UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT
OF 1934 [Fee Required] For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period from ______________ to
_____________.
Commission file Number 0-25384
LAFAYETTE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3190678
(State or other jurisdiction of incorporation or o(I.R.S.tEmployer
Identification Number)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 233-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of March 31, 1997
------------------- ---------------------------------------
Common Stock, par value 0.01 per share 13,440,000
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 for the past 90 days. Yes X No ___
Indicate by a 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. [ ]
For fiscal year ended December 31, 1996, the Company had revenues of $6,073,000.
As of March 31, 1997, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $12,926,158.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 and 11 are incorporated by reference to registrant's proxy statement to
be filed with the Commission within 120 days from the end of the registrant's
fiscal year.
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Item 1. Business
Introduction
Since December 20, 1996, the principal business of Lafayette Industries, Inc.,
(the "Company" or "Lafayette") has consisted of four primary business segments:
(1) Electro-Mechanical and Electro-Optical Products Manufacturing which consists
of subsidiaries that manufacture and sell products such as devices that measure
distance and velocity, instrumentation devices and debit card vending machines;
(2) Audio Products Manufacturing which consists of a subsidiary that
manufactures and sells a professional line of loudspeakers; (3) Prepaid
Telephone Calling Cards, which consists of a subsidiary that sells telephone
debit cards; and (4) Fingerprint Identification Products which consists of a
subsidiary that is developing a fingerprint identification system. During the
years ended December 31, 1996, 1995 and 1994, the Company's segments revenue as
a percentage of total was as follows:
1996 1995 1994
---- ---- ---
Audio Products Manufacturing 53% 14% --
Electro-Mechanical and Electro-Optical Products
Manufacturing 39 86% 100%
Prepaid Telephone Calling Cards 8% -- --
Fingerprint Identification Product -- -- --
Additional financial information regarding the Company's business segments is
presented in the Company's financial statements including revenues, operating
income or loss and identifiable assets attributable to each of the Company's
business segments. Lafayette's revenue and net loss reflect the consolidated
revenue and results of operations of its subsidiaries.
All of Lafayette's operating subsidiaries are indirectly owned or controlled
through SES Holdings, Corp., ("SESH"), which is a Delaware corporation that was
organized in July 1992 and is a wholly owned subsidiary of Lafayette. Set forth
below is a description of the Company's business segments.
AUDIO PRODUCTS MANUFACTURING
The audio products manufacturing segment reflects the operations of WWR
Technology, Inc., ("WWR"), which is a wholly owned subsidiary of SESH. WWR was
incorporated in 1992 for the purpose of acquiring the professional products
business segment of the Klipsch(tm) loudspeaker line from Klipsch and
Associates, Inc. ("KA"). WWR acquired the inventory, tooling, equipment and
certain licenses from KA as part of such purchase. The predecessor to KA was
founded in the mid 1940's by Paul W. Klipsch and has established itself as a
leader in loudspeaker design and innovation. KA's primary market traditionally
has been the home high fidelity loudspeaker business. Concurrently, it has
developed a reputation as a manufacturer of rugged, well designed loudspeakers
for the professional, commercial and theater sound markets. The acquisition of
the Klipsch(tm) Professional product line gives WWR one of the most
long-established and, WWR believes, recognizable brand names in the industry.
After WWR's acquisition of the Klipsch(tm) professional loudspeaker line from
KA, KA continued to manufacture products and provide other related services to
WWR pursuant to a manufacturing agreement between WWR and KA. In August 1994,
WWR entered into a lease for a manufacturing facility in Hope, Arkansas and
between August and October 1994 moved all of its manufacturing and related
services into the newly leased facility. In connection with the completion of
this move, the manufacturing agreement with KA was terminated.
The nature of WWR's business is to market and sell loudspeakers and related
products to the professional audio market. The professional audio market is
defined as any application for loudspeakers other than those used for home and
automotive entertainment purposes. Generally, this is a definition of the
difference between "home entertainment" and commercial sound reproduction. As
part of the future development of commercial sound reproduction, WWR believes
that the application of digitally controlled and processed signals to control
and enhance the performance of professional loudspeakers will become a
significant factor in the marketplace. WWR believes it has access to the
resources needed, on an as-needed contractual basis with original equipment
manufacturers, to successfully develop these products although there can be no
assurance that it will be able to do so.
Markets and Marketing
Products are sold through a network of domestic and international independent
manufacturers' representatives, who are compensated on a commission basis to
retailers, distributors, sound contractors installers and occasionally to end
users. WWR assumed the responsibility for international sales from KA in the
spring of 1993, and such sales currently constitute a significant portion of
WWR's total sales. During 1996, 1995 and 1994 international sales constituted
approximately 20%, 20% and 23% of total sales, respectively. International sales
are made to appointed distributors in individual countries and the distributors
resell and service the products within their respective countries.
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The Markets for the products include, but are not limited to: contractor
installation of sound systems, paging systems, musical instrument sound
re-enforcement, public address, concert sound, fixed installation, touring
sound, theater and sound re-enforcement. End users of the products include:
churches, synagogues, stadiums, concert halls, restaurants, schools, musical
performers, movie theaters and all other applications where information and/or
entertainment is presented to the public in a commercial venue.
The contractor installation market is comprised of customers of WWR. These
customers bid on installation of audio systems based on specifications provided
by acoustical consultants in the process of designing or renovating commercial
properties, restaurants, nightclubs, churches, concert halls, stadiums and other
similar buildings. The requirements for each project vary according to the need
and purpose of the facility and the sound systems and the types of loudspeakers
range from small speakers for simple paging systems to very large speakers for
concert halls, theaters or stadiums. WWR sees this market as having significant
growth potential for its products and has developed and continues to develop
products targeted to the various needs of this market.
The musical instrument market includes retail sale of products to professional
and amateur musicians. Loudspeakers in this market have two general purposes:
(1) the reproduction of amplified or electronic instruments, and (2) the
re-enforcement of voice and acoustic instruments. A portion of WWR's product
line is targeted specifically to this product and the product line for this
market has been expanded by WWR with new loudspeakers introduced in 1994 and
plans to continue to introduce additional new products in 1995.
The motion picture theater market has improved over the past few years as a
result of the increase in the number of motion pictures including digital film
sound tracks. Digital based sound reproduction systems were subsequently
introduced in motion picture theaters and while there has been little new
construction of movie theaters, the current trend is to upgrade the sound
reproduction systems in current theaters. WWR is upgrading its motion picture
product line to meet the needs of this market. The concert and touring sound
market is comprised of two segments: (1) the tours of the "big" name
entertainers handled by major international touring sound companies, and (2) the
smaller regional or national sound companies that provide services to lesser
known performers and events. While there are significant sales in the major
international touring sound companies market as a whole, the loudspeaker portion
is dominated by the proprietary enclosure (cabinet) designs of the large touring
sound companies using the raw frame components made by original equipment
manufacturers, including WWR. WWR has a number of raw frame component drivers
that have significant potential in this market. Success in this portion of the
market must be viewed as a marketing tool; by having its products selected for
use on major tours, WWR has the opportunity to be associated with the success of
the tour and/or the artist. The smaller regional touring companies represent a
greater opportunity for WWR as these customers are not as likely to be building
their own enclosures and, therefore, purchase whole speaker systems.
New Products
WWR is engaged in market research to determine the specific needs of the end
user so as to develop new market oriented products. Two new trapezoidal shaped
loudspeakers have been introduced for use in various commercial applications.
Currently under development are the following: a new line of loudspeakers
designed for the musical instrument market, two new medium format (size) horns
for use in fixed installations and updating of the motion picture product line
utilizing newly developed components. A line of loudspeakers designed for the
musical instrument market were put into production and became available for
purchase in October 1994 and it is expected that the new construction techniques
and materials for this line of loudspeakers will enable WWR to achieve higher
gross profit margins.
Competition
The industry is comprised of a large number of competing manufacturers, the
majority of which are of little overall impact in the market. Generally, the
smaller firms specialize in selected portions of the market as opposed to
offering a wide array of products. However, there are two dominant competitors
in the overall professional loudspeaker industry - Harmon International
Industries, Inc. (Harmon) which owns a number of product lines including JBL and
Mark IV industries, Inc. which owns Electro Voice (EV), Altec Lansing (Altec)
and University Sound (University). Other competitors include, but are not
limited to, Bose Corporation, Peavey Electronics, Inc., Apogee Sound, Inc.,
Meyer Sound Laboratories, Inc. and Eastern Acoustic Works, Inc. WWR provides
high quality products for all segments of the market but, due to the relatively
smaller size of the product line offered by WWR, it is not able to compete with
JBL and EV on a model by model basis. It is the plan of WWR to continue niche
marketing, while expanding is product offerings as business conditions allow.
WWR's general pricing policy and distribution is to offer its high quality
products at competitive prices and to limit the distribution of Klipsch(tm)
Professional products to a selected group of retail and contractor customers. By
doing so, WWR is able to position Klipsch(tm) Professional as a "limited
distribution" product line offering the contractor and retailer the opportunity
to differentiate themselves in the range of products they offer and to further
enhance their profit margins by offering products that are not as easily
"shopped for price".
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Licenses
As part of the purchase of substantially all of the assets of the Klipsch(tm)
Professional loudspeaker business from KA, WWR received a non-exclusive
trademark license for the use of KA's trademark "Klipsch(tm)" in conjunction
with various professional loudspeaker products ("Licensed Products") provided
that the trademark is used only in combination with the terms "Professional
Loudspeakers," "Professional Products," "Pro Loudspeakers," Pro Products" or a
similar designation pre-approved by KA. WWR also has agreed to indicate that
"Klipsch(tm)" is a registered trademark of KA. The licenses are world-wide and
royalty free, and KA has agreed not to grant licenses and/or otherwise permit
others to use in the professional market the trademarks and certain design
patents licensed to WWR. However, the licenses are terminable if WWR defaults in
certain of their respective obligations to KA, becomes bankrupt or insolvent or
reorganizes or ceases to use the "Klipsch(tm)" trademark for 18 or more
consecutive months. The loss of these licenses would effectively eliminate the
ability of WWR to continue to sell under the Klipsch(tm) Professional brand,
however it would not prohibit WWR from seeking other professional loudspeaker
products to distribute through its distribution network. WWR believes that,
while WWR's relationship with KA is good, there can be no assurance that there
will be no future developments which will cause a termination of the licenses.
Employees
As of December 31, 1996 WWR had 42 employees None of WWR's employees are
represented by a labor organization, and WWR believes that its employee
relations are good.
ELECTRO-MECHANICAL AND ELECTRO-OPTICAL PRODUCTS MANUFACTURING
The electro-mechanical and electro-optical products manufacturing segment
reflects the operations of Sequential Electronic Systems, Inc., ("SES"), and
S-Tech, Inc., ("S-Tech"), which are wholly owned subsidiaries SESH.
Sequential Electronic Systems, Inc.
SES is a Delaware corporation organized in 1985. The principal products
manufactured by SES are optical encoders, encoded motors and limit programmers.
Products Manufactured
Optical encoders, like those that are produced by SES, are utilized in almost
every manufacturing process where position is required as a part of the
manufacturing process. Encoders are used as position sensors on CNC machines,
packaging machinery, etc., in industries such as food packaging, manufacture of
paper products, and as measurement devices on medical equipment. Additionally,
SES furnishes encoders to the military for such applications as position
transducers for the Multi-Launch Rocket System and for the Patriot Missile
Defense System. Both of these systems were extensively used in the Gulf War. SES
encoders are also used in the latest state-of-the-art NEXRAD weather system. SES
high resolution encoders provide azimuth and elevation data on the National
Aeronautics and Space Administration's telemetry tracking antennas located
around the world.
Encoded motors are used as capstan drives in weather map recorders and
state-of-the-art instrumentation tape recorders. These recorders are used by the
government in antisubmarine warfare detection systems and in seismic measurement
recording systems.
Limit programmers are primarily designed in industry to control the sequence of
events required during the manufacturing process. SES limit programmers are
found in machinery to manufacture tires, toilet tissue, disposable diapers, as
well as machinery used to package bread, cake, coffee, soap and other consumer
purchased products. SES limit programmers provide direct digital position
output, allowing for the direct transfer of digital position information to
microcomputer based control systems.
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Markets, Marketing and Competition
Revenue for SES has decreased from the prior periods, amounting to $1,363,000,
$2,556,000 and $3,035,000 for 1996, 1995 and 1994 respectively. Revenues from
two U.S. government agencies amounted to $893,000 and $563,000 for 1995 and
1994, respectively, which comprised 20% and 15% , respectively, of total
revenues for 1995 and 1994. No revenues were earned from these government
agencies in 1996. SES believes that the high resolution encoder market is
becoming a significant market to the U.S. government again after a no-budget
year for 1996. Primary areas of sales for high resolution encoders are the
missile test ranges under the heading of Missile Range Instrumentation. U.S.
government facilities that are anticipated to be covered are Air Force bases
that are tied into respective weapons test centers. In order to take advantage
of fiscal 1997 U.S. government budgets and new programs, an effort is being made
to determine the level of upcoming new procurements and upgrading of existing
range instrumentation. Photo-Sonics, a Burbank, California company is a major
supplier of missile range instrumentation devices to the U.S. government and a
significant portion of Photo Sonics devices use encoders manufactured by SES. In
order for SES to reestablish itself as a leader in the military type hardware,
it will require visits and presentations to weapons test centers and the
utilization of the Photo-Sonics sales force.
Related to non-military applications, SES presently completed an order for
prototype units for ABB Daimen Benz for encoders. These units are currently in
evaluation for use as part of the speed control system for rail cars.
The future growth of SES will require a restructuring of existing product lines
as the current product lines may not be sufficient to sustain the growth of SES.
