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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ELEKTRYON
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(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0353324
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6565 Spencer Street, Suite 206, Las Vegas, NV 89119
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(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
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
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ELEKTRYON
FORM 10/A NO. 2
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Elektryon, a Nevada corporation (also referred to herein as the
"Company"), submits this Amendment No. 2 to its Form 10 filed on April 30, 2001,
as amended by Amendment No. 1 thereto dated June 28, 2001, to amend the
following Items.
ITEM 2.FINANCIAL INFORMATION.
Elektryon hereby amends and restates in its entirety Item 2 of its Form
10 as follows:
SELECTED FINANCIAL DATA
The following historical selected financial data are derived from a
combination of audited and 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,
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2000 1999 1998 1997 1996
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ............................. $ 190 $ -- $ -- $ -- $ --
Cost of revenues ..................... 137 -- -- -- --
Other operating expenses ............. 23,757 8,517 3,541 2,566 25
Operating loss ....................... (23,704) (8,517) (3,541) (2,566) (25)
Net loss per Common Share:
Basic and Diluted .................. (3.77) (1.97) (1.11) (1.47) (0.02)
Weighted average shares outstanding:
Basic and Diluted .................. 6,169 4,344 3,230 1,745 1,201
AS OF DECEMBER 31,
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2000 1999 1998 1997 1996
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(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets ......................... $ 20,273 $ 6,916 $ 594 $ 930 $ 10
Long-term liabilities ................ 89 131 203 70 --
Stockholders' equity ................. 14,943 6,008 (1,140) 815 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,
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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 being
developed and refined. 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 1993, and has since inception incurred operating
losses of $37.9 million as of December 31, 2000. The Company expects operating
losses to continue through the year 2001.
Since inception, the Company has 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.
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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 in 1999 and $190,000 of revenues in 2000.
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 $53,000 in
gross profits in 2000.
RESEARCH AND DEVELOPMENT
As a development stage company, the Company spent approximately $4.4
million for Research and Development in 2000, $2.8 million, or 57%, higher than
in 1999, as the Company researched, designed and built prototype units for
demonstration and testing. Sixteen units were installed for testing and
demonstration purposes in 2000.
SELLING, GENERAL AND ADMINISTRATIVE
The Company's Selling, General and Administrative expenses were
approximately $12.3 million in 2000, $5.7 million, or 215%, 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 in 1999 or 1998.
RESEARCH AND DEVELOPMENT
As a development stage company, the Company spent approximately $2.8
million in 1999, $1.5 million, or 87%, higher than in 1998, as the Company
researched, designed and built prototype units for demonstration and testing.
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SELLING, GENERAL AND ADMINISTRATIVE
The Company's Selling, General and Administrative expenses were
approximately $5.7 million in 1999, $2.0 million, or 185%, higher than in 1998.
This increase related 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 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
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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 0 137 0 0 0
Gross profit (loss).... 0 0 0 0 53 0 0 0
Operating expenses..... 0 0 0 0 0 0 0 0
Research and
development............ 145 516 256 1,916 155 210 212 3,850
Selling, general &
administrative......... 736 987 1,020 2,941 2,852 2,069 4,732 2,676
Royalty expense........ 0 0 0 0 0 0 0 0
Interest income
(expense).............. 0 0 0 (24) 86 66 129 175
Income (loss) from
operations............. (881) (1,503) (1,276) (4,881) (2,865) (2,213) (4,815) (13,351)
Net income (loss)...... $ (881) $(1,503) $(1,276) $(4,881) $(2,865) $(2,213) $(4,815) $(13,351)
The revenues and the cost of goods sold in the first quarter of 2000
reflect 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 must 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. On September 1, 2001, the Company
terminated the Asset Acquisition Agreement, and, accordingly, the Company will
not receive the $5 million cash payment from Solo contemplated to be paid under
that agreement. The Company does not have sufficient capital to fund operations
and has no available credit facilities or other currently available sources of
financing. As of September 15, 2001, the Company had reduced its payroll to 12
employees to reduce operating costs and had sold inventory and fixed assets for
$1,542,000 to raise operating funds. The Company currently is continuing the
sale of additional inventory and some fixed assets with the objective of
satisfying the claims of its creditors. The Company believes it can satisfy
those claims, which aggregate approximately $3,022,000.
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In the year ended December 31, 2000, the Company wrote inventories down
to estimated net realizable value and recorded an expense of $7 million in its
statement of operations. SEE NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1999 AND 2000 -- NOTE 2. There can be no assurance that the
Company could sell its remaining inventories for the estimated net realizable
value of such inventories.
The Company financed the development of the POWR/MASTR(TM) technology
primarily through private equity offerings, including the issuance of stock in
exchange for services. The Company raised approximately $63.3 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 $21.1 million, $6.0 million, and $3.1
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.
During the year 2000 the Company purchased approximately 700,000 shares of its
outstanding Common Stock from its three founding shareholders for approximately
$14.0 million, at $20 per share, which amount was obtained by the Company from
sales of such shares by the Company to third parties. In addition, approximately
250,000 shares of the Company's Common Stock were sold by the Company's
founders, primarily during 1999 and 2000, directly to third party investors and
the proceeds were not remitted to the Company. It further appears that in many
cases the fact that the proceeds were not remitted to the Company was not
disclosed to the third party investors. SEE "ITEM 6. EXECUTIVE COMPENSATION --
THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS" AND "ITEM 7. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Elektryon has obtained waivers from its accredited investor shareholders
of specified securities claims such shareholders may have against Elektryon and
any representative of the Company. At July 30, 2001, Elektryon had received the
requested waivers from accredited investor shareholders holding approximately
87% of the outstanding Common Stock.
In consideration for entering into a Waiver and Release Agreement,
Elektryon issued an additional fraction of a share of Common Stock with respect
to each share of Common Stock that had been purchased by a shareholder from the
Company at a price in excess of $11.00 per share in cash, as set forth in the
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 received was rounded down to the nearest number of
whole shares.
Shareholders who had purchased shares from the Company for $11.00 per
share or less or did not pay any cash for shares and who entered into a Waiver
and Release Agreement received nominal consideration of $10.00 per holder,
regardless of the number of shares held.
Each shareholder who entered into a Waiver and Release Agreement waived
and released 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. As of July 30, 2001, such holders of
approximately 7,357,474 shares of Common Stock (or 87% of the
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outstanding shares of Common Stock) had granted such waivers and releases. In
addition, as of that date the Company had received Waiver and Release Agreements
executed by non-accredited investors holding 335,120 or 4% of Elektryon's
issued and outstanding Common Stock which it has not and will not accept and
which are not enforceable by the Company. The Board has decided to issue shares
of Common Stock and/or pay cash to such holders in the same manner as with
accredited investors.
