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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ELEKTRYON
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0353324
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
6565 Spencer Street, Suite 206, Las Vegas, NV 89119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (702) 361-1719
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which
to be so Registered Each Class is to be Registered
- ------------------- ------------------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of Class)
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ELEKTRYON
INDEX TO FORM 10
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PAGE
Item 1. Business............................................................................................. 1
Item 2. Financial Information................................................................................ 29
Item 3. Properties........................................................................................... 34
Item 4. Security Ownership of Certain Beneficial Owners and Management....................................... 34
Item 5. Directors and Executive Officers..................................................................... 35
Item 6. Executive Compensation............................................................................... 36
Item 7. Certain Relationships and Related Transactions....................................................... 42
Item 8. Legal Proceedings.................................................................................... 42
Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters...... 42
Item 10. Recent Sales of Unregistered Securities.............................................................. 43
Item 11. Description of Registrant's Securities to be Registered.............................................. 44
Item 12. Indemnification of Officers and Directors............................................................ 44
Item 13. Financial Statements and Supplementary Data.......................................................... 44
Item 14. Changes in and Disagreements with Accountants........................................................ 45
Item 15. Financial Statements and Exhibits.................................................................... 45
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ELEKTRYON
FORM 10
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF THE BUSINESS.
Elektryon, a Nevada corporation (also referred to herein as the
"Company"), develops, assembles and has recently begun to market the
POWR/MASTR(TM), a natural gas-fueled product designed to generate
uninterruptible electricity on-site for the rapidly growing distributed
generation market. Elektryon was incorporated on March 1, 1994 under the name
Engine Corporation of America. On February 12, 1996, the Company changed its
name to Engine World, Inc., and on June 1, 2000, the Company changed its name to
Elektryon. Elektryon's principal executive offices are located at 6565 Spencer
Street, Suite 206, Las Vegas, Nevada 89119. For a discussion of the risks
associated with an investment in Elektryon, see the "Risk Factors" section of
this Item 1.
The Board of Directors of Elektryon has adopted a plan of
reorganization (the "Plan of Reorganization"), subject to shareholder approval,
pursuant to which Elektryon has entered into an Asset Acquisition Agreement with
Solo Energy Corporation ("Solo") under which Solo will acquire substantially all
of Elektryon's assets in exchange for (a) $5 million in cash, subject to
adjustment, (b) 51,878,788 shares of Solo's common stock, par value $.0001 per
share ("Solo Common Stock"), (c) up to 36,363,636 additional shares of Solo
Common Stock to the extent Elektryon achieves specified sales and other goals
after the closing of the proposed transaction, and (d) Solo's assumption of
specified liabilities of Elektryon. The 51,878,788 shares of Solo Common Stock
to be received by Elektryon (including shares to be deposited in an escrow
account but not including any earn-out shares) together with the shares of Solo
Common Stock issuable upon exercise of options to be granted to executive
officers of Elektryon upon consummation of the transaction (adjusted by the
treasury stock method) will represent approximately 56% of the then outstanding
shares of Solo Common Stock after giving effect to (i) the exercise of all then
outstanding warrants of Solo to purchase shares of Solo convertible preferred
stock at $1.65 per share or less and (ii) the conversion of all then outstanding
Solo convertible preferred stock (including the shares of Solo convertible
preferred stock referred to in clause (i)). This percentage will be reduced by
any future sales of securities by Solo. Elektryon understands that Solo is
currently seeking to raise approximately $30 million through the sale of a
series of convertible preferred stock at a price equivalent to $1.65 per share
of Solo Common Stock. There can be no assurance that any such sale will occur or
what the aggregate dollar amount or per share price will be if a sale occurs.
The terms governing the proposed transactions (collectively, the "Asset
Acquisition") are summarized below. SEE " -- THE REORGANIZATION -- THE ASSET
ACQUISITION AGREEMENT."
In connection with the Asset Acquisition, the Company intends to seek
from certain of its shareholders a waiver and release of certain identified
potential securities claims which the Company's shareholders may have against
the Company and representatives of the Company in connection with the sale of
securities of the Company. Shareholders who sign a waiver and release of such
claims will receive an additional fraction of a share of common stock, par value
$0.001 per share, of Electryon ("Common Stock") for each share of Common Stock
they purchased from the Company for more than $11.00 per share in cash or, if
they purchased shares from the Company for $11.00 per share or less or did not
pay any cash for shares, nominal consideration of $10.00 per holder, regardless
of the number of shares held. Solo's obligations under the Asset Acquisition
Agreement are
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conditioned on Elektryon's obtaining such waivers from shareholders representing
at least 60% of the aggregate shares of Common Stock held by all of Elektryon's
shareholders. Only shareholders of Elektryon who are "accredited investors" (as
such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act")) will be asked to
waive and release such claims at the time of such solicitation. SEE "--THE
REORGANIZATION -- THE WAIVER AND RELEASE SOLICITATION."
If Elektryon's Plan of Reorganization, including the Asset Acquisition
Agreement, is approved by Elektryon's shareholders and the Asset Acquisition is
consummated, Elektryon will wind up its affairs and transfer its assets to a
liquidating trust (the "Liquidating Trust"). Elektryon's shareholders will
receive beneficial interests in the Liquidating Trust in proportion to their
respective interests in Elektryon. SEE " -- THE REORGANIZATION -- THE
LIQUIDATING TRUST."
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates as a single industry segment within the meaning of
Statement of Financial Accounting Standards No. 131.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
OVERVIEW
If the Asset Acquisition is consummated, Elektryon will transfer
substantially all of its assets to Solo and wind up its business. The following
description summarizes Elektryon's current business before the closing of the
Asset Acquisition, and will continue to apply if the Asset Acquisition is not
consummated and Elektryon continues its business operations.
Elektryon develops, assembles and has recently begun to market the
POWR/MASTR(TM), a product designed to generate uninterruptible electricity
on-site for the rapidly growing distributed generation market. Elektryon
believes it is one of the first distributed generation companies to commercially
manufacture on-site power generation devices that may eventually serve as a
baseload power source. The POWR/MASTR(TM) is a specially designed natural
gas-fueled reciprocating engine with high fuel efficiency and low emissions
levels which produces on-site electricity for a wide range of commercial and
industrial applications. The POWR/MASTR(TM) uses patented technological
modifications to a standard General Motors ("GM") light duty truck gasoline
engine that improve its efficiency, capacity and longevity.
As of April 2001, Elektryon had installed 21 test units at commercial
and industrial sites and had installation agreements for an additional 4 test
units. All of the installed units are operating under test arrangements by which
the host site receives free use of a POWR/MASTR(TM) in exchange for permitting
Elektryon to test the unit in actual use, and use it for promotional purposes.
The Company believes the POWR/MASTR(TM) can be utilized effectively in
a broad range of applications. As a result Elektryon intends to target a number
of distributed generation markets, including:
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- peak shaving,
- back up / standby power,
- cogeneration, and
- resource recovery.
The Company believes that customers are increasingly looking for ways
to manage electricity prices in today's volatile price environment. Elektryon
plans to focus product marketing in North America in areas with historically
high or volatile average utility prices and, internationally, in areas where
basic electric grid infrastructure is deficient or not present. In addition,
Elektryon plans to market to customers with increasing demands for high quality,
reliable power, primarily to the customers of strategic partners, such as
Energy Service Companies ("ESCs") that have large end-user customer bases. The
Company believes that the growth of data and telecommunications infrastructure
and increase in power disruptions, as reported by the U.S. Department of Energy,
should continue to support this marketing channel. Where appropriate, Elektryon
expects to work to establish partnerships with local and national corporations
to effectively market the POWR/MASTR(TM).
The Company has recently begun marketing a 100 kilowatt ("kW")
POWR/MASTR(TM) that can be used as a peaking or standby power source and, with
further development, as a baseload power source. Elektryon works with the local
utility in each customer installation to ensure that all the necessary permits
are obtained and standby charges are minimized for the customer. The total cost
per kilowatt hour to end users consists of installation costs, maintenance
costs, capital expenditures for the unit, fuel costs and a monthly standby power
charge payable to the local utility. The actual cost will vary based on fuel
costs and standby power charges that differ geographically. The unit is easily
transportable and up to eight units can be linked to meet large and fluctuating
load demands for electricity.
While Elektryon is currently focused on the commercial development and
marketing of the 100 kW POWR/MASTR(TM), the Company is actively continuing
research and development efforts as a means to enhance performance and
efficiency, add features and functionality to the POWR/MASTR(TM) and develop new
units in other kW ranges to satisfy larger and smaller customer needs. SEE "
- -- RESEARCH AND DEVELOPMENT."
Elektryon intends to concentrate primarily on the commercial on-site
generation and the premium power markets that on a combined basis is estimated
to reach $35 billion in the United States and $100 billion worldwide by 2010.
Elektryon believes that large retail chains, supermarkets, restaurants, hotels,
and other businesses that traditionally pay high costs for electricity and whose
business revenues are directly affected by electricity disruptions, would
greatly benefit from the cost savings and reliability associated with the
POWR/MASTR(TM). Elektryon also believes that the POWR/MASTR(TM) is well suited
for large commercial and office complexes, hospitals, high tech,
telecommunications, and other companies that place a premium on reliable, high
quality power.
As of April 2001, Elektryon had installed POWR/MASTR(TM) units in a
number of various locations, including 4 units at Kmart, in Linden, N.J. and 1
unit at Albertson's grocery store in Rancho Bernardo, California. These units
continue to generate electricity in test and demonstration mode. Elektryon is
currently installing four linked POWR/MASTR(TM) units at a
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Wal-Mart in Chula Vista, California. In 2000 the Company sold and installed 3
units at West Meadows Ice Arena, Rolling Meadows, Illinois, which units
constitute the only sales the Company has made since inception.
Other than the West Meadows Units, the Company's other installations
will undergo testing and review periods, but at this time the Company does not
have any purchase or lease agreements with these companies. With the exception
of the Albertson's unit and the new Wal-Mart installation, these units, referred
to as C-1 units, were prototypes for testing and demonstration. The C-3 units,
the Company's commercial product, will be sold or leased to end-user customers
or to ESCs that already have large customer bases to whom they will sell
electricity, primarily using the C-3 unit as a peaking device. In California,
where there are very high charges for peak power in the $0.30 per kW range, the
POWR/MASTR(TM) can produce electricity at half the grid price.
PRODUCT
The POWR/MASTR(TM) is designed to operate efficiently on clean burning
natural gas or other vaporous fuels while producing a high amount of power and
torque at very low speeds. All of the Company's design improvements to the GM
light truck gasoline engine are intended to result in longer life, better fuel
efficiency, greater reliability, and environmentally safer operating conditions.
Elektryon is currently focusing on the commercial development and
marketing of a 100 kW C-3 POWR/MASTR(TM) unit. The 100 kW POWR/MASTR(TM)
generates electricity using natural gas, propane, butane, or methane for fuel.
It is installed at the location where the electricity is in demand. The 100 kW
unit uses 10 to 14 therms of natural gas fuel per hour to deliver the 100 kW,
significantly better than competing microturbines. Up to eight 100 kW units can
be linked together to satisfy a larger customer's electricity needs. This
modularity component can also prevent the total loss of electricity upon the
shutdown of one unit among multiple units linked together.
TECHNOLOGY
The base of the POWR/MASTR(TM) technology is an internal combustion
engine, the same as that found in a car or truck. Elektryon makes certain
patented modifications to the internal combustion engine which are designed to
improve the efficiency, reliability, emissions profile and electricity
generation capability of the engine. Without the Elektryon patented
improvements, Elektryon's base engine, the GM 7.4L engine, produces 60 kW hours
of power using 13 therms of fuel, compared to the POWR/MASTR(TM) which produces
100 kW hours of power using 10 to 14 therms of fuel.
The POWR/MASTR'S(TM) on-site generation system integrates a rotating AC
alternator, together with a natural gas fueled, internal combustion power
source. This method of coupling these elements with a sophisticated software
enabled control and communications system, is advanced within the industry.
Innovations incorporated into the product include:
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- - total air/fuel mixture cooling,
- - velocity intake manifolds,
- - tuned intake port,
- - tuned exhaust port,
- - pulse loss correction gear train,
- - non-parasitic loss mixture charging,
- - high thermal efficiency, and
- - innovative head and piston design.
In several POWR/MASTR(TM) applications, multiple POWR/MASTR(TM) units
are capable of operating together, while simultaneously operating in parallel
with the utility. Utilizing a rotating AC alternator makes paralleling with the
utility possible because it generates the same type of voltage, current, and
frequency as that which is available from the utility.
RESEARCH AND DEVELOPMENT
Elektryon intends to significantly expand its current engineering and
production staff. From January 1, 1998 through April 30, 2001, Elektryon has
expended approximately $16.9 million on research and development. The Company
recognizes the importance of research and development to product innovation and
expects to spend as much as $5 million to develop the 100 kW C-4 POWR/MASTR(TM)
and begin the development of other new products. These potential products
include 200 kW and 50 kW POWR/MASTRS(TM). Elektryon believes that the new C-4
unit will incorporate numerous improvements in design to improve efficiency,
reduce emissions and noise levels, and reduce the overall manufacturing costs
relative to the C-3 unit.
The research and development team at Elektryon developed the C-3 unit
to produce more horsepower than a standard gasoline engine while operating on
natural gas. In addition, the C-3 POWR/MASTR(TM) has the ability to produce 100
kW using 10 to 14 therms of natural gas, approximating a 27% to 31% efficiency
level. This compares to the lower efficiency level of a standard engine or
microturbine, which typically performs in the range of 21% to 27% efficiency.
The POWR/MASTR(TM) has met these milestones while being fueled on standard
utility natural gas with gas line pressure of 5 psi. The POWR/MASTR(TM) is also
characterized by a sophisticated monitoring and control system. All current
POWR/MASTR(TM) installations include an Elektryon developed communications line
to provide Elektryon with online real time remote access to installed units.
Elektryon developed POWR/MASTR'S(TM) monitoring features to alleviate the
customer's need to monitor and control its own power plant. The POWR/MASTR'S(TM)
on-site energy system can automatically alternate from generating electricity to
obtaining electricity from an electric utility during periods when the utility
offers lower pricing, adding to the advantages of an on-site energy system.
To expedite product advancement and development, Elektryon combines the
design and engineering accomplishments of its internal staff together with those
developed by outside firms. Elektryon utilizes the technological advances from
various industries and strongly encourages every contractor and vendor that is
affiliated with the POWR/MASTR(TM) to go beyond their specified focus and
deliver new ideas and solutions. While some other distributed generation
equipment companies rely solely on in-house engineering, Elektryon believes that
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there are valuable and applicable engineering and technological advances
available from outside firms.
Although cost savings advances in producing parallel interconnect
switchgear have been made, advances to further reduce costs are being developed.
Elektryon engineers are working to improve accessibility and reliability as it
relates to the remote monitoring network.
MANUFACTURING, SOURCING AND QUALITY CONTROL
The unique engineering design of the POWR/MASTR(TM) facilitates low
cost manufacturing, efficient assembly and reliable quality control processes.
Elektryon avoids capital intensive manufacturing facilities by out-sourcing the
manufacturing of the POWR/MASTR'S(TM) components and assembles these components
in its state of the art Odessa, Texas facility. In addition, Elektryon believes
that its product cost will decrease if it obtains economies of scale.
MANUFACTURING AND ASSEMBLY
Elektryon currently assembles units in Odessa. The facility was
designed for a manufacturing capacity of 4,800 units per year, although it has
not been operated at that rate. The Company has produced a limited number of
POWR/MASTR(TM) units for testing in preparation for beginning its commercial
operations.
Prior to release of the product into the manufacturing process, all
assembly information is documented in the form of work instructions with digital
photographs. All tasks are documented down to each nut, bolt and washer. The
assembly process is conducted in a continuous flow environment. All tools
necessary to perform each task are assigned to the workstation. Every component
is stored at the point of consumption, and is replenished through a just-in-time
system by material coordinators. Time studies are performed for every task,
thereby allowing the Company to balance the amount of work performed in each
operation to ensure that work content does not create bottlenecks, and to better
predict output. An Elektryon objective is to increase volumes by decreasing
cycle time through the assembling of components in parallel.
The Company has expansion plans for the Odessa facility designed to
increase the overall capacity to 8,400 units per year if sales so require.
Elektryon currently is reviewing several sites, both domestic and international,
for further expansion to increase manufacturing as needed.
SOURCING
Elektryon sources most of its components from contract manufacturers
and uses standard off the shelf parts where possible. Approximately 80% of the
parts used in the POWR/MASTR(TM) are available off the shelf. This strategy is
intended to permit the Company to rapidly increase production volumes while
maintaining high inventory turns. The POWR/MASTR(TM) components are currently
bought through a manual purchase order process, which is expected to be
automated with the implementation of a PeopleSoft(TM) materials management
system.
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Most of the components are dual sourced, except that the Company does rely
on single suppliers for engines, generators, control systems and automatic
paralleling switch units. Elektryon's engines are purchased from GM. After
disassembling and reassembling the engine using several Company-specific parts,
the only section of the stock engine remaining is the block and crankshaft. The
entire upper portion of the engine is reassembled with parts designed and
manufactured to meet Elektryon's technological specifications for natural gas
fueling. Newage Stamford Inc. supplies the current generator and Encorp supplies
the current electronic control system. Currently, the only supplier of the
electronic controls is Encorp. The Company is in active discussions with another
potential supplier of less costly and higher functionality control systems. The
Company believes that if relations with any of its sole source suppliers for
engines, generators or control systems falter, other manufacturers can supply
the required POWR/ MASTR(TM) components. Cutler Hammer is the sole source of the
automatic paralleling switch unit used in the POWR/MASTR(TM). The Company is not
aware of any other suppliers who would produce these units to the Company's
specifications and time requirements. Although the Company is working to
redesign the POWR/MASTR(TM) to allow for multiple switch unit sources, the
Company could see significant delays and interruptions if its sole source for
this component faltered. Elektryon constantly reviews other suppliers' products
in order to increase the Company's options for suppliers and to continue
improving the functionality of all the components incorporated into the
POWR/MASTR(TM).
QUALITY CONTROL
Elektryon's quality control process is integrated into the
manufacturing system. Quality control verifications are performed by
manufacturing personnel after each workstation has completed its task. Quality
control personnel at points throughout the assembly area perform a redundant
verification. A functional test of the finished unit is performed by the quality
control department at the end of the assembly process, where 100% of the units
are put through a series of real life scenarios and measured against expected
standards.
