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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-16097
BAYOU INTERNATIONAL, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 98-0079697
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANISATION)
LEVEL 8, 580 ST. KILDA ROAD, MELBOURNE, VICTORIA 3004 AUSTRALIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 011 (613) 9276-7860
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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N/A N/A
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.15 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value based on the average bid and asked price on the
over-the-counter market of the Registrant's common stock, $0.15 par value per
share ("Common Stock"), held by non-affiliates or the Company was A$11,314,835
(US$8,440,867) as of September 16, 1997.
There were 46,941,789 outstanding shares of Common Stock as of September
16, 1997.
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TABLE OF CONTENTS
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PART I
Item 1 Business................................................................... 2
Item 2 Properties................................................................. 10
Item 3 Not applicable............................................................. 10
Item 4 Not applicable............................................................. 10
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters.................................................................... 10
Item 6 Selected Financial Data.................................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 13
Item 8 Not applicable............................................................. 17
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 17
PART III
Item 10 Directors and Executive Officers of the Registrant......................... 17
Item 11 Executive Compensation..................................................... 18
Item 12 Security Ownership of Certain Beneficial Owners and Management............. 19
Item 13 Certain Relationships and Related Transactions............................. 20
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 20
Signatures................................................................. 21
Exhibit Index.............................................................. 23
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PART I
ITEM 1. BUSINESS
GENERAL
Bayou International, Ltd. a Delaware corporation (the "Company") is
primarily engaged in the research and development of high efficiency low
pollution or pollution-free products and technologies in the energy conversion
and conservation fields through its wholly owned subsidiary, Solmecs Corporation
N.V., a Netherlands Antilles corporation ("Solmecs").
Unless otherwise indicated, all amounts in this Report are presented in
Australian Dollars ("A$"). In addition, for the convenience of the reader, the
Australian Dollar figures for the year ended June 30, 1997 have been translated
into United States Dollars ("US$") using the rate of exchange at June 30, 1997
(A$1.00 = US$0.7459).
The executive offices of the Company are located at Level 8, 580 St. Kilda
Road Melbourne Victoria 3004 Australia and the telephone number is 011 (613)
9276-7860. The executive offices of Solmecs are located at 7 Ben Zui Road
Beer-Sheva Israel.
Unless the context otherwise indicates, the term "Bayou Group" as used in
this Report refers to Bayou International, Ltd., its subsidiary, Solmecs, and
its predecessor corporation, Bayou Oil and Gas, Inc. ("Bayou Oil") (defined
below) after giving effect to the Kingsway and Fehr Exchanges and the
Reincorporation (also defined below).
RECENT DEVELOPMENTS
In March 1997, Bayou commenced negotiations with SCNV Acquisition Corp
("SCNV") for the sale of Bayou's subsidiary Solmecs to SCNV. A letter of intent
was signed on May 5, 1997 and agreements to effect the sale are in the process
of being negotiated. It is intended that, as part of the sale of Solmecs, Bayou
will acquire a 24% stake in SCNV.
The sale of Solmecs is subject to the approval of shareholders of the
Company. Following the completion of formal contracts for the sale of Solmecs,
the Company will prepare and distribute an Information Memorandum which sets
forth additional information concerning this transaction.
In the event that the sale of Solmecs is consummated, of which there can be
no assurance, the Company intends to seek other business activities for the
Company which may be in the fields of energy conversion and conservation and/or
other industries including the mineral exploration industry. There can be no
assurance that the Company will be able to locate or engage in an alternate
business activity or that the Company will have access to sufficient funds to
develop such businesses.
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BAYOU INTERNATIONAL COMPANY STRUCTURE
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HISTORY
The Company's predecessor corporation, Bayou Oil, was incorporated under
the laws of Minnesota in 1973. From 1973 through to 1981 Bayou Oil was engaged
in the design and production of protective athletic equipment and it also owned
rights to a line of sportswear. These business lines were ultimately
discontinued and in March, 1981 Bayou Oil entered into the oil and gas
exploration business by acquiring certain rights to oil and gas leases. These
rights were not profitable and, as a result, from 1981 through to May 1986 Bayou
Oil did not engage in any meaningful business activities or operations.
In May, 1986, 5,771,482 shares or 85.1% of the common stock of Bayou Oil
then outstanding were acquired by Kingsway Group Limited, a corporation
incorporated under the laws of New South Wales, Australia, now known as
Australia Wide Industries Limited ("Australia Wide") in exchange (the "Kingsway
Exchange") for all of the issued and outstanding stock of its subsidiary Lake
Macquarie Diaries Pty Ltd ("Lake") which was engaged in the acquisition and
development of residential and commercial real estate in Australia. An
additional 332,318 shares or 4.9% of the Bayou Oil common stock then outstanding
were issued to Mr. George D. Fehr in exchange for the transfer to the Company of
certain oil and gas and mineral leases and the rights to receive royalties from
the leases (the "Fehr Exchange"). Due to the relationship between Australia Wide
and Lake and subsequently the Company, the Kingsway Exchange was accounted for
as a book value purchase.
On March 6, 1987 Bayou Oil merged into the Company its wholly-owned
Delaware subsidiary for the purpose of effecting its incorporation in the State
of Delaware (the "Reincorporation"). Pursuant to the terms of the
Reincorporation, holders of Bayou Oil common stock received one share of Common
Stock in the Company for each share of Bayou Oil held by them. The primary
purpose of the Reincorporation was to allow Bayou Oil and its officers and
Directors to avail themselves of the advantages of being incorporated under the
Delaware General Corporation Law. In addition, as a result of the
Reincorporation Bayou Oil's name was changed to "Bayou International, Ltd." in
order to more accurately reflect the changing nature of the Company's business
and the par value of the Common Stock was increased from US$0.01 to US$0.15 per
share in order to meet the listing requirements of the Australian Stock Exchange
Limited ("ASX"). The Reincorporation was approved by the stockholders of Bayou
Oil at its' Annual Meeting of Stockholders held on March 6, 1987. The Company
did not complete the listing on the ASX due to a change in economic
circumstances in Australia in October 1987.
In 1987, the Company acquired 54% of the issued and outstanding capital
stock of Solmecs and in April 1988 the Bayou Group was a founding shareholder of
Advanced Technology Engineering Limited ("Atel") which was formerly the parent
company of Satec Ltd, an Israeli Corporation ("Satec"). In December 1989, the
Bayou Group purchased the remaining 8% of Atel not previously owned by it for an
aggregate purchase price of A$150,000. The Bayou Group subsequently transferred
all of Atel's assets directly to the Bayou Group (including Atel's investment in
Satec) and assumed all of Atel's liabilities in connection therewith. Atel was
subsequently liquidated and dissolved as the Bayou Group no longer required the
corporate shell of Atel. Satec was organised to engage in the design,
development, manufacture and marketing of proprietary high technology products
and technologies.
In April 1989, Solmecs transferred all of its right, title and interest in
the certain geothermal energy conversion technology to its wholly owned
subsidiary Solmecs Corporation UK Ltd in exchange for all of the issued and
outstanding shares of Solmecs Corporation UK Ltd. Solmecs Corporation UK Ltd
then changed its name to TFC Power. The shares of TFC Power were subsequently
distributed to the shareholders of Solmecs and as a result, TFC Power became a
54% owned subsidiary of the Company.
The Company has previously held a 54% interest (via Solmecs) in Solmecs
Flo-Ice Systems Ltd ("SFI") which is engaged in the design, development and
marketing of its "Flo-Ice" ice generator which is an innovative method of
producing very fine crystals of ice which are dispersed in water. Solmecs paid a
dividend in June 1991 which was effected by distributing the shares it held in
SFI to the shareholders of Solmecs on a pro-rata basis. At the time the Company
held 54% of Solmecs and as a result of the dividend 54% of the shares of SFI
were transferred to the Company.
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In October 1990, following a review of its operations, the Bayou Group
decided not to renew the leases over a number of its mineral, oil and gas
properties. The Company is not currently engaged in any mineral, oil or gas
exploration or development activities.
In March 1991, the assets and liabilities of Lake were transferred to the
Company and Lake was placed in members voluntary liquidation which was completed
in March 1992 as Lake had ceased its business operations and the corporate
entity of Lake was no longer required.
During the year ended June 30, 1991 the Bayou Group decided to concentrate
its effort on the Liquid Metal Magneto-HydroDynamics ("LMMHD") technology
(discussed below) and as a result Solmecs reduced its holding in SFI from 54% to
23% through the sale of a part of its holding and the issue of additional shares
by SFI.
In July 1991, the Company transferred all of the ordinary shares of Satec
owned by it and all of the inter-company loans owed by Satec to the Company to
Isratech Ltd., a Delaware corporation ("Isratech") in consideration for the
assumption by Isratech of all of the Company's liabilities and obligations with
respect to Satec. Isratech was a private Delaware corporation, the officers,
Directors and shareholders of which include members of the family of Mr. Daniel
Branover who was the President of Satec at the time of the transaction and
formerly a Director of the Company.
In January 1992, the Company completed the acquisition of the remaining 46%
of the issued and outstanding shares of Solmecs. Solmecs minority shareholders
received shares in the Company in exchange for their Solmecs shares. The Company
now holds all of the issued and outstanding shares of Solmecs.
In July 1992, the Company agreed to dilute its interest in TFC Power from
54% to 36% in consideration for services rendered by key executives and as an
incentive for future services.
In December 1994, the Company entered into an agreement with TFC Power, SFI
and Peter Kalms ("Kalms") whereby the Company transferred shares in TFC Power
and SFI to Kalms in consideration for Kalms taking an assignment of debts of
Solmecs to TFC Power and SFI and forgiving a debt due from Solmecs to Kalms.