As of September 15, 2001, with respect to shareholders who accepted the
Waiver Offer, Elektryon (a) issued 1,728,656 shares of Common Stock to
shareholders who purchased shares of Common Stock from the Company for more than
$11.00 per share, and (b) paid nominal consideration of $10.00 per holder,
regardless of the number of shares held, to shareholders who purchased shares of
Common Stock for $11.00 per share or less or who paid no cash for shares. 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 $65 million 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 or an asset sale 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 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. SEE "ITEM 1.
BUSINESS -- LITIGATION."
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
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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. The Company does not
expect SFAS No. 133 to have a material effect on our financial condition or
results of operations.
In December 1999, the Commission 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
Commission'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.
ITEM 4.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Elektryon hereby amends and restates in its entirety Item 4 of its Form
10 as follows:
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The table below sets forth the beneficial ownership of Common Stock as
of July 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 Percent of Common
Name Common Stock Owned Stock Owned
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Philip C. Meisinger
1812 E. 56th Street 865,000 9.1%
Odessa, TX 79762
Gene E. Stinson
1819 Ottawa Drive 875,000 9.2%
Las Vegas, NV 89109
Edwin Wheeler
P.O. Box 96507 571,231 6.0%
Las Vegas, NV 89193
Michael E. Holmstrom,
President 300,000(1) 3.2%
Joanne Firstenberg,
General Counsel 250,000(2) 2.6%
Wendell H. Adair, Jr.,
Director 31,091 *
Curtis Olson,
Director 24,576 *
John Cavalier,
Director 45,955 *
All directors and executive
officers as a group (5 651,622 6.9%
individuals)(3)
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* 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.
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ITEM 6.EXECUTIVE COMPENSATION.
Elektryon hereby amends and restates in its entirety the sections
entitled "Employment Agreements" and "Stock Options" of Item 6 of its Form 10
and adds a new section to Item 6 entitled "Option Repricing Report" as follows:
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 Chief Financial Officer/President of the Company until
November 7, 2003 (the "Holmstrom Employment Period"), or such earlier date as
provided therein. The Holmstrom Employment Agreement provides that while Mr.
Holmstrom is employed by the Company, he will devote substantially his full
business time, energies and talents to serving as an officer of the Company,
provided that he may engage in other activities, including, without limitation,
other for profit businesses, so long as such activities do not materially
interfere with his responsibilities to the Company. Mr. Holmstrom is to receive
an annual salary of $250,000. Pursuant to the Holmstrom Employment Agreement,
the Company paid Mr. Holmstrom (a) a bonus of $200,000 on August 2, 2001, and
(b) a lump sum payment of $500,000 on August 23, 2001. The Holmstrom
Employment Agreement further provides that Mr. Holmstrom shall remain employed
by the Company through February 1, 2002, provided that Mr. Holmstrom may
terminate his employment with the Company prior to such date for Good Reason (as
such term is defined in such agreement), and that it shall be a breach of the
Holmstrom Employment Agreement if Mr. Holmstrom terminates his employment with
the Company without Good Reason prior to February 1, 2002.
On November 7, 2000, the Board of Directors of the Company granted Mr.
Holmstrom stock options to purchase 150,000 shares of the Company's Common Stock
at an exercise price of $10.00 per share. Pursuant to an amendment to the
Holmstrom Employment Agreement dated February 12, 2001, the Company (a) granted
Mr. Holmstrom an option to purchase an additional 150,000 shares of Common Stock
with an exercise price of $2.00 per share and (b) decreased the per share
exercise price of the option previously granted to Mr. Holmstrom to $2.00 and
accelerated the vesting of that option. All of the options granted to Mr.
Holmstrom have vested. The options are exercisable for a period of 60 months
from the date on which they were issued regardless of Mr. Holmstrom's employment
status at the time. SEE "-- STOCK OPTIONS" AND "-- REPORT ON REPRICING OF
OPTIONS."
The Company has agreed to assign the title of one of its automobiles to
Mr. Holmstrom. The Company will pay the operating costs of such automobile while
Mr. Holmstrom is employed by the Company and the Company will also provide Mr.
Holmstrom with tax gross-up payments so that after applicable taxes are incurred
with regard to the automobile and operating costs Mr. Holmstrom will be kept
whole.
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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; 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 the 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 Firstenberg
Employment Agreement provides that she will devote substantially her full
business time, energies and talents to serving as an officer of the Company,
provided that she may engage in other activities, including, without limitation,
other for profit businesses, so long as such activities do not materially
interfere with her responsibilities to the Company. Pursuant to the Firstenberg
Employment Agreement, the Company paid Ms. Firstengerg (a) a bonus of $150,000
on August 2, 2001, and (b) a lump sum payment of $500,000 on August 23, 2001.
The Firstenberg Employment Agreement further provides that Ms. Firstenberg
shall remain employed by the Company through February 1, 2002, provided that Ms.
Firstenberg may terminate her employment with the Company prior to such date for
Good Reason (as such term is defined in such agreement), and that it shall be a
breach of the Firstenberg Employment Agreement if Ms. Firstenberg terminates her
employment with the Company without Good Reason prior to February 1, 2002.
On November 7, 2000, the Board of Directors of the Company granted Ms.
Firstenberg stock options to purchase 125,000 shares of the Company's Common
Stock, at an exercise price of $10.00 per share. Pursuant to an amendment to the
Firstenberg Employment Agreement dated
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February 12, 2001, the Company (a) granted Ms. Firstengerg an option to purchase
an additional 125,000 shares of Common Stock with an exercise price of $2.00 per
share, and (b) decreased the per share exercise price of the option previously
granted to Ms. Firstenberg to $2.00 and accelerated the vesting of that option.
All of the options granted to Ms. Firstenberg have vested. The options are
exercisable for a period of 60 months from the date which they were issued
regardless of Ms. Firstenberg's employment status at the time. SEE "-- STOCK
OPTIONS" AND "-- REPORT ON REPRICING OF OPTION."
The Company has agreed to buy out the lease covering Ms. Firstenberg's
automobile for a lump sum payment of approximately $36,000 payable to the
automobile leasing company. The title of such automobile will be registered in
Ms. Firstenberg's name. The Company will pay the operating costs of such
automobile while Ms. Firstengerg is employed by the Company and the Company will
also provide Ms. Firstenberg with tax gross-up payments so that after applicable
taxes are incurred with regard to the automobile and operating costs Ms.
Firstenberg will be kept whole.
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, 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.
STOCK OPTIONS
The following table provides information concerning grants of stock
options by the Company to the named executive officers during 2000.
