-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GbtJ6uhsUT7Cu52tlrrmItoDoq4DE0jgMkZjY+RruppnP5JrLj+kiuSpjJc5NHeo NGrNAEp/MCys39eudcH7zg== 0000950123-01-503949.txt : 20010629 0000950123-01-503949.hdr.sgml : 20010629 ACCESSION NUMBER: 0000950123-01-503949 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20010628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELEKTRYON CENTRAL INDEX KEY: 0001139184 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 880353324 STATE OF INCORPORATION: NV FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-32657 FILM NUMBER: 1670487 BUSINESS ADDRESS: STREET 1: 6565 SPENCER STREET STREET 2: SUITE 206 CITY: LAS VEGAS STATE: NY ZIP: 89119 BUSINESS PHONE: 7023611719 MAIL ADDRESS: STREET 1: 6565 SPENCER STREET STREET 2: SUITE 206 CITY: LAS VEGAS STATE: NV ZIP: 89119 10-12G/A 1 e48316a1e10-12ga.txt ELEKTRYON 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10/A AMENDMENT NO. 1 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 ELEKTRYON (Exact Name of Registrant as Specified in its Charter) Nevada 88-0353324 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6565 Spencer Street, Suite 206, Las Vegas, NV 89119 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (702) 361-1719 Securities to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which to be so Registered Each Class is to be Registered ------------------- ------------------------------ None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of Class) 2 ELEKTRYON INDEX TO FORM 10 INFORMATION REQUIRED IN REGISTRATION STATEMENT
PAGE Item 1. Business..............................................................................................1 Item 2. Financial Information................................................................................41 Item 3. Properties...........................................................................................48 Item 4. Security Ownership of Certain Beneficial Owners and Management.......................................49 Item 5. Directors and Executive Officers.....................................................................50 Item 6. Executive Compensation...............................................................................51 Item 7. Certain Relationships and Related Transactions.......................................................57 Item 8. Legal Proceedings....................................................................................58 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters......58 Item 10. Recent Sales of Unregistered Securities..............................................................58 Item 11. Description of Registrant's Securities to be Registered..............................................59 Item 12. Indemnification of Officers and Directors............................................................59 Item 13. Financial Statements and Supplementary Data..........................................................60 Item 14. Changes in and Disagreements with Accountants........................................................60 Item 15. Financial Statements and Exhibits....................................................................60
3 ELEKTRYON FORM 10 INFORMATION REQUIRED IN REGISTRATION STATEMENT ITEM 1. BUSINESS. (A) GENERAL DEVELOPMENT OF THE BUSINESS. Elektryon, a Nevada corporation (also referred to herein as the "Company"), develops, assembles and has recently begun to market the POWR/MASTR(TM), a natural gas-fueled product designed to generate uninterruptible electricity on-site for the rapidly growing distributed generation market. Elektryon was incorporated on March 1, 1994 under the name Engine Corporation of America. On February 12, 1996, the Company changed its name to Engine World, Inc., and on June 1, 2000, the Company changed its name to Elektryon. Elektryon's principal executive offices are located at 6565 Spencer Street, Suite 206, Las Vegas, Nevada 89119. For a discussion of the risks associated with an investment in Elektryon, see the "Risk Factors" section of this Item 1. The Board of Directors of Elektryon has adopted an amended and restated plan of reorganization (the "Plan of Reorganization"), subject to shareholder approval, pursuant to which Elektryon has entered into an Asset Acquisition Agreement with Solo Energy Corporation ("Solo") under which Solo will acquire substantially all of Elektryon's assets in exchange for (a) $5 million in cash, subject to adjustment, (b) 51,878,788 shares of Solo's common stock, par value $.0001 per share ("Solo Common Stock"), (c) up to 36,363,636 additional shares of Solo Common Stock to the extent Elektryon achieves specified sales and other goals after the closing of the proposed transaction, and (d) Solo's assumption of specified liabilities of Elektryon. The 51,878,788 shares of Solo Common Stock to be received by Elektryon (including shares to be deposited in an escrow account but not including any earn-out shares) together with the shares of Solo Common Stock issuable upon exercise of 3,333,334 Solo options to be granted to executive officers of Elektryon upon consummation of the transaction will represent approximately 58% of the then outstanding shares of Solo Common Stock after giving effect (as adjusted by the treasury method) to (i) the exercise of all currently outstanding warrants of Solo to purchase shares of Solo convertible preferred stock at $1.65 or less per share (but excluding approximately 5,500,000 currently outstanding warrants with an exercise price of greater than $1.65), (ii) the conversion of all currently outstanding promissory notes convertible into shares of Solo convertible preferred stocks (assuming conversion at $1.65 per share, although such conversion price could be lower under the terms of the promissory notes), (iii) the conversion of all currently outstanding Solo convertible preferred stock (including the shares of Solo convertible preferred stock referred to in clauses (i) and (ii)) and (iv) the exercise of all currently outstanding options of Solo to purchase shares of Solo Common Stock at $1.65 or less per share. The treasury share method assumes that approximately 93 million shares will be outstanding upon the exercise of warrants or options with an exercise price at $1.65 or less, Solo will be paid the value of the aggregate exercise price of such securities, and will use such proceeds to repurchase approximately 9.5 million shares at an assumed market price of $1.65 per share. This percentage will be reduced 1 4 by any future sales of securities by Solo, including any sales of Solo's Series D Preferred Stock. Elektryon understands that Solo is currently seeking to raise approximately $30 million through the sale of a series of convertible preferred stock at a price equivalent to $1.65 per share of Solo Common Stock. On June 27, 2001, Solo advised Elektryon that while it continues to believe it will be able to raise $30 million, it believes any funds raised may be at a significantly lower valuation. There can be no assurance that any such sale will occur or what the aggregate dollar amount or per share price will be if a sale occurs. The terms governing the proposed transactions (collectively, the "Asset Acquisition") are summarized below. SEE " -- THE REORGANIZATION -- THE ASSET ACQUISITION AGREEMENT." In connection with the Asset Acquisition, the Company sought from certain of its shareholders a waiver and release of certain identified potential securities claims which the Company's shareholders may have against the Company and representatives of the Company in connection with the sale of securities of the Company. Shareholders who waived and released such claims received an additional fraction of a share of common stock, par value $0.001 per share, of Elektryon ("Common Stock") for each share of Common Stock they purchased from the Company for more than $11.00 per share in cash or, if they purchased shares from the Company for $11.00 per share or less or did not pay any cash for shares, nominal consideration of $10.00 per holder, regardless of the number of shares held. Solo's obligations under the Asset Acquisition Agreement are conditioned on Elektryon's obtaining such waivers from shareholders representing at least 60% of the aggregate shares of Common Stock held by all of Elektryon's shareholders. Only shareholders of Elektryon who are "accredited investors" (as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), have been asked to waive and release such claims. As of June 26, 2001, such holders of approximately 4,888,105 shares of Common Stock (or 74% of the outstanding shares of Common Stock) had granted such waivers and releases. In addition, the Company had received Waiver and Release Agreements executed by non-accredited investors holding 582,864 or 9% 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. SEE " -- THE REORGANIZATION -- THE WAIVER AND RELEASE SOLICITATION." If Elektryon's Plan of Reorganization, including the Asset Acquisition Agreement, is approved by Elektryon's shareholders and the Asset Acquisition is consummated, Elektryon will wind up its affairs and liquidate. Elektryon's shareholders will receive shares of Solo Common Stock obtained by Elektryon in the Asset Acquisition in proportion to their respective interests in Elektryon (the "Liquidation"). SEE " -- THE REORGANIZATION." (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company operates as a single industry segment within the meaning of Statement of Financial Accounting Standards No. 131. (C) NARRATIVE DESCRIPTION OF BUSINESS. OVERVIEW If the Asset Acquisition is consummated, Elektryon will transfer substantially all of its assets to Solo and wind up its affairs and liquidate. The following description summarizes Elektryon's 2 5 current business before the closing of the Asset Acquisition, and will continue to apply if the Asset Acquisition is not consummated and Elektryon continues its business operations. Elektryon develops, assembles and has recently begun to market the POWR/MASTR(TM), a product designed to generate uninterruptible electricity on-site for the rapidly growing distributed generation market. Elektryon believes it is one of the first distributed generation companies to commercially manufacture on-site power generation devices that may eventually serve as a baseload power source. The POWR/MASTR(TM) is a specially designed natural gas-fueled reciprocating engine with high fuel efficiency and low emissions levels which produces on-site electricity for a wide range of commercial and industrial applications. The POWR/MASTR(TM) uses patented technological modifications to a standard General Motors ("GM") light duty truck gasoline engine that improve its efficiency, capacity and longevity. As of June, 2001, Elektryon had installed 17 test units at commercial and industrial sites, 3 of which have been sold, and 5 of which are operating in test mode. The remaining 9 units were C-1 units which have been decommissioned. All of the installed units are operating under test arrangements by which the host site receives free use of a POWR/MASTR(TM) in exchange for permitting Elektryon to test the unit in actual use, and use it for promotional purposes. The Company believes the POWR/MASTR(TM) can be utilized effectively in a broad range of applications. Therefore, Elektryon intends to target a number of distributed generation markets, including: - peak shaving, - back up / standby power, - cogeneration, and - resource recovery. The Company believes that customers are increasingly looking for ways to manage electricity prices in today's volatile price environment. Elektryon plans to focus product marketing in North America in areas with historically high or volatile average utility prices and, internationally, in areas where basic electric grid infrastructure is deficient or not present. In addition, Elektryon plans to market to customers with increasing demands for high quality, reliable power, primarily to the customers of strategic partners, which will be Energy Service Companies ("ESCs") that have large end-user customer bases. The Company believes that the growth of data and telecommunications infrastructure and increase in power disruptions, as reported by the U.S. Department of Energy, should continue to support this marketing channel. Where appropriate, Elektryon expects to work to establish partnerships with local and national corporations to effectively market the POWR/MASTR(TM). The Company has recently begun marketing a 100 kilowatt ("kW") POWR/MASTR(TM) that can be used as a peaking or standby power source and, with further development, as a baseload power source. Elektryon works with the local utility in each customer installation to ensure that all the necessary permits are obtained and standby charges are minimized for the 3 6 customer. The total cost per kilowatt hour to end users consists of installation costs, maintenance costs, capital expenditures for the unit, fuel costs and a monthly standby power charge payable to the local utility. The actual cost will vary based on fuel costs and standby power charges that differ geographically. The unit is easily transportable and up to eight units can be linked to meet large and fluctuating load demands for electricity. While Elektryon is currently focused on the commercial development and marketing of the 100 kW POWR/MASTR(TM), the Company is actively continuing research and development efforts as a means to enhance performance and efficiency, add features and functionality to the POWR/MASTR(TM) and develop new units in other kW ranges to satisfy larger and smaller customer needs. SEE " -- RESEARCH AND DEVELOPMENT." Elektryon intends to concentrate primarily on the commercial on-site generation and the premium power markets that on a combined basis are estimated to reach $35 billion in the United States and $100 billion worldwide by 2010. Elektryon believes that large retail chains, supermarkets, restaurants, hotels, and other businesses that traditionally pay high costs for electricity and whose business revenues are directly affected by electricity disruptions, would greatly benefit from the cost savings and reliability associated with the POWR/MASTR(TM). Elektryon also believes that the POWR/MASTR(TM) is well suited for large commercial and office complexes, hospitals, high tech, telecommunications, and other companies that place a premium on reliable, high quality power. As of April 2001, Elektryon had installed POWR/MASTR(TM) units in a number of locations, including 4 units at a Kmart, in Linden, N.J. and 1 unit at an Albertson's grocery store in Rancho Bernardo, California. These units continue to generate electricity in test and demonstration mode. The Company has completed the testing of the unit installed at Albertson's, which is being upgraded to the new C-3 unit design. Elektryon will continue testing this unit as it attempts to sell it to Albertson's. Elektryon is currently installing four linked POWR/MASTR(TM) units at a Wal-Mart in Chula Vista, California. The units installed at Wal-Mart are expected to commence test operations on or about July 1, 2001. The installation at Wal-Mart experienced some technical difficulties which have been resolved. In 2000 the Company sold and installed 3 units at West Meadows Ice Arena, Rolling Meadows, Illinois, which are the only units sold by the Company since inception. Other than the West Meadows units, the Company's installations will undergo testing and review periods, but at this time the Company does not have any purchase or lease agreements for these units. With the exception of the Albertson's unit and the new Wal-Mart installation, these units, referred to as C-1 units, were prototypes for testing and demonstration. The C-3 units, the Company's commercial product, will be sold or leased to end-user customers or to ESCs that already have large customer bases to whom they will sell electricity, primarily using the C-3 unit as a peaking device. In California, where there are very high charges for peak power in the $0.30 per kW range, the POWR/MASTR(TM) can produce electricity at half the grid price. 4 7 PRODUCT The POWR/MASTR(TM) is designed to operate efficiently on clean burning natural gas or other vaporous fuels while producing a high amount of power and torque at very low speeds. All of the Company's design improvements to the GM light truck gasoline engine are intended to result in longer life, better fuel efficiency, greater reliability, and environmentally safer operating conditions. Elektryon is currently focusing on the commercial development and marketing of a 100 kW C-3 POWR/MASTR(TM) unit. The 100 kW POWR/MASTR(TM) generates electricity using natural gas, propane, butane, or methane for fuel. It is installed at the location where the electricity is in demand. The 100 kW unit uses 10 to 14 therms of natural gas fuel per hour to deliver the 100 kW, significantly better than competing microturbines. Up to eight 100 kW units can be linked together to satisfy a larger customer's electricity needs. This modularity component can also prevent the total loss of electricity upon the shutdown of one unit among multiple units linked together. TECHNOLOGY The base of the POWR/MASTR(TM) technology is an internal combustion engine, the same as that found in a car or truck. Elektryon makes certain patented modifications to the internal combustion engine which are designed to improve the efficiency, reliability, emissions profile and electricity generation capability of the engine. Without the Elektryon patented improvements, Elektryon's base engine, the GM 7.4L engine, produces 60 kW hours of power using 13 therms of fuel, compared to the POWR/MASTR(TM) which produces 100 kW hours of power using 10 to 14 therms of fuel. The POWR/MASTR'S(TM) on-site generation system integrates a rotating AC alternator, together with a natural gas fueled, internal combustion power source. This method of coupling these elements with a sophisticated software enabled control and communications system is advanced within the industry. Innovations incorporated into the product include: - total air/fuel mixture cooling, - velocity intake manifolds, - tuned intake port, - tuned exhaust port, - pulse loss correction gear train, - non-parasitic loss mixture charging, - high thermal efficiency, and - innovative head and piston design. Multiple POWR/MASTR(TM) units are capable of operating together, while simultaneously operating in parallel with the utility. Utilizing a rotating AC alternator makes paralleling with the utility possible because it generates the same type of voltage, current, and frequency as that which is available from the utility. 5 8 RESEARCH AND DEVELOPMENT Elektryon intends to significantly expand its current engineering and production staff. From January 1, 1998 through May 31, 2001, Elektryon has expended approximately $16.9 million on research and development. The Company recognizes the importance of research and development to product innovation and expects to spend as much as $5 million to develop the 100 kW C-4 POWR/MASTR(TM) and begin the development of other new products. Among other things, the base engine will be upgraded to a similar, heavier duty block, the choice of which has not yet been determined, and may operate without a gearbox between the engine and the generator. These potential products include 200 kW and 50 kW POWR/MASTRS(TM). Elektryon believes that the new C-4 unit will incorporate numerous improvements in design to improve efficiency, reduce emissions and noise levels, and reduce the overall manufacturing costs relative to the C-3 unit. The research and development team at Elektryon developed the C-3 unit to produce more horsepower than a standard gasoline engine while operating on natural gas. In addition, the C-3 POWR/MASTR(TM) has the ability to produce 100 kW using 10 to 14 therms of natural gas, approximating a 27% to 31% efficiency level. This compares to the lower efficiency level of a standard engine or microturbine, which typically performs in the range of 21% to 27% efficiency. The POWR/MASTR(TM) has met these milestones while being fueled on standard utility natural gas with gas line pressure of 5 psi. The POWR/MASTR(TM) is also characterized by a sophisticated monitoring and control system. All current POWR/MASTR(TM) installations include an Elektryon developed communications line to provide Elektryon with online real time remote access to installed units. Elektryon developed POWR/MASTR'S(TM) monitoring features to alleviate the customer's need to monitor and control its own power plant. The POWR/MASTR'S(TM) on-site energy system can automatically alternate from generating electricity to obtaining electricity from an electric utility during periods when the utility offers lower pricing, adding to the advantages of an on-site energy system. To expedite product advancement and development, Elektryon combines the design and engineering accomplishments of its internal staff together with those developed by outside firms. Elektryon utilizes the technological advances from various industries and strongly encourages every contractor and vendor that is affiliated with the POWR/MASTR(TM) to go beyond their specified focus and deliver new ideas and solutions. While some other distributed generation equipment companies rely solely on in-house engineering, Elektryon believes that there are valuable and applicable engineering and technological advances available from outside firms. GM, the sole supplier of the engine used by Elektryon to manufacture the POWR/MASTR(TM), has discontinued production of the engine. Although cost savings advances in producing parallel interconnect switchgear have been made, advances to further reduce costs are being developed. Elektryon engineers are working to improve accessibility and reliability as it relates to the remote monitoring network. MANUFACTURING, SOURCING AND QUALITY CONTROL The unique engineering design of the POWR/MASTR(TM) facilitates low cost manufacturing, efficient assembly and reliable quality control processes. Elektryon avoids 6 9 capital intensive manufacturing facilities by out-sourcing the manufacturing of the POWR/MASTR'S(TM) components and assembles these components in its state of the art Odessa, Texas facility. In addition, Elektryon believes that its product cost will decrease if it obtains economies of scale. MANUFACTURING AND ASSEMBLY Elektryon currently assembles units in Odessa. The facility was designed for a manufacturing capacity of 4,800 units per year, although it has not been operated at that rate. The Company has produced a limited number of POWR/MASTR(TM) units for testing in preparation for beginning its commercial operations. Prior to release of the product into the manufacturing process, all assembly information is documented in the form of work instructions with digital photographs. All tasks are documented down to each nut, bolt and washer. The assembly process is conducted in a continuous flow environment. All tools necessary to perform each task are assigned to the workstation. Every component is stored at the point of consumption, and is replenished through a just-in-time system by material coordinators. Time studies are performed for every task, thereby allowing the Company to balance the amount of work performed in each operation to ensure that work content does not create bottlenecks, and to better predict output. An Elektryon objective is to increase volumes by decreasing cycle time through the assembling of components in parallel. The Company has expansion plans for the Odessa facility designed to increase the overall capacity to 8,400 units per year if sales so require. Elektryon currently is reviewing several sites, both domestic and international, for further expansion to increase manufacturing as needed. SOURCING Elektryon sources most of its components from contract manufacturers and uses standard off the shelf parts where possible. Approximately 80% of the parts used in the POWR/MASTR(TM) are available off the shelf. This strategy is intended to permit the Company to rapidly increase production volumes while maintaining high inventory turns. The POWR/MASTR(TM) components are currently bought through a manual purchase order process, which is expected to be automated with the implementation of a PeopleSoft(TM) materials management system. Most of the components are dual sourced, except that the Company does rely on single suppliers for engines, generators, control systems and automatic paralleling switch units. Elektryon's engines are purchased from GM. After disassembling and reassembling the engine using several Company-specific parts, the only section of the stock engine remaining is the block and crankshaft. The entire upper portion of the engine is reassembled with parts designed and manufactured to meet Elektryon's technological specifications for natural gas fueling. Elektryon's POWR/MASTR(TM) units are currently designed around a 7.4 liter light duty truck engine manufactured by GM, production of which has been discontinued. As a result, the POWR/MASTR(TM) unit will eventually require some design modifications to function with an alternative engine. However, Elektryon currently has more than 500 of these GM engines in 7 10 inventory, which are expected to meet its production needs until such time as it has completed design modifications. Newage Stamford Inc. is the sole supplier of the current generator, and World Products, Inc. is the sole supplier of cylinder heads used in the POWR/MASTR(TM). Currently, the only supplier of the electronic control system is Encorp. The Company is in active discussions with another potential supplier of less costly and similar functionality electronic control systems. Cutler Hammer is the sole source of the automatic paralleling switch unit used in the POWR/MASTR(TM). The Company is not aware of any other suppliers who would produce these units to the Company's specifications and time requirements. Although the Company is working to redesign the POWR/MASTR(TM) to allow for multiple switch unit sources, the Company could see significant delays and interruptions if its sole source for this component faltered. Elektryon constantly reviews other suppliers' products in order to increase the Company's options for suppliers and to continue improving the functionality of all the components incorporated into the POWR/MASTR(TM). The Company believes that if relations with any of its sole source suppliers for engines, generators or control systems falter, other manufacturers can supply the required POWR/MASTR(TM) components. QUALITY CONTROL Elektryon's quality control process is integrated into the manufacturing system. Quality control verifications are performed by manufacturing personnel after each workstation has completed its task. Quality control personnel at points throughout the assembly area perform a redundant verification. A functional test of the finished unit is performed by the quality control department at the end of the assembly process, where 100% of the units are put through a series of real life scenarios and measured against expected standards. ENVIRONMENTAL COMPLIANCE Elektryon is subject to federal and state clean air emission standards as well as noise abatement regulations. Elektryon believes the C-3 unit complies with applicable environmental laws and regulations. SEASONALITY Elektryon believes that its business will not be affected by seasonal factors, except to the extent that interest in alternative sources of electricity such as the POWR/MASTR(TM) may increase during periods when warm weather causes an increase in power usage and electrical rates. INTELLECTUAL PROPERTY AND PATENTS Elektryon regards its patented intellectual property, trademarks, copyrights, service marks, trade dress, trade secrets and similar intellectual property as critical to its success. The 8 11 U.S. Patent and Trademark Office has issued a patent with more than 90 claims on the POWR/MASTR(TM) technology. COMPETITION The power generation market is highly competitive and undergoing a period of change resulting from restructuring and deregulation of the power industry. The Company believes that superior technologies will compete on the basis of: - operating efficiency, - reliability, - product quality and performance, - life cycle costs, - development of new products and features, - quality and experience of sales, marketing and service organizations, - availability and price of natural gas, - product price, - emissions levels, - scalability, - manufacturing capability, - functionality, - product availability, - name recognition, and - quality of distribution channels. The Company faces competition from energy service providers (including electric utilities), independent power producers and system integrators including Calpine, Dynegy, Edison International, Enron Corporation, Mirant, NRG Energy, Pacific Gas & Electric, RealEnergy and Sempra Energy. The Company also competes with other distributed generation technologies, including microturbines, fuel cells, and solar power technologies. The majority of existing reciprocating engine products of competitive companies are used for back-up power. The most well established of such companies include Caterpillar, Waukesha, Cummins Engine, Detroit Diesel, Generac, Portable Products, Tecogen and Kohler Company. 