Kalms was the former Managing Director of Solmecs and was Managing Director of
TFC Power and SFI. As a result, the Company and Solmecs now hold interests of
8.4% in TFC Power and 8.6% in SFI.
In late 1995 Solmecs incorporated a subsidiary Heatex Ltd ("Heatex") in
Israel for the purpose of engaging in research, development and
commercialisation of a domestic hot water tank control and display system.
Further details on Heatex are contained within this section of the Report.
SOLMECS CORPORATION N.V.
Solmecs was established in 1980 to engage in the research, development and
commercialisation of products and technologies in the energy conversion field.
The Company owns all of the issued and outstanding shares of Solmecs which in
turns owns all of the outstanding shares of Solmecs (Israel) Ltd ("Solmecs
Israel").
LMMHD-ECT: A primary area of research and development for Solmecs
involves the innovative technology known as LMMHD Energy Conversion Technology
(ECT).
A report prepared by an independent engineering consulting firm in Israel
has indicated that the installed capital cost of the ETGAR-7, Solmecs' mature
LMMHD power plant once its development has been completed will only be 76% of
that of a conventional steam turbo generator plant. In addition the estimated
efficiency of the ETGAR-7 will be higher than that of the steam turbo-generator
plant resulting in lower fuel costs and reduced pollution of the environment.
Scientific Background: The LMMHD-ECT differs from the conventional methods
used to generate electricity. In conventional methods a copper coil installed in
the rotating portion of a generator (the "rotor") is forced to turn in a
perpendicular magnetic field created in the stationary portion of a general (the
"stator").
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The force to cause the rotation is typically provided by a fossil fuel burning
turbine or reciprocating engine although hydro power is also used.
In LMMHD-ECT the rotating copper coil in a magnetic field is replaced by
forcing a conducting fluid (such as lead) through a magnetic field. The
resulting MHD generator is a direct energy conversion device as it converts the
thermal energy of the working fluid directly to electricity rather than first
converting the thermal energy to mechanical energy to cause the rotation of the
"rotor" in the conventional electric generator.
The unique concept of LMMHD-ECT features no moving machinery for the energy
conversion and, as a result, the complex, expensive and specialised turbine and
generator are not needed. LMMHD is therefore expected to require relatively low
maintenance and offer inherent high availability (on-time) and high reliability
energy generation.
Additionally the "no heat exchange" or adiabatic expansion process typical
of conventional turbo-machinery is inherently less cycle-efficient than the
nearly isothermal, continuous heating expansion process typical of the
LMMHD-ECT. This unique feature of LMMHD-ECT offers this nearly isothermal
expansion process without the need for extra reheaters. This feature
characterised as "infinite re-heater" can also be matched in some versions of
LMMHD-ECT with a compressor that also performs the function of an 'infinite
intercooler' again without the need for extra hardware.
Liquid metal, such as lead, has a low chemical reactivity with many
materials and exhibits a low vapour pressure even at the upper temperature range
of practical thermodynamic cycles. It is therefore practical, in certain
industrial applications, to bring this lead into direct contact with the heat
source. Examples of these industrial applications include imperial smelting
technology for Zinc production, the patented process used for heat treatment of
steel wires, and the conversion of organic furfural into furan. When the
LMMHD-ECT is combined with these processes, a highly efficient conversion of the
otherwise "wasted" heat to DC electricity is achieved. This "free" electricity
can then be used in the industrial process to offset the cost of purchased
electricity.
Finally the inherent high heat capacity of the liquid metal of LMMHD energy
conversion is orders of magnitude higher than the heat capacity of the working
thermo dynamic fluids found in conventional power plants of comparable capacity.
This makes the technology particularly attractive to many applications needing
nearly constant temperature heat sink-heat source as well as applications
requiring large heat storage capacity such as solar energy utilisation.
OMACON: The particular form of LMMHD-ECT which Solmecs is engaged in
developing is referred to as OMACON (which stands for Optimised
Magnetohydrodynamic Conversion). The patented technology for the OMACON
generator was originally developed by Professor Herman Branover an
astrophysicist who is the head of Ben-Gurion University's centre for
Magneto-Hydro-Dynamics ("MHD") studies in Israel and a former Professor at the
Academy of Science in Riga Lotvia. It is widely acknowledged in international
engineering and scientific circles that, due to the work done by Professor
Branover and Solmecs, Israel is closer to practical application of LMMHD than
either the U.S.A. or the former U.S.S.R.
Ben-Gurion University, through its commercial arm Advanced Products
(Beer-Sheva) Ltd. ("AP"), has assigned all of its right, title and interest in
and to the patents and technology which underlie the OMACON generator to Solmecs
in consideration of an initial payment of $100,000 and the payment of royalties
during a period which is equal to the greater of the life of any patent or eight
years from the commencement of commercial sales of the technology. In addition,
Solmecs agreed to assume certain obligations of AP to the Government of Israel
to repay certain research grants which AP had received in connection with the
development of the OMACON generator.
The Agreement also provided that Solmecs would conduct certain of its LMMHD
research and development activities with respect of the initial stages of the
program through the centre of MHD studies at Ben-Gurion University.
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Solmecs currently has a team of experienced researchers and engineers in
the field of LMMHD technology under the supervision of Professor Branover. The
team is headquartered at Solmecs' facilities which are rented from Ben-Gurion
University.
The ETGAR Program: The presently ongoing LMMHD program of Solmecs
commenced in 1981. It is carried out by the Centre for MHD Studies of Ben-Gurion
University in Beer-Sheva. The program concentrates on the development of OMACON
systems and towards the commercialisation of small-scale (1 - 10 MW with a
possible further upscaling to 25 MW) power plants being able to utilise a
variety of heat sources. This program is called the ETGAR Program.
In 1987 the program reached the beginning of its commercialisation stage.
Solmecs decided to proceed with the development and building of a commercial
scale demonstration plant after it became evident that all of the previous
theoretical, experimental and engineering work and especially the two-year long
testing of the integrated pilot plant ETGAR-3 provided the necessary data base
for such development.
All of the power generating systems which are planned to be built according
to the ETGAR program implement the OMACON concept with either a single-phase
generator or a two-phase generator.
The ETGAR commercialisation program will be conducted in three stages.
Firstly, ETGAR 5 the industrial scale co-generation demonstration plant, will be
built at an industrial site. Then ETGAR 6, the first commercial full scale
co-generation plant, will incorporate the know-how obtained from ETGAR 5 and
inputs from the supporting research and development program. This will be
carried out in parallel with the ETGAR 5 design and construction. The ETGAR 7
Co-generation Plant will be designed as a generic concept applicable for
utilisation with different heat sources and for operation over a wide range of
applications in the 1 - 20 MW size.
Solmecs has an agreement with the High Temperature Institute of the Academy
of Sciences of the USSR ("the Institute") pursuant to which the Institute will
manufacture certain of the components for the ETGAR-5 facility. The components
will be manufactured by the Institute based on Solmecs' specifications without
charge to Solmecs in return for preferential rights to act as a manufacturer for
these products once they have reached the commercialisation stage.
New Directions
Solmecs initiated an additional development program for further advancement
and refinement of its LMMHD technology as well as for increasing the range of
its potential applications. The following leading new directions have been
pursued.
a) Additional advancement of the performance of ETGAR-type LMMHD ECT
An ETGAR system with a "boiling mixer" has been invented and
developed. A large scale prototype called "Ofra" has been designed and
constructed at the MHD centre of Ben-Gurion University in Israel. The
prototype is now in the last stages of commissioning and first tests
commenced in the beginning of 1997. Approximately US$1 million has been
spent on this project and it was elaborated jointly with the International
Lead and Zinc Research Organisation ("ILZRO") in North Carolina USA. On the
basis of the positive results of previous smaller scale experiments, it is
anticipated that the introduction of a "boiling mixer" (that is, injection
of volatile thermodynamic fluid directly into the molten metal which causes
boiling of the volatile fluid through direct contract heat exchange) will
lead to a further substantial increase of the efficiency of an ETGAR system
with simultaneous decrease in installation costs (due to elimination of a
boiler which constitutes up to 40% of the capital investment in power
stations).
b) New applications for LMMHD ECT
A number of new applications for ETGAR-type LMMHD ECT have been
detected and explored. The following are just a few examples
- Using ETGAR systems on off-shore oil pumping platforms. In this case
the system will produce electricity utilising heat and pressure of
gases mixed with the oil stream arriving from very deep
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off-shore oil wells. This direction is being explored with AMEC Process
and Energy Limited (London) who are a very large British engineering
company specialising in the off-shore oil industry.
- Matching ETGAR-technology to a novel energy system developed by the
European Organisation for Nuclear Research CERN in Geneva (the world
largest elementary particle accelerator built jointly by the countries
of the European Community). This system is using a flux of accelerated
protons which hit a molten lead target and cause neutron emission
directed on thorium rods. Ultimately the generated thermal energy is
absorbed by the molten lead. It is suggested by Solmecs team that the
hot lead would be directed into an ETGAR type LMMHD electricity
generating device.
c) Electromagnetic Processing of Materials
(i) The know-how in the field of Liquid Metals and of MHD phenomena
allowed Solmecs to enter into a number of studies related to
electromagnetic processing of materials. The preliminary data obtained
to date indicates that the following results can be achieved
- Substantial improvement of the quality of complicated castings
- Creation of new alloys with "exotic" properties
- Advancement of monocrystal growths technology (larger crystals with
improved quality).
