SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1997 number O-8482
ASTROCOM CORPORATION
(Name of small business issuer in its charter)
Minnesota 41-0946755
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Summer Street N.E., Minneapolis, Minnesota 55413-2820
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (612) 378-7800
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
Issuer's revenues for its most recent fiscal year were $3,646,000.
As of March 13, 1998, the aggregate market value of the voting stock held by
non-affiliates was $6,915,188, computed by reference to the average of the bid
and asked prices on such date, as reported in the over-the-counter market.
As of March 13, 1998, there were outstanding 10,538,180 shares of the
registrant's common stock, par value $.10 per share, and 200,000 shares
of the registrant's preferred stock, par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended
December 31, 1997, are incorporated by reference into Part II.
Portions of the proxy statement for the annual meeting of shareholders to
be held on May 28, 1998, are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) GENERAL.
Astrocom Corporation ("Astrocom") was incorporated in the State of
Minnesota on September 28, 1968. Astrocom has been engaged in the design,
development, manufacture, assembly and sale of electronic products used for
data communications since it commenced operations in 1968.
(b) BUSINESS OF REGISTRANT.
ELECTRONIC PRODUCTS. Registrant develops, manufactures, markets and
services electronic devices which address key areas of wide area data, voice and
video communication networks. Registrant's current products can be generally
placed in the following product categories: T1 and Fractional T1 CSU/DSU's and
Multiplexers, 56/64K Kbps DDS CSU/DSU's and Statistical Multiplexers. These
products contain all the features and functionality of industry standard
counterparts combined with application specific added value features which
address the requirements of the Internet, Video Conferencing and Corporate
Internetworking markets. Advanced features of registrant's products help
organizations make better use of their bandwidth and reduce capital costs.
Registrant's products are backed by 2-year, 5-year and lifetime warranties
which include its signature Customer Service program which provides 7 days a
week, 24 hours a day toll-free technical support and overnight replacement
of failed units.
Registrant's customers include telephone companies, Internet Service
Providers (ISPs), corporate and institutional end-users, integrators and
distributors. Registrant is also an original equipment manufacturer (OEM) for
a computer products catalog. Two purchasers of registrant's products each
accounted for more than 10% of registrant's total net revenues during 1997.
The sales activities for registrant's electronic products are carried on
by a combination of manufacturers representative firms, system integrators,
value added resellers (VARs) and distributors. In addition to channel sales,
registrant's sales force pursues direct business with sizable service providers
and end-user accounts. Registrant provides marketing support through
participation in selected industry trade shows, through a comprehensive
corporate web site, through direct mail campaigns and through cooperative
marketing activities with distributors.
MANUFACTURING. In 1997, registrant subcontracted over 95% of its
manufacturing operations to outside organizations specializing in
manufacturing. Registrant believes that there are several outside
organizations who could provide the specialized manufacturing services required
by registrant.
SOURCE AND AVAILABILITY OF MATERIALS. The outside organizations with
which registrant subcontracts to do its manufacturing purchase the necessary
components and raw materials. Registrant purchases a limited amount of
components and raw materials from an assortment of suppliers, manufacturers
and distributors throughout the United States. Registrant believes that there
are several sources of supply for the required components and raw materials.
PATENTS. Registrant has no patents, exclusive licenses, franchises or
concessions which are of material importance to its business. Registrant has
registered the trademark "WanMaster" with the United States Patent and
Trademark Office and is in the process of registering additional trademarks.
BACKLOGS AND TURN-OVER. The backlog of unfilled orders for electronic
products as of March 13, 1998, was approximately $109,000, as compared to
approximately $160,000 on March 14, 1997. Registrant normally fills its
orders for electronic products within ten days after receipt. Accordingly, the
backlog figure is not indicative of future sales. There is no significant
seasonal aspect to the backlog for electronic products.
GOVERNMENT SALES. Registrant has for several years sold and leased
electronic products to various United States government agencies. Revenues
received from such sales and leases are currently nominal.
COMPETITION. The business of registrant is highly competitive. Price
competition and service are the most significant features of the market in
which registrant competes. Registrant competes on a nationwide basis with many
other firms. Almost all of its competitors are larger and financially stronger
than registrant. Management believes that registrant accounts for only a very
small portion of the respective national and local markets.
RESEARCH AND DEVELOPMENT. Registrant spent $445,000 in 1996 and $560,000
in 1997 for research and development.
Registrant deducts internal research and development costs as items of
expense as they occur.
Registrant recognizes that the sale of electronic products will require
continuous development of new products and refinement of established products.
GOVERNMENT REGULATION. Some of registrant's electronic products are used
in conjunction with the telephone network. Existing Federal Communications
Commission (FCC) regulations and local tariffs allow such products to be
interconnected with the telephone network. Certain of the products marketed by
registrant have been registered with the FCC and management believes they meet
all applicable FCC standards. Restrictive changes in interstate regulation (FCC
jurisdiction) or intrastate tariffs (state regulatory agency jurisdiction)
could limit the uses and hence the marketability of some of registrant's
products.
ENVIRONMENTAL ISSUES. Management believes that compliance with federal,
state and local provisions which have been enacted or adopted regulating the
discharge of materials in the environment or otherwise relating to the
protection of the environment should have no material effect upon the capital
expenditures, earnings and competitive position of registrant's operations.
EMPLOYEES. As of March 13, 1998, registrant had a total of 14 employees.
No employees are currently represented by labor organizations and there
are no collective bargaining agreements. Registrant provides paid holidays and
vacations. In addition, registrant provides and partially funds group medical
and dental insurance.
SALE OF SUBSIDIARY AND LEASE SETTLEMENT COSTS. On May 29, 1990, a
wholly-owned subsidiary of registrant sold its business and substantially all
its assets to Visi-Tour Vision, Inc. (subsequently renamed Circuit Board One,
Inc.). As a result of that transaction, all of the subsidiary's right, title
and interest in a real estate lease and various equipment leases were assigned
to Circuit Board One, Inc., but registrant remained contingently liable to the
respective lessors in the event of default by Circuit Board One, Inc. Circuit
Board One, Inc. ceased operations on October 8, 1992.
The real estate lease assigned to Circuit Board One, Inc. covered a 29,867
square foot office, manufacturing and warehouse facility at 4300 Peavey Road,
Chaska, Minnesota. Registrant's guaranty of the lease remained in effect after
the assignment to Circuit Board One, Inc. After Circuit Board One, Inc. ceased
operations, the landlord asserted a claim against registrant. This matter was
settled during 1993, and the landlord and the registrant agreed upon a
settlement payment schedule. Registrant continues to make payments pursuant
to such payment schedule. See Notes to Financial Statements.
TRANSACTIONS WITH HANROW FINANCIAL GROUP, LTD., HANROW CAPITAL FUND
FIVE AND HANROW CAPITAL FUND X
A. Hanrow Financial Group, Ltd./Hanrow Capital Fund Five. On March 15,
1991, registrant delivered to Hanrow Capital Fund Five, a Minnesota limited
partnership, a certificate for 654,545 shares of common stock in exchange for
payment of 360,000. On April 5, 1991, in exchange for payment of an additional
$360,000, registrant delivered to Hanrow Capital Fund Five a five year
Subordinated Note bearing interest at 16% per annum and secured by a second
security position in all assets of registrant, and a Warrant enabling Hanrow
Financial Group, Ltd. to purchase 180,000 shares of the common stock
of registrant at $1.00 per share.
On April 5, 1992, the Subordinated Note was reduced by $60,000 in exchange
for 200,000 shares of common stock. Registrant also issued a Warrant enabling
Hanrow Capital Fund Five to purchase 50,000 shares of the common stock of
registrant at $.35 per share for a period of five years and the interest rate
on the remaining $300,000 subordinated debt balance was reduced to 13%. On
March 31, 1997, Hanrow Capital Fund Five exercised its Warrant and purchased
50,000 shares of the common stock of registrant.
On June 3, 1993, registrant borrowed $33,000 from Hanrow Capital Fund
Five. On June 30, 1993, Hanrow Capital Fund Five received 110,000 shares of
the common stock of registrant at $.30 per share in exchange for conversion of
the $33,000 loan. At that time, Hanrow Capital Fund Five also received an
additional 365,833 shares of the common stock of registrant at $.30 per share
in exchange for a $100,000 reduction in the Subordinated Note and conversion
of the interest payment in the amount of $9,750 to be owing to it by
registrant as of July 1, 1993.
On June 16, 1993, registrant issued a Warrant enabling Hanrow Financial
Group, Ltd. to purchase 50,000 shares of the common stock of registrant at $.30
per share for a period of five years. Registrant delivered the Warrant in
consideration of financial and management advisory services provided to
registrant by Hanrow Financial Group, Ltd.
On June 30, 1994, Hanrow Capital Fund Five received 13,000 shares of the
common stock of registrant at $.50 per share in payment of the interest in the
amount of $6,500 to be owing to it by registrant as of July 1, 1994.
On April 5, 1996, Hanrow Fund Five converted the remaining $200,000
principal amount of the Subordinated Note into 200,000 shares of Convertible
Preferred Stock, $1.00 par value. The Preferred Stock is convertible into
shares of the common stock of registrant at $.46 per common share. The
Preferred Stock is callable by registrant at $2.00 per share on April 5,
2000.