9 12 Elektryon competes with microturbine manufacturers for secondary power applications between 50kW and 500 kW. Microturbine manufacturers include a number of well established companies, the majority of which are either publicly traded on a major securities exchange or subsidiaries of such companies. These include Capstone Turbine Corporation ("Capstone"), EnergyNow (DTE Energy Co., Pratt & Whitney Inc., and Turbo Genset joint-venture), Honeywell (AlliedSignal), Mitsubishi Heavy Industries Ltd., NREC (Igersoll-Rand Co. Inc.), Toyota Motor Corp., Turbec (Volvo/ABB joint-venture) and Elliot Energy Systems. At the present time, the Company believes that only Capstone is shipping commercial products. The Company believes that microturbines will be the distributed generation devices most likely to provide competition due to their current technological development, emissions and cost of production. Elektryon does not view fuel cells or solar power as principal competitors due to their high installed capital costs, lack of commercially viable products, and low power output. At the present time, the Company believes that International Fuel Cells, a division of United Technologies Corporation, is the only company commercially producing fuel cells. Publicly traded fuel cell and solar power companies include Avista Laboratories Inc., Ballard Power Systems, Fuel Cell Energy, Global Thermoelectric, H Power, Manhattan Scientifics, Medis Technologies, Millennium Cell, Plug Power, Proton Energy Systems, AstroPower, Evergreen Solar and FuelCell Energy. EMPLOYEES As of June 27, 2001, the Company employed 51 persons, of whom 33 were primarily engaged in manufacturing, 2 in research and development activities, 4 in customer service and support and 12 in sales, marketing and general administration services. None of the Company's employees are currently represented by a labor union. Elektryon considers its relations with its employees to be good. LITIGATION On March 9, 2001, Bill Eggar, Mike Lewis and E.L. Energy Connection, Inc. commenced an action against Elektryon and its former Chief Executive Officer, Philip Meisinger, in the District Court of Ector County, Texas alleging that defendants breached (i) an agreement to pay finder's fees to Messrs. Eggar and Lewis for introducing investors to Elektryon, and (ii) an agreement to buy out an alleged distribution agreement pursuant to which plaintiffs marketed Elektryon's products to prospective customers. Plaintiffs are seeking unspecified money damages, an accounting with respect to proceeds from the sale of shares of Common Stock, and specific performance of the alleged agreement to buy out the alleged distribution agreement for 35,000 shares of Common Stock. The Company believes the asserted claims are not material to its operations and will vigorously defend against the claims. 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. 10 13 On June 13, 2001, three stockholders of Elektryon, E. Craig Coats, Jr., Robert A. Doto and Jay F. Higgins, filed a complaint against Elektryon in Superior Court in Stamford, Connecticut alleging that Elektryon violated federal and state statutes requiring the registration of shares of common stock sold by Elektryon to the plaintiffs, and is liable for violating federal and state antifraud securities statutes and for negligent misrepresentation arising from (a) allegedly misleading statements made by representatives of the Company regarding (i) K-Mart's alleged expression of interest in purchasing POWR/MASTR units, and (ii) the performance, efficiency, reliability and emissions standards compliance of POWR/MASTR units installed in a K-Mart facility located in Linden, New Jersey, and (b) failing to disclose that (x) former directors and officers of Elektryon were selling shares of common stock owned by them back to Elektryon, which sales were funded by Elektryon's sales of shares of common stock to the plaintiffs and other investors, and (y) a former director of Elektryon had been convicted of securities fraud. The Company has moved to stay the Connecticut proceeding and compel arbitration of the asserted claims in Nevada. 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 $111,917.25 plus interests and costs. The Company and Dynalco are discussing the claims asserted in Dynalco's complaint. THE REORGANIZATION OVERVIEW Elektryon has adopted the Plan of Reorganization, subject to shareholder approval, pursuant to which Elektryon will transfer substantially all of its assets to Solo in exchange for cash, shares of Solo Common Stock and other consideration, as described more fully below. If that transaction closes, Elektryon will wind up its affairs and distribute its assets, including shares of Solo Common Stock, to the shareholders of Elektryon in proportion to their interest in Elektryon and in accordance with the terms of the Asset Acquisition Agreement, as more fully described below. Elektryon's Board of Directors also has approved seeking waivers and releases from shareholders who are "accredited investors" (as defined below) of certain identified potential securities laws claims such shareholders may have against Elektryon and any representative of the Company in connection with the sale of securities of the Company (the "Waiver Offer"). The Company believes that substantially all of its shareholders may have the right to assert such claims, and to seek rescission of their securities purchases or damages, including interest. Each shareholder who is an "accredited investor" and who paid the Company more than $11.00 per share of Common Stock in cash was offered additional shares of Common Stock in exchange for entering into a waiver and release agreement (the "Waiver and Release Agreement"), which shares are intended to result in an average cost of $11.00 per share to such holders. Such shareholders who paid the Company $11.00 or less per share of Common Stock or did not pay any cash for shares will be paid nominal consideration of $10.00 per holder, regardless of the number of shares held, for entering into a Waiver and Release Agreement. The Asset Acquisition Agreement provides that Solo's obligations under the Asset Acquisition Agreement 11 14 are conditioned on Elektryon's receipt of executed Waiver and Release Agreements from shareholders holding at least 60% of Elektryon's issued and outstanding Common Stock. As of June 26, 2001, such shareholders of Elektryon holding 4,888,105 or approximately 74% of Elektryon's issued and outstanding Common Stock had delivered executed Waiver and Release Agreements to Elektryon. As of June 26, 2001, Elektryon also had received Waiver and Release Agreements executed by non-accredited investors holding 582,864 or 9% 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. THE ASSET ACQUISITION AGREEMENT Pursuant to the Asset Acquisition Agreement, Solo will acquire substantially all of Elektryon's assets (the "Acquired Assets") in exchange for (a) $5 million in cash, subject to adjustment, (b) 51,878,788 shares of Solo Common Stock, (c) up to 36,363,636 additional shares of Solo Common Stock to the extent Elektryon achieves specified sales and other goals after the closing of the proposed transaction (the "Earn-Out Shares"), and (d) Solo's assumption of specified liabilities of Elektryon. In addition, Solo will grant options (collectively, the "Solo Options") to purchase 1,818,182 shares of Solo Common Stock to Michael Holmstrom, the President of Elektryon, with an exercise price of $0.33 per share, and 1,515,152 shares of Solo Common Stock to Joanne Firstenberg, the General Counsel of Elektryon, with an exercise price of $0.33 per share, which grants are intended to constitute substantially equivalent value to options held by Mr. Holmstrom and Ms. Firstenberg to purchase shares of Common Stock which will be terminated in connection with the Asset Acquisition. The Solo Options will be fully vested upon issuance, as are the options to purchase Common Stock currently held by Mr. Holmstrom and Ms. Firstenberg. The 51,878,788 shares of Solo Common Stock to be received by Elektryon (including shares to be deposited in an escrow account but not including any Earn-Out shares) together with the 3,333,334 shares of Solo Common Stock issuable upon exercise of options to be granted to executive officers of Elektryon upon consummation of the transaction will represent approximately 58% of the then outstanding shares of Solo Common Stock after giving effect (as adjusted by the treasury stock method) to (i) the exercise of all currently outstanding warrants of Solo to purchase shares of Solo convertible preferred stock at an exercise price of $1.65 or less per share (but excluding approximately 5,500,000 currently outstanding warrants with an exercise price of greater than $1.65), (ii) the conversion of all currently outstanding promissory notes convertible into shares of Solo convertible preferred stock (assuming conversion at $1.65 per share, although such conversion price could be lower under the terms of the promissory notes), (iii) the conversion of all currently outstanding Solo convertible preferred stock (including the shares of Solo convertible preferred stock referred to in clauses (i) and (ii)), and (iv) the exercise of all currently outstanding options of Solo to purchase shares of Solo Common Stock at $1.65 or less per share. The treasury share method assumes that approximately 93 million shares of Solo stock will be outstanding upon the exercise of Solo warrants and options with an exercise price of $1.65 or less per share, Solo will be paid the value of the aggregate exercise price of such securities, and will use such proceeds to repurchase approximately 9.5 million shares at an assumed market price of $1.65 per share. This percentage will be reduced by any future sales of securities by Solo, including sales of Solo's Series D Preferred Stock. Elektryon understands that Solo is currently seeking to raise approximately $30 million through the sale of a series of convertible preferred stock at a price equivalent to $1.65 per share of Solo Common Stock. On June 27, 2001, Solo advised Elektryon that while it continues to believe it will be able to raise $30 million, it believes any funds raised may be at a significantly lower valuation. There can be no assurance that any such sale will occur or what the aggregate dollar amount or per share price will be if a sale occurs. 12 15 Additional terms of the Asset Acquisition Agreement are summarized below, which summary is qualified in its entirety by reference to the terms of the Asset Acquisition Agreement, filed as Exhibit 2.1 to this Form 10, and the Letter Agreement, dated as of June 14, 2001, between Elektryon and Solo, filed as Exhibit 2.4 to this Form 10. As of June 27, 2001, Elektryon shareholders holding a majority of the Company's issued and outstanding Common Stock (including shares held by the Company's founding shareholders voted by the Company pursuant to voting agreements) had voted to approve the Reorganization, including the Asset Acquisition Agreement. THE REORGANIZATION THE EARN-OUT PROVISIONS. After the closing of the Asset Acquisition (the "Closing"), Solo will issue to Elektryon either an additional (i) 18,181,818 shares of Solo Common Stock if Elektryon achieves the First Performance Goal (as defined below), or (ii) 36,363,636 shares of Solo Common Stock if Elektryon achieves the Second Performance Goal (as defined below). The First Performance Goal will have been achieved if within 90 days of April 16, 2001 (the date the parties signed the Asset Acquisition Agreement), Elektryon or Solo has obtained from an unaffiliated buyer or buyers (A) a purchase commitment for at least 50 C-3 units for delivery by December 31, 2001, and (B) a letter of intent for the delivery of an additional 100 C-3 units in 2001 or 2002. The Second Performance Goal will have been achieved if within 90 days of April 16, 2001 (the date the parties signed the Asset Acquisition Agreement), Elektryon or Solo has obtained from an unaffiliated buyer or buyers (A) a purchase commitment for at least 100 C-3 units for delivery by December 31, 2001, and (B) a letter of intent for the delivery of an additional 200 C-3 units in 2001 or 2002, in each case including units counted toward the satisfaction of the First Performance Goal. However, purchase commitments of and sales to Wal-Mart on or before October 20, 2001 will be counted toward meeting the First Performance Goal and Second Performance Goal. Section 2.7 of the Asset Acquisition Agreement contains additional terms regarding the calculation of the earn-out consideration, including terms concerning the minimum sales price per unit and agreements for service of the units. CONDITIONS OF SOLO TO CLOSING. The obligations of Solo to consummate and effect the Asset Acquisition Agreement and the transactions contemplated thereby will be subject to the satisfaction at or prior to the closing date of the Asset Acquisition (the "Closing Date") of each of several conditions, any of which may be waived in writing by Solo, including that: - there shall have been no material adverse change in the financial condition or results of operations of Elektryon's business (the "Business") on the Closing Date as compared with April 16, 2001; - Solo shall have received audited financial statements of Elektryon for the fiscal years ended December 31, 2000, 1999 and 1998 with an opinion from Elektryon's accountants qualified only as to Elektryon's status as a going concern; 13 16 - Elektryon shall have made reasonable provision for the payment of all of its outstanding liabilities when due; - Solo shall have received a solvency opinion from Valuation Research Corporation, dated as of the Closing Date, with respect to the solvency of Elektryon; - the Commissioner of the California Department of Corporations shall have approved the fairness of the terms and conditions of the issuance of Solo Common Stock to Elektryon after a hearing held pursuant to Section 25142 of the California Corporations Code (the "Fairness Approval"); and - Elektryon's accredited investors representing at least 60% of the aggregate shares of Common Stock held by all Elektryon shareholders shall have executed Waiver and Release Agreements. The last two conditions have been satisfied. The Asset Acquisition Agreement contains additional conditions to Solo's obligations to close the Asset Acquisition. For a more complete description of such closing conditions see Article 10 of the Asset Acquisition Agreement. CONDITIONS OF ELEKTRYON TO CLOSING. The obligations of Elektryon to consummate and effect the Asset Acquisition Agreement and the transactions contemplated thereby will be subject to the satisfaction at or prior to the Closing Date of each of several conditions, any of which may be waived in writing by Elektryon, including that: - there shall have been no material adverse change in the financial condition or results of operations of Solo's business on the Closing Date as compared with April 16, 2000; - the Board of Directors of Solo shall consist of either (i) seven members, including two directors designated by Elektryon at Closing and agreed to by Solo, at, or shortly after, the Closing or, in the alternative (at Elektryon's option), (ii) nine members, including three directors designated by Elektryon at Closing and agreed to by Solo, at, or shortly after, the Closing; - each employee of Solo shall have signed a proprietary information and inventions agreement; - Solo shall have issued the Solo Options to Mr. Holmstrom and Ms. Firstenberg and all outstanding options exercisable for shares of Elektryon held by Mr. Holmstrom and Ms. Firstenberg as of the Closing Date shall have been terminated; and 14 17 - Solo shall have filed an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State in the form annexed to the Asset Acquisition Agreement. The Asset Acquisition Agreement contains additional conditions to Elektryon's obligations to close the Asset Acquisition. For a more complete description of such closing conditions, see Article 11 of the Asset Acquisition Agreement. REPRESENTATIONS AND WARRANTIES. The Asset Acquisition Agreement contains certain representations and warranties made by Solo and by Elektryon as of the date of the Asset Acquisition Agreement. Each party's representations and warranties are primarily concerned with certain aspects of such party's business including without limitation, its corporate organization, capital structure, obligations with respect to capital stock, authority and non-contravention, financial statements and financial condition, absence of certain changes and events, taxes, title to properties, absence of liens and encumbrances, intellectual property, compliance with laws, permits and restrictions, litigation, brokers' and finders' fees, interested party transactions, employee benefit plans, environmental matters, agreements, contracts, commitments, board approval and insurance coverage and claims. Such representations and warranties will survive the consummation of the transactions contemplated by the Asset Acquisition Agreement and continue until the earlier of (i) the one year anniversary of the Closing Date and (ii) the closing of Solo's initial public offering (the "Survival Termination Date"); provided that if any claims for indemnification have been asserted with respect to any such representations, warranties and covenants prior to the Survival Termination Date, the representations, warranties and covenants on which any such claims are based shall continue in effect until final resolution of such claims. For a more complete description of the representations and warranties made by each party to the Asset Acquisition Agreement, see Article 4 and Article 5 of the Asset Acquisition Agreement. INDEMNIFICATION OF SOLO FROM ESCROW FUND. As a condition to the Closing of the Asset Acquisition, Solo, Elektryon, and Chase Manhattan Bank and Trust Company (the "Escrow Agent") will enter into an Escrow Agreement providing for the escrow of 10,909,091 shares of Solo Common Stock (the "Escrow Shares") to be issued under the Asset Acquisition Agreement (the "Escrow Fund"). These shares will be held in escrow until the earlier of the twelve month anniversary of the Closing Date or the consummation of Solo's initial public offering (the "Escrow Period"); provided, however, that a portion of the Escrow Shares, which (as set forth in a certificate of Solo) is necessary to satisfy any unsatisfied claims specified in any officer's certificate delivered to the Escrow Agent prior to termination of the Escrow Period with respect to the facts and circumstances existing prior to the expiration of the Escrow Period, will remain in the Escrow Fund until such claims have been resolved. Pursuant to the terms of the Asset Acquisition Agreement and in connection with the Escrow Agreement, Elektryon will indemnify Solo from and against any and all losses, costs, damages, liabilities and expenses arising from claims, demands, actions, or causes of action arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Elektryon in the Asset Acquisition Agreement, or any exhibit or schedule to the Asset Acquisition Agreement. Any individual claim by Solo for indemnification must relate to an individual claim in excess of $50,000 and in an aggregate amount exceeding $150,000, and the total amount of damages to be indemnified by Elektryon will not exceed $7.5 million. Solo 15 18 shall similarly indemnify Elektryon from and against any and all losses, costs, damages, liabilities and expenses arising from claims, demands, actions, or causes of action arising out of any misrepresentation or breach of or default in connection with any of the representations, warranties, covenants and agreements given or made by Solo in the Asset Acquisition Agreement or any exhibit or schedule to the Asset Acquisition Agreement, subject to the same minimum of $50,000 and $150,000 and maximum of $7.5 million. In addition to the shares of Solo Common Stock held in the escrow, $1,000,000 of the cash payable by Solo to Elektryon under the Asset Acquisition Agreement will be held in an interest bearing escrow account and will be distributed to Elektryon within ten days following the approval by Solo of Elektryon's Closing Date balance sheet (which will set forth its inventories, accounts receivable and trade payables as of the Closing). Solo will be entitled to make claims against such escrowed cash to the extent the value of Elektryon's inventories and accounts receivable decrease between execution of the Asset Acquisition Agreement and the Closing, and to the extent Elektryon's trade payables exceed $3,000,000 at Closing. For a more complete description of the indemnification and escrow provisions applicable to the Acquisition, see Article 2 and Article 12 of the Asset Acquisition Agreement. ELEKTRYON'S CONDUCT PRIOR TO THE EFFECTIVE TIME. Elektryon has agreed that, until the earlier of the Closing or the termination of the Asset Acquisition Agreement, Elektryon will provide Solo with reasonable access to its representatives, personnel, the Elektryon assets to be assumed by Solo and to all existing books, records, tax returns, work papers and other documents and information relating to Elektryon and provide copies of all such documents to Solo. Elektryon has agreed that, during the pre-Closing period, it will conduct its business in the ordinary course and in substantially the same manner as previously conducted. Elektryon has further agreed to pay debts and obligations when due, and to preserve its business organization, keep available the services of its current officers and employees and maintain its relationships with all suppliers, customers, landlords, creditors, employees and other persons having business dealings with Elektryon. Elektryon has agreed that it (a) will not create, incur or assume (i) any borrowings under capital leases, or (ii) any obligation that would in any material way affect the Business, the Acquired Assets or Solo's ability to conduct the Business in substantially the same manner and condition as conducted by Elektryon on the date of this Agreement; (b) will not change in any material manner the compensation of, or agree to provide additional benefits to, or enter into any employment agreement with, any employee except in the normal course of business consistent with past practice; (c) will maintain insurance coverage in amounts adequate to cover the reasonably anticipated risks of the business conducted with the Acquired Assets; (d) will not acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the Business; (e) will not sell, dispose of or encumber any of the Acquired Assets or license any Acquired Assets to any person, other than the sale of C-1 units currently included in Elektryon's inventories but only if such units have been modified to become C-3 units meeting certain criteria set forth in the Asset Acquisition Agreement; provided, that any proceeds from such sale shall be immediately 16 19 applied to Elektryon's trade payables or included in the Acquired Assets to be transferred to Solo pursuant to this Agreement; (f) will not engage in any special promotion that promotes the sale of inventories with highly discounted terms; (g) will not enter into any agreements or commitments relating to the Business, including any agreement relating to the acquisition of additional inventories, except on commercially reasonable terms in the ordinary course of business of the Business; (h) will comply in all material respects with all laws and regulations applicable to the Business; (i) will not enter into any agreement with any third party for the distribution of any of the Acquired Assets; (j) will use reasonable efforts to assist Solo in employing after the Closing Date those employees to whom offers of employment are made by Solo, and will not (and will cause its affiliates not to) solicit such employees to remain in the employ of Elektryon or any of its affiliates after the Closing Date; (k) will not change or announce