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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 EXERCISE
UNDERLYING GRANTED TO PRICE PER
OPTIONS/SARS EMPLOYEES SHARE EXPIRATION
NAME GRANTED IN 2000 ($/SH) DATE 5% 10%
-------------------- ------------ ------------ ------------ --------- ------- ---------
Michael E. Holmstrom 150,000 27.3% $10.00 11/7/05 $82,884 $183,153
Joanne Firstenberg 125,000 22.7% $10.00 12/15/05 $69,070 $152,628
(1) 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.
REPORT ON REPRICING OF OPTIONS
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE AT EXERCISE TERM
UNDERLYING TIME OF PRICE AT NEW REMAINING
OPTIONS REPRICING TIME OF EXERCISE AT DATE OF
NAME DATE REPRICED (2) REPRICING PRICE REPRICING
-------------------- ------------ ------------ ------------ --------- ------- ---------
Michael E. Holmstrom(1) 2/12/01 150,000 $2.00 $10.00 $2.00 57 months
Joanne Firstenberg(1) 2/12/01 125,000 $2.00 $10.00 $2.00 58 months
(1) On February 12, 2001, the options granted to Mr. Holmstrom and Ms.
Firstenberg during 2000 were repriced pursuant to their respective amended
employment agreements. The $2.00 exercise price was intended to be the
equivalent of fair market value of the Common Stock at the date of grant.
(2) 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.
Compensation Committee
Wendall H. Adair, Jr.
Curtis Olson
John Cavalier
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Elektryon hereby amends and restates in its entirety Item 7 of its Form
10 as follows:
Each of the directors of Elektryon in his capacity as a shareholder of
Elektryon received and accepted a Waiver Offer. Pursuant to their respective
Waiver Offers, Elektryon issued the following consideration to them:
- Mr. Adair received an additional 2,418 shares of Common Stock;
12
14
- Mr. Cavalier received an additional 20,454 shares of Common
Stock; and
- Mr. Olson received an additional 1,818 shares of Common Stock
SEE "ITEM 1. BUSINESS -- THE REORGANIZATION -- THE WAIVER OFFERS."
The Company believes that during 2000, Messrs. Meisinger, Stinson and
Wheeler sold an aggregate of approximately 700,000 shares of Common Stock held
by them to the Company for an aggregate of approximately $14 million, which
amount was obtained by the Company from sales of such shares by the Company to
third parties. See "ITEM 6. EXECUTIVE COMPENSATION -- THE SETTLEMENT WITH THE
COMPANY'S FORMER DIRECTORS." In addition, approximately 250,000 shares of the
Company's Common Stock were sold by the Company's founders, primarily during
1999 and 2000, directly to third party investors and the proceeds were not
remitted to the Company. It further appears that in many cases the fact that the
proceeds were not remitted to the Company was not disclosed to the third party
investors.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Elektryon hereby amends and restates in its entirety Item 10 of its Form
10 as follows:
The following are the unregistered sales of shares of Common Stock made
by the Company within the past three years:
PERIOD NUMBER OF SHARES PRICE RANGE ($)
------------------------------ ------------------ ----------------
April 1 - June 30, 1998 1,869,901 $15.00
July 1 - September 30, 1998 43,645 $15.00
October 1 - December 31, 1998 44,521 $8.00 - $15.00
January 1 - March 31, 1999 114,058 $15.00 - $20.00
April 1 - June 30, 1999 59,010 $15.00 - $20.00
July 1 - September 30, 1999 200,653 $15.00 - $20.00
October 1 - December 31, 1999 832,203 $15.00 - $20.00
January 1 - March 31, 2000 279,390 $20.00
April 1 - June 30, 2000 506,282 $20.00
July 1 - September 30, 2000 1,094,374 $20.00
October 1 - December 31, 2000 320,222 $20.00
January 1 - June 27, 2001 121,455 $20.00
---------- --------------
13
15
The Company believes that substantially all sales of the Company's
equity securities were made to accredited investors as defined in Rule 501 of
Regulation D, or given or sold for nominal consideration to employees of and
consultants to the Company. Accordingly, such offers and sales of such
securities may have been exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and
Regulation D promulgated thereunder, although the Company can give no assurance
that such offers and sales were exempt.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Elektryon hereby amends and restates in its entirety Item 13 of its Form
10 as follows:
See pages F-1 to F-22 of this Form 10 for the Company's audited
financial statements for the periods December 31, 1998, 1999, and 2000.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Elektryon hereby amends and restates in its entirety Item 14 of its Form
10 as follows:
There have been no changes in accountants or disagreements with
accountants.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
Elektryon hereby amends and restates in its entirety Item 15 of its Form
10 as follows:
(a) FINANCIAL STATEMENTS
The following financial statements are exhibits to this Form 10:
Report of Independent Public Accountants
Audited Balance Sheets as of December 31, 1999 and 2000
Audited Statements of Operations for the years ended December
31, 1998, 1999 and 2000
Audited Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000
Audited Statements of Cash Flows for the years ended December
31, 1998, 1999 and 2000
Notes to Audited Financial Statements
14
16
(b) EXHIBITS
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.*
2.4 Letter Agreement between Solo Energy Corporation and Elektryon
dated June 14, 2001.*
2.5 Amended and Restated 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
("Firstenberg Employment Agreement").*
10.2 Employment Agreement dated November 7, 2000, as amended on
February 12, 2001, between Elektryon and Michael E. Holmstrom
("Holmstrom Employment Agreement").*
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.*
-----------------------
*Previously filed
15
17
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.*
10.10 First Amendment, dated as of July 3, 2001, to the Holmstrom
Employment Agreement.
10.11 Second Amendment, dated as of August 23, 2001, to the Holmstrom
Employment Agreement.
10.12 First Amendment, dated as of July 3, 2001, to the Firstenberg
Employment Agreement.
10.13 Second Amendment, dated as of August 23, 2001, to the
Firstenberg Employment Agreement.
-----------------------
*Previously filed
16
18
ELEKTRYON
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................................ F-2
Audited Balance Sheets as of December 31, 1999 and 2000................................. F-4
Audited Statements of Operations for the years ended December 31, 1998, 1999
and 2000................................................................................ F-5
Audited Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000........................................................ F-6
Audited Statements of Cash Flows for the years ended December 31, 1998, 1999
and 2000................................................................................ F-7
Notes to Audited Financial Statements................................................... F-8
F-1
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Elektryon:
We have audited the accompanying balance sheets of Elektryon (a Nevada
corporation in the development stage) (the "Company") as of December 31, 2000
and 1999, and the related statements of operations, stockholders' (deficit)
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As further discussed in Note 9, as a result of possible securities laws
violations by the Company in connection with the issuances of its common stock,
the Company had a contingent rescission liability estimated by management of up
to approximately $65 million, excluding any potential penalties and interest, as
of December 31, 2000. Management and legal counsel are unable to predict the
impact, if any, on the financial position or results of operations of the
Company as a result of the ultimate outcome of this matter. In the opinion of
management, there is not an amount that is probable and reasonably estimable of
the Company's liability upon ultimate resolution of this matter. Therefore, a
liability for the contingent rescission obligation is not reflected in the
accompanying financial statements.