The future spending of the U.S. government on military related projects has been
and will continue to be volatile due to unpredictability of amounts budgeted for
military spending. As such, no assurances can be given that SES will be able to
produce sales volumes that will sustain its planned growth.
Government Regulation
As a manufacturer of products that are used in devices purchased by the Defense
Department or its contractors, SES is subject to the provisions of the
procurements regulations of the Defense Department. These regulations generally
provide the government with the right to terminate the contract for the
convenience of the Defense Department, and, in certain cases may include
provisions for renegotiation. The Department of Defense also has regulations
pursuant to which the Defense Department may inspect a contractor's or
sub-contractor's manufacturing facilities. Such inspectors frequent SES's
facilities on a regular basis.
Employees
As of December 31, 1996, SES had 21 employees. None of SES's employees are
represented by a labor organization, and SES believes that its employee
relations are good.
S-Tech, Inc.
S-Tech is a Delaware corporation that was organized in June 1992. S-Tech is a
design and manufacturing facility which has several unique and specialized
product lines which consist of specialized vending machines, avionics equipment
and industrial lighting.
Markets, Marketing and Competition
Specialized vending is used to describe a vending product which includes
sophisticated electronic circuitry and or computer software. The vending
products presently being manufactured under contract include prepaid telephone
debit card machines, automated payment centers, information kiosks and stamp
machines. S-Tech has entered into contracts with such major companies as
ConEdison, NYNEK and Kinkos. Previously, S-Tech manufactured in excess of 11,000
stamp machines for the United States Postal Service and designed and
manufactured the token vending machines for the New York City Transit Authority.
The avionics equipment manufactured by S-Tech consists primarily of various
cockpit instruments and oil pressure transmitters. The majority of these
products require a qualified product list designation ("QPL"). The QPL list
consists of qualified products, with a limited number of approved sources, which
are purchased by the Department of Defense, contractors and subcontractors. In
many instances this QPL designation places the company in a highly advantageous
competitive position as it pertains to government contracts by limiting the
number of qualified bidders. In addition, S-Tech responds to "build-to-print"
solicitations which are subject to competitive bidding. These products are
manufactured in accordance with drawings and data packages provided by the
Department of Defense or other procuring agencies.
S-Tech's revenues for 1996 and 1995 was $1,015,000 and $2,556,000, respectively.
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Telephone Debit Card Vending
The specialized vending product line offers the maximum opportunity for
long-term growth and profitability. The specific products that S-Tech is
currently targeting are the prepaid telephone calling card machines and the
automated bill payment centers. The prepaid telephone calling card machines
require that S-Tech be able to provide its customers with a card that is
dispensed from the machine. In response to a recent industry demand, S-Tech has
designed a prepaid telephone calling card machine for the purpose of dispensing
calling cards. Pre-paid calling cards are already used worldwide as the most
convenient and affordable means of making long-distance telephone calls made
away from home. The telephone debit card vending machines are used in a variety
of locations such as bus stations, airports, cruise lines, rental car locations,
hotel lobbies, gift shops, nursing homes, train stations and gas stations.
Automated Payment Centers
S-Tech's experience in the USPS programs and in specialty vending products
permitted the company to expand their product base into a number of new areas.
The most important of these is the Automated Bill Payment Center. S-Tech is
presently under contract to design, develop and manufacture a customer operated
Bill Payment Center for a major utility company and is being considered by two
(2) other public service companies for a similar unit. The unit is simple in
operation, aids the user with visual prompts, accepts currency, prints a
transaction report, and provides change to the customer. Customer interface with
the system begins with a touch screen selection button, Start Transaction or
English/Spanish selection. The system responds with the first help screen
showing an animated version of the bill form. The screen will then show how the
bill is to be inserted into the bar code scanner on the payment machine.
Software identifies when the bill form is in place, and will automatically begin
the scan. Three attempts will be programmed, after which, the system will flag
the second help screen. The second help screen will show in animated form the
proper method for reading and manually punching in the account number as it
appears on the bill form. The animation shows where the account number appears,
the number of characters, and how to use the touch screen keypad.
Once the account number has been entered the system uses the existing public
service company's software to interface with their main-frame system. This
interface retrieves the customer name, address, and all other pertinent billing
facts such as usage, current balance due, and account status (ie. the same
information that is available to the current clerk operated system). When the
system asks for a confirmation, the touch screen will again be enabled for a
response. Upon a positive response the system provides a help screen to aid in
the selection of the account payment. An animated screen will demonstrate a
complete or partial payment, enable the currency validator and display how bills
are to be inserted. The system will also instruct the customer to insert large
bills first so that an undesired change situation will be avoided. Once payment
is received and validated, the account is credited and the account transaction
is forwarded to the main frame where it is registered. Change is always given in
the largest denomination available. The payment centers use intelligent routines
which will prevent the input of currency in an undesirable manner and in turn
prevent situations where a larger than normal amount of change must be
dispensed. The program will be used to dispense change in the most efficient
manner to assure that the system will remain in operation for as long as
possible. For the average $6.50 of change dispensed, the unit will be able to
service several hundred clients in terms of change in $5 and $1 bills, quarters,
nickels and pennies.
The final step in the transaction sequence is the printing of a receipt and
recording of the transaction. The machine will automatically switch to the
display mode in English until a customer initiates the transactions or bilingual
mode. A telephone line is provided on the payment center to permit the customer
to speak with a representative of the public service company if clarification is
required or verification is needed such as "reinstalling a disconnect notice".
The system automatically requests service when any of the utility functions
approach a level which can cause an "out of service" condition within several
transactions. If service is not accomplished a threshold is established upon
which the system disables. Items such as a low currency dispenser, low coin
hopper, printer paper low, floppy disc near full condition, or the bill
validator is full will generate an alert signal to be sent to the appropriate
monitor. Special software monitors bill volume so that a stacker full signal is
avoided (which will remove the unit from operation). This condition must be
avoided because it could occur in the middle of a transaction where it will lead
to an unacceptable level of customer stress and inconvenience.
The following options can also be provided: Single frame video of customer(s).
Audio (interactive) or message upon initial customer contact with touch
screen. Special signage.
Credit/Debit card payments.
Permit payment for other public service companies
Bilingual graphics.
Vending of standard Prepaid Telephone Calling Cards
Alarm system (security)
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The most significant of these options is the ability to support other public
service companies by providing an interactive communications network that will
permit interfacing with different devices, external networks and proprietary
hosts on the same network as well as easily add on new devices with a minimum of
change and in a relative short period of time. This system will permit the
Payment Center to facilitate collections for other public service companies,
payment by credit card and payment by bank debit card thus expanding the centers
capability and sharing of the systems cost. This proposed system would ensure
that an internationally standards-oriented baseline technology architecture is
implemented to facilitate connection to a much broader variety of host-based and
network-based technologies and expand the potential products and services
offered by the system within the context of its current strategies as well as
beyond.
S-Tech believes this system represents the best possible combination of
architecture, technology, support and experience available. The proposed network
system enables access to all types of shared cash dispensing networks. The
system will control and manage all aspects of bill payment authorization on
behalf of the host system, with features such as:
Authorization Processing
Network Interface
Host System Interface
Message Management
Security Processing
Failure Monitoring
Reporting/MIS
Bill Payment Device Handling
The market potential is significant since over 30% of the customer base do not
have checking accounts or credit cards. Most public service companies prefer
their customers to pay by mail. However, a considerable number of customers
continue to use the service company's payment centers which operate like
mini-banks or use various retail stores such as pharmacies, card shops and check
cashing facilities for the payment of bills. These methods cost the service
company a commission or fee. The service company's payment centers are generally
busy during lunch hour, on Fridays (pay day), at the end of the month or before
and after normal working hours resulting in a large waiting lines to pay their
bills thus adding to their frustration. The Customer Operated Bill Paying
Machine provides a means for the customer to pay, either in full or in part,
their bill, reconcile accounts, and to do so with 24 hour availability and
independent of any clerical assistance unless required by the customer.
Information Kiosks
The automated payment center paves the way into another market. The kiosk
provides access to forms for municipalities and the federal government, Internet
accessibility, "how to get-to" information centers, postal information centers,
court house directories, and for college registration and student services.
Expanding capabilities in this field leads to other similar kiosk related
products. S-Tech negotiated for a contract to design and develop the hardware
for a Municipality Forms Kiosk that will permit individuals to obtain computer
generated forms used by the various agencies of a municipality at one central
location. At present, 21 units are on order with the potential sales of over 100
units. These new products have broad base applications for public service
companies, municipalities governments and postal services for both domestic and
on an international basis. S-Tech is presently negotiating to design and
fabricate a cash payment machine that can be utilized as a customer interactive
customer selection and payment machine in fast food locations. This concept will
also be applicable to customer interactive machines for checkout and payment in
supermarkets. Special signage and kiosk designs are also included to provide
other revenue sources and unique vending designs will be incorporated in these
designs for money handling and MIS data transmission.
Stamp Vending Products
S-Tech manufactures automatic postage stamp booklet vending machines, automatic
postage stamp vending machines and currency to coin change machines. S-Tech's
postage stamp booklet vending machines dispense one or two different stamp
booklet denominations booklets and are programmable for price. S-Tech's
programmable stamp booklet vending machines contain an electronic control board
of electronic components, integrated circuits and micro-switches, which allow
for channel and price selection instead of requiring replacement of the entire
coin changer. In addition, this design permits adaptation of the machine to
foreign currencies. The units have a self- testing capability, cold temperature
compensation and anti-tampering devices. The coin changer has slug and bent coin
protection and is adjustable in $.05 increments up through $12.75 with change
being returned in nickels and quarters. The units are usually "through the wall"
mounted, allowing for servicing from the rear.
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The automatic postage stamp vending units operate in a similar manner to the
automatic postage stamp booklet vending units and also contain multi-channels
for the dispensing of various denominations of stamps. For example, if so
selected, one channel may dispense four 32 cent stamps, a second channel may
dispense one 32 cent stamp and a third channel may dispense three 32 cent
stamps. In the event that the post office changes the stamp price, the machine
has the capability of returning penny stamps and/or change to the customer. For
example, if the stamp price is 32 cents and the customer inserts four dimes into
the machine, he would receive one 32 cent stamp, three penny stamps and one
nickel change. The bulk of S-Tech sales of postal products to date have been to
the United States Postal Service. However, over the past two years the company
has developed commercial applications and is presently marketing in the
commercial area. These locations include hospitals, colleges and universities,
office supply stores and a number of other specialty stores. Sales to Kinkos, an
office supply store, over the past two years were approximately 250 stamp
machines with bill validators.
Token Vending
Several years ago the S-Tech management team designed and manufactured the token
vending machines for the New York City Transit Authority. The contract provided
for the design, manufacture and the installation and maintenance of 59 machines
that are located in the NYC transit system. The system is fully operational
today and has never experienced a break-in. S-Tech's marketing will be expanded
for this product line. The United States Postal Service has recently embarked
upon a program called "the Future Electronic Marketplace" in order to improve
their image as a public communications facilitator and regain revenues lost to
other carriers through the use of computers and fax machines. This program
consists of three revenue sources: vending machines for their prepaid telephone
calling card in association with American Express; a customer interactive system
linked to 200 million home TV's, 40 million PC's and 15,000 kiosks which will
provide information on government forms, payment of fees, retail catalog sales
and postal services. S-Tech is meeting with the United States Postal Service in
an attempt to participate in this program.
Avionics Products
The S-Tech avionics product line consists of both new and spare (replacement)
items to maintain existing aircraft in an operational status. The products
consists of a variety of approximately 20 synchro repeater instruments and 2 oil
pressure transmitters. This product line had been relatively flat in sales with
a range of $1 to $3 million dollars annually. The last few years have been seen
a significant reduction in sales due to a reduction in Department of Defense
(DOD) expenditures. Although there is no guarantee of an upswing in the late
90's, it must be anticipated that inventories are low and spares will be
required. Projected annual sales for this product area is anticipated to
increase slightly because of the low inventory levels coupled with S-Tech's
strategy to expand the instrument product line. In the event that the DOD 5 year
forecast indicate future procurement of these items, S-Tech will be requalifying
nine (9) indicators and one transmitter in anticipation of future procurements.
In addition to the DOD sales, a limited number of sales are made in the
galvanometer type indicator area to commercial accounts.
Approximately 95% of S-Tech's business in this product line is defense related.
The total market is in the billions of dollars. Selection of biddable items will
include only those products which are within our capability and when competition
has not forced the price down to a level which does not meet our ROI objectives.
Competition is fairly aggressive and solicitations may have as few as 2 or 3
bidders or as many as 15 to 20 bidders. It is reasonable to expect an award
percentage, based upon previous experience, of approximately 4% for build to
print programs.
The majority of S-Tech sales are obtained through the bidding process for the
military items that are identified by CBD announcements, filing of 129 Forms at
cognizant agencies and by repeat bid requests as a prior manufacturer. S-Tech
carefully reviews the CBD publications and seeks out those instruments that
align themselves with the QPL and desired technology.
As part of its marketing strategy, S-Tech actively identifies other avionics
products that will be: Separated as small business set-aside.
Competition Advocacy break-outs.
SBIR requirements.
Major OEM subcontract requirements.
Catalogs, advertising and visits to major avionics centers and aircraft
manufacturers is essential to maintain this product line growth. Attendance at
major avionics related shows and membership in key national organizations such
as SAE, Air Force Association and the Navy League is essential. Financing will
provide the assets to accomplish these tasks.
Recent solicitations for oil pressure transmitters similar to ones currently
manufactured by S-Tech were bid and are presently pending. These units if
awarded to S-Tech will require design modifications to our existing design.