any change to the products or services sold by the Business except with Acquirer's written consent or at Solo's request; (l) will not materially violate or materially amend or change in any way adverse to Elektryon the terms of any of the Contracts; (m) will not assign, sell or otherwise convey to any third party, without obtaining Solo's prior written consent, any of its accounts receivable prior to the Closing Date; (n) will (i) recover any inventories or other assets related to Elektryon's agreement with CPC, including those located in Troy, Michigan; (ii) recover any inventories or other assets located in Midland, Texas; (iii) recover any inventories or other assets located in La Jolla, California; and (iv) deliver all of such inventories and assets to Elektryon's facilities in Odessa, Texas within 30 days of Closing. Elektryon has also agreed that it will not take any action to solicit or encourage the initiation of any inquiry, proposal or offer from another person relating to a possible Third Party Acquisition (as defined in Section 6.4 to the Asset Acquisition Agreement). Elektryon will promptly notify Solo in writing of any material inquiry, proposal or offer relating to a possible Third Party Acquisition. Elektryon will keep Solo fully informed of the status and details of any such inquiry, proposal or offer. If, however, the Elektryon Board by a majority vote determines in its good faith judgment, after consultation with counsel reasonably acceptable to Solo, that it is required to do so in order to comply with its fiduciary duties, the Elektryon Board may withdraw its recommendation of the transactions contemplated by the Asset Acquisition Agreement or approve or recommend a Superior Proposal (as defined below in Section 6.4 of the Asset Acquisition Agreement). In addition, Elektryon has agreed that following the Closing, it will not distribute any shares of Solo Common Stock to its shareholders until the earlier of (A) the consummation of Solo's initial public offering or (B) the date two years following the Closing Date; provided that if, in the reasonable opinion of Solo, the Fairness Approval provides an adequate exemption from registration of such shares under federal and state securities laws, Elektryon may transfer such shares to its shareholders on the day immediately preceding the last date on which such distribution would be exempt from registration under the Securities Act on the basis of the Fairness Approval. In the event that the Fairness Approval does not provide such exemption, Solo shall register the distribution of such shares to Elektryon's shareholders. Elektryon has also agreed in connection with an initial public offering of Solo Common Stock, Elektryon's founders, directors, officers and shareholders holding a percentage of shares of Solo Common Stock specified by Solo's managing underwriter will not transfer shares of Solo Common Stock without Solo's consent during the period beginning on the date of the final prospectus of such 17 20 offering and ending on a date specified by Solo (provided that such period will not exceed the lesser of (A) the lock-up applicable to Solo's directors, officers and affiliates, and (B) 180 days). RIGHT OF FIRST OFFER TO ELEKTRYON. Solo has agreed to grant to Elektryon and its Accredited Investor shareholders a right of first offer with respect to the sale by Solo of shares of its preferred stock in its next equity financing. Upon written notification by Solo, Elektryon or any of its Accredited Investor shareholders may elect to purchase at the price and on the terms specified in such notice up to that portion of such preferred stock offering that equals the proportion that the number of shares of Solo Common Stock issued and held by Elektryon bears to the total number of shares of Solo Common Stock then outstanding. These first offer rights are subject to adjustments and exemptions set forth in Section 8.6 of the Asset Acquisition Agreement. TERMINATION. The Asset Acquisition Agreement can be terminated for certain reasons including: (i) by mutual written consent of Solo and Elektryon; (ii) by Solo or Elektryon if any governmental entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Asset Acquisition Agreement; (iii) by Elektryon if the Elektryon Board has received a Superior Proposal and has complied with the provisions of Section 6.4(b) of the Asset Acquisition Agreement regarding other bids for the assets or stock of Elektryon; (iv) by Solo if (A) Elektryon shall have breached any of its covenants or agreements under Section 6.4(b) of the Asset Acquisition Agreement or (B) if the Elektryon Board shall have recommended to Elektryon's shareholders a Superior Proposal; or (v) by either party if the Closing does not occur by July 30, 2001, other than due to a breach of the Asset Acquisition Agreement by the party seeking to terminate. Elektryon will pay Solo $500,000 if the Asset Acquisition Agreement is terminated by Solo because Elektryon has breached any of its covenants or agreements under Section 6.4(b) of the Asset Acquisition Agreement or by either party because Elektryon's Board of Directors has received a Superior Proposal. BOARD RIGHTS. The Board of Directors of Solo shall consist of either (i) seven members, including two directors designated by Elektryon at the Closing and agreed to by Solo, or (ii) in the alternative at Elektryon's option, nine members, including three directors designated by Elektryon at the Closing and agreed to by Solo. Following the Closing, Solo's Amended and Restated Certificate of Incorporation shall provide that in the event there are seven board members, a majority of each of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred holders will be entitled to designate one board member to represent each respective Series of Preferred Stock, a majority of the holders of Solo's Common Stock will be entitled to designate two board members, and a majority of the holders of Solo's Preferred Stock and Common Stock, voting together, shall be entitled to designate one board member. Alternatively, in the event there are nine board members, a majority of each of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred holders will be entitled to designate one board member to represent each respective Series of Preferred Stock, a majority of the holders of Solo's Common Stock will be entitled to designate three board members, and a majority of the holders of Solo's Preferred Stock and Common Stock, voting together, shall be entitled to designate two board members. 18 21 THE WAIVER AND RELEASE SOLICITATION A condition to Solo's obligations under the Asset Acquisition Agreement is that Elektryon obtain waivers of specified securities claims shareholders may have against Elektryon and any representative of the Company from its accredited investor shareholders holding at least 60% of the issued and outstanding shares of Elektryon Common Stock. As of June 26, 2001, such holders of approximately 4,888,105 shares of Common Stock (or 74% of the outstanding Common Stock) had granted such waivers and releases. In addition, the Company received Waiver and Release Agreements executed by non-accredited investors holding 582,864 or 9% 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. An "accredited investor" is an investor who meets the definition of such term set forth in Rule 501 of Regulation D promulgated under the Securities Act. In consideration for entering into a Waiver and Release Agreement, Elektryon issued an additional fraction of a share of Common Stock with respect to each share of Common Stock purchased by a shareholder from the Company at a price in excess of $11.00 per share in cash, as set forth in the following table. The issuance of the additional shares of Common Stock will have the effect of reducing the participating shareholder's average purchase price per share to approximately $11.00. The total number of shares of Common Stock that each such shareholder received was rounded down to the nearest number of whole shares.
Purchase Price Paid Per Share of Additional Number of Shares of Common Stock Common Stock to be Distributed Per Share of Common Stock Purchased $14.71 0.33727 $14.99 0.36273 $15.00 0.36364 $15.02 0.36545 $16.00 0.45455 $17.14 0.55818 $17.99 0.63545 $20.00 0.81818
Shareholders who purchased shares from the Company for $11.00 per share or less or did not pay any cash for shares and who 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 claims against Elektryon and its representatives in connection with their purchase of Common Stock from the Company based upon the following: - any violation or alleged violation of any applicable securities law registration requirement; 19 22 - any statement or omission relating to whether a public offering of Elektryon Common Stock will occur, when it will occur, what the Company's valuation will be in the public offering, or at what price shares of Common Stock will trade if there is a public offering; - any statement or omission as to what the Company's valuation was, is or will be if it does not complete a public offering, or at what price shares of Common Stock might be sold if the Company does not complete a public offering; - any statement or omission as to whether there will be a split of the shares of the Common Stock or what the value per share of Common Stock will be after a split; - any statement or omission relating to the amount of the backlog, if any, of orders for the Company's products or proposed products; - any statement or omission regarding whether indications of interest by prospective customers were "near orders;" - any statement or omission as to the development status of the Company's products or proposed products and the technology related thereto; - any statement or omission regarding the prospective operating life of the Company's products or proposed products, the need or absence of need for maintenance, maintenance intervals and whether the Company will provide any warranty of performance; - any statement or omission regarding the Company's products installed at Kmart stores and other locations operating properly when, in fact, the units were not operating properly and were maintained on a continuing basis by technicians at a high cost to the Company; - any statement or omission regarding whether Kmart, Wal-Mart or any other potential customer was close to signing a purchase order for the Company's products or proposed products; - any statement or omission regarding problems with the technology employed in the Company's products or proposed products, such as the premature failure of pistons; - any statement or omission regarding problems encountered in a test by General Electric of the Company's products; - any statement or omission regarding Apache Oil Company's rejection of the Company's products and a subsequent agreement between the Company and Apache to pay Apache for electricity; 20 23 - any statement or omission regarding potential customer dissatisfaction with the Company's products because of noisy operation; - any statement or omission relating to the availability to the Company of investment funds, although the Company had not received such funds and that financing transactions had not been completed; - any statement or omission relating to the alleged interest of Goldman Sachs and Credit Suisse First Boston in the Company and its products or proposed products; - any statement or omission regarding whether or when the Company's products or proposed products were or would be commercially viable; - any statement or omission regarding the absence of government permits needed so that the Company's products could be installed quickly; - any statement or omission regarding the low level of installation and service capacity available to prospective customers from the Company's personnel; - any statement or omission regarding the sales by the founders or other representatives of the Company of shares of Common Stock to the Company in exchange for the cash proceeds of sales of stock by the Company to third party investors; and - any statement or omission inconsistent with the Form 10 as initially filed with the Securities and Exchange Commission on April 30, 2001. FEDERAL INCOME TAX CONSEQUENCES TO ELEKTRYON AND THE ELEKTRYON SHAREHOLDERS The following discussion is a summary of the material United States federal income tax consequences to Elektryon and to a holder of Elektryon Common Stock of the Asset Acquisition and the subsequent distributions of Solo Common Stock and Elektryon's other remaining assets to Elektryon's shareholders (the "Liquidation"). The discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, administrative rulings and pronouncements, and judicial decisions as of the date hereof, all of which are subject to change (possibly with retroactive effect). This discussion does not address all aspects of federal taxation that may be relevant to particular Elektryon shareholders in light of their personal investment circumstances or to Elektryon shareholders subject to special treatment under the Code (including insurance companies, tax-exempt organizations, financial institutions, dealers, regulated investment companies, shareholders who received their shares through the exercise of employee stock options or otherwise as compensation, foreign corporations and persons who are not citizens or residents of the United States and shareholders who hold their shares as part of a straddle, hedge or conversion transaction) who may be subject to tax rules that differ significantly from those described below. In addition, this discussion does not include a discussion of any state, local or foreign tax consequences. 21 24 EACH ELEKTRYON SHAREHOLDER IS URGED TO CONSULT THAT SHAREHOLDER'S TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THAT SHAREHOLDER OF THE ASSET ACQUISITION AND THE LIQUIDATION, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND OF CHANGES IN APPLICABLE TAX LAWS. Elektryon believes, although the matter is not free from doubt, that for federal income tax purposes the Asset Acquisition and Liquidation should qualify as a reorganization within the meaning of Code section 368(a). This belief of the Company is not binding on the Internal Revenue Service (the "Service") and no assurance can be given that the Service will not challenge the tax treatment of the Asset Acquisition and the Liquidation and that such challenge will not be upheld by the courts. TAXATION OF ELEKTRYON SHAREHOLDERS. Assuming that the Asset Acquisition and the Liquidation qualify as a reorganization under Code section 368(a), an Elektryon shareholder will not recognize gain or loss upon the distribution by Elektryon of Solo Common Stock to that shareholder. The shareholder will recognize gain (but not loss) with respect to any property other than Solo Common Stock (including cash) distributed to such shareholder, in an amount, with respect to each block of Elektryon Common Stock held by the shareholder, equal to the lesser of (i) the excess, if any, of (A) the value of the property (including Solo Common Stock, cash and promissory notes) distributed to such shareholder with respect to that block of Elektryon Common Stock over (B) the shareholder's tax basis in that block of Elektryon Common Stock, and (ii) the value of the property other than Solo Common Stock distributed by Elektryon to such shareholder with respect to that block of Elektryon Common Stock. Any such gain recognized by an Elektryon shareholder that held the Elektryon stock as a capital asset should be capital gain, which would be long-term or short-term depending on the Elektryon shareholder's holding period in the respective block of Elektryon Common Stock. The shareholder's tax basis in the Solo Common Stock will equal the shareholder's basis in the Elektryon Common Stock, increased by the amount of any gain recognized by the shareholder, and decreased by the amount of property other than Solo Common Stock distributed to such shareholder with respect to that shareholder's Elektryon Common Stock. The shareholder's holding period in the Solo Common Stock will include the shareholder's holding period in the Elektryon Common Stock. Pursuant to the Plan of Reorganization, five days prior to the first anniversary of the closing of the Asset Acquisition, Elektryon may transfer to one or more trusts that qualify as liquidating trusts under Treasury Regulation section 301.7701(d) all of its property that it is not feasible for Elektryon to distribute to its shareholders. Such a transfer will be deemed to be a distribution to the shareholders of Elektryon with the result that each shareholder will recognize gain (but not loss) upon such transfer as set forth above with respect to distributions of property other than Solo Common Stock. If the Asset Acquisition and the Liquidation were determined not to constitute a Code section 368(a) reorganization, an Elektryon shareholder would recognize gain or loss in an amount equal to the difference between (i) the value of the property (including Solo Common Stock, cash and promissory notes) distributed to such shareholder with respect to that shareholder's Elektryon Common Stock and (ii) the shareholder's tax basis in his or her Elektryon Common Stock. Such gain would be capital gain if the Elektryon Common Stock was 22 25 held as a capital asset, and would be long-term or short term depending on the shareholder's holding period in the Elektryon Common Stock. In that case, the shareholder's tax basis in the Solo Common Stock would be equal to the value of that stock at the time of transfer to such shareholder. The shareholder could also be liable, as a transferee, for a portion of Elektryon's tax liability arising out of the Asset Acquisition and Liquidation, which is discussed below. TAXATION OF ELEKTRYON. Assuming that the Asset Acquisition and the Liquidation qualify as a Code section 368(a) reorganization, Elektryon will not recognize gain or loss with respect to the receipt from Solo of the Solo Common Stock or the distribution of that stock to Elektryon's shareholders. Elektryon will recognize gain (i.e., the excess of (i) the value of the total consideration received from Solo, including the Solo Common Stock and the assumption of liabilities, over (ii) Elektryon's tax basis in the assets transferred to Solo) to the extent of the amount of cash Elektryon receives from Solo is not distributed to its shareholders (this gain may be offset by any deductions Elektryon obtains with respect to expenditures of that cash). If the Asset Acquisition and the Liquidation were determined not to constitute a Code section 368(a) reorganization, Elektryon would recognize gain in an amount equal to the entire excess of (i) the value of the consideration received from Solo (including the Solo Common Stock) over (ii) Elektryon's tax basis in the transferred assets. Elektryon would also recognize gain or loss upon the distribution of the Solo Common Stock to Elektryon's shareholders, in an amount equal to the difference between the value of that stock when received by Elektryon and its value at the time of distribution to its shareholders. An Elektryon shareholder could be liable for any Elektryon tax not paid by the corporation, to the extent of the value of the property (including Solo Common Stock) distributed to that shareholder. SOLO ENERGY CORPORATION'S BUSINESS The following information regarding Solo has been taken from Solo's Private Placement Memorandum, dated May 4, 2001, in connection with its Series D Convertible Preferred Stock offering. Solo is in the business of developing cost-effective, highly reliable and environmentally-friendly on-site distributed power generation to commercial customers. Its strategy entails delivering grid-independent electricity using its patented Wireless Energy microturbine products, in conjunction with various third-party equipment, at an all-inclusive cost that is competitive with grid-supplied electricity. It plans to be able to deliver energy to customers who want to outsource their power generation, as well as sell products to customers who prefer to self-manage their energy needs. Solo's Wireless Energy energy services business will offer turnkey design, installation and operation of on-site distributed power generation, utilizing a combination of its proprietary Wireless Energy distributed generation systems and various third-party products. Its strategy is to deliver cost-effective and reliable electricity under fixed-term and fixed-price contracts. In many cases, it expects its energy services will be competitively priced relative to customers' 23 26 current energy costs while providing more reliable power and reducing their exposure to volatile energy prices. By leveraging the remote monitoring and control capabilities of its products, Solo wishes to be able to help customers intelligently manage their energy needs. Solo has established key strategic alliances with Enron North America ("Enron"), a subsidiary of Enron Corporation, and SCANA Resources ("SCANA"), a subsidiary of SCANA Corporation, and anticipates working with these partners to help it manage its business and accelerate its growth. Solo expects its partners will help it procure long term fuel contracts to hedge its exposure to volatile natural gas prices, as well as help implement its commercial test program and serve as distribution partners in selected areas. Furthermore, Enron and SCANA have each previously purchased shares of Solo's Preferred Stock and, together, own 22.9% of Solo on a fully-diluted basis. Solo's headquarters are located in Alameda, California. As of March 31, 2001 it had 38 employees, of whom 26 were in research and development, nine were in general and administrative, and three were in sales and marketing functions. In addition, as of the same date, Solo had three full-time consultants associated with research and development and one part-time employee associated with general and administrative functions. RISK FACTORS RELATING TO ELEKTRYON AND ITS BUSINESS Following are certain risk factors relating to an investment in Elektryon. Elektryon believes that these risk factors with respect to Elektryon's business and the lack of a market for its Common Stock also may apply to Solo's business because both companies are early stage companies in the on-site power generation business. POTENTIAL RESCISSION LIABILITY The Waiver Offer was made to all "accredited investors" (as defined in Rule 501 under the Securities Act) (the "offerees") who purchased shares of Common Stock from the Company ("Subject Securities"). See "-- THE REORGANIZATION -- THE WAIVER AND RELEASE SOLICITATION." If all of the offerees holding the Subject Securities accept the Waiver Offer, the Company estimates that it will be required to make nominal cash payments and issue fewer than two million shares of Common Stock. 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 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 $60 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 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. 