Accounting principles generally accepted in the United States require that a
development stage company present cumulative financial information from
inception for the statements of operations, stockholders' equity and cash flows.
As more fully explained in Note 2 to the financial statements, no cumulative
financial information from inception has been provided in the accompanying
statements of operations, stockholders' (deficit) equity and cash flows.
F-2
20
In our opinion, except for the effect of the omission of the development stage
company information matter discussed in the preceding paragraph, the financial
statements referred to above present fairly, in all material respects, the
financial position of Elektryon as of December 31, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses during the
development stage, and its cash on hand and projected internally generated funds
will not be sufficient to fund operations in fiscal 2001, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. As further
discussed in Note 9 the Company is subject to a contingent liability related to
the potential rescission of the Company's stock. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
August 29, 2001
F-3
21
ELEKTRYON
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
December 31, December 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,413,601 $ 7,515,099
Inventories -- 4,976,094
Prepaid expenses and other current assets 26,583 762,462
------------ ------------
Total current assets 6,440,184 13,253,655
Property, plant and equipment, net 441,931 4,034,771
Other assets, net 34,165 2,985,021
------------ ------------
Total assets $ 6,916,280 $ 20,273,447
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 396,550 $ 4,619,874
Accrued expenses 294,015 468,790
Current portion of long-term debt 73,434 51,044
Other current liabilities 12,600 101,713
------------ ------------
Total current liabilities 776,599 5,241,421
Long-term debt 130,812 89,073
------------ ------------
Total liabilities 907,411 5,330,494
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value,
authorized 25,000,000 and
125,000,000 in 1999 and 2000,
respectively; issued and outstanding;
5,266,594 and 7,455,197
in 1999 and 2000, respectively 2,439 4,619
Paid-in capital 20,725,249 54,300,336
Deferred compensation -- (350,000)
Treasury stock -- (1,050,000)
Deficit accumulated during the
development stage (14,718,819) (37,962,002)
------------ ------------
Total stockholders' equity 6,008,869 14,942,953
------------ ------------
Total liabilities and stockholders' equity $ 6,916,280 $ 20,273,447
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
22
ELEKTRYON
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
December 31, December 31, December 31,
1998 1999 2000
------------ ------------ ------------
Net sales $ -- $ -- $ 190,000
Cost of sales -- -- 137,017
------------ ------------ ------------
Gross profit -- -- 52,983
Operating Costs and Expenses:
Research and development expense 1,501,458 2,833,215 4,426,713
Selling, general and administrative
expense 2,039,133 5,683,459 12,329,954
Write down of inventory -- -- 7,000,000
------------ ------------ ------------
Operating loss (3,540,591) (8,516,674) (23,703,684)
Other income (expense):
Interest income 7,968 2,611 456,153
Other (42,601) (26,966) 4,348
------------ ------------ ------------
Net loss before income taxes (3,575,224) (8,541,029) (23,243,183)
Benefit for income taxes -- -- --
------------ ------------ ------------
Net loss $ (3,575,224) $ (8,541,029) $(23,243,183)
============ ============ ============
Loss per common share:
Basic and diluted $ (1.11) $ (1.97) $ (3.77)
============ ============ ============
Weighted average common shares
outstanding 3,230,256 4,343,549 6,169,462
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
23
ELEKTRYON
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
DEFICIT
PAID-IN ACCUMULATED
COMMON STOCK CAPITAL IN DURING THE STOCKHOLDERS'
NUMBER OF COMMON EXCESS OF DEFERRED TREASURY DEVELOPMENT (DEFICIT)
SHARES STOCK PAR COMPENSATION STOCK STAGE EQUITY
-------------------------------------------------------------------------------------------
January 1, 1998 2,081,203 1,364 3,416,698 - - (2,602,566) 815,496
Capital contributions 1,961,717 161 2,563,777 - - - 2,563,938
Common stock issued for services 17,750 18 194,632 - - - 194,650
Net loss - - - - - (3,575,224) (3,575,224)
-------------------------------------------------------------------------------------------
Year ended December 31, 1998 4,060,670 1,543 6,175,107 - - (6,177,790) (1,140)
Capital contributions 1,008,242 698 12,550,848 - - - 12,551,546
Common stock issued for services 175,182 175 1,928,067 - - - 1,928,242
Common stock issued for land 22,500 23 71,227 - - - 71,250
Net loss - - - - - (8,541,029) (8,541,029)
-------------------------------------------------------------------------------------------
Year ended December 31, 1999 5,266,594 2,439 20,725,249 - - (14,718,819) 6,008,869
Capital contributions 1,457,384 1,449 29,015,409 - - - 29,016,858
Treasury stock purchased from founders (650,896) (651) - - (13,949,974) - (13,950,625)
Stock reissued from treasury 650,896 651 - - 12,899,974 - 12,900,625
Common stock issued for services 731,219 731 3,059,678 - - - 3,060,409
Deferred compensation from - - 1,500,000 (1,500,000) - - -
stock option issuances
Amortization of deferred compensation - - - 1,150,000 - - 1,150,000
Net loss - - - - - (23,243,183) (23,243,183)
-------------------------------------------------------------------------------------------
Year ended December 31, 2000 7,455,197 $ 4,619 $54,300,336 $ (350,000) $ (1,050,000) $(37,962,002) $14,942,953
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-6
24
ELEKTRYON
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
December 31, December 31, December 31,
1998 1999 2000
-----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,575,224) $ (8,541,029) $(23,243,183)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 59,380 89,712 396,392
Write down of inventory -- -- 7,000,000
Common stock issued for services 194,650 1,928,242 3,060,409
Warrants issued for services -- -- 374,572
Amortization of deferred compensation -- -- 1,150,000
Increases (decreases) in operating
accounts:
Inventory -- -- (11,976,094)
Prepaid expenses and other current assets (30,876) 103,278 (735,879)
Accounts payable 202,096 194,454 4,223,324
Accrued expenses and other current liabilities 64,844 206,827 263,888
-----------------------------------------------------------
Net cash used in operating activities (3,085,130) (6,018,516) (19,486,571)
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment (125,270) (62,226) (3,902,800)
Purchase of other assets (25,000) -- (3,037,288)
-----------------------------------------------------------
Cash used in investing activities (150,270) (62,226) (6,940,088)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 2,563,938 12,551,546 28,642,286
Payment for treasury stock -- -- (13,950,625)
Proceeds from reissuance of treasury stock -- -- 12,900,625
Proceeds from long-term debt 40,000 -- --
Payments on long-term debt (19,870) (88,731) (64,129)
-----------------------------------------------------------
Cash provided by financing activities 2,584,068 12,462,815 27,528,157
-----------------------------------------------------------
Increase (decrease) in cash (651,332) 6,382,073 1,101,498
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
===========================================================
Supplemental cash flow information
Cash paid for interest $ 13,395 $ 24,819 $ 12,916
The accompanying notes are an integral part of these financial statements.