ENVIRONMENTAL COMPLIANCE
Elektryon is subject to federal and state clean air emission standards
as well as noise abatement regulations. Elektryon believes the C-3 unit complies
with applicable environmental laws and regulations.
SEASONALITY
Elektryon believes that its business will not be affected by seasonal
factors, except to the extent that interest in alternative sources of
electricity such as the POWR/MASTR(TM) may increase during periods when warm
weather causes an increase in power usage and electrical rates.
INTELLECTUAL PROPERTY AND PATENTS
Elektryon regards its patented intellectual property, trademarks,
copyrights, service marks, trade dress, trade secrets and similar intellectual
property as critical to its success. The U.S. Patent and Trademark Office has
issued a patent with more than 90 claims on the POWR/MASTR(TM) technology.
COMPETITION
The power generation market is highly competitive and undergoing a
period of change resulting from restructuring and deregulation of the power
industry. The Company believes that superior technologies will compete on the
basis of:
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- - Cost - Emissions
- - Efficiency - Reliability
- - Scalability - Functionality
- - Manufacturing Capability
The Company faces competition from electric utilities. The Company also
competes with other distributed generation technologies, including
microturbines, fuel cells, and solar power technologies. The majority of
existing reciprocating engine products of competitive companies are used for
back-up power. The most well established of such companies include Caterpillar,
Waukesha, Cummins Engine, Detroit Diesel, Generac and Tecogen.
Elektryon competes with microturbine manufacturers for secondary power
applications between 50kW and 500 kW. Microturbine manufacturers include a
number of well established companies, the majority of which are either publicly
traded on a major securities exchange or subsidiaries of such companies. These
include Capstone Turbine Corporation ("Capstone"), EnergyNow (DTE Energy Co.,
Pratt & Whitney Inc., and Turbo Genset joint-venture), Honeywell (AlliedSignal),
Mitsubishi Heavy Industries Ltd., NREC (Igersoll-Rand Co. Inc.), Toyota Motor
Corp., Turbec (Volvo/ABB joint-venture) and Elliot. At the present time, the
Company believes that only Capstone is shipping commercial products. The Company
believes that microturbines will be the distributed generation devices most
likely to provide competition due to their current technological development,
emissions and cost of production.
Elektryon does not view fuel cells as a principal competitor due to
their high installed capital costs, lack of commercially viable products, and
low power output. At the present time, the Company believes that International
Fuel Cells, a division of United Technologies Corporation, is the only company
commercially producing fuel cells. Publicly traded fuel cell companies include
Avista Laboratories Inc., Ballard Power Systems, Fuel Cell Energy, Global
Termoelectric, H Power, Manhattan Scientifics, Medis Technologies, Millennium
Cell, Plug Power, and Proton Energy Systems.
EMPLOYEES
As of April 30, 2001, the Company employed 60 persons, of whom 31
were primarily engaged in manufacturing, 5 in research and development
activities, 6 in customer service and support and 18 in sales, marketing and
general administration services. None of the Company's employees are currently
represented by a labor union. Elektryon considers its relations with its
employees to be good.
LITIGATION
On March 9, 2001, Bill Eggar, Mike Lewis and E.L. Energy Connection,
Inc. commenced an action against Elektryon and its former Chief Executive
Officer, Philip Meisinger, in the District Court of Ector County, Texas alleging
that defendants breached (i) an agreement to pay finder's fees to Messrs. Eggar
and Lewis for introducing investors to
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Elektryon, and (ii) an agreement to buy out an alleged distribution agreement
pursuant to which plaintiffs marketed Elektryon's products to prospective
customers. Plaintiffs are seeking unspecified money damages, an accounting with
respect to proceeds from the sale of shares of Common Stock, and specific
performance of the alleged agreement to buy out the alleged distribution
agreement for 35,000 shares of Common Stock. The Company believes the asserted
claims are not material to its operations and will vigorously defend against the
claims.
In a letter dated April 25, 2001, Controlled Power Company ("CPC")
asserted claims against Elektryon for damages arising from Elektryon's alleged
failure to perform under a POWR/MASTR(TM) Assembly Agreement between Elektryon
and CPC dated as of October 1, 2000 (the "CPC Agreement") pursuant to which the
parties agreed, subject to the terms and conditions of the CPC Agreement, that
CPC would assemble POWR/MASTR(TM) units from parts supplied by Elektryon. CPC's
alleged damages include its alleged costs to prepare for the manufacture of the
units of $784,778, CPC's alleged liability for its landlord's alleged costs in
the amount of $1 million, and other unspecified damages.
Under the Asset Acquisition Agreement, Elektryon is obligated to
recover from CPC any inventories of Elektryon located at CPC's facility in Troy,
Michigan and deliver all such inventories to Elektryon's facilities located in
Odessa, Texas within 30 days of the closing of the Asset Acquisition, which
Odessa facilities will then be owned by Solo. Elektryon currently has inventory
with a book value of $2,360,000 located at CPC's Troy facility.
THE REORGANIZATION
OVERVIEW
Elektryon has adopted a Plan of Reorganization, subject to shareholder
approval, pursuant to which Elektryon will transfer substantially all of its
assets to Solo in exchange for cash, shares of Solo Common Stock and other
consideration, as described more fully below. If that transaction closes,
Elektryon will wind up its affairs and establish the Liquidating Trust, which
will hold for the benefit of Elektryon's shareholders, among other things, the
shares of Solo Common Stock obtained in the Asset Acquisition. The Liquidating
Trust will distribute its assets, including shares of Solo Common Stock, to the
shareholders of Elektryon in proportion to their interest in Elektryon and in
accordance with the terms of the Asset Acquisition Agreement, as more fully
described below.
Elektryon's Board of Directors also has approved seeking waivers and
releases from shareholders who are Accredited Investors (as defined below) of
certain identified potential securities laws claims such shareholders may have
against Elektryon and any representative of the Company in connection with the
sale of securities of the Company (the "Waiver Offer"). The Company believes
that substantially all of its shareholders may have the right to assert such
claims, and to seek rescission of their securities purchases or damages,
including interest. Each shareholder who is an Accredited Investor and who paid
the Company more than $11.00 per share of Common Stock in cash will be offered
additional shares of Common Stock in exchange for entering into a waiver and
release agreement (the "Waiver and Release Agreement"), which
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shares are intended to result in an average cost of $11.00 per share to such
holders. Such shareholders who paid the Company $11.00 or less per share of
Common Stock or did not pay any cash for shares will be paid nominal
consideration of $10.00 per holder, regardless of the number of shares held, for
entering into a Waiver and Release Agreement. The Asset Acquisition Agreement
provides that Solo's obligations under the Asset Acquisition Agreement are
conditioned on Elektryon's receipt of executed Waiver and Release Agreements
from shareholders holding at least 60% of Elektryon's issued and outstanding
Common Stock.
THE ASSET ACQUISITION AGREEMENT
Pursuant to the Asset Acquisition Agreement, Solo will acquire
substantially all of Elektryon's assets (the "Acquired Assets") in exchange for
(a) $5 million in cash, subject to adjustment, (b) 51,878,788 shares of Solo
Common Stock, (c) up to 36,363,636 additional shares of Solo Common Stock to the
extent Elektryon achieves specified sales and other goals after the closing of
the proposed transaction (the "Earn-Out Shares"), and (d) Solo's assumption of
specified liabilities of Elektryon. The 51,878,788 shares of Solo Common Stock
to be received by Elektryon (including shares to be deposited in an escrow
account but not including any Earn-Out shares) together with the shares of Solo
Common Stock issuable upon exercise of options to be granted to executive
officers of Elektryon upon consummation of the transaction (adjusted by the
treasury stock method) will represent approximately 56% of the then outstanding
shares of Solo Common Stock after giving effect to (i) the exercise of all then
outstanding warrants of Solo to purchase shares of Solo convertible preferred
stock at $1.65 per share or less and (ii) the conversion of all then outstanding
Solo convertible preferred stock (including the shares of Solo convertible
preferred stock referred to in clause (i)). This percentage will be reduced by
any future sales of securities by Solo. Elektryon understands that Solo is
currently seeking to raise approximately $30 million through the sale of a
series of convertible preferred stock at a price equivalent to $1.65 per share
of Solo Common Stock. There can be no assurance that any such sale will occur or
what the aggregate dollar amount or per share price will be if a sale occurs.
In addition, Solo will grant options (collectively, the "Solo Options") to
purchase 1,818,182 shares of Solo Common Stock to Michael Holmstrom, the
President of Elektryon, with an exercise price of $0.33 per share, and 1,515,152
shares of Solo Common Stock to Joanne Firstenberg, the General Counsel of
Elektryon, with an exercise price of $0.33 per share, which grants are intended
to constitute substantially equivalent value to options held by Mr. Holmstrom
and Ms. Firstenberg to purchase shares of Common Stock which will be terminated
in connection with the Asset Acquisition. The Solo Options will be fully vested
upon issuance, as are the options to purchase Common Stock currently held by Mr.
Holmstrom and Ms. Firstenberg.
Additional terms of the Asset Acquisition Agreement are summarized
below, which summary is qualified in its entirety by reference to the terms of
the Asset Acquisition Agreement, filed as Exhibit 2.1 to this Form 10.
THE EARN-OUT PROVISIONS. After the closing of the Asset Acquisition
(the "Closing"), Solo will issue to Elektryon either an additional (i)
18,181,818 shares of Solo Common Stock if Elektryon achieves the First
Performance Goal (as defined below), or (ii) 36,363,636 shares of Solo Common
Stock if Elektryon achieves the Second Performance Goal (as defined below). The
First Performance Goal will have been achieved if within 90 days of April 16,
2001 (the date the parties signed the Asset Acquisition Agreement), Elektryon or
Solo has obtained from an unaffiliated buyer or buyers (A) a purchase commitment
for at least 50 C-3 units for delivery by December 31, 2001, and (B) a letter of
intent for the delivery of an
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additional 100 C-3 units in 2001 or 2002. The Second Performance Goal will have
been achieved if within 90 days of April 16, 2001 (the date the parties signed
the Asset Acquisition Agreement), Elektryon or Solo has obtained from an
unaffiliated buyer or buyers (A) a purchase commitment for at least 100 C-3
units for delivery by December 31, 2001, and (B) a letter of intent for the
delivery of an additional 200 C-3 units in 2001 or 2002, in each case including
units counted toward the satisfaction of the First Performance Goal. Section 2.7
of the Asset Acquisition Agreement contains additional terms regarding the
calculation of the earn-out consideration, including terms concerning the
minimum sales price per unit and agreements for service of the units.
CONDITIONS OF SOLO TO CLOSING. The obligations of Solo to consummate
and effect the Asset Acquisition Agreement and the transactions contemplated
thereby will be subject to the satisfaction at or prior to the closing date of
the Asset Acquisition (the "Closing Date") of each of several conditions, any of
which may be waived in writing by Solo, including that:
- there shall have been no material adverse change in the
financial condition or results of operations of Elektryon's
business (the "Business") on the Closing Date as compared with
April 16, 2001;
- Solo shall have received audited financial statements of
Elektryon for the fiscal years ended December 31, 2000, 1999
and 1998 with an opinion from Elektryon's accountants
qualified only as to Elektryon's status as a going concern;
- Elektryon shall have made reasonable provision for the payment
of all of its outstanding liabilities when due;
- Solo shall have received a solvency opinion from Valuation
Research Corporation, dated as of the Closing Date, with
respect to the solvency of Elektryon;
- the Commissioner of the California Department of Corporations
shall have approved the fairness of the terms and conditions
of the issuance of Solo Common Stock to Elektryon after a
hearing held pursuant to Section 25142 of the California
Corporations Code (the "Fairness Approval"); and
- Elektryon's Accredited Investors representing at least 60% of
the aggregate shares of Common Stock held by all Elektryon
shareholders shall have executed Wavier and Release
Agreements.
The Asset Acquisition Agreement contains additional conditions to
Solo's obligations to close the Asset Acquisition. For a more complete
description of such closing conditions see Article 10 of the Asset Acquisition
Agreement.
CONDITIONS OF ELEKTRYON TO CLOSING. The obligations of Elektryon to
consummate and effect the Asset Acquisition Agreement and the transactions
contemplated thereby will be subject to the satisfaction at or prior to the
Closing Date of each of several conditions, any of which may be waived in
writing by Elektryon, including that:
- there shall have been no material adverse change in the
financial condition or results of operations of Solo's
business on the Closing Date as compared with April 16, 2000;
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- the Board of Directors of Solo shall consist of either (i)
seven members, including two directors designated by Elektryon
at Closing and agreed to by Solo, at, or shortly after, the
Closing or, in the alternative (at Elektryon's option), (ii)
nine members, including three directors designated by
Elektryon at Closing and agreed to by Solo, at, or shortly
after, the Closing;
- each employee of Solo shall have signed a proprietary
information and inventions agreement;
- Solo shall have issued the Solo Options to Mr. Holmstrom and
Ms. Firstenberg and all outstanding options exercisable for
shares of Elektryon held by Mr. Holmstrom and Ms. Firstenberg
as of the Closing Date shall have been terminated; and
- Solo shall have filed an Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State in the form
annexed to the Asset Acquisition Agreement.
The Asset Acquisition Agreement contains additional conditions to
Elektryon's obligations to close the Asset Acquisition. For a more complete
description of such closing conditions, see Article 11 of the Asset Acquisition
Agreement.
REPRESENTATIONS AND WARRANTIES. The Asset Acquisition Agreement
contains certain representations and warranties made by Solo and by Elektryon as
of the date of the Asset Acquisition Agreement. Each party's representations and
warranties are primarily concerned with certain aspects of such party's business
including without limitation, its corporate organization, capital structure,
obligations with respect to capital stock, authority and non-contravention,
financial statements and financial condition, absence of certain changes and
events, taxes, title to properties, absence of liens and encumbrances,
intellectual property, compliance with laws, permits and restrictions,
litigation, brokers' and finders' fees, interested party transactions, employee
benefit plans, environmental matters, agreements, contracts, commitments, board
approval and insurance coverage and claims. Such representations and warranties
will survive the consummation of the transactions contemplated by the Asset
Acquisition Agreement and continue until the earlier of (i) the one year
anniversary of the Closing Date and (ii) the closing of Solo's initial public
offering (the "Survival Termination Date"); provided that if any claims for
indemnification have been asserted with respect to any such representations,
warranties and covenants prior to the Survival Termination Date, the
representations, warranties and covenants on which any such claims are based
shall continue in effect until final resolution of such claims. For a more
complete description of the representations and warranties made by each party to
the Asset Acquisition Agreement, see Article 4 and Article 5 of the Asset
Acquisition Agreement.
INDEMNIFICATION OF SOLO FROM ESCROW FUND. As a condition to the Closing
of the Asset Acquisition, Solo, Elektryon, and Chase Manhattan Bank and Trust
Company (the "Escrow Agent") will enter into an Escrow Agreement providing for
the escrow of 10,909,091 shares of Solo Common Stock ("the Escrow Shares") to be
issued under the Asset Acquisition Agreement (the "Escrow Fund"). These shares
will be held in escrow until the earlier of the twelve month anniversary of the
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Closing Date or the consummation of Solo's initial public offering (the "Escrow
Period"); provided, however, that a portion of the Escrow Shares, which (as set
forth in a certificate of Solo) is necessary to satisfy any unsatisfied claims
specified in any officer's certificate delivered to the Escrow Agent prior to
termination of the Escrow Period with respect to the facts and circumstances
existing prior to the expiration of the Escrow Period, will remain in the Escrow
Fund until such claims have been resolved. Pursuant to the terms of the Asset
Acquisition Agreement and in connection with the Escrow Agreement, Elektryon
will indemnify Solo from and against any and all losses, costs, damages,
liabilities and expenses arising from claims, demands, actions, or causes of
action arising out of any misrepresentation or breach of or default in
connection with any of the representations, warranties, covenants and agreements
given or made by Elektryon in the Asset Acquisition Agreement, or any exhibit or
schedule to the Asset Acquisition Agreement. Any individual claim by Solo for
indemnification must relate to an individual claim in excess of $50,000 and in
an aggregate amount exceeding $150,000, and the total amount of damages to be
indemnified by Elektryon will not exceed $7.5 million. Solo shall similarly
indemnify Elektryon from and against any and all losses, costs, damages,
liabilities and expenses arising from claims, demands, actions, or causes of
action arising out of any misrepresentation or breach of or default in
connection with any of the representations, warranties, covenants and agreements
given or made by Solo in the Asset Acquisition Agreement or any exhibit or
schedule to the Asset Acquisition Agreement, subject to the same minimum of
$50,000 and $150,000 and maximum of $7.5 million.
In addition to the shares of Solo Common Stock held in the escrow,
$1,000,000 of the cash payable by Solo to Elektryon under the Asset Acquisition
Agreement will be held in an interest bearing escrow account and will be
distributed to Elektryon within ten days following the approval by Solo of
Elektryon's Closing Date balance sheet (which will set forth its inventories,
accounts receivable and trade payables as of the Closing). Solo will be entitled
to make claims against such escrowed cash to the extent the value of Elektryon's
inventories and accounts receivable decrease between execution of the Asset
Acquisition Agreement and consummation of the Acquisition, and to the extent
Elektryon's trade payables exceed $3,000,000 at Closing. For a more complete
description of the indemnification and escrow provisions applicable to the
Acquisition, see Article 2 and Article 12 of the Asset Acquisition Agreement.
ELEKTRYON'S CONDUCT PRIOR TO THE EFFECTIVE TIME. Elektryon has agreed
that, until the earlier of the Closing or the termination of the Asset
Acquisition Agreement, Elektryon will provide Solo with reasonable access to its
representatives, personnel, the Elektryon assets to be assumed by Solo and to
all existing books, records, tax returns, work papers and other documents and
information relating to Elektryon and provide copies of all such documents to
Solo.
Elektryon has agreed that, during the pre-Closing period, it will
conduct its business in the ordinary course and in substantially the same manner
as previously conducted. Elektryon has further agreed to pay debts and
obligations when due, and to preserve its business organization, keep available
the services of its current officers and employees and maintain its
relationships with all suppliers, customers, landlords, creditors, employees and
other persons having business dealings with Elektryon.