However one contract in this family of units will permit us a better competitive
opportunity to bid on the other items in this family of units since the
differences are only the operating pressure range.
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The requirements for night vision compatible instruments (green illumination
instead of white or red) is becoming an increasing requirement for low level
support aircraft and helicopters. This is a requirement to avoid blooming (pilot
blindness) when using night vision image intensified goggles. S-Tech presently
has a proposal submitted to Lockheed to modify two QPL instruments for this type
of application.
S-Tech intends initially to: (1) bid on items that are repeat items or similar
to repeat items to minimize our risk(s); (2) bid on items to reduce inventory
excess levels; and (3) select items that are well within our capability (low
risks). In the long term, S-Tech will expand its QPL instruments and
transmitters to allow for increased sales.
Government Regulation
As a manufacturer of products purchased by the Department of Defense or its
contractors, S-Tech is subject to the provisions of the procurement regulations
of the Department of Defense. These regulations generally provide the government
with the right to terminate the contract for the convenience of the Department
of Defense, and, in certain cases may include provisions for renegotiation. The
Department of Defense also has regulations pursuant to which the Department may
inspect a contractor's or subcontractor's manufacturing facilities. Such an
inspector is present at S-Tech's facility on a regular basis.
Employees
As of December 31, 1996, S-Tech had 11 employees. None of S-Tech's employees are
represented by a labor organization, and S-Tech believes that its employee
relations are good.
PREPAID TELEPHONE CALLING CARDS
Televend, Inc.
Televend is a Delaware corporation that was organized in December 1995 and is a
wholly owned subsidiary of SESH. Televend has developed and markets a line of
telephone cards for general use. Televend intends to ultimately sell the
telephone cards using S-Tech's telephone calling card vending machines and is
currently selling the cards through an independent network of sales
representatives.
Markets, Marketing and Competition
Prepaid phone cards were first issued in Italy nearly 20 years ago. They are now
used in over 200 countries and enable the holder to place a call from a public
telephone without the use of a coin or token. These prepaid phone cards are
"smart cards" with the value stored in the card itself utilizing optical,
magnetic strip or chip technology. These types of cards were issued by the
country's PTT (Public Telephone & Telegraph) and require telephones specially
designed for their acceptance. European sales are estimated at $5 billion per
year, Japanese sales alone are approximately $4 billion.
The vast majority of cards issued in the United States are "remote memory" cards
with all information stored in a network-based central computer. These cards are
used from any touchtone phone by dialing a toll-free 800 number and entering the
PIN number unique to the card and then dialing any domestic or international
call. Many cards are "rechargeable" which enable the holder to add additional
time to the card after the initial amount purchased runs out. The market for
prepaid cards in the United States is estimated at $10 billion per year. To
date, U.S.
market penetration is estimated to be less than 4%.
The prepaid phone cards have a promotional value. Several national promotional
programs have already been implemented by companies such as American Express,
Ryder, NBC, Mienekie, Dollar Rent-A-Car, and Monroe Mufflers. Over the next few
years, public awareness will increase dramatically as consumers are inundated
with millions of cards to be given away or sold by corporate and retail giants
such as Coca- Cola, Pepsi, Philip Morris, RJR, Nabisco, APT, Kodak, K Mart and
Walmart, Sears and major car rental companies.
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The market for telephone cards in the United States is arguably the largest in
the world at between $5.0 billion to $15.0 billion. A survey of the market for
prepaid phone cards in the United States has shown that it has developed into
five primary segments. These markets are: utility, promotional, corporate,
affinity and collector. The utility component of the market is based upon sales
to consumers through retail establishments such as convenience stores, travel
agents, newsstands, check cashing stores and supermarkets. The consumer is
typically charged rates ranging from $.29 to $.60 per minute for domestic long
distance calling time. The promotional premium segment is based upon cards that
are given away to reward customer loyalty or promote specific products. Prepaid
phone cards have been given away with purchases of frozen dinners, baby food,
dog food, sneakers, soft drinks and clothing just to name a few. This has proven
to be a particularly effective marketing tool since long distance calls have
nearly universal appeal. The corporate segment of the market is based upon the
use of prepaid cards by corporations for use by their employees for calls made
outside the office. Not only does this achieve a cost savings for the business,
but additionally allows for effective budgeting. The affinity component of the
market is based upon a group or organization distributing prepaid cards to its
members. Affinity groups such as motor clubs religious organizations, alumni
groups, unions, etc., receive commissions and residuals for the use of
group-issued cards by their members. The collector portion of the market is
based upon the card itself (the image, its desirability and its availability) as
well as the underlying economics. Many collectors expect the value of their
cards to increase which also brings into consideration soundness as a financial
investment.
The market for prepaid phone cards in the United States has developed slowly.
Although prepaid cards have been issued for several years, current estimates of
annual sales of approximately $150 million indicate a market penetration of less
than 4 percent, with rapid growth predicted. The U.S. has been the last major
market to develop due to the general lack of public awareness about the use and
benefits of prepaid calling. Public awareness will increase dramatically with
the development and implementation of promotional and premium programs currently
being planned by many Fortune 500 companies. Consumers will be inundated with
millions of cards which will be given away by such corporate and retail giants.
Additionally, companies currently issuing membership and charge cards to their
customer base (e.g. AAA, Exxon, Sunoco, Fingerhut and Blockbuster) are planing
to market and distribute telephone cards to their existing data base.
Once there is a widespread recognition of prepaid phone cards and their use,
distribution of cards to the utility segment will increase dramatically. Since a
typical call (3 to 5 minutes in duration) with a prepaid card is substantially
less expensive and does not have the attendant fraud problems associated with
conventional credit cards. It can be assumed that a large part of that market
will convert to the use of a prepaid card. Given the fact that Nippon Telephone
& Telegraph sells over $4.0 billion of cards through more than 140,000 points of
distribution (retail stores and vending machines) with a customer base of
approximately 125 million, the utility market in the United States can be
conservatively projected to a similar level.
As the market expands, consumers will become sensitive to items such as the cost
per minute and the availability of network-based enhanced features such as voice
mail, store and forward of voice and data, audio text and other interactive
services. These features, combined with the rechargeable feature of the cards
will also lead to a dramatic increase in the corporate and affinity segments of
the market. Numerous corporations and organizations will custom tailor a
telephone card program for their employees and members.
Another factor affecting the market is regulation by various federal and state
agencies, including the Federal Communications Commission, as well as state
Public Utility and Tax Commissions.
Although competition is high for this product area, Televend intends to capture
its share of the market by innovative design, improved reliability, customized
features for large quantity purchases, special signage, and use of state of the
art components. The United States Postal Service is presently in a pilot program
with American Express and MCI (telephone carrier) to sell prepaid telephone
calling cards over the counter.
Televend has generated revenues of $387,000 and $356,000 in 1996 and 1995,
respectively, and has incurred net losses of $268,000 and $134,000 for 1996 and
1995. No assurances can be given that Televend will be able to generate revenues
significant enough to penetrate the competitive environment of selling telephone
calling cards as Televend is competing with competitors that have a current
market share, a more competitive pricing arrangement and significantly greater
capital resources.
Employees
As of December 31, 1996, Televend had one employee. None of Televend's employees
are represented by a labor organization, and Televend believes that its employee
relations are good.
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FINGERPRINT IDENTIFICATION PRODUCTS
FMX Corp.
FMX is a Delaware corporation that was organized in 1995 and is a 51% owned
subsidiary of SESH. The only employee and founder of FMX owns or controls the
remaining 49% of FMX. FMX is a development stage company which designs, develops
and integrates all of the critical building blocks of a Fingerprint ID System
("FIDS"). In conjunction, FMX has completed development of a proprietary unique
optical fingerprint scanner, VLS-10, which has a live-scan ten print touch/roll
and single print touch/roll capability. Presently in development is the VLS-IFP,
which is of the same genre as the VLS-10. This unit is significantly smaller and
is designed to be integrated with SmartCard technology. Presently, there are no
comparable units available to OEM system integrators. FMX expects that its FIDS
can be implemented into a super high reliability product because of the tight
control of the individual building blocks and the connecting interfaces. This is
a cost effective package which will be offered to OEMs in the security,
entitlement, and law enforcement markets as well as positioning FMX to be able
to participate and directly compete in the "low end" access control market.
FMX considers that one of the major impediments to general acceptance of
fingerprint as opposed to retinal and hand geometry biometric constructs has
been the inability of all fingerprint scanners to satisfactorily scan and/or
reliably image the broad spectrum of fingerprint quality evidenced in any user
population of the representative randomly chosen subjects. FMX expects that its
scanners will allow a much increased spectrum of user acceptance, which in this
crucial area, will be on a par with the very much less accurate systems based on
retinal patterns or hand geometry.
FMX anticipates an immediate market for the sale of the VLS-10 to OEMs who
currently buy fingerprint scanners from only one source. FMX's penetration of
this market is based upon the superior performance and ergonomic comfort of the
VLS-10. There are at least 10 OEMs using fingerprint identification systems and
significantly more using only the scanner.
The VLS-IFP is structured to appeal to the credit card companies, who are
interested in integration of fingerprint scanners into smart cards, and
periodically attempt to tantalize television audiences with the predicted
technical advancements.
A patent application on the unique electro-optical mechanization of VLS-10 and
VLS-IFP is in progress but has not been completed to date.
FMX has not generated any revenues and no assurances can be given that the
future revenues generated by FMX, if any, will be substantial. Additionally, a
lack of sufficient funding will delay the development of the prototypes and
could result in the competitor companies developing a product of similar
capability prior to FMX's prototype completion. Further development and
perfection of other biometric devices may effect the marketability of FMX's
product. During 1996, FMX has incurred $144,000 in research development
expenses. The research and development and all substantial engineering is
performed by the 49% minority interest owner of the company. Administrative
support is provided by Consolidated.
HOLDING COMPANIES
The activity of the holding companies reflects the operations of Lafayette
Industries, Inc., the Registrant, and SESH, a wholly owned subsidiary of the
Registrant. The operating activity of the holding companies consists primarily
of management and administration functions and related expenses.
REVERSE ACQUISITION
On December 20, 1996, the Company acquired all of the issued and outstanding
capital stock of SESH (which at the date of the acquisition was an 80% owned
subsidiary of SIS Capital Corp., ("SISC"), which is a wholly owned subsidiary of
Consolidated Technology Group, Ltd., a publicly held company) and issued 1,000
shares of Series A preferred stock which is convertible at a ratio that will
give SISC a 65% ownership of Lafayette's fully diluted common stock upon
stockholder approval of an increase in the authorized number of common shares of
Lafayette. Contemporaneously with the reverse acquisition, Lafayette issued
1,000 shares of Series B preferred stock which has a redemption value of
$6,750,000. The Series B preferred stock was issued as payment to SISC for
$4,000,000 of subordinated debt due to SISC and in exchange for the cancellation
of $2,750,000 of preferred stock of the underlying entities of SESH which was
held by SISC. The redemption provisions of the Series B Preferred stock are the
following:
[i] - The Company may, at any time commencing March 1, 1997, redeem the
Series B Preferred stock in whole or in part from time to time upon not
less than ten nor more than sixty days prior written notice at the
redemption price of $6,750 per Series B preferred share. The Company is
not required to provide for the redemption of any shares of the Series B
preferred stock through the operation of a sinking fund.
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[ii] - Until all of the Series B preferred stock shall have been redeemed,
the Company shall apply 25% of the net proceeds from any sale of equity
securities (including stock issued on the exercise of any warrants or
options, whether presently outstanding or hereafter issued, and stock
issued in connection with a public offering or private placement of
securities, but excluding stock issued in an acquisition or in connection
with the purchase of assets), occurring after March 1, 1997 to the
redemption of the shares of the Series B preferred stock. Net proceeds
shall mean the gross proceeds less any underwriting, brokerage, finders or
investment banking fee, discount, expense allowance (whether or not
accountable), consulting contract or other similar payments however
designated, provided that, for purposes of determining net proceeds no
value shall be given to any securities issued or transferred to the
underwriter, broker, finder or investment banker.
[iii] - Until all of the shares of the Series B preferred stock shall have
been redeemed, for each calendar year commencing with the year ended
December 31, 1997, the Company shall apply to the redemption of the Series
B preferred stock an amount equal to 25% of the amount by which the
greater of (a) the Company's income before taxes, determined in accordance
with generally accepted accounting principles consistently applied, or (b)
the Company's cash flow from operations, determined in accordance with
generally accepted accounting principles consistently applied, less
interest other than interest owed to the Company's parent or affiliate,
exceeds $250,000 to the redemption of shares of the Series B preferred
stock.
FORMER BUSINESS OF THE COMPANY
Prior to the reverse acquisition, the Company's principal business was the
design, manufacture and sale of customized store fixtures and merchandising
systems, through certain wholly owned subsidiaries. During 1995 the Company had
a net loss of $1.9 million, or $1.38 per share, on revenues of $16.6 million,
and during 1994 had net income of $466,000, or $0.45 per share, on revenues of
$12.3 million. The Company's business focus prior to the reverse acquisition,
was to capitalize on its expertise in the design and sale of store fixtures and
merchandising systems by expanding its sales force and by increasing its
manufacturing operations to become a company with a national market presence. As
it became evident that the Company would not be able to operate profitably, it
sought a business opportunity which it felt it could develop into a profitable
business. Following this strategy, Lafayette implemented plans to discontinue
all of its prior business operations and entered into the reverse acquisition.