F-7
25
ELEKTRYON
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1. DESCRIPTION OF THE COMPANY
Elektryon, a Nevada corporation (also referred to herein as the
"Company"), a development stage 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 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 May 24, 2000, the Company changed
its name to Elektryon. In May 2000, the Company amended its Articles of
Incorporation to authorize 125,000,000 shares of Common Stock at $ .001 par
value. Elektryon's principal executive offices are located at 6565 Spencer
Street, Suite 206, Las Vegas, Nevada, 89119.
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred
operating losses of approximately $35.4 million during the three years ended
December 31, 2000. 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. In addition, as a result of possible securities
laws violations by the Company in connection with the issuances of its common
stock, the Company had a contingent rescission liability estimated by management
of up to approximately $65 million, excluding any potential penalties and
interest, as of December 31, 2000. The Company currently does not have
sufficient funds to honor the potential rescission liability (See Note 9). The
Company is therefore severely constrained by a lack of cash resources. As a
result of these factors, the Company will be unable, without additional
financing, to continue as a going concern. The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
To date, the Company has funded its activities primarily through
private equity funding. The Company has experienced difficulty in obtaining
additional funding, and there can be no assurance that financing will be
available on terms satisfactory to the Company or that positive operating cash
flows will be achieved.
As a result of the Company's financial condition, it has entered into
an agreement with Solo Energy Corporation ("Solo") to sell substantially all its
assets, including its intellectual property and patent rights to Solo in
exchange for approximately 50% of the combined companies in the form of newly
issued common stock of Solo and $5.0 million in cash, subject to certain
adjustments (See Note 10). The Company believes that the cash proceeds will be
sufficient to discharge any creditor obligations remaining with the Company
following the closing of the Solo transaction, with the exception of any
rescission obligations to its shareholders (See Note 9). Should the Company be
unable to conclude the Solo transaction, the Company would be forced into an
immediate scaling back of its operations, reducing its workforce significantly
and liquidating its assets to satisfy creditor claims. Management believes such
a process would satisfy
F-8
26
ELEKTRYON
(A Development Stage Enterprise)
substantially all valid creditor claims but leave the Company with insufficient
resources to resume normal operations without additional capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development State Company--Statement of Financial Accounting Standards
No. 7 "Accounting and Reporting by Development Stage Enterprises" requires that
a development stage company present cumulative financial information from
inception for the statements of operations, stockholders' equity and cash flows.
Such cumulative financial information from inception has been omitted from the
accompanying financial statements.
Start-up costs--The Company has expensed all start-up costs as
incurred.
Use of Estimates--The financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States 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.
Accordingly, 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 5 to 39 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. Costs of major
improvements are capitalized, while costs of normal repairs and maintenance are
charged to expense as incurred.
The Company evaluates the carrying value of each of the Company's
assets for impairment. If, in management's opinion, the fair value of the assets
is less than the net book value of the net assets, a loss reserve is
established. Fair value is determined based upon discounted cash flows of the
assets at rates deemed reasonable for the type of property and prevailing market
conditions, appraisals and, if appropriate, current estimated net sales proceeds
from pending.
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.
Research and Development--Research and development expenses consist
principally of expenditures for research, including materials cost, the assembly
and testing of generators conducted by the Company. All research and development
costs are expensed as incurred. Prior to August 2000, all costs associated with
the development, design, fabrication, installation and trial operation were
charged to Research and Development expense. Management believes that
F-9
27
ELEKTRYON
(A Development Stage Enterprise)
units fabricated after August, 2000 will be ultimately available for commercial
sale and are reflected in Finished Goods inventory as of December 31, 2000.
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, without 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 7). 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 (See Note 7).
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. Historically, the Company has
utilized sole source suppliers for its generator, electronic control system,
cylinder heads, engine and switch unit.
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 and certain stock warrants due to their antidilutive effect as a result
of the Company's net loss for the periods presented. The number of stock options
and warrants excluded in the computation for each of the years 1998, 1999, and
2000 were 978,833, 1,071,950, and 1,332,971, respectively.
Supplemental Cash Flow Information--In 1999 the Company acquired land
in exchange for 22,500 shares of common stock. The land has been recorded at its
estimated fair market value of $71,250. In 1998, the Company financed and
capitalized approximately $194,000 of leasehold improvements to its
manufacturing facilities. In 2000, the Company recognized deferred compensation
in the amount of $1,500,000 related to stock options issued with exercise prices
below the market value of the Company's stock issued to executives.
Segment Reporting--The Company is considered to be a single operating
segment in conformity with Statement of Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
business activities of the 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
F-10
28
ELEKTRYON
(A Development Stage Enterprise)
and credit carry forwards, 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 recorded a
valuation allowance against all of its deferred income tax assets.
Inventory--Inventories are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value). In the year ended December
31, 2000, the Company wrote inventories down to estimated net realizable value
and recorded an expense of $7 million in the statement of operations, as
follows:
Estimated
Valuation Net Realizable
Cost Basis Reserve Value
----------- ------------ -----------
Raw materials $ 9,220,915 $ (4,244,821) $ 4,976,094
Finished goods 2,755,179 (2,755,179) -
----------- ------------ -----------
Total $11,976,094 $ (7,000,000) $ 4,976,094
=========== ============ ===========
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 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.
F-11
29
ELEKTRYON
(A Development Stage Enterprise)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 2000 consisted
of the following:
December 31, December 31,
1999 2000
----------- -----------
Leasehold improvements $ 215,388 $ 818,786
Furniture and equipment 166,225 2,918,680
Vehicles 156,594 401,563
Land 71,250 71,250
Building and improvements - 301,978
----------- -----------
609,457 4,512,257
----------- -----------
Less accumulated depreciation and amortization (167,526) (477,486)
----------- -----------
Property, plant and equipment, net $ 441,931 $ 4,034,771
=========== ===========
Depreciation and amortization expense was approximately
$59,000, $89,000, and $310,000 for the years ended December 31, 1998,
1999 and 2000, respectively.