24 27 There can be no assurance that claims asserting violations of state or federal securities laws will not be asserted notwithstanding the Waiver Offer. Furthermore, there can be no assurance that the Company will not be subject to penalties or fines relating to past securities issuances or that the offerees or other holders of the Common Stock will not assert and prevail in claims against the Company for rescission or damages under federal or state securities laws. Even if the Company were successful in defending any securities law claims, the assertion of such claims against the Company would result in costly litigation and significant diversions of effort by the Company's management. In addition, the Waiver Offer will not prevent the Securities and Exchange Commission (the "Commission") or any state securities commission from pursuing enforcement action against the Company with respect to any alleged violations of federal or state securities laws. The occurrence of any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. ELEKTRYON MAY NOT BE ABLE TO FUND FUTURE OPERATING REQUIREMENTS The Company expects that it will require significant capital in the future to fund the continued development of its business and for working capital purposes. Such capital may not be available on terms satisfactory to the Company, if at all. The Company's capital and credit requirements will depend on numerous factors, including the pace and success of customer acquisition and associated increase in sales and production, the growth of its revenues, if any, and the rate of such growth. Elektryon believes it currently has sufficient capital to meet its cash flow requirements over the next two months. As a result, the Company will need to raise additional capital in the near future. The timing of the need for additional capital will also be affected by the extent to which holders of Common Stock assert or prevail in claims against the Company for rescission or other damages. If the Company's cash flow from operations is not sufficient to provide funds for working capital, capital expenditures and the potential rescission liability and if equity or debt or other financing is not available, the Company expects that it may experience insufficient liquidity. If adequate funds are not available on acceptable terms, the Company may have to delay or limit any further expansion of its business. Any inability to fund the Company's future capital requirements could have a material adverse effect on its business, financial condition and operating results. As of May 31, 2001, Elektryon had approximately $ million in unrestricted cash and cash equivalents. Elektryon believes it has insufficient cash to fund future operations beyond July, 2001. If adequate capital is not made available to Elektryon, it would likely be required to significantly curtail or possibly even cease its operations. Should the Asset Acquisition not close for any reason, Elektryon would immediately reduce the scope of its operations and sell inventory to raise funds to pay creditors and other obligations while seeking additional financing. DIFFICULTY IN EVALUATING ELEKTRYON'S BUSINESS AND PROSPECTS DUE TO ITS LIMITED COMMERCIAL OPERATING HISTORY The Company has a limited operating history and limited historical information. Accordingly, there is only a limited basis upon which one can evaluate Elektryon's business and prospects. Given the Company's limited operating history, there can be no assurance that it will be able to generate sufficient cash flow to achieve its objectives and sustain its business. The Company is unable to predict with certainty how customer demand for the POWR/MASTR(TM) may develop over time. The Company's likelihood of success must be 25 28 considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the development of new technology, and the competitive and regulatory environment in which the Company operates. The Company has made no material sales to date and has generated cumulative losses of approximately $26.4 million from inception in 1994 through December 31, 2000. Investors must consider Elektryon's prospects in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly technology-based companies operating in unproven markets with unproven services and products. These risks include: - its ability to respond to developments from its competitors, - its ability to attract, assimilate, retain and motivate qualified personnel, - its ability to establish effective distribution channels, - its ability to effectively manage any growth that it may achieve, - its ability to continue to upgrade its technologies, and - its ability to successfully commercialize services and products incorporating its technologies. Elektryon cannot assure investors that it will be successful in addressing these risks. INABILITY TO EFFECTIVELY MANAGE GROWTH If the Company is successful in executing its business plan, the Company will experience growth in its business that could place a significant strain on its management and other resources. The Company's failure to manage its growth effectively could have a material adverse effect on its business, financial condition and operating results. LIMITED PRODUCT OFFERING The Company has only one available product that has any operating history at customer test sites, the C-3 POWR/MASTR(TM). To generate revenue, the Company must commercially introduce to the market the C-3 unit and other products the Company is developing in a timely manner. Even if the Company is able to commercially introduce products, they may not achieve market acceptance. This would substantially impair the Company's revenue prospects and could have a material adverse effect on its business, financial condition and operating results. INABILITY TO GENERATE MARKET DEMAND The Company's product is new and it does not know whether its targeted customers will accept its technology or will purchase its product in sufficient quantities to grow its business. If a mass market fails to develop for onsite energy generation or develops more slowly than the 26 29 Company anticipates, it may be unable to recover the losses it has incurred to develop its product, it may be unable to meet its operational expenses and the Company may be unable to achieve profitability. The development of a mass market for its product is highly uncertain and may be impacted by many factors which are out of the Company's control, including: - the cost competitiveness of the POWR/MASTR(TM), - the future costs and availability of fuels used by the POWR/MASTR(TM), - Elektryon's ability to properly price its services and products to generate the greatest revenue opportunities, - consumer reluctance to try new services or products or to pay for Elektryon's services and products, - consumer perceptions of the reliability and safety of the POWR/MASTR(TM), - regulatory requirements, and - the emergence of newer, more competitive technologies and products. HISTORY OF OPERATING LOSSES To date, Elektryon has not generated operating revenues, has never been profitable, has incurred losses, and has experienced negative cash flow from operations. Elektryon had net losses of approximately $3 million in 1998, approximately $7.5 million in 1999 and approximately $14.8 million in 2000. Its accumulated deficit was approximately $26.8 million at December 31, 2000. In the past Elektryon has relied upon capital financing to sustain its operations. It may not be able to continue as a going concern if it is unable to become profitable or obtain equity financing in the future. It expects to incur substantial additional costs to: - further develop and enhance its technology, - conduct testing to commercialize its products, - establish sales and distribution channels, and - develop and commercialize new products to supplement and replace its current products. Elektryon expects to incur a loss in 2001 and it may operate at a loss for the foreseeable future. These losses will impact its consolidated financial results. Elektryon may not be able to achieve profitability or, if achieved, sustain such profitability. RISKS RELATED TO THE COST OF ELECTRICITY AND ACCEPTANCE OF ELEKTRYON'S PRODUCT Elektryon intends to target geographic markets in which the price of electricity from the grid is currently higher than the cost of installing and operating its products. It believes these markets initially will include California, the Northeast, mid-Atlantic (particularly the greater 27 30 New York City region) and upper-Midwest (particularly in and around Chicago). Pricing in these and other markets will depend on several factors that are beyond Elektryon's control, including, but not limited to, local grid cost and local delivery costs. In addition, certain markets currently impose standing charges or have other pricing policies that discriminate against distributed generation. In the event costs in these markets fluctuate and Elektryon's products cannot produce electricity at a cost lower than the prevailing market price, it's margins will be reduced and demand for its services and products could decrease. Elektryon can give no assurances that demand for its products will develop or that if it does develop, that it will not diminish over time. Accordingly, its ability to expand its business operations may be limited. WARRANTY RISK Incorporated into the proposed unit price for the POWR/MASTR(TM) is a $10,000 maintenance fee designed to cover all maintenance and service costs for the unit over its life, which is estimated to be a minimum of two years. Because the Company has had no material sales, it has not recorded a warranty reserve charge. While the Company believes that the $10,000 maintenance fee is adequate, it may not be sufficient to cover its warranty expenses in the future. Although the Company will attempt to reduce its risk of warranty claims through warranty disclaimers, the Company cannot assure you that its efforts will effectively limit its liability. Any significant incurrence of warranty expense could have a material adverse effect on its financial condition and operating results. Malfunctions of Elektryon's products could expose it to significant warranty expenses. Because it is in the early stages of production and durability testing to confirm the appropriate periods for warranty terms, Elektryon cannot be certain that it will be able to adequately determine its warranty exposure prior to commencing sales. Moreover, as Elektryon develops and introduces new reciprocating engine products and as customers place existing configurations in commercial use for long periods of continuous use, it may experience product malfunctions that cause its products to fall below acceptable reliability levels. RISKS RELATED TO THE MAINTENANCE AND RELIABILITY OF ELEKTRYON'S PRODUCT Testing of Elektryon's POWR/MASTR(TM) units to date indicates that the units will require ongoing maintenance as well as periodic remanufacturing or replacement of key parts in order to ensure long-term reliability. In addition, while the Company intends to determine and preserve appropriate amounts to cover such costs, Elektryon can provide no assurances that the costs of maintenance of its product will not exceed Elektryon's projections. RISKS RELATED TO UNDETECTED DEFECTS IN ELEKTRYON'S PRODUCT Elektryon's product may contain undetected defects when first introduced. Its product is complex and problems may be found from time to time in its existing, new or enhanced products. Elektryon's product also incorporates components manufactured by third-parties that may have undetected defects. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause Elektryon to incur significant repair and warranty costs, divert the attention of its engineering personnel from its product development efforts, lend to delays or interruptions in the provision of services, and cause significant customer relations 28 31 problems. Due to its limited operating history and the fact that its technology is new and rapidly evolving, Elektryon may not be able to accurately predict the failure rate of its products and the number of claims that may be made against it for warranties. DEPENDENCE ON HIRING AND RETAINING KEY PERSONNEL The Company's success depends to a significant degree upon the skills of its key employees, including Michael Holmstrom, its President, Joanne Firstenberg, its General Counsel, and Brian Mewhort, its Vice President of Operations, and its ability to identify, hire, and retain additional sales, marketing, and financial personnel. The Company may be unsuccessful in retaining its existing key personnel or in attracting and retaining additional key personnel. The loss of services of key personnel, or the inability to attract, hire and retain additional qualified personnel could have a material adverse effect upon its business and operating results. The Company may not be able to hire and retain the technical personnel necessary to continue its product development and production expansion, which could cause delays in its business plan. The Company has historically experienced, and expects to continue to experience, delays in filling technical positions. In addition, it is vital that the Company secures support personnel, either internally or externally, to handle all service and maintenance associated with the POWR/MASTR(TM). It cannot be assured that as the Company grows the Company will be able to adequately supply such services. Competition is intense for qualified technical personnel, and in particular skilled engineers. SALES AND DISTRIBUTION RISK Due to its limited commercial operating history in selling the POWR/MASTR(TM), Elektryon has limited experience in the sales, marketing and distribution of its product. The Company needs to develop a professional sales and marketing staff in order to market its product and implement its business plan. The expense of such internal expansion will be significant and may exceed the net revenues generated through such efforts. The Company's sales and marketing team may not be able to successfully compete against the more extensive and well-funded sales and marketing operations of its current and future competitors. The Company's inability to recruit, or its loss of, important sales and marketing personnel, or the inability of new sales personnel to effectively sell and market its POWR/MASTR(TM) product could have a material adverse effect on its business and operating results. The Company is in the early stages of developing its distribution network. In order to develop its customer base, the Company believes that it must enter into strategic marketing alliances or similar collaborative relationships, in which the Company allies itself with companies that have customers who require on-site energy resources. Providing consulting fees, volume discounts and other allowances may reduce the potential return from these relationships. The Company may not be able to identify appropriate distributors on a timely basis, and the distributors with whom it partners may not focus adequate resources on selling its product or may be unsuccessful in selling it. In addition, the Company may be unable to negotiate collaborative relationships on favorable terms, or at all. The lack of success of its collaborators in marketing its product may adversely affect its financial condition and operating results. 29 32 DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS Although the Company generally attempts to use standard parts and components for its product, certain components are currently available only from a single source or from limited sources. The Company depends on GM to supply the base engine block that is significantly modified to assemble the POWR/MASTR(TM). Production of that GM engine has been discontinued. As a result, the POWR/MASTR(TM) will eventually require some design modifications to function with an alternative engine. However, the Company currently has more than 500 of these units in its inventory, which is expected to meet its projected production needs until such time as it has completed design modifications. The Company currently purchases all of its software and controls, which are related to its remote monitoring and control capabilities, from Encorp and depends on Newage Stamford Inc. to supply generators and Cutler Hammer to supply an automatic paralleling switch unit. World Products, Inc. is the sole supplier of cylinder heads to the Company. With these suppliers as the Company's sole providers of these crucial POWR/MASTR(TM) components, its access to these components could be interrupted or terminated. The Company may not be able to procure these products from another supplier or be able to manufacture these products on a timely basis and delays or failure to identify alternate vendors, or a reduction or interruption in supply or a significant increase in the manufacturing costs could materially adversely affect its business and operating results. At present Elektryon has not entered into formal contracts with any of its critical suppliers. Elektryon cannot assure investors that its suppliers will be able to furnish sufficient units to meet its demands, that Elektryon will be able to purchase these components from these suppliers at commercially acceptable prices or that these suppliers will continue making the components Elektryon requires. Nor can Elektryon assure investors that it would be able to procure alternative supplies or manufacture them itself on a timely basis and at commercially acceptable prices, should that become necessary. In addition, to be financially successful, its products must be manufactured in commercial quantities and at acceptable costs while also preserving the quality levels achieved in manufacturing these products in more limited quantities. This presents a number of technological and engineering challenges for the Company. Elektryon cannot assure investors that its third-party suppliers will be successful in meeting its demands for expansion of production of its products that will enable it to meet the quality, price, engineering, design and product standards or production volumes required to successfully manufacture economically viable quantities of its products. Even if Elektryon's third-party suppliers are able to manufacture and assemble in economically viable quantities, Elektryon does not know whether they will do so in time to meet its energy services or products commercialization schedule or satisfy the requirements of its customers. RAPID TECHNOLOGICAL CHANGE The market for the Company's C-3 POWR/MASTR(TM) and other products under development is characterized by rapidly changing technologies, extensive research and new product introductions. The Company believes that its future success will depend in large part upon the Company's ability to continue to enhance its existing product and to develop, introduce and market new products. As a result, the Company expects to continue to make a significant 30 33 investment in product development. The Company may be unable to develop and introduce new products or enhancements to its existing product in a timely manner that would satisfy customer needs, achieve market acceptance or address technological changes in target markets. In addition, new products or enhancements may contain undetected deficiencies or performance problems that, despite testing, are discovered only after commercial installation. Products or technologies developed by others may adversely affect the Company's competitive position or render its products or technologies noncompetitive or obsolete. The Company's failure to develop products and introduce them successfully and in a timely manner could adversely affect its competitive position, financial condition and operating results. INABILITY TO DECREASE PRODUCTION COSTS The Company believes that it will need to reduce the unit production cost of the POWR/MASTR(TM) over time to offer competitively priced products. The Company's ability to achieve cost reductions will depend on low cost design enhancements, obtaining necessary tooling and favorable vendor contracts, as well as increasing sales volumes so the Company can achieve economies of scale. The Company may be unable to achieve any production cost reductions. RISKS RELATING TO DEVELOPING NEW PRODUCTS The timely and successful launch of Elektryon's next-generation products is important to its strategy for further penetrating markets. Factors that could delay or hinder successful launches of its products include: - research and development problems; - difficulties in adjusting prior production assembly systems to produce and assemble the units; and - an unstable supply or unsatisfactory quality of components. Moreover, Elektryon cannot guarantee that demand for its future units will exist and not diminish or cease at the time it is prepared to commercially produce them. It is also possible that production of future products could replace or diminish the market for its preexisting products that Elektryon may then have in its inventory. LENGTHY SALES CYCLE The sale of the POWR/MASTR(TM) will involve a lengthy sales cycle and the Company may not anticipate sales levels appropriately, which could impair profitability. The sale of the POWR/MASTR(TM) will involve a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. The Company targets, in part, customers in the utility industry, which generally commit to a larger number of products when ordering and which have a lengthy process for approving capital expenditures. For these and other reasons, the sales cycle associated with the POWR/MASTR(TM) will be lengthy and subject to a number of significant risks over which the Company has little or no control. The Company expects to plan its production and inventory levels based on internal forecasts of 31 34 customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, the Company's financial condition and operating results could suffer. In addition, the Company's operating expenses are based on anticipated sales levels, and a high percentage of its expenses are generally fixed in the short term. As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary from period to period. The Company expects that its products under development, if they ever become commercially available, will have similar lengthy sales cycles. POTENTIAL SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS As a result of Elektryon's limited operating history and the recent emergence of the peaking on-site distributed generation markets it is targeting, it has neither internal nor industry-based historical financial data for any significant period of time upon which it can project revenues or future operating expenses. Elektryon expects that in the future its results of operations will fluctuate significantly from quarter to quarter as a result of a variety of factors, including: - its ability to obtain sufficient supplies of sole or limited-source components for its products, - the ability of both its internal operations and third-party suppliers and assemblers to manufacture and assemble its products in a timely and cost-effective manner that meets its customers' requirements, - industry acceptance of its distributed generation energy products, - size of back-up fees charged by utilities, - regulations promulgated by local, state or federal agencies, - the size, timing, terms and fluctuations of customer orders, particularly large orders from a limited number of customers, - the gain or loss of significant customers, - the availability of natural gas, - the introduction and acceptance of new, enhanced or alternative products or services by it or its competitors, - quality problems with its products, - its ability to anticipate and adapt effectively to a developing market and rapidly changing technologies, industry standards, customer or end user preferences, - changes in its business strategy or development plans, - liability and other claims asserted against it, 32 35 - economic changes impacting market sectors that require distributed generation energy services and products, - general economic conditions, - economic conditions specific to technology and the distributed generation industry. - changes in market prices for natural resources that could lower the desirability of POWR/MASTRs(TM), - its expected reliance on a small number of customers, - customers delaying orders of POWR/MASTRs(TM) because of the anticipated release of new products, - changes in its operating expenses or product pricing, - the ability of its suppliers to deliver quality parts when needed, - development of its direct and indirect sales channels, and - loss of key personnel. The Company expects its order flow to be uneven from period to period because it is in the early stages of its marketing plan. A small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter because a significant portion of its expenses are fixed. DEPENDENCE ON CERTAIN CUSTOMERS The Company's initial intent is to focus on marketing directly to a small number of large companies with alternative power source needs. If the Company is successful in this strategy, the loss of any one customer could have a material adverse effect on its operating results. In addition, if the Company does not perform satisfactorily for a customer, that customer could further harm its future business if the customer communicates its dissatisfaction or does not recommend its services to other potential or existing customers. POTENTIAL LITIGATION; PRODUCT LIABILITY RISKS Potential intellectual property, shareholder or other litigation may adversely impact the Company's business. Because of the nature of the Company's business, the Company may face litigation relating to intellectual property matters, labor matters and product liability disputes. Any litigation could be costly, divert management attention or result in increased costs of doing business. Potential rescission liability and related litigation is discussed earlier under the caption "Potential Rescission Liability." 33 36 Potential customers will rely upon Elektryon's products for critical energy needs. A malfunction or the inadequate design of its products could result in product liability or other tort claims. Elektryon's products operate at high speeds, high temperatures and use flammable fuels. Accidents involving its products could lead to personal injury or physical damage. Although Elektryon intends to reduce the risk of these types of losses through liability limitation clauses in its agreements and insurance, it cannot assure investors that its efforts will effectively limit its liability. Any liability for damages resulting from malfunctions could be substantial and could materially adversely affect Elektryon's business and result of operations. In addition, a well-publicized actual or perceived problem could adversely affect the market's perception of its products. This could result in a decline in demand for its services and products, which would materially adversely affect its financial condition and results of operations. COMPETITION The Company's competitors, who have significantly greater resources than the Company does, may be able to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their products, and the Company may be unable to compete effectively. The Company's competitors include several well established companies that benefit from larger economies of scale and worldwide presence. The Company believes that developing and maintaining a competitive advantage will require continued investment in product development, manufacturing capability and sales and marketing. The Company does not, and cannot assure you that the Company will have, sufficient resources to make the necessary investments to do so. In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom the Company has strategic relationships. Accordingly, new competitors or alliances may emerge and rapidly acquire significant market share. The market for distributed power generation products may ultimately be dominated by technologies other than the Company's. The following competing distributed generation technologies currently exist: - RECIPROCATING ENGINES. A number of electricity generating systems for on-site distributed generation are powered by reciprocating engines that use both liquid and gaseous fuels. These systems are available from several large companies such as Caterpillar, Waukesha, Cummins Engine, Detroit Diesel, Generac, Portable Products, Tecogen and Kohler Company. Other systems are also available from a number of small companies. - FUEL CELLS. Fuel cells are a technology in development for application to the distributed generation industry. General consensus is that any commercially ready model for any application is several years away. There are many major technological barriers, including cost. If fuel cells become commercially available for distributed generation, however, the Company does not know whether they will directly compete for any electricity generation market share with the POWR/MASTR(TM). Publicly traded fuel cell companies include Avista Laboratories Inc., Ballard Power Systems, Fuel Cell Energy, Global Termoelectric, H Power, Manhattan Scientifics, Medis Technologies, Millennium Cell, Plug Power, International Fuel Cells (a division of United Technologies 34 37 Corporation), Proton Energy Systems, AstroPower, Evergreen Solar and Fuel Cell Energy. - MICROTURBINES. The microturbine, an aircraft engine derivative, is designed for use in a variety of industrial applications. Off-grid electrical power generation for stand-by, emergency power, portable power and cogeneration are its most common objectives. Its construction is fairly simple. The turbine, compressor and permanent-magnet generator are all mounted on a single high-speed shaft that is supported on air bearings. This shaft spins at high speeds producing electricity. Current microturbine competitors include Capstone, EnergyNow, Honeywell, Mitsubishi Heavy Industries Ltd., NREC, Toyota Motor Corp., Turbec and Elliot Energy Systems. The Company also faces competition from energy service providers (including electric utilities), independent power producers and system integrators including Calpine, Dynegy, Edison International, Enron Corporation, Mirant, NRG Energy, Pacific Gas & Electric, RealEnergy and Sempra Energy. In