Item 2. Property
WWR Technology occupies approximately 70,000 square feet of usable
manufacturing, office and storage space located in Hope, Arkansas at an annual
rental of approximately $76,000. SES occupies approximately 15,000 square feet
of office and manufacturing space in Elmsford, New York at an annual rental of
approximately $141,000. S-Tech occupies approximately 6,500 square feet of
manufacturing and office space in West Babylon, New York at an annual rental of
approximately $28,000. Televend leases 500 square feet of office space in New
York City, which it rents on a month-to-month basis from SISC at an annual
rental of approximately $7,500 which represents the cost of such space to SISC.
The companies operating in the electro-mechanical and electro-optical products
manufacturing segment believe that their space is adequate for their immediate
needs and that, if additional space is required, it would be readily available
on commercially reasonable rates.
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Item 3. Legal Proceedings
Litigation
Lafayette Industries, Inc.:
The Company's prior principal business, which was the manufacture and sale of
store fixtures, was discontinued in 1996. The manufacturing facilities for these
operations were located in Mexico and were seized by the landlord. Although the
Company is contesting the seizure, no assurances can be given that the Company
will be able to realize any future benefits from these assets and has placed a
reserve for the full amount of such assets.
During the year ended December 31, 1996 Lafayette either sold or closed all of
its operating subsidiaries from its prior principal business. The Company and
its subsidiaries, are also contingently liable individually and jointly with
others as guarantors of long-term debt and obligations principally relating to
various debt agreements, leased equipment and facilities. In connection with
those transactions, the Company has been notified that it is party to various
litigations, with one claim ranging up to approximately $1,600,000. The Company
believes it may also be identified as a party to as yet unasserted claims which
may be substantial in amount. The Company has estimated its exposure to
contingent liabilities and guarantees and believes the amount could range
between $300,000 and $1,600,000 and management has accrued the minimum amount of
$300,000. Although management has made what it feels is its best estimate of the
liabilities, the nature of the liabilities are subject to substantial
uncertainty. The amount of potential additional liabilities above the $300,000
accrued can not be reasonably estimated. It is at least reasonably possible that
the liability could be revised in the near term.
WWR Technology, Inc.:
There was an action pending against WWR alleging claims against WWR for
unauthorized use of the Klipsch trademark. WWR denies these allegations and
asserted there had been no breach of contract. This case was dismissed in 1996
by the granting of a motion for summary judgment. The plaintiff maintains the
right to appeal this decision.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote during the fourth
quarter of 1996.
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock was traded as part of a unit (a "Unit") until July
13, 1995. Each unit included one share of Common Stock and one warrant to
purchase one share of Common Stock through May 12, 19999 at $6.00 per share.
During 1995 and 1996 Lafayette's Units, Common Stock and Warrants were traded on
the Nasdaq SmallCap Market. Effective March 18, 1997, a Nasdaq Listings
Qualifications Panel determined to delete the Company's securities from The
Nasdaq Stock Market. Such decision was based on (1) the failure of the Company
to maintain compliance with continued listing requirements based on the
September 30, 1996 10-QSB/A; and (2) the failure of the Company to meet initial
listing requirements which were triggered by the reverse acquisition. As of
March 18, 1997, the securities of the Company became immediately eligible for
trading on the OTC Bulletin Board. Set forth below is the reported high and low
bid prices of the Units, Common Stock and Warrants for the quarters listed.
Units
Quarter Ending High Bid Low Bid
March 31, 1995 $11.50 $4.50
June 30, 1995 $7.00 $3.25
September 30, 1995 $7.75 $4.50
December 31, 1995 $7.00 $2.13
March 31, 1996 $4.13 $4.06
June 30, 1996 $4.75 $3.56
September 30, 1996 $3.00 $1.25
December 31, 1996 $1.00 $0.50
Common Stock
Quarter Ending High Bid Low Bid
Beginning July 13, 1995:
September 30, 1995 $7.00 $4.25
December 31, 1995 $6.25 $1.75
March 31, 1996 $4.75 $4.00
June 30, 1996 $4.38 $3.50
September 30, 1996 $2.25 $1.38
December 31, 1996 $1.19 $0.63
Warrants
Quarter Ending High Bid Low Bid
Beginning July 13, 1995:
September 30, 1995 $0.75 $0.38
December 31, 1995 $0.50 $0.25
March 31, 1996 $0.63 $0.25
June 30, 1996 $0.06 $0.06
September 30, 1996 $0.06 $0.06
December 31, 1996 $0.06 $0.06
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
As of December 31, 1996, there were over 300 holders of record of the Company's
common stock.
No cash dividends have been paid to the holders of the Common Stock during the
years ended December 31, 1996, 1995 and 1994.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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Financial Condition - Liquidity
As of December 31, 1996, it was determined that the ability of the Company to
continue as a going concern is dependent upon the success of the Company's
marketing efforts and its access to sufficient funding to enable it to continue
operations. The ability of the Company to effect its transition, ultimately, to
profitable operations is dependent upon obtaining adequate financing and
achieving a level of revenues to support its cost structure. The failure of the
Company to generate revenues at a level in excess of its ongoing expenses may
force the Company to reduce or cease operations. Management plans to increase
revenues of WWR by way of a sound marketing plan to increase the domestic dealer
base and, by concentrating on its international distribution. Furthermore, WWR
plans to release a new "high tech" range of loudspeakers to gain attention to
the line and increase its worldwide market share. SES and S-Tech plan to
increase revenues through the introduction of new products and through revenues
which are expected to be generated in connection with certain development
agreements. Management is also in the process of obtaining financing through
financial institutions and other sources. As a part of obtaining adequate
capital, on February 7, 1997, the Company sold an aggregate of 2,000,000 shares
of Common Stock at $.25 per share, for an aggregate of $500,000 to two offshore
investors pursuant to Regulation S of the Securities Act of 1933 each of which
purchased 1,000,000 shares of Common Stock for $250,000. No underwriter was
involved in connection with such issuances and no brokerage or underwriting fees
or commissions were paid.
Financial Condition - Capital Resources
Sources of Cash
The Company's principal working capital consists of cash and cash equivalents.
Cash and cash equivalents were $1,094,000 at December 31, 1996 compared to
$75,000 at December 31, 1995. During 1996, the Company's operations used
$1,378,000 of cash in operations. Significant sources of cash includes $20,000
of cash from a merged Company, (see footnote 1 to the financial statements
regarding the reverse acquisition), $1,000,000 from a Regulation S private
placement, and $1,701,000 of advances from the Company's parent company, SIS
Capital Corp. Although in the past, SIS Capital Corp. has been the primary
source of the Company's operating capital, SIS Capital has no obligations to
continue the funding of the Company's working capital, and further, no
assurances can be given that SIS Capital Corp. will have the ability to continue
funding the Company's operations. The Company has also received $190,000 in net
advances from an asset based lendor. Other sources of cash amounted to $10,000
for 1996.
Uses of Cash
Uses of cash includes the repayment of notes payable of $324,000, capital
expenditures of $109,000, payments on capital leases of $16,000 and other
expenditures approximating $75,000.
Effect of Loan Defaults
The Company is in technical default on loans approximating $478,000 as of
December 31, 1996. Such defaults have not had, and is not expected to have a
significant impact on the operations of the related segment. The creditors have
not called such loans and are working under extended repayment terms.
Results of Operations
Audio Visual Manufacturing and Services - This segment is engaged in the
business of manufacturing and marketing a professional line of loudspeakers.
This segment was acquired on September 30, 1995. As such, the operations
reported herein reflect only the results from the date of acquisition through
December 31, 1996 and the prior periods are not comparable. During 1996, this
segment's revenues, gross profit and loss from operations were $3,308,000,
$549,000 and $1,082,000, respectively. During 1996, approximately, 79% of
revenues were generated from domestic customers, approximately 15% of sales were
from customers in the Far East and approximately 6% of sales were from other
foreign market customers. From the date of acquisition through December 31, 1995
revenues, gross margins and losses from operations were $626,000, ($106,000) and
$437,000, respectively. From the date of acquisition through December 31, 1995,
approximately, 75% of revenues were generated from domestic customers,
approximately 12% of sales were from customers in the Far East and approximately
13% of sales were from other foreign market customers.
During the period from the acquisition through December 31, 1995, costs of sales
included $200,000 of write-offs of obsolete inventory which resulted in negative
gross profit. Excluding such write-off, the gross margin percentage was 15% and
during 1996 was 17%. Since the acquisition of this segment, the gross margins
have been less than that required to operate profitably. A significant cause of
the low margins relates to idle plant capacity, an outdated production machine
and a lack of funds to purchase the parts required to build product. During the
fourth quarter of 1996, financing has been obtained which has allowed the
segment to purchase product for production but not at a level that will allow
the segment to significantly increase production. Management is attempting to
obtain financing to purchase a new production machine which would produce
products significantly faster and additionally, reduce the need to purchase
assembly parts from an outside source
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since the new production machine would be able to produce such parts on a timely
basis. Although no assurance can be given that such financing will be obtained.
Selling, general and administrative expenses were $1,222,000 for 1996 and were
$331,000 from the date of acquisition through December 31, 1995. This excess of
expenses over gross profit is a reflection of the volume problem of this
segment. In January management implemented a price increase of approximately 10%
and management believes that this will not have a significant impact on sales
volume due to high product quality and the name recognition of "KLIPSCH
PROFESSIONAL" in the market place. Interest expense for 1996 was $150,000 and
for the period from acquisition to December 31, 1995 was $19,000.
Management believes that if this segment is able to find an appropriate
financing package, it will be able to significantly increase its revenues and
overall profitability during 1997. However, due to the uncertainties surrounding
the ability of the segment to obtain adequate financing, management is unable to
determine at this time whether the segment will ever be profitable.
Electro-Mechanical and Electro-Optical Products Manufacturing - This segment
consists of two companies which manufactures optical encoders, encoded motors
and limit programmers, debit card vending machines and various avionics
instrumentation devices. Comparing 1996 and 1995, revenues decreased 38% from
$3,862,000 for 1995 to $2,378,000 for 1996. Additionally, gross profit was
negative for 1996 due primarily to the write-off of obsolete inventory of
$350,000 for 1996. Write-off of obsolete inventory for 1995 amounted to
$270,000. Excluding such write-offs, the gross profit percentages for 1996 and
1995 were 6% and 12%, respectively. The significant decrease in revenues and
gross margins is attributed to lower levels of shipments to existing customers
while new customers have not been obtained to replace the lost revenues and the
gross margins on current period contracts have lower margins than on revenues
that were lost.
Selling, general and administrative expenses remained relatively level
approximating $1,341,000 and $1,380,000 for 1996 and 1995, respectively,
reflecting increased spending of approximately $200,000 on developing new
technologies, which was offset by planned cutbacks in expenses related to
existing operations. Interest expense was approximately $150,000 for both 1996
and 1995. A significant portion of the interest expense is related party
interest charged from the parent company, (SIS Capital Corp.) charged on
advances made to this segment to fund its operations.
Net losses increased from $1,050,000 for 1995 to $1,709,000 for 1996, reflecting
the decrease in gross profit while other expenses remained relatively level. In
prior periods, this segment focused primarily on sales to the governmental
sector and currently management is attempting to place more emphasis on sales to
the private sector through the sale of encoders to private manufacturing
companies while also trying to capitalize on the recent potential for increased
governmental military spending and while there exists a possibility that there
will be reversals in government spending cutbacks no assurance can be made that
this segment will be able to qualify for the related government contracts.
Management plans to continue placing more emphasis on sales to the private
sector although no assurances can be given that the segment will ever be able to
operate profitably.
Prepaid Telephone Calling Cards - This segment consists of one company that
markets telephone debit cards which was acquired in April 1996. This segments
revenues, gross profit and operating loss, from the date of acquisition through
December 31, 1996, approximated $387,000, ($152,000) and $313,000. This segment
operates in a highly competitive market and is competing against companies that
are larger, more well established and have significantly greater resources. The
impact of this competition has required the segment to sell the calling cards at
below cost in order to attempt to establish a market presence which has resulted
in a negative gross margin. Selling, general and administrative costs were
$153,000 from the period of acquisition to December 31, 1996 which consists
primarily of salaries and related expenses. Based on the competitive environment
that this segment operates in, no assurances can be given that its operations
will ever reach profitable levels. Finger Print Identification Products - This
segment consists of one company that designs, develops and integrates all of the
critical building blocks of a Fingerprint ID System. All of the activity of this
segment to date have been the costs of developing its products. Such amounts for
1996 approximated $144,000. Due to the nature of a development stage company, no
assurances can be given that this segment will ever be able to develop a
marketable product and achieve revenues that will allow to operate profitably.
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<PAGE>
Impact of Inflation:
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
Item 7. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 8. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company's independent public accountants for the years ended December 31,
1995 and 1994 was Lazar, Levine & Company LLP, whose report on such financial
statements is included in the 10-KSB for the year ended December 31, 1995. Such
report included an explanatory paragraph concerning the ability of the Company
to continue as a going concern.
The Company changed accountants following the completion of the reverse
acquisition for the following reasons. Pursuant to the reverse acquisition
accounting rules, SESH is the successor corporation and Moore Stephens and
Associates, PC were the independent accountants for SESH prior to the reverse
acquisition and substantially all of the Company's post acquisition business is
that of SESH. The decision to change accountants was made by the Company's board
of directors and is subject to stockholder approval. There were no disagreements
with Lazar, Levine & Company LLP, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
Item 9. Directors and Executive Officers Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors are elected on an annual basis. The present terms for each
director will expire at the next annual meeting of Shareholders or at such time
as a successor is duly elected. Officers serve at the discretion of the Board of
Directors. The directors and executive officers of the Company and their
respective positions are as of follows.