4. OTHER ASSETS
Other assets at December 31, 1999 and 2000 consisted of the following:
December 31, December 31,
1999 2000
----------- -----------
Capitalized software $ - $ 3,037,288
Capitalized patents 35,200 35,200
--------- -----------
35,200 3,072,488
Less accumulated amortization
(1,035) (87,467)
--------- -----------
Other assets, net $ 34,165 $ 2,985,021
========= ===========
The Company capitalizes internal and external costs incurred to develop
internal-use computer software in accordance with AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Such software through December 31, 2000
consisted primarily of Enterprise Resource Planning ("ERP") software.
Management periodically reviews and revises, when necessary, its
estimate of the future benefit of these costs and expenses them if it
deems there no longer is a future benefit. At December 2000, ERP
Software development costs capitalized totaled $2,952,927. Costs are
amortized over a straight-line basis over the estimated useful life of
3 years. Amortization expense was $84,000 for the year ended December
31, 2000.
F-12
30
ELEKTRYON
(A Development Stage Enterprise)
5. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 2000 consisted of the
following:
1999 2000
Notes Payable - Property, Plant and Equipment $ 204,246 $ 140,117
Less current portion of long-term debt (73,434) (51,044)
--------- ---------
$ 130,812 $ 89,073
========= =========
Maturities of long-term debt as of December 31, 2000 are as follows:
Year Amount
---- ---------
2001 $ 51,044
2002 61,164
2003 27,909
---------
$ 140,117
=========
The Notes Payable for Property, Plant and Equipment are secured by the
underlying assets with an approximate book value of $158,000, which are
principally vehicles and leasehold improvements and have payment terms of two to
five years and bear interest at rates of approximately 10 to 12 percent, a
portion of which are tied to the Wall Street Journal prime rate. All interest
has been expensed in the year incurred.
6. INCOME TAXES
Significant components of the Company's net deferred income tax assets
(liabilities) and related valuation allowance at December 31, 1999 and 2000 are
as follows:
Year Ended December 31,
---------------------------
1999 2000
----------- ------------
Deferred tax assets:
Net operating loss carryforward....... $ 976,885 $ 4,771,294
Research and development.............. 559,161 1,716,836
Inventory............................. 826,331 3,207,691
Start-up costs........................ 1,838,452 1,451,409
Valuation Allowance...... (4,200,829) (11,147,230)
----------- ------------
Net Asset............................. $ -- $ --
=========== ============
F-13
31
ELEKTRYON
(A Development Stage Enterprise)
Due to the uncertainty surrounding the timing of realizing the benefits
of its favorable tax attributes in future income tax returns, the Company has
recorded a valuation allowance against all of its deferred income tax assets.
As of December 31, 1999 and 2000, the Company has net operating loss
("NOL") carryforwards of approximately $2.9 million and $14.0 million,
respectively. Such NOL's can be carried forward to offset future taxable income,
if any. As a result of the cumulative changes in stock ownership by key
shareholders, the actual amount of the Company's net operating loss
carryforwards may be limited by Section 382 of the Internal Revenue Code. Annual
limitations have not yet been determined. Net operating losses expire at various
dates through 2020.
A reconciliation of the expected income tax benefit to the federal
statutory rate of 34% is as follows:
Year Ended December 31,
--------------------------
1998 1999 2000
------ ------ ------
Federal income tax benefit at the
statutory rate.......................... (34.0%) (34.0%) (34.0%)
Permanent items......................... 4.6% 4.6% 4.1%
Valuation allowance..................... 29.4% 29.4% 29.9%
------ ------ ------
-% -% -%
====== ====== ======
7. STOCK OPTION PLANS
The Company has authorized the granting of options for the purchase of
the Company's common stock to both employees and non-employees. The vesting
terms range from immediate vesting to 90 days and the options have contractual
terms ranging from 1 year to 5 years. As of December 31, 2000, the Company had
outstanding options to employees and various third parties for the purchase of
up to 1,207,971 shares of the Company's common stock.
The Company recognizes compensation expense for the difference between
the exercise price of the options and the fair market value of the Company's
common stock at the time of the grant for employees and the estimated fair
market value of the options determined using the Black-Scholes model for
non-employees.
Under the employment contracts with its two principal executives (See
Note 9), the Company issued 250,000 options at an exercise price which was below
the market value of the Company's stock. The options vest 50% immediately and
50% 90 days from grant. Accordingly the Company recognized $1.5 million in
deferred compensation based on the difference between the exercise price of the
options and the market value of the stock on the date of grant. Based on the
vesting of the options, $1.15 million of expense was recognized in 2000.
F-14
32
ELEKTRYON
(A Development Stage Enterprise)
Stock-based compensation for the three years ended December 31, 2000 is
as follows:
================================================================================
Year Options granted Recorded compensation expense
--------------------------------------------------------------------------------
1998 68,567 $ 457,251
1999 161,592 $ 832,728
2000 390,473 $2,373,171
================================================================================
F-15
33
ELEKTRYON
(A Development Stage Enterprise)
Information relating to the outstanding stock options is as follows:
Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise No. of Exercise No. of Exercise
No. of Shares Price Shares Price Shares Price
Outstanding at beginning of year 920,000 $ 1.20 978,833 $ 1.72 1,071,950 $ 3.06
Granted 78,567 10.26 226,917 14.05 400,473 7.14
Exercised (14,201) (11.48) (63,467) (13.74) (84,829) (6.88)
Forfeited/canceled (5,533) (10.48) (70,333) (10.24) (179,623) (11.11)
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 978,833 $ 1.72 1,071,950 $ 3.06 1,207,971 $ 1.65
Exercisable at year end 978,833 $ 1.72 1,071,950 $ 3.06 1,082,971 $ 1.39
Weighted Weighted Weighted Weighted Weighted Weighted
Average Fair Average Average Average Average Average
Value of Exercise Fair Value Exercise Fair Value Exercise
Options Price of Options Price of Options Price
Options granted with exercise $ 7.19 $ 9.84 $ 6.14 $ 10.00 $ 9.42 $ 4.52
price below market value of
stock on grant date
Options granted with exercise $ 6.33 $ 10.00 -- -- -- --
price equal to market value of
stock on grant date
Options granted with exercise $ 6.29 $ 15.00 $ 4.89 $ 15.98 $ 7.78 $ 16.19
price in excess of market
value of stock on grant date
------------------------------------------------------------------------------------------------------------------------------------
F-16
34
ELEKTRYON
(A Development Stage Enterprise)
Additional information regarding options outstanding at December 31,
2000, is as follows:
Outstanding Exercisable
---------------------------------------- -----------------------------
Average
Weighted Weighted
Remaining Average Weighted
Number of Average Life Exercise Number of Average
Exercise Price Options (Years) Price Options Exercise Price
---------------- ---------- ------------ -------- ---------- --------------
$1.00 to $5.00 1,150,000 1.12 years $ 1.87 1,025,000 $ 1.49
$10.00 to $22.00 57,971 1.06 years $ 15.10 57,971 $ 15.10
The impact of SFAS No. 123 was calculated using the Black-Scholes model
with the following assumptions for 1998, 1999 and 2000: risk-free interest rate
of approximately 5.0 percent, expected volatility of 98% and no assumed dividend
yield. The weighted average expected life of the options granted was 1, 2 and 5
years for 1998, 1999, and 2000, respectively.