B. Hanrow Capital Fund X. In August and September 1994, registrant
borrowed an additional $65,785 from Hanrow Capital Fund X. On December 22,
1994, registrant issued a Convertible Debenture covering the loaned amount.
On December 22, 1994, registrant also issued a Warrant enabling Hanrow
Capital Fund X to purchase 131,570 shares of the common stock of registrant
at $.50 per share from December 22, 1994 through December 31, 1999.
On March 15, 1995, registrant borrowed an additional $35,000 from Hanrow
Capital Fund X. A Convertible Debenture covering the additional loaned
amount, and containing the same terms and conditions as the December 22, 1994
Convertible Debenture, was issued by registrant. Registrant also issued a
Warrant enabling Hanrow Capital Fund X to purchase 70,000 shares of the common
stock of registrant at $.50 per share from March 15, 1995 through December 31,
1999.
On June 30, 1996, Hanrow Capital Fund X exchanged its two Convertible
Debentures for a new Note bearing interest at 10%. This Note was paid in full
by registrant in September 1996.
C. Covenants. A March 15, 1991 Agreement and related Security Agreement
entered into between registrant and Hanrow Financial Group, Ltd. ("Investor")
contained various covenants relating to registrant's operations and financial
condition. From time to time in 1992, 1993, 1994 and 1995, registrant was in
violation of several of these covenants. Investor waived registrant's breach of
certain covenants for the periods ending December 31, 1991, 1992, 1993, 1994 and
1995. No waiver letter was requested for the periods ending December 31, 1996
or December 31, 1997.
D. Hanrow Business Finance Corp. In consideration of a $50,000 loan made
to registrant on May 10, 1996, and an additional $25,000 loan made to
registrant on June 5, 1996, Hanrow Business Finance received warrants to
purchase an aggregate 75,000 shares of the common stock of registrant at
$1.50 per share. The warrants were issued on August 1, 1996, and September
1, 1996, the respective dates on which the loans were repaid.
PRIVATE PLACEMENT. On August 28, 1997, and September 17, 1997, registrant
accepted subscription agreements covering an aggregate $510,000 loaned to
registrant by 17 accredited investors, and authorized the issuance of
Subordinated Convertible Promissory Notes and five-year Warrants to such
investors. The Notes bear interest at 12% per annum and mature on July 31,
1998. The Warrants provide for the issuance of an aggregate 765,000 shares
of common stock, at $.50 per share.
ITEM 2. DESCRIPTION OF PROPERTY.
ST. PAUL PROPERTIES. On June 1, 1992, registrant sold and assigned to
The Crepeau Company ("Crepeau") all rights, duties and liabilities registrant
had under a lease from the Port Authority which covered approximately 33,600
square feet of office and manufacturing space and 165,258 square feet of land
at 120 West Plato Boulevard, St. Paul, Minnesota, in the St. Paul Port
Authority's Riverview Industrial Area West. The lease from the Port Authority
runs through August 31, 2007. Registrant remains contingently liable to the
Port Authority in the event that Crepeau defaults under the terms of the
lease.
Registrant leases from the St. Paul Port Authority 81,568 square feet of
undeveloped land. The lease runs through August 31, 2007 and provides for
rental payments of $626 per month. On August 16, 1993, registrant subleased
said undeveloped land to Rutzick-Sheehy Office Center, a Minnesota general
partnership. The sublease runs through August 31, 2007, and provides for
payments of $626 per month during the entire term of the sublease. Subtenant
also agreed to pay all taxes, special assessments and other charges and expenses
required to be paid by registrant pursuant to its lease with the Port Authority.
On March 5, l993, registrant entered into a Lease Agreement with Summer
Business Center Partnership ("Summer") pursuant to which registrant leases
approximately 17,524 square feet of square feet of office and manufacturing
space at 2700 Summer Street NE, Minneapolis, Minnesota. The lease runs from
April 9, l993, through March 31, l999, and provides for escalating monthly
rental payments over the term of the lease, with registrant to pay all taxes
and insurance and utility, maintenance and other costs.
On February 21, 1995, registrant and Summer entered into an Amendment to
Lease providing that effective March 1, 1995, the leased premises would be
reduced by 2,262 square feet and redefined to be 15,262 square feet of office
and manufacturing space. The Amendment provides for rental payments of
$6,995.08 per month for the months of April 1996 through March 1999.
ITEM 3. LEGAL PROCEEDINGS.
On July 27, 1983, the Board of the Minnesota Pollution Control Agency
found registrant and 13 other corporations to be responsible persons under the
Minnesota Superfund Act and thereby secondarily liable for the cleanup of
hazardous wastes given to Ecolotech and Brian Carriere. Ecolotech collected
such waste materials from registrant during the period 1973 to 1978. On
January 25, 1984, registrant and the 13 other corporations entered into an
agreement to share the costs of cleanup and litigation in proportion to the
respective volumes of waste materials given by each to Ecolotech. As of
March 13, 1998, registrant had paid approximately $171,000 pursuant to the
agreement, none of which was paid during 1997. The cleanup was completed on
February 1, 1986. During February, 1987, a judgment was obtained in favor of
registrant and the 13 other corporations against Carriere Properties and
others. No estimate can be given as to the collectibility of said judgment.
Registrant believes that any costs or liabilities that it may incur in
connection with any latent problems will not have a material effect on the
financial condition of registrant.
In June 1988, registrant was informed by Mibco, the owner and lessor of
the Minnetonka facility where registrant's wholly-owned subsidiary was located
until March 6, 1989, that there were soil and groundwater contamination
problems at the facility. There currently appear to be seven companies
(including Mibco) which are potentially responsible parties. Registrant's
alleged involvement occurred during the period March 1972 through September
1973. The matter has been reported to the Minnesota Pollution Control Agency
(MPCA) which has made a preliminary assessment, conducted a followup site
investigation and included the site on Minnesota's permanent list of
priorities. Registrant will continue to monitor the site testing required by
the MPCA. Registrant believes that any costs or liabilities that it may
incur in connection with the proceedings before the MPCA or any lawsuit
commenced by MPCA or the present owner will not have a material effect on the
financial condition of registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information regarding Market and Dividend Data included in
registrant's annual report to shareholders for the year ended December 31,
1997, is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations included in registrant's annual report to shareholders for the
year ended December 31, 1997, are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements included in registrant's annual report to
shareholders for the year ended December 31, 1997, are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No disagreements with accountants have occurred within the two-year period
ended December 31, 1997, which required reporting on Form 8-K.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by Item 9 is incorporated herein by reference
to the proxy statement to be filed within 120 days after year end.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 is incorporated herein by reference
to the proxy statement to be filed within 120 days after year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated herein by reference to
the proxy statement to be filed within 120 days after year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is incorporated herein by reference
to the proxy statement to be filed within 120 days after year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
3(i) Restated Articles of Incorporation of registrant
[incorporated by reference to Exhibit 19 to Form 10-Q for
the quarter ended June 30, 1984 (File No.0-8482)].
3(ii) Restated Bylaws of registrant [incorporated by reference
to Exhibit 3(ii) to Form 10-K for the year ended
December 31, 1984 (File No. 0-8482)].
3(iii) Amendment to Restated Bylaws of registrant adopted by the
directors on June 25, 1985 [incorporated by reference to
Exhibit 3(iii) to Form 10-K for the year ended December 31,
1986 (File No. 0-8482)].
3(iv) Amendment to Restated Articles of Incorporation of
registrant approved by shareholders at May 20, 1987 meeting
[incorporated by reference to Exhibit 3(iv) to Form 10-K
for the year ended December 31, 1987 (File No. 0-8482)].
3(v) Amendment to Restated Bylaws of registrant adopted by the
directors on February 21, 1988 [incorporated by reference
to Exhibit 3(iv) to Form 10-K for the year ended
December 31, 1988 (File 0-8482)].
3(vi) Amendment to Restated Bylaws of registrant adopted by the
directors on July 31, 1989 [incorporated by reference to
Exhibit 3(vi) to Form 10-K for the year ended December 31,
1989 (File 0-8482)].
3(vii) Amendment to Restated Articles of Incorporation of
registrant approved by shareholders at December 20, 1996
meeting [incorporated by reference to Exhibit 3(vii)
to Form 10-KSB for the year ended December 31, 1996
(File 0-8482)].
10(i) 1988 Stock Option Plan of registrant as approved by
shareholders at May 25, 1988 meeting [incorporated by
reference to Exhibit 10(iv) to Form 10-K for the year ended
December 31, 1988 (File No. 0-8482)].
10(ii) Amendment to 1988 Stock Option Plan of registrant adopted
by the directors on October 17, 1988 [incorporated by
reference to Exhibit 10(v) to Form 10-K for the year ended
December 31, 1989 (File No. 0-8482)].
10(iii) Amendment to 1988 Stock Option Plan of registrant adopted
by the directors on January 25, 1996 and approved by the
shareholders on May 23, 1996 [incorporated by reference to
Exhibit 10(iii) to Form 10-KSB Report for the year ended
December 31, 1996 (File No. O-8482)].