Mr Lewis S. Schiller is chairman of the board. chief executive officer and
a director as of December 20, 1996. Mr. Schiller is also chairman of the board,
chief executive officer and a director of Consolidated Technology Group
Ltd.("Consolidated") and SIS Capital Corp.("SISC"), the majority stockholder of
Lafayette. Mr. Schiller is also chairman of the board, chief executive officer
and a director of Netsmart Technologies, Inc.("Netsmart"), a majority-owned
publicly traded subsidiary of Consolidated that markets health information
systems and other network based software systems, and Trans Global Services,
Inc., a majority-owned publicly-traded subsidiary of SISC which is engaged in
providing contract engineering services- Mr. Schiller is also a director and
chairman of the board and/or chief executive officer of other subsidiaries of
Lafayette. Mr. Schiller has held his position with Consolidated for more than
the past five years. Mr. Schiller devotes a significant portion of his time to
the business of Consolidated and its other subsidiaries, and he devotes only a
portion of his time to the 'business of Lafayette.
Mr. Norman J. Hoskin has served as director since December 20, 1996. Hoskin
is chairman of Atlantic Capital Group, a financial advisory services company, a
position he has held for more than the past five years. He is also chairman of
the board and a director of Tapistron International, Inc., a high tech
manufacturer of carpeting, and is a director of Consolidated, Netsmart, Trans
Global, Aqua Care Systems., Inc., a water media filtration and remediation
company, and Spintek Gaming, Inc., a manufacturer of gaming equipment. He is
also a director of other subsidiaries of Lafayette.
Mr. Colin Halpern served as Secretary of the Company from January 1997 to
July 1993 and as Executive Vice President from July 1993 to December 20, 1996
and as a director since July 1993. Mr. Halpern serves as the President of
Crescent Capital, Inc. and International Franchise Systems, Inc. Mr. Halpern
also serves as the President and Treasurer and as Director of Red Hot Concepts,
Inc., a public company that intends to operate certain restaurants in the
United Kingdom. Mr. Halpern was formerly the President and Chief Executive
Officer of DRC Industries, Inc., a company which, from November 1975 through
October 1985 had a Budget Rent-A-Car master license agreement for the
New York metropolitan area, including LaGuardia and John F. Kennedy airports.
Mr. Bernard M. Goldman has served as director since July 1993. From 1957 to
1979 he was CFO of Goldman 7 s Discount Department Stores, a 14 store chain of
department stores located throughout southwestern Ohio. Presently, in addition
to owning and operating a variety of real estate investment properties, Mr.
Goldman is involved with a variety of philanthropic organizations.
16
<PAGE>
Mr. Lloyd C. Robinson served as the Vice President of Finance from July 1993 to
June 1995 when he became Vice President of Operations.
Mr Robinson resigned as Vice President in April 1996 and became Chief Financial
Officer effective December 20,1996, Mr. Robinson was
Chief Financial Officer of LDF from April 1986 through June 1988 and was a
financial consultant to LDF from January 1989 through December 1991.
Mr. Robinson was a consultant to LDF when it filed Chapter 1 1 of the United
States Bankruptcy Code in January 1991. Mr. Robinson
graduated from Wharton School of Business at the University of Pennsylvania
with a B.S. in Economics.
Item 10. Executive Compensation
To be incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
To be incorporated by reference.
Item 12. Certain Relationships and Related Transactions
The Company is owed $85,000 for non-interest bearing advances to a director of
the Company. Such amount is expected to be collected
during 1997.
The amount due to a related party represents $690,000 of short-term advances
made to the Company by a director of the Company and his wife. The advances are
non-interest bearing and were made through several entities in which the
directors hold a controlling interest.
During 1996, SES received consulting services from The Trinity Group, an
unconsolidated affiliate. The Company's statement of operations includes
consulting expense of $127,000 in each of the years ended December 31, 1996 and
1995 for such services.
Item 13. Exhibits and Reports on Form 8-K
Form 8K for December 11, 1996, filed December 19, 1996, reporting that the
Company entered into a letter of intent to acquire SES Holdings, Inc. subject to
a definitive purchase agreement.
Form 8K for December 20, 1996, filed January 31, 1997, reporting change in
control, acquisition of assets, expansion of the board of directors, change in
certified accountants, and sale of equity securities pursuant to Reg. S.
Form 8K/A Amendment No. 1 for December 20, 1996, filed February 25, 1997,
includes historical financial statements and pro forma
financial statements for SES Holdings, Inc. transaction.
17
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditor's Report F-2
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Deficit
for the Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Lafayette Industries, Inc.
New York, New York
We were engaged to audit the accompanying consolidated balance sheet
of Lafayette Industries, Inc. and its subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the two years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management.
We were unable to obtain written representations from certain of the
Company's outside legal counsel regarding pending or threatened litigation, or
obtain confirmation regarding certain related party transactions. In addition,
we were not able to confirm the existence of certain notes receivable and
payable. The Company's records do not permit the application of other auditing
procedures to determine the existence and/or completeness of the aforementioned
assets and liabilities.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Notes 3, 12 and 22 to the financial statements, the Company has
suffered recurring losses since its inception, has an accumulated deficit of
$6.5 million, has a total shareholders' deficit of $6.9 million, is in default
on substantially all of its debt, and is party to various litigation, including
but not limited to financial guarantees. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The outcome of
these events and management's plans are subject to substantial uncertainty. The
financial statements do not include any adjustment that might result from the
outcome of these uncertainties.
Because of the significance of the matters described in the
preceding paragraph, and the scope limitations described in second paragraph,
and our inability to apply other auditing procedures to satisfy ourselves
regarding the fair presentation of the consolidated financial statements in
conformity with generally accepted accounting principles, the scope of our work
was not sufficient to enable us to express, and we do not express, an opinion on
the consolidated financial statements referred to in the first paragraph.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 9, 1997
F-2
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 1,094,000
- --------------------------------------------------------------------------
Receivables - Net of Allowances 631,000
- --------------------------------------------------------------------------
Inventories 3,125,000
- --------------------------------------------------------------------------
Loan Receivable - Related Party 85,000
- --------------------------------------------------------------------------
Prepaid Expenses and Other Current Assets 51,000
- --------------------------------------------------------------------------
Total Current Assets 4,986,000
Property and Equipment - Net 495,000
------------
Other Assets:
Note Receivable - Long-Term 490,000
Trademark - Net 368,000
Deferred Financing Costs 469,000
Investment in Common Stock 1,988,000
Other Assets 120,000
------------
Total Other Assets 3,435,000
Total Assets $ 8,916,000
============
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 3,268,000
Accrued Payroll and Related Obligations 200,000
Accrued Interest 417,000
Due to Related Party 690,000
Notes Payable 1,161,000
Convertible Debentures - Net 441,000
Current Portion of Obligations Under Capital Leases 119,000
------------
Total Current Liabilities 6,296,000
Long-Term Liabilities:
Subordinated Notes Payable to Affiliated Companies 2,744,000
Obligations Under Capital Leases 34,000
Total Long-Term Liabilities 2,778,000
Commitments and Contingencies [22] --
Class B Redeemable Preferred Stock, $0.01 Par Value,
1,000 Shares Authorized, Issued and Outstanding
[Aggregate Liquidation Preference $6,750] 6,750,000
------------
Shareholders' Deficit:
Preferred Stock, Class A Convertible, $0.01 Par Value, 1,000 Shares
Authorized, Issued and Outstanding [Aggregate Liquidation Preference
$100,000] --
Common Stock, $0.01 Par Value, 20,000,000 Shares Authorized, 9,440,000
Shares Issued and Outstanding 94,000
Additional Paid-in Capital (952,000)
Accumulated Deficit (6,492,000)
Unrealized Gain on Investment in Common Stock 442,000
------------
Total Shareholders' Deficit (6,908,000)
Total Liabilities and Shareholders' Deficit $ 8,916,000
============
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
December
1 9 9 6 1 9 9 5
------- -------
Revenues $6,073,000 $ 4,488,000
Cost of Goods Sold 5,591,000 3,644,000
Inventory Write Downs 381,000 470,000
---------- -----------
Gross Profit 101,000 374,000
Selling, General and Administrative Expenses 2,874,000 1,711,000
Loss from Operations (2,773,000) (1,337,000)
---------- -----------
Other Income [Expense]:
Interest Expense (302,000) (169,000)
Other Income 9,000 --
---------- -----------
Total Other [Expense] (293,000) (169,000)
---------- -----------
Net Loss $(3,066,000) $(1,506,000)
=========== ===========
Net Loss Per Share $ (0.$ (0.06)
============ ================
Weighted Average Number of Shares Outstanding 29,927,747 24,066,433
========== ===========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995.
- ------------------------------------------------------------------------------
Unrealized
Gain on
Preferred Stock Additional Investment Total
Class A [1][20] Common Stock Paid-inAccumulatedin CommonShareholders'
Shares Amount Shares Amount Capital Deficit Stock Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1994 1,000 $ -- 1,500 $ 15,000 $ 223,000 $(1,920,000$ -- $(1,682,000)
Net Loss -- -- -- -- -- (1,506,000) -- (1,506,000)
Recapitalization
Adjustment -- -- (1,500) (15,000) 15,000 -- -- --
------- ------- -------- -------- --------- --------- ------- ---------
Balance -
December 31, 1995 1,000 -- -- -- 238,000 (3,426,000) -- (3,188,000)
Acquired Equity in Stock
Acquisition -- -- 5,440,000 54,000 (2,150,000) -- -- (2,096,000)
Issuance of Common
Stock Pursuant to
Regulation S - See
Note [20H] -- -- 4,000,000 40,000 960,000 -- -- 1,000,000
Unrealized Gain on
Investments -- -- -- -- -- -- 442,000 442,000
Net Loss -- -- -- -- -- (3,066,000) -- (3,066,000)
------- ------- -------- -------- --------- ---------- ------- ----------
Balance -
December 31, 1996 1,000 $ -- 9,440,000$ 94,000 $(952,000)$(6,492,000)$442,000 $(6,908,000)
======= ===== ======== ======== ======= ======== ========= ===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
December
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net Loss $(3,066,000) $(1,506,000)
----------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 268,000 84,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (35,000) 418,000
Inventories 543,000 520,000
Prepaid Expenses and Other Current Assets 37,000 (28,000)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 515,000 144,000
Accrued Payroll and Related Obligations 200,000 --
Accrued Interest 135,000 116,000
Total Adjustments 1,663,000 1,254,000
----------- -----------
Net Cash - Operating Activities (1,403,000) (252,000)
----------- -----------
Investing Activities:
Increase in Other Assets (68,000) (13,000)
Cash of Merged Company 20,000 --
Cash of Company Acquired 10,000 47,000
Advances on Notes Receivable (7,000) --
Capital Expenditures (110,000) (71,000)
----------- -----------
Net Cash - Investing Activities (155,000) (37,000)
----------- -----------
Financing Activities:
Net Advances from Affiliates 1,701,000 71,000
Net Advances from Asset Based Lendor 190,000 --
Payments Under Capital Lease Obligations (16,000) (19,000)
Proceeds from Issuance of Notes Payable -- 10,000
Repayment of Notes Payable (298,000) (39,000)
Common Stock Issuance 1,000,000 --
Net Cash - Financing Activities 2,577,000 23,000
----------- -----------
Net Increase [Decrease] in Cash 1,019,000 (266,000)
Cash - Beginning of Years 75,000 341,000
----------- -----------
Cash - End of Years $ 1,094,000 $ 75,000
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 167,000 $ 53,000
Income Taxes $ -- $ --
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
LAFAYETTE INDUSTRIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investing and Financing Activities:
During the year ended December 31, 1996:
[1] - Acquired Televend, Inc., and in conjunction therewith, recorded assets
of $33,000, [including cash of $10,000], and liabilities of $204,000.
[2] - Effected a reverse acquisition between SES Holdings Corp. and Lafayette
Industries, Inc. and in conjunction therewith recorded assets of $619,000,
[including cash of $20,000], and liabilities of $3,392,000.
[3] - Converted $4,000,000 of subordinated debt due to affiliates into
preferred stock.
During the year ended December 31, 1995:
[1] - Acquired equipment under capital lease obligations with a net present
value of $63,000. [2] - Acquired WWR Technology, Inc., and in conjunction
therewith, recorded assets of $3,628,000 and
liabilities of $3,674,000.
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
[1] Basis of Presentation, Organization and Nature of Operations
On December 20, 1996, Lafayette Industries, Inc., (the "Company" or
"Lafayette"), acquired all of the issued and outstanding capital stock of SES
Holdings Corp., ("SESH"), (which at the date of the acquisition was an 80% owned
subsidiary of SIS Capital Corp., ("SISC"), which is a wholly owned subsidiary of
Consolidated Technology Group, Ltd., a publicly held company) and issued 1,000
shares of Class A preferred stock which is convertible at a ratio that will give
SISC a 65% ownership of Lafayette's fully diluted common stock upon stockholder
approval of an increase in the authorized number of common shares of Lafayette.
Contemporaneously with the reverse acquisition, Lafayette issued 1,000 shares of
Class B preferred stock which has a redemption value of $6,750,000. The Class B
preferred stock was issued as payment to SISC for $4,000,000 of subordinated
debt due to SISC and in exchange for the cancellation of $2,750,000 of preferred
stock of the underlying entities of SESH which was held by SISC.
The Class A Preferred shares issued are treated as issued by SESH for cash and
are shown as outstanding for all periods presented in the same manner as for a
stock split. The consolidated financial statements will reflect the results of
operations of the Company and SESH from the date of merger onward. The
consolidated financial statements prior to the date of merger reflect the
results of operations and financial position of SESH. Pro forma information on
this transaction is not presented as, at the date of this transaction, the
Company was considered a public shell and, accordingly, the transaction was not
considered a business combination. The Company's prior principal business, which
was principally the manufacture and sale of store fixtures, has been
discontinued.