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Elektryon has agreed that it (a) will not create, incur or assume (i)
any borrowings under capital leases, or (ii) any obligation that would in any
material way affect the Business, the Acquired Assets or Solo's ability to
conduct the Business in substantially the same manner and condition as conducted
by Elektryon on the date of this Agreement; (b) will not change in any material
manner the compensation of, or agree to provide additional benefits to, or enter
into any employment agreement with, any employee except in the normal course of
business consistent with past practice; (c) will maintain insurance coverage in
amounts adequate to cover the reasonably anticipated risks of the business
conducted with the Acquired Assets; (d) will not acquire or agree to acquire by
merging or consolidating with, or by purchasing any assets or equity securities
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the Business; (e) will not sell, dispose of or encumber any of
the Acquired Assets or license any Acquired Assets to any person, other than the
sale of C-1 units currently included in Elektryon's inventories but only if such
units have been modified to become C-3 units meeting certain criteria set forth
in the Asset Acquisition Agreement; provided, that any proceeds from such sale
shall be immediately applied to Elektryon's trade payables or included in the
Acquired Assets to be transferred to Solo pursuant to this Agreement; (f) will
not engage in any special promotion that promotes the sale of inventories with
highly discounted terms; (g) will not enter into any agreements or commitments
relating to the Business, including any agreement relating to the acquisition of
additional inventories, except on commercially reasonable terms in the ordinary
course of business of the Business; (h) will comply in all material respects
with all laws and regulations applicable to the Business; (i) will not enter
into any agreement with any third party for the distribution of any of the
Acquired Assets; (j) will use reasonable efforts to assist Solo in employing
after the Closing Date those employees to whom offers of employment are made by
Solo, and will not (and will cause its affiliates not to) solicit such employees
to remain in the employ of Elektryon or any of its affiliates after the Closing
Date; (k) will not change or announce any change to the products or services
sold by the Business except with Solo's written consent or at Solo's request;
(l) will not materially violate or materially amend or change in any way adverse
to Elektryon the terms of any of the Contracts; (m) will not assign, sell or
otherwise convey to any third party, without obtaining Solo's prior written
consent, any of its accounts receivable prior to the Closing Date; (n) will (i)
recover any inventories or other assets related to Elektryon's agreement with
CPC, including those located in Troy, Michigan (See "- Litigation" for a
description of claims CPC has asserted against Elektryon); (ii) recover any
inventories or other assets located in Midland, Texas; (iii) recover any
inventories or other assets located in La Jolla, California; and (iv) deliver
all of such inventories and assets to Elektryon's facilities in Odessa, Texas
within 30 days of Closing.
Elektryon has also agreed that it will not take any action to solicit
or encourage the initiation of any inquiry, proposal or offer from another
person relating to a possible Third Party Acquisition (as defined in Section 6.4
to the Asset Acquisition Agreement). Elektryon will promptly notify Solo in
writing of any material inquiry, proposal or offer relating to a possible Third
Party Acquisition. Elektryon will keep Solo fully informed of the status and
details of any such inquiry, proposal or offer. If, however, the Elektryon Board
by a majority vote determines in its good faith judgment, after consultation
with counsel reasonably acceptable to Solo, that it is required to do so in
order to comply with its fiduciary duties, the Elektryon Board may withdraw its
recommendation of the transactions contemplated by the Asset Acquisition (See
"-- Litigation" for a description of claims CPC has asserted against Elektryon)
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Agreement or approve or recommend a Superior Proposal (as defined below in
Section 6.4 of the Asset Acquisition Agreement).
In addition, Elektryon has agreed that following the Closing, it will
not distribute any shares of Solo Common Stock to its shareholders until the
earlier of (A) the consummation of Solo's initial public offering or (B) the
date two years following the Closing Date; provided, however, that Elektryon
may transfer such shares to the Liquidating Trust; and provided further, that
if, in the reasonable opinion of Solo, the Fairness Approval provides an
adequate exemption from registration of such shares under federal and state
securities laws, Elektryon may transfer such shares to its shareholders on the
day immediately preceding the last date on which such distribution would be
exempt from registration under the Securities Act on the basis of the Fairness
Approval. In the event that the Fairness Approval does not provide such
exemption, Solo shall register the distribution of such shares from the
Liquidating Trust to Elektryon's shareholders. Elektryon has also agreed in
connection with an initial public offering of Solo Common Stock, Elektryon's
founders, directors, officers and shareholders holding a percentage of shares
of Solo Common Stock specified by Solo's managing underwriter will not transfer
shares of Solo Common Stock without Solo's consent during the period beginning
on the date of the final prospectus of such offering and ending on a date
specified by Solo (provided that such period will not exceed the lesser of (A)
the lock-up applicable to Solo's directors, officers and affiliates, and (B)
180 days).
RIGHT OF FIRST OFFER TO ELEKTRYON. Solo has agreed to grant to
Elektryon and its Accredited Investor shareholders a right of first offer with
respect to the sale by Solo of shares of its preferred stock in its next equity
financing. Upon written notification by Solo, Elektryon or any of its
Accredited Investor shareholders may elect to purchase at the price and on the
terms specified in such notice up to that portion of such preferred stock
offering that equals the proportion that the number of shares of Solo Common
Stock issued and held by Elektryon bears to the total number of shares of Solo
Common Stock then outstanding. These first offer rights are subject to
adjustments and exemptions set forth in Section 8.6 of the Asset Acquisition
Agreement.
TERMINATION. The Asset Acquisition Agreement can be terminated for
certain reasons including: (i) by mutual written consent of Solo and Elektryon;
(ii) by Solo or Elektryon if any governmental entity shall have issued an order,
decree or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Asset Acquisition Agreement;
(iii) by Elektryon if the Elektryon Board has received a Superior Proposal and
has complied with the provisions of Section 6.4(b) of the Asset Acquisition
Agreement regarding other bids for the assets or stock of Elektryon; (iv) by
Solo if (A) the Elektryon shall have breached any of its covenants or agreements
under Section 6.4(b) of the Asset Acquisition Agreement or (B) if the Elektryon
Board shall have recommended to Elektryon's shareholders a Superior Proposal; or
(v) by either party if the Closing does not occur by June 30, 2001, other than
due to a breach of the Asset Acquisition Agreement by the party seeking to
terminate. Elektryon will pay Solo $500,000 if the Asset Acquisition Agreement
is terminated by Solo because Elektryon has breached any of its covenants or
agreements under Section 6.4(b) of the Asset Acquisition Agreement or by either
party because Elektryon's Board of Directors has received a Superior Proposal.
BOARD RIGHTS. The Board of Directors of Solo shall consist of either
(i) seven members, including two directors designated by Elektryon at the
Closing and agreed to by Solo, or (ii) in the alternative at Elektryon's option,
nine members, including three directors designated by Elektryon at the Closing
and agreed to by Solo. Following the Closing, Solo's Amended and Restated
Certificate of Incorporation shall provide that in the event there are seven
board members, a majority of each of the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred holders will be entitled to designate
one board member to represent each respective Series of Preferred Stock, a
majority of the holders of Solo's Common Stock will be entitled to designate two
board members, and a majority of the holders of Solo's Preferred Stock and
Common Stock, voting together, shall be entitled to designate one board member.
Alternatively, in the event there are nine board members, a majority of each of
the Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred holders will be entitled to designate one board member to represent
each respective Series of Preferred Stock, a majority of the holders of Solo's
Common Stock will be entitled to designate three board members, and a majority
of the holders of Solo's Preferred Stock and Common Stock, voting together,
shall be entitled to designate two board members.
THE WAIVER AND RELEASE SOLICITATION
A condition to Solo's obligations under the Asset Acquisition Agreement
is that Elektryon obtain waivers of specified securities claims shareholders may
have against Elektryon and any representative of the Company from its Accredited
Investor shareholders holding at least 60% of the issued and outstanding shares
of Elektryon Common Stock. Elektryon currently is in the process of seeking to
obtain the Waiver and Release Agreements. An "Accredited Investor" is an
investor who meets the definition of such term set forth in Rule 501 of
Regulation D promulgated under the Securities Act.
In consideration for entering into a Waiver and Release Agreement,
Elektryon will issue an additional fraction of a share of Common Stock with
respect to each share of Common Stock purchased by a shareholder from the
Company at a price in excess of $11.00 per share in cash, as set forth in the
following table. The issuance of the additional shares of Common Stock will have
the effect of reducing the participating shareholder's average purchase price
per share to approximately $11.00. The total number of shares of Common Stock
that each such shareholder will receive will be rounded down to the nearest
number of whole shares.
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Additional Number of Shares of Common Stock
Purchase Price Paid Per Share of to be Distributed Per Share of Common Stock
Common Stock Purchased
------------ ---------
$14.71 0.33727
$14.99 0.36273
$15.00 0.36364
$15.02 0.36545
$16.00 0.45455
$17.14 0.55818
$17.99 0.63545
$20.00 0.81818
Shareholders who purchased shares from the Company for $11.00 per share
or less or did not pay any cash for shares and who enter into a Waiver and
Release Agreement will receive nominal consideration of $10.00 per holder,
regardless of the number of shares held.
Each shareholder who enters into a Waiver and Release Agreement will
waive and release claims against Elektryon and its representatives in connection
with their purchase of Common Stock from the Company based upon the following:
- any violation or alleged violation of any applicable
securities law registration requirement;
- any statement or omission relating to whether a public
offering of Elektryon Common Stock will occur, when it will
occur, what the Company's valuation will be in the public
offering, or at what price shares of Common Stock will trade
if there is a public offering;
- any statement or omission as to what the Company's valuation
was, is or will be if it does not complete a public offering,
or at what price shares of Common Stock might be sold if the
Company does not complete a public offering;
- any statement or omission as to whether there will be a split
of the shares of the Common Stock or what the value per share
of Common Stock will be after a split;
- any statement or omission relating to the amount of the
backlog, if any, of orders for the Company's products or
proposed products;
- any statement or omission regarding whether indications of
interest by prospective customers were "near orders;"
- any statement or omission as to the development status of the
Company's products or proposed products and the technology
related thereto;
- any statement or omission regarding the prospective operating
life of the Company's products or proposed products, the need
or absence of need for maintenance, maintenance intervals and
whether the Company will provide any warranty of performance;
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- any statement or omission regarding the Company's products
installed at Kmart stores and other locations operating
properly when, in fact, the units were not operating properly
and were maintained on a continuing basis by technicians at a
high cost to the Company;
- any statement or omission regarding whether Kmart, Wal-Mart
or any other potential customer was close to signing a
purchase order for the Company's products or proposed
products;
- any statement or omission regarding problems with the
technology employed in the Company's products or proposed
products, such as the premature failure of pistons;
- any statement or omission regarding problems encountered in a
test by General Electric of the Company's products;
- any statement or omission regarding Apache Oil Company's
rejection of the Company's products and a subsequent agreement
between the Company and Apache to pay Apache for electricity;
- any statement or omission regarding potential customer
dissatisfaction with the Company's products because of noisy
operation;
- any statement or omission relating to the availability to the
Company of investment funds, although the Company had not
received such funds and that financing transactions had not
been completed;
- any statement or omission relating to the alleged interest of
Goldman Sachs and Credit Suisse First Boston in the Company
and its products or proposed products;
- any statement or omission regarding whether or when the
Company's products or proposed products were or would be
commercially viable;
- any statement or omission regarding the absence of government
permits needed so that the Company's products could be
installed quickly;
- any statement or omission regarding the low level of
installation and service capacity available to prospective
customers from the Company's personnel;
- any statement or omission regarding the sales by the founders
or other representatives of the Company of shares of Common
Stock to the Company in exchange for the cash proceeds of
sales of stock by the Company to third party investors; and
- any statement or omission inconsistent with this Form 10.
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THE LIQUIDATING TRUST
The transfer of Elektryon's assets under the Asset Acquisition
Agreement is structured as a tax-free reorganization and this requires that
Elektryon be dissolved and that its assets, net of its liabilities, be
distributed to its shareholders. Elektryon intends to establish a Liquidating
Trust for the benefit of its shareholders. The Company expects that immediately
following the consummation of the Asset Acquisition it will wind up its affairs
and transfer its non-cash assets to the Liquidating Trust. The Liquidating Trust
will hold the shares of Solo Common Stock issued to Elektryon at the Closing and
any additional shares of Solo Common Stock that may be released from the Escrow
Fund or earned by Elektryon as additional consideration under the earn-out
provisions of the Asset Acquisition Agreement, net of any shares payable as
broker's fees or finder's fees. The Directors of Elektryon will serve as the
Trustees of the Liquidating Trust.
All of the outstanding shares of Elektryon's Common Stock will be
deemed cancelled when Elektryon transfers its assets to the Liquidating Trust.
Elektryon's shareholders will receive interests in the Liquidating Trust based
on their proportional ownership interest in Elektryon. The interests in the
Liquidating Trust will not be certificated and will not be transferable except
by will, the laws of descent and distribution or the operation of law and shall
not carry any voting rights. Subsequently, the Liquidating Trust will distribute
its assets, including the Solo Common Stock, to the Elektryon shareholders based
on their ownership interest in the Liquidating Trust. It is contemplated that
the adoption of the Plan of Reorganization by Elektryon's shareholders and the
establishment of the Liquidating Trust will occur only in connection with and
following the closing of the Asset Acquisition.
FEDERAL INCOME TAX CONSEQUENCES TO
ELEKTRYON AND THE ELEKTRYON SHAREHOLDERS
The following discussion is a summary of the material United States
federal income tax consequences to Elektryon and to a holder of Elektryon Common
Stock of the Asset Acquisition and the subsequent distributions of Solo Common
Stock and any remaining other assets of Elektryon to the Liquidating Trust (the
"Liquidation"). The Liquidating Trust will subsequently distribute its assets to
Elektryon's shareholders. The discussion is based on the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder,
administrative rulings and pronouncements, and judicial decisions as of the date
hereof, all of which are subject to change (possibly with retroactive effect).
This discussion does not address all aspects of federal taxation that may be
relevant to particular Elektryon shareholders in light of their personal
investment circumstances or to Elektryon shareholders subject to special
treatment under the Code (including insurance companies, tax- exempt
organizations, financial institutions, dealers, regulated investment companies,
shareholders who received their shares through the exercise of employee stock
options or otherwise as compensation, foreign corporations and persons who are
not citizens or residents of the United States and shareholders who hold their
shares as part of a straddle, hedge or conversion transaction) who may be
subject to tax rules that differ significantly from those described below. In
addition, this discussion does not include a discussion of any state, local or
foreign tax consequences.
EACH ELEKTRYON SHAREHOLDER IS URGED TO CONSULT THAT SHAREHOLDER'S
TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THAT SHAREHOLDER OF THE
ASSET ACQUISITION AND THE LIQUIDATION, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL OR FOREIGN TAX LAWS AND OF CHANGES IN APPLICABLE TAX LAWS.
Elektryon believes, although the matter is not free from doubt,
that for federal income tax purposes the Asset Acquisition and Liquidation
should qualify as a reorganization within the meaning of Code section 368(a).
This belief of the Company is not binding on the Internal Revenue Service (the
"Service") and no assurance can be given that the Service will not challenge the
tax treatment of the Asset Acquisition and the Liquidation and that such
challenge will not be upheld by the courts.
TAXATION OF ELEKTRYON SHAREHOLDERS. Assuming that the Asset
Acquisition and the Liquidation qualify as a reorganization under Code section
368(a), an Elektryon shareholder will not recognize gain or loss upon the
transfer by Elektryon of Solo Common Stock to the Liquidating Trust or a
subsequent distribution to that shareholder. The shareholder will recognize gain
(but not loss) with respect to any property other than Solo Common Stock
(including cash) distributed to the Liquidating Trust, in an amount, with
respect to each block of Elektryon Common Stock held by the shareholder, equal
to the LESSER of (i) the excess, if any, of (A) the value of the property
(including Solo Common Stock, cash and promissory notes) distributed to the
Liquidating Trust with respect to that block of Elektryon Common Stock over (B)
the shareholder's tax basis in that block of Elektryon Common Stock, and (ii)
the value of the property other than Solo Common Stock distributed by Elektryon
to the Liquidating Trust with respect to that block of Elektryon Common Stock.
Any such gain recognized by an Elektryon shareholder that held the Elektryon
stock as a capital asset should be capital gain, which would be long-term or
short-term depending on the Elektryon shareholder's holding period in the
respective block of Elektryon Common Stock. The shareholder's tax basis in the
Solo Common Stock will equal the shareholder's basis in the Elektryon Common
Stock, increased by the amount of any gain recognized by the shareholder, and
decreased by the amount of property other than Solo Common Stock distributed to
the Liquidating Trust with respect to that shareholder's Elektryon Common Stock.
The shareholder's holding period in the Solo Common Stock will include the
shareholder's holding period in the Elektryon Common Stock.
If the Asset Acquisition and the Liquidation were determined not to
constitute a Code section 368(a) reorganization, an Elektryon shareholder would
recognize gain or loss in an amount equal to the difference between (i) the
value of the property (including Solo Common Stock, cash and promissory notes)
distributed to the Liquidating Trust with respect to that shareholder's
Elektryon Common Stock and (ii) the shareholder's tax basis in his or her
Elektryon Common Stock. Such gain would be capital gain if the Elektryon Common
Stock was held as a capital asset, and would be long-term or short term
depending on the shareholder's holding period in the Elektryon Common Stock. In
that case, the shareholder's tax basis in the Solo Common Stock would be equal
to the value of that stock at the time of transfer to the Liquidating Trust.
The Liquidating Trust and the shareholder could also be liable, as
a transferee, for a portion of Elektryon's tax liability arising out of the
Asset Acquisition and Liquidation, which is discussed below.
TAXATION OF ELEKTRYON. Assuming that the Asset Acquisition and the
Liquidation qualify as a Code section 368(a) reorganization, Elektryon will not
recognize gain or loss with respect to the receipt from Solo of the Solo Common
Stock or the distribution of that stock to the Liquidating Trust. Elektryon will
recognize gain (i.e., the excess of (i) the value of the total consideration
received from Solo, including the Solo Common Stock and the assumption of
liabilities, over (ii) Elektryon's tax basis in the assets transferred to Solo)
to the extent of the amount of cash Elektryon receives from Solo is not
distributed to the Liquidating Trust (this gain may be offset by any deductions
Elektryon obtains with respect to expenditures of that cash).
If the Asset Acquisition and the Liquidation were determined not to
constitute a Code section 368(a) reorganization, Elektryon would recognize gain
in an amount equal to the entire excess of (i) the value of the consideration
received from Solo (including the Solo Common Stock) over (ii) Elektryon's tax
basis in the transferred assets. Elektryon would also recognize gain or loss
upon the distribution of the Solo Common Stock to the Liquidating Trust, in an
amount equal to the difference between the value of that stock when received by
Elektryon and its value at the time of distribution to the Liquidating Trust.