10(iv) Lease Agreement between registrant and Port Authority of
the City of St. Paul, dated September 1, 1977
[incorporated by reference to Exhibit 1 to Form 8-K Report
for September 27, 1977 (File No. 0-8482)].
10(v) Asset Sale Agreement between registrant's subsidiary,
Circuit Board One, Inc. and Visi-Tour Vision, Inc., dated
March 16, 1990 [incorporated by reference to Exhibit
10(viii) to Form 10-K Report for the year ended
December 31, 1989 (File No. 0-8482)].
10(vi) Agreement for Assignment and Assumption of Lease between
registrant and the Crepeau Company, dated January 16, 1992
[incorporated by reference to Exhibit 10(xi) to Form 10-K
Report for the year ended December 31, 1991 (File 0-8482)].
10(vii) Purchase Agreement between registrant and Hanrow Financial
Group, Ltd., dated March 15, 1991 [incorporated by
reference to Exhibit 10(x) to Form 10-K Report for the
year ended December 31, 1990 (File 0-8482)].
10(viii) Subordinated Promissory Note, Security Agreement and
Warrant, dated April 5, 1991, delivered to Hanrow Financial
Group, Ltd. [incorporated by reference to Exhibit 10(xiii)
to Form 10-K Report for the year ended December 31, 1991
(File 0-8482)].
10(ix) First Amendment to Purchase Agreement, Subordinated
Promissory Note and Security Agreement [incorporated by
reference to Exhibit 10(xv) to Form 10-K Report for the
year ended December 31, 1991 (File 0-8482)].
10(x) Lease Agreement between registrant and Summer Business
Center Partnership, dated March 5, 1993 [incorporated by
reference to Exhibit 10(xvi) to Form 10-KSB Report for the
year ended December 31, 1992 (File O-8482)].
10(xi) Sublease Agreement between registrant and Rutzick-Sheehy
Office Center, dated August 16, 1993 [incorporated by
reference to Exhibit 10(xiv) to Form 10-KSB Report for the
year ended December 31, 1993 (File O-8482)].
10(xii) Amendment to Lease between registrant and Summer Business
Center Partnership, dated February 21, 1995 [incorporated
by reference to Exhibit 10(xxi) to Form 10-KSB Report for
the year ended December 31, 1994 (File O-8482)].
10(xiii) Subordinated Convertible Promissory Note and Warrant, dated
8/28/97 or September 17, 1997
10(xiv) Combined Account Factoring and Security Agreement between
registrant and Principal Resources, LLC, dated October 13,
1997
10(xv) Warrant issued to Ronald B. Thomas, dated July 2, 1997.
13 Registrant's 1997 Annual Report to Shareholders.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ASTROCOM CORPORATION
By: s/ Ronald B. Thomas
Ronald B. Thomas, President
Dated: March 26, 1998.
By: s/ Ronald B. Thomas
Ronald B. Thomas, Principal
Financial Officer and Principal
Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons, constituting a majority of the Board of Directors, on
behalf of the registrant and in the capacities and on the dates indicated.
Date
s/ S. Albert D. Hanser March 26, 1998
S. Albert D. Hanser, Director
s/ Dennis E. Evans March 26, 1998
Dennis E. Evans, Director
s/ Roger V. Stageberg March 26, 1998
Roger V. Stageberg, Director
s/ Douglas M. Pihl March 26, 1998
Douglas M. Pihl, Director
s/ Ronald B. Thomas March 26, 1998
Ronald B. Thomas, Director
<PAGE>
Exhibit 10(xiii) Subordinated Convertible Promissory Note and Warrant, dated
8/28/97 or September 17, 1997
Exhibit 10(xiv) Combined Account Factoring and Security Agreement between
registrant and Principal Resources, LLC, dated October 13,
1997
Exhibit 10(xv) Warrant issued to Ronald B. Thomas, dated July 2, 1997
Exhibit 13 Registrant's 1997 Annual Report to Shareholders
Exhibit 23 Consent of Independent Public Accountants
<PAGE>
Exhibit 10(xiii)
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
AND WARRANT
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Minneapolis, Minnesota
_________, 1997
FOR VALUE RECEIVED, Astrocom Corporation (the "Company") promises to pay
to the order of ______________________________ or any permitted successor or
assign (the "Lender"), at ____________________________________ or any other
place subsequently designated by the holder hereof, in lawful money of the
United States of America, the principal sum of ________________________________
Dollars, or so much thereof as may have been advanced to or for the benefit of
the undersigned and remains unpaid from time to time, together with interest
thereon (calculated on the basis of actual days elapsed in a 365-day year) at an
annual rate of twelve (12%) percent.
Maturity Date. If not sooner paid in accordance with the terms hereof, the
principal balance hereunder, together with all unpaid interest accrued thereon,
shall be due and payable, in full, on July 31, 1998 (hereinafter called
"Maturity Date").
Conversion. The Lender has the right, at any time prior to the payment in
full of this Note, to convert the principal amount of this Note and accrued
interest into common stock of the Company, as such shares shall be constituted
at the date of conversion, at a conversion price per share equal to 80% of the
average of the bid and asked prices for one share of common stock at the close
of business on the day preceding the date of conversion.
Conversion of this Note shall be made by surrender hereof by the Lender to
the Company at its principal office with a request for conversion of a
designated amount, and such conversion shall be deemed to have been effected
upon such surrender. The Company shall thereafter promptly issue certificates
for the number of shares of common stock into which such amount of this Note
shall have been converted. The Lender shall be deemed to be the record owner of
such shares as of the close of business on the date of such conversion. The
Lender shall not be entitled to receive a fractional share of common stock,
but in lieu thereof the Company shall pay in cash an amount equal to the value
of such fractional share on the date of such conversion. The Company shall
thereupon cancel this Note, and, in the event that less than the entire amount
hereof is so converted, shall issue a new Note for the balance not so
converted.
Transferability. This Note, and the shares of common stock issuable upon
conversion hereof, may not be sold, transferred, assigned or hypothecated unless
(i) a registration statement under the Securities Act of 1933, as amended,
relating thereto is in effect and this Note or the shares of common stock are
sold in accordance with such registration, (ii) such transfer is exempt from the
registration requirements of such Act and an opinion of counsel satisfactory to
the Company to such effect is obtained, (iii) a "no action letter" has been
received from the Securities and Exchange Commission (the "Commission") to the
effect that the distribution of this Note or the shares of common stock without
registration will not result in a recommendation by the staff of the Commission
that such Act has been violated, or (iv) by will or pursuant to the laws of
descent and distribution. If this Note, or the shares of common stock issuable
upon conversion hereof, are transferred, any assignee or transferee of this Note
or the shares of common stock, by acceptance thereof, represents and warrants
that the acquisition of this Note or the shares of common stock is for
investment and without any view to the distribution thereof and that, except
with respect to any permitted assignment, such assignee has no intention of
selling or otherwise transferring this Note or the shares of common stock.
Restrictions on Conversion and Transferability. The holder of this Note,
by acceptance hereof, agrees to give written notice to the Company before
conversion of this Note or assigning or transferring this Note, or assigning or
transferring any shares of common stock issued upon the conversion hereof, of
such holder's intention to do so, describing briefly the timing of any proposed
conversion and the manner of any proposed assignment or transfer. If, in the
opinion of counsel to the Company, the proposed conversion, assignment or
transfer may be effected without registration or qualification under federal or
state law, the Company shall notify such holder, whereupon such holder shall be
entitled to convert this Note or assign or transfer this Note or the shares of
common stock, all in accordance with the terms of the notice delivered by such
holder to the Company. If, in the opinion of such counsel, the proposed
conversion or assignment or transfer described in the written notice given
pursuant to this paragraph may not be effected without registration or
qualification of this Note or the shares of common stock issued on conversion
thereof, the Company shall promptly give written notice to such effect to the
holder thereof and the Company shall have no obligation to complete such
conversion or assignment or transfer.
Acceleration of Maturity. Upon the occurrence of any of the following
events the Lender may, at its option, demand immediate repayment in full of the
indebtedness evidenced by this Note:
(1) The Company shall fail to make any payment when due hereunder
and said failure shall continue for ten days after Lender gives written
notice thereof to the undersigned.
(2) The default by the Company on its payment obligations under
any agreement under which the Company is indebted (notice of which will be
promptly given to the Lender).
(3) The Company makes an assignment for the benefit of creditors,
or the Company applies for or consents to the appointment of a trustee or
receiver for the Company.
(4) A trustee or receiver is appointed for the Company or for the
major part of its property and the order of such appointment is not
discharged, vacated or stayed within 90 days after such appointment.
(5) Bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings for relief under any
bankruptcy or similar law or laws for the relief of debtors, are
instituted by or against the Company and, if instituted against the
Company are consented to or, if contested by the Company, are not
dismissed by the adverse parties or by an order, decree or judgment within
90 days after such institution.
Payments. Interest shall be accrued commencing on the date hereof and
continuing thereafter until the Maturity Date, on which date the entire unpaid
principal balance and unpaid accrued interest shall be due and payable in full.
Prepayment. The Company may prepay this Note at any time without penalty.
