Merger will not result in any limitation on the ability of Reorganized PDI to
carry forward any of its NOLs.
14.3. TAX CONSEQUENCES TO CREDITORS. The tax consequences of the
confirmation and implementation of the Plan to any particular Creditor will
depend mainly on whether that Creditor's Claim constitutes a "security" for
federal income tax purposes (referred to as "TAX SECURITIES"). The determination
of whether a Claim constitutes a Tax Security depends on the facts and
circumstances surrounding the origin and nature of the Claim and its maturity
date.
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Generally, claims arising out of the extension of trade credit have been held
not to be Tax Securities. Instruments with terms of five years or less also
rarely qualify as Tax Securities.
(a) CLAIMS CONSTITUTING TAX SECURITIES. Tax Code Section 354 generally
provides for the non-recognition of gain or loss by holders of Tax Securities of
a corporation who exchange their Tax Securities solely for new stock pursuant to
a tax-free reorganization. A Creditor would recognize gain, however, upon the
receipt of Reorganized PDI Common Stock and cash from the Creditor Trust, the
fair market value of which exceeds the tax basis of the Claim of such Creditor.
The amount of gain, IF ANY, that would be required to be recognized is the
lesser of (i) the excess, if any, of the cash and the fair market value of the
Reorganized PDI Common Stock received over the tax basis of the Creditor in its
Claim (other than any Claim in respect of accrued interest), or (ii) the amount
of such cash.
(b) CLAIMS NOT CONSTITUTING TAX SECURITIES. A holder of a Claim that
does not constitute a Tax Security will recognize gain or loss upon the receipt
of Reorganized PDI Common Stock measured by the difference between the amount
realized and such holder's tax basis in the Claim. The amount realized will be
the aggregate fair market value of the Reorganized PDI Common Stock distributed
to such claimant (to the extent not allocable to interest).
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(c) RECEIPT OF INTEREST. A Creditor who, under its accounting method,
was not required to include in income interest attributable to its Claim that is
accrued but unpaid will be treated as having received ordinary interest income
to the extent the consideration received is allocable to such interest. This
treatment results whether or not the Creditor realizes an overall gain or loss
as a result of the exchange of its existing Claim. A Creditor who had previously
included in income accrued but unpaid interest attributable to its Claim will
recognize a loss (generally deductible in full against ordinary income) to the
extent such accrued but unpaid interest is not satisfied in full.
For purposes of the above discussion, "accrued" interest means interest
which was accrued while the underlying Claim was held by the Creditor.
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14.4 IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE. The
preceding sections are intended only to be a summary and are not a substitute
for careful tax planning with a tax professional. The federal, state and local
tax consequences of the Plan are complex and, in some cases, uncertain. Such
consequences may also vary based upon the individual circumstances of each
holder of a Claim or Interest. Accordingly, each holder of a Claim or Interest
is strongly urged to consult with its own tax advisor regarding the federal,
state and local tax consequences of the Plan.
15. POST CONFIRMATION MANAGEMENT
15.1 BOARD OF DIRECTORS. Under the terms of the Plan, the
Board of Directors of Reorganized PDI on the Effective Date will consist of
seven persons, selected or designed as follows:
(a) MANAGEMENT DESIGNEE. Initially, Melvin Becker Vice
President of Operations until a Chief Executive Officer ("CEO") is
retained by Reorganized PDI. Thereafter, the CEO shall be the
Management Designee.
(b) INVERNESS DESIGNEES. Two (2) people designated by
Inverness, in its sole discretion.
(c) NOTEHOLDERS' DESIGNEE. Shannon LeRoy.
(d) BRIDGE NOTEHOLDERS' DESIGNEES. Raymond E. Joslin and
Robert Dorfman.
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(e) DIRECTOR LOANHOLDERS' DESIGNEE. Robert Sparacino.
The re-election or replacement of directors shall be in accordance with
the terms of that certain Shareholders Agreement attached as Exhibit 7.3 to the
Plan and automatically made effective upon the Effective Date of the Plan.
(f) DIRECTORS OF REORGANIZED PDI
The following is a brief summary of the five known initial directors of
Reorganized PDI.
The six and seventh directors will be selected by Inverness.
ROBERT R. SPARACINO. Mr. Sparacino was appointed as a Director
of the Company on October 7, 1997. Mr. Sparacino has served as
President of Sparacino Associates, a management and venture
capital consulting firm specializing in high technology
businesses since 1982, as a Director and Vice Chairman of
Tristar Corporation since 1992 and as a Director of Concurrent
Computer Corporation, a computer equipment manufacturer, from
November, 1994 to November, 1997. Additionally, Mr. Sparacino
has served in executive management positions with Xerox
Corporation and General Motors Corporation. Mr. Sparacino
holds a Doctoral Degree in Instrumentation from the
Massachusetts Institute of Technology. Mr. Sparacino holds
approximately two-thirds in amount of the Director Loan.