The Liquidating Trust and an Elektryon shareholder could be liable
for any Elektryon tax not paid by the corporation, to the extent of the value of
the property (including Solo Common Stock) distributed to the Liquidating Trust
or to that shareholder, respectively.
SOLO ENERGY CORPORATION'S BUSINESS
Solo is in the business of developing cost effective, clean, reliable
energy services through the use of its proprietary distributed generation
technology platform. This platform is based on its Wireless Energy microturbine,
a small gas turbine that is protected by existing and pending patents. Solo
believes its microturbine will be cleaner, more efficient, lower in cost, more
reliable and have better load following characteristics than other
microturbines. Combining this proprietary technology with fixed cost fuel to be
procured by Solo's strategic investors is expected to enable Solo to effectively
eliminate price volatility for its potential customers while providing superior
energy service and reliability. Solo believes that its business model is unique
among distributed generation market competitors. Unlike its competitors, Solo
intends to sell energy service, not hardware.
Solo has established strategic alliances with Enron North America Corp.
and SCANA Resources, Inc., a wholly-owned subsidiary of SCANA Corporation, for
the procurement of fuel, the implementation of its commercial test program and
the distribution of energy services. Solo expects that its first commercial
prototype units will be delivered in 2001. Solo's commercial test program is
intended to include the installation of up to 50 microturbines at 10-15 sites in
SCANA's service territory. Solo and its strategic partners plan to begin
marketing energy service contracts in 2002.
Solo's headquarters are located in Alameda, California. As of March 31,
2001 it had 38 employees, of whom 26 were in research and development, nine were
in general and
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administrative, and three were in sales and marketing functions. In addition, as
of the same date, Solo had three full-time consultants associated with research
and development and one part-time employee associated with general and
administrative functions.
RISK FACTORS RELATING TO ELEKTRYON'S BUSINESS
Following are certain risk factors relating to an investment in
Elektryon. Elektryon believes that these risk factors also may apply to Solo's
business because both companies are early stage companies in the on-site power
generation business.
POTENTIAL RESCISSION LIABILITY
The Waiver Offer is being made to all "accredited investors" (as
defined in Rule 501 under the Securities Act) (the "offerees") who purchased
shares of Common Stock from the Company ("Subject Securities"). If all of the
offerees holding the Subject Securities accept the Waiver Offer, the Company
estimates that it will be required to make nominal cash payments and issue fewer
than two million shares of Common Stock. The Company estimates that if all of
the non-accredited investors who purchased Common Stock from the Company were to
successfully assert rescission rights, it would be required to make payments to
them equal to the price they paid for their securities plus the aggregate amount
of interest at the statutory interest rates from the date of issuance to the
date of rescission. The Company also estimates that if the holders of all shares
of Common Stock were to successfully assert rescission rights, it would be
required to make payments aggregating approximately $45,000,000 plus the
aggregate amount of interest at the statutory interest rates from the date of
issuance to the date of the rescission offer. The Company currently has no cash
available to fund the potential rescission liability. The Company would be
required to seek capital through equity financing or the sale of assets to fund
its rescission liability, and there can be no assurance that sufficient
financing could be obtained on terms acceptable to it or at all. If the Company
were unable to obtain additional financing to satisfy any demand for rescission
it will continue to be subject to claims from the holders of the Common Stock
for possible violations of applicable state and federal securities laws.
There can be no assurance that claims asserting violations of state or
federal securities laws will not be asserted notwithstanding the Waiver Offer.
Furthermore, there can be no assurance that the Company will not be subject to
penalties or fines relating to past securities issuances or that the offerees or
other holders of the Common Stock will not assert and prevail in claims against
the Company for rescission or damages under federal or state securities laws.
Even if the Company were successful in defending any securities law claims, the
assertion of such claims against the Company would result in costly litigation
and significant diversions of effort by the Company's management. In addition,
the Waiver Offer will not prevent the Securities and Exchange Commission (the
"Commission") or any state securities commission from pursuing enforcement
action against the Company with respect to any alleged violations of federal or
state securities laws. The occurrence of any of the foregoing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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LIMITED OPERATING HISTORY
The Company has a limited operating history. Given the Company's
limited operating history, there can be no assurance that it will be able to
generate sufficient cash flow to achieve its objectives and sustain its
business.
The Company is unable to predict with certainty how customer demand for
the POWR/MASTR(TM) may develop over time. The Company's likelihood of success
must be considered in light of the expenses, difficulties, complications,
problems and delays frequently encountered in connection with the growth of a
new business, the development of new technology, and the competitive and
regulatory environment in which the Company operates. The Company has made no
material sales to date and has generated cumulative losses of approximately
$27.3 million from inception in 1994 through December 31, 2000.
ACCESS TO ADDITIONAL CAPITAL
The Company expects that it will require significant capital in the
future to fund the continued development of its business and for working capital
purposes. Such capital may not be available on terms satisfactory to the
Company, if at all. The Company's capital and credit requirements will depend on
numerous factors, including the pace and success of customer acquisition and
associated increase in sales and production, the growth of its revenues, if any,
and the rate of such growth. Elektryon believes it currently has sufficient
capital to meet its cash flow requirements over the next two months. As a
result, the Company will need to raise additional capital in the near future.
The timing of the need for additional capital will also be affected by the
extent to which holders of Common Stock assert or prevail in claims against the
Company for rescission or other damages. If the Company's cash flow from
operations is not sufficient to provide funds for working capital, capital
expenditures and the potential rescission liability and if equity or debt or
other financing is not available, the Company expects that it may experience
insufficient liquidity. If adequate funds are not available on acceptable terms,
the Company may have to delay or limit any further expansion of its business.
Any inability to fund the Company's future capital requirements could have a
material adverse effect on its business, financial condition and operating
results.
INABILITY TO EFFECTIVELY MANAGE GROWTH
If the Company is successful in executing its business plan, the
Company will experience growth in its business that could place a significant
strain on its management and other resources. The Company's failure to manage
its growth effectively could have a material adverse effect on its business,
financial condition and operating results.
LIMITED PRODUCT OFFERING
The Company has only one available product that has any operating
history at customer test sites, the C-3 POWR/MASTR(TM). To generate revenue, the
Company must commercially introduce to the market the C-3 unit and other
products the Company is developing in a timely manner. Even if the Company is
able to commercially introduce products, they may not achieve market acceptance.
This would substantially impair the Company's revenue prospects and could have a
material adverse effect on its business, financial condition and operating
results.
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INABILITY TO GENERATE MARKET DEMAND
The Company's product is new and the it does not know whether its
targeted customers will accept its technology or will purchase its product in
sufficient quantities to grow its business. If a mass market fails to develop
for onsite energy generation or develops more slowly than the Company
anticipates, it may be unable to recover the losses it has incurred to develop
its products, it may be unable to meet its operational expenses and the Company
may be unable to achieve profitability. The development of a mass market for its
products may be impacted by many factors which are out of the Company's control,
including:
- the cost competitiveness of the POWR/MASTR(TM),
- the future costs and availability of fuels used by the
POWR/MASTR(TM),
- consumer reluctance to try a new product,
- consumer perceptions of the safety of the POWR/MASTR(TM),
- regulatory requirements, and
- the emergence of newer, more competitive technologies and
products.
WARRANTY RISK
Incorporated into the proposed unit price for the POWR/MASTR(TM) is a
$10,000 maintenance fee designed to cover all maintenance and service costs for
the unit over its life, which is estimated to be a minimum of two years. Because
the Company has had no material sales, it has not recorded a warranty reserve
charge. While the Company believes that the $10,000 maintenance fee is adequate,
it may not be sufficient to cover its warranty expenses in the future. Although
the Company will attempt to reduce its risk of warranty claims through warranty
disclaimers, the Company cannot assure you that its efforts will effectively
limit its liability. Any significant incurrence of warranty expense could have a
material adverse effect on its financial condition and operating results.
DEPENDENCE ON HIRING AND RETAINING KEY PERSONNEL
The Company's success depends to a significant degree upon the skills
of its key employees, including Michael Holmstrom, its President, Joanne
Firstenberg, its General Counsel, and Brian Mewhort, its Vice President of
Operations, and its ability to identify, hire, and retain additional sales,
marketing, and financial personnel. The Company may be unsuccessful in retaining
its existing key personnel or in attracting and retaining additional key
personnel. The loss of services of key personnel, or the inability to attract,
hire and retain additional qualified personnel could have a material adverse
effect upon its business and operating results.
The Company may not be able to hire and retain the technical personnel
necessary to continue its product development and production expansion, which
could cause delays in its business plan. The Company has historically
experienced, and expects to continue to experience,
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delays in filling technical positions. In addition, it is vital that the Company
secures support personnel, either internally or externally, to handle all
service and maintenance associated with the POWR/MASTR(TM). It cannot be
assured that as the Company grows the Company will be able to adequately
supply such services. Competition is intense for qualified technical personnel,
and in particular skilled engineers.
SALES AND DISTRIBUTION RISK
The Company needs to develop a professional sales and marketing staff
in order to implement its business plan. The expense of such internal expansion
will be significant and may exceed the net revenues generated through such
efforts. The Company's sales and marketing team may not be able to successfully
compete against the more extensive and well-funded sales and marketing
operations of its current and future competitors. The Company's inability to
recruit, or its loss of, important sales and marketing personnel, or the
inability of new sales personnel to effectively sell and market its
POWR/MASTR(TM) product could have a material adverse effect on its business and
operating results.
The Company is in the early stages of developing its distribution
network. In order to develop its customer base, the Company believes that it
must enter into strategic marketing alliances or similar collaborative
relationships, in which the Company allies itself with companies that have
customers who require on-site energy resources. The Company may not be able to
identify appropriate distributors on a timely basis, and the distributors with
whom it partners may not focus adequate resources on selling its product or may
be unsuccessful in selling it. In addition, the Company may be unable to
negotiate collaborative relationships on favorable terms, or at all. The lack of
success of its collaborators in marketing its product may adversely affect its
financial condition and operating results.
DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS
Although the Company generally attempts to use standard parts and
components for its product, certain components are currently available only from
a single source or from limited sources. For example, the Company currently
purchases all of its software and controls, which are related to its remote
monitoring and control capabilities, from Encorp. The Company also depends on GM
to supply the base engine block that is significantly modified to assemble the
POWR/MASTR(TM), Newage Stamford Inc. to supply generators and Cutler Hammer to
supply an automatic paralleling switch unit. With these suppliers as the
Company's sole providers of these crucial POWR/MASTR(TM) components, its access
to these components could be interrupted or terminated. The Company may not be
able to procure these products from another supplier or be able to manufacture
these products on a timely basis and delays or failure to identify alternate
vendors, or a reduction or interruption in supply or a significant increase in
the manufacturing costs could materially adversely affect its business and
operating results.
RAPID TECHNOLOGICAL CHANGE
The market for the Company's C-3 POWR/MASTR(TM) and other products
under development is characterized by rapidly changing technologies, extensive
research and new product introductions. The Company believes that its future
success will depend in large part
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upon the Company's ability to continue to enhance its existing product and to
develop, introduce and market new products. As a result, the Company expects to
continue to make a significant investment in product development. The Company
may be unable to develop and introduce new products or enhancements to its
existing product in a timely manner that would satisfy customer needs, achieve
market acceptance or address technological changes in target markets. In
addition, products or technologies developed by others may adversely affect the
Company's competitive position or render its products or technologies
noncompetitive or obsolete. The Company's failure to develop products and
introduce them successfully and in a timely manner could adversely affect its
competitive position, financial condition and operating results.
INABILITY TO DECREASE PRODUCTION COSTS
The Company believes that it will need to reduce the unit production
cost of the POWR/MASTR(TM) over time to offer competitively priced products. The
Company's ability to achieve cost reductions will depend on low cost design
enhancements, obtaining necessary tooling and favorable vendor contracts, as
well as increasing sales volumes so the Company can achieve economies of scale.
The Company may be unable to achieve any production cost reductions.
LENGTHY SALES CYCLE
The sale of the POWR/MASTR(TM) will involve a lengthy sales cycle and
the Company may not anticipate sales levels appropriately, which could impair
profitability. The sale of the POWR/MASTR(TM) will involve a significant
commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. The Company targets, in part,
customers in the utility industry, which generally commit to a larger number of
products when ordering and which have a lengthy process for approving capital
expenditures. For these and other reasons, the sales cycle associated with the
POWR/MASTR(TM) will be lengthy and subject to a number of significant risks over
which the Company has little or no control. The Company expects to plan its
production and inventory levels based on internal forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially. If sales in any
period fall significantly below anticipated levels, the Company's financial
condition and operating results could suffer. In addition, the Company's
operating expenses are based on anticipated sales levels, and a high percentage
of its expenses are generally fixed in the short term. As a result of these
factors, a small fluctuation in timing of sales can cause operating results to
vary from period to period. The Company expects that its products under
development, if they ever become commercially available, will have similar
lengthy sales cycles.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
A number of factors could affect the Company's operating results and
thereby cause variations in such results, including:
- changes in market prices for natural resources that could
lower the desirability of POWR/MASTRS(TM),
- the timing of the introduction or enhancement by the Company
of POWR/MASTRS(TM) or similar products by its competitors,
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- its expected reliance on a small number of customers,
- the size, timing and shipment of individual orders,
- market acceptance of new products,
- customers delaying orders of POWR/MASTRS(TM) because of the
anticipated release of new products,
- changes in its operating expenses or product pricing,
- the ability of its suppliers to deliver quality parts when
needed,
- development of its direct and indirect sales channels, and
- loss of key personnel.
The Company expects its order flow to be uneven from period to period
because it is in the early stages of its marketing plan. A small variation in
the timing of recognition of revenue can cause significant variations in
operating results from quarter to quarter because a significant portion of its
expenses are fixed.
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's initial intent is to focus on marketing directly to a
small number of large companies with alternative power source needs. If the
Company is successful in this strategy, the loss of any one customer could have
a material adverse effect on its operating results. In addition, if the Company
does not perform satisfactorily for a customer, that customer could further harm
its future business if the customer communicates its dissatisfaction or does not
recommend its services to other potential or existing customers.
POTENTIAL LITIGATION
Potential intellectual property, shareholder or other litigation may
adversely impact the Company's business. Because of the nature of the Company's
business, the Company may face litigation relating to intellectual property
matters, labor matters and product liability disputes. Any litigation could be
costly, divert management attention or result in increased costs of doing
business. Potential rescission liability and related litigation is discussed
earlier under the caption "Potential Rescission Liability."
PRODUCT LIABILITY RISKS
POWR/MASTRS(TM) run at high speeds and high temperatures and use
flammable fuels which are inherently dangerous substances. Accidents involving
its products could lead to personal injury or physical damage. Although the
Company attempts to reduce the risk of these types of losses through liability
limitation clauses in agreements, its efforts may not effectively limit its
liability. Any liability for damages resulting from malfunctions could be
substantial and could materially adversely affect the Company's business and
operating results. In addition, a well-publicized actual or perceived problem
could adversely affect the market's perception of its products. This could
result in a decline in demand for its products, which would materially affect
its financial condition and operating results.
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COMPETITION
The Company's competitors, who have significantly greater resources than
the Company does, may be able to adapt more quickly to new or emerging
technologies or to devote greater resources to the promotion and sale of their
products, and the Company may be unable to compete effectively. The Company's
competitors include several well established companies that benefit from larger
economies of scale and worldwide presence. The Company believes that developing
and maintaining a competitive advantage will require continued investment in
product development, manufacturing capability and sales and marketing. The
Company does not, and cannot assure you that the Company will have, sufficient
resources to make the necessary investments to do so. In addition, current and
potential competitors have established or may in the future establish
collaborative relationships among themselves or with third parties, including
third parties with whom the Company has strategic relationships. Accordingly,
new competitors or alliances may emerge and rapidly acquire significant market
share. The market for distributed power generation products may ultimately be
dominated by technologies other than the Company's. The following competing
distributed generation technologies currently exist:
- RECIPROCATING ENGINES. A number of electricity generating systems
for on-site distributed generation are powered by reciprocating
engines that use both liquid and gaseous fuels. These systems are
available from several large companies such as Caterpillar,
Waukesha, Cummins Engine, Detroit Diesel, Generac and Tecogen. Other
systems are also available from a number of small companies.
- FUEL CELLS. Fuel cells are a technology in development for
application to the distributed generation industry. General
consensus is that any commercially ready model for any application
is several years away. There are many major technological barriers,
including cost. If fuel cells become commercially available for
distributed generation, however, the Company does not know whether
they will directly compete for any electricity generation market
share with the POWR/MASTR(TM). Publicly traded fuel cell companies
include Avista Laboratories Inc., Ballard Power Systems, Fuel Cell
Energy, Global Termoelectric, H Power, Manhattan Scientifics, Medis
Technologies, Millennium Cell, Plug Power, International Fuel Cells
(a division of United Technologies Corporation), and Proton Energy
Systems.
- MICROTURBINES. The microturbine, an aircraft engine derivative, is
designed for use in a variety of industrial applications. Off-grid
electrical power generation for stand-by, emergency power, portable
power and cogeneration are its most common objectives. Its
construction is fairly simple. The turbine, compressor and
permanent-magnet generator are all mounted on a single high-speed
shaft that is supported on air bearings. This shaft spins at high
speeds producing electricity. Current microturbine competitors
include Capstone, EnergyNow, Honeywell, Mitsubishi Heavy Industries
Ltd., NREC, Toyota Motor Corp., Turbec and Elliot.
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FUEL SUPPLY RISK
The POWR/MASTR's(TM) ability to produce electricity depends on the
availability of natural gas or propane. If one of these fuels is not readily
available to the mass market or if its price is such that electricity produced
by the Company's system costs more than electricity provided through the
electric grid, its business, prospects, operating results, or financial
condition could be harmed, and could have a material adverse effect on its
business, financial condition and operating results. Shortages of natural gas
and/or interruptions in supply could be possible in certain areas such as
Southern California during peak summer usage periods.
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company depends on its intellectual property to make its products
competitive and if it is unable to protect its intellectual property, its
business may suffer. The Company relies on a combination of patent, trade
secret, copyright and trademark law and nondisclosure agreements to establish
and protect its intellectual property rights in its products. The Company
possesses a U.S. patent with over 90 claims on the POWR/MASTR(TM) technology.