Subordination. This Note is subordinate in right only to claims of Senior
Lenders. For purposes of this Note, "Senior Lenders" shall mean the holders of
security interests presently effective against the assets of the Company, but
excluding, specifically, Hanrow Capital Fund Five, a Minnesota limited
partnership, Hanrow Financial Group, Ltd. and the successors and assigns of each
of them.
Waiver of Notices; Collection Costs. Except as provided in the paragraph
of this Note entitled "Acceleration of Maturity", the Company waives demand,
presentment for payment, notice of dishonor, protest and notice of protest and,
in the event of default hereunder, the Company agrees to pay, on demand, all
costs of collection, including reasonable attorneys' fees.
Amendment. No amendment, modification or waiver of any provision of this
Note shall be effective unless the same shall be in writing and signed by the
Company and the holder hereof.
No Waiver. Failure or delay of the Lender to enforce any provision of this
Note shall not be deemed a waiver of any such provision, and the Lender shall
not be prevented from enforcing any such provision at a later time. Any waiver
by the Lender of any provision hereof must be expressed and must be in a writing
signed by the Lender. Any such waiver shall be effective only in a specific
instance and for the specific purpose for which it was given.
Cumulative Remedies. The remedies provided in this Note are cumulative and
not exclusive of any remedies provided by law.
Governing Law; Severability. The terms of this Note shall be governed by
and construed in accordance with the laws of the State of Minnesota. Any term
hereof which is deemed unenforceable shall not affect the enforceability of any
other term hereof.
ASTROCOM CORPORATION
By /s/ Ronald B. Thomas
Its President
2700 Summer Street N.E.
Minneapolis, MN 55413-2820
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED
UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS
COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT AND SUCH LAWS.
<PAGE>
WARRANT FOR PURCHASE OF COMMON STOCK
OF
ASTROCOM CORPORATION
(A Minnesota Corporation)
______ shares
This certifies that _______________________________________________________
(hereinafter the "holder"), is entitled to purchase from Astrocom Corporation
(hereinafter the "Company") ______ fully paid and nonassessable shares of Common
Stock of the Company, par value $.10 per share, pursuant to the terms and
conditions hereinafter set forth, at the price of $.50 per share.
1. The rights represented by this Warrant may be exercised at any time
from the date hereof through July 31, 2002 by the holder hereof, in whole or in
part (but not as to a fractional share of Common Stock), by the surrender of
this Warrant at the principal office of the Company and upon payment to the
Company by certified check or bank draft of the purchase price for such shares
as set forth above. The holder shall also execute and deliver such agreements
and representations concerning the holder's intention not to distribute the
Common Stock so obtained and such other matters as the Company may reasonably
request in order to permit issuance of the shares of Common Stock pursuant to
exemptions from registration under federal and state laws, provided, however,
that the unavailability of any such exemption shall not affect the Company's
obligation to issue shares of its Common Stock pursuant hereto. Upon any
exercise of the rights represented by this Warrant, certificates for the shares
of stock so purchased shall be delivered to the holder hereof within a
reasonable time, not exceeding fifteen (15) days, and, unless this Warrant has
expired, a new Warrant representing the number of shares, if any, with respect
to which this Warrant shall not then have been exercised shall also be issued
to the holder hereof within such time.
2. The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon issuance,
be fully paid and nonassessable and free from all taxes, liens, and charges with
respect to the issuance thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved for the
purpose of issuance upon the exercise of the subscription rights evidenced by
this Warrant, a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Warrant.
3. In the event that the Company shall, at any time prior to the
expiration date of this Warrant and prior to the exercise hereof: (a) declare or
pay to the holders of the Common Stock a dividend payable in any kind of shares
of stock of the Company; or (b)
THIS WARRANT IS SUBJECT TO THE TERMS OF THE LEGEND SET FORTH ON THE LAST PAGE
HEREOF.
change or divide or otherwise reclassify its Common Stock into the same or a
different number of shares with or without par value, or into shares of any
class or classes; or (c) consolidate or merge with, or transfer its property as
an entirety or substantially as an entirety to, any other corporation; then,
upon the subsequent exercise of this Warrant, the holder hereof shall receive
for the exercise, such additional shares of stock of the Company, or such
reclassified shares of stock of the Company, or such shares or securities of the
Company or any other entity resulting from the occurrence of any such event
which he would have been entitled to receive had he exercised this Warrant prior
to the happening of any of the foregoing events.
4. The certificates representing the shares to be issued upon exercise
of the rights represented by this Warrant which have not been registered under
applicable federal and state laws will bear a legend substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or the securities act of
any state. The securities have been acquired for investment and may
not be sold, transferred for value, pledged, hypothecated or
otherwise encumbered unless (1) pursuant to an effective
registration of them under the Securities Act of 1933 and the
applicable securities act of any state, or (2) there is presented to
the corporation an opinion of counsel acceptable to counsel for the
corporation to the effect that such registration is not required."
By exercise of this Warrant the holder agrees to be bound by the terms of such
legend.
5. This Warrant shall not entitle the holder hereof to any voting rights
or other rights as a stockholder of the Company.
6. This Warrant shall not be transferable by the holder, other than
pursuant to registration under federal and state securities laws or an exemption
from such registration, the availability of which shall be reasonably determined
by the Company, and then only: (a) to members of the immediate family of the
holder or trusts for the benefit of the immediate family of the holder; (b) as
provided in paragraph 7 below; or (c) if the holder is a corporation,
partnership or other business entity, to the owners or affiliates thereof.
7. In the event of the death of the holder prior to the expiration date
of this Warrant, and prior to its exercise, this Warrant shall be exercisable
until the expiration date of this Warrant, but only by the executors or
administrators of the estate of the holder or by the persons to whom the
holder's rights shall pass by the holder's Will, or the laws of descent and
distribution.
8. This Warrant is being executed and delivered in the State of
Minnesota, and this Warrant shall be construed in accordance with the laws of
such State.
9. This Warrant shall expire and be void unless exercised on or before
July 31, 2002.
WITNESS the signature of the Company's duly authorized officer as of the
____ day of ______, 1997.
ASTROCOM CORPORATION
By /s/ Ronald B. Thomas
Its President
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 ("THE ACT") OR UNDER APPLICABLE STATE LAWS. THE WARRANT
MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT AS PROVIDED ABOVE
AND NO TRANSFER OF IT WILL BE MADE BY THE CORPORATION OR ITS TRANSFER AGENT IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE WARRANT UNDER THE
ACT, AS AMENDED, A "NO ACTION" LETTER OF THE SECURITIES AND EXCHANGE COMMISSION,
OR AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED. FURTHERMORE THE WARRANT MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR
HYPOTHECATED EXCEPT AS PROVIDED ABOVE AND NO TRANSFER OF IT WILL BE MADE BY THE
CORPORATION OR ITS TRANSFER AGENT IN THE ABSENCE OF AN OPINION OF COUNSEL
ACCEPTABLE TO THE CORPORATION THAT SUCH TRANSFER DOES NOT REQUIRE COMPLIANCE
WITH APPLICABLE STATE LAW OR THAT SUCH COMPLIANCE HAS BEEN EFFECTED.<PAGE>
Exhibit 10(xiv)
COMBINED ACCOUNT FACTORING AND SECURITY
AGREEMENT WITH PRINCIPAL FINANCIAL RESOURCES, LLC
COMBINED ACCOUNT FACTORING AND SECURITY AGREEMENT
This Agreement entered into as of October 3, 1997, by and among Astrocom
Corporation (herein called "Client"), a Minnesota corporation, whose address is
2700 Summer Street NE, Minneapolis, Minnesota 55413-2820, and Principal
Resources, LLC (herein called "Factor"), a Minnesota corporation, whose address
is 5217 Wayzata Boulevard, Suite 120, Minneapolis, MN 55416. In consideration
of the mutual covenants set forth herein, Client and Factor agree as follows:
I. DEFINITIONS
"Account" means the right to payment for goods sold or leased, and delivered, or
services rendered, which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance, but does not include any
Account arising out of sales or leases to any subsidiary, parent or affiliated
entity of Client.
"Affiliate" means, with respect to the Client, any person which directly or
indirectly controls, is controlled by, or is under common control with the
Client. The Client shall be deemed to control another person if the Client owns
directly or indirectly 5% or more of any class of voting stock of the controlled
person or possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of the controlled person, whether
through ownership of stock by contract or otherwise. In addition, the Client's
Affiliates shall include the Client's officer, directors, joint venturers and
partners and any person controlled by any such officer, director, joint venturer
partner.
"Collateral" means all of the property, real or personal, tangible or
intangible, given as security pursuant to Section 7.01 hereof for the
obligations of Client under this agreement.
"Credit Problem" means a Customer is unable to pay its debts because of
insolvency, the dissolution, termination of existence, or business failure of
the Customer, the voluntary filing of a petition of bankruptcy, or the
commencement of any proceeding under the Bankruptcy Code or any other bankruptcy
or insolvency laws by or against Customer such that payment on the Account is or
will be impaired.
"Customer" means Client's customer or the account debtor.