RAYMOND E. JOSLIN. Mr. Joslin was appointed as a Director of
the Company on October 7, 1997. Mr. Joslin currently serves as
a Director, and as Vice President and Group Head of the
Entertainment & Syndication Group of Hearst Corporation. Mr.
Joslin is also a Founding Director and Co-Chairman of
Hearst/ABC Video Services, and serves as a Founding Director
and Co-Chairman of each of 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
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holds a Bachelor's Degree in Economics from Trinity College.
Mr. Joslin directly or indirectly holds $200,000 of the
Subordinated Bridge Notes.
SHANNON LEROY. Mr. LeRoy was appointed as a Director of the
Company on October 7, 1997. Mr. LeRoy currently serves are
President of Tennessee Business Investment, Inc., the general
partner of Equitas, L.P., a licensed Small Business Investment
Company. From 1984 to 1994, Mr. LeRoy served as Senior Vice
President of First Union National Bank of Tennessee, where he
managed commercial banking. Mr. LeRoy is a Director of HLM
Design, Inc., an architectural and engineering firm, and Laure
Beverage Company, Inc., a consumer beverage company. Mr. LeRoy
holds a Bachelor of Arts degree from the University of North
Carolina in Chapel Hill. Equitas, L.P. holds approximately
$700,000 of the Subordinated Notes.
MELVIN BECKER. Mr. Becker has served as a Vice President of
the Company since November, 1996. Mr. Becker has served as a
Director of the Company since 1984, and served as President
from January, 1984 to November, 1996, and as Vice President in
charge of Manufacturing of the issuer from 1971 to 1979. Mr.
Becker served as Vice President of Operations and as Executive
Assistant to the President at Ferranti-Venus, a manufacturer
of DC Power Supplies from March, 1979 to December, 1983. Mr.
Becker holds a Bachelor's Degree in Electrical Engineering
from the University of Miami.
ROBERT S. DORFMAN. Mr. Dorfman will become a Director upon the
confirmation of the Company's bankruptcy case. He 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 was formerly Managing Director
-Business Development for Advest, Inc., a regional investment
bank and brokerage firm and also held positions as Vice
President of Corporate Finance at Berg & Co., and as a Banking
Officer at National Westminster Bank, USA. Mr. Dorfman holds a
Bachelor of Arts degree from Tufts University and a Master of
Business Administration
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degree from Boston University. Crescent Capital hold $50,000
of the Bridge Notes.
15.2 EXECUTIVE OFFICERS. The officers of Reorganized PDI will be
appointed by the Board of Directors on or after the Effective Date. As provided
by the Amended By-Laws, such officers will include, among others, a president
and chief executive officer, a chief financial officer, and a secretary. To
date, none of the officers has been selected. Anthony Intino serving as Chief
Financial Officer and General Manager and Melvin Becker as Vice President of
Operation and Secretary shall continue to serve as the senior management of
Reorganized PDI until such time as the Board retains a permanent Chief Executive
or Operating Officer and a Chief Financial Officer.
16. POTENTIAL BANKRUPTCY CAUSES OF ACTION
The Debtors are unaware of any significant bankruptcy causes of
actions, including preferences, or fraudulent conveyances, which would provide
additional proceeds for distribution to Creditors.
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17. VOTING PROCEDURES AND REQUIREMENTS
17.1 BALLOTS AND VOTING DEADLINES - A ballot to be used for voting
whether to accept or reject the Plan is enclosed with a copy of this Disclosure
Statement and has been mailed to Creditors entitled to vote. BEFORE COMPLETING
YOUR BALLOT, PLEASE READ CAREFULLY THE INSTRUCTION SHEET THAT ACCOMPANIES THE
BALLOT.
The Bankruptcy Court has directed that, in order to be counted for
voting purposes, ballots for the acceptance or rejection of the Plan must be
RECEIVED by the Debtors' counsel, Zeisler & Zeisler, P.C., 558 Clinton Avenue,
Bridgeport, Connecticut 06605, Attention: James Berman, Esq., by no later than
5:00 p.m. on the date fixed by the Bankruptcy Court. General questions regarding
the ballot may be referred to Attorney James Berman, Zeisler & Zeisler, P.C.,
558 Clinton Avenue, Bridgeport, Connecticut 06605; (203)368-4234.
17.2 PARTIES-IN-INTEREST ENTITLED TO VOTE - All creditors holding
Allowed Claims are entitled to vote. Persons holding Allowed Equity Interests in
Class 5 are deemed to have rejected the Plan because the Plan provides for no
distributions to such holders.