The Company believes that, due to the rapid pace of technological innovation in
distributed generation products, its ability to establish and maintain a
position among the technology leaders in the industry depends on both its
patents and other intellectual property and the skills of its development
personnel. Patents, trademarks, copyrights or licenses owned or held by the
Company may be invalidated, circumvented or challenged. These rights provide the
Company competitive advantages. Future patent applications may be issued within
the scope of the claims asserted by the Company.
Another party may be able to reverse engineer the Company's technology and
discover its intellectual property and trade secrets. The Company may be subject
to or may initiate proceedings in the U.S. Patent and Trademark Office, which
can require significant financial and management resources. In addition, the
laws of foreign countries in which the Company's products are or may be
developed, manufactured or sold may not protect its products and intellectual
property rights to the same extent as the laws of the United States. The
Company's inability to protect intellectual property adequately could have a
material adverse effect on its financial condition or operating results.
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT
Third parties may claim infringement by the Company with respect to past,
current or future proprietary rights. Royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
and could significantly harm its business and operating results. Litigation may
also be necessary in the future to enforce the Company's patent or other
intellectual property rights, to protect its trade secrets and to determine the
validity and scope of proprietary rights of others. The cost of litigation and
loss of intellectual property rights could harm its financial condition and
operating results.
REGULATORY RISK
The Company will operate in a highly regulated business environment and
changes in regulation could impose costs on the Company or make its current and
proposed products less economical. The distributed energy industry is subject to
federal, state, local and foreign laws
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and regulations, governing, among other things, emissions to air as well as laws
relating to occupational health and safety. Regulatory agencies may impose
special requirements for implementation and operation of the Company's current
and proposed products, such as connection with the electric grid, or may
significantly impact or even eliminate some of its target markets. The Company
may incur material costs or liabilities in complying with government
regulations. In addition, the Company may require potentially significant
expenditures in order to comply with evolving environmental and health and
safety laws, regulations and requirements that may be adopted or imposed in the
future. Furthermore, its potential utility customers must comply with numerous
laws and regulations. The deregulation of the utility industry may also create
challenges for its marketing efforts.
CONTROL OF THE COMPANY
The Company's current executive officers, directors and holders of 5% or
more of the Company's Common Stock beneficially own in the aggregate 3,025,167
shares (approximately 46%) of its outstanding Common Stock. However, 2,365,000
of such shares are held by the three founders of the Company, Phil Meisinger,
Gene Stinson and Edwin Wheeler. All of the founders' shares are held in voting
trusts and these shares will be voted on all matters in the same proportion as
the votes cast by its other shareholders.
MANUFACTURING CONCERNS
The Company's current Odessa, Texas facility is designed to produce 400
units per month. The Company's business plan requires expansion of its
production capabilities. The Company may not be able to manage or fund this
expansion in a timely manner to meet expected sales demand.
GRID CONNECTIVITY ISSUES
The Company's current test units in operation have been able to
successfully connect to the local utility grids and operate effectively either
with the POWR/MASTR(TM) or local utility as the back-up source of electricity.
In some areas of the country, cost or legal barriers may exist that may
limit the ability to connect POWR/MASTRs(TM) with the local utility. Utility
companies commonly charge fees to industrial customers for disconnecting from
the grid, for using less electricity, or for having the capacity to use power
from the grid for back-up purposes. These types of fees could increase the cost
to the Company's potential customers of using its systems and could make its
systems less desirable, thereby harming its revenue and profitability.
INTERNATIONAL EXPANSION
The Company plans to develop international operations as soon as
practicable. The Company's entry into international markets will require
significant management attention and financial resources, which could harm its
ability to effectively manage domestic operation. The Company will also be
subject to the following challenges associated with conducting international
business:
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- difficulties of managing remote offices,
- burdens of complying with foreign laws and regulatory requirements,
- reduced protection of proprietary rights,
- problems in meeting different technology standards,
- increased tax burdens, and
- exposure to general foreign economic declines, currency fluctuations
and political instability.
GENERAL ECONOMIC CONDITIONS
Certain industries to which the Company plans to market, such as the
utility industry and the retail sales industry, have been subject to high rates
of restructuring and rationalization. In the future, the Company's results may
be subject to substantial period-to-period fluctuations as a consequence of the
industry patterns of its customers, general or regional economic conditions and
other factors. These factors may also have a material adverse effect on its
business, operating results and financial condition.
LACK OF PUBLIC MARKET FOR COMMON STOCK
There is no public trading market for the Company's Common Stock and there
can be no assurance that any trading market will ever develop. The Company
cannot predict the extent to which a trading market will develop or how liquid
that market may become. Shares of its Common Stock may only be resold if they
are subsequently registered with the SEC or if they are sold pursuant to an
exemption from registration. Even if the Company does undertake an initial
public offering, the underwriters commonly require that the existing
shareholders waive any rights they may have to register shares in the offering.
It is unlikely that shareholders will be able to sell their Common Stock in any
initial public offering that the Company may undertake in the future. In
addition, shareholders may be subject to a lock-up provision, which
contractually obligates them not to sell any of their shares during the 180 day
period after the closing of any initial public offering. Accordingly, holders of
the Company's Common Stock may be required to bear the economic risks of their
investment for an indefinite period of time.
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ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following historical selected financial data are derived from the
unaudited financial statements of the Company. The operating data and balance
sheet data set forth below should be read in conjunction with the Company's
Financial Statements and related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this document.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- --------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ............................ $ 190 $ -- $ -- $ -- $ --
Cost of revenues .................... 134 -- -- -- --
Other operating expenses ............ 16,299 7,046 2,815 1,237 25
Operating loss ...................... (15,782) (7,046) (2,815) (1,237) (25)
Net loss per Common Share:
Basic and Diluted ................. (2.42) (1.56) (0.80) (0.70) (0.02)
Weighted average shares outstanding:
Basic and Diluted ................. 6,521 4,530 3,540 1,759 1,486
AS OF DECEMBER 31,
2000 1999 1998 1997 1996
-------- --------- --------- --------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets ....... $24,831 $6,987 $625 $1,236 $10
Long-term liability 89 131 203 78 --
Stockholders' equity 19,933 6,423 114 1,126 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain items discussed in this Form 10 constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and, as such, involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
statements can be identified by the fact that they do not relate strictly to
historical or current facts. Statements which make reference to the expectations
or beliefs of the Company or any of its management are such forward-looking
statements. These statements use words such as "believe," "expect," "may,"
"should" and "anticipate." Such information includes, without limitation,
statements regarding the Company's future financial performance, development of
products, expansion plans, and estimated capital expenditures. Such information
also includes statements regarding the performance of the Company's technology,
which is in the process of
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being upgraded. Actual results will be affected by a variety of risks and
factors, including, without limitation, international, national and local
economic conditions and financing risks.
All such forward-looking statements speak only as of the date of this Form
10. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS FORM 10.
OVERVIEW
Elektryon develops, assembles, and has recently begun to market the
POWR/MASTR(TM), a 100 kW generator designed specifically for uninterruptible
on-site electricity generation to address the rapidly growing distributed
generation market. The Company's commercially available POWR/MASTER(TM) is a
specially customized GM reciprocating engine with high fuel efficiency and low
emissions levels which produces on-site electricity for a wide range of
commercial and industrial applications. The POWR/MASTR(TM) technology is
protected by a U.S. Patent with over 90 claims. The Company began developing the
POWR/MASTR(TM) technology in 1994, and has since inception incurred operating
losses of $27.3 million as of December 31, 2000. The Company expects operating
losses to continue through the year 2001.
Since inception, the Company been developing and refining its technology
and, in early 2000, began testing several units in field operations in Chicago,
Illinois; Linden, New Jersey; Tucson, Arizona; and San Diego, California. The
Company has recently begun marketing its product to several potential nationwide
customers. The Company has built an assembly facility on leased property in
Odessa, Texas. The Company has also installed a complete Information Technology
system for managing both the production of POWR/MASTR(TM) units and the
long-term servicing of the units generating electricity on customers' premises.
Installed units are expected to be connected in a nationwide data network with
central monitoring and alarming facilities that will enable the Company to
provide prompt and effective maintenance.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
REVENUES
The Company was a development stage enterprise in both years and generated
no material revenues.
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GROSS PROFIT (LOSS)
The Company had no units assembled for sale and therefore derived no gross
profit in 1999, and generated $190,000 in sales resulting in $54,000 in gross
profits in 2000.
RESEARCH AND DEVELOPMENT
As a development stage company, the Company spent approximately $11.8
million in 2000, $8.9 million, or 307%, higher than in 1999 as the Company
researched, designed and built prototype units for demonstration and testing.
Approximately 16 units were installed for testing and demonstration purposes
in 2000.
SELLING, GENERAL AND ADMINISTRATIVE
The Company's Selling, General and Administrative expenses were $4.5
million in 2000, $1.1 million, or 32% higher than in 1999. This increase
related to increased costs of supporting demonstration units in field locations
and developing potential customers.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES
The Company was a development stage enterprise in both years and generated
no material revenues.
GROSS PROFIT (LOSS)
The Company was a development stage enterprise in both years and had no
units assembled for sale and therefore derived no gross profit.
RESEARCH AND DEVELOPMENT
As a development stage company, the Company spent approximately $2.8
million in 1999, $1.5 million, or 93%, higher than in 1998 as the Company
researched, designed and built prototype units for demonstration and testing.
SELLING, GENERAL AND ADMINISTRATIVE
The Company's Selling, General and Administrative expenses were $3.4
million in 1999, $2.1 million, or 161%, higher than in 1998. This increase
relates to increased costs of supporting demonstration units in field locations
and developing potential customers.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents the unaudited quarterly financial information
for the eight quarters ended December 31, 2000. This information was prepared in
accordance with generally accepted accounting principles, and, in the opinion of
management, contains all of the necessary adjustments for a fair presentation of
such quarterly information when read in conjunction with
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the financial statements included elsewhere in this document. Operating results
for any prior quarters may not necessarily prove indicative of the results for
any future quarters.
1999 2000
-------------------------------------------- ----------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ----- ------- ------- ------- ------- -------
Total revenues ............ $ 0 $ 0 $ 0 $ 0 $ 190 $ 0 $ 0 $ 0
Cost of goods sold ........ 0 0 0 0 134 0 0 0
Gross profit (loss) ....... 0 0 0 0 55 0 0 0
Operating expenses ........ 0 0 0 0 0 0 0 0
Research and development .. 296 945 549 1,060 2,632 1,540 3,738 3,901
Selling, general &
administrative ............ 1,207 331 332 1,569 319 739 1,203 2,154
Royalty expense ........... 0 0 0 779 0 0 0 0
Interest income (expense) . 0 0 0 22 86 66 126 166
Income (loss) from
operations ................ (1,503) (1,276) (881) (3,386) (2,865) (2,213) (4,815) (5,889)
Net income (loss) ......... $(1,503) $(1,276) $(881) $(3,386) $(2,865) $(2,213) $(4,815) $(5,889)
The increase in revenues and the cost of goods sold in the first quarter
of 2000 reflects the Company's only sale since inception.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements depend upon many factors, including its
product development activities, production expansion and commercialization
efforts. Substantial resources are expected to be devoted to expanding marketing
and sales efforts, increasing the Company's manufacturing capacity, expanding
research and development operations, and installing a centralized system for
continuous remote monitoring of units in service. The Company believes its
current cash balances will provide sufficient capital to fund operations through
June, 2001.
The Company has financed the development of the POWR/MASTR(TM) technology
primarily through private equity offerings, including the use of stock in
exchange for services. The Company has raised approximately $45 million through
December 31, 2000. The primary use of capital has been to fund research and
development, capital expenditures and production costs for prototype units. Net
cash used in operating activities was $21.4 million, $5.2 million, and $2.6
million for the years ended December 31, 2000, 1999 and 1998. At December 31,
2000, the Company had commitments of approximately $4.6 million for expenses.
On April 16, 2001 the Company signed a definitive agreement to sell
substantially all of its assets to Solo, an Alameda, California based developer
of microturbine technology, as discussed under "Item 1 - The Reorganization -
The Asset Acquisition Agreement." At Closing, the Solo Common Stock received by
Elektryon will be deposited in the Liquidating Trust (other than the shares held
in the Escrow Fund). Elektryon will also receive at Closing $5 million in cash,
subject to adjustment, and will retain certain non-operating assets, including
promissory notes aggregating $10,257,000 from two former directors of the
Company. SEE ITEM 6 "EXECUTIVE COMPENSATION - THE SETTLEMENT WITH THE COMPANY'S
FORMER DIRECTORS." The Company believes that the cash and proceeds of the
promissory notes will provide for sufficient resources to wind up the affairs of
the Company, including the payment of liabilities not transferred to Solo and
any future litigation costs.
A condition to Solo's obligations under the Asset Acquisition Agreement is
that Elektryon obtain waivers of specified securities claims shareholders may
have against Elektryon and any representative of the Company from its Accredited
Investor shareholders holding at least 60% of the issued and outstanding shares
of Elektryon Common Stock. Elektryon currently is in the process of seeking to
obtain the Waiver and Release Agreements.
In consideration for entering into a Waiver and Release Agreement,
Elektryon will issue an additional fraction of a share of Common Stock with
respect to each share of Common Stock purchased by a shareholder from the
Company at a price in excess of $11.00 per share in cash, as set forth in the
following table in "Item 1. Business - The Reorganization - The Waiver and
Release Solicitation". The issuance of the additional shares of Common Stock
will have the effect of reducing the participating shareholder's average
purchase price per share to approximately $11.00. The total number of shares of
Common Stock that each such shareholder will receive will be rounded down to the
nearest number of whole shares.
Shareholders who purchased shares from the Company for $11.00 per share or
less or did not pay any cash for shares and who enter into a Waiver and Release
Agreement will receive nominal consideration of $10.00 per holder, regardless of
the number of shares held.
Each shareholder who enters into a Waiver and Release Agreement will waive
and release certain identified potential claims against Elektryon and its
representatives in connection with their purchase of Common Stock from the
Company. See "Item 1. Business - The Reorganization - The Waiver and Release
Agreement" for a list of those claims.
If all of the offerees holding the Subject Securities accept the Waiver
Offer, the Company estimates that it will be required to make nominal cash
payments and issue fewer than two million shares of Common Stock. The Company
estimates that if all of the non-accredited investors who purchased Common Stock
from the Company were to successfully assert rescission rights, it would be
required to make payments to them equal to the price they paid for their
securities plus the aggregate amount of interest at the statutory interest rates
from the date of issuance to the date of rescission. The Company also estimates
that if the holders of all shares of Common Stock were to successfully assert
rescission rights, it would be required to make payments aggregating
approximately $45,000,000 plus the aggregate amount of interest at the statutory
interest rates from the date of issuance to the date of the rescission offer.
The Company currently has no cash available to fund the potential rescission
liability. The Company would be required to seek capital through equity
financing or the sale of assets to fund its rescission liability, and there can
be no assurance that sufficient financing could be obtained on terms acceptable
to it or at all. If the Company were unable to obtain additional financing to
satisfy any demand for rescission it will continue to be subject to claims from
the holders of the Common Stock for possible violations of applicable state and
federal securities laws.
There can be no assurance that claims asserting violations of state or
federal securities laws will not be asserted notwithstanding the Waiver Offer.
Furthermore, there can be no assurance that the Company will not be subject to
penalties or fines relating to past securities issuances or that the offerees or
other holders of the Common Stock will not assert and prevail in claims against
the Company for rescission or damages under federal or state securities laws.
Even if the Company were successful in defending any securities law claims, the
assertion of such claims against the Company would result in costly litigation
and significant diversions of effort by the Company's management. In addition,
the Waiver Offer will not prevent the Commission or any state securities
commission from pursuing enforcement action against the Company with respect to
any alleged violations of federal or state securities laws. The occurrence of
any of the foregoing could have a material adverse effect on the Company's
business, financial condition and results of operations.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK
The Company is currently developing products for sale in North America,
Europe and Asia. As a result, factors such as changes in foreign currency
exchange rates or economic conditions in foreign markets could affect the
Company's financial results. Inasmuch as the Company's sales have been
negligible it has not utilized foreign exchange contracts to reduce its exposure
to foreign currency fluctuations. The Company has no foreign currency
translations in its reported financial statements. In the future, as the
Company's customers and vendor bases expand, the Company anticipates that some
transactions will be in foreign currencies.
INTEREST
The Company's long term debt relates to capital leases on motor vehicles
and leasehold improvements at the Company's Odessa facility.
INFLATION
The Company does not believe that inflation has had a material effect on
its financial position or results of operations during the past three years.
However, the Company cannot predict with certainty the future effects of
inflation, including interest rate fluctuations and market fluctuations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all
quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS
No. 133 to have a material effect on our financial condition or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which was subsequently updated by SAB 101A. SAB 101 and SAB 101A
summarize certain of the SEC's views in applying accounting principles generally
accepted in the United States to revenue recognition in financial statements.
The Company does not anticipate any material impact resulting from the adoption
of SAB 101.
In March 2000, the FASB issued Interpretation 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("FIN 44"), which among other issues, addresses repricing and other
modifications made to previously issued stock options. The Company does not
anticipate any material impact resulting from the adoption of FIN 44.
In July 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs. When adopted, EITF No. 00-10 requires that all amounts billed to
customers in sale of transactions related to shipping and handling be classified
as revenue. The Company does not anticipate any material impact resulting from
EITF No. 00-10.
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ITEM 3. PROPERTIES.
The Company's executive offices are located at 6565 Spencer Street, Suite
206, Las Vegas, Nevada 89119, and consist of approximately 5,000 square feet of
office space under a lease expiring in January 2003 at a current monthly rent of
$5,250. The Company leases a manufacturing facility located at 320 East
Interstate 20, Odessa, Texas consisting of 27,000 square feet under a lease
expiring in April 2008 at a current monthly rent of $2,979. In addition, the
Company leases two storage facilities at 4501 County Road, 1310 South Midland
County, Odessa, Texas, consisting of: (i) 8,500 square feet under a lease
expiring June 30, 2001 at a current annual rent of $12,000 and (ii) 4,000 square
feet under a month-to-month lease at a current monthly rent of $750. The Company
owns approximately eight (8) acres of land surrounding the Odessa manufacturing
facility and a tract of land which contains a fabrication plant located at 2121
East 2nd Street, Odessa, Texas.