As a result of the acquisition of SESH, the principal business of the Company
became the business of SESH. SESH was organized in 1994 as a wholly-owned
subsidiary of SISC, a non-public holding company owned 100% by Consolidated
Technology Group, Ltd, ("Consolidated"), a publicly held holding company. As of
December 31, 1996, SESH's subsidiaries consist of Sequential Electronic Systems,
Inc. ("SES"), S- Tech, Inc., ("S-Tech"), WWR Technology, Inc., ("WWR"),
Televend, Inc., ("Televend") and FMX, Corp., ("FMX").
SES was organized during 1986 as a wholly-owned subsidiary of Consolidated. SES
took over all of the manufacturing assets and related liabilities of the
precision electronic instrument operations of Consolidated. During 1990, all of
Consolidated's shares and notes in SES were assigned to SISC. During 1994, the
stock of SES was transferred to SESH from SISC. SES is primarily engaged in the
manufacture of electro-mechanical and electro-optical devices. Sales are made to
customers throughout the United States.
S-Tech was organized as a wholly-owned subsidiary of Consolidated. During 1990,
all of Consolidated's shares in S-Tech were assigned to SISC. During 1994, the
stock of S-Tech was transferred to SESH from SISC. S-Tech is primarily engaged
in the manufacture and assembly of aircraft instruments and vending devices for
sale to commercial and governmental institutions. Sales are made to customers
throughout the United States.
WWR was incorporated in 1992 for the acquisition of certain assets of the
professional audio speaker business of Klipsch and Associates, Inc. During 1993,
all of the stock of WWR was acquired by and operated as a business segment of
Trans Global Services, Inc., ("Trans Global"), a publicly held company. During
1995, Trans Global, a subsidiary of Consolidated, sold all of the stock of WWR
to SESH. WWR is primarily engaged in the manufacture of a professional line of
audio speaker products. Sales are made to customers throughout the world.
Televend was organized in December 1995 as a wholly owned subsidiary of SISC and
effective April 1, 1996, the stock of Televend was transferred to SESH. Televend
has developed and markets a line of telephone cards for general use. Televend
intends to ultimately sell the telephone cards using S-Tech's telephone calling
card vending machines and is currently selling the cards through an independent
network of sales representatives.
FMX was organized in 1995 and is a 51% owned subsidiary of SESH. The only
employee and founder of FMX owns or controls the remaining 49% of FMX. FMX is a
development stage company which designs, develops and integrates all of the
critical building blocks of a Fingerprint ID System.
The Company's principle business prior to the acquisition of SESH was the
design, manufacture and sale of customized store fixtures and merchandising
systems, through certain wholly owned subsidiaries. The Company's business focus
prior to the acquisition of SESH was to capitalize on its expertise in the
design and sale of store fixtures and merchandising systems by expanding its
sales force and by increasing its manufacturing operations to become a company
with a national market presence. As it became evident that the Company would not
be able to operate profitably, it sought a business opportunity which it felt it
could develop into a profitable business. Following this strategy, Lafayette
implemented plans to discontinue all of its prior business operations and
entered into an agreement to purchase SESH.
The acquisition of SESH was accounted for as a reverse acquisition, with SESH
being the surviving company for accounting purposes. In accounting for the
reverse acquisition, the equity of SESH, as the surviving company, and
Lafayette, as the acquired company, was recapitalized as of December 31, 1996.
The balance sheet information at December 31, 1996 reflects the consolidated
financial position of the Company with SESH as the surviving entity. The
statement of operations and the statement of cash flows for the years ended
December 31, 1996 and 1995 reflect the operations of SESH, the successor
corporation. Accordingly, the financial information presented in the Company's
Form 10-KSB for the year ended December 31, 1996 is not comparable with its Form
10-KSB for the year ended December 31, 1995, which reflected only the prior
Lafayette business.
F-9
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The Company's consolidated financial statements
include the accounts Lafayette Industries, Inc. and SESH and its affiliates,
SES, S-Tech, WWR, Televend and FMX. All material intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
Company had no cash equivalents at December 31, 1996.
Inventories - Inventories consist of raw materials, work-in-process and finished
goods. Raw materials are valued at the lower of cost (average price) or market.
The work-in-process and finished goods represent accumulated costs of raw
materials, direct labor and factory overhead on current work orders. Costs
accumulated under government contracts are net of progress payments. Management
has established an estimated reserve for obsolescence as of December 31, 1996.
Management feels that the remaining value of the inventory is reasonable and
that no further reserve is needed. This is based upon the existence of contracts
and projected sales which will require a portion of this inventory and the
expectation of future similar type contracts. Actual results could differ from
these estimates.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
are stated at cost less accumulated depreciation. The cost of equipment held
under capital leases is equal to the fair value of the leased property at the
inception of the lease. Depreciation is computed generally by the straight-line
method at rates adequate to allocate the cost of applicable assets over their
expected useful lives which range from five to seven years. Amortization of
capitalized leases is included with depreciation expense. Leasehold improvements
are amortized over the lesser of the improvements useful life or the term of the
lease.
Investments - The Company maintains its investments in common stock in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires certain investments that have readily determinable fair values to be
categorized as either trading, available-for-sale, or held-to-maturity. All of
the Company's equity investments in common stock are categorized as
available-for-sale and are recorded at fair value with unrealized gains and
losses recorded as a separate component of shareholders' equity. Additionally,
available-for-sale investments that are deemed to be permanently impaired are
written down to fair market value and such write down is charged to earnings as
a realized loss.
Trademark - The acquired trademark of WWR was valued at acquisition based on
fair value and is being amortized on a straight-line basis over 25 years. This
acquired trademark gives WWR a nonexclusive trademark license for the use of
Klipsch and Associates trademark "Klipsch" for use with various professional
loudspeaker products provided that the trademark is used only in connection with
professional loudspeakers. Klipsch and Associates' predecessor was incorporated
during the 1940's and has an established name as a leader in loudspeaker design
and innovation. Management believes that the acquisition of the Klipsch
Professional product line gives WWR one of the most long- established and
recognizable brand names in the industry. WWR is currently defending its right
to continue the use of such trademark. The Financial Accounting Standards Board
["FASB"] has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," addressing the accounting
for the impairment of long-lived assets that will be held and used, including
certain identifiable intangibles. Management of the Company evaluates the period
of amortization for the trademark to determine whether latter events and
circumstances warrant revised estimates of useful lives. This evaluation is done
by comparing the carrying value of the trademark to the value of projected cash
flows from the related operations (undiscounted and without interest charges).
Impairment is recognized if the carrying value of the trademark is greater than
the projected cash flows for related operations. Management does not believe
that there is any impairment of the trademark at December 31, 1996.
Organization Costs - Organization costs are recorded at cost and are being
amortized on a straight-line basis over five years.
Deferred Financing Costs - Deferred financing costs are amortized over the life
of the related debt which is three years. However, the life may be reduced
pending resolution of the debt default [See Note 12].
Warranties - WWR provides customers with various warranties and therefore is
exposed to the risk that its ultimate warranty liability may exceed amounts
accrued in the accompanying financial statements. Management believes that
future warranty payments in excess of such amounts accrued, if any, will not
have a significant impact on the Company's financial position and results of
operations. At December 31, 1996, WWR has approximately $15,000 accrued for
estimated warranty liabilities which amount is included with accrued expenses.
Actual results may differ from amounts accrued.
Revenue Recognition - Sales and profits under all fixed price type contracts are
accounted for under the unit of delivery method. Under the unit of delivery
method, sales and profits are recognized in proportion to the number of units
shipped in relation to total units ordered. Anticipated losses on contracts in
progress are charged to operations as soon as such losses can be determined.
Revenues not generated under fixed price type contracts are recognized when
product is shipped. The Company reserves amounts against revenues for estimated
product returns and sales discounts.
Research and Development - Research and development expense approximated
$262,000 and $87,000 for the years ended December 31, 1996 and 1995,
respectively.
F-10
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist of cash and accounts
receivable. Generally, the Company does not require collateral or other security
to support customer receivables. The Company routinely assesses the financial
strength of its customers and based upon factors surrounding the credit risk of
its customers establishes an allowance for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited. The Company places its cash with a high credit
quality financial institution. The amount on deposit that exceeds federally
insured limits is subject to credit risk. At December 31, 1996, the Company had
approximately $150,000 deposited in excess of federally insured limits. Revenues
from two U.S. government agencies approximated to $321,000 and $893,000 and
comprised approximately 5% and 20% of the total revenues for the years ended
December 31, 1996 and 1995, respectively. Sales to the two U.S. Government
Agencies were made by the Electra-Mechanical and Electro-Optical Products
Manufacturing Segment.
Advertising - The Company expenses advertising costs as incurred.
Advertising expense approximated $176,000 and $86,000 for the years
ended December 31, 1996 and 1995, respectively.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Options Issued to Employees - The Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," on January 1, 1996 for financial note
disclosure purposes and will continue to apply the intrinsic value method of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," for financial reporting purposes.
Fair Value of Financial Instruments - Generally accepted accounting principles
require disclosing the fair value of financial instruments to the extent
practicable for financial instruments which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. In assessing the fair value of these financial
instruments, the Company used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at that time. For
certain instruments, including cash, trade receivables and trade payables and
officer advances, it was estimated that the carrying amount approximated fair
value for the majority of these instruments because of their short maturities.
For long-term investment in marketable securities, fair value is estimated based
on current quoted market price. It was not practicable to estimate the fair
value of long-term debt, and amounts due to affiliated companies, due to the
substantial uncertainties involved, such as resolution of the various debt
defaults and litigation to which the Company is a party.
Loss Per Share - Loss per share of common stock is based on the weighted average
number of common shares outstanding for the period presented, plus the number of
shares issued in the reverse merger, as if they were outstanding for all periods
presented and assuming conversion of the Class A Preferred Stock into Common
Stock. Common stock equivalents are included in the computation when their
effect is dilutive.
[3] Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained losses
since inception and has an accumulated deficit at December 31, 1996 of
approximately $6.5 million. In addition, it is party to various litigation and
is in default on substantially all of its debt. The ability of the Company to
continue as a going concern is dependent upon the success of the Company's
marketing efforts, access to sufficient funding to enable it to continue
operations and its ability to resolve litigation favorably. The ability of the
Company to effect its transition, ultimately, to profitable operations is
dependent upon obtaining adequate financing and achieving a level of revenues to
support its cost structure. The failure of the Company to generate revenues at a
level in excess of its ongoing expenses may force the Company to reduce or cease
operations. Management plans to increase revenues of WWR by way of a sound
marketing plan to increase the domestic dealer base and by concentrating on its
international distribution. Furthermore, WWR plans to release a new "high tech"
range of loudspeakers to gain attention to the line and increase its worldwide
market share. SES and S-Tech plan to increase revenues through the introduction
of new products and through revenues which are expected to be generated in
connection with certain development agreements. Management is also in the
process of obtaining financing through financial institutions and other sources.
To date, no financing has been obtained other than that discussed in Note 24A.
There can be no assurance that management's plans to reduce operating losses or
obtain additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-11
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
[4] Receivables
Accounts receivable consist of the following as of December 31, 1996:
Trade accounts receivable $682,000
Less - Allowance for bad debts 51,000
Receivables, net of allowances $631,000
[5] Inventories
Inventories as of December 31, 1996 are as follows:
Finished goods $ 69,000
Work-in-process 1,663,000
Raw materials 2,174,000
---------
Total 3,906,000
Less: Reserve for obsolescence (781,000)
--------
Inventories, net $3,125,000
==========
During the years ended December 31, 1996 and 1995, approximately $381,000 and
$470,000, respectively, was charged to operations for the write-off of obsolete
inventory.
[6] Loan Receivable, Related Party
The Company is owed $85,000 for non-interest bearing advances to a director of
the Company. Such amount is expected to be collected during
1997.
[7] Plant, Plant and Equipment and Depreciation
Property, plant and equipment and accumulated depreciation as of December 31,
1996 are as follows:
Machinery and equipment $1,672,000
Vehicles 25,000
Tools and dies 654,000
Furniture and fixtures 288,000
Leasehold improvements 163,000
Computer equipment 10,000
Equipment under capital lease obligations 326,000
Total cost 3,138,000
Less: Accumulated depreciation (2,643,000)
--------
Property, plant and equipment, net $ 495,000
Depreciation expense charged to operations approximated $240,000 and $56,000 for
1996 and 1995, respectively.
F-12
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
[8] Notes Receivable
In December 1996, the Company accepted assignment of a purchase mortgage loan.
The loan bears interest at prime plus 2% (an effective rate of 10.25%) and
matures on May 1, 2002. Maturities on this note are as follows:
1997 $ 49,000
1998 98,000
1999 98,000
2000 98,000
2001 98,000
Thereafter 49,000
--------
Total $490,000
The entire balance of this note receivable has been classified as long-term as
the collection of this note receivable in 1997 is uncertain due to pending legal
issues [See Note 22].
[9] Investment in Common Stock
As of December 31,1996, the Company's investment in common stock consists of
1,060,000 shares of Trans Global Services, Inc. (See Notes 14, 17 and 24) :
Cost basis $1,546,000
Net unrealized holding gain included as a
separate
component of shareholders' equity 442,000
Fair Value $1,988,000
[10] Intangible Assets
Intangible assets as of December 31, 1996 are as follows:
Trademark $429,000
Less: Accumulated amortization (61,000)
--------
Trademark, net $368,000
========
Organization costs
(included in other assets) 67,000
Less: Accumulated amortization (57,000)
Organization costs, net $ 10,000
Deferred financing costs $526,000
Less: Accumulated amortization (57,000)
--------
Deferred financing costs, net $469,000
========
Amortization expense charged to operations was $28,000 for both years ended
December 31, 1996 and 1995.