(ii) Solmecs currently sells its consulting and development services to
the Dead Sea Works Industry for handling Liquid Magnesium using LMMHD
technology.
d) The know-how in the field of energy and heat transfer allowed Solmecs to
enter into the development of a domestic hot water tank control and display
system. The development stage is now finished.
e) In addition, the good connections developed between Solmecs,
institutions and companies in the former Soviet Union countries have
permitted Solmecs to commence commercial activities on a limited basis in
the following two areas:
(i) The marketing in Israel of photovoltaic ("PV") modules manufactured
by the Russian firm "Musson".
(ii) The supplying in Israel of services of Plasma-Chemical
modifications (PMC) of elastomer products using Russian technology.
The Company believes that there is a substantial worldwide market for
each of the abovementioned new technologies.
Status of Funding for LMMHD Project
In 1995, ILZRO and Solmecs (Israel) proposed to form a joint venture to
further develop technology relating to LMMHD. Research work would be carried out
both within the Solmecs Laboratory at the Centre for MHD Studies of Ben-Gurion
University in Beer-Sheva, Israel and at a USA site where a scaled-up LMMHD
facility would be constructed and used for research.
The demonstration plant would be built and scale-up technology would be
further proven during a four-year grant period with a total budget of
approximately US$6 million. Grant co-sponsors would include four sources: the
U.S. Department of Commerce, the Israel Ministry of Industry, Solmecs and a
private group of investors including a subsidiary of ILZRO.
Towards the end of the four year grant period, the two private groups of
investors will form a joint venture company to be called Pb-MHD to own and
operate the demonstration facility as a fee-based service for clients along with
private consulting services to these clients with substantial revenues to
Pb-MHD. It is anticipated that the above activity of Pb-MHD will substantially
enhance the amount of OMACON Power generating systems paying licences fees to
Solmecs and ordering key components from Solmecs.
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Unique to these proposals which are intended for application in the near
future is the availability of matching funds from the US and Israeli governments
which will reduce capital requirements by one half.
Heatex Ltd.
Heatex was established in 1995 to engage in research, development and
commercialisation of a domestic hot water tank control and display system.
This new system provides the user with accurate information on the amount
of hot water left for use in the domestic hot water tank. The system allows a
user to remotely control the operation of the water heating system no matter
whether it is fuelled by electricity or solar power. The controller displays the
necessary information such as the number of standard showers available in the
tank and the user is able to fix the desired number of showers he or she wants
to keep in the system at time intervals he or she chooses, that is, the device
will help to avoid unnecessary waste of energy and will allow a comfortable use
of the water heating system.
Following the research and development stage, an Israeli electronic firm
(Aerobit Industries Ltd., a wholly owned subsidiary of L S B Industries, Inc.
USA) was subcontracted to engineer the product. Aerobit has now completed its
contract and provided Heatex with working prototypes of the product.
The commercialisation stage of the product began in the second quarter of
1997. The Heatex control and display system is being adapted to a Dutch boiler
sent to Israel by the Inventum Dutch firm which is interested in adding the
product to its boilers. France's leading boiler's manufacturer and distributor
is interested in the product and its adaptation is planned for late 1997 and
early 1998. The sales prospects for this product in other countries including
the USA are now being considered.
The production will be undertaken at first by subcontractors and later
depending on market demand a decision will be taken as to whether Heatex will
manufacture the control and display system.
Employees
As of July 1, 1997 the Bayou Group (through Solmecs) had 13 employees, 8 of
whom are engaged on a full-time basis and 5 of whom are engaged on a part-time
basis.
The services of the Company's Chief Executive Officer and Chief Financial
Officer as well as clerical employees are provided to it on a part-time basis
pursuant to a Service Agreement dated November 25, 1988 (the "Service
Agreement") by and between the Company and AWI Administration Services Pty. Ltd.
("AWI Admin"). AWI Admin also provides office facilities, equipment,
administrative and clerical services to the Company pursuant to the Service
Agreement. This Agreement may be terminated by written notice from the parties
thereto.
For a discussion of the additional terms of this agreements, see "Item
13 -- Certain Relationships and Related Transactions" and "Item 11 -- Executive
Compensation."
Competition
The Company believes that Solmecs is the only commercial company engaged in
the development of LMMHD generator systems and that the LMMHD system is the
leading future technology in the energy conversion field. However the Company
believes that the competition in the worldwide market for energy conversion
systems is intense and that Solmecs may encounter substantial competition from
other companies engaged in the development of competing energy conversion
systems.
Patents and Proprietary Rights
As of June 30, 1997 Solmecs has filed applications for patents in the
United States, Israel and a number of other countries in connection with its
development of the LMMHD. Solmecs has been granted patents for its MHD
Applications (homogenous flow) in the United States, Israel, Italy, Great
Britain, Germany, France, Sweden, Canada, Japan and Australia and for its Solar
MHD in the United States.
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Even if Solmecs is successful in obtaining all of its applications for
patents, there can be no assurance that the protection afforded by such patents
would be as broad as the claim made in the applications or that the patents as
granted would be found to be valid if the patents were contested in litigation.
In the event Solmecs is unable to secure any patents with respect to the LMMHD
Generator or in any foreign jurisdiction in which it is actually seeking to
market the LMMHD Generator it would be at a severe competitive disadvantage and
may not be able to market the LMMHD Generator in any jurisdictions where the
patents would be unavailable to it.
The Company also relies on trade secret protection for much of the
proprietary know how related to its LMMHD technology as well as the technology
related to the Heatex systems.
Legal Proceedings
There are no pending legal proceedings to which the Company is a party or
to which any of its property is the subject which the Company considers
material.
ITEM 2. PROPERTIES
The Company occupies certain executive and administrative office facilities
in Melbourne Victoria Australia which are provided to it pursuant to the Service
Agreement with AWI Admin. See "Item 1 -- Business -- Employees" and "Item
13 -- Certain Relationships and Related Transactions". The Company believes that
its administrative space is adequate for its current needs.
The executive offices of Solmecs are located at 7 Ben Zui Road, Beer-Sheva,
Israel (nearby the Company's Laboratories) and are leased pursuant to a lease at
approximately US$250 per month.
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is traded in the over-the-counter market. The trading for
the Common Stock has been sporadic and the market for the Common Stock cannot be
classified as an established public trading market.
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The following table sets forth the high and low bid information for the
Common Stock as reported by the National Quotation Service Bureau for each
period/quarter indicated in US$:
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CALENDAR PERIOD HIGH BID(1)(2) LOW BID(L)(2)
------------------------------------------------ -------------- -------------
<S> <C> <C>
1995
First Quarter................................. 7/16 3/8
Second Quarter................................ 9/16 3/8
Third Quarter................................. 3/8 3/8
Fourth Quarter................................ 3/8 3/8
1996
First Quarter................................. 1/2 1/4
Second Quarter................................ 5/8 3/8
Third Quarter................................. 5/8 5/8
Fourth Quarter................................ 1/2 1/2
1997
First Quarter................................. 3/8 3/8
Second Quarter................................ 1/4 1/4
</TABLE>
- ---------------
(1) The quotations set forth herein reflect interdealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
(2) These prices reflect market adjustments made in connection with the
Company's one-for-five reverse stock split effective as of December 31,
1986.
On September 16, 1997 the closing bid for the Common Stock was 5/8.
SHAREHOLDERS
As of August 28, 1997 the Company had approximately 291 holders of record.
DIVIDEND POLICY
It is the present policy of the Board of Directors to retain earnings for
use in the Company's business. The Company has not declared any cash dividends
to the holders of its Common Stock and does not intend to declare such dividends
in the foreseeable future.
TRANSFER AGENT, REGISTRAR AND ESCROW AGENT
The United States Transfer Agent and Registrar of the Company is Chase
Mellon Bank.
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
years in the five-year period ended June 30, 1997, and balance sheet data at
June 30, 1993, 1994, 1995, 1996 and 1997 have been derived from the financial
statements of the Company which financial statements have been examined by Rodee
and Associates PC, independent accountants, in respect of the years ended June
30, 1993, and 1994, and by David T Thomson PC, independent accountants, in
respect of the years ended June 30, 1995, 1996 and 1997. The selected financial
data should be read in conjunction with the consolidated financial statements of
the Company for each of the years in the three-year period ended June 30, 1997,
and notes thereto which are included elsewhere in this Report and in "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR END JUNE 30
-------------------------------------------------------------
CONV.