If the Asset Acquisition is consummated, Solo will assume the lease for
the Odessa manufacturing facility and Elektryon will transfer to Solo ownership
of the land surrounding the Odessa manufacturing facility and the Odessa
fabrication plant.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of Common Stock as of
April 30, 2001 by (i) each director, (ii) each of the executive officers, (iii)
all directors and executive officers of the Company as a group, and (iv) all
persons known by the Board of Directors to be beneficial owners of more than
five percent of the outstanding Common Stock.
Number of Shares
of Common Stock Percent of Common
Name Owned Stock Owned
-------------------- ------------------ ------------------
Philip C. Meisinger
1812 E. 56th Street 865,000 13.3%
Odessa, TX 79762
Gene E. Stinson 875,000 13.4%
1819 Ottawa Drive
Las Vegas, NV 89109
Edwin Wheeler 625,000 9.6%
P.O. Box 96507
Las Vegas, NV 89193
Michael E. Holmstrom, 300,000(1) 4.4%
President
Joanne Firstenberg, 250,000(2) 3.7%
General Counsel
Wendell H. Adair, Jr. 28,667 *
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Number of Shares
of Common Stock Percent of Common
Name Owned Stock Owned
-------------------- ------------------ ------------------
Director
Curtis Olson, 55,000 *
Director
John Cavalier, 26,500 *
Director
All directors and
executive officers as a 660,167 10.1%
group (5 individuals)(3)
* Less than one percent.
(1) Consists of 300,000 shares of Common Stock issuable upon exercise of
vested options.
(2) Consists of 250,0000 shares of Common Stock issuable upon exercise of
vested options.
(3) Includes 550,000 shares of Common Stock issuable upon exercise of vested
options.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following is a list of the Company's directors and executive officers
and their respective positions:
NAME AGE POSITION
--------------------- ---- ---------------
Wendell H. Adair, Jr. 56 Director
Curtis Olson 37 Director
John Cavalier 50 Director
Michael E. Holmstrom 58 President
Joanne Firstenberg 50 General Counsel
Wendell H. Adair, Jr. has practiced law for over 32 years, concentrating
in corporate matters, banking and finance, restructurings and reorganization and
mergers and acquisitions. Mr. Adair's clients include major insurance, pension
plan and mutual fund investors. Since June 1999, Mr. Adair has been a partner at
the law firm of Stroock & Stroock & Lavan. Mr. Adair was previously a partner in
the law firm of McDermott, Will & Emery from September 1989 to May 1999 and the
law firm of Mayer, Brown & Platt from September 1972 to August 1989. Mr. Adair
earned an A.B. from Emory University and a J.D. from the University of Chicago.
Curtis Olson. From October 1988 to October 2000, Mr. Olson held a variety
of positions at Dell Computer Corporation, most recently serving as its Director
of Global Sales. Mr. Olson earned a B.B.A. from the University of Iowa and an
M.B.A. from Southwest Texas State University.
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John Cavalier is a Managing Director in the Investment Banking Division of
Credit Suisse First Boston ("CSFB"). In this capacity, Mr. Cavalier serves as
financial advisor to companies in their emerging energy technology sector with a
focus on financing, restructuring, and mergers and acquisitions. Mr. Cavalier
joined Donaldson, Lufkin & Jenrette in 1990, and before then served as an
investment banker for Shearson Lehman Brothers and Drexel Burnham Lambert. From
1972 to 1981, Mr. Cavalier served in the U.S. Army as an officer in the Signal
Corps, and later in the Judge Advocate Generals Corps. Mr. Cavalier is a
graduate of the U.S. Military Academy, the University of Illinois School of Law,
and Harvard Business School.
Michael E. Holmstrom has served as the President of Elektryon since
January 2001. He joined the Company in November 2000 as Chief Financial Officer.
Prior to joining Elektryon, Mr. Holmstrom was Senior Vice President and Chief
Financial Officer of Alaska Communications from February 1999 to November 2000.
From July 1998 to February 1999, Mr. Holmstrom was Chief Financial Officer,
Secretary and Treasurer of Atlantic Tele-Network, Inc., a telecommunications
company, where he was responsible for the financial and administrative functions
of the company. From September 1996 to March 1998, Mr. Holmstrom was Chief
Operating Officer of Spectrum Network Systems, an Australian telecommunications
service provider, where he was responsible for the operations, financial, and
administrative functions of the company. Mr. Holmstrom received a B.S. in
business administration from Gannon University in Erie, Pennsylvania.
Joanne Firstenberg has served as the General Counsel of Elektryon since
December 2000. Prior to joining the Company, Ms. Firstenberg was a partner of
Hudson Capital, a private equity fund that invested in small and midsize
companies from 1994 to 2000, during which period she also was a partner in the
law firm of Cane & Firstenberg. From 1993 to 1994, Ms. Firstenberg was a
Managing Director of Whitman, Heffernan and Rhein, Inc., a firm specializing in
the evaluation and negotiation of acquisitions in the financial sector as well
as companies in need of restructuring. From 1986 to 1989, Ms. Firstenberg was
the Chief Executive Officer of Moorgate U.S., a subsidiary of a London-based
stock exchange firm specializing in servicing financial institutions.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information about the compensation paid by
the Company for services rendered by Michael Holmstrom, the President of the
Company, and Joanne Firstenberg, the Company's General Counsel, the only
executive officers paid more than $100,000 on an annualized basis. The following
table also sets forth information about the compensation paid by the Company to
two executive officers whose employment with the Company was terminated during
2000: Philip C. Meisinger, the former Chief Executive Officer of the Company,
and Gene E. Stinson, the former President of the Company.
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ANNUAL COMPENSATION LONG-TERM COMPENSATION
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING COMPEN-
SALARY BONUS SATION AWARD(S) OPTIONS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------- ---- --- --- --- --- --- ---
Michael Holmstrom, 2000 37,981(1) -- -- -- 300,000 60,000(1)
President
Joanne Firstenberg, 2000 10,417(2) -- -- -- 250,000 60,000(2)
General Counsel
Philip C. Meisinger,(3) 2000 260,500 -- -- -- -- --
Chief Executive Officer
1999 184,000 -- -- -- -- --
1998 85,000 -- -- -- -- --
Gene E. Stinson,(3) 2000 213,000 -- -- -- -- --
President
1999 184,000 -- -- -- -- --
1998 85,000 -- -- -- -- --
(1) Mr. Holmstrom began his employment with the Company on November 7,
2000 and was paid a salary at an annualized rate of $250,000. All
Other Compensation consists of $60,000 for moving expenses.
(2) Ms. Firstenberg began her employment with the Company on December
15, 2000, and was paid a salary at an annualized rate of $250,000.
All Other Compensation consists of $60,000 for moving expenses.
(3) Messrs. Meisinger and Stinson were paid pursuant to consulting
agreements described more fully below. Options granted to Messrs.
Meisinger and Stinson were cancelled in connection with a settlement
of the Company's potential claims against them. Pursuant to the
consulting agreements, the Company leased automobiles for Messrs.
Meisinger and Stinson. SEE " -- CONSULTING AGREEMENTS" AND " -- THE
SETTLEMENT AGREEMENT WITH THE COMPANY'S FORMER DIRECTORS."
EMPLOYMENT AGREEMENTS
Following is a description of employment agreements between the Company
and Mr. Holmstrom and Ms. Firstenberg.
Michael E. Holmstrom
Michael E. Holmstrom is employed by the Company pursuant to an amended
employment agreement (the "Holmstrom Employment Agreement") which provides for
him to serve as the President of the Company until November 7, 2003 (the
"Holmstrom Employment Period"), or such earlier date as provided therein. Mr.
Holmstrom is to receive an annual salary of $250,000 (the "Base Salary"). Mr.
Holmstrom will also be entitled to certain perquisites and to bonus payments of
(a) $100,000 upon the completion of the Company's audited financial statements
by the Company's accountants, payable no later than five business days after
such financial statements are completed, and (b) $100,000 upon the consummation
of an initial public offering of the Company's Common Stock (an "IPO") payable
no later than five business days after the date of the final prospectus relating
to the IPO. All bonus payments will be payable immediately upon any change in
control of the Company, which is defined as any or all of the following: an
asset sale of substantial assets of the Company, a substantial change in the
executive board of the Company, or a material equity infusion greater than $10
million into the Company during the Holmstrom Employment Period.
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Under the Holmstrom Employment Agreement, the Board of Directors of the
Company granted Mr. Holmstrom stock options to purchase 300,000 shares of the
Company's Common Stock, at an exercise price of $2.00 per share, all of which
have vested. The options are exercisable for a period of 60 months from the date
on which they vest regardless of Mr. Holmstrom's employment status at the time.
Mr. Holmstrom has agreed that during his employment and for one year after
the termination of the Holmstrom Employment Agreement, he will not directly or
indirectly engage in, assist, perform services for, establish or open, or have
any equity interest (other than ownership of 5% or less of the outstanding stock
of any corporation listed on the New York Stock Exchange or American Stock
Exchange or included in NASDAQ) in any person, firm or corporation or business
entity that engages in any activity in the world in which the Company is
conducting business activities which are the same as, similar to, or competitive
with the business of the distributed generation of electricity. Mr. Holmstrom
has also agreed to keep secret and confidential indefinitely all non-public
information concerning the Company and its affiliates which was acquired by or
disclosed to him during the course of his employment with the Company and not to
disclose the same, either directly or indirectly, to any other person, firm or
entity or to use it in any way.
If Mr. Holmstrom's employment with the Company terminates before the end
of the Holmstrom Employment Period (a) for any reason, the Company will pay him
a lump sum equal to his earned but unpaid salary for the period ending on the
date of termination of his employment, but in no event less than one year's
annual salary; and (b) as a result of Mr. Holmstrom's termination of employment
by the Company for reasons other than Cause (as defined in the Holmstrom
Employment Agreement) and not on account of his death, disability, voluntary
resignation or mutual agreement of the parties, Mr. Holmstrom will receive from
the Company a lump sum payment equal to his salary for the period commencing on
the date of termination of his employment and ending on the earliest of (i) the
last day of the Holmstrom Employment Period, (ii) the date of Mr. Holmstrom's
death, or (iii) the first anniversary of the date of termination of his
employment.
Joanne Firstenberg
Joanne Firstenberg is employed by the Company pursuant to an amended
employment agreement (the "Firstenberg Employment Agreement") which provides for
her to serve as General Counsel of the Company until December 15, 2003 (the
"Firstenberg Employment Period"), or such earlier date as provided therein. Ms.
Firstenberg is to receive an annual salary of $250,000 (the "Base Salary"). Ms.
Firstenberg also will be entitled to certain perquisites to bonus payments of
(i) $50,000 upon the completion of the Company's audited financial statements by
the Company's accountants, payable no later than 5 business days after such
financial statements are completed, (ii) $50,000 upon the effectiveness of a
Form 10 on behalf of the Company, payable no later than 5 business days after
the Form 10 becomes effective, and (iii) $100,000 upon the consummation of an
initial public offering of the Company's Common Stock (an "IPO"), payable no
later than 5 business days after the date of the final prospectus relating to
the IPO. All bonus payments will be payable immediately upon any change in
control of the Company, which is defined as any or all of the following: an
asset sale of substantial assets of the Company, a substantial change in the
executive board of the
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Company, or a material equity infusion greater than $10 million into the Company
during the Firstenberg Employment Period.
Under the Firstenberg Employment Agreement, the Board of Directors of the
Company granted Ms. Firstenberg stock options to purchase 250,000 shares of the
Company's Common Stock, at an exercise price of $2.00 per share, all of which
have vested. The options are exercisable for a period of 60 months from the date
on which they vest regardless of Ms. Firstenberg's employment status at the
time.
Ms. Firstenberg has agreed that during her employment and for one year
after the termination of the Firstenberg Employment Agreement, she will not
directly or indirectly engage in, assist, perform services for, establish or
open, or have any equity interest (other than ownership of 5% or less of the
outstanding stock of any corporation listed on the New York Stock Exchange or
American Stock Exchange or included in the NASDAQ) in any person, firm or
corporation or business entity that engages in any activity in the world in
which the Company is conducting business activities which are the same as,
similar to, or competitive with the business of the distributed generation of
electricity. Ms. Firstenberg has also agreed to keep secret and confidential
indefinitely all non-public information concerning the Company and its
affiliates which was acquired by or disclosed to her during the course of her
employment with the Company and not to disclose the same, either directly or
indirectly, to any other person, firm or entity or to use it in any way.
If Ms. Firstenberg's employment with the Company terminates before the end
of the Firstenberg Employment Period (a) for any reason, the Company will pay
her a lump sum equal to her earned but unpaid salary for the period ending on
date of termination of her employment, but in no event no less than one year's
annual salary; and (b) as a result of Ms. Firstenberg's termination of
employment by the Company for reasons other than Cause (as defined in the
Firstenberg Employment Agreement) and not on account of her death, disability,
voluntary resignation, or mutual agreement of the parties Ms. Firstenberg will
receive from the Company a lump sum payment equal to her salary for the period
commencing on the date of termination of her employment and ending on the
earliest of (i) the last day of the Firstenberg Employment Period, (ii) the date
of Ms. Firstenberg's death, or (iii) the first anniversary of the date of
termination of her employment.
CONSULTING AGREEMENTS
Each of Messrs. Meisinger and Stinson were parties to separate consulting
agreements with the Company dated as of February 20, 1999, pursuant to which he
was paid $180,000 per year, subject to adjustment for inflation (the "Consulting
Agreements"). Under the Consulting Agreements, each of Messrs. Meisinger and
Stinson received specified perquisites, including a vehicle of his choice, a $1
million term life insurance policy paid by the Company, medical insurance with
disability coverage and an office with staff support. Each Consulting Agreement
also provided that the consultant would be paid his consulting fee for a
two-year period following termination of the Consulting Agreement for any
reason.
The Consulting Agreements also provided that each of Messrs. Meisinger and
Stinson's annual compensation would increase to $240,000 if the Company entered
into an agreement with
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a major funding partner who agreed to invest at least $10 million in the Company
or if the Company filed a registration statement with the Commission. The
Consulting Agreements were terminated in connection with the Company's
settlement of its claims against Messrs. Meisinger and Stinson, as described
more fully below. SEE "--THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS."
THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS
Pursuant to a Separation and Release Agreement dated as of February 28,
2001 (the "Separation and Release Agreement"), the Company on the one hand and
two former directors and officers of the Company, Messrs. Meisinger and Stinson
(the "Former Executives"), on the other hand settled and released all claims
against each other. The Separation and Release Agreement provides for the
termination of the Former Executives' employment with the Company and their
resignation from its Board of Directors. The Separation and Release Agreement
also terminates all other agreements between the Company and the Former
Executives, including stock option grants to purchase an aggregate of 620,000
shares of Common Stock, and provides for the assignment by the Former Executives
of their alleged rights in any Elektryon intellectual property.
The Former Executives also surrendered an aggregate of 461,950 shares of
Common Stock to the Company, paid the Company an aggregate of $2,500,000 and
gave the Company promissory notes for an aggregate of $10,257,000, which notes
are non-recourse to the Former Executives but are secured by the Former
Executives' remaining shares of Common Stock not surrendered to the Company in
connection with the settlement. The Former Executives agreed to restrictions on
their right to transfer their remaining shares of Common Stock and agreed to
apply proceeds from any permitted sales of their shares to pay principal and
interest on the promissory notes. In the event a Former Executive breaches the
Separation and Release Agreement, the Company may elect to repurchase such
Former Executive's shares of Common Stock for a purchase price of $15.00 per
share of Common Stock. In addition, the Former Executives agreed to subject
their remaining shares of Common Stock to a voting trust agreement, which
provides that the Former Executives have appointed Curtis Olson, a director of
the Company, their proxy and attorney-in-fact with respect to the voting of such
shares. Under the voting agreement, Mr. Olson will vote the Former Executives'
shares of Common Stock in the same proportion as the votes cast or consents
given by all holders of Common Stock except the Former Executives and persons
affiliated with them. The voting agreement also prohibits the Former Executives
from soliciting proxies, engaging in tender offers or taking other steps to
affect the composition of the Company's Board of Directors or its affairs and
policies.
Pursuant to an Agreement and Release, dated as of January 19, 2001,
between the Company and Edwin Wheeler, a former director of the Company, Mr.
Wheeler agreed to (a) contribute 550,000 shares of Common Stock to the Company
at no cost to the Company, (b) purchase 75,000 shares of Common Stock from the
Company for a purchase price of $20.00 per share, (c) acknowledge that the
options to purchase 310,000 shares of Common Stock granted to him by the Company
were cancelled, and (d) sever any and all relationships with the Company other
than in his capacity as the beneficial owner of shares of Common Stock. Mr.
Wheeler also agreed to release any claims he may have had against the Company.
The Company in turn
40
43
agreed not to sue Mr. Wheeler in connection with his sales of shares of Common
Stock or any other incident arising directly or indirectly from his performance
of services for the Company. Wheeler further agreed not to use or disclose any
proprietary information of the Company.
The remaining shares of Common Stock owned by Mr. Wheeler are subject to
the terms of a voting agreement, dated as of November 11, 2000, as amended on
January 19, 2001, between Mr. Wheeler and Elektryon. Pursuant to the voting
agreement, Mr. Wheeler appointed the Company's independent directors as his
proxy and attorneys-in-fact with respect to the voting of his shares of Common
Stock. Under the voting agreement the directors will vote Mr. Wheeler's shares
in the same proportion as votes cast or consents given by all holders of Common
Stock except Mr. Wheeler and persons affiliated with him. The voting agreement
also prohibits him from soliciting proxies, engaging in tender offers or taking
other steps to affect the Company's Board of Directors or its affairs or
policies.
STOCK OPTIONS
The following table provides information concerning grants of stock
options by the Company to the named executive officers during 2000.
OPTIONS GRANTS FOR FISCAL 2000
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERMS (1)
NUMBER OF % OF TOTAL --------------------------
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 2000 SHARE ($/SH) DATE 5% 10%
- ---- ------- ---- ------------ ---- -- ---
Michael E. Holmstrom 150,000 27.3% $2.00 11/7/05 $82,884 $183,153
150,000 27.3% $2.00 2/7/06 $82,884 $183,153
Joanne Firstenberg 125,000 22.7% $2.00 12/15/05 $69,070 $152,628
125,000 22.7% $2.00 3/15/06 $69,070 $152,628
There is no established market for the Common Stock and, accordingly, the fair
market value of the securities underlying the options granted to Mr. Holmstrom
and Ms. Firstenberg cannot be determined. The $2.00 exercise price was intended
to be the equivalent of fair market value of the Common Stock at the date of
grant.