Had compensation expense been determined consistent with SFAS 123, the
Company's net loss and loss per share would have increased by the following pro
forma amounts:
1998 1999 2000
---------- ---------- -----------
Loss as reported (3,575,224) (8,541,029) (23,243,183)
Pro forma loss (4,008,823) (9,135,142) (24,303,101)
Loss per share as reported (1.11) (1.97) (3.77)
Pro forma loss per share (1.24) (2.10) (3.94)
For purposes of determining the SFAS No. 123 pro forma compensation
expense, the weighted-average fair value of the options is amortized over the
expected life of the options.
The Company issued warrants in July 2000 to purchase 125,000 shares of
the Company's stock at an exercise price of $20. The exercise price of the
warrants are subject to adjustment should the Company sell its common stock to
any party at any price less than the grant price of the warrants. As of December
31, 2000, no shares had been issued at a price less than $20 since the warrants
were issued. The Solo transaction (See Note 10) is a triggering event that may
adjust the exercise price of the warrants to a lower value. The value of the
warrants is approximately $750,000 and is based on the Black-Scholes model with
the following assumptions: market value of the Company's stock at $11.00 per
share (based on the equalization price discussed in Note 9), risk-free interest
rate of approximately 5.0 percent, 5 year expected life of the warrant, expected
volatility of 98% and no assumed dividend yield.
F-17
35
ELEKTRYON
(A Development Stage Enterprise)
8. RELATED PARTY TRANSACTIONS
The Company acquired certain intellectual property in 1998 from its
three founding shareholders in exchange for 1,800,000 shares of common stock. In
addition, 1,946,500 shares of the Company's common stock were issued to the
founding shareholders for no consideration. The Company has recorded no asset
value in its financial statements as a result of these share issuances.
The Company paid $263,000, $583,000 and $647,000 in consulting
compensation to its three founding shareholders in 1998, 1999 and 2000,
respectively.
During 2000, the Company purchased shares of the Company's common stock
from the founding shareholders (See Notes 9 and 10).
9. 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 leases were as follows:
Year Ending
December 31:
2001........................................ $132,250
2002........................................ 126,250
2003........................................ 73,292
2004........................................ 70,437
2005........................................ 70,437
Thereafter.................................. 164,354
--------
Total minimum lease payments................ $637,020
========
The Company had approximately $9.4 million in outstanding purchase
orders at December 31, 2000, primarily for raw materials, inventory parts and
plant supplies with various suppliers.
As a result of possible securities laws violations by the Company in
connection with the issuances of its common stock, the Company had a contingent
rescission liability estimated by
F-18
36
ELEKTRYON
(A Development Stage Enterprise)
management of up to approximately $65 million, excluding any potential penalties
and interest, as of December 31, 2000. In June and July 2001, following the
Company's disclosure to shareholders of certain potential securities law claims,
investor shareholders representing approximately 79% of the total shares
outstanding as of June 30, 2001, had waived their right of rescission. In
connection with the waivers, the Company issued additional shares to all
accredited investors who waived their rescission right and who paid in excess of
$11.00 per share in cash for their shares, equalizing their average price paid
per share to $11.00. The Company currently does not have sufficient funds to
honor the potential liability should rescission be requested by those
shareholders who have not waived their rescission rights. Management and legal
counsel are unable to predict the impact, if any, on the financial position or
results of operations of the Company as a result of the ultimate outcome of this
matter. In the opinion of management, there is not an amount that is probable
and reasonably estimable of the Company's liability upon ultimate resolution of
this matter. Therefore, a liability for the contingent rescission obligation is
not reflected in the accompanying financial statements. Additionally, any defect
in the disclosure concerning the waivers could result in a greater than expected
rescission amount. 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.
During 2000, the Company purchased approximately 651,000 shares of the
Company's common stock from the founding shareholders for approximately $14.0
million in cash (See Note 10). The source of such cash was primarily sales of
stock to third party investors, and management believes that the use of proceeds
to purchase shares from the Company's founders was not disclosed to such
investors in many instances. These transactions are presented in the
accompanying statements of changes in stockholder's (deficit) equity as treasury
stock purchased from founders and stock reissued from treasury. The proceeds
received from the third party investors are included in the $65 million
contingent liability for rescission rights described above.
In addition, management believes that approximately 250,000 shares of
the Company's common stock were sold by the Company's founders, primarily during
1999 and 2000, directly to third party investors and the proceeds were not
remitted to the Company. It further appears that in many cases the fact that the
proceeds were not remitted to the Company was not disclosed to the third party
investors. In the opinion of management, the ultimate resolution of any claims
arising from these stock transactions with third party investors will not have a
material adverse effect on the Company's financial position or results of
operations. These transactions are considered transactions among shareholders
and therefore not reflected in the accompanying financial statements.
The Company signed three year employment contracts with its two
principal executives on November 7, 2000 and December 15, 2000, respectively,
that require aggregate compensation expenditures of $500,000 per year. The
contracts also specify certain bonus and option arrangements. Additionally, the
contracts specify that if the executive's employment with the Company terminates
before the end of the Employment Period (a) for any reason, the Company will pay
the executive a lump sum equal to his/her earned but unpaid salary for the
period ending on the date of the termination of his/her employment, but in no
event less than one year's annual salary; and (b) as a result of the executive's
termination of employment by the Company a lump sum payment equal to his/her
salary for the period commencing on the date of termination of his
F-19
37
ELEKTRYON
(A Development Stage Enterprise)
/her employment and ending on the earliest of the last day of the executive's
Employment Period, the date of the executive's death, or the first anniversary
of the date of termination of his/her employment (See Note 7).
10. SUBSEQUENT EVENTS
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 Solo pursuant to which Solo will acquire substantially all of
Elektryon's assets (the "Asset Acquisition") in exchange for (a) $5 million in
cash, subject to adjustment, as defined, (b) 51,878,788 shares of Solo's common
stock, par value $.001 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. Upon
consummation of the transaction, Elektryon will be entitled to receive
51,878,788 shares of Solo Common Stock (including shares to be deposited in the
escrow account but not including any earn-out shares), or approximately 50% 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 and (ii) the conversion of all the then outstanding
Solo convertible preferred stock (including the shares of Solo convertible
preferred stock referred to in clause (i). The Solo agreement that was
originally set to expire on June 30, 2001 was extended to July 30, 2001, by
mutual agreement on June 14, 2001, and again to August 31, 2001, by mutual
agreement on August 7, 2001.