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17.3 VOTE REQUIRED FOR CLASS ACCEPTANCE - The Code defines acceptance
of a plan by class of claims as acceptance by holders of at least two-thirds in
dollar amount, and more than one-half in number, of the claims of that class
which actually casts ballots for acceptance or rejection of the Plan. Thus,
class acceptance takes place only if at least two-thirds in amount and a
majority in number of the holders of claims voting cast their ballots in favor
of acceptance.
17.4 SPECIAL NOTE CONCERNING VOTING ON PLAN. If the Consolidation
Motion is granted prior to Confirmation, voting on the Plan will be conducted by
combining the subclasses within each class. For example, Class 1A and Class 1B
will be considered a single Class: Class 1. On the other hand, if the
Consolidation Motion is not granted prior to Confirmation, each subclass will be
considered a separate class for voting purposes. For example, Class 4A and Class
4B will be considered separate and distinct classes for voting purposes.
18. CONFIRMATION OF THE PLAN
Under the Code, the following steps must be taken to confirm the Plan:
18.1 CONFIRMATION HEARING - Section 1128(a) of the Code requires the
Bankruptcy Court, after notice, to hold a hearing on Confirmation of the Plan.
By order of the Bankruptcy Court the confirmation hearing has been scheduled for
the date listed in the order approving this Disclosure Statement, at the U.S.
Courthouse, 915 Lafayette Boulevard, Bridgeport, Connecticut (the "Confirmation
Hearing"). The Confirmation Hearing may be adjourned from time to time by the
Bankruptcy Court without further notice except for an announcement made at the
Confirmation Hearing or any adjournment thereof.
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Section 1128 (b) of the Code provides that any party-in-interest may
object to confirmation of a plan. ANY OBJECTION TO CONFIRMATION OF THE PLAN MUST
BE MADE IN WRITING AND FILED WITH THE BANKRUPTCY COURT AND SERVED UPON DEBTORS'
COUNSEL, JAMES BERMAN, ESQ., ZEISLER & ZEISLER, P.C. 558 CLINTON AVENUE,
BRIDGEPORT, CONNECTICUT 06605; INVERNESS' COUNSEL, MARK I. FISHMAN, ESQ., PEPE &
HAZARD LLP, 30 JELLIFF LANE, SOUTHPORT, CONNECTICUT 06490; PDI CREDITOR'S
COMMITTEE COUNSEL, ROBERT U. SATTIN, ESQ., REID AND RIEGE, P.C., ONE STATE
STREET, HARTFORD, CONNECTICUT 06103; AND PDIXF CREDITOR'S COMMITTEE COUNSEL,
BRIAN COURTNEY, ESQ., BROWN RUDNICK FREED & GESMER, 185 AYLUM STREET, HARTFORD,
CONNECTICUT 06103, NO LATER THAN THE DATE LISTED IN THE ORDER APPROVING THIS
DISCLOSURE STATEMENT. Objections to Confirmation of the Plan are governed by
Rule 9014 F.R. Bankr.P.. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED
AND FILED, IT WILL NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
18.2 REQUIREMENTS FOR CONFIRMATION OF THE PLAN - At the Confirmation
Hearing, the Bankruptcy Court must determine whether the Code's requirements for
confirmation of the Plan have been satisfied, in which event the Bankruptcy
Court shall enter an order confirming the Plan. As set forth in section 1129 of
the Code, these requirements are as follows:
(a) The plan complies with the applicable provisions of
the Code.
(b) The proponent of the plan complies with the
applicable provisions of the Code.
2(c) The plan has been proposed in good faith and not by
any means forbidden by law.
<PAGE>
(d) Any payment made or promised by the proponent, by the
Debtors, or by a person issuing securities or
acquiring property under the plan, for services or
for costs and expenses in, or in connection with the
case, or in connection with the plan and incident to
the case, has been approved by, or is subject to the
approval of the bankruptcy court as reasonable.
(e) 1. (a) The proponent of the plan has disclosed the
identity of affiliations of any individual
proposed to serve, after confirmation of the plan,
as a director, officer, or voting trustee of the
debtor, an affiliate of the debtor participating
in a joint plan with the debtor, or a successor to
the debtor under the plan; and
(b) the appointment to, or continuance in such office
of such individual, is consistent with the
interests of creditors and equity security holders
and with public policy; and
2. the proponent of the plan has disclosed the
identify of any insider that will be employed or
retained by the reorganized debtor and the nature
of any compensation for such insider.