TRANSL
------
1993 1994 1995 1996 1997 1997
A$ A$ A$ A$ A$ US$
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sales Revenue....................... -- -- -- 30 66 49
Other Income........................ 305 114 82 117 11 8
Total Revenue....................... 305 114 82 147 77 57
------ ------ ------ ------ ------ ------
Costs and expenses.................. (1,530) (1,402) (1,229) (1,165) (1,134) (846)
------ ------ ------ ------ ------ ------
Loss from operations................ (1,225) (1,288) (1,147) (1,018) (1,057) (789)
Other income (loss)................. 247 686 220 (459) 330 247
Loss before income taxes and
amortisation of goodwill.......... (978) (602) (927) (1,477) (727) (542)
Provision for income taxes.......... -- -- -- -- -- --
Loss before amortisation of
goodwill.......................... (978) (602) (927) (1,477) (727) (542)
Amortisation of goodwill............ (533) (533) (532) (533) (533) (398)
------ ------ ------ ------ ------ ------
Net loss............................ (1,511) (1,135) (1,459) (2,010) (1,260) (940)
------ ------ ------ ------ ------ ------
CENTS CENTS CENTS CENTS CENTS CENTS
------ ------ ------ ------ ------ ------
Net loss per share.................. (0.06) (0.03) (0.03) (0.04) (0.03) (0.02)
====== ====== ====== ====== ====== ======
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
------ ------ ------ ------ ------ ------
Weighted average number of shares
outstanding....................... 26,426 34,501 46,942 46,942 46,942 46,942
====== ====== ====== ====== ====== ======
A$ A$ A$ A$ A$ US$
------ ------ ------ ------ ------ ------
Total assets........................ 2,487 2,060 1,357 717 167 125
Total liabilities................... 3,421 660 1,542 2,344 3,405 2,540
------ ------ ------ ------ ------ ------
Stockholders' equity (deficiency)... (934) 1,400 (185) (1,627) (3,238) (2,415)
====== ====== ====== ====== ====== ======
</TABLE>
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOREIGN CURRENCY TRANSLATION
The majority of the Company's administrative operations are in Australia
and, as a result, its accounts are maintained in Australian dollars. The income
and expenses of its foreign operations are translated into Australian dollars at
the average exchange rate prevailing during the period. Assets and liabilities
of the foreign operations are translated into Australian dollars at the
period-end exchange rate. The following table shows the average rates of
exchange of the Australian dollar as compared to the US dollar during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- ------------------------------
<C> <C> <S>
1993 -- A$1.00 = US$0.665
1994 -- A$1.00 = US$0.724
1995 -- A$1.00 = US$0.711
1996 -- A$1.00 = US$0.787
1997 -- A$1.00 = US$0.7459
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 VERSUS YEAR ENDED JUNE 30, 1996
Sales revenue increased from A$30,000 for the year ended June 30, 1996 to
A$66,000 (US$49,000) for the year ended June 30, 1997 as a result of the
increase in commercial activities of Solmecs. Other income reduced from
A$117,000 for the year ended June 30, 1996 to A$11,000 (US$8,000) for the year
ended June 30, 1997. A$7,000 (US$5,000) was received during the year from
external consulting services compared to A$76,000 for the year ended June 30,
1996. In addition, during the year ended June 30, 1996 interest income on a debt
was received amounting to A$48,000 compared with A$4,000 (US$3,000) for the year
ended June 30, 1997.
Costs and expenses decreased from A$1,165,000 for the year ended June 30,
1996 to A$1,134,000 (US$846,000) for the year ended June 30, 1997. The decrease
is a net result of
(i) an increase in the cost of sales from A$23,000 for the year ended
June 30, 1996 to A$63,000 (US$47,000) for the year ended June 30, 1997
which is directly comparable to the increase in sales in revenue.
(ii) an increase in interest expense from A$185,000 for the year ended
June 30, 1996 to A$259,000 (US$193,000) for the year ended June 30, 1997
which is a result of the increase in the level of borrowings of the
Company.
(iii) a decrease in salaries and wages from A$544,000 for the year
ended June 30, 1996 to A$393,000 (US$293,000) for the year ended June 30,
1997. In early 1996 the Company made a decision to close its administration
offices in Jerusalem and shift the administration function of Solmecs to
Beer-Sheva which is close to the Ben-Gurion University where the Company's
research and development program is conducted. This decision resulted in
the decrease in salaries and wages.
(iv) an increase in administrative expenses from A$153,000 for the
year ended June 30, 1996 to A$212,000 (US$158,000) as a result of the costs
involved in the negotiation for the sale of Solmecs details of which are
set out in the section, "Item 1 -- Business -- General" and as a result of
an increase in marketing expenses incurred by Solmecs due to the beginning
of commercialisation of the Heatex shower programmer and control "thermo
Fix".
(v) a decrease in research and development from A$94,000 for the year
ended June 30, 1996 to A$72,000 (US$55,000) for the year ended June 30,
1997 due to a cost control program within Solmecs.
13
<PAGE> 15
(vi) a decrease in travel and accommodation from A$57,000 for the year
ended June 30, 1996 to A$34,000 (US$25,000) for the year ended June 30,
1997 due to a decrease in the foreign travel necessary as there was no
income from the Ilzro Project and a general control of costs.
As a result of the foregoing, the Company incurred a loss from operations
of A$1,057,000 (US$789,000) for the year ended June 30,1997 compared with a loss
of $A1,018,000 for the year ended June 30, 1996.
The Company recorded an unrealised foreign exchange gain of A$332,000
(US$248,000) for the year ended June 30,1997 compared with an unrealised foreign
exchange loss for the year ended June 30, 1996 of A$546,000. This was a result
of the movements in the exchange rate between the Australian dollar and the US
dollar. The Company's loan accounts are denominated in US dollars.
As a result of the foregoing, the Company recorded a loss before income tax
and amortisation of goodwill of A$727,000 (US$542,000) for the year to June
30,1997 compared with a loss of A$1,477,000 the year ended June 30, 1996.
The Company was not required to provide for income tax during the year
ended June 30, 1997 or 1996. Amortisation of goodwill A$533,000 (US$398,000) for
both 1997 and 1996. However, the Company has now fully amortised the goodwill
resulting from the initial purchase of Solmecs in 1987 and the financial results
will not be affected by amortisation of goodwill in future years.
As a result, the Company recorded a net loss of A$1,260,000 (US$940,000)
for the year ended June 30, 1997 compared with a net loss of A$2,010,000 for the
year ended June 30, 1996. This reduced the loss per Common Equivalent Share to
A$0.03 (US$0.02) from A$0.04. The weighted number of Common Equivalent Shares
Outstanding was unchanged.
YEAR ENDED JUNE 30, 1996 VERSUS YEAR ENDED JUNE 30, 1995
Revenues increased from A$82,000 for the year ended June 30, 1995 to
A$147,000 for the year ended June 30, 1996. Sales revenue increased from A$nil
for the year ended June 30, 1995 to A$30,000 for the year ended June 30, 1996 as
a result of the commencement of commercial activities of Solmecs. The other
income during the year ended June 30, 1996 comprised A$76,000 for contracting
services received from external parties and interest income amounting to
A$48,000 on a debt outstanding. There were no comparable amounts in the prior
year. In the year ended June 30, 1995 the other income represented grants from
the Israeli government for which there were no comparable amounts in the year
ended June 30, 1996.
Cost and expenses decreased approximately 8% from $1,229,000 for the year
ended June 30, 1995 to A$1,165,000 for the year ended June 30, 1996. The
significant changes in cost and expenses were as follows
(i) an increase in the cost of sales from A$nil for the year ended
June 30, 1995 to A$23,000 for the year ended June 30, 1996 which is
directly comparable to the increase in sales revenue as a result of the
commencement of commercial activities of Solmecs.
(ii) increase in the interest expense from A$67,000 for the year ended
June 30, 1995 to A$185,000 for the year ended June 30, 1996 as a result of
the increase in the level of debt of the Company as the Company was funded
by loans.
(iii) reduction in legal, accounting and professional expenses from
A$141,000 for the year ended June 30, 1995, to A$95,000 for the year ended
June 30, 1996. During the year the Company moved its offices in Israel from
Jerusalem to Beer-Sheva where the Ben-Gurion University was located and
achieved a reduction in costs by utilising cheaper office space.
(iv) reduction in salaries and wages from A$700,000 for the year ended
June 30, 1995 to A$544,000 for the year ended June 30, 1996. As discussed
under point (ii) above, the Company achieved savings as a result of the
move of its administrative offices from Jerusalem to Beer-Sheva and, at the
same time, was able to reduce the number of administration staff working
for Solmecs.
(v) decrease in research and development costs from A$129,000 for the
year ended June 30, 1995, to A$94,000 for the year ended June 30, 1996.
14
<PAGE> 16
(vi) increase in travel and accommodation from A$21,000 for the year
ended June 30, 1995, to A$57,000 for the year ended June 30, 1996.
As a result of the foregoing, the Company incurred a reduced loss from
operations of A$1,018,000 for the year ended June 30, 1996 compared to a loss of
A$1,147,000 for the year ended June 30, 1995.
An unrealised gain of A$2,000 was recorded on the Company's investments
during the year compared to an unrealised loss on the same investments of
A$14,000 in the year to June 30, 1995. This was a result of the Company's policy
of valuing investments at market value.
In 1995, the Company recorded a gain of A$125,000 on the disposal of a
significant portion of its investment in Solmecs Flow Ice Limited ("SFI") and
TFC. During that period the Company entered into an agreement with the former
managing director of Solmecs whereby Solmecs was released from liabilities to
SFI, TFC and the former managing director of Solmecs and in exchange the Company
agreed to transfer a 16.7% interest in SFI and a 24% interest in TFC to the
former managing director of Solmecs. The Company made a decision to concentrate
on the LMMHD Project which is the property of Solmecs and did not wish to invest
any funds or the time of its executives on the activities on SFI and TFC. As a
result, the Company was prepared to dispose of the above-mentioned interests in
SFI and TFC. There was no such disposal in the year ended June 30, 1996.
The Company realised a foreign currency exchange loss of A$546,000 for the
year ended June 30, 1996, compared to a foreign currency exchange gain of
A$109,000 for the year ended June 30, 1995. This was a result of the movements
in the exchange rate between the Australian dollar and the US dollar. The
Company's loan accounts are denominated in US dollars.
A debt owed to a subsidiary company was repaid during the 12 months ended
June 30, 1996. The subsidiary company had previously believed that it would not
be able to collect this receivable and provided for the amount as a doubtful
debt. As a result of the repayment, the subsidiary company recorded a gain of
A$79,000. There was no comparable amount in the year ended June 30, 1995.
As a result of the foregoing the Company recorded a loss before income tax
and amortisation of goodwill of A$1,477,000 (US$1,163,000) for the year ended
June 30, 1996 compared to a loss of A$927,000 for the year ended June 30, 1995.
The Company was not required to provide for income tax during the year
ended June 30, 1996 or the year ended June 30, 1995. Amortisation of goodwill
amounted to A$533,000 for the year ended June 30, 1996 compared to A$532,000 for
the year ended June 30, 1995.