most markets, the principal competitor for Elektryon's distributed generation energy services may be the local incumbent utility company or an unregulated affiliate of the incumbent utility. The incumbent utilities generally have the advantage of long-standing relationships with an extensive range of customers, longer operating histories, greater financial and other resources and greater name recognition in their markets than Elektryon does. In addition, incumbent utilities have been subject to regulatory oversight, in some cases for close to a century, and thus have a significant amount of experience regarding the regulators' policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service. Incumbent utilities may seek to decrease their tariffed rates to limit or to preclude the opportunities for competitive energy suppliers, and otherwise seek to establish rates, terms and conditions to the disadvantage of competitive energy suppliers. The incumbent utilities may later seek regulatory approval to raise rates once the competition has been eliminated. The market for Elektryon's products is highly competitive and is changing rapidly. Elektryon believes that the primary competitive factors affecting the market for its products include: - operating efficiency, - reliability, - product quality and performance, - life cycle costs, - development of new products and features, - quality and experience of sales, marketing and service organizations, 35 38 - availability and price of natural gas, - product price, - emissions levels, - scalability, - manufacturing capability, - functionality, - product availability, - name recognition, and - quality of distribution channels. Several of these factors are outside Elektryon's control. Elektryon cannot assure investors that it will be able to compete successfully in the future with respect to these or any other competitive factors. FUEL SUPPLY RISK The POWR/MASTR's(TM) ability to produce electricity depends on the availability of natural gas or propane. If one of these fuels is not readily available to the mass market or if its price is such that electricity produced by the Company's system costs more than electricity provided through the electric grid, its business, prospects, operating results, or financial condition could be harmed, and could have a material adverse effect on its business, financial condition and operating results. Shortages of natural gas and/or interruptions in supply could be possible in certain areas such as Southern California during peak summer usage periods. DEPENDENCE ON INTELLECTUAL PROPERTY The Company depends on its intellectual property to make its products competitive and if it is unable to protect its intellectual property, its business may suffer. The Company relies on a combination of patent, trade secret, copyright and trademark law and nondisclosure agreements to establish and protect its intellectual property rights in its products. The Company possesses a U.S. patent with over 90 claims on the POWR/MASTR(TM) technology. The Company believes that, due to the rapid pace of technological innovation in distributed generation products, its ability to establish and maintain a position among the technology leaders in the industry depends on both its patent and other intellectual property and the skills of its development personnel. Patents, trademarks, copyrights or licenses owned or held by the Company may be invalidated, circumvented or challenged. These rights provide the Company competitive advantages. Future patent applications of others may be issued within the scope of the claims asserted by the Company. Elektryon cannot assure investors that any patent, trademark, copyright or license owned or held by it will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to it or that any of its future patent applications will be issued with the scope of the claims asserted by it, if at all. Further, Elektryon cannot 36 39 assure investors that third-parties or competitors will not develop technologies that are similar or superior to its technology, duplicate its technology or design around Elektryon's patents. Another party may be able to reverse engineer the Company's technology and discover its intellectual property and trade secrets. The Company may be subject to or may initiate proceedings in the U.S. Patent and Trademark Office, which can require significant financial and management resources. In addition, the laws of foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect its products and intellectual property rights to the same extent as the laws of the United States. The Company's inability to protect intellectual property adequately could have a material adverse effect on its financial condition or operating results. RISK OF INTELLECTUAL PROPERTY INFRINGEMENT Third parties may claim infringement by the Company with respect to past, current or future proprietary rights. Royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all, and could significantly harm its business and operating results. Litigation may also be necessary in the future to enforce the Company's patent or other intellectual property rights, to protect its trade secrets and to determine the validity and scope of proprietary rights of others. Future patent infringement disputes, with or without merit, could result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Elektryon cannot be certain that the necessary licenses would be available or that they could be obtained on commercially acceptable terms. If Elektryon fails to obtain these royalty or licensing agreements in a timely manner and on commercially acceptable terms, its business, results of operations and financial condition would be materially adversely affected. REGULATORY RISK The Company will operate in a highly regulated business environment and changes in regulation could impose costs on the Company or make its current and proposed products less economical. The distributed energy industry is subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions to air as well as laws relating to occupational health and safety. Regulatory agencies may impose special requirements for implementation and operation of the Company's current and proposed products, such as connection with the electric grid, or may significantly impact or even eliminate some of its target markets. The Company may incur material costs or liabilities in complying with government regulations. In addition, the Company may require potentially significant expenditures in order to comply with evolving environmental and health and safety laws, regulations and requirements that may be adopted or imposed in the future. Furthermore, its potential utility customers must comply with numerous laws and regulations. The deregulation of the utility industry may also create challenges for its marketing efforts. For example, as part of electric utility deregulation, federal, estate and local governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to Elektryon's product. Elektryon can provide no assurances that it will be able to obtain these approvals and changes in a timely manner, or at all. 37 40 RELIANCE ON UTILITIES Under the regulatory structure adopted in most jurisdictions, Elektryon will be required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for it to serve customers of its on-site distributed energy generation services. Any delay in these negotiations or Elektryon's inability to enter into reasonable agreements could delay or negatively impact its ability to serve these customers, which could have a material negative impact on its business, results of operations and financial condition. CONTROL OF THE COMPANY The Company's current executive officers, directors and holders of 5% or more of the Company's Common Stock beneficially own in the aggregate 3,025,167 shares (approximately 46%) of its outstanding Common Stock. However, 2,365,000 of such shares are held by the three founders of the Company, Phil Meisinger, Gene Stinson and Edwin Wheeler, who are not officers or directors of the Company. All of the founders' shares are held in voting trusts and these shares will be voted on all matters in the same proportion as the votes cast by its other shareholders. MANUFACTURING CONCERNS The Company's current Odessa, Texas facility is designed to produce 400 units per month. The Company's business plan requires expansion of its production capabilities. The Company may not be able to manage or fund this expansion in a timely manner to meet expected sales demand. GRID CONNECTIVITY ISSUES The Company's current test units in operation have been able to successfully connect to the local utility grids and operate effectively either with the POWR/MASTR(TM) or local utility as the back-up source of electricity. In some areas of the country, cost or legal barriers may exist that may limit the ability to connect POWR/MASTRs(TM) with the local utility. Utility companies commonly charge fees to industrial customers for disconnecting from the grid, for using less electricity, or for having the capacity to use power from the grid for back-up purposes. These types of fees could increase the cost to the Company's potential customers of using its systems and could make its systems less desirable, thereby harming its revenue and profitability. INTERNATIONAL EXPANSION The Company plans to develop international operations as soon as practicable. The Company's entry into international markets will require significant management attention and financial resources, which could harm its ability to effectively manage domestic operation. The Company will also be subject to the following challenges associated with conducting international business: 38 41 - difficulties of managing remote offices, - burdens of complying with foreign laws and regulatory requirements, - reduced protection of proprietary rights, - problems in meeting different technology standards, - increased tax burdens, and - exposure to general foreign economic declines, currency fluctuations and political instability. GENERAL ECONOMIC CONDITIONS Certain industries to which the Company plans to market, such as the utility industry and the retail sales industry, have been subject to high rates of restructuring and rationalization. In the future, the Company's results may be subject to substantial period-to-period fluctuations as a consequence of the industry patterns of its customers, general or regional economic conditions and other factors. These factors may also have a material adverse effect on its business, operating results and financial condition. LACK OF PUBLIC MARKET FOR COMMON STOCK There is no public trading market for the Company's Common Stock and there can be no assurance that any trading market will ever develop. The Company cannot predict the extent to which a trading market will develop or how liquid that market may become. Shares of its Common Stock may only be resold if they are subsequently registered for resale with the SEC or if they are sold pursuant to an exemption from registration. Even if the Company does undertake an initial public offering, the underwriters commonly require that the existing shareholders waive any rights they may have to register shares in the offering. It is unlikely that shareholders will be able to sell their Common Stock in any initial public offering that the Company may undertake in the future. In addition, shareholders may be subject to a lock-up provision, which contractually obligates them not to sell any of their shares during the 180 day period after the closing of any initial public offering. Accordingly, holders of the Company's Common Stock may be required to bear the economic risks of their investment for an indefinite period of time. RISKS RELATING TO THE INTEGRATION OF ELEKTRYON'S AND SOLO'S BUSINESSES The Asset Acquisition is likely to be accompanied by the risks commonly encountered in acquisitions, including: - the difficulty in assimilating the technologies, operations and personnel of acquired companies, - the potential disruption of the parties' existing businesses, - the diversion of resources, including the attention of management teams, - the incidence of acquisition-related expenses, 39 42 - adverse effects on financial results, including one-time write-offs, ongoing charges for amortization of intangible assets and the assumption of unknown or unanticipated liabilities, and - the inability to maintain uniform standards, controls, procedures and policies and the integration of new personnel. Specifically, the Elektryon acquisition will require, among other things, the integration of the POWR/MASTR(TM) with Solo's microturbine products, coordination of research and development and sales and marketing efforts, the assumption by Solo of certain liabilities under agreements with Elektryon and the integration of Elektryon's personnel and operating facilities into Solo's business. Elektryon cannot assure you that Solo will be successful in addressing these risks. Any failure to successfully address these acquisition-related risks could materially adversely affect the combined business, results of operations and financial condition. FRAUDULENT TRANSFER CONSIDERATIONS If a court in a lawsuit by an unpaid creditor or representative of creditors of Elektryon, such as a trustee in bankruptcy, were to find that at the time Elektryon effected the transfer of assets to Solo, Elektryon did not receive reasonable equivalent value in return for the transfer of the assets, and Elektryon (i) was insolvent, (ii) was rendered insolvent by reason of the transfer of assets, (iii) was engaged, or was about to engage, in a business or transaction for which its remaining assets constituted unreasonably small capital or (iv) intended to incur, or believed it would incur, debts beyond its ability to pay such debts as they matured, such court may be asked to void the asset acquisition (in whole or in party) as a fraudulent transfer and require that Solo return some or all of the assets, acquired under the Acquisition Agreement and Elektryon return some or all of the cash and stock received from and reacquire the liabilities assumed by Solo in the Asset Acquisition. 40 43 ITEM 2. FINANCIAL INFORMATION. SELECTED FINANCIAL DATA The following historical selected financial data are derived from the unaudited financial statements of the Company. The operating data and balance sheet data set forth below should be read in conjunction with the Company's Financial Statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document. 41 44
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues $ 190 $ -- $ -- $ -- $ -- Cost of revenues 134 -- -- -- -- Other operating expenses 14,826 7,543 2,983 1,237 25 Operating loss (14,365) (7,543) (2,983) (1,237) (25) Net loss per Common Share: Basic and Diluted (2.19) (1.67) (.80) (0.0) (0.0) Weighted average shares outstanding: Basic and Diluted XXXX XXXX XXXX XXXX XXXX
AS OF DECEMBER 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Total assets $27,290 $ 6,987 $ 684 $ 1,236 $ 10 Long-term liability 89 131 203 78 -- Stockholders' equity 23,528 6,465 174 1,126 10
42 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain items discussed in this Form 10 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements which make reference to the expectations or beliefs of the Company or any of its management are such forward-looking statements. These statements use words such as "believe," "expect," "may," "should" and "anticipate." Such information includes, without limitation, statements regarding the Company's future financial performance, development of products, expansion plans, and estimated capital expenditures. Such information also includes statements regarding the performance of the Company's technology, which is in the process of being upgraded. Actual results will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and financing risks. All such forward-looking statements speak only as of the date of this Form 10. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS FORM 10. OVERVIEW Elektryon develops, assembles, and has recently begun to market the POWR/MASTR(TM), a 100 kW generator designed specifically for uninterruptible on-site electricity generation, to address the rapidly growing distributed generation market. The Company's commercially available POWR/MASTER(TM) is a specially customized GM reciprocating engine with high fuel efficiency and low emissions levels which produces on-site electricity for a wide range of commercial and industrial applications. The POWR/MASTR(TM) technology is protected by a U.S. Patent with over 90 claims. The Company began developing the POWR/MASTR(TM) technology in 1993, and have since inception incurred operating losses of $26.2 million as of December 31, 2000. The Company expects operating losses to continue through the year 2001. Since inception, the Company been developing and refining its technology and, in early 2000, began testing several units in field operations in Chicago, Illinois; Linden, New Jersey; Tucson, Arizona; and San Diego, California. The Company has recently begun marketing its 43 46 product to several potential nationwide customers. The Company has built an assembly facility on leased property in Odessa, Texas. The Company has also installed a complete Information Technology system for managing both the production of POWR/MASTR(TM) units and the long-term servicing of the units generating electricity on customers' premises. Installed units are expected to be connected in a nationwide data network with central monitoring and alarming facilities that will enable the Company to provide prompt and effective maintenance. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 REVENUES The Company was a development stage enterprise in both years and generated no material revenues 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 $5.0 million for Research and Development in 2000, $2.2 million, or 80%, higher than in 1999, as the Company researched, designed and built prototype units for demonstration and testing. 16 units were installed for testing and demonstration purposes in 2000. SELLING, GENERAL AND ADMINISTRATIVE The Company's Selling, General and Administrative expenses were approximately $9.8 million in 2000, $5.9 million, or 153%, 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. 44 47 RESEARCH AND DEVELOPMENT As a development stage company, the Company spent approximately $2.8 million in 1999, $1.4 million, or 100%, higher than in 1998, as the Company researched, designed and built prototype units for demonstration and testing. SELLING, GENERAL AND ADMINISTRATIVE The Company's Selling, General and Administrative expenses were approximately $3.9 million in 1999, $2.4 million, or 155%, 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 ----------------------------------------- --------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- Total revenues............. $ 0 $ 0 $ 0 $ 0 $ 190 $ 0 $ 0 $ 0 Cost of goods sold......... 0 0 0 0 134 0 0 0 Gross profit (loss)........ 0 0 0 0 55 0 0 0 Operating expenses......... 0 0 0 0 0 0 0 0 Research and development... 296 945 549 1,060 2,632 1,540 3,738 3,901 Selling, general & administrative............. 1,207 331 332 1,569 319 739 1,203 2,154 Royalty expense............ 0 0 0 779 0 0 0 0 Interest income (expense).. 0 0 0 22 86 66 126 166 Income (loss) from operations................. (1,503) (1,276) (881) (3,386) (2,865) (2,213) (4,815) (5,889) Net income (loss).......... $(1,503) $(1,276) $ (881) $(3,386) $(2,865) $(2,213) $(4,815) $(5,889)
The 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. The Company believes its current cash balances will provide sufficient capital to fund operations through July, 2001. 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 45 48 capital has been to fund research and development, capital expenditures and production costs for prototype units. Net cash used in operating activities was $21.4 million, $5.2 million, and $2.6 million for the years ended December 31, 2000, 1999 and 1998. At December 31, 2000, the Company had commitments of approximately $4.6 million for expenses. During the year 2000 the Company purchased approximately 700,000 shares of its common stock from its three founding shareholders for approximately $14.0 million, at $20 per share. On April 16, 2001 the Company signed a definitive agreement to sell substantially all of its assets to Solo, an Alameda, California based developer of microturbine technology, as discussed under "Item 1 - The Reorganization - The Asset Acquisition Agreement." At Closing, the Solo Common Stock will be issued to Elektryon (other than the shares held in the Escrow Fund). Elektryon will not distribute any of such shares to its shareholders until the earlier of two years from the closing of the Asset Purchase Agreement or a Solo Initial Public Offering; provided that Elektryon may so distribute such shares on an earlier date under certain circumstances. Elektryon will also receive at Closing $5 million in cash, subject to adjustment, and will retain certain non-operating assets, including promissory notes aggregating $10,257,000 from two of the founding shareholders and former directors of the Company. SEE ITEM 6 "EXECUTIVE COMPENSATION - THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS." The Company believes that the cash and proceeds of the promissory notes will provide for sufficient resources to wind up the affairs of the Company, including the payment of liabilities not transferred to Solo and any future litigation costs. A condition to Solo's obligations under the Asset Acquisition Agreement is that Elektryon obtain waivers of specified securities claims its shareholders may have against Elektryon and any representative of the Company from its accredited investor shareholders holding at least 60% of the issued and outstanding shares of Elektryon Common Stock. At June 26, 2001 Elektryon had received the requested waivers from accredited investor shareholders holding approximately 70% of the outstanding Elektryon 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 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 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 June 26, 2001, such holders of approximately 4,888,105 shares of Common Stock (or 74% of the 46 49 outstanding shares of Common Stock) had granted such waivers and releases. In addition, the Company had received Waiver and Release Agreements executed by non-accredited investors holding 582,864 or 9% 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. If all of the offerees holding the Subject Securities accept the Waiver Offer, the Company estimates that it will be required to make nominal cash payments and issue fewer than two million shares of Common Stock. As of June 26, 2001, with respect to shareholders who accepted the Waiver Offer, Elektryon (a) issued 1,588,562 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 $56.1 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 asset purchasers could be obtained on terms acceptable to it or at all. If the Company were unable to obtain additional financing to satisfy any demand for rescission it will continue to be subject to claims from the holders of the Common Stock for possible violations of applicable state and federal securities laws. There can be no assurance that claims asserting violations of state or federal securities laws will not be asserted notwithstanding the Waiver Offer. Furthermore, there can be no assurance that the Company will not be subject to penalties or fines relating to past securities issuances or that the offerees or other holders of the Common Stock will not assert and prevail in claims against the Company for rescission or damages under federal or state securities laws. Even if the Company were successful in defending any securities law claims, the assertion of such claims against the Company would result in costly litigation and significant diversions of effort by the Company's management. In addition, the Waiver Offer will not prevent the Commission or any state securities commission from pursuing enforcement action against the Company with respect to any alleged violations of federal or state securities laws. The occurrence of any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. 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 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. 47 50 INTEREST The Company's long term debt relates to capital leases on motor vehicles and leasehold improvements at the Company's Odessa facility. INFLATION The Company does not believe that inflation has had a material effect on its financial position or results of operations during the past three years. However, the Company cannot predict with certainty the future effects of inflation, including interest rate fluctuations and market fluctuations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material effect on our financial condition or results of operations. In December 1999, the 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 3. PROPERTIES. The Company's executive offices are located at 6565 Spencer Street, Suite 206, Las Vegas, Nevada 89119, and consist of approximately 5,000 square feet of office space under a lease expiring in January 2003 at a current monthly rent of $5,250. The Company leases a manufacturing facility located at 320 East Interstate 20, Odessa, Texas consisting of 27,000 square feet under a lease expiring in April 2008 at a current monthly rent of $2,979. In addition, the Company leases two storage facilities at 4501 County Road, 1310 South Midland County, 48 51 Odessa, Texas, consisting of: (i) 8,500 square feet under a lease expiring June 30, 2001 at a current annual rent of $12,000 and (ii) 4,000 square feet under a month-to-month lease at a current monthly rent of $750. The Company owns approximately eight (8) acres of land surrounding the Odessa manufacturing facility and a tract of land which contains a fabrication plant located at 2121 East 2nd Street, Odessa, Texas. If the Asset Acquisition is consummated, Solo will assume the lease for the Odessa manufacturing facility and Elektryon will transfer to Solo ownership of the land surrounding the Odessa manufacturing facility and the Odessa fabrication plant. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The table below sets forth the beneficial ownership of Common Stock as of June 26, 2001 by (i) each director, (ii) each of the executive officers, (iii) all directors and executive officers of the Company as a group, and (iv) all persons known by the Board of Directors to be beneficial owners of more than five percent of the outstanding Common Stock.