OPTION EXERCISES AND VALUES FOR 2000
The named executive officers did not exercise any options during 2000.
There is no established market for the Common Stock and, accordingly, the fair
of market value at year end of the securities underlying the options granted to
the named executive officers cannot be determined.
DIRECTORS' COMPENSATION
Each of the Company's directors receives 500 shares of Common Stock for
each meeting of the Board of Directors attended in person.
41
44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors or officers of the Company have any relationships
which must be disclosed under this caption.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to the Asset Acquisition Agreement, Solo has agreed upon the
closing of the Asset Acquisition to issue to (a) Michael E. Holmstrom, the
President of Elektryon, options to purchase 1,818,182 shares of Solo Common
Stock with an exercise price per share of $0.33, and (b) Joanne Firstenberg, the
General Counsel of Elektryon, options to purchase 1,515,152 shares of Solo
Common Stock with an exercise price per share of $0.33. The Elektryon stock
options issued to Mr. Holmstrom and Ms. Firstenberg will be terminated when the
Solo stock options are issued to them. SEE "ITEM 1. BUSINESS -- THE
REORGANIZATION -- THE ASSET ACQUISITION AGREEMENT."
If the Asset Acquisition is consummated, the Company will pay Mr.
Holmstrom $600,000 and Ms. Firstenberg $600,000 pursuant to the change in
control and termination provisions of their respective employments agreements.
SEE "ITEM 6. EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENTS."
Each of the directors of Elektryon in his capacity as a shareholder of
Elektryon will receive a Waiver Offer. If the directors accept their respective
Waiver Offers, Elektryon will issue the following consideration to them:
- Mr. Adair will receive an additional 2,418 shares of Common Stock;
- Mr. Cavalier will receive an additional 20,454 shares of Common
Stock; and
- Mr. Olson will receive an additional 1,818 shares of Common Stock
The Company has agreed to pay CSFB a fee in cash or Common Stock equal to
3% of the stock consideration payable to the Company if the Asset Acquisition
closes. Mr. Cavalier, a director of the Company, is a Managing Director of CSFB.
The Company believes that during 2000, Messrs. Meisinger, Stinson and
Wheeler sold an aggregate of 696,905 shares of Common Stock held by them to the
Company for an aggregate of $13,615,562, which amount was obtained by the
Company from sales of such shares by the Company to third parties.
SEE "ITEM 1. BUSINESS -- THE REORGANIZATION -- THE WAIVER OFFERS."
ITEM 8. LEGAL PROCEEDINGS.
SEE "ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS -- LITIGATION" for a
description of claims asserted against the Company.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Market Information. As of April 30, 2001, the Company had a total of
6,571,925 shares of Common Stock issued and outstanding. There is no established
United States public trading market in which the Company's Common Stock is being
traded, and the Company is unaware of
42
45
any trading in its Common Stock. The Company estimates that approximately 57% of
its issued and outstanding shares of Common Stock could be sold under Rule 144
promulgated under the Securities Act of 1933, as amended. 855,401 shares of
Common Stock are subject to outstanding options to purchase Common Stock.
Holders. As of April 30, 2001, there were approximately 1,425 record
holders of Common Stock.
Dividends. The Company has not previously paid any dividends on the Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The only restrictions that limit the Company's ability to pay dividends on the
Common Stock are those imposed by Nevada law. Under Nevada law, no dividends or
other distributions may be made which would render the Company insolvent or
reduce the Company's assets to less than the sum of its liabilities plus the
amount needed to satisfy any liquidation preference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
To be filed by amendment.
43
46
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and
Regulation D promulgated thereunder.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of 125,000,000 shares of
Common Stock.
Common Stock. Under Nevada law and the Company's Amended and Restated
Articles of Incorporation (the "Articles of Incorporation"), holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of legally available funds. In the event of the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
The Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock.
Anti-takeover Effects of Provisions of the By-Laws. The Company's By-Laws
provide that stockholders may call a special meeting of stockholders only upon a
request of stockholders entitled to exercise a majority of the voting power of
the Company. These provisions of the By-Laws could discourage potential
acquisition proposals and could delay or prevent a change in control. These
provisions enhance the likelihood of continuity and stability in the composition
of the Board of Directors and in the policies formulated by the Board of
Directors and discourage certain types of transactions that may involve an
actual or threatened change of control. Such provisions could have the effect of
discouraging others from making tender offers for the Common Stock.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Articles of Incorporation contain provisions that limit the liability
of directors in certain instances. As permitted by the Nevada General
Corporation Law, directors will not be liable to the Company for monetary
damages arising from a breach of their fiduciary duty as directors. Such
limitation does not affect liability for any breach of a director's duty to the
Company or its stockholders that involve (i) intentional misconduct, fraud or a
knowing violation of law or (ii) for the payment of dividends in violation of
Nevada Revised Statutes 78.300.
Nevada Revised Statutes 78.751 and 78.7502 contains provisions permitting
a Nevada corporation, such as Elektryon, to provide indemnification for its
officers and directors for losses incurred in connection with their service to
the corporation in these capacities. The Articles of Incorporation contain
provisions requiring indemnification by Elektryon of its directors, officers,
employees and agents, and of persons serving at the request of Elektryon as a
director, officer, employee or agent of any other enterprise, to the fullest
extent permitted by law.
44
47
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements are currently being audited but the
audit is not yet completed. The Company will file its audited financial
statements by amendment to this Form 10 when they are available.
See pages F-1 to F-17 of this Form 10 for the Company's unaudited
financial statements and accompanying notes.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
To be filed by amendment with the Company's audited financial statements.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
The following financial statements are exhibits to this Form 10:
Unaudited Balance Sheets as of December 31, 1998, 1999 and 2000
Unaudited Statements of Operations for the years ended December 31,
1998, 1999, 2000 and cumulative since April 1994 (date of inception)
to December 31, 2000
Unaudited Statements of Stockholders' Equity for the period from
April 1994 (date of inception) to December 31, 1998 and for the
years ended December 31, 1998, 1999 and 2000
Unaudited Statements of Cash Flow for the years ended December 31,
1998, 1999 and 2000 and cumulative since April 1994 (date of
inception) to December 31, 2000
Notes to Unaudited Financial Statements
(b) EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Asset Acquisition Agreement between Solo Energy Corporation and
Elektryon dated April 16, 2001.
45
48
Exhibit No. Description
- ----------- -----------
2.2 Liquidating Trust Agreement.
2.3 Plan of Reorganization of Elektryon.
3.1 Amended and Restated Articles of Incorporation of Elektryon dated
August 21, 2000.
3.2 Amended and Restated By-Laws of Elektryon dated August 21, 2000.
9.1 Voting Agreement dated as of February 28, 2001, among Elektryon,
Philip C. Meisinger, Gene E. Stinson and Curtis Olson.
9.2 Voting Agreement dated as of November 11, 2000, as amended
January 19, 2001, between Elektryon and Edwin Wheeler.
10.1 Employment Agreement dated December 15, 2000, as amended on
February 12, 2001, between Elektryon and Joanne Firstenberg.
10.2 Employment Agreement dated November 7, 2000, as amended on
February 12, 2001, between Elektryon and Michael E. Holmstrom.
10.3 Separation and Release Agreement, dated as of February 28, 2001,
among Elektryon, Philip C. Meisinger and Gene E. Stinson.
10.4 Release, dated as of February 28, 2001, among Elektryon, Philip C.
Meisinger and Gene E. Stinson.
10.5 Pledge Agreement, dated as of February 28, 2001, made by Philip
C. Meisinger in favor of Elektryon.
10.6 Pledge Agreement, dated as of February 28, 2001, made by Gene E.
Stinson in favor of Elektryon.
10.7 Promissory Note, dated as of February 28, 2001, made by Philip C.
Meisinger in favor of Elektryon.
10.8 Promissory Note, dated as of February 28, 2001, made by Gene E.
Stinson in favor of Elektryon.
10.9 Agreement and Release, dated January 9, 2001, between Elektryon
and Edwin W. Wheeler.
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49
ELEKTRYON
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Balance Sheets as of December 31, 1998, 1999 and 2000....... F-2
Unaudited Statements of Operations for the years ended December 31,
1998, 1999, 2000 and cumulative since April 1994 (date of inception) to
December 31, 2000..................................................... F-3
Unaudited Statements of Stockholders' Equity for the period from April
1994 (date of inception) to December 31, 1998 and for the years ended
December 31, 1998, 1999 and 2000...................................... F-4
Unaudited Statements of Cash Flow for the years ended December 31,
1998, 1999, 2000 and cumulative since April 1994 (date of inception) to
December 31, 2000..................................................... F-5
Notes to Unaudited Financial Statements............................... F-6
F-1
50
ELEKTRYON
(A Development Stage Enterprise)
ELEKTRYON
UNAUDITED CONSOLIDATED BALANCE SHEETS
December 31, December 31, December 31,
1998 1999 2000
------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents ................. $ 31,528 $ 6,413,601 $ 7,515,099
Inventory:
Raw materials .......................... 9,234,838
Work in process and finished goods ..... 3,275,917
Other current assets ...................... 174,960 101,733 837,612
------------ ------------ ------------
Total current assets .......................... 206,488 6,515,334 20,863,466
Property plant and equipment, net ......... 407,994 437,814 3,935,940
Other assets .............................. 10,200 34,165 32,094
------------ ------------ ------------
Total assets .................................. $ 624,682 $ 6,987,313 $ 24,831,500
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .......................... $ 217,529 $ 230,526 $ 4,630,574
Accrued expenses .......................... 117,000 25,874
Current portion of long-term debt ......... 90,243 73,434 51,044
Other current liabilities ................. 12,600 101,713
------------ ------------ ------------
Total current liabilities ..................... 307,772 433,560 4,809,205
Long-term debt ............................ 202,734 130,812 89,073
------------ ------------ ------------
Total liabilities ............................. $ 510,506 $ 564,372 $ 4,898,278
Stockholders, equity:
Common stock; $.001 par value,
authorized 25,000,000, 25,000,000 and
125,000,000 in 1998, 1999 and 2000,
respectively; issued and outstanding;
4,062,293, 5,268,417 and 7,416,545
in 1998, 1999 and 2000 respectively ....... $ 4,062 $ 5,268 $ 7,416
Paid in capital ........................... 4,536,993 17,890,350 47,180,939
Deficit accumulated during the
development stage ......................... (4,426,879) (11,472,677) (27,255,133)
------------ ------------ ------------
Total stockholders' equity .................... 114,176 6,422,941 19,933,222
------------ ------------ ------------
Total liabilities and stockholders' equity .... $ 624,682 $ 6,987,313 $ 24,831,500
============ ============ ============
F-2
51
ELEKTRYON
(A Development Stage Enterprise)
ELEKTRYON
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1999, 2000 and cumulative since April
1994 (date of inception) to December 31, 2000
December 31, December 31, December 31, Cumulative
1998 1999 2000 Since Inception
------------ ------------ ------------ ---------------
Net sales ............................ $ 190,000 $ 190,000
Cost of sales ........................ 134,374 134,374
------------ ------------ ------------ ------------
Gross profit ......................... 55,626 55,626
Operating Costs and Expenses:
Research and development expense .. 1,460,930 2,850,703 11,810,989 16,893,637
Selling, general and administrative
expense ......................... 1,326,920 3,408,598 4,487,594 10,061,258
------------ ------------ ------------ ------------
Operating loss ....................... (2,787,850) (6,259,301) (16,242,957) (26,899,269)
Other income (expense):
Royalty Expense .................. (778,788) (778,788)
Interest Income .................. 456,153 456,153
Other ............................ (26,769) (7,709) 4,348 (33,729)
------------ ------------ ------------ ------------
Net loss before income taxes ......... (2,814,619) (7,045,798) (15,782,456) (27,255,133)
Provision for income taxes ........... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) .................... $ (2,814,619) $ (7,045,798) $(15,782,456) $(27,255,133)
============ ============ ============ ============
Income per Common Share:
Basic and Diluted .................... (0.80) (1.56) (2.42) (4.18)
============ ============ ============ ============
Weighted average common shares
outstanding ...................... 3,539,912 4,530,111 6,521,193 6,521,193
============ ============ ============ ============
F-3
52
ELEKTRYON
(A Development Stage Enterprise)
ELEKTRYON
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
For the period from April 1994 (date of inception) to December 31, 1998 and the
years ended December 31, 1998, 1999 and 2000
Deficit
Accumulated
Common Stock Common Stock During the
Number of and Paid-in Development
Shares Capital Stage Total
--------- ---------- ----------- ----------
Balance, January 1, 1994 ....... -- $ -- $ -- $ --
Capital contributions .......... 2,450,310 4,054,008 4,054,008
Common Stock issued for services 1,612,083 487,047 - 487,047
Net loss ....................... (4,426,879) (4,426,879)
--------- ---------- ----------- ----------
Balance, December 31, 1998 ..... 4,062,393 4,541,055 (4,426,879) 114,176
Capital contributions .......... 697,283 11,718,859 11,718,859
Common stock issued for services 421,342 800,666 800,666
Common stock issued for royalty
agreements ................. 64,899 778,788 778,788
Common stock issued for land ... 22,500 56,250 56,250
Net loss ....................... (7,045,798) (7,045,798)
--------- ---------- ----------- ----------
Balance, December 31, 1999 ..... 5,268,417 17,895,618 (11,472,677) 6,422,941
Capital contributions .......... 1,799,726 26,369,116 26,369,116
Common stock issued for services 348,402 2,923,622 2,923,622
Net loss ....................... (15,782,456) (15,782,456)
--------- ---------- ----------- ----------
Balance December 31,2000 ....... 7,416,545 47,188,356 (27,255,133) 19,933,223
========= ========== =========== ==========
F-4
53
ELEKTRYON
(A Development Stage Enterprise)
ELEKTRYON
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1999, 2000 and cumulative since
April 1994 (date of inception) to
December 31, December 31, December 31, Cumulative
1998 1999 2000 Since Inception
------------ ------------ ------------ ---------------
Cash Flows from Operating Activities:
Net loss ............................... $ (2,814,619) $ (7,045,798) $(15,782,456) $(27,255,133)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......... 59,380 89,712 312,031 480,592
Common stock issued for services ....... -- 800,666 2,923,622 4,211,335
Common stock issued for royalty
agreements ........................... -- 778,788 -- 778,788
Increases (decreases) in operating
accounts:
Inventory .............................. -- -- (12,510,755) (12,510,755)
Other current assets ................... (75,975) 73,227 (735,879) (837,612)
Accounts payable and accrued expenses .. 187,390 129,997 4,308,921 4,656,448
Other current liabilities .............. 79,930 (4,209) 66,723 152,757
------------ ------------ ------------ ------------
Net cash used in operating activities ...... (2,563,894) (5,177,617) (21,417,793) (30,323,580)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property, plant and
equipment ........................... (329,131) (118,498) (3,808,086) (4,413,428)
Investment in Patent ................... -- (25,000) -- (35,200)
Common stock issued for land purchase .. -- 56,250 -- 56,250
------------ ------------ ------------ ------------
Cash used in investing activities .......... (329,131) (87,248) (3,808,086) (4,392,378)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Contributed capital .................... 2,108,493 11,718,860 26,369,116 42,141,984
Long-term debt incurred ................ 133,200 (71,922) (41,739) 89,073
------------ ------------ ------------ ------------
Cash provided by financing activities ...... 2,241,693 11,646,938 26,327,377 42,231,057
------------ ------------ ------------ ------------
Increase (decrease) in cash ................ (651,332) 6,382,073 1,101,498 7,515,099
Cash and cash equivalents, beginning ....... 682,860 31,528 6,413,601 --
------------ ------------ ------------ ------------
Cash and cash equivalents, ending .......... $ 31,528 $ 6,413,601 $ 7,515,099 $ 7,515,099
============ ============ ============ ============
F-5
54
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Elektryon, a Nevada corporation (also referred to herein as the
"Company"), is a development stage company that develops, assembles and will
shortly begin to market the POWR/MASTR(TM), a natural gas-fueled product
designed to generate uninterruptible electricity on-site for the rapidly growing
distributed generation market. Elektryon was incorporated as a Nevada
corporation on March 1, 1994 under the name Engine Corporation of America. On
February 12, 1996, the Company changed its name to Engine World, Inc., and on
June 1, 2000, the Company changed its name to Elektryon. Elektryon's principal
executive offices are located at 6565 Spencer Street, Suite 206, Las Vegas,
Nevada 89119.
F-6
55
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY (CONTINUED)
The Company has incurred significant operating losses since its
inception. Management anticipates incurring additional losses until the Company
can produce sufficient revenues to cover costs. There can be no assurance that
the Company will achieve or sustain profitability or positive cash flow from its
operations.
To date, the Company has funded its activities primarily through
private equity funding. The Company has received proceeds of $42,141,984 through
the issuance of common stock from 1996 to 2000. The Company expects to obtain
additional funding through private or public equity offerings until such time as
it achieves positive cash flow from operations; however, there can be no
assurance that such financing will be available on terms satisfactory to the
Company or that positive operating cash flows will be achieved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES:
The financial statements of the Company have been prepared in
conformity with generally accepted accounting principles which require
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.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash on hand and short term
investments with original maturities of three months or less.
PROPERTY, PLANT AND EQUIPMENT AND LONG-LIVED ASSETS:
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful lives ranging from 2
to 10 years. Leasehold improvements are amortized over the period of the lease
or the estimated useful life of the assets, whichever is shorter. Amortization
of assets under capital leases is included with depreciation and amortization
expense.
Certain costs associated with obtaining and licensing patents are
capitalized as incurred and are amortized on a straight-line basis over
estimated useful lives up to 17 years. The Company reviews long-lived assets and
identifiable intangible assets for impairment whenever any events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable.
F-7
56
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of expenditures
for research, including the assembly and testing of generators conducted by the
Company and arrangements made with vendors. All research and development costs
are expensed as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" was effective for the Company
beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models even
though such models were developed to estimate the fair value of freely tradable
and fully transferable options, with vesting restrictions, which significantly
differ from the Company's stock option awards. Companies are permitted, however,
to continue to apply Accounting Principle Board Opinion ("APB Opinion") No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company has
elected to continue to apply APB Opinion No. 25 in its employee stock-based
compensation arrangements (see Note). Expense for common stock options granted
to non-employees is recorded based upon the fair value of the equity instrument
awarded calculated through the use of an option pricing model.
RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable. The Company places its cash equivalents with high credit quality
institutions.
Because the company has been in the development stage, it has had only
one customer during the periods presented.
There is a sole source of the automatic paralleling switch unit, a key
component, used in the Company's product. The Company is not aware of any other
suppliers who would produce these units to the Company's specifications and time
requirements. Although the Company is working to redesign its product to allow
for multiple switch unit sources, the Company could see significant delays and
interruptions.
NET LOSS PER COMMON SHARE
Basic loss per common share is computed using the weighted-average
number of common shares outstanding for the period. Diluted loss per share
excludes incremental shares related to employee stock options due to their
antidilutive effect as a result of the Company's net loss from operations for
the periods presented.
F-8
57
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
During 1998, 1999, and 2000, the Company issued $2,108,493, $13,354,563
and $29,292,738 of common stock.
During 1999 and 2000, the Company issued $800,666 and $2,923,622 of
common stock for services rendered by several vendors, all of which was expensed
during 1999 and 2000. The expense was recorded at the estimated fair market
value of services rendered. In addition, the Company issued $778,788 of common
stock for the purchase of the royalty rights of certain shareholders all of
which was expensed in 1999.
SEGMENT REPORTING
The Company is considered to be a single operating segment in
conformity with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
business activities of said operating segment are the development, manufacture
and sale of on-site energy systems.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Due to the uncertainty
surrounding the realization of the benefits of its past losses and deferred tax
assets, the Company has placed a 100% valuation allowance against its deferred
income tax assets.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out basis)
or market (net realizable value).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all
quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS
No. 133 to have a material effect on our financial condition or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements, " which was subsequently updated by SAB 101A. SAB 101 and SAB 101A
summarize certain of the SEC's views in applying accounting principles generally
accepted
F-9
58
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the United States to revenue recognition in financial statements.
The Company does not anticipate any material impact resulting from the adoption
of SAB 101.
In March 2000, the FASB issued Interpretation 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25 ("FIN 44"), which among other issues, addresses repricing and
other modifications made to previously issued stock options. The Company does
not anticipate any material impact resulting from the adoption of FIN 44.
In July 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs. When adopted, EITF No. 00-10 requires that all amounts billed to
customers in sale of transactions related to shipping and handling be classified
as revenue. The Company does not anticipate any material impact resulting from
EITF No. 00-10.
SEGMENT REPORTING
SFAS No. 131 established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial statements. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of a business,
for which separate financial information is available, that management regularly
evaluates in deciding how to allocate resources and assess performance. We do
not expect SFAS No. 131 to have a material effect on our financial condition or
results of operations.
F-10
59
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1999 and 2000
consisted of the following:
December 31, December 31, December 31,
1998 1999 2000
-------- ---------- ----------
Leasehold improvements $200,617 $ 215,389 $ 818,667
Machinery and
equipment ........... 286,225 333,701 3,538,509
Land ................. -- 56,250 56,250
-------- ---------- ----------
486,842 605,340 4,413,426
Less accumulated
depreciation ........ 78,848 167,256 477,486
-------- ---------- ----------
Property, plant and
equipment, net ...... $407,994 $ 437,814 $3,935,940
======== ========== ==========
Depreciation and amortization expense was approximately $78,848,
$88,677 and $309,960 for the years ended December 31, 1998, 1999 and 2000.
4. LONG-TERM DEBT
Long-term debt at December 31, 1998, 1999 and 2000 consisted of the
following:
1998 1999 2000
-------- -------- --------
Notes Payable for Fixed Assets ......... $247,977 $204,246 $140,117
Notes Payable - Officers ............... 45,000 -- --
-------- -------- --------
292,977 204,246 140,117
Less - current portion of long-term debt 90,243 73,434 51,044
-------- -------- --------
$202,734 $130,812 $ 89,073
======== ======== ========
The maturities of long-term debt beginning January 1, 2000 are as
follows:
Year Amount
---------- ----------
2001 $ 51,044
2002 51,858
2003 27,909
Thereafter --
----------
$ 140,117
==========
NOTES TO FINANCIAL STATEMENTS, (Continued)
F-11
60
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Significant components of the Company's deferred income tax assets
(liabilities) and related valuation allowance at December 31, 1998, 1999, and
2000 are as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999 2000
---- ---- ----
Current deferred income tax assets:
Other ..................................
Current deferred income tax liabilities:
Other ..................................
Net Current deferred income tax asset (liability)
Long-term deferred assets:
Net operating loss carryforwards .......
Tax credit carryforwards ...............
Net long-term deferred income tax asset .........
Valuation allowance .............................
Total deferred income tax asset ................. $ 0 $ 0 $ 0
===== ===== ====
Due to the uncertainty surrounding the timing of realizing the benefits
of its favorable tax attributes in future income tax returns, the Company has
place a 100% valuation allowance against its otherwise recognizable deferred
income tax assets.
The Company's net operating loss and tax credit carryforwards for
federal and state income tax purposes at December 31, 1998, 1999, and 2000 are
as follows:
EXPIRATION PERIOD
-----------------
Federal, NOL.................................... $ 27.3 million
Federal tax credit carryforwards................ $ 9.6 million
The net operating losses and federal tax credits can be carried forward
to offset future taxable income, if any.
F-12
61
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
A reconciliation of income tax benefit to the federal statutory rate
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
--------- ---------- --------
Federal income tax at the statutory rate..........
Other.............................................
Valuation allowance...............................
$ $ $
========= ========== ========
6. STOCK OPTION PLANS
The Company has granted options for the purchase of up to 1,227,234
shares of the Company's common stock. These grants are summarized in the table
below.
Prior to 2000, the Company issued common stock options at exercise
prices equal to, or greater than, the fair value of its common stock.
Accordingly, no stock-based compensation was recorded for those periods.
Information relating to the outstanding stock options is as follows:
SHARES WEIGHTED-
AVERAGE
EXERCISE PRICE
------- --------------
Outstanding at January 1, 1997 -- --
Granted ............. 920,000 $1.22
Exercised ........... -- --
Canceled ..................... -- --
F-13
62
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------- --------------
Outstanding December 31, 1998 . 920,000 $ 1.22
Granted ....................... 66,034 10.28
Exercised ..................... -- --
Canceled ...................... -- --
Outstanding December 31, 1999 . 986,034 1.86
Granted ....................... 241,200 14.60
Exercised ..................... 35,734 10.80
Canceled ...................... -- --
Outstanding December 31, 2000 . 1,191,500 4.17
Additional information regarding options outstanding at December 31,
1999, is as follows:
Outstanding
-----------------------------------------
Average Weighted
Remaining Average
Common Life Exercise
Exercise Price Stock (Years) Price
-------------- ------- ---------- ---------
$ 1.00 to $8.00............... 905,000 3 years $ 1.04
$10.00 to 20.00............... 286,500 2 years 13.88
------- ---------- ---------
If the Company recognized employee stock option-related compensation expense in
accordance with SFAS No. 123 and used the minimum value method for determining
the fair value of options granted after December 31, 1998, its net loss
attributable to common stockholders and net loss per share -- basic and diluted
would have been $xxx,xxx, and $xxx,xxx, respectively, for the years ended
December 31, 1998 and 1999. In computing the impact of SFAS No. 123, the
weighted-average fair value of $.xx, and $.xx for 1998 and 1999 stock option
grants, respectively, was estimated at the dates of grand using the minimum
value model with the following assumptions for 1998 and 1999: risk-free interest
rate of approximately 6.0 and 5.3 percent, and no assumed dividend yield. The
weighted average expected life of the options was x and x years for 1998 and
1999, respectively.
For purposes of determining the SFAS No. 123 pro forma compensation expense, the
weighted-average fair value of the options is amortized over the vesting period.
F-14
63
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company acquired certain intellectual property in 1996 from its
three principal shareholders in exchange for 3,000,000 shares of common stock.
The Company paid $255,000, $552,000 and $646,000 in consulting
compensation to its three largest shareholders in 1998, 1999, and 2000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office, manufacturing and warehouse space under
various non-cancelable operating leases. Rent expense related to these leases
amounted to approximately $49,000, $70,900 and $140,400 for the years ended
December 31, 1998, 1999 and 2000, respectively.
At December 31, 2000, the Company's commitments under noncancelable
operating and capital leases were as follows:
2000
----------
Year Ending Operating
December 31: Leases
------------ ----------
2001............................ 126,250
2002............................ 126,250
2003............................ 73,292
2004............................ 70,437
2005............................ 70,437
Thereafter ..................... 164,354
----------
Total minimum lease payments.. $ 631,020
==========
The Company had approximately $4.6 million in outstanding purchase
orders at December 31, 2000 with various suppliers and vendors that will come
due in the ordinary course of business during 2001.
10. SUBSEQUENT EVENTS
In May, 2000 the Company amended its Articles of Incorporation to authorize
125,000,000 shares of Common Stock at $ .001 par value.
The Solo Transaction
The Board of Directors of Elektryon has adopted a plan of
reorganization (the "Plan of Reorganization"), subject to shareholder approval,
pursuant to which Elektryon has entered into an Asset Acquisition Agreement with
F-15
64
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Solo Energy Corporation ("Solo") pursuant to which Solo will acquire
substantially all of Elektryon's assets in exchange for (a) $5 million in cash,
subject to adjustment, (b) 51,878,788 shares of Solo's common stock, par value
[$.0001] per share ("Solo Common Stock"), (c) up to 36,363,636 additional shares
of Solo Common Stock to the extent Elektryon achieves specified sales and other
goals after the closing of the proposed transaction, and (d) Solo's assumption
of specified liabilities of Elektryon. The 51,878,788 shares of Solo Common
Stock to be received by Elektryon (including shares to be deposited in an escrow
account but not including any earn-out shares) together with the shares of Solo
Common Stock issuable upon exercise of options to be granted to executive
officers of Elektryon upon consummation of the transaction (adjusted by the
treasury stock method) will represent approximately 56% of the then outstanding
shares of Solo Common Stock after giving effect to (i) the exercise of all
outstanding warrants of Solo to purchase shares of Solo convertible preferred
stock at $1.65 per share or less and (ii) the conversion of all then outstanding
Solo convertible preferred stock (including the shares of Solo convertible
preferred stock referred to in clause (i)). This percentage will be reduced by
any future sales of securities by Solo. Elektryon understands that Solo is
currently seeking to raise approximately $30 million through the sale of a
series of convertible preferred stock at a price equivalent to $1.65 per share
of Solo Common Stock. There can be no assurance that any such sale will occur
or what the aggregate dollar amount or per share price will be if a sale occurs.
In connection with the Asset Acquisition, the Company intends to seek a
waiver and release of certain identified potential securities claims which the
Company's shareholders may have against the Company and representatives of the
Company in connection with the sale of the Company's securities. Shareholders
who sign a waiver and release of such claims will receive an additional fraction
of a share of common stock, par value $0.001 per share ("Common Stock"), of
Elektryon for each share of Common Stock they purchased for more than $11.00 per
share in cash or, if they purchased their shares for $11.00 per share or less or
did not pay any cash for shares, nominal consideration of $10.00 per holder,
regardless of the number of shares held. Solo's obligations under the Asset
Acquisition Agreement are conditioned on Elektryon's obtaining such waivers from
shareholders representing at least 60% of the aggregate shares of Common Stock
held by all of Elektryon's shareholders. Only shareholders of Elektryon who are
"accredited investors" (as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"))
will be asked to waive and release such claims at the time of such solicitation.
If Elektryon's Plan of Reorganization, including the Asset Acquisition
Agreement, is approved by Elektryon's shareholders and the Asset Acquisition is
consummated, Elektryon will wind up its affairs and transfer its assets to a
liquidating trust (the "Liquidating Trust"). Elektryon's shareholders will
receive beneficial interests in the Liquidating Trust in proportion to their
respective interests in Elektryon.
If the Asset Acquisition is consummated, Elektryon will transfer
substantially all of its assets to Solo and wind up its business.
F-16
65
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
The Settlement With the Company's Former Directors
Pursuant to a Separation and Release Agreement dated as of February 28,
2001 (the "Separation and Release Agreement"), the Company on the one hand and
Messrs. Meisinger and Stinson (the "Former Directors") on the other hand settled
and released all claims against each other. The Separation and Release Agreement
provides for the termination of the Former Directors' employment with the
Company and their resignation from its Board of Directors. The Separation and
Release Agreement also terminates all other agreements between the Company and
the Former Directors, including the termination of stock option grants to
purchase 620,000 shares of Common Stock, and provides for the assignment by the
Former Directors of their alleged rights in any Elektryon intellectual property.
The Former Directors surrendered an aggregate of 461,950 shares of
Common Stock to the Company, paid the Company an aggregate of $2,500,000 and
gave the Company promissory notes for an aggregate of $10,257,000, which notes
are non-recourse to the Former Directors but are secured by Former Directors'
remaining shares of Common Stock not surrendered to the Company in connection
with the settlement. The Former Directors agreed to restrictions on their right
to transfer their remaining shares of Common Stock and principal and interest on
the agreed to apply proceeds from any permitted sales of their shares to repay
the promissory notes. In the event a Former Director breaches the Separation and
Release Agreement, the Company may elect to repurchase such Former Director's
shares of Common Stock for a purchase price of $15.00 per share of Common Stock.
In addition, the Former Directors agreed to subject their remaining shares of
Common Stock to a voting trust agreement, which provides that the Former
Directors have appointed Curtis Olson, a director of the Company, their proxy
and attorney-in-fact with respect to the voting of such shares. Under the voting
agreement, Mr. Olson will vote the Former Directors' shares of Common Stock in
the same proportion as the votes cast or consents given by all holders of Common
Stock except the Former Directors and persons affiliated with them. The voting
agreement also prohibits the Former Directors from soliciting proxies, engaging
in tender offers or taking other steps to affect the composition of the
Company's Board of Directors or its affairs and policies.
Pursuant to an Agreement and Release, dated as of January 19, 2001,
between the Company and Edwin Wheeler, a former director of the Company, Mr.
Wheeler agreed to (a) contribute 550,000 shares of Common Stock to the Company
at no cost to the Company, (b) purchase 75,000 shares of Common Stock from the
Company for a purchase price of $20.00 per share, (c) acknowledge that the
options to purchase 310,000 shares of Common Stock granted to him by the Company
were cancelled, and (d) sever any and all relationships with the Company other
than in his capacity as the beneficial owner of shares of Common Stock. Mr.
Wheeler also agreed to release any claims he may have had against the Company.
The Company in turn agreed not to sue Mr. Wheeler in connection with his sales
of shares of Common Stock or any other incident arising directly or indirectly
from his performance of services for the Company. Wheeler further agreed not to
use or disclose any proprietary information of the Company.
The remaining shares of Common Stock owned by Mr. Wheeler as amended on
January 1, 2001 are subject to the terms of a voting agreement, dated as of
November 11, 2000, as amended on January 1, 2000, between Mr. Wheeler and
Elektryon. Pursuant to the voting agreement, Mr. Wheeler appointed the
Company's independent directors as his proxy and attorneys-in-fact with respect
to the voting of his shares of Common Stock. Under the voting agreement the
directors will vote Mr. Wheeler's shares in the same proportion as votes cast or
consents given by all holders of Common Stock except Mr. Wheeler and persons
affiliated with him. The voting agreement also prohibits him from soliciting
proxies, engaging in tender offers or taking other steps to affect the Company's
Board of Directors or its affairs or policies.
Litigation
On March 9, 2001, Bill Eggar, Mike Lewis and E.L. Energy Connection,
Inc. commenced an action against Elektryon and Philip Meisenger in the District
Court of Ector County, Texas alleging that defendants breached (i) an agreement
to pay finder's fees to Messrs. Eggar and Lewis for introducing investors to
Elektryon, and (ii) an agreement to buy out an alleged distribution agreement
pursuant to which plaintiffs marketed Elektryon's products to prospective
customers. Plaintiffs are seeking unspecified money damages, an accounting with
respect to proceeds from the sale of shares of Elektryon Common Stock, and
specific performance of the alleged agreement to buy out the alleged
distribution agreement for 35,000 shares of Common Stock. The Company believes
the asserted claims are not material to its operations and will vigorously
defend against the claims.
F-17
66
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
by the undersigned, thereunto duly authorized.
ELEKTRYON
Dated: April 30, 2001 By: /s/ Michael E. Holmstrom
------------------------
Michael E. Holmstrom
President
By: /s/ Joanne Firstenberg
----------------------
Joanne Firstenberg
General Counsel
67
EXHIBITS INDEX
Exhibit No. Description
- ----------- -----------
2.1 Asset Acquisition Agreement between Solo Energy Corporation and
Elektryon dated April 16, 2001.
2.2 Liquidating Trust Agreement
2.3 Plan of Reorganization of Elektryon
3.1 Amended and Restated Articles of Incorporation of Elektryon dated
August 21, 2000.
3.2 Amended and Restated By-Laws of Elektryon dated August 21, 2000.
9.1 Voting Agreement dated as of February 28, 2001, among Elektryon,
Phil C. Meisinger, Gene E. Stinson and Curtis Olson.
9.2 Voting Agreement dated as of November 11, 2000, as amended
January 19, 2001, between Elektryon and Edwin Wheeler.
10.1 Employment Agreement dated December 15, 2000, as amended on
February 12, 2001, between Elektryon and Joanne Firstenberg,
General Counsel.
10.2 Employment Agreement dated November 7, 2000, as amended on
February 12, 2001, between Elektryon and Michael E. Holmstrom.
10.3 Separation and Release Agreement, dated as of February 28, 2001,
among Elektryon, Philip C. Meisinger and Gene E. Stinson.
10.4 Release, dated as of February 28, 2001, among Elektryon, Philip.
Meisinger and Gene E. Stinson.
10.5 Pledge Agreement, dated as of February 28, 2001, made by Philip
C. Meisinger in favor of Elektryon.
10.6 Pledge Agreement, dated as of February 28, 2001, made by Gene E.
Stinson in favor of Elektryon.
10.7 Promissory Note, dated as of February 28, 2001, made by Philip C.
Meisinger in favor of Elektryon.
10.8 Promissory Note, dated as of February 28, 2001, made by Gene E.
Stinson in favor of Elektryon.
E-1
68
Exhibit No. Description
- ----------- -----------
10.9 Agreement and Release, dated January 9, 2001, between Elektryon
and Edwin W. Wheeler.
E-2