The deferred financing costs represent warrants issued in connection with the
convertible debentures which are in default as of December 31, 1996. Therefore,
if the default is not cured, these costs will be charged to operations in the
future period [See Note 13].
[11] Due to Related Party
The amount due to a related party represents short-term advances made to the
Company by a director of the Company and his wife. The advances are non-interest
bearing and were made through several entities in which the directors hold a
controlling interest.
F-13
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
[12] Notes Payable
Notes payable is comprised of the following as of December 31, 1996:
[A] Note payable to Rosenthal and Rosenthal payable in quarterly
installments, due November 1999, currently in defaul $ 458,000
Note payable to Small Business Administration, currently in default.153,000
Note payable to National Westminster bank, USA payable in
monthly installments of $20,000 at prime plus 2%, [an effective
rate of 10.5%] at December 31, 1996, due March 20, 1997. 8,000
[B] Note payable to AllState Financing
The note carries an effective interest rate
of 24.5% at December 31, 1996. 217,000
[C] Note payable to former stockholder, requires monthly interest
payments at 13.5% with the principal due November 1997, currently
in default. 325,000
Total notes payable 1,161,000
Current portion 1,161,000
---------
Long-term portion $ --
=========
[A] The note payable to Rosenthal is guaranteed by Sunbelt Fixtures and
Lafayette Products (pre reverse merger subsidiaries of Lafayette). The note
agreement includes covenants which include among others, covenants restricting
dividend payments and requiring a stated net worth. At December 31, 1996, the
Company was in default of a negative covenant preventing mergers with outside
parties and a covenant requiring consolidated net worth in excess of $1,000,000.
Additionally, the Company failed to make a required payment in the first quarter
of 1997. Due to the above defaults, the interest rate is increased by 3% per
annum (effective rate of 13.25%).
[B] In 1996, the Company entered into an agreement to sell its accounts
receivable with recourse to a financing company for cash. Since the future
obligation under the recourse provisions cannot be reasonably estimated, the
amount of cash received under the agreement is recorded as a liability. The
amount received was $215,000 for fiscal 1996. The financing agreement is
collateralized by substantially all the assets of WWR.
[C] The note payable to a former stockholder is collateralized by accounts
receivable and is guaranteed by Consolidated, Trans Global Services, Inc. and
others. The note agreement includes covenants which include, among other
covenants, restrictions on dividend payments and borrowings of additional debt.
As of December 31, 1996, a required monthly interest payment on this note was
paid late and caused said note to be in default.
[13] Convertible Debentures
At December 31, 1996, the Company had outstanding $700,000 of convertible
debentures. These debentures bear interest at 8-1/2% per annum and are
convertible at a conversion price per each share of common stock equal to the
lesser of $4.00 per share or a specified percentage of the market value of the
stock on the day immediately preceding the conversion date. The debentures are
due in April and July of 1998. The Company issued detachable warrants in
conjunction with the debentures. Each debenture was issued with one such warrant
for the purchase of 8,333 shares of common stock at $2.00 per share. The
warrants expire in 1999. The value of the warrants is recorded as a discount on
bonds which offsets the amount of the liability under the debentures. At
December 31, 1996, the amount of unamortized discount was approximately
$259,000.
The Company is in default at December 31, 1996 for accrued interest on the
convertible debentures of approximately $35,000.
F-14
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
[14] Subordinated Notes Payable to Affiliated Companies
SIS Capital Corp. $ 2,187,000
The Trinity Group 557,000
----------
$2,744,000
SIS Capital Corp. - SIS Capital Corp. owns a controlling interest in the Company
and such amounts have arisen from cash advances and intercompany charges to the
Company's subsidiaries. The subordinated debt has no specified repayment
provisions. Of the total amounts due to SISC, $1,109,000 bears interest at 10%,
$75,000 bears interest at 8% and $1,560,000 is non-interest bearing. Due to the
non-interest bearing nature and unspecified payment terms, it was not
practicable to estimate the fair value of the subordinated amounts due to
affiliate. In addition, the Company has pledged its investment in Trans Global
Services, Inc. as collateral on this obligation [See Note 9].
The Trinity Group - The amounts owed to The Trinity Group are for unpaid
consulting fees for services provided to the Company's subsidiaries. The Trinity
Group is a wholly owned subsidiary of Consolidated which is the parent company
of SISC. There are no specified repayment terms and the amounts owed are
non-interest bearing.
[15] Lease Obligations
Capitalized Lease Obligations - The Company leases equipment and vehicles under
noncancellable capital leases which are collateralized by equipment and vehicles
having cost of $326,000 and accumulated amortization of $283,000 at December 31,
1996.
Future minimum payments under capitalized lease obligations are as follows as of
December 31, 1996:
1997 $ 125,000
1998 22,000
1999 12,000
2000 2,000
Total future minimum lease payments 161,000
Less: Amount representing interest (8,000)
Net present value of minimum lease payments 153,000
Current portion of obligations under capital
leases 119,000
Long-term portion of obligations under
capital leases 34,000
Included in the 1997 obligations is approximately a $100,000 lease obligation
which is in default.
Operating Lease Obligations - SES leases equipment under noncancellable
operating leases expiring in 1997. SES currently is on a month to month lease on
its primary facility. S-Tech leases a facility under a noncancellable operating
lease expiring in 1997 and such lease includes a renewal option for an
additional two years. WWR leases its manufacturing and administrative facility
and certain office and computer equipment under noncancellable operating leases
expiring in 1999.
Minimum future rental payments under noncancellable operating leases having a
remaining term in excess of one year are as follows as of December 31, 1996:
1997 $ 91,000
1998 77,000
1999 45,000
----------
Total minimum rental commitments $ 212,000
==========
Rental expense for 1996 and 1995 approximated $252,000 and $245,000,
respectively.
F-15
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
[16] Income Taxes
The Company and its consolidated subsidiaries apply the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
The major components of deferred income tax asset and liabilities are as
follows:
Deferred Tax Liability
Marketable securities $ (199,000)
----------
Deferred Tax Asset
Reserves and allowances 410,000
Stock based compensation 268,000
Net operation loss carry forwards 2,430,000
-----------
Total Deferred Tax Assets 3,108,000
----------
Net Deferred Tax Asset Before
Valuation Allowance 2,909,000
Valuation Allowance (2,909,000)
----------
Net $ --
==========
The Company recorded an increase in its valuation allowance of $1,244,000 over
the allowance at December 31,1995.
The Company has a net operating loss carry forward of approximately $5,400,000
of which approximately $700,000 will expire in 2009, $2,400,000 in 2010 and
$2,300,000 in 2011.
[17] Acquisitions
WWR Technology, Inc.:
Effective September 30, 1995, the Company purchased all of the stock of WWR
Technology, Inc. from Trans Global Services, Inc., ("TGS"), a subsidiary of
Consolidated in exchange for the repayment of approximately $2,100,000 of
subordinated notes payable that WWR owed to TGS. The repayment of such
intercompany debt was satisfied by the issuance of certain preferred convertible
stock by Consolidated to TGS through SISC. As a result of this repayment,
WWR, effective as of September 30, 1995, effectively replaced subordinated
notes payable to TGS with subordinated notes payable to SISC. At the time of
the purchase, WWR's liabilities exceeded its assets by $1,545,923 and TGS
issued 1,060,000 shares of its common stock to the Company which was valued at
$1,545,923 at the time of issuance. As a result of the transaction, all
historical asset and liability balances, which approximate fair market value,
were retained and no goodwill was recorded. The underlying assets and
liabilities acquired are as follows:
Assets:
Cash $ 47,000
Accounts receivable 474,000
Inventories 810,000
Property, plant and equipment 344,000
Trademark 386,000
Other assets 69,000
Liabilities:
Accounts payable and accrued expense 732,000)
Notes payable and capital lease obligation (567,000)
Subordinated notes payable to affiliate (2,375,000)
Value of common stock received from TGS
which is included in investments on the
Company's balance sheet $ 1,546,000
============
The transaction was accounted for using the purchase method of accounting and
WWR's operating activity is included in the Company's statement of operations
since September 30, 1995.
F-16
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
Televend Inc.:
Effective April 1, 1996, SISC transferred all of its ownership in Televend's
common stock to SESH. At the date of the transfer, Televend's accumulated
deficit was $171,000 for which SESH received a reduction in the subordinated
amounts due to SISC of $171,000. The underlying assets and liabilities acquired
are as follows:
Assets:
Cash $ 10,000
Inventories 19,000
Property, plant & equipment, net 4,000
Liabilities:
Accounts payable and accrued expenes (49,000)
Subordinated debt (155,000)
Reduction of subordinated debt to SISC $171,000
For accounting purposes, Televend's operating activity is included in the
Company's statement of operations since March 31, 1996.
FMX Corp.:
Effective January 1, 1996, SISC transferred its ownership in the FMX Corp.
equity to SESH. All material operating activity of FMX did not occur until 1996
and as such no assets or liabilities existed at the date of the transfer and the
Company's statements of operations includes all of the operating activity of
FMX.
Pro Forma Results:
The following pro forma unaudited results assume that the above
acquisitions occurred at the beginning of the indicated periods:
December 31,
1 9 9 6 1 9 9 5
------- -------
Revenues $6,145,000 $7,031,000
Net Loss $(3,103,000) $(3,806,000)
Net Loss Per Share $ ($ (.16)
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the indicated periods or of the future results of operations.
[18] Related Party Transactions
During 1996, SES received consulting services from The Trinity Group, an
unconsolidated affiliate. The Company's statement of operations includes
consulting expense of $127,000 in each of the years ended December 31, 1996 and
1995 for such services.
[19] Industry Segments
Since December 20, 1996, the principal business of Lafayette Industries, Inc.,
(the "Company" or "Lafayette") has consisted of four primary business segments:
(1) Audio Products Manufacturing which consists of a subsidiary that
manufactures and sells a professional line of loudspeakers; (2)
Electro-Mechanical and Electro-Optical Products Manufacturing which consists of
subsidiaries that manufacture and sell products such as devices that measure
distance and velocity, instrumentation devices and debit card vending machines;
(3) Prepaid Telephone Calling Cards, which consists of a subsidiary that sells
telephone debit cards; and (4) Fingerprint Identification Products which
consists of a subsidiary that is developing a fingerprint identification system.
The following provides certain information regarding the Company's business
segments for 1996 and 1995.
F-17
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Revenues 1996 1995
Audio Products Manufacturing $3,308,000 $ 626,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 378,000 3,862,000
Prepaid Telephone Calling Cards 387,000 --
Fingerprint Identification Products -- --
$6,073,000 $4,488,000
Loss from Operations 1996 1995
Audio Products Manufacturing $(751,000) $(437,000)
Electro-Mechanical and Electro-Optical Products
Manufacturing (1,557,000) (900,000)
Prepaid Telephone Calling Cards (268,000) --
Fingerprint Identification Products (189,000) --
Corporate and Other (8,000) --
$(2,773,000) $(1,337,000)
Capital Expenditures 1996 1995
---- ----
Audio Products Manufacturing $ 103,000 $ 68,000
Electro-Mechanical and Electro-Optical Products
Manufacturing -- 3,000
Prepaid Telephone Calling Cards 6,000 --
Fingerprint Identification Products 1,000 --
Corporate and Other -- --
--------- ---------
$ 110,000 $ 71,000
========= =========
Depreciation & Amortization 1996 1995
Audio Products Manufacturing $ 201,000 $ 47,000
Electro-Mechanical and Electro-Optical Products
Manufacturing 65,000 37,000
Prepaid Telephone Calling Cards 1,000 --
Fingerprint Identification Products 1,000 --
Corporate and Other -- --
$ 268,000 $ 84,000
========= =========
At
December 31,
1996
Identifiable Assets
Audio Products Manufacturing $1,478,000
Electro-Mechanical and Electro-Optical Products
Manufacturing 3,245,000
Prepaid Telephone Calling Cards 119,000
Fingerprint Identification Products 27,000
Corporate and Other 4,047,000
$8,916,000
F-18
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
[20] Capital Stock Transactions
The accompanying footnotes [A] through [G] detail stock transactions of
Lafayette prior to the reverse acquisition discussed in Note 1 and are presented
for informational purposes.
[A] In connection with a consulting agreement entered into in March 1996, the
Company conveyed a common stock purchase warrant, for which the consultant paid
$13,000, which entitled the consultant to purchase 130,000 shares of the
Company's common stock at a price of $2.625 per share. In May 1996, the
consultant exercised such warrant and purchased 130,000 shares of common stock
which yielded the Company net proceeds [after deducting issuance costs] of
$307,000.
[B] On April 17, 1996, the Company received $160,000 in exchange for two 8.5%
promissory notes with a face value of $80,000 each. These notes also gave the
holders the right to acquire an aggregate of 160,000 shares of the Company's
common stock at a price of $.25 per share, which rights were exercised at the
time of execution of the notes. In June 1996, the holders, in accordance with
the provisions of the notes, as amended, converted the principal amount of the
notes to 320,000 shares of common stock.
[C] In May 1996, the Company issued 8.5% promissory notes in the aggregate
amount of $320,000, these notes being convertible to shares of the Company's
common stock at a price of $.50 per share. The holders of these notes were also
given the right to purchase an aggregate of 400,000 shares of the Company's
common stock at a price of $.50 per share, which rights were exercised prior to
June 30, 1996. In July 1996, the holders converted the $320,000 promissory notes
to 640,000 shares of the Company's common stock at a price of $.50 per share.
[D] During the second quarter, 983,000 shares previously held in escrow, which
were not released, were returned to the Company and canceled.