"Customer Dispute" means any claim by a Customer against Client, valid or
invalid, now existing or hereafter arising (including but not limited to a claim
for credit or refund due to a return of goods which gave rise to an Account),
that may reduce the amount collectible from Customer by Factor. The foregoing
notwithstanding, a dispute with a Customer involving both a Customer Dispute and
a Credit Problem shall be deemed a Customer Dispute.
"Daily Rate" means the amount per diem equal to 2.5% over the Reference Rate per
annum times the Part Payment, as set forth in Section 2.06 below, for each day
an Account assigned herein remains unpaid.
"Eligible Amount" means the difference between the gross amount of the Account
and any partial payments under the Account if less than the gross face amount,
and any trade or cash discounts, credits or allowances, or any adjustments to
the Account taken by the Customer.
"Insolvent" means, with respect to any person or entity, that such person's or
entity's liabilities exceed such person's or entity's assets and/or such person
or entity is not generally paying its debts as they become due.
"Reference Rate" means the rate of interest from time to time publicly announced
by First Bank National Association as its "Reference Rate" or "Base Rate".
II. PURCHASE OF ACCOUNTS RECEIVABLE
2.01 Assignment/Purchase. Client hereby assigns to Factor as absolute owner
with recourse all Accounts approved and deemed acceptable by Factor, now or
hereafter created by Client's credit sales to Customers, and represented by
Client to be bona fide existing obligations of its Customers arising out of, and
acquired by it, in the ordinary course of its business, which Accounts are or
will be due and owing to Client without defense, offset or counterclaim.
2.02 Factor's Discretion. Factor shall purchase only such Accounts hereunder
as Factor may select and approve in its sole and absolute discretion. Factor
shall not have any liability to Client or any of Client's Customers for Factor's
failure or refusal to purchase an Account.
2.03 Assignment Documents. Client will provide Factor with an assignment of
Account, in a form(s) satisfactory to Factor (including any notices or
assignment as may be required by Factor), together with the original invoice or
a true copy of each invoice and/or statement, as may be specified by Factor,
including evidence of shipment, or other instruments or papers that Factor may
require.
2.04 Stamping. At Factor's request, Client will place a sticker on, or stamp,
each original invoice being sent to Factor, indicating that the Account has been
sold to Factor and that payment must be made directly to Factor. Said stickers
or stamp will be supplied to Client by Factor.
2.05 Notification. Client agrees to provide Factor a sufficient number of
Notice of Assignment of Account forms, in a form satisfactory to Factor, signed
by authorized representative of Client, which may, at Factor's sole discretion,
be distributed by Factor to each Customer whose Account is assigned and sold to
Factor by Client. If Factor so requires, it shall be Client's obligation to
ensure that the Notice of Assignment of Accounts form be duly executed by an
authorized representative of the Customer and returned to Factor.
2.06 Part Payment. Upon approval and acceptance by Factor of an Account, Client
shall be entitled to part payment of the Account in an amount not exceeding 80%
(eighty percent) of the Eligible Amount.
2.07 Processing Fee. For each Account approved and accepted by Factor
hereunder, Factor shall receive from Client and Client shall be obligated to pay
to Factor a processing fee equal to 1.50% (one and fifty hundredths percent) of
the monthly average Eligible Amount(s).
2.08 Purchase Price. The purchase price of each Account shall be equal to
98.50% (ninety-eight and fifty hundredths percent) of the Eligible amount; the
purchase price will be reduced in accordance by the Daily Rate beginning as of
the date that Factor makes part payment as to each Account and continuing for
each day thereafter that such Account remains unpaid (the "Purchase Price").
2.09 Collected Reserve. Upon collection by Factor of an Account purchased by
Factor, Factor may hold in reserve account the difference between the Part
Payment and the Purchase Price ("Collected Reserve"). The Collected Reserve may
be held by Factor as security against charge-backs or any other obligations of
Client to Factor and may be applied by Factor against such charge-backs or other
obligations. The Collected Reserve is not due and payable to Client until any
and all of Client's obligations to Factor are fully paid and/or satisfied.
2.10 Return of Collected Reserve. Factor will return to Client the balance of
the Collected Reserve every Wednesday as of the previous Friday only if, in
Factor's sole and absolute discretion, Factor has determined that Client has
complied with all of the terms and conditions of this Agreement, that no events
of default as defined in Article VIII below have occurred and Client
acknowledges to Factor that there are no offsets or claims against or customer
disputes relating to any Account purchased by Factor. However, if the Collected
Reserve as a deficit balance at any time, Client shall be obligated to
immediately pay to Factor the amount of such deficit.
2.11 Customer Disputes. Upon the occurrence of any Customer dispute, whether
valid or invalid, Client will immediately pay to Factor, on the Account
purchased by Factor subject to the Customer Dispute, the amount of any Part
Payment made on the Account by Factor plus the Factor's Discount. Further,
notwithstanding the payment obligation set forth herein, Factor may, in addition
to any other remedies available to Factor under this Agreement, immediately
charge-back the Account purchased by Factor, which is subject to the Customer
Dispute, to Client and provide notice thereof to Client. Any such charge-back
Account shall be subject to Factor's security interest therein. Client shall
notify Factor immediately of any disputes between Customer and Client. Factor
may, but is not obligated to settle any Customer Dispute directly with Customer.
Such settlement does not relieve Client of final responsibility for payment of
any such Account purchased by Factor.
2.12 Client's Obligation. Until all Accounts purchased by Factor are paid or
declared in Factor's own judgment to be uncollectible due to a Credit Problem,
and the Client has met with the requirements of paragraph 2.05 of this
Agreement, the amount paid for the Account together with the Factor's Discount
shall be and remain an obligation of Client to Factor.
III. WARRANTIES AND REPRESENTATIONS OF CLIENT
In order to induce Factor to enter into this Agreement, and with full
knowledge that the truth and accuracy of the warranties and representations set
forth in this Agreement are being relied upon by Factor, since time is of the
essence, and a substantial delay could be caused by a complete credit
investigation of each Customer, Client warrants and represents to Factor now,
and during the term of this Agreement, that:
3.01 Client Organization; Etc. Client:
(a) is duly organized, validly existing and in good standing under the
laws of the State of Minnesota;
(b) has the power and authority to own its properties and carry on its
business as it is now being conducted, and is to be conducted
following consummation of the transactions contemplated by this
Agreement;
(c) is qualified to do business in every jurisdiction where such
qualification is necessary;
(d) is duly authorized to conduct such business under the name of
Astrocom Corporation and such trade name has been properly
registered as required by the laws of the State of Minnesota; and
(e) has the power to execute and deliver this Agreement and to execute
and deliver to Factor any and all documents required to be executed
and delivered hereunder.
3.02 Customer Solvency. To the best knowledge of Client, no Customer of Client
whose Accounts are to be assigned to purchase by Factor, is insolvent.
3.03 Title to Assets. Client has good title to all inventory and Accounts, free
and clear of all mortgages, liens and encumbrances, covenants or restrictions.
3.04 Validity of Accounts; Etc. Each Account offered for sale to Factor: (a)
is an accurate and undisputed (without claim of offset, defense or counterclaim)
statement of indebtedness by Customer to Client, for a sum certain, which is due
and payable within thirty days or less, or within such time as is agreed to, in
writing, by Factor and Client; and (b) arises out of a bona fide absolute sale,
delivery and acceptance of goods (not on consignment, or on approval, or on hold
basis, or subject to any other contingency), or rendition of service by Client
to Customer, made in the ordinary course of Client's business.
3.05 Title to Accounts; Etc. None of the Accounts being sold to Factor have
heretofore been sold or assigned to any person, firm or corporation, nor has any
security interest in such Accounts been granted to any person, firm or
corporation, or are owed by a Customer who is one of Client's Affiliates.
3.06 No Contravening Agreements. There are no agreements, verbal or written,
between Client and Customer, or any other party, which would prohibit the sale
of the Customer Account by Client to Factor.
3.07 Authorization, Etc. The execution and performance by Client of the terns
and provisions of this Agreement and the execution and delivery of any other
documents required to be executed and delivered hereunder have been duly
authorized by all requisite company action, and neither the execution and
performance of this Agreement or any other documents required to be delivered
hereunder, will violate any provision of law, any order of any court or other
agency of government, the articles of incorporation or agreement of partnership,
if any, of Client, or any indenture, agreement or other instrument to which
Client is a party, or by which Client is bound, or be in conflict with, result
in breach of, or constitute (with due notice or lapse of time or both) a default
under, or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the property or assets of
Client pursuant to, any such indenture, agreement or instrument, except as
provided in this Agreement.
3.08 No Litigation. There is no action, suit or proceeding at law or in equity
or by or before any governmental instrumentality or other agency now pending or,
to the knowledge of Client, threatened against or affecting Client which, if
adversely determined, would have a material adverse effect on the business,
operations, properties, assets or condition, financial or otherwise, of Client.
3.09 No Adverse Agreements. Client is not a party to any material agreement or
instrument or subject to any restriction adversely affecting its business,
properties or assets, operations or condition, financial or otherwise. Client
is not in default in the performance, observance or fulfillment of any of the
material agreements or instruments to which it is a party.