As a result the Company recorded a net loss of A$2,010,000 for the year
ended June 30, 1996 compared to a net loss of A$1,459,000 for the year ended
June 30, 1995.
Certain amounts and details in this section headed "Year ended June 30,
1996 versus Year ended June 30, 1995" have been amended as a result of the
reclassification of financial information.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997 the Company had short term obligations of A$406,000
(US$303,000) consisting of accounts payable and accrued expenses.
The Company also has long term obligations of A$2,999,000 (US$2,237,000) at
June 30, 1997 which are amounts owed to Chevas of which Mr J I Gutnick,
President of Bayou, is a Director.
The Company anticipates it will be able to defer repayment of certain of
its short term loan commitments until it has sufficient liquidity to unable
these loans to be repaid or other arrangements can be put in place for repayment
of these debts. In addition, the Company has historically relied on loans and
advances from affiliates to meet the Company's cash flow requirements which
based on discussions with the affiliates the Company believes will continue to
be available during fiscal 1998 and 1999.
15
<PAGE> 17
As set out in "Item 1 -- Business -- Recent Developments" the Company is
negotiating the sale of Solmecs which will relieve the Company of its
requirements to fund the LMMHD project.
In the event that the sale of Solmecs does not proceed the Company will be
required to consider the ongoing operations of Solmecs.
Other than the arrangements noted above, the Company has not confirmed any
other arrangements for ongoing funding. As a result, the Company may be required
to raise funds by additional debt or equity offerings and/or increased revenues
for operations in order to meet its cash flow requirements during the
forthcoming year of which there can be no assurance.
The Independent Auditors' Report on the Company's audited financial
statements contains an explanatory paragraph with respect to the ability of the
Company to continue as a going concern.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION
REFORM ACT OF 1995.
Certain information contained in this Form 10-K are forward-looking
statements within the meaning of the Private Securities Litigation Act of 1995
(the "Act"), which became law in December 1995. In order to obtain the benefits
of the "safe harbour" provisions of the Act for any such forward-looking
statements, the Company wishes to caution investors and prospective investors
about significant factors which, among others, have in some cases affected the
Company's actual results and are in the future likely to affect the Company's
actual results and cause them to differ materially from those expressed in any
such forward-looking statements. This Form 10-K contains forward-looking
statements relating to future financial results. Actual results may differ as a
result of factors over which the Company has no control including the strength
of domestic and foreign economies, slower than anticipated completion of
research and development projects, and movements in foreign exchange rates.
INFLATION
To date the Company believes that inflation has not had a material adverse
impact on its operations in Australia. In the United States the Company's
activities to date have been principally related to the exploration preliminary
testing of certain mineral claims and, although the Company has not operated in
the United States during a period of significant inflation, management believes
that inflation would not have a material adverse affect on such operations in
this country.
SEASONALITY
Management believes that its operations are not subject to seasonal
fluctuation.
IMPACT OF AUSTRALIAN TAX LAW
Australian resident corporations are subject to Australian income tax on
their non-exempt worldwide assessable income which includes capital gains less
allowable deductions at the rate of 36%. Foreign tax credits are allowed where
tax has been paid on foreign source income provided the tax credit does not
exceed 36% of foreign source income.
Under the U.S./Australia tax treaty, a U.S. resident corporation, such as
the Company is subject to Australian income tax on net profits attributable to
the carrying on of a business in Australia through a "permanent establishment"
in Australia. A "permanent establishment" is a fixed place of business through
which the business of an enterprise is carried on. The treaty limits the
Australian tax on interest and royalties paid by an Australian business to a
U.S. resident to 10% of the gross interest or royalty income unless it relates
to a permanent establishment. Although the Company considers that it does not
have a permanent establishment in Australia, it may be deemed to have such an
establishment due to the location of its administrative offices in Melbourne. In
addition the Company may receive interest or dividends from time to time.
16
<PAGE> 18
IMPACT OF AUSTRALIAN GOVERNMENTAL, ECONOMIC, MONETARY OR FISCAL POLITICS
Although Australian taxpayers are subject to substantial regulation, the
Company believes that its operations are not materially impacted by such
regulations nor is it subject to any broader regulations or governmental
policies than most Australian taxpayers.
ITEM 8. NOT APPLICABLE
ITEM 9. NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Joseph I. Gutnick................ 45 Chairman of the Board, President, Chief Executive
Officer and Director
Henry Herzog..................... 56 Vice President and Director
Joseph Hayden Barry.............. 56 Vice President and Director
Eduard Eshuys.................... 52 Vice President and Director
David Tyrwhitt................... 59 Director
Peter Lee........................ 40 Director, Assistant Secretary, Chief Financial Officer
and Chief Accounting Officer.
</TABLE>
JOSEPH I. GUTNICK. Mr. Gutnick has been the Chairman of the Board,
President and Chief Executive Officer of the Company since March, 1988. Mr.
Gutnick has been a Director of numerous public companies in Australia since 1980
specialising in the mining sector including Great Central Mines Limited ("Great
Central") (whose American Depositary Shares are publicly traded in the United
States on NASDAQ pursuant to a sponsored ADR program), Centaur Mining &
Exploration Limited ("Centaur"), and Johnson's Well Mining N.L. ("Johnson's
Well") (whose ordinary shares are publicly traded in the U.S. in the over-the-
counter market).
HENRY HERZOG. Mr. Herzog served as the President and Chief Executive
Officer of the Company from May, 1986, to March, 1988. In March, 1988, Mr.
Herzog became a Vice President of the Company and Mr. Gutnick became President
and Chief Executive Officer of the Company. Mr. Herzog has served as a Director
of the Company since May 1986. Mr. Herzog was a Director of Australia Wide from
1982 to June 1988 and was a Director of numerous subsidiaries of Australia Wide
from 1983 to June 1988. Since 1991, he has been involved in hotel management,
consulting and investment.
JOSEPH HAYDEN BARRY. Mr. Barry was appointed a Director of the Company in
January, 1992. Mr. Barry is a Fellow of the Chartered Institute of Company
Secretaries in Australia Ltd, a Fellow of the Institute of Company Directors in
Australia and an Associate of the Chartered Institute of Management Accountants
in Australia. He holds a degree in Financial Control from the University of
Lancaster (UK) and is a Certified Practising Accountant. He has over 25 years
business experience. Mr. Barry is a Director and Company Secretary of several
publicly listed companies in Australia including Great Central (whose American
Depositary Shares are publicly traded in the United States on NASDAQ pursuant to
a sponsored ADR program), Centaur, and Johnson's Well (whose ordinary shares are
publicly traded in the U.S. in the over-the-counter market).
EDUARD ESHUYS. Mr. Eshuys has been a Director of the Company since June,
1991. Mr. Eshuys is a Fellow of the Australian Institute of Mining and
Metallurgy and a Fellow of the Institute of Company Directors in Australia. He
is a Geologist holding a Bachelor of Science degree from the University of
Tasmania. He has 20 years experience in mineral exploration and management and
in the development and
17
<PAGE> 19
operation of gold mines in Australia. Mr. Eshuys is a Director of several
publicly listed companies in Australia in the mining industry including Great
Central (whose American Depositary Shares are publicly traded in the United
States on NASDAQ pursuant to a sponsored ADR program), Centaur, and Johnson's
Well (whose ordinary shares are publicly traded in the U.S. in the
over-the-counter market).
DAVID STUART TYRWHITT. Mr. Tyrwhitt was appointed a Director of the
Company on November 15, 1996. He is a Geologist holding a Bachelor of Science
and he has 38 years experience in mineral exploration and management development
and operation of gold mines in Australia. Mr. Tyrwhitt is a Director of several
publicly listed companies in Australia in the mining industry including Great
Central (whose American Depositary Shares are publicly traded in the United
States on NASDAQ pursuant to a sponsored ADR program), Centaur and Johnson's
Well (whose ordinary shares are publicly traded in the U.S. in the over-the-
counter market).
PETER LEE. Mr. Lee has been Chief Financial Officer and Chief Accounting
Officer since August 1989 and was appointed as a Director on February 9, 1996.
Mr. Lee is a Member of the Institute of Chartered Accountants in Australia, a
Fellow of the Chartered Institute of Company Secretaries in Australia Ltd, and
holds a Bachelor of Business (Accounting) from Royal Melbourne Institute of
Technology. He has over 16 years commercial experience and is currently General
Manager Corporate of several publicly listed companies in Australia including
Great Central (whose American Depositary Shares are publicly traded in the
United States on NASDAQ pursuant to a sponsored ADR program), Centaur and
Johnson's Well (whose ordinary shares are publicly traded in the U.S. in the
over-the-counter market).
KEY PERSONNEL
The following persons, although not executive officers of the Company, make
significant contributions to the business of Solmecs.
DR. IAN SMITH is a member of the Scientific Advisory Panel of Solmecs and
is a Reader at the City University, London, and specialist in binary
thermodynamic cycles. Dr. Smith was the originator of the TFC technology.
HERMAN BRANOVER. Professor Branover is the Chief Scientist of Solmecs. He
graduated from Leningrad Polytechnical Institute in 1953 and earned a PhD and
DSc in MHD from the Moscow Aviation Institute in 1962. In 1971 he earned the
title of Full Professor from the Ministry of Higher Education of the former
U.S.S.R. and held various teaching and research positions within the former
U.S.S.R. in the field of MHD, fluid flow, turbulence and energy conversion.
In 1972 he left the former U.S.S.R. and accepted a full professorship in
the Department of Mechanical Engineering of the Ben-Gurion University of the
Negev, Israel, and a part-time professorship in the Department of Fluid,
Mechanics and Heat Transfer in the Tel Aviv University. In 1978 Professor
Branover was appointed as the Lady Davis Professor of Magnetohydrodynamics at
the Ben-Gurion University. He initiated the construction of the Liquid Metal MHD
Laboratories at the Ben-Gurion University and has been the head of these
laboratories since 1982.