(f) Any governmental regulatory commission with
jurisdiction, after confirmation of the plan, over
the rates of the debtor has approved any rate change
provided for in the plan, or such rate change is
expressly conditioned on such approval.
(g) With respect to each impaired class of claims or
interest:
1. each holder of a claim or interest of such class has
(a) accepted the plan; or
(b) will receive or retain under the plan on account
of such claim or interest property of a value, as
of the effective date of the plan, that is not
less than the amount that such holder would so
receive or retain if the debtor were liquidated on
such date under Chapter 7 of the Code on such
date; or
<PAGE>
2. if section 1111(b)(2) of the Code applies to the
claims of such class, the holder of a claim of
such class will receive or retain under the plan
on account of such claim property of a value, as
of the effective date of the plan, that is not
less than the value of such holder's interest in
the estate's interest in the property that
secures such claims.
(h) With respect to each class of claims or interests:
1. such class has accepted the plan; or
2. such class is not impaired under the plan.
(i) Except to the extent that the holder of a particular
claim has agreed to a different treatment of such
claim, the Plan provides that:
1. with respect to a claim of a kind specified in
section 507(a) (1) or 501(a)(2) of the Code, on the
effective date of the plan, the holder of such
claim will receive on account of such claim equal
to the allowed amount of such claim;
2. with respect to a class of claims of a kind specified
in section 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)
(6) of the Code each holder of a claim of such class
will receive:
(a) if such class has accepted the plan, deferred cash
payments of a value, as of the effective date of
the Plan, equal to the allowed amount of such
claim; or
(b) if such class has not accepted the plan, cash on
the effective date of the plan equal to the
allowed amount of such claim; and
(j) with respect to a claim of a kind specified in
section 507(a) (7) of the Code, the holder of a claim
will receive on account of such claim deferred cash
payments, over a period not exceeding six (6) years
after the date of such claim, of a value as of the
effective date of the plan equal to the allowed
amount of such claim.
<PAGE>
(k) If a class of claims is impaired under the plan, at
least one class of claims; that is impaired has
accepted the plan, determined without including any
acceptance of the plan by any insider holding a claim
of such class.
(l) Confirmation of the plan is not likely to be followed
by the liquidation, or the need for further financial
reorganization, of the debtor or any successor to the
debtor under the plan, unless such liquidation or
reorganization is proposed in the plan.
(m) All fees payable under 28 U.S.C. section 1930, as
determined by the bankruptcy court at the hearing on
confirmation of the plan, have been paid or the plan
provides for the payments of all such fees on the
effective date of the plan.
(n) The plan provides for the continuation after its
effective date of payment of all retiree benefits, as
that term is defined in section 1114 of the Code, at
the level established pursuant to subsection (3) (1)
(B) or (g) of section 1114, at any time prior to
confirmation of the plan, for the duration of the
period the debtor has obligated itself to provide
such benefits.
The Debtors believe that the Plan satisfies all the statutory
requirements of Chapter 11 of the Code, that the Debtors have complied or will
have complied with all the requirements of Chapter 11, and that the Plan is
proposed in good faith. The Debtors submit that holders of all Allowed Claims
impaired under the Plan will receive payments under the Plan having a present
value as of the Effective Date not less than the amounts likely to be received
if the Debtors were liquidated in a case under Chapter 7 of the Code. At the
Confirmation Hearing the Bankruptcy Court will determine whether holders of
Allowed Claims or allowed Equity Interests would receive greater distributions
under the Plan than they would receive in a liquidation under Chapter 7.
<PAGE>
18.3 CRAMDOWN - The Bankruptcy Court may still confirm the Plan at the
request of the Debtors, if, as to each impaired Class which is deemed to have
rejected the Plan, the Bankruptcy Court determines that the Plan "does not
discriminate unfairly" and is "fair and equitable" with respect to that Class. A
plan of reorganization "does not discriminate unfairly" within the meaning of
the Code if no Class receives more than it is legally entitled to receive for
its Claims or Equity Interests.
"Fair and equitable" has different meanings with respect to the
treatment of Unsecured Claims and Equity Interests. As set forth in section
1129(b)(2) of the Code, those meanings are as follows:
(a) With respect to a class of unsecured claims:
1. the Plan provides that each holder of a claim of such
class receive or retain on account of such claim
property of a value, as of the effective date of the
plan, equal to the allowed amount of such claims; or
2. the holder of any such claim or interest that is
junior to the claims of such class will not receive or
retain under the Plan on account of such junior claim
or interest any property.