3.10 No Adverse Event. Except as disclosed in writing to Factor, there is no
fact known to Client which materially adversely affects the business,
operations, affairs or condition of Client or any of its properties.
3.11 Taxes. Client has filed all tax returns required by law to be filed and
has paid all taxes, assessments and other governmental charges levied upon its
properties, assets and income, other than those not yet delinquent. There are
no unpaid assessments for additional taxes or any basis therefor.
3.12 Compliance With Laws. Client is in full compliance with all state and
federal laws relating to the conduct of its business.
IV. CONDITIONS TO FACTOR'S OBLIGATIONS HEREUNDER
4.01 Conditions Precedent. The obligations of Factor to perform its obligations
hereunder is subject to the conditions precedent that the representations and
warranties set forth in Article III hereof shall be true and correct on and as
of the date hereof, and on the date each Account is offered to Factor for sale
pursuant to this Agreement; and no Event of Default as specified in Article VIII
hereof, nor any event which upon notice or lapse of time or both would
constitute such an Event of Default, shall have occurred and be continuing; and
each offer of an Account for sale to Factor shall constitute a certification to
such effect as of the date of such offer.
V. AFFIRMATIVE COVENANTS BY CLIENT
Client covenants and agrees that, from the date hereof and until
termination of this Agreement and performance of all of Client's obligations
hereunder, Client will, unless otherwise agreed to in writing by Factor:
5.01 Inspection of Records. Promptly, from time to time, permit Factor to
inspect its books and records, at reasonable business hours, and to make copies
of abstracts thereof, and furnish such other information regarding its
operations, assets, business affairs and financial condition, as Factor may
request.
5.02 Notices. Promptly notify Factor of:
(a) any developments which would materially adversely affect the
business of Client, its properties or affairs or the ability of
Client to perform its obligations under this Agreement, or any other
documents delivered in connection herewith;
(b) any material adverse change in Client's condition, financial or
otherwise;
(c) of the occurrence of any Event of Default by Client as defined in
Article VIII hereof, and of the occurrence of any event which upon
notice or lapse of time, or both, would constitute such an Event of
Default; or
(d) any change of address of Client.
5.03 Taxes. Pay all taxes or fees in relation to the Accounts, goods sold or
services rendered, giving rise to the Accounts.
5.04 Factor's Property. Immediately turn over to Factor and, until doing so,
hold in trust and safekeeping separate and apart from Client's other property
and as the sole and separate property of Factor any payment on an Account
purchased by Factor whenever any such payment, whether case, check (payable to
Client, Factor or both), money order or other form of payment, comes into
Client's possession, and all goods giving rise to Accounts purchased by Factor
which are returned or rejected by, or repossessed from Customer(s).
5.05 Book Entries. Upon the sale of any of its Accounts to Factor, Client will
immediately make proper entries on its books and records disclosing the sale of
such Accounts to Factor.
5.06 Reimbursement of Expenses; Etc. Reimburse the Factor for its reasonable
expenses, fees and disbursements (including without limitation, reasonable
attorneys' fees and legal expenses and wire transfer fees), incurred in
connection with the preparation or administration of this Agreement or any other
document relating hereto or the Factor's enforcement of the obligations of the
Client under this Agreement or any other such document, whether or not suit is
commenced, which attorneys' fees and legal expenses shall include, but not be
limited to, any attorneys' fees and legal expenses incurred in connection with
any appeal of a lower court's judgment or order. The Factor is hereby
authorized to charge from time to time against any reserve account (including,
without limitation, the Collected Reserve) established by the Factor pursuant to
this Agreement any obligation of Client to Factor hereunder when due.
5.08 Reporting to Factor. Client shall provide the financial information to
Factor as follows:
(a) Client's year end audit reports shall be delivered by Client within
120 days of Client's respective year ends during the term of this
Agreement;
(b) Client's monthly financial statements, including Client's accounts
receivable aging and account payable aging, shall be delivered by
Client by the 30th day of the month immediately following the month
end to which the financial statements relate.
5.09 Insurance. Maintain insurance of such types and in such amounts as are
maintained by companies of similar size engaged in the same or similar
businesses; provided, however, that each policy insuring any collateral securing
any and all obligations of Client shall name Factor as the loss payee.
VI. NEGATIVE COVENANTS
Client covenants and agrees that, until termination of this Agreement and
performance by Client of all of its obligations hereunder, unless Factor shall
otherwise consent in writing, it will not directly or indirectly:
6.01 No Liens. Create, incur, assume or suffer to exist any pledge, lien,
charge or other encumbrance of any nature whatsoever on any of its Accounts or
inventory, now or hereafter owned.
6.02 No Sale of Assets; Etc. Sell, lease, transfer or otherwise dispose of any
of its business, except in the ordinary course of its business.
6.03 No Interference With Factor's Rights. Interfere in any fashion or under
any circumstances with any of Factor's right under this Agreement.
6.04 No Other Sale of Accounts. Factor or sell its Accounts except to Factor
during the term of this Agreement.
6.05 No Change of Account Terms. Change or modify the terms of the original
Account with Customer.
6.06 No Pledge of Factor's Credit. Pledge the credit of Factor to any person
or entity for any purpose whatsoever.
6.07 No Alternations of Payment Schedule. Alter any Customer payment schedule.
VII. SECURITY INTEREST
7.01 Grant of Securing Interest. As a further inducement for Factor to enter
into this Agreement, Client hereby grants to Factor, as security for the
repayment of any and all of Client's obligations hereunder, a security interest
in all of Client's accounts and all inventory, equipment, instruments,
documents, contract rights, chattel paper, general intangibles and the proceeds
thereof (including any insurance proceeds) now or hereafter owned by Client, or
in which Client now or hereafter may have any rights, wherever situated and
whenever acquired.
VIII. DEFAULTS
8.01 Events of Default. Upon the occurrence of any of the following events
(each of which is herein sometimes called an "Event of Default"):
(a) If Client shall fail to pay any of its obligations to Factor when
due;
(b) If Client confesses inability to continue performance in accordance
with this Agreement;
(c) If any representation or warranty made herein or in any report,
assignment, certificate, financial statement or other instrument
furnished in connection with this Agreement, shall prove to be false
or misleading in any material respect;
(d) If Client shall fail to perform any covenant, condition or agreement
contained herein;
(e) If Client or any other person liable in whole or in part for payment
or performance of the obligations contained herein shall (i) apply
for or consent to appointment of a receiver, trustee, custodian or
liquidator of it or any of its property; (ii) admit in writing its
inability to pay its debts as they mature, (iii) make a general
assignment for the benefit of creditors; (iv) be adjudicated
bankrupt or insolvent or be the subject of an order for relief under
Title 7 or 11 of the United States Code or (v) file a voluntary
petition in bankruptcy, or a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage
of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or an answer admitting
the material allegation of a petition filed against it in any
proceeding under any such law, or if a corporate action shall be
taken for the purpose of effecting any of the foregoing;
(f) If any order, judgment or decree shall be entered, without the
application, approval or consent of Client by any court of competent
jurisdiction, approving a petition seeking reorganization of Client
or appointing a receiver trustee, custodian or liquidator of Client,
or of all or a substantial part of the assets of Client;
(g) If there occurs any attachment on any deposits or other property of
Client in the hands or possession of Factor;
(h) If any "default" (however defined) shall occur under any guaranty of
Client's obligations hereunder;
then, and in every such Event of Default and at any time thereafter during the
continuance of such event, Factor may take any one or more of the following
actions; (i) charge back to Client all outstanding Accounts and declare all
obligations secured hereby immediately due and payable; (ii) enforce the
security interest given hereunder pursuant to the Uniform Commercial Code or any
other law; (iii) enforce the security interest given hereunder pursuant to the
Uniform Commercial Code or any other law; (iii) require Client to assemble the
Collateral and the records pertaining to the Accounts and make them available to
Factor at a place designated by Factor; (iv) enter the premises of Client and
take possession of the Collateral and of the records pertaining to the Accounts
and any other Collateral; (v) grant extensions, compromise claims and settle the
Accounts for less than the face value, and without prior notice to Client; (vi)
use, in connection with any assembly or disposition of the Collateral, a
trademark, trade name, copyright, patent right or technical process used or
utilized by Client without payment of any license fee or royalty to Client;
(vii) retain any surplus realized to cover Client's obligations to Factor and
hold Client liable for any deficiency as provided in the Uniform Commercial
Code; (viii) offset any funds held by Factor in any reserve account for
obligations of Client to Factor, including but not limited to legal fees or
other costs associated with the collection of Accounts, or pursue any other
remedy at law or equity which Factor may have.
IX. MISCELLANEOUS
9.01 Survival of Agreement; Etc. This Agreement and all covenants, agreements,
representations and warranties made herein, shall survive the purchase by Factor
of the Accounts hereunder, and shall continue in full force and effect, so long
as Client shall have any obligations to Factor hereunder. Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the heirs, personal representatives, legal representatives,
successors and assigns of such parties; and all covenants, promises and
agreements in this Agreement contained, by or on behalf of Client, shall inure
to the benefit of the successors and assigns of Factor.