In 1979 Professor Branover was invited to work as visiting scientist at the
Argaune National Laboratory in Chicago and since 1987 he has been an Adjunct
Professor of Applied Sciences Department at the New York University. Professor
Branover is a Delegate of the State of Israel to the UNESCO Liaison Group of
Magnetohydrodynamics.
Professor Branover has 14 patents registered to his name in the U.S.S.R.,
U.S.A. and Israel, has authored 17 books, and to date, has authored or
co-authored more than 200 scientific journal publications.
ITEM 11. EXECUTIVE COMPENSATION
No officer individually and no group of officers and Directors received any
compensation for their services on behalf of or rendered to the Company for the
fiscal year ended June 30,1997 other than is noted below.
18
<PAGE> 20
In accordance with the Service Agreement, the Company paid AWI Admin
A$16,500 for the fiscal year ended June 30, 1997, for services rendered and
facilities provided by AWI Admin to the Company including providing the services
of the Company's Chief Executive Officer and Chief Financial Officer.
For additional information about the Service Agreement and the Consulting
Agreement see "Item 1 -- Business -- Employees" and "Item 13 -- Certain
Relationships and Related Transactions".
The Board of Directors has established a policy that the Company will not
guarantee loans to or accept notes from officers, Directors, or employees of the
Company or any members of their families unless such loans or notes are approved
by a majority of the disinterested non-employee Directors of the Company who
shall determine that such loans may reasonably be expected to benefit the
Company.
COMPENSATION PURSUANT TO PLANS
The Company does not have any pension or profit sharing plans and no
contributions were made to any employee benefit or health plan during the year
ended June 30, 1997.
COMPENSATION OF DIRECTORS
It is the policy of the Company to reimburse Directors for reasonable
travel and lodging expenses incurred in attending Board of Directors meetings.
In the year ended June 30, 1997, one of the non-executive Directors was paid
A$16,000 for services as a Director and a further Director was paid a retirement
benefit of A$38,978 upon his retirement as a Director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best of the Company's knowledge, the
number of shares beneficially owned as of September 16, 1997, by (i) each of the
current Executive Officers and Directors of the Company; (ii) each person
(including any "group" as that term is defined in Section 13(d)(3) of the
Exchange Act) who beneficially owns more than 5% of the Common Stock, and (iii)
all current Directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OWNED PERCENT OF SHARES(1)
- ----------------------------------------------------- ---------------------- --------------------
<S> <C> <C>
Centaur.............................................. 5,076,000 10.8%
Mamash Ltd........................................... 5,426,388 11.6%
A.W.I. Administration Services Pty. Ltd. ............ 4,589,795 9.8%
Edensor Nominees Proprietary Limited................. 20,046,207 42.7%
Henry Herzog......................................... --(3)
Joseph I. Gutnick.................................... 21,079,207(2)(3) 44.9%
(4)(5)(6)
Stera M. Gutnick..................................... 20,566,207(4)(6) 43.8%
Eduard Eshuys........................................ 100(2) *
Hayden Barry......................................... --(2)
Peter Lee............................................ --(2)
David Tyrwhitt....................................... --(2)
All officers and directors as a group (7 persons).... 21,079,307 44.9%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock.
(l) Based upon 46,941,789 shares outstanding.
(2) Does not include (i) 941,651 shares of Common Stock beneficially owned by
Australia Wide or (ii) 5,076,000 shares of Common Stock beneficially owned
by Centaur or (iii) 178,985 shares of Common Stock beneficially owned by Mt.
Kersey Mining N.L. or (iv) 541,585 shares of Common Stock beneficially owned
by Australian Gold Resources Limited or (v) 38,376 shares of Common Stock
beneficially owned by Quantum Resources Limited, and (vi) 4,589,795 shares
of Common Stock owned
19
<PAGE> 21
by AWI Admin of which companies Messrs Gutnick, Tyrwhitt, Eshuys, Barry and
Lee are officers and/or Directors as they disclaim beneficial ownership to
those shares.
(3) Does not include 50,000 shares of Common Stock beneficially owned by Solmecs
of which Mr. Gutnick who is an officer and Director of Solmecs disclaims
beneficial ownership to those shares.
(4) Includes 20,046,207 shares of Common Stock owned by Edensor Nominees
Proprietary Limited and 520,000 shares of Common Stock owned by Pearlway
Investments Pty. Ltd. of which Joseph I. Gutnick, Stera M. Gutnick and
members of their family are officers, Directors and principal stockholders.
(5) Joseph I. Gutnick is the beneficial owner of 513,000 shares.
(6) Joseph I. Gutnick and Stera M. Gutnick are husband and wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with the Service Agreement, AWI Admin provides the Company
with the services of the Company's Chief Executive Officer, Chief Financial
Officer and clerical employees as well as office facilities, equipment,
administrative and clerical services. As compensation therefore, the Company
pays AWI Admin for the actual cost of such facilities and services plus a
maximum service fee of 15%. The Company paid AWI Admin A$16,500 in respect of
the Service Agreement for fiscal 1997. The Service Agreement may be terminated
by written notice by either party.
Transactions with Management. The Company has a policy that it will not
enter into any transaction with an officer, Director or affiliate of the Company
or any member of their families unless the transaction is approved by a majority
of the disinterested Directors of the Company and the disinterested majority
determines that the terms of the transaction are no less favourable to the
Company than the terms available from non-affiliated third parties or are
otherwise deemed to be fair to the Company at the time authorised.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules
The Financial Statements and schedules listed on the Index to
Financial Statements at page F-l of this Annual Report on Form 10-K are
filed as a part of this Annual Report.
The Financial Data schedule as required by Item 601(c) of Regulation
SK is filed as part of this Annual Report.
(a) (3) Exhibits
The Exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index at page 33 of this Annual Report.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorised.
BAYOU INTERNATIONAL, LTD.
(Registrant)
By: /s/ JOSEPH GUTNICK
------------------------------------
Joseph Gutnick
President
Dated: October 1, 1997
21
<PAGE> 23
[FORM 10-K SIGNATURE PAGE]
Pursuant to the requirements Of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------- -----------------
<S> <C> <C>
/s/ JOSEPH GUTNICK Chairman of the Board, October 1, 1997
- ------------------------------------------ President and Chief Executive
Joseph Gutnick Officer (Principal Executive
Officer) and Director
/s/ PETER LEE Director, Assistant October 1, 1997
- ------------------------------------------ Secretary, Chief Financial
Peter Lee Officer and Principal
Financial and Accounting
Officer
/s/ HENRY HERZOG Vice President and Director October 1, 1997
- ------------------------------------------
Henry Herzog
/s/ DAVID TYRWHITT Vice President and Director October 2, 1997
- ------------------------------------------
David Tyrwhitt
/s/ JOSEPH HAYDEN BARRY Vice President and Director October 1, 1997
- ------------------------------------------
Joseph Hayden Barry
/s/ EDUARD ESHUYS Vice President and Director October 1, 1997
- ------------------------------------------
Eduard Eshuys
</TABLE>
22
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NO.
INCORPORATED BY EXHIBIT SEQUENTIAL
REFERENCE TO NO. EXHIBITS NO. SYSTEM
- ------------------- ------- ------------------------------------------------- ----------
<S> <C> <C> <C>
(1) Exhibit 3.1 3.1 Certificate of Incorporation of the Registrant.
(1) Exhibit 3.2 3.2 By-laws of the Registrant.
(2) Exhibit B 3.3 Amendment to Certificate of Incorporation
(3) Exhibit 10.5 10.4 Service Agreement dated November 25, 1988, by and
between the Registrant and AWI Administration
Services Pty. Ltd.
*21 List of Subsidiaries
*99 Reports of other Accountants upon whom the
Principal Accountant is relying.
</TABLE>
- ---------------
* Filed herewith.
(1) Registrant's Registration Statement on Form S-l (File No. 33-14784).
(2) Registrant's Definitive Information Statement dated April 10, 1997.
(3) Registrant's Annual Report on Form 10-K for the fiscal year ended June 27,
1989.
23
<PAGE> 25
BAYOU INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(WITH INDEPENDENT AUDITOR'S REPORT)
<PAGE> 26
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditor......................................................... 1
Consolidated Balance Sheets........................................................... 2
Consolidated Statements of Operations................................................. 3
Consolidated Statements of Stockholders' Equity....................................... 4
Consolidated Statements of Cash Flows................................................. 5
Notes to Consolidated Financial Statements............................................ 6-10
</TABLE>
<PAGE> 27
DAVID T. THOMSON P.C. CERTIFIED PUBLIC ACCOUNTANT
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Bayou International, Ltd
I have audited the accompanying consolidated balance sheets of Bayou
International, Ltd (a Delaware corporation) and Subsidiary at June 30, 1997 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these consolidated financial statements based on my
audits. I did not audit the financial statements of Solmecs Corporation, N.V., a
subsidiary of Bayou International, Ltd., which statements reflect total assets
of A$166,151, A$180,997 and A$286,065 as of June 30, 1997, 1996 and 1995,
respectively and total revenues of A$76,744, A$147,367 and A$82,175,
respectively, for the years then ended. Those statements were audited by other
auditors whose reports have been furnished to me, and my opinion, insofar as it
relates to the amounts included for Solmecs Corporation, N.V., is based solely
on the reports of the other auditors.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audits and the reports of other auditors provide a reasonable
basis for my opinion.