In connection with the Asset Acquisition, the Company has sought a
waiver and release of certain identified potential securities law claims which
the Company's shareholders may have against the Company. Shareholders who have
signed a waiver and release of such claims received additional shares of common
stock, par value $0.001 per share ("Common Stock"), of Elektryon which shares
were intended to result in an average cost of $11.00 per share to such
shareholders. Shareholders who purchased their shares for $11.00 per share or
less were paid 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. As of June 30, 2001, waivers from holders of
approximately 79% of the outstanding shares had been received and an additional
1.8 million shares of Common Stock were issued during June and July 2001.
If the Asset Acquisition is consummated, Elektryon will hold the Solo
shares until distributed pro-rata to its shareholders upon the earlier of two
years from the closing of the Asset Acquisition Agreement or Solo's Initial
Public Offering. Following the Solo share distribution, Elektryon will wind up
its affairs and distribute its remaining assets to the Elektryon shareholders.
If the Asset Acquisition is consummated, Elektryon will transfer substantially
all of its assets to Solo and wind up its business. The terms of the Asset
Acquisition Agreement require that Elektryon pay Solo $500,000 if the agreement
is terminated by Solo because Elektryon has breached certain covenants under the
agreement or by either party because Elektryon's board of directors has received
a superior proposal as defined.
F-20
38
ELEKTRYON
(A Development Stage Enterprise)
On June 25, 2001, the California Department of Corporations approved
the fairness of the terms and conditions of the issuance of Solo common stock in
the Solo transaction following a public hearing on that same day. On June 27,
2001, the Company's shareholders holding approximately 70% of the outstanding
shares consented to the Solo transaction. Closing of the transaction is subject
to certain other conditions.
On August 29, 2001, the Company was advised by Solo that the financing
for its acquisition of Elektryon's assets was not in place and that Solo could
not close the proposed transaction by August 31, 2001. The Company is examining
its alternatives, including renegotiating the transaction with Solo, seeking
other potential investors, liquidating its inventory, severely curtailing its
operations, or filing for bankruptcy protection while it seeks additional
financing or a buyer for its assets. Any transaction with Solo or other parties
for the sale of the Company or substantially all of its assets will require
shareholder approval, a process that management estimates will take four to six
months under the proxy rules of the Securities and Exchange Commission.
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 and Messrs. Meisinger and Stinson (the
"Former Directors") 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 930,000 shares of Common Stock,
and provides for the assignment by the Former Directors of their alleged rights
in any Elektryon intellectual property.
In 2001, 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 the Former Directors' remaining shares of Common Stock not
surrendered to the Company in connection with the settlement. The Company
expects that these notes will be fully reserved for financial reporting
purposes. The Former Directors 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 repay the promissory notes. 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.
The Company also entered into a separate settlement agreement with
Edwin Wheeler dated January 19, 2001. This settlement provides for the payment
of $1.5 million to Elektryon in exchange for 75,000 shares of Common Stock, the
contribution of 550,000 shares of Common Stock to the Company at no cost to the
Company, the repudiation of all options to purchase common stock in which
Wheeler or his spouse hold any beneficial interest and the relinquishment of any
and all positions, agreements or understandings of any kind that Wheeler or any
affiliate of
F-21
39
ELEKTRYON
(A Development Stage Enterprise)
Wheeler may have with the Company, without any payment by the Company. In
addition, all shares owned by Wheeler are voted in accordance with the
provisions of a voting agreement between the Company and Wheeler. In
consideration for the above agreements, the Company has agreed not to sue
Wheeler regarding the sale or transfer of any of his founders stock or for any
incident arising directly or indirectly from Wheeler's performance of services
to the Company.
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 Common Stock, and
specific performance of the alleged agreement to buy out the alleged
distribution agreement for 35,000 shares of Common Stock. Management believes
the ultimate outcome of this matter will not have a material adverse effect on
the Company's financial position or results of operations.
On June 4, 2001, Allrite Sheet Metal, Inc. ("Allrite") filed a
complaint against Elektryon in the District Court of Clark County, Nevada
alleging that Elektryon breached an alleged contract with Allrite for the design
and manufacture of canopy assembly units by failing to pay for delivered units
and repudiating the alleged contract. Allrite is seeking unspecified damages.
The Company and Allrite are discussing the claims asserted in Allrite's
complaint. Should Allrite prevail in its complaint, the result could have a
material adverse effect on the Company's financial position and results of
operations.
On June 13, 2001, three shareholders of the Company filed a lawsuit to
require the Company to refund their investment in the Company's common stock.
The ultimate liability in the event of an adverse outcome of the lawsuit is
approximately $150,000, plus statutory interest. The lawsuit has been withdrawn,
but may be refiled in another jurisdiction.
On June 22, 2001, Dynalco Controls Corporation ("Dynalco") filed a
complaint against Elektryon in the United States District Court for the District
of Nevada alleging that Elektryon breached an alleged contract with Dynalco for
the purchase of air/fuel controller systems by failing to pay for delivered
systems. Dynalco is seeking damages of $112,000 plus interest and costs. The
Company and Dynalco are discussing the claims asserted in Dynalco's complaint.
Management believes the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial position or results of operations.
F-22
40
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: October 10, 2001 By: /s/ Michael E. Holmstrom
------------------------
Michael E. Holmstrom
President
By: /s/ Joanne Firstenberg
------------------------
Joanne Firstenberg
General Counsel
41
INDEX TO EXHIBITS
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.*
2.4 Letter Agreement between Solo Energy Corporation and Elektryon
dated June 14, 2001.*
2.5 Amended and Restated 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
("Firstenberg Employment Agreement").*
10.2 Employment Agreement dated November 7, 2000, as amended on
February 12, 2001, between Elektryon and Michael E. Holmstrom
("Holmstrom Employment Agreement").*
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.*
-----------------------
*Previously filed
E-1
42
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.*
10.10 First Amendment, dated as of July 3, 2001, to the Holmstrom
Employment Agreement.
10.11 Second Amendment, dated as of August 23, 2001, to the Holmstrom
Employment Agreement.
10.12 First Amendment, dated as of July 3, 2001, to the Firstenberg
Employment Agreement.
10.13 Second Amendment, dated as of August 23, 2001, to the Firstenberg
Employment Agreement.
-----------------------
*Previously filed
E-2