9.02 Factor's Property. Once Factor has purchased an Account, payment on such
Account by Customer is the sole property of Factor.
9.03 Appointment of Attorney-in-Fact. In order to carry out this Agreement and
avoid unnecessary notification to Customers, Client irrevocably appoints Factor,
or any person designated by Factor, its special attorney-in-fact or agent, with
power to:
(a) Delete Client's address on all invoices and statements mailed to
Customers and to substitute in its place Factor's address;
(b) Receive, open and dispose of all mail addressed to Client or to
Client's trade name at Factor's address;
(c) Endorse the name of Client or Client's trade name on any checks or
other evidences of payment that may come into the possession of
Factor with respect to any Collateral;
(d) In Client's name, or otherwise, to demand, sue for, collect, receive
and give acquittance for any and all monies due or to become due on
Accounts purchased by Factor;
(e) To settle, compromise, compound, prosecute or defend any action or
proceeding with respect to said Accounts;
(f) To extend the time of payment of any or all of the Accounts
purchased by Factor and to make any allowances and other adjustments
with reference thereto;
(g) Offer discounts to Client's Customer exclusive of Client's normal
business custom with said Customer where necessary to affect
collection; and
(h) To do any and all things necessary and proper to carry out the
purpose of this Agreement. The authority granted pursuant to this
power of attorney shall continue in full force and effect until all
Accounts purchased by Factor have been paid in full.
9.04 Open Items. Should Factor receive a double payment on an Account or other
payment which is not identified, Factor shall carry such sums as open items and
shall return to Client or Customer upon proper notification.
9.05 Indemnifications of Factor. Client shall hold Factor harmless against any
Customer ill will arising from Factor's collecting or attempting to collect any
Account.
9.06 Term of Agreement. This Agreement shall continue in full force and effect
until April 3, 1998 ("Initial Termination Date"). Factor may terminate this
Agreement at any time. Absent termination of this Agreement by Factor, or as
provided elsewhere in this Agreement, this Agreement shall automatically and
continually renew for successive periods of six months (each such period
referred to as a "Renewal Period") from the Initial Termination Date or the end
of a Renewal Period unless, Client, no less than thirty (30) days prior to the
Initial Termination Date or the expiration of a Renewal Period: (a) gives
Factor written notice to terminate this Agreement; and (b) pays Factor as
liquidated damages an amount equal to the Monthly Minimum as set forth in
Section 9.07 for each month or part of a month between the stated termination
date and the Initial Termination Date or end of a Renewal Period, whichever is
applicable.
9.07 Monthly Minimum. Client agrees to generate a minimum of fees to Factor in
the amount of $2,000.00 per month during the term of this Agreement (such
minimum fees to be referred to as the "Monthly Minimum"). Should Factor not
receive the Monthly Minimum or for any month during the term of this Agreement,
Client agrees to remit immediately to Factor the difference between the Monthly
Minimum and the fees actually generated through factoring for such month.
Remittance of the difference to Factor shall be made as follows: by Factor's
deducting the difference from Client's Assignment and Schedule of Accounts,
Reserve Release and/or any collateral securing Client's obligations to Factor,
or by Client's direct payment to Factor of such difference.
9.08 Survival of Security Interest; Etc. After termination of this Agreement,
Client shall remain fully responsible to Factor for any Accounts purchased
before such termination and Factor's security interest shall survive such
termination until all of Client's obligations hereunder shall have been fully
paid and/or satisfied.
9.09 Binding Effect; Etc. This Agreement shall inure to the benefit of and be
binding upon the heirs, executors, administrators, successors and assigns of the
parties hereto.
9.10 Rights and Remedies. No failure on the part of Factor to exercise, and no
delay in exercising, and no course of dealing with respect to, any right, power
or remedy under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise by Factor of any right, power or remedy under this
Agreement preclude any other right, power or remedy. The remedies in this
Agreement are cumulative and are not exclusive of any other remedies provided by
law.
9.11 Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of Minnesota. Unless otherwise defined
herein, or unless the context otherwise requires, all terms used herein which
are defined in the Minnesota Uniform Commercial Code have the meanings therein
stated.
9.12 Consent to Jurisdiction; Etc. Client hereby consents to the jurisdiction
of the courts of the State of Minnesota and the United States District Court for
the District of Minnesota for the purpose of any suit, action or other
proceeding arising out of any of its obligations hereunder or with respect to
the transactions contemplated hereby, and expressly waives any and all
objections it may have as to venue in any of such courts. CLIENT AND FACTOR
ALSO WAIVE TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS
AGREEMENT.
9.13 Factor's Customer Notification Rights; Etc. Factor may in its sole
discretion give notice of assignment to any and all Customers of Client and
collect Accounts directly from such Customers.
9.14 Notices. All notices and communications hereunder shall be given or made
to the parties at their respective addresses set forth in the first paragraph of
this Agreement, or at such other address as the addressee may hereafter specify
for the purpose by written notice to the other party hereto. Such notices and
other communications will be effectively given only if and when given in writing
and delivered at the address set forth herein or duly deposited in the mails
with first-class postage prepaid, or delivered to a telegraph company with all
charges prepaid, addressed as aforesaid.
9.15 Separability. If any provision hereof is held invalid, illegal or
unenforceable in any jurisdiction, for any reason whatsoever, the other
provisions hereof shall remain in full force and effect in such jurisdiction and
to that end provisions hereof are declared to be severable and the remaining
provisions shall be liberally construed in favor of Factor.
9.16 Headings. The various headings of this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto all
as of the day and year first above written.
PRINCIPAL RESOURCES, LLC ASTROCOM CORPORATION
By _______________________ By ______________________
Its ______________________ Its ______________________
By _______________________
Its ______________________
<PAGE>
Exhibit 10(xv)
WARRANT ISSUED TO RONALD B. THOMAS DATED JULY 2, 1997
WARRANT FOR PURCHASE OF COMMON STOCK
OF
ASTROCOM CORPORATION
(A Minnesota Corporation)
2,892,403 shares
This certifies that Ronald B. Thomas (hereinafter the "Holder"), is
entitled to purchase from Astrocom Corporation (hereinafter the "Company")
2,892,403 fully paid and nonassessable shares of Common Stock of the Company,
par value $.10 per share, pursuant to the terms and conditions hereinafter set
forth, at the price of $.47 per share.
1. The rights represented by this Warrant shall vest as follows:
(a) No shares may be purchased prior to January 2, 1998.
(b) The right to purchase 964,134 shares may be exercised at any
time from January 2, 1998 through July 1, 2007, in whole or in
part, but only if Holder has remained an employee of the
Company, without a break in service, during the period July 2,
1997 through January 1, 1998.
(c) The right to purchase 964,134 shares may be exercised at any
time from July 2, 1998 through July 1, 2007, in whole or in
part, but only if Holder has remained an employee of the
Company, without a break in service, during the period July 2,
1997 through July 1, 1998.
(d) The right to purchase 964,135 shares may be exercised at any
time from July 2, 1999 through July 1, 2007, in whole or in
part, but only if Holder has remained an employee of the
Company, without a break in service, during the period July 2,
1997 through July 1, 1999.
Provided, however, that in the event that Holder has remained an employee of the
Company, without a break in service, during the period July 2, 1997 through
January 1, 1998, the right to purchase the 964,134 shares otherwise becoming
exercisable pursuant to subparagraph (c) above shall become exercisable on such
earlier date, if any, on which any one of the benchmarks set forth below has
been achieved, and the right to purchase the 964,135 shares otherwise becoming
exercisable pursuant to subparagraph (d) above shall become exercisable on such
earlier date, if any, on which any two of the benchmarks set forth below have
been achieved:
THIS WARRANT IS SUBJECT TO THE TERMS OF THE LEGEND SET FORTH ON THE LAST PAGE
HEREOF.<PAGE>
The Company sells its Port Extender technology for $200,000 or
more.
The Company receives an equity investment or bridge loans,
with a term of at least nine months, in the aggregate amount
of $500,000.
The Company has two consecutive months of at least break-even
performance.
The Company has $900,000 in revenue for a calendar quarter.
The Company has $5,000,000 in revenue for a period of twelve
consecutive months.
The Company has net income during a period of twelve
consecutive months.
The Company receives ISO 9000 certification.
The rights represented by this Warrant may be exercised, when vested as
provided above, by the surrender of this Warrant at the principal office of the
Company and upon payment to the Company by certified check or bank draft of the
purchase price for the shares to be purchased. Holder shall also execute and
deliver such agreements and representations concerning Holder's intention not to
distribute the Common Stock so obtained and such other matters as the Company
may reasonably request in order to permit issuance of the shares of Common Stock
pursuant to exemptions from registration under federal and state laws, provided,
however, that the unavailability of any such exemption shall not affect the
Company's obligation to issue shares of its Common Stock pursuant hereto. Upon
any exercise of the rights represented by this Warrant, certificates for the
shares of stock so purchased shall be delivered to Holder within a reasonable
time, not exceeding fifteen days, and, unless this Warrant has expired, a new
Warrant representing the number of shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to Holder within
such time.