In my opinion, based on my audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Bayou International, Ltd. And
Subsidiary at June 30, 1997 and 1996 and the results of its operations and its
cash flows for each of three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiary will continue as going concerns. As
discussed in Note (8) to the consolidated financial statements, the Company and
its subsidiary have suffered recurring losses from operations, have no net
working capital and have stockholders' deficits. These factors raise substantial
doubt as to the consolidated entities, ability to continue as going concerns.
Management's plans in regard to these matters are discussed in Note(8). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ David T. Thomson P.C.
Salt Lake City, Utah
September 12, 1997
180 South 300 West, Suite 329, Salt Lake City, Utah 84101 (801) 328-3900
1
<PAGE> 28
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
AUSTRALIAN DOLLARS CONVENIENCE
------------------- TRANSLATION
A$000'S A$000'S US$000'S
1996 1997 1997
------- ------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... 73 53 40
Accounts Receivable, net.................................. 53 63 47
Investments............................................... 3 -- --
------- ------- -------
Total Current Assets.............................. 129 116 87
------- ------- -------
Other Assets:
Property and Equipment, net 55 51 38
Goodwill, net............................................. 533 -- --
------- ------- -------
Total Other Assets................................ 588 51 38
------- ------- -------
Total Assets...................................... 717 167 125
------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses..................... 346 406 303
------- ------- -------
Total Current Liabilities......................... 346 406 303
Long-Term Debt.............................................. 1,998 2,999 2,237
------- ------- -------
Total Liabilities................................. 2,344 3,405 2,540
------- ------- -------
Stockholders' Equity (Deficit):
Common stock: $0.20 par value 100,000,000 shares
authorised, 46,941,789 shares issued and outstanding... 9,388 9,388 7,003
Additional Paid-in-Capital................................ 11,592 11,592 8,646
Retained Deficits......................................... (22,531) (23,791) (17,745)
------- ------- -------
Total Stockholders' Deficit....................... (1,627) (3,238) (2,415)
------- ------- -------
Total Liabilities and Stockholder's Equity........ 717 167 125
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 29
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
A$000'S A$000'S A$000'S US$000'S
1995 1996 1997 1997
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Revenues
Sales............................................... -- 30 66 49
Other Income........................................ 82 117 11 8
------ ------ ------ ------
82 147 77 57
------ ------ ------ ------
Cost and expenses
Cost of sales....................................... -- 23 63 47
Interest Expense.................................... 67 185 259 193
Legal, Accounting Professional...................... 141 95 89 66
Depreciation & Amortisation......................... 15 14 12 9
Salaries & Wages.................................... 700 544 393 293
Administrative...................................... 156 153 212 158
Research and Development............................ 129 94 72 55
Travel and Accommodation............................ 21 57 34 25
------ ------ ------ ------
1,229 1,165 1,134 846
------ ------ ------ ------
Loss from Operations................................ (1,147) (1,018) (1,057) (789)
------ ------ ------ ------
Unrealised Gain (Loss) on Investments............... (14) 2 -- --
Gain (Loss) on Disposition of Assets................ 125 6 (2) (1)
Foreign Currency Exchange Gain...................... 109 (546) 332 248
Bad Debt (Expense) Recovery......................... -- 79 -- --
------ ------ ------ ------
220 (459) 330 247
------ ------ ------ ------
Loss before Income Tax and Amortisation of
Goodwill.......................................... (927) (1,477) (727) (542)
Provision for Income Tax............................ -- -- -- --
------ ------ ------ ------
Loss before Amortisation of Goodwill................ (927) (1,477) (727) (542)
Amortisation of Goodwill............................ (532) (533) (533) (398)
------ ------ ------ ------
Net Loss............................................ (1,459) (2,010) (1,260) (940)
====== ====== ====== ======
Earnings (Loss) per Common Equivalent Share......... (0.3) (0.4) (.03) (.02)
====== ====== ====== ======
Weighted Number of Common Equivalent Shares
Outstanding....................................... 46,942 46,942 46,942 46,942
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 30
BAYOU INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON RETAINED CUMULATIVE
ADDITIONAL STOCK PAID-IN TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL ADJUSTMENTS (DEFICIT)
---------- ------------ -------- ----------- --------
A$000'S A$000'S A$000'S A$000'S A$000'S
<S> <C> <C> <C> <C> <C>
Balance June 30, 1994.............. 46,942 9,388 11,592 (518) (19,062)
Net Loss........................... -- -- -- -- (1,459)
Foreign Currency Translation....... -- -- -- (126) --
------ ----- ------ ---- -------
Balance June 30, 1995.............. 46,942 9,388 11,592 (644) (20,521)
Net Loss........................... -- -- -- -- (2,010)
Foreign Currency Translation....... -- -- -- 568 --
------ ----- ------ ---- -------
Balance June 30, June 1996......... 46,942 9,388 11,592 (76) (22,531)
Net Loss........................... -- -- -- -- (1,260)
Foreign Currency Translation....... -- -- -- (351) --
------ ----- ------ ---- -------
Balance June 30, 1997.............. 46,942 9,388 11,592 (427) (23,791)
====== ===== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 31
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
A$000'S A$000'S A$000'S US$000'S
1995 1996 1997 1997
------ ------ ------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss............................................. (1,459) (2,010) (1,260) (940)
Adjustments
Foreign Currency Translation......................... (126) 568 (351) (262)
Depreciation & Amortisation.......................... 547 547 545 407
(Gain) Loss on Disposal of Assets.................... (9) (6) 2 1
Unrealised Gain (Loss) on Investments................ -- (2) -- --
Recovery (Provision) for Bad debt.................... -- 79 -- --
Net Change In :
Accounts Receivable.................................. 60 33 (10) (7)
A/P & Accrued Expenses............................... 62 (335) 60 45
------ ------ ------ ----
Net Cash Provided by (Used in) Operating
Activities......................................... (925) (1,126) (1,014) (756)
------ ------ ------ ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures................................. (22) (7) (8) (6)
Net Proceeds from Investments........................ (35) (2) 1 1
------ ------ ------ ----
Net Cash Provided by (Used in) Investing
Activities......................................... (57) (9) (7) (5)
------ ------ ------ ----
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of Long Term Debt.......................... -- -- -- --
Net Borrowing under Credit Line Arrangements......... 32 (73) -- --
Borrowing From Affiliates............................ 788 1,210 1,001 747
New Borrowing........................................ -- -- -- --
------ ------ ------ ----
Net Cash Provided by (Used in) Financing
Activities......................................... 820 1,137 1,001 747
------ ------ ------ ----
Net Increase (Decrease) in Cash...................... (162) 2 (20) (14)
Cash at Beginning of Year............................ 233 71 73 54
------ ------ ------ ----
Cash at End of Year.................................. 71 73 53 40
====== ====== ====== ====
Supplemental Disclosures
Common Stock Issued in Lieu of Debt Repayment........ -- -- -- --
Interest Paid (Net Capitalised)...................... -- 15 256 191
Income Taxes Paid.................................... -- -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 32
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) ORGANIZATION
Bayou International, Ltd. ("Bayou") is incorporated in the State of
Delaware. The principal shareholder of Bayou is Edensor Nominees Proprietary
Limited ("Edensor"), an Australian corporation. Edensor owned 42.7% of Bayou as
of June 30, 1997.
Bayou's subsidiary is Solmecs Corporation N.V. ("Solmecs"), which it
acquired a controlling interest of on September 3, 1987 and 100% ownership on
January 2, 1992.
Bayou is primarily engaged in the research and development of high
efficiency, low pollution or pollution-free products and technologies in the
energy conversion and conversation fields through its 100%-owned subsidiary
Solmecs. All revenue is from contracted services provided by Solmecs. Almost all
of Bayou's operating expenses are of a general and administrative and research
and development nature.
(2) ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in connection with the preparation of the consolidated financial statements.
(a) Consolidation
The consolidated financial statements include the accounts of Bayou
and the 100% interest it holds in Solmecs Corporation N.V.
All significant intercompany transactions and balances have been
eliminated in consolidation.
(b) Revenue Recognition
Research grants and contracts are recognised at the time granted and
commercial sales through Bayou's subsidiary are recognised on an accrual
basis.
(c) Foreign Currency Translation
The majority of Bayou's administrative operations are in Australia and
as a result its accounts are maintained in Australian dollars. The income
and expenses of its foreign operations are translated into Australian
dollars at the average exchange rate prevailing during the period. Assets
and liabilities of the foreign operations are translated into Australian
dollars at the period-end exchange rate.
(d) Financial Instruments
The following methods and assumptions were used by Bayou to estimate
the fair values of financial instruments as disclosed herein:
(i) Cash and Equivalents -- The carrying amount approximates fair
value because of the short period to maturity of the instruments.
(ii) Investment Securities -- For both trading securities and
available-for-sale securities, the carrying amounts approximate fair
value which is based on quoted market prices.
(iii) Long-term Debt -- The fair value of long-term debt is
estimated based on interest rates for the same or similar debt offered
to Bayou having the same or similar remaining maturities and collateral
requirements.
6
<PAGE> 33
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Investment Securities
Management determines the appropriate classification of investment
securities at the time they are acquired and evaluates the appropriateness
of such classification at each balance sheet date. The classification of
these securities and the related accounting policies are as follows:
(i) Trading securities are held for resale in anticipation of
short-term fluctuations in market prices. Trading securities consisting
primarily of actively traded marketable equity securities are stated at
fair value. Realised and unrealised gains and losses are included in
income.
(ii) Available-for-sale securities consist of marketable equity
securities not classified as trading securities. Available-for-sale are
stated at fair value and unrealised holding gains and losses net of the
related deferred tax effect, are reported as a separate component of
stockholders' equity.
(iii) Dividends on marketable equity securities are recognised in
income when declared. Realised gains and losses are included in income.