[E] During the period of May 1996 through July 1996, $1,025,000 in convertible
debentures were sold of which $325,000 were converted to 182,918 shares of
common stock. These debentures bear interest at 8-1/2% per annum and are
convertible at a conversion price per each share of common stock equal to the
lesser of $4 per share or a specified percentage of the market value of the
common stock on the day immediately preceding the conversion date. The
debentures are due in April and July of 1998.
[F] In July 1996, 57,000 shares of the Company's common stock were issued to
consultants in return for services rendered. [G] In August 1996, 2,000,000
shares of common stock were issued at $.25 per share pursuant to Regulation S of
the Securities Act of 1933.
[H] In December 1996, the Company sold an aggregate of 4,000,000 shares of
common stock at $.25 per share, for a total of $1,000,000 to four offshore
investors pursuant to Regulation S of the Securities Act of 1933. Each investor
purchased 1,000,000 shares of common stock for $250,000. No underwriter was
involved in connection with such issuances and no brokerage or underwriting fees
or commissions were paid.
[I] On December 20, 1996, SIS Capital Corp. ["SISC"], a wholly-owned subsidiary
of Consolidated Technology Group, Ltd. ["Consolidated"], DLB, Inc. ["DLB"] and
Lewis S. Schiller, the sole stockholders of SES Holdings Corp. ["SESH"],
transferred all of the issued and outstanding capital stock of SESH to the
Company pursuant to an agreement dated as of December 20, 1996, among SISC, DLB,
Mr. Schiller and the Company, in exchange for shares of two newly-created
classes of the Company's preferred stock, the Class A Convertible Preferred
Stock ["Class A Preferred Stock"] and the Class B Redeemable Preferred Stock
["Class B Preferred Stock"] [See Note 1].
The Class A Preferred Stock provides for annual non-cumulative dividends of $100
per share which, at the Company's election, can be paid in Company common stock.
The Class A Preferred Stock carries one vote per share and the Class A Preferred
Stockholders have the right to elect one director. The Class A Preferred Stock
automatically converts to a number of shares of common stock based on a formula
which gives the Class A Preferred Stockholders a 65% ownership [approximately
20,500,000 shares at December 31, 1996] of the Company upon stockholder approval
of an amendment to the Company's certificate of incorporation to allow for at
least 80,000,000 shares of common stock. The Class A Preferred Stock has a
liquidation preference of $100 per share or $100,000 in the aggregate. The Class
A Preferred Stock participates equally with the Class B Preferred Stock as to
dividends, liquidation and dissolution.
F-19
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
SISC received 80% of the shares of Class A Preferred Stock and all of the shares
of Class B Preferred Stock. DLB and Schiller, each of whom owned 10% of the
outstanding common stock of SESH, did not receive the shares of Class A
Preferred Stock issuable in respect of their shares of SESH common stock, but
received the right to receive, at the time the Company's common stock is
issuable to SISC upon conversion of its Class A Preferred Stock, the number of
shares of Common Stock which would have been issuable to them if they held the
Class A Preferred Stock issuable in respect of their shares of SESH common
stock. In addition, SISC holds a warrant to acquire, for nominal consideration,
15% of the common stock of each of Lafayette's [formerly SESH's] subsidiaries
under certain conditions.
SESH's common stock was owned by SISC [80%], DLB [10%] and Mr. Schiller [10%].
DLB is owned by Ms. Carol Schiller, wife of Mr.Lewis S. Schiller, the Chairman
of the Board and Chief Executive Officer of Consolidated, SISC and SESH.
Mr. Schiller disclaims beneficial interest in DLB or in any securities owned
by DLB. Mr. Schiller acquired his stock in SESH pursuant to his employment
agreement with Consolidated.
Although the Class A Preferred Stock is entitled to one vote per share, upon the
conversion of the Class A Preferred Stock, SISC, DLB and Mr. Schiller would
receive such number of shares of Common Stock as equals 65% of the outstanding
Common Stock, on a fully-diluted basis after giving effect to the issuance of
the Company's Common Stock upon such conversion and all shares of the Company's
Common Stock reserved for issuance, including shares reserved for issuance
pursuant to certain anticipated financings, including the Regulation S.
Accordingly, the issuance of the Series A Preferred Stock and the issuance of
the Common Stock upon conversion of the Class A Preferred Stock results in a
change in control of the Company.
[J] Class B Redeemable Preferred Stock - The Class B Preferred Stock is
non-voting and provides for annual non-cumulative dividends of $100 per share
which, at the Company's election, can be paid in Company common stock. The Class
B Preferred Stock has a redemption value of $6,750 per share or $6,750,000 in
the aggregate. The Class B Preferred Stock may be redeemed, in whole or in part,
at any time commencing March 1, 1997. Until all shares of the Class B Preferred
Stock have been redeemed the Company must apply 25% of the net proceeds from any
equity sales subsequent to March 1, 1997, and commencing December 31, 1997, the
greater of 25% of the Company's income before taxes or cash flow from
operations, as defined, in excess of $250,000 to the redemption of the Class B
Preferred Stock. The Class B Preferred Stock has a liquidation preference of
$6.75 per share or $6,750 in the aggregate.
[21] Stock Options and Warrants
Under the Company's employee incentive stock options plan, options to purchase
stock were granted to employee beginning in 1994. The options vest over a five
year period and have a contract life of 10 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, for stock options
issued to employees in accounting for its stock option plans. No compensation
expense has been recognized for the Company's stock-based compensation plans.
The exercise price for all stock options issued to employees during 1996 and
1995 was equal to the market price of the Company's stock at the date of grant.
F-20
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
A summary of the activity under the plan is as follows:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
Shares Price Life
Balance - December 31, 1994 172,500 $ 6.00
Granted 426,500 4.22
Exercised -- --
Forfeited/Expired -- --
---------- ---------
Outstanding - December 31, 1995 599,000 4.73
- -------------------------------
Granted -- --
Exercised -- --
Forfeited/Expired (250,500) (4.34)
---------- ---------
Outstanding - December 31, 1996 348,500 $ 4.97 7.13 Years
- ------------------------------- ========== ========= ==========
Exercisable - December 31, 1996 -- -- --
- ------------------------------- ========== ========= ========
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net loss and loss per
share would have been increased, on a pro forma basis, by approximately
$120,000, or $.01 per share for the year ended December 31, 1996 and by
approximately $150,000, or $.01 per share for the year ended December 31, 1995.
The weighted average fair value of stock options granted to employees used in
determining the pro forma amounts is estimated at $-0- and $4.22 for the years
ended December 31, 1996 and 1995, respectively using the Black-Scholes
option-pricing model for the pro forma amounts with the following weighted
average assumptions:
December 31,
1 9 9 6 1 9 9 5
Risk-free Interest Rate N/A 6.36%
Expected LifeN/A 6 Years
Expected Volatility N/A 292.12%
Expected Dividends None
Net income and net earnings per share as reported, and on a pro forma basis as
if compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:
December 31,
1 9 9 6 1 9 9 5
Net [Loss]:
As Reported $ (3,066,000) $ (1,506,000)
------------ ------------
Pro Forma $ (3,186,000) $ (1,656,000)
------------ ------------
Net [Loss] Per Share:
As Reported $ (.10) $ (.06)
------------ ------------
Pro Forma $ (.11) $ (.07)
------------ ------------
F-21
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During 1996, the Company issued 499,990 stock warrants to non-employees at
exercise prices below or equal to the market price at the date of grant, ranging
from $2 to $3, and having a weighted average exercise price of $2.50. All of
these warrants became fully vested on date of grant. The total cost of issuing
these stock warrants to non-employees during 1996 is approximately $1,309,000.
Of this amount, $900,000 relates to a warrant issued in conjunction with a debt
issuance and is being charged to additional paid-in capital and deferred
financing costs. The remaining $409,000 was for detachable warrants issued with
the same debt issuance. This is also being charged to additional paid-in
capital. The cost of the warrants is being amortized over 3 year life of the
related debt. The weighted average fair value of stock warrants granted to
non-employee during 1996 is estimated at $2.62 using the Black-Scholes
option-pricing model and using a weighted average risk-free interest rate of
5.96% and a weighted average expected life of 3 years with an estimated
volatility of 292%. No dividends are expected to be paid during the expected
life of the warrants.
At December 31, 1996, the company has warrants outstanding and exercisable to
purchase the following:
249,990 shares of common stock at an exercise price of $2 per share expiring in
April 1999 250,000 shares of common stock at an exercise price of $3 per share
expiring in April 1999 632,500 shares of common stock at an exercise price of $6
per share expiring in May 2004
62,500 shares of common stock at an exercise price of $9 per share expiring in
May 2004
[22] Commitments and Contingencies
Litigation
Lafayette Industries, Inc.:
The Company's prior principal business, which was the manufacture and sale of
store fixtures, was discontinued in 1996. The manufacturing facilities for these
operations were located in Mexico and were seized by the landlord. Although the
Company is contesting the seizure, no assurances can be given that the Company
will be able to realize any future benefits from these assets and has placed a
reserve for the full amount of such assets.
During the year ended December 31, 1996 Lafayette either sold or closed all of
its operating subsidiaries from its prior principal business. The Company and
its subsidiaries, are also contingently liable individually and jointly with
others as guarantors of long-term debt and obligations principally relating to
various debt agreements, leased equipment and facilities. In connection with
those transactions, the Company has been notified that it is party to various
litigations, with one claim ranging up to approximately $1,600,000. The Company
believes it may also be identified as a party to as yet unasserted claims which
may be substantial in amount. The Company has estimated its exposure to
contingent liabilities and guarantees and believes the amount could range
between $300,000 and $1,600,000 and management has accrued the minimum amount of
$300,000. Although management has made what it feels is its best estimate of the
liabilities, the nature of the liabilities are subject to substantial
uncertainty. The amount of potential additional liabilities above the $300,000
accrued can not be reasonably estimated. It is at least reasonably possible that
the liability could be revised in the near term.
WWR Technology, Inc.:
There was an action pending against WWR alleging claims against WWR for
unauthorized use of the Klipsch trademark. WWR denies these allegations and
asserted there had been no breach of contract. This case was dismissed in 1996
by the granting of a motion for summary judgment. The plaintiff maintains the
right to appeal this decision.
F-22
<PAGE>
Lafayette Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
[23] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996.
Earlier application is not allowed. The provisions of SFAS No. 125 must be
applied prospectively; retroactive application is prohibited. SFAS No. 125
supercedes SFAS No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse." While both SFAS No.
125 and SFAS No. 77 required a surrender of "control" of
financial assets to recognize a sale, the SFAS 125 requirements of sale are
generally more stringent. The Company does not recognize sales
under SFAS No. 77 and, therefore, the changes in SFAS No. 125 are not expected
to have a material impact on the Company.
The FASB issued Statement of Financial Accounting Standards ["SFAS"] No. 128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. SFAS No. 128 simplifies the earnings per share
["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No.
15, and related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity, similar to the fully diluted EPS of APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, SFAS No. 128 will require
restatement of all prior-period EPS data presented; however, the Company has not
sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will
have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[24] Subsequent Events
[A] On February 7, 1997, the Company sold an aggregate of 2,000,000 shares of
Common Stock at $.25 per share, for an aggregate of $500,000 to two offshore
investors pursuant to Regulation S of the Securities Act of 1934 each of which
purchased 1,000,000 shares of Common Stock for $250,000. No underwriter was
involved in connection with such issuances and no brokerage or underwriting fees
or commissions were paid.
[B] SESH has an agreement pursuant to which SESH is to pay a The Trinity Group,
Inc., a monthly management fee of $25,000 for the five-year period commencing
January 1, 1997.
[C] The Company's investment in Trans Global Services, Inc. had a fair value of
approximately $1,300,000 on April 4, 1997. This estimated value represents a
decrease of $688,000 from the December 31, 1996
fair value of $1,988,000.
F-23
<PAGE>
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 authorized.
LAFAYETTE INDUSTRIES, INC.
Date: April 15, 1997 By:/s/ Lewis S. Schiller
---------------------
Lewis S. Schiller
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Lewis S. Schiller President and Director April 15, 997
Lewis S. Schiller (Principal Executive Officer)
/s/ Lloyd C. Robinson Chief Financial Officer April 15, 1997
Lloyd C. Robinson (Principal Financial and
Accounting Officer)
Director _______________
Director _______________
<PAGE>
Lafayette Industries, Inc.
Index to Exhibits
December 31, 1996
EX-21.1 List of Subsidiaries of Registrant.
EX-27 Financial Data Schedule
(filed only to the SEC in electronic format)
Lafayette Industries, Inc.
EX 21.1 List of Subsidiaries of the Registrant
State of
Company Incorporation
Lafayette Industries, Inc. Delaware
SES Holdings Corp. Delaware
Sequential Electronic Systems, Inc. Delaware
S-Tech, Inc. Delaware
WWR Technology, Inc. Delaware
Televend, Inc. Delaware
FMX Corp. Delaware
Sunbelt Fixtures Texas
Lafayette Products Texas
Lafayette de Mexico SA de CV Mexico
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
this schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statements of operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> dec-31-1996
<PERIOD-END> dec-31-1996
<CASH> 1,094,000
<SECURITIES> 0
<RECEIVABLES> 631,000
<ALLOWANCES> 0
<INVENTORY> 3,125,000
<CURRENT-ASSETS> 4,986,000
<PP&E> 495,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,916,000
<CURRENT-LIABILITIES> 6,296,000
<BONDS> 0
0
6,750,000
<COMMON> 94,000
<OTHER-SE> (7,002,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,916,000
<SALES> 6,073,000
<TOTAL-REVENUES> 6,073,000
<CGS> 5,591,000
<TOTAL-COSTS> 2,874,000
<OTHER-EXPENSES> (9,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302,000
<INCOME-PRETAX> (3,066,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,066,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,066,000)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