Number of Shares of Common Percent of Common Stock Name Stock Owned Owned ------------------- -------------------------- ------------------------- Philip C. Meisinger 865,000 10.6% 1812 E. 56th Street Odessa, TX 79762 Gene E. Stinson 875,000 10.7% 1819 Ottawa Drive Las Vegas, NV 89109 Edwin Wheeler 625,000 7.7% P.O. Box 96507 Las Vegas, NV 89193 Michael E. Holmstrom, 300,000(1) 3.1% President Joanne Firstenberg, 250,000(2) 3.1% General Counsel Wendell H. Adair, Jr., 28,667 * Director Curtis Olson, 21,091 * Director John Cavalier, 26,500 * Director All directors and executive officers 626,258 7.7% as a group (5 individuals)(3) ----------------
49 52 * Less than one percent. (1) Consists of 300,000 shares of Common Stock issuable upon exercise of vested options. (2) Consists of 250,0000 shares of Common Stock issuable upon exercise of vested options. (3) Includes 550,000 shares of Common Stock issuable upon exercise of vested options. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS. The following is a list of the Company's directors and executive officers and their respective positions:
NAME AGE POSITION - -------------------- --- -------- Wendell H. Adair, Jr. 56 Director Curtis Olson 37 Director John Cavalier 50 Director Michael E. Holmstrom 58 President Joanne Firstenberg 51 General Counsel
Wendell H. Adair, Jr. has practiced law for over 32 years, concentrating in corporate matters, banking and finance, restructurings and reorganization and mergers and acquisitions. Mr. Adair's clients include major insurance, pension plan and mutual fund investors. Since June 1999, Mr. Adair has been a partner at the law firm of Stroock & Stroock & Lavan. Mr. Adair was previously a partner in the law firm of McDermott, Will & Emery from September 1989 to May 1999 and the law firm of Mayer, Brown & Platt from September 1972 to August 1989. Mr. Adair earned an A.B. from Emory University and a J.D. from the University of Chicago. Curtis Olson. From October 1988 to October 2000, Mr. Olson held a variety of positions at Dell Computer Corporation, most recently serving as its Director of Global Sales. Mr. Olson earned a B.B.A. from the University of Iowa and an M.B.A. from Southwest Texas State University. John Cavalier is a Managing Director in the Investment Banking Division of Credit Suisse First Boston ("CSFB"). In this capacity, Mr. Cavalier serves as financial advisor to companies in their emerging energy technology sector with a focus on financing, restructuring, and mergers and acquisitions. Mr. Cavalier joined Donaldson, Lufkin & Jenrette in 1990, and before then served as an investment banker for Shearson Lehman Brothers and Drexel Burnham Lambert. From 1972 to 1981, Mr. Cavalier served in the U.S. Army as an officer in the Signal Corps, and later in the Judge Advocate Generals Corps. Mr. Cavalier is a graduate of the U.S. Military Academy, the University of Illinois School of Law, and Harvard Business School. Michael E. Holmstrom has served as the President of Elektryon since January 2001. He joined the Company in November 2000 as Chief Financial Officer. Prior to joining Elektryon, Mr. Holmstrom was Senior Vice President and Chief Financial Officer of Alaska Communications from February 1999 to November 2000. From July 1998 to February 1999, Mr. Holmstrom was Chief Financial Officer, Secretary and Treasurer of Atlantic Tele-Network, Inc., a telecommunications company, where he was responsible for the financial and 50 53 administrative functions of the company. From September 1996 to March 1998, Mr. Holmstrom was Chief Operating Officer of Spectrum Network Systems, an Australian telecommunications service provider, where he was responsible for the operations, financial, and administrative functions of the company. Mr. Holmstrom received a B.S. in business administration from Gannon University in Erie, Pennsylvania. Joanne Firstenberg has served as the General Counsel of Elektryon since December 2000. Prior to joining the Company, Ms. Firstenberg was a partner of Hudson Capital, a private equity fund that invested in small and midsize companies from 1994 to 2000, during which period she also was a partner in the law firm of Cane & Firstenberg. From 1993 to 1994, Ms. Firstenberg was a Managing Director of Whitman, Heffernan and Rhein, Inc., a firm specializing in the evaluation and negotiation of acquisitions in the financial sector as well as companies in need of restructuring. From 1986 to 1989, Ms. Firstenberg was the Chief Executive Officer of Moorgate U.S., a subsidiary of a London-based stock exchange firm specializing in servicing financial institutions. ITEM 6. EXECUTIVE COMPENSATION. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table sets forth information about the compensation paid by the Company for services rendered by Michael E. Holmstrom, the President of the Company, and Joanne Firstenberg, the Company's General Counsel, the only executive officers paid more than $100,000 on an annualized basis. The following table also sets forth information about the compensation paid by the Company to two executive officers whose employment with the Company was terminated during 2000: Philip C. Meisinger, the former Chief Executive Officer of the Company, and Gene E. Stinson, the former President of the Company. 51 54
ANNUAL COMPENSATION LONG-TERM COMPENSATION - ---------------------------------------------------------- -------------------------------------------------------- OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER COMPEN- STOCK UNDERLYING COMPEN- SALARY BONUS SATION AWARD(S) OPTIONS SATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) - --------------------------- ---- ------ ----- ------------ --------- ---------- -------- Michael E. Holmstrom, 2000 37,981(1) -- -- -- 300,000 60,000(1) President Joanne Firstenberg, 2000 10,417(2) -- -- -- 250,000 60,000(2) General Counsel Philip C. Meisinger,(3) 2000 260,500 -- -- -- -- -- Chief Executive Officer 1999 184,000 -- -- -- -- -- 1998 85,000 -- -- -- -- -- Gene E. Stinson,(3) 2000 213,000 -- -- -- -- -- President 1999 184,000 -- -- -- -- -- 1998 85,000 -- -- -- -- --
(1) Mr. Holmstrom began his employment with the Company on November 7, 2000 and was paid a salary at an annualized rate of $250,000. All Other Compensation consists of $60,000 for moving expenses. (2) Ms. Firstenberg began her employment with the Company on December 15, 2000, and was paid a salary at an annualized rate of $250,000. All Other Compensation consists of $60,000 for moving expenses. (3) Messrs. Meisinger and Stinson were paid pursuant to consulting agreements described more fully below. Options granted to Messrs. Meisinger and Stinson were cancelled in connection with a settlement of the Company's potential claims against them. Pursuant to the consulting agreements, the Company leased automobiles for Messrs. Meisinger and Stinson. SEE " -- CONSULTING AGREEMENTS" AND " -- THE SETTLEMENT AGREEMENT WITH THE COMPANY'S FORMER DIRECTORS." EMPLOYMENT AGREEMENTS Following is a description of employment agreements between the Company and Mr. Holmstrom and Ms. Firstenberg. Michael E. Holmstrom Michael E. Holmstrom is employed by the Company pursuant to an amended employment agreement (the "Holmstrom Employment Agreement") which provides for him to serve as the President of the Company until November 7, 2003 (the "Holmstrom Employment Period"), or such earlier date as provided therein. Mr. Holmstrom is to receive an annual salary of $250,000 (the "Base Salary"). Mr. Holmstrom will also be entitled to certain perquisites and to bonus payments of (a) $100,000 upon the completion of the Company's audited financial statements by the Company's accountants, payable no later than five business days after such financial statements are completed, and (b) $100,000 upon the consummation of an initial public offering of the Company's Common Stock (an "IPO") payable no later than five business days 52 55 after the date of the final prospectus relating to the IPO. All bonus payments will be payable immediately upon any change in control of the Company, which is defined as any or all of the following: an asset sale of substantial assets of the Company, a substantial change in the executive board of the Company, or a material equity infusion greater than $10 million into the Company during the Holmstrom Employment Period. Under the Holmstrom Employment Agreement, the Board of Directors of the Company granted Mr. Holmstrom stock options to purchase 300,000 shares of the Company's Common Stock, at an exercise price of $2.00 per share, all of which have vested. The options are exercisable for a period of 60 months from the date on which they vest regardless of Mr. Holmstrom's employment status at the time. Mr. Holmstrom has agreed that during his employment and for one year after the termination of the Holmstrom Employment Agreement, he will not directly or indirectly engage in, assist, perform services for, establish or open, or have any equity interest (other than ownership of 5% or less of the outstanding stock of any corporation listed on the New York Stock Exchange or American Stock Exchange or included in NASDAQ) in any person, firm or corporation or business entity that engages in any activity in the world in which the Company is conducting business activities which are the same as, similar to, or competitive with the business of the distributed generation of electricity. Mr. Holmstrom has also agreed to keep secret and confidential indefinitely all non-public information concerning the Company and its affiliates which was acquired by or disclosed to him during the course of his employment with the Company and not to disclose the same, either directly or indirectly, to any other person, firm or entity or to use it in any way. If Mr. Holmstrom's employment with the Company terminates before the end of the Holmstrom Employment Period (a) for any reason, the Company will pay him a lump sum equal to his earned but unpaid salary for the period ending on the date of termination of his employment, but in no event less than one year's annual salary; and (b) as a result of Mr. Holmstrom's termination of employment by the Company for reasons other than Cause (as defined in the Holmstrom Employment Agreement) and not on account of his death, disability, voluntary resignation or mutual agreement of the parties, Mr. Holmstrom will receive from the Company a lump sum payment equal to his salary for the period commencing on the date of termination of his employment and ending on the earliest of (i) the last day of the Holmstrom Employment Period, (ii) the date of Mr. Holmstrom's death, or (iii) the first anniversary of the date of termination of his employment. Joanne Firstenberg Joanne Firstenberg is employed by the Company pursuant to an amended employment agreement (the "Firstenberg Employment Agreement") which provides for her to serve as General Counsel of the Company until December 15, 2003 (the "Firstenberg Employment Period"), or such earlier date as provided therein. Ms. Firstenberg is to receive an annual salary of $250,000 (the "Base Salary"). Ms. Firstenberg also will be entitled to certain perquisites to bonus payments of (i) $50,000 upon the completion of the Company's audited financial statements by the Company's accountants, payable no later than 5 business days after such financial statements are completed, (ii) $50,000 upon the effectiveness of a Form 10 on behalf of 53 56 the Company, payable no later than 5 business days after the Form 10 becomes effective, and (iii) $100,000 upon the consummation of an initial public offering of the Company's Common Stock (an "IPO"), payable no later than 5 business days after the date of the final prospectus relating to the IPO. All bonus payments will be payable immediately upon any change in control of the Company, which is defined as any or all of the following: an asset sale of substantial assets of the Company, a substantial change in the executive board of the Company, or a material equity infusion greater than $10 million into the Company during the Firstenberg Employment Period. Under the Firstenberg Employment Agreement, the Board of Directors of the Company granted Ms. Firstenberg stock options to purchase 250,000 shares of the Company's Common Stock, at an exercise price of $2.00 per share, all of which have vested. The options are exercisable for a period of 60 months from the date on which they vest regardless of Ms. Firstenberg's employment status at the time. Ms. Firstenberg has agreed that during her employment and for one year after the termination of the Firstenberg Employment Agreement, she will not directly or indirectly engage in, assist, perform services for, establish or open, or have any equity interest (other than ownership of 5% or less of the outstanding stock of any corporation listed on the New York Stock Exchange or American Stock Exchange or included in the NASDAQ) in any person, firm or corporation or business entity that engages in any activity in the world in which the Company is conducting business activities which are the same as, similar to, or competitive with the business of the distributed generation of electricity. Ms. Firstenberg has also agreed to keep secret and confidential indefinitely all non-public information concerning the Company and its affiliates which was acquired by or disclosed to her during the course of her employment with the Company and not to disclose the same, either directly or indirectly, to any other person, firm or entity or to use it in any way. If Ms. Firstenberg's employment with the Company terminates before the end of the Firstenberg Employment Period (a) for any reason, the Company will pay her a lump sum equal to her earned but unpaid salary for the period ending on date of termination of her employment, but in no event no less than one year's annual salary; and (b) as a result of Ms. Firstenberg's termination of employment by the Company for reasons other than Cause (as defined in the Firstenberg Employment Agreement) and not on account of her death, disability, voluntary resignation, or mutual agreement of the parties Ms. Firstenberg will receive from the Company a lump sum payment equal to her salary for the period commencing on the date of termination of her employment and ending on the earliest of (i) the last day of the Firstenberg Employment Period, (ii) the date of Ms. Firstenberg's death, or (iii) the first anniversary of the date of termination of her employment. CONSULTING AGREEMENTS Each of Messrs. Meisinger and Stinson were parties to separate consulting agreements with the Company dated as of February 20, 1999, pursuant to which he was paid $180,000 per year, subject to adjustment for inflation (the "Consulting Agreements"). Under the Consulting Agreements, each of Messrs. Meisinger and Stinson received specified perquisites, including a vehicle of his choice, a $1 million term life insurance policy paid by the Company, medical 54 57 insurance with disability coverage and an office with staff support. Each Consulting Agreement also provided that the consultant would be paid his consulting fee for a two-year period following termination of the Consulting Agreement for any reason. The Consulting Agreements also provided that each of Messrs. Meisinger and Stinson's annual compensation would increase to $240,000 if the Company entered into an agreement with a major funding partner who agreed to invest at least $10 million in the Company or if the Company filed a registration statement with the Commission. The Consulting Agreements were terminated in connection with the Company's settlement of its claims against Messrs. Meisinger and Stinson, as described more fully below. SEE "--THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS." THE SETTLEMENT WITH THE COMPANY'S FORMER DIRECTORS Pursuant to a Separation and Release Agreement dated as of February 28, 2001 (the "Separation and Release Agreement"), the Company on the one hand and two former directors and officers of the Company, Messrs. Meisinger and Stinson (the "Former Executives"), on the other hand settled and released all claims against each other. The Separation and Release Agreement provides for the termination of the Former Executives' employment with the Company and their resignation from its Board of Directors. The Separation and Release Agreement also terminates all other agreements between the Company and the Former Executives, including stock option grants to purchase an aggregate of 620,000 shares of Common Stock, and provides for the assignment by the Former Executives of their alleged rights in any Elektryon intellectual property. The Former Executives also surrendered an aggregate of 461,950 shares of Common Stock to the Company, paid the Company an aggregate of $2,500,000 and gave the Company promissory notes for an aggregate of $10,257,000, which notes are non-recourse to the Former Executives but are secured by the Former Executives' remaining shares of Common Stock not surrendered to the Company in connection with the settlement. The Former Executives agreed to restrictions on their right to transfer their remaining shares of Common Stock and agreed to apply proceeds from any permitted sales of their shares to pay principal and interest on the promissory notes. In the event a Former Executive breaches the Separation and Release Agreement, the Company may elect to repurchase such Former Executive's shares of Common Stock for a purchase price of $15.00 per share of Common Stock. In addition, the Former Executives agreed to subject their remaining shares of Common Stock to a voting trust agreement, which provides that the Former Executives have appointed Curtis Olson, a director of the Company, their proxy and attorney-in-fact with respect to the voting of such shares. Under the voting agreement, Mr. Olson will vote the Former Executives' shares of Common Stock in the same proportion as the votes cast or consents given by all holders of Common Stock except the Former Executives and persons affiliated with them. The voting agreement also prohibits the Former Executives from soliciting proxies, engaging in tender offers or taking other steps to affect the composition of the Company's Board of Directors or its affairs and policies. Pursuant to an Agreement and Release, dated as of January 19, 2001, between the Company and Edwin Wheeler, a former director of the Company, Mr. Wheeler agreed to (a) contribute 550,000 shares of Common Stock to the Company at no cost to the Company, (b) 55 58 purchase 75,000 shares of Common Stock from the Company for a purchase price of $20.00 per share, (c) acknowledge that the options to purchase 310,000 shares of Common Stock granted to him by the Company were cancelled, and (d) sever any and all relationships with the Company other than in his capacity as the beneficial owner of shares of Common Stock. Mr. Wheeler also agreed to release any claims he may have had against the Company. The Company in turn agreed not to sue Mr. Wheeler in connection with his sales of shares of Common Stock or any other incident arising directly or indirectly from his performance of services for the Company. Wheeler further agreed not to use or disclose any proprietary information of the Company. The remaining shares of Common Stock owned by Mr. Wheeler are subject to the terms of a voting agreement, dated as of November 11, 2000, as amended on January 19, 2001, between Mr. Wheeler and Elektryon. Pursuant to the voting agreement, Mr. Wheeler appointed the Company's independent directors as his proxy and attorneys-in-fact with respect to the voting of his shares of Common Stock. Under the voting agreement the directors will vote Mr. Wheeler's shares in the same proportion as votes cast or consents given by all holders of Common Stock except Mr. Wheeler and persons affiliated with him. The voting agreement also prohibits him from soliciting proxies, engaging in tender offers or taking other steps to affect the Company's Board of Directors or its affairs or policies. STOCK OPTIONS The following table provides information concerning grants of stock options by the Company to the named executive officers during 2000. OPTIONS GRANTS FOR FISCAL 2000
POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK SECURITIES OPTIONS/SARs PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE TERMS (1) OPTIONS/SARs EMPLOYEES IN PRICE PER EXPIRATION ----------------------------- NAME GRANTED 2000 SHARE ($/SH) DATE 5% 10% - ---- ------------ ------------ ------------ ---------- --------- --------- Michael E. Holmstrom 150,000 27.3% $2.00 11/7/05 $82,884 $183,153 150,000 27.3% $2.00 2/7/06 $82,884 $183,153 Joanne Firstenberg 125,000 22.7% $2.00 12/15/05 $69,070 $152,628 125,000 22.7% $2.00 3/15/06 $69,070 $152,628
(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. The $2.00 exercise price was intended to be the equivalent of fair market value of the Common Stock at the date of grant. OPTION EXERCISES AND VALUES FOR 2000 The named executive officers did not exercise any options during 2000. There is no established market for the Common Stock and, accordingly, the fair of market value at year end of the securities underlying the options granted to the named executive officers cannot be determined. 56 59 DIRECTORS' COMPENSATION Through 2000, each of the Company's directors received 500 shares of Common Stock for each meeting of the Board of Directors attended in person. This compensation policy was suspended in 2001. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the directors or officers of the Company have any relationships which must be disclosed under this caption. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Pursuant to the Asset Acquisition Agreement, Solo has agreed upon the closing of the Asset Acquisition to issue to (a) Michael E. Holmstrom, the President of Elektryon, options to purchase 1,818,182 shares of Solo Common Stock with an exercise price per share of $0.33, and (b) Joanne Firstenberg, the General Counsel of Elektryon, options to purchase 1,515,152 shares of Solo Common Stock with an exercise price per share of $0.33. The Elektryon stock options issued to Mr. Holmstrom and Ms. Firstenberg will be terminated when the Solo stock options are issued to them. SEE "ITEM 1. BUSINESS -- THE REORGANIZATION -- THE ASSET ACQUISITION AGREEMENT." Pursuant to their respective employment agreements, Elektryon will pay each of Mr. Holmstrom and Ms. Firstenberg (a) $100,000 upon the consummation of the Asset Acquisition, and (b) $500,000 upon the termination of employment with Elektryon as a result of the dissolution of Elektryon pursuant to the Plan of Reorganization. SEE "ITEM 6. EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENTS." Each of the directors of Elektryon in his capacity as a shareholder of Elektryon will receive a Waiver Offer. If the directors accept their respective Waiver Offers, Elektryon will issue the following consideration to them: - Mr. Adair will receive an additional 2,418 shares of Common Stock; - Mr. Cavalier will receive an additional 20,454 shares of Common Stock; and - Mr. Olson will receive an additional 1,818 shares of Common Stock SEE "ITEM 1. BUSINESS -- THE REORGANIZATION -- THE WAIVER OFFERS." The Company has agreed to pay CSFB a fee in cash or Common Stock equal to 3% of the stock consideration payable to the Company if the Asset Acquisition closes. Mr. Cavalier, a director of the Company, is a Managing Director of CSFB. The Company believes that during 2000, Messrs. Meisinger, Stinson and Wheeler sold an aggregate of 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 57 60 COMPANY'S FORMER DIRECTORS." [MH/JF: LET'S DISCUSS THIS FIGURE; THE SPREAD SHEET SUPPLIED BY YOUR STAFF INDICATES A DIFFERENT AMOUNT.] ITEM 8. LEGAL PROCEEDINGS. SEE "ITEM 1. NARRATIVE DESCRIPTION OF BUSINESS -- LITIGATION" for a description of claims asserted against the Company. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information. As of June 27, 2001, the Company had a total of 8,163,987 shares of Common Stock issued and outstanding. There is no established United States public trading market in which the Company's Common Stock is being traded, and the Company is unaware of any trading in its Common Stock. The Company estimates that approximately 46% of its issued and outstanding shares of Common Stock could be sold under Rule 144 promulgated under the Securities Act of 1933, as amended, commencing 90 days after this Form 10 becomes effective. 855,401 shares of Common Stock are subject to outstanding options to purchase Common Stock, and 125,000 shares of Common Stock are subject to outstanding warrants to purchase Common Stock. Holders. As of May 31, 2001, there were approximately 1,425 record holders of Common Stock. Dividends. The Company has not previously paid any dividends on the Common Stock and does not anticipate paying cash dividends in the foreseeable future. The only restrictions that limit the Company's ability to pay dividends on the Common Stock are those imposed by Nevada law. Under Nevada law, no dividends or other distributions may be made which would render the Company insolvent or reduce the Company's assets to less than the sum of its liabilities plus the amount needed to satisfy any liquidation preference. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. 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 July 1 - September 30, 1998 43,645 October 1 - December 31, 1998 44,521 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 - $20.00