Realised gains and losses are determined on the actual cost of the
securities sold.
(f) Cash and Cash Equivalents
Bayou considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. For the
periods presented there were no cash equivalents. There were no non-cash
investing or financing activities.
(g) Property and Equipment
Property and equipment is stated at the lower of historical cost or
market or in the case of acquisitions from related parties at the lower of
historical cost to the related party or market. Depreciation is computed
over a period covering the estimated useful life of the applicable property
and equipment.
(h) Income Tax
Income taxes are provided on financial statement income. For the
periods presented there was no taxable income. There are no deferred income
taxes resulting from timing differences in reporting certain income and
expense items for income tax and financial accounting purposes. Bayou at
this time is not aware of any net operating losses which are expected to be
realised.
(i) Earnings (loss) per share
Primary (loss) per share is computed based on the weighted average
number of common shares and common share equivalents outstanding during the
period.
(j) Goodwill
Goodwill principally from the acquisition of Solmecs in 1987 and 1992
represents the excess of cost over fair value of net assets acquired and is
being amortised over ten years using the straight-line method.
(k) Convenience Translation to US$
The consolidated financial statements at June 30, 1997 have been
translated into United States dollars using the rate of exchange of the
United States dollar at June 30, 1997 (AUS $1.00=US $.7459). The
translation was made solely for the convenience of readers in the United
States.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
7
<PAGE> 34
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(m) Research and Development
Research and development costs are charged to operations as incurred.
<TABLE>
<CAPTION>
A$000'S A$000'S
1996 1997
------- -------
<S> <C> <C>
(3) ACCOUNTS RECEIVABLE
Accounts Receivable at June 30, 1996 and 1997 includes:
Miscellaneous Receivables......................................... 53 63
Less Allowance for Doubtful Account............................... -- --
---- ----
Net............................................................... 53 63
==== ====
(4) INVESTMENT SECURITIES
The following is a summary of Investment Securities, 1996 and 1997:
Trading Securities:
Marketable Equity Securities, at cost............................. 1 --
Gross Unrealised Gains............................................ 2 --
Gross Unrealised Losses........................................... -- --
---- ----
Marketable Equity Securities, at fair value....................... 3 --
==== ====
(5) PROPERTY
Property at June 30, 1996 and 1997 includes:
Office Furniture & Equipment...................................... 170 185
Motor Vehicles.................................................... 38 40
---- ----
208 225
Less Accumulated Depreciation..................................... (153) (174)
---- ----
55 51
==== ====
</TABLE>
8
<PAGE> 35
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) SHORT TERM AND LONG-TERM DEBT
The following is a summary of Bayou's borrowing arrangements as of June 30,
1996 and 1997.
<TABLE>
<CAPTION>
A$000'S A$000'S
1996 1997
------- -------
<S> <C> <C>
LONG TERM
Loan from corporations affiliated with the President of Bayou.
Interest accrues at the ANZ Banking Group Limited rate +1% for
overdrafts over $100,000. Repayment of loan not required before
June 30, 1998. .................................................. 1,998 2,999
SHORT-TERM
Overdraft arrangement with balance.................................
Accruing interest.................................................. -- --
Notes Payable -- Affiliates........................................ -- --
----- -----
Total.................................................... 1,998 2,999
===== =====
</TABLE>
(7) AFFILIATE TRANSACTIONS
Bayou advances to and receives advances from various affiliates. All
advances between consolidated affiliates are eliminated on consolidation. At
June 30, 1997 Bayou had no outstanding advances to or from unconsolidated
affiliated companies. $125,000, $68,000 and $14,000 of accounts payable for the
years shown is due to an affiliated management company.
(8) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of Bayou and Solmecs as going concerns. However, both Bayou and
Solmecs have sustained recurring losses. In addition, neither Bayou or Solmecs
have any net working capital and both have retained stockholders' deficits,
which raises substantial doubts as to their ability to continue as going
concerns.
Bayou anticipates that it will be able to defer repayment of certain of its
short term loan commitments until it has sufficient liquidity to enable these
loans to be repaid or other arrangements to be put in place.
In addition Bayou has historically relied on loans and advances from
corporations affiliated with the President of Bayou. Based on discussions with
these affiliate companies, Bayou believes this source of funding will continue
to be available.
Other than the arrangements noted above, Bayou has not confirmed any other
arrangement for ongoing funding. As a result Bayou may be required to raise
funds by additional debt or equity offerings in order to meet its cash flow
requirements during the forthcoming year.
(9) COMMITMENTS
Solmecs has entered into the following commitments:
(a) B.G. Negev Technology and Application Ltd. (AP) and the Ben-Gurion
University of the Negev -- The Research and Development Authority (RDA),
jointly and severally (APRDA):
In accordance with an agreement dated November 5, 1981, between
Solmecs, Ben-Gurion University and APRDA, Solmecs' subsidiary is continuing
research and development (R&D) projects which were previously carried out
by APRDA on the campus of Ben-Gurion University. It was further agreed that
the University would enable the projects to continue on its campus in
consideration for a fee
9
<PAGE> 36
BAYOU INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the use of the facilities. Solmecs owns the patents connected with
these projects and agreed to pay royalties to APRDA at the rate of 1.75% on
sales of products and at the rate of 11.5% on income from licensing fees.
Solmecs also agreed to assume the obligations of APRDA to pay
royalties to the Ministry of Energy on products developed from these R&D
projects for its participation in the research and development cost of
APRDA. As of June 30, 1997, this liability amounted to approximately
US$308,000 (including linkage to the Consumer Price Index and interest at
4% per annum). Subsequent to the repayment of the liability, Solmecs is to
pay royalties to the Ministry of Energy (ME) at a reduced rate.
Through June 30, 1997, there were no sales or income on which royalties
were payable to APRDA or the ME.
(b) International Lead Zinc Research Organisation (ILZRO)
In connection with a research contract with ILZRO, Solmecs' subsidiary
agreed to pay ILZRO a fee for any lead used in future production by the
subsidiary. The total fee commitment is limited to US$1,864,000. Through
June 30, 1997, the subsidiary has not used any lead for which it is
required to pay fees.
(c) Chief Scientist of the Government of Israel
For the period from 1981 to 1991, Solmecs' subsidiary received
participation from the Chief Scientist of $2,274,420 towards the cost of a
research and development project. In return, the subsidiary is required to
pay royalties at the rate of 2% of sales of know-how or products derived
from the project. Through June 30, 1997, no royalties were payable.
(10) SUBSEQUENT EVENT
In March 1997, Bayou commenced negotiations with SCNV Acquisition Corp
("SCNV") for the sale of Bayou's subsidiary Solmecs to SCNV. A letter of intent
was signed on May 5, 1997 and agreements to effect the sale are in the process
of being negotiated. It is intended that, as part of the sale of Solmecs, Bayou
will acquire a 24% interest in SCNV.
The sale of Solmecs is subject to the approval of shareholders of Bayou.
Following the signing of formal contracts for the sale of Solmecs, Bayou will
prepare and distribute an Information Memorandum for the purpose of seeking
shareholder approval.
10
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
1. Solmecs Corporation N.V., a Netherlands Antilles Corporation
(100% -- owned).
2. Solmecs (Israel) Ltd., an Israeli Corporation (100% owned through
Solmecs Corporation N.V.)
3. Heatex Ltd, an Israeli Corporation (85% owned through Solmecs (Israel)
Ltd).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REPORT ON FORM 10-K OF BAYOU INTERNATIONAL LTD FOR THE YEAR ENDED JUNE 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> AUSTRALIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> .7459
<CASH> 53
<SECURITIES> 0
<RECEIVABLES> 63
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 116
<PP&E> 225
<DEPRECIATION> (174)
<TOTAL-ASSETS> 167
<CURRENT-LIABILITIES> 406
<BONDS> 2999
0
0
<COMMON> 9,388
<OTHER-SE> 11,592
<TOTAL-LIABILITY-AND-EQUITY> 167
<SALES> 66
<TOTAL-REVENUES> 77
<CGS> 63
<TOTAL-COSTS> 63
<OTHER-EXPENSES> 812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> (727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (533)
<NET-INCOME> (1,260)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
<PAGE> 1
LUBOSHITZ,
KASIERER & CO
ARTHUR ANDERSEN
AUDITORS' REPORT TO THE SHAREHOLDERS
OF
SOLMECS CORPORATION N.V.
We have audited the accompanying balance sheets of SOLMECS CORPORATION N.V.
(the "Company") of June 30, 1997 and 1996, and the related statements of
operations, changes in shareholders' deficiency and cash flows for the year then
ended. These financial statements are the responsibility of the Company's Board
of Directors and management. Our responsibility is to express an opinion on
these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audits in
accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether caused by an error in the financial statements or by an
irregularity therein. 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 the Company's Board of Directors and management, as well as evaluating
the overall financial presentation. We believe that our audit provides a fair
basis for our opinion.
As discussed in Note 11, a liability in the amount $200,000 was written off
to income in a prior year. We were unable to obtain any documentary evidence
supporting the writeoff or management's belief that the liability will not have
to be repaid.
As more fully discussed in Note 2, the Company prepares its financial
statements in US dollars.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to obtain evidence
regarding the liability described above, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position as of June 30, 1997 and 1996, and the results of operations, changes in
shareholders' deficiency and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
We draw attention to the matter discussed in Note x. The Company has
incurred substantial operating losses, and at June 30, 1997, the Company has an
accumulated deficient of approximately $12.7 million and a shareholders'
deficiency of approximately $5.1 million. The Company's ability to continue as a
going concern is dependent on obtaining the financing necessary for its
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Certified Public Accountants (Isr.)
Beer-Sheva, August 29, 1997