(b) With respect to a class of equity interests:
1. the plan provides that each holder of an interest of
such class receive or retain on account of such
interest property of a value, as of the effective date
of the plan, equal to the greatest of the allowed
amount of any fixed liquidation preference to which
such holder is entitled, any fixed redemption price to
which such holder is entitled or the value of such
interest; or
<PAGE>
2. the holder of any interest that is junior to the
interest of such class will not receive or retain
under the plan on account of such junior interest any
property.
The Bankruptcy Court will determine at the Confirmation Hearing whether
the Plan is fair and equitable with respect to, and does not discriminate
unfairly against, any rejecting impaired Class of Claims or Equity Interests.
For the reasons set forth above, the Debtors believe the Plan does not
discriminate unfairly against, and is fair and equitable with respect to each
impaired Class of Claims or Equity Interests.
19. ALTERNATIVES TO THE PLAN
LIQUIDATION OF DEBTORS. An orderly liquidation of the assets of each of
the Debtors would net significantly less than the amounts due Inverness as a
secured creditor. In a liquidation, unsecured creditors would receive nothing.
Dated this 24th day of November, 1999.
POWER DESIGNS, INC.
By: /s/ MELVIN BECKER
-----------------------------------
Melvin Becker
Vice President
PDIXF ACQUISITION CORPORATION
By: /s/ MELVIN BECKER
---------------------------------
Melvin Becker
Vice President
<PAGE>
EXHIBIT B
Liquidation Analysis
<TABLE>
<CAPTION>
Asset Book Value Liquidation Value
(As of September 30, 1999)
- ----------------------------------- -------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Power Designs, Inc Cash 118,199.72 118,199.72
- ----------------------------------- -------------------------- ------------------------- --------------------------
Partnership Investment 22,041.00 0.00
- ------------------------------------ -------------------------- -------------------------- --------------------------
Accounts Receivable(1) 18,184.50 14,547.60
- ------------------------------------ -------------------------- -------------------------- --------------------------
Mach. & Equipment 0.00 0.00
- ------------------------------------ -------------------------- -------------------------- --------------------------
Inventory(2) 66,788.22 33,394.11
- ------------------------------------ -------------------------- -------------------------- --------------------------
TOTAL 225,213.44 166,141.43
- ------------------------------------ -------------------------- -------------------------- --------------------------
- ------------------------------------ -------------------------- -------------------------- --------------------------
PDIXF
- ------------------------------------ -------------------------- -------------------------- --------------------------
Accounts Receivable(1) 344,813.41 275,850.72
- ------------------------------------ -------------------------- -------------------------- --------------------------
Mach. & Equipment 357,439.78 255,710.00
- ------------------------------------ -------------------------- -------------------------- --------------------------
Inventory(2) 762,523.33 381,261.66
- ------------------------------------ -------------------------- -------------------------- --------------------------
UPS Technology 0 50,000.00
- ------------------------------------ -------------------------- -------------------------- --------------------------
TOTAL 1,464,776.52 962,822.38
- ------------------------------------ -------------------------- -------------------------- --------------------------
GRAND TOTAL 1,689,989.96 1,128,963.81
- ------------------------------------ -------------------------- -------------------------- --------------------------
Inverness Claim 7,259,019.02 7,259,019.02
- ------------------------------------ -------------------------- -------------------------- --------------------------
VALUE TO OTHER CREDITORS 0 0
- ------------------------------------ -------------------------- -------------------------- --------------------------
</TABLE>
(1) Receivables are valued at 80% of book value in liquidation.
(2) Inventory is valued at 50% of book value in liquidation
Any Net Operating Loss Carry Forward, which the Debtors may have, has no value
in liquidation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 53,395
<SECURITIES> 0
<RECEIVABLES> 425,289
<ALLOWANCES> 0
<INVENTORY> 710,874
<CURRENT-ASSETS> 1,233,761
<PP&E> 829,379
<DEPRECIATION> (434,007)
<TOTAL-ASSETS> 1,794,070
<CURRENT-LIABILITIES> 799,161
<BONDS> 16,970,032
0
3,167
<COMMON> 240
<OTHER-SE> (17,361,337)
<TOTAL-LIABILITY-AND-EQUITY> 1,794,070
<SALES> 2,875,686
<TOTAL-REVENUES> 2,875,686
<CGS> 1,767,242
<TOTAL-COSTS> 1,767,242
<OTHER-EXPENSES> 946,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,645,965
<INCOME-PRETAX> (1,484,024)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,484,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,152
<CHANGES> 0
<NET-INCOME> (1,560,176)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