58 61
PERIOD NUMBER OF SHARES PRICE RANGE ($) ---------------------------- ---------------- --------------- 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
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 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. The Company's authorized capital stock consists of 125,000,000 shares of Common Stock. Common Stock. Under Nevada law and the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation"), holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. The holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds. In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. Anti-takeover Effects of Provisions of the By-Laws. The Company's By-Laws provide that stockholders may call a special meeting of stockholders only upon a request of stockholders entitled to exercise a majority of the voting power of the Company. These provisions of the By-Laws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and discourage certain types of transactions that may involve an actual or threatened change of control. Such provisions could have the effect of discouraging others from making tender offers for the Common Stock. ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Articles of Incorporation contain provisions that limit the liability of directors in certain instances. As permitted by the Nevada General Corporation Law, directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as 59 62 directors. Such limitation does not affect liability for any breach of a director's duty to the Company or its stockholders that involve (i) intentional misconduct, fraud or a knowing violation of law or (ii) for the payment of dividends in violation of Nevada Revised Statutes 78.300. Nevada Revised Statutes 78.751 and 78.7502 contains provisions permitting a Nevada corporation, such as Elektryon, to provide indemnification for its officers and directors for losses incurred in connection with their service to the corporation in these capacities. The Articles of Incorporation contain provisions requiring indemnification by Elektryon of its directors, officers, employees and agents, and of persons serving at the request of Elektryon as a director, officer, employee or agent of any other enterprise, to the fullest extent permitted by law. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements are currently being audited but the audit is not yet completed. The Company will file its audited financial statements by amendment to this Form 10 when they are available. See pages F-1 to F-17 of this Form 10 for the Company's unaudited financial statements. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. To be filed by amendment with the Company's audited financial statements and accompanying notes. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. (a) FINANCIAL STATEMENTS The following financial statements are exhibits to this Form 10: Unaudited Balance Sheets as of December 31, 1998, 1999 and 2000 Unaudited Statements of Operations for the years ended December 31, 1998, 1999, 2000 and cumulative since April 1994 (date of inception) to December 31, 2000 60 63 Unaudited Statements of Stockholders' Equity for the period from April 1994 (date of inception) to December 31, 1998 and for the years ended December 31, 1998, 1999 and 2000 Unaudited Statements of Cash Flow for the years ended December 31, 1998, 1999 and 2000 and cumulative since April 1994 (date of inception) to December 31, 2000 Notes to Unaudited Financial Statements (b) EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 Asset Acquisition Agreement between Solo Energy Corporation and Elektryon dated April 16, 2001.* 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, Phillip C. Meisinger, Gene E. Stinson and Curtis Olson.* 9.2 Voting Agreement dated as of November 11, 2000, as amended January 19, 2001, between Elektryon and Edwin Wheeler.* 10.1 Employment Agreement dated December 15, 2000, as amended on February 12, 2001, between Elektryon and Joanne Firstenberg.* 10.2 Employment Agreement dated November 7, 2000, as amended on February 12, 2001, between Elektryon and Michael E. Holmstrom.* 10.3 Separation and Release Agreement, dated as of February 28, 2001, among Elektryon, Philip C. Meisinger and Gene E. Stinson.*
* Previously filed 61 64
Exhibit No. Description - ----------- ----------- 10.4 Release, dated as of February 28, 2001, among Elektryon, Philip C. Meisinger and Gene E. Stinson.* 10.5 Pledge Agreement, dated as of February 28, 2001, made by Philip C. Meisinger in favor of Elektryon.* 10.6 Pledge Agreement, dated as of February 28, 2001, made by Gene E. Stinson in favor of Elektryon.* 10.7 Promissory Note, dated as of February 28, 2001, made by Philip C. Meisinger in favor of Elektryon.* 10.8 Promissory Note, dated as of February 28, 2001, made by Gene E. Stinson in favor of Elektryon.* 10.9 Agreement and Release, dated January 9, 2001, between Elektryon and Edwin W. Wheeler.*
*Previously filed 62 65 ELEKTRYON INDEX TO FINANCIAL STATEMENTS
Page Unaudited Balance Sheets as of December 31, 1998, 1999 and 2000....... F-2 Unaudited Statements of Operations for the years ended December 31, 1998, 1999, 2000 and cumulative since April 1994 (date of inception) to December 31, 2000..................................................... F-3 Unaudited Statements of Stockholders' Equity for the period from April 1994 (date of inception) to December 31, 1998 and for the years ended December 31, 1998, 1999 and 2000...................................... F-4 Unaudited Statements of Cash Flow for the years ended December 31, 1998, 1999, 2000 and cumulative since April 1994 (date of inception) to December 31, 2000..................................................... F-5 Notes to Unaudited Financial Statements............................... F-6
F-1 66 ELEKTRYON (A Development Stage Enterprise) ELEKTRYON UNAUDITED CONSOLIDATED BALANCE SHEETS
December 31, December 31, December 31, 1998 1999 2000 ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents ................. $ 31,528 $ 6,413,601 $ 7,515,099 Inventory: Raw materials .......................... 9,234,838 Work in process and finished goods ..... 3,275,917 Other current assets ...................... 174,960 101,733 837,612 ------------ ------------ ------------ Total current assets .......................... 206,488 6,515,334 20,863,466 Property plant and equipment, net ......... 407,994 437,814 3,935,940 Other assets .............................. 10,200 34,165 32,094 ------------ ------------ ------------ Total assets .................................. $ 624,682 $ 6,987,313 $ 24,831,500 ============ ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable .......................... $ 217,529 $ 230,526 $ 4,630,574 Accrued expenses .......................... 117,000 25,874 Current portion of long-term debt ......... 90,243 73,434 51,044 Other current liabilities ................. 12,600 101,713 ------------ ------------ ------------ Total current liabilities ..................... 307,772 433,560 4,809,205 Long-term debt ............................ 202,734 130,812 89,073 ------------ ------------ ------------ Total liabilities ............................. $ 510,506 $ 564,372 $ 4,898,278 Stockholders, equity: Common stock; $.001 par value, authorized 25,000,000, 25,000,000 and 125,000,000 in 1998, 1999 and 2000, respectively; issued and outstanding; 4,062,293, 5,268,417 and 7,416,545 in 1998, 1999 and 2000 respectively ....... $ 4,062 $ 5,268 $ 7,416 Paid in capital ........................... 4,536,993 17,890,350 47,180,939 Deficit accumulated during the development stage ......................... (4,426,879) (11,472,677) (27,255,133) ------------ ------------ ------------ Total stockholders' equity .................... 114,176 6,422,941 19,933,222 ------------ ------------ ------------ Total liabilities and stockholders' equity .... $ 624,682 $ 6,987,313 $ 24,831,500 ============ ============ ============
F-2 67 ELEKTRYON (A Development Stage Enterprise) ELEKTRYON UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1998, 1999, 2000 and cumulative since April 1994 (date of inception) to December 31, 2000
December 31, December 31, December 31, Cumulative 1998 1999 2000 Since Inception ------------ ------------ ------------ --------------- Net sales ............................ $ 190,000 $ 190,000 Cost of sales ........................ 134,374 134,374 ------------ ------------ ------------ ------------ Gross profit ......................... 55,626 55,626 Operating Costs and Expenses: Research and development expense .. 1,460,930 2,850,703 11,810,989 16,893,637 Selling, general and administrative expense ......................... 1,326,920 3,408,598 4,487,594 10,061,258 ------------ ------------ ------------ ------------ Operating loss ....................... (2,787,850) (6,259,301) (16,242,957) (26,899,269) Other income (expense): Royalty Expense .................. (778,788) (778,788) Interest Income .................. 456,153 456,153 Other ............................ (26,769) (7,709) 4,348 (33,729) ------------ ------------ ------------ ------------ Net loss before income taxes ......... (2,814,619) (7,045,798) (15,782,456) (27,255,133) Provision for income taxes ........... -- -- -- -- ------------ ------------ ------------ ------------ Net income (loss) .................... $ (2,814,619) $ (7,045,798) $(15,782,456) $(27,255,133) ============ ============ ============ ============ Income per Common Share: Basic and Diluted .................... (0.80) (1.56) (2.42) (4.18) ============ ============ ============ ============ Weighted average common shares outstanding ...................... 3,539,912 4,530,111 6,521,193 6,521,193 ============ ============ ============ ============
F-3 68 ELEKTRYON (A Development Stage Enterprise) ELEKTRYON UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS For the period from April 1994 (date of inception) to December 31, 1998 and the years ended December 31, 1998, 1999 and 2000
Deficit Accumulated Common Stock Common Stock During the Number of and Paid-in Development Shares Capital Stage Total --------- ---------- ----------- ---------- Balance, January 1, 1994 ....... -- $ -- $ -- $ -- Capital contributions .......... 2,450,310 4,054,008 4,054,008 Common Stock issued for services 1,612,083 487,047 - 487,047 Net loss ....................... (4,426,879) (4,426,879) --------- ---------- ----------- ---------- Balance, December 31, 1998 ..... 4,062,393 4,541,055 (4,426,879) 114,176 Capital contributions .......... 697,283 11,718,859 11,718,859 Common stock issued for services 421,342 800,666 800,666 Common stock issued for royalty agreements ................. 64,899 778,788 778,788 Common stock issued for land ... 22,500 56,250 56,250 Net loss ....................... (7,045,798) (7,045,798) --------- ---------- ----------- ---------- Balance, December 31, 1999 ..... 5,268,417 17,895,618 (11,472,677) 6,422,941 Capital contributions .......... 1,799,726 26,369,116 26,369,116 Common stock issued for services 348,402 2,923,622 2,923,622 Net loss ....................... (15,782,456) (15,782,456) --------- ---------- ----------- ---------- Balance December 31,2000 ....... 7,416,545 47,188,356 (27,255,133) 19,933,223 ========= ========== =========== ==========
F-4 69 ELEKTRYON (A Development Stage Enterprise) ELEKTRYON UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1999, 2000 and cumulative since April 1994 (date of inception) to
December 31, December 31, December 31, Cumulative 1998 1999 2000 Since Inception ------------ ------------ ------------ --------------- Cash Flows from Operating Activities: Net loss ............................... $ (2,814,619) $ (7,045,798) $(15,782,456) $(27,255,133) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .......... 59,380 89,712 312,031 480,592 Common stock issued for services ....... -- 800,666 2,923,622 4,211,335 Common stock issued for royalty agreements ........................... -- 778,788 -- 778,788 Increases (decreases) in operating accounts: Inventory .............................. -- -- (12,510,755) (12,510,755) Other current assets ................... (75,975) 73,227 (735,879) (837,612) Accounts payable and accrued expenses .. 187,390 129,997 4,308,921 4,656,448 Other current liabilities .............. 79,930 (4,209) 66,723 152,757 ------------ ------------ ------------ ------------ Net cash used in operating activities ...... (2,563,894) (5,177,617) (21,417,793) (30,323,580) ------------ ------------ ------------ ------------ Cash Flows from Investing Activities: Purchase of property, plant and equipment ........................... (329,131) (118,498) (3,808,086) (4,413,428) Investment in Patent ................... -- (25,000) -- (35,200) Common stock issued for land purchase .. -- 56,250 -- 56,250 ------------ ------------ ------------ ------------ Cash used in investing activities .......... (329,131) (87,248) (3,808,086) (4,392,378) ------------ ------------ ------------ ------------ Cash Flows from Financing Activities: Contributed capital .................... 2,108,493 11,718,860 26,369,116 42,141,984 Long-term debt incurred ................ 133,200 (71,922) (41,739) 89,073 ------------ ------------ ------------ ------------ Cash provided by financing activities ...... 2,241,693 11,646,938 26,327,377 42,231,057 ------------ ------------ ------------ ------------ Increase (decrease) in cash ................ (651,332) 6,382,073 1,101,498 7,515,099 Cash and cash equivalents, beginning ....... 682,860 31,528 6,413,601 -- ------------ ------------ ------------ ------------ Cash and cash equivalents, ending .......... $ 31,528 $ 6,413,601 $ 7,515,099 $ 7,515,099 ============ ============ ============ ============
F-5 70 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE COMPANY Elektryon, a Nevada corporation (also referred to herein as the "Company"), is a development stage company that develops, assembles and will shortly begin to market the POWR/MASTR(TM), a natural gas-fueled product designed to generate uninterruptible electricity on-site for the rapidly growing distributed generation market. Elektryon was incorporated as a Nevada corporation on March 1, 1994 under the name Engine Corporation of America. On February 12, 1996, the Company changed its name to Engine World, Inc., and on June 1, 2000, the Company changed its name to Elektryon. Elektryon's principal executive offices are located at 6565 Spencer Street, Suite 206, Las Vegas, Nevada 89119. F-6 71 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF THE COMPANY (CONTINUED) The Company has incurred significant operating losses since its inception. Management anticipates incurring additional losses until the Company can produce sufficient revenues to cover costs. There can be no assurance that the Company will achieve or sustain profitability or positive cash flow from its operations. To date, the Company has funded its activities primarily through private equity funding. The Company has received proceeds of $42,141,984 through the issuance of common stock from 1996 to 2000. The Company expects to obtain additional funding through private or public equity offerings until such time as it achieves positive cash flow from operations; however, there can be no assurance that such financing will be available on terms satisfactory to the Company or that positive operating cash flows will be achieved. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES: The financial statements of the Company have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand and short term investments with original maturities of three months or less. PROPERTY, PLANT AND EQUIPMENT AND LONG-LIVED ASSETS: Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives ranging from 2 to 10 years. Leasehold improvements are amortized over the period of the lease or the estimated useful life of the assets, whichever is shorter. Amortization of assets under capital leases is included with depreciation and amortization expense. Certain costs associated with obtaining and licensing patents are capitalized as incurred and are amortized on a straight-line basis over estimated useful lives up to 17 years. The Company reviews long-lived assets and identifiable intangible assets for impairment whenever any events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. F-7 72 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Research and development expenses consist principally of expenditures for research, including the assembly and testing of generators conducted by the Company and arrangements made with vendors. All research and development costs are expensed as incurred. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" was effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models even though such models were developed to estimate the fair value of freely tradable and fully transferable options, with vesting restrictions, which significantly differ from the Company's stock option awards. Companies are permitted, however, to continue to apply Accounting Principle Board Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company has elected to continue to apply APB Opinion No. 25 in its employee stock-based compensation arrangements (see Note). Expense for common stock options granted to non-employees is recorded based upon the fair value of the equity instrument awarded calculated through the use of an option pricing model. RISK CONCENTRATIONS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. The Company places its cash equivalents with high credit quality institutions. Because the company has been in the development stage, it has had only one customer during the periods presented. There is a sole source of the automatic paralleling switch unit, a key component, used in the Company's product. The Company is not aware of any other suppliers who would produce these units to the Company's specifications and time requirements. Although the Company is working to redesign its product to allow for multiple switch unit sources, the Company could see significant delays and interruptions. NET LOSS PER COMMON SHARE Basic loss per common share is computed using the weighted-average number of common shares outstanding for the period. Diluted loss per share excludes incremental shares related to employee stock options due to their antidilutive effect as a result of the Company's net loss from operations for the periods presented. F-8 73 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUPPLEMENTAL CASH FLOW INFORMATION During 1998, 1999, and 2000, the Company issued $2,108,493, $13,354,563 and $29,292,738 of common stock. During 1999 and 2000, the Company issued $800,666 and $2,923,622 of common stock for services rendered by several vendors, all of which was expensed during 1999 and 2000. The expense was recorded at the estimated fair market value of services rendered. In addition, the Company issued $778,788 of common stock for the purchase of the royalty rights of certain shareholders all of which was expensed in 1999. SEGMENT REPORTING The Company is considered to be a single operating segment in conformity with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The business activities of said operating segment are the development, manufacture and sale of on-site energy systems. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Due to the uncertainty surrounding the realization of the benefits of its past losses and deferred tax assets, the Company has placed a 100% valuation allowance against its deferred income tax assets. INVENTORY Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material effect on our financial condition or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements, " which was subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize certain of the SEC's views in applying accounting principles generally accepted F-9 74 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in the United States to revenue recognition in financial statements. The Company does not anticipate any material impact resulting from the adoption of SAB 101. In March 2000, the FASB issued Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25 ("FIN 44"), which among other issues, addresses repricing and other modifications made to previously issued stock options. The Company does not anticipate any material impact resulting from the adoption of FIN 44. In July 2000, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. When adopted, EITF No. 00-10 requires that all amounts billed to customers in sale of transactions related to shipping and handling be classified as revenue. The Company does not anticipate any material impact resulting from EITF No. 00-10. SEGMENT REPORTING SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of a business, for which separate financial information is available, that management regularly evaluates in deciding how to allocate resources and assess performance. We do not expect SFAS No. 131 to have a material effect on our financial condition or results of operations. F-10 75 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1998 and 1999 and 2000 consisted of the following:
December 31, December 31, December 31, 1998 1999 2000 -------- ---------- ---------- Leasehold improvements $200,617 $ 215,389 $ 818,667 Machinery and equipment ........... 286,225 333,701 3,538,509 Land ................. -- 56,250 56,250 -------- ---------- ---------- 486,842 605,340 4,413,426 Less accumulated depreciation ........ 78,848 167,256 477,486 -------- ---------- ---------- Property, plant and equipment, net ...... $407,994 $ 437,814 $3,935,940 ======== ========== ==========
Depreciation and amortization expense was approximately $78,848, $88,677 and $309,960 for the years ended December 31, 1998, 1999 and 2000. 4. LONG-TERM DEBT Long-term debt at December 31, 1998, 1999 and 2000 consisted of the following:
1998 1999 2000 -------- -------- -------- Notes Payable for Fixed Assets ......... $247,977 $204,246 $140,117 Notes Payable - Officers ............... 45,000 -- -- -------- -------- -------- 292,977 204,246 140,117 Less - current portion of long-term debt 90,243 73,434 51,044 -------- -------- -------- $202,734 $130,812 $ 89,073 ======== ======== ========
The maturities of long-term debt beginning January 1, 2000 are as follows:
Year Amount ---------- ---------- 2001 $ 51,044 2002 51,858 2003 27,909 Thereafter -- ---------- $ 140,117 ==========
NOTES TO FINANCIAL STATEMENTS, (Continued) F-11 76 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES Significant components of the Company's deferred income tax assets (liabilities) and related valuation allowance at December 31, 1998, 1999, and 2000 are as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 2000 ---- ---- ---- Current deferred income tax assets: Other .................................. Current deferred income tax liabilities: Other .................................. Net Current deferred income tax asset (liability) Long-term deferred assets: Net operating loss carryforwards ....... Tax credit carryforwards ............... Net long-term deferred income tax asset ......... Valuation allowance ............................. Total deferred income tax asset ................. $ 0 $ 0 $ 0 ===== ===== ====
Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future income tax returns, the Company has place a 100% valuation allowance against its otherwise recognizable deferred income tax assets. The Company's net operating loss and tax credit carryforwards for federal and state income tax purposes at December 31, 1998, 1999, and 2000 are as follows:
EXPIRATION PERIOD ----------------- Federal, NOL.................................... $ 27.3 million Federal tax credit carryforwards................ $ 9.6 million
The net operating losses and federal tax credits can be carried forward to offset future taxable income, if any. F-12 77 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) A reconciliation of income tax benefit to the federal statutory rate follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 --------- ---------- -------- Federal income tax at the statutory rate.......... Other............................................. Valuation allowance............................... $ $ $ ========= ========== ========
6. STOCK OPTION PLANS The Company has granted options for the purchase of up to 1,227,234 shares of the Company's common stock. These grants are summarized in the table below. Prior to 2000, the Company issued common stock options at exercise prices equal to, or greater than, the fair value of its common stock. Accordingly, no stock-based compensation was recorded for those periods. Information relating to the outstanding stock options is as follows:
SHARES WEIGHTED- AVERAGE EXERCISE PRICE ------- -------------- Outstanding at January 1, 1997 -- -- Granted ............. 920,000 $1.22 Exercised ........... -- -- Canceled ..................... -- --
F-13 78 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCK OPTION PLANS (CONTINUED)
WEIGHTED- AVERAGE SHARES EXERCISE PRICE ------- -------------- Outstanding December 31, 1998 . 920,000 $ 1.22 Granted ....................... 66,034 10.28 Exercised ..................... -- -- Canceled ...................... -- -- Outstanding December 31, 1999 . 986,034 1.86 Granted ....................... 241,200 14.60 Exercised ..................... 35,734 10.80 Canceled ...................... -- -- Outstanding December 31, 2000 . 1,191,500 4.17
Additional information regarding options outstanding at December 31, 1999, is as follows:
Outstanding ----------------------------------------- Average Weighted Remaining Average Common Life Exercise Exercise Price Stock (Years) Price -------------- ------- ---------- --------- $ 1.00 to $8.00............... 905,000 3 years $ 1.04 $10.00 to 20.00............... 286,500 2 years 13.88 ------- ---------- ---------
If the Company recognized employee stock option-related compensation expense in accordance with SFAS No. 123 and used the minimum value method for determining the fair value of options granted after December 31, 1998, its net loss attributable to common stockholders and net loss per share -- basic and diluted would have been $xxx,xxx, and $xxx,xxx, respectively, for the years ended December 31, 1998 and 1999. In computing the impact of SFAS No. 123, the weighted-average fair value of $.xx, and $.xx for 1998 and 1999 stock option grants, respectively, was estimated at the dates of grand using the minimum value model with the following assumptions for 1998 and 1999: risk-free interest rate of approximately 6.0 and 5.3 percent, and no assumed dividend yield. The weighted average expected life of the options was x and x years for 1998 and 1999, respectively. For purposes of determining the SFAS No. 123 pro forma compensation expense, the weighted-average fair value of the options is amortized over the vesting period. F-14 79 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS The Company acquired certain intellectual property in 1996 from its three principal shareholders in exchange for 3,000,000 shares of common stock. The Company paid $255,000, $552,000 and $646,000 in consulting compensation to its three largest shareholders in 1998, 1999, and 2000, respectively. 8. COMMITMENTS AND CONTINGENCIES The Company leases office, manufacturing and warehouse space under various non-cancelable operating leases. Rent expense related to these leases amounted to approximately $49,000, $70,900 and $140,400 for the years ended December 31, 1998, 1999 and 2000, respectively. At December 31, 2000, the Company's commitments under noncancelable operating and capital leases were as follows:
2000 ---------- Year Ending Operating December 31: Leases ------------ ---------- 2001............................ 126,250 2002............................ 126,250 2003............................ 73,292 2004............................ 70,437 2005............................ 70,437 Thereafter ..................... 164,354 ---------- Total minimum lease payments.. $ 631,020 ==========
The Company had approximately $4.6 million in outstanding purchase orders at December 31, 2000 with various suppliers and vendors that will come due in the ordinary course of business during 2001. 10. SUBSEQUENT EVENTS In May, 2000 the Company amended its Articles of Incorporation to authorize 125,000,000 shares of Common Stock at $ .001 par value. The Solo Transaction The Board of Directors of Elektryon has adopted a plan of reorganization (the "Plan of Reorganization"), subject to shareholder approval, pursuant to which Elektryon has entered into an Asset Acquisition Agreement with F-15 80 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Solo Energy Corporation ("Solo") pursuant to which Solo will acquire substantially all of Elektryon's assets in exchange for (a) $5 million in cash, subject to adjustment, (b) 51,878,788 shares of Solo's common stock, par value [$.0001] per share ("Solo Common Stock"), (c) up to 36,363,636 additional shares of Solo Common Stock to the extent Elektryon achieves specified sales and other goals after the closing of the proposed transaction, and (d) Solo's assumption of specified liabilities of Elektryon. The 51,878,788 shares of Solo Common Stock to be received by Elektryon (including shares to be deposited in an escrow account but not including any earn-out shares) together with the shares of Solo Common Stock issuable upon exercise of options to be granted to executive officers of Elektryon upon consummation of the transaction (adjusted by the treasury stock method) will represent approximately 56% of the then outstanding shares of Solo Common Stock after giving effect to (i) the exercise of all outstanding warrants of Solo to purchase shares of Solo convertible preferred stock at $1.65 per share or less and (ii) the conversion of all then outstanding Solo convertible preferred stock (including the shares of Solo convertible preferred stock referred to in clause (i)). This percentage will be reduced by any future sales of securities by Solo. Elektryon understands that Solo is currently seeking to raise approximately $30 million through the sale of a series of convertible preferred stock at a price equivalent to $1.65 per share of Solo Common Stock. There can be no assurance that any such sale will occur or what the aggregate dollar amount or per share price will be if a sale occurs. In connection with the Asset Acquisition, the Company intends to seek a waiver and release of certain identified potential securities claims which the Company's shareholders may have against the Company and representatives of the Company in connection with the sale of the Company's securities. Shareholders who sign a waiver and release of such claims will receive an additional fraction of a share of common stock, par value $0.001 per share ("Common Stock"), of Elektryon for each share of Common Stock they purchased for more than $11.00 per share in cash or, if they purchased their shares for $11.00 per share or less or did not pay any cash for shares, nominal consideration of $10.00 per holder, regardless of the number of shares held. Solo's obligations under the Asset Acquisition Agreement are conditioned on Elektryon's obtaining such waivers from shareholders representing at least 60% of the aggregate shares of Common Stock held by all of Elektryon's shareholders. Only shareholders of Elektryon who are "accredited investors" (as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) will be asked to waive and release such claims at the time of such solicitation. If Elektryon's Plan of Reorganization, including the Asset Acquisition Agreement, is approved by Elektryon's shareholders and the Asset Acquisition is consummated, Elektryon will wind up its affairs and transfer its assets to a liquidating trust (the "Liquidating Trust"). Elektryon's shareholders will receive beneficial interests in the Liquidating Trust in proportion to their respective interests in Elektryon. If the Asset Acquisition is consummated, Elektryon will transfer substantially all of its assets to Solo and wind up its business. F-16 81 ELEKTRYON (A Development Stage Enterprise) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS (CONTINUED) The Settlement With the Company's Former Directors Pursuant to a Separation and Release Agreement dated as of February 28, 2001 (the "Separation and Release Agreement"), the Company on the one hand and Messrs. Meisinger and Stinson (the "Former Directors") on the other hand settled and released all claims against each other. The Separation and Release Agreement provides for the termination of the Former Directors' employment with the Company and their resignation from its Board of Directors. The Separation and Release Agreement also terminates all other agreements between the Company and the Former Directors, including the termination of stock option grants to purchase 620,000 shares of Common Stock, and provides for the assignment by the Former Directors of their alleged rights in any Elektryon intellectual property. The Former Directors surrendered an aggregate of 461,950 shares of Common Stock to the Company, paid the Company an aggregate of $2,500,000 and gave the Company promissory notes for an aggregate of $10,257,000, which notes are non-recourse to the Former Directors but are secured by Former Directors' remaining shares of Common Stock not surrendered to the Company in connection with the settlement. The Former Directors agreed to restrictions on their right to transfer their remaining shares of Common Stock and principal and interest on the agreed to apply proceeds from any permitted sales of their shares to repay the promissory notes. In the event a Former Director breaches the Separation and Release Agreement, the Company may elect to repurchase such Former Director's shares of Common Stock for a purchase price of $15.00 per share of Common Stock. In addition, the Former Directors agreed to subject their remaining shares of Common Stock to a voting trust agreement, which provides that the Former Directors have appointed Curtis Olson, a director of the Company, their proxy and attorney-in-fact with respect to the voting of such shares. Under the voting agreement, Mr. Olson will vote the Former Directors' shares of Common Stock in the same proportion as the votes cast or consents given by all holders of Common Stock except the Former Directors and persons affiliated with them. The voting agreement also prohibits the Former Directors from soliciting proxies, engaging in tender offers or taking other steps to affect the composition of the Company's Board of Directors or its affairs and policies. Pursuant to an Agreement and Release, dated as of January 19, 2001, between the Company and Edwin Wheeler, a former director of the Company, Mr. Wheeler agreed to (a) contribute 550,000 shares of Common Stock to the Company at no cost to the Company, (b) purchase 75,000 shares of Common Stock from the Company for a purchase price of $20.00 per share, (c) acknowledge that the options to purchase 310,000 shares of Common Stock granted to him by the Company were cancelled, and (d) sever any and all relationships with the Company other than in his capacity as the beneficial owner of shares of Common Stock. Mr. Wheeler also agreed to release any claims he may have had against the Company. The Company in turn agreed not to sue Mr. Wheeler in connection with his sales of shares of Common Stock or any other incident arising directly or indirectly from his performance of services for the Company. Wheeler further agreed not to use or disclose any proprietary information of the Company. The remaining shares of Common Stock owned by Mr. Wheeler as amended on January 1, 2001 are subject to the terms of a voting agreement, dated as of November 11, 2000, as amended on January 1, 2000, between Mr. Wheeler and Elektryon. Pursuant to the voting agreement, Mr. Wheeler appointed the Company's independent directors as his proxy and attorneys-in-fact with respect to the voting of his shares of Common Stock. Under the voting agreement the directors will vote Mr. Wheeler's shares in the same proportion as votes cast or consents given by all holders of Common Stock except Mr. Wheeler and persons affiliated with him. The voting agreement also prohibits him from soliciting proxies, engaging in tender offers or taking other steps to affect the Company's Board of Directors or its affairs or policies. Litigation On March 9, 2001, Bill Eggar, Mike Lewis and E.L. Energy Connection, Inc. commenced an action against Elektryon and Philip Meisenger in the District Court of Ector County, Texas alleging that defendants breached (i) an agreement to pay finder's fees to Messrs. Eggar and Lewis for introducing investors to Elektryon, and (ii) an agreement to buy out an alleged distribution agreement pursuant to which plaintiffs marketed Elektryon's products to prospective customers. Plaintiffs are seeking unspecified money damages, an accounting with respect to proceeds from the sale of shares of Elektryon Common Stock, and specific performance of the alleged agreement to buy out the alleged distribution agreement for 35,000 shares of Common Stock. The Company believes the asserted claims are not material to its operations and will vigorously defend against the claims. F-17 82 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: June 27, 2001 By: /s/ Michael E. Holmstrom ------------------------ Michael E. Holmstrom President By: /s/ Joanne Firstenberg ------------------------ Joanne Firstenberg General Counsel 83 Exhibits Index -------------- Exhibit No. Description ----------- ----------- 2.1 Asset Acquisition Agreement between Solo Energy Corporation and Elektryon dated April 16, 2001.* 2.2 Liquidating Trust Agreement.* 2.3 Plan of Reorganization of Elektryon.* 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, Phillip C. Meisinger, Gene E. Stinson and Curtis Olson.* 9.2 Voting Agreement dated as of November 11, 2000, as amended January 19, 2001, between Elektryon and Edwin Wheeler.* 10.1 Employment Agreement dated December 15, 2000, as amended on February 12, 2001, between Elektryon and Joanne Firstenberg.* 10.2 Employment Agreement dated November 7, 2000, as amended on February 12, 2001, between Elektryon and Michael E. Holmstrom.* 10.3 Separation and Release Agreement, dated as of February 28, 2001, among Elektryon, Philip C. Meisinger and Gene E. Stinson.* E-1 84 Exhibit No. Description ----------- ----------- 10.4 Release, dated as of February 28, 2001, among Elektryon, Philip C. Meisinger and Gene E. Stinson.* 10.5 Pledge Agreement, dated as of February 28, 2001, made by Philip C. Meisinger in favor of Elektryon.* 10.6 Pledge Agreement, dated as of February 28, 2001, made by Gene E. Stinson in favor of Elektryon.* 10.7 Promissory Note, dated as of February 28, 2001, made by Philip C. Meisinger in favor of Elektryon.* 10.8 Promissory Note, dated as of February 28, 2001, made by Gene E. Stinson in favor of Elektryon.* 10.9 Agreement and Release, dated January 9, 2001, between Elektryon and Edwin W. Wheeler.* - ----------------------- *Previously filed E-2 EX-2.4 2 e48316a1ex2-4.txt LETTER AGREEMENT 1 Solo Energy Corporation June 14, 2001 [LOGO] Exhibit 2.4 June 14, 2001 Martin Lagod, President Solo Energy Corporation 2701 Monarch Street, Suite 210 Alameda, California 94501 Re: Asset Acquisition Agreement dated as of April 16, 2001 ("Acquisition Agreement" by and between Elektryon and Solo Energy Corporation (the "Company") Dear Marty: Reference is made to the above referenced Acquisition Agreement by and between Elektryon and the Company, dated as of April 16, 2001. Capitalized terms used herein, but not defined herein, shall have the meanings set forth in the Acquisition Agreement, except as modified below. TERMINATION DATE. Pursuant to Section 13.1(e) of the above referenced Acquisition Agreement, such Acquisition Agreement may be terminated if the Closing does not occur by June 30, 2001 (the "Termination Date"). Pursuant to this letter, the Termination Date shall be extended from June 30, 2001 to July 30, 2001. As a result of such extension, the Company shall not be obligated to consummate the transactions contemplated by the Acquisition Agreement until July 30, 2001. EARN-OUT CONSIDERATION. Pursuant to Section 2.7 of the Acquisition Agreement, the term "First Performance Goal" means that within 90 days of date of execution of the Acquisition Agreement, Elektryon or the Company, as appropriate, has obtained from a Buyer (A) a Purchase Commitment for the delivery of at least 50 Units for delivery by December 31,2001 and (B) a Letter of Intent for the delivery of an additional 100 Units in 2001 or 2002 and the term "second Performance Goal" means that within 90 days of the date of execution of the Acquisition Agreement, Elektryon or the Company, as appropriate, has obtained from a Buyer or Buyers (A) a Purchase Commitment for the delivery of at least 100 Units for delivery by December 31,2001 and (B) a Letter of Intent for the delivery of an additional 200 Units in 2001 or 2002, in each case including any Units counted toward satisfaction of the First Performance Goal. Pursuant to this letter, the Company hereby agrees that, solely with respect to a Purchase Commitment with Wal-Mart as Buyer and not with respect to any other Buyer, each of the terms "First Performance Goal" and "Second Performance Goal" shall be modified such that with respect to the Purchase Commitment and Letter of Intent required there under, rather than obtaining "within 90 days from the execution of the date of execution of the 2 Solo Energy Corporation June 14, 2001 Page 2 Acquisition Agreement", each shall instead be obtained "within 120 days from the execution of a tariff agreement between Wal-Mart and San Diego Gas & Electric". DISCLOSURE SCHEDULE. The Transferor Disclosure Schedule is amended to include the following exceptions to the referenced sections of the Acquisition Agreement: [Intentionally deleted.] [Intentionally deleted.] [Intentionally deleted.] SECTIONS 4.20 and 4.25. Transferor is party to the following document, a copy of which has previously been provided to Acquiror: Warrant dated July, 2000 to purchase 125,000 shares of common stock of Elektryon at $20.00 per share issued in the name of Ballentine Capital Partners Fund, L.P. ALL OTHER TERMS SET FORTH IN THE ACQUISITION AGREEMENT AND SPECIFICALLY, SECTION 2.7, SHALL REMAIN IN FULL FORCE AND EFFECT. ELEKTRYON RESERVES THE RIGHT TO SUBSTITUTE NEW, UPDATED FINANCIALS FOR THOSE IN THE SCHEDULES. If the foregoing correctly represents your understanding and agreement, please so indicate by signing a copy of this letter agreement in the place indicated, whereupon all of the parties hereto shall be legally bound on the foregoing terms and conditions. Very truly yours, ELEKTRYON /S/Michael E. Holmstrom Michael E. Holmstrom, President Agreed and Accepted by Solo Energy By: /s/ Brooks Tanner ------------------------------- Title: Chief Financial Officer Date: June 15, 2001 EX-2.5 3 e48316a1ex2-5.txt AMENDED & RESTATED PLAN OF REORGANIZATION 1 EXHIBIT 2.5 AMENDED AND RESTATED PLAN OF REORGANIZATION OF ELEKTRYON The amended and restated plan of reorganization of Elektryon, a Nevada corporation ("Transferor"), relating to the transaction contemplated by the Asset Acquisition Agreement (the "Agreement") to be entered into, by and between Elektryon and Solo Energy Corporation (the "Acquiror") is as follows: 1. Transferor shall enter into the Agreement. 2. Transferor shall transfer its properties to Acquiror in accordance with the terms of the Agreement. 3. Following the closing under the Agreement (the "Closing"), Transferor shall not engage in business and shall proceed to wind up its affairs and dissolve as expeditiously as possible. 4. Five days prior to the first anniversary of the Closing, Transferor shall transfer to one or more trusts that qualify as liquidating trusts under Treasury Regulations section 301.7701-4(d) all of Transferor's assets that it is not feasible for Transferor to distribute to its shareholders, and shall distribute the remaining assets to its shareholders. Dated: June __, 2001 -----END PRIVACY-ENHANCED MESSAGE-----