2. (a) If at any time the Company receives a written request therefor
from Holder with respect to shares of Common Stock issued pursuant to this
Warrant not theretofore registered under the Securities Act of 1933 (the "Act"),
the Company shall prepare and file a Registration Statement on Form S-3 (or any
successor form subsequently promulgated by the Securities and Exchange
Commission as a replacement for Form S-3) under the Act covering the shares
which are the subject of such request and shall use its best efforts to cause
such Registration Statement to become effective. The Company shall be obligated
to prepare, file and cause to become effective one Registration Statement on
Form S-3 pursuant to this subparagraph 2(a). In the event that Holder
determines for any reason not to proceed with the registration at any time
before the Registration Statement has been declared effective by the Securities
and Exchange Commission, and Holder requests the Company to withdraw such
Registration Statement (if theretofore filed), and such Registration
Statement is withdrawn with respect to the shares covered thereby, and
Holder agrees to bear his own expenses incurred in connection therewith and
to reimburse the Company for the expenses incurred by it attributable to the
registration of such shares, then Holder shall not be deemed to have
exercised his right to require the Company to register shares pursuant to
this subparagraph 2(a).
(b) If at any time the Company shall determine to proceed with the
actual preparation and filing of a Registration Statement under the Act in
connection with the proposed offer and sale for money of any of its securities
by it or any of its securityholders, the Company shall give written notice to
Holder, and upon the written request of Holder given within 30 days after
receipt of such notice from the Company, the Company will, except as herein
provided, cause all shares of Common Stock issued to Holder pursuant to the
exercise of this Warrant to be included in such Registration Statement, to the
extent requested by Holder in writing within said 30-day period; provided,
however, that the Company shall not be required to give notice or include any
shares of Common Stock in such registration if the proposed registration is of
an employees' stock option, stock purchase or compensation plan and the shares
of Common Stock held by Holder cannot be included in the registration form
appropriate thereto, or if the securities are proposed to be issued in exchange
for securities or assets or in connection with a merger with or acquisition of
another corporation. If any registration pursuant to this section shall be
underwritten in whole or in part, the Company may require that Holder's
shares requested for inclusion pursuant to this section be included in the
underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters; and if in the good faith judgment of
the managing underwriter of such public offering the inclusion of all of
Holder's shares covered by the request of Holder for registration under
this section would reduce the number of shares to be offered by the Company (or
the prospective seller of the shares to be registered, if other than the
Company) or interfere with the successful marketing of the shares to be offered
by the Company (or the prospective seller of the shares to be registered, if
other than the Company), the number of shares of Holder otherwise to be included
in the underwritten public offering under this section may be eliminated or
reduced.
(c) With respect to any registration pursuant to subparagraphs 2(a)
or 2(b) above, the Company shall bear the following fees, costs and expenses:
All registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if required
by such underwriter or underwriters), all internal Company expenses, the
premiums or other costs of all policies of insurance against liability arising
out of the public offering, and all legal fees and disbursements and other
expenses of complying with state securities laws. Underwriting discounts and
commissions and transfer taxes for the shares sold by Holder and any other
expenses incurred by Holder not expressly included above shall be borne by
Holder.
3. The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon issuance,
be fully paid and nonassessable and free from all taxes, liens, and charges with
respect to the issuance thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved for the
purpose of issuance upon the exercise of the subscription rights evidenced by
this Warrant, a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Warrant.
4. In the event that the Company shall, at any time prior to the
expiration date of this Warrant and prior to the exercise hereof: (a) declare or
pay to the holders of the Common Stock a dividend payable in any kind of shares
of stock of the Company; or (b)
change or divide or otherwise reclassify its Common Stock into the same or a
different number of shares with or without par value, or into shares of any
class or classes; or (c) consolidate or merge with, or transfer its property as
an entirety or substantially as an entirety to, any other corporation; then,
upon the subsequent exercise of this Warrant, Holder shall receive for the
exercise, such additional shares of stock of the Company, or such reclassified
shares of stock of the Company, or such shares or securities of the Company or
any other entity resulting from the occurrence of any such event which he would
have been entitled to receive had he exercised this Warrant prior to the
happening of any of the foregoing events.
5. The certificates representing the shares to be issued upon exercise
of the rights represented by this Warrant which have not been registered under
applicable federal and state laws will bear a legend substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or the securities act of
any state. The securities have been acquired for investment and may
not be sold, transferred for value, pledged, hypothecated or
otherwise encumbered unless (1) pursuant to an effective
registration of them under the Securities Act of 1933 and the
applicable securities act of any state, or (2) there is presented to
the corporation an opinion of counsel acceptable to counsel for the
corporation to the effect that such registration is not required."
By exercise of this Warrant Holder agrees to be bound by the terms of such
legend.
6. This Warrant shall not entitle Holder to any voting rights or other
rights as a stockholder of the Company.
7. This Warrant shall not be transferable by Holder, other than pursuant
to registration under federal and state securities laws or an exemption from
such registration, the availability of which shall be reasonably determined by
the Company, and then only: (a) to members of the immediate family of Holder or
trusts for the benefit of the immediate family of Holder; or (b) as provided in
paragraph 8 below.
8. In the event of the death of Holder prior to the expiration date of
this Warrant, and prior to its exercise, this Warrant shall be exercisable to
the extent provided above until the expiration date of this Warrant, but only by
the executors or administrators of the estate of Holder or by the persons to
whom Holder's rights shall pass by Holder's Will, or the laws of descent and
distribution.
9. This Warrant is being executed and delivered in the State of
Minnesota, and this Warrant shall be construed in accordance with the laws of
such State.
10. This Warrant shall expire and be void unless exercised on or before
July 1, 2007.
WITNESS the signature of the Company's duly authorized officer as of the
2nd day of July, 1997.
ASTROCOM CORPORATION
By _______________________________________
Its Chairman of the Board
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 ("THE ACT") OR UNDER APPLICABLE STATE LAWS. THE WARRANT
MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT AS PROVIDED ABOVE
AND NO TRANSFER OF IT WILL BE MADE BY THE CORPORATION OR ITS TRANSFER AGENT IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE WARRANT UNDER THE
ACT, AS AMENDED, A "NO ACTION" LETTER OF THE SECURITIES AND EXCHANGE COMMISSION,
OR AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED. FURTHERMORE THE WARRANT MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR
HYPOTHECATED EXCEPT AS PROVIDED ABOVE AND NO TRANSFER OF IT WILL BE MADE BY THE
CORPORATION OR ITS TRANSFER AGENT IN THE ABSENCE OF AN OPINION OF COUNSEL
ACCEPTABLE TO THE CORPORATION THAT SUCH TRANSFER DOES NOT REQUIRE COMPLIANCE
WITH APPLICABLE STATE LAW OR THAT SUCH COMPLIANCE HAS BEEN EFFECTED.
<PAGE>
Exhibit 13
REGISTRANT'S 1997
ANNUAL REPORT TO SHAREHOLDERS
2700 Summer Street N.E.
Minneapolis, Minnesota 55413-2820
(612) 378-7800
<PAGE>
TO OUR SHAREHOLDERS:
[To be provided at a later date.]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Astrocom, a public company (O.T.C, ATCC), was incorporated in 1968 to design,
manufacture and distribute telecommunication products to serve the short-haul
communication market by providing line drivers and other equipment for local
area networks (LANs). In 1989 the Company developed high speed digital access
communications equipment linking facilities through wide area networks (WANs).
Astrocom's CSU/DSUs (Channel Service Unit/Digital Service Unit) function as an
interface to high bandwidth telephone company services for such applications as
high-speed Internet access, video conferencing, and corporate internetworking.
Astrocom multiplexers reduce telecommunications costs by combining up to seven
separate paths into a single communication line. Astrocom products are used by
Internet service providers, telephone service providers, government and
educational entities, private enterprises and others. Astrocom sells its
products through a direct sales force, as well as a network of distributors and
value-added resellers (VARs). The Company is also an original equipment
manufacturer (OEM) for a major computer networking products catalog.
RESULTS OF OPERATIONS
The following table presents selected financial information derived from the
Company's statements of operations expressed as a percentage of net sales for
the years indicated.
Percentage of Net Sales for Years Ended December 31,
1997 1996 1995
Net Sales 100.0% 100.0% 100.0%
Cost of Sales (87.3) (74.7) (64.1)
Write-off of Inventory -- -- (12.5)
Gross Profit 12.7 25.3 23.4
Selling and Administrative (46.1) (52.1) (40.1)
Research and Development (15.4) (13.5) (13.9)
Operating Loss (48.8) (40.3) (30.6)
Other Income (Expense) (3.1) (2.6) (3.5)
Net Loss (51.9%) (42.9%) (34.1%)
1997 COMPARED TO 1996
NET SALES for the year ended December 31, 1997 increased by 11% to $3,646,000
compared to $3,287,000 for the same period ended December 31, 1996. This
increase is largely the result of strong market acceptance of the Company's new
T-1 products. Products introduced within the last 15 months accounted for 56%
of the Company's 1997 sales. Sales were led by the Company's newest product,
the Astrocom SP-100, with approximately 43% of period sales.
GROSS PROFIT for the year ended December 31, 1997 was $464,000 compared to
$832,000 in 1996 (13% and 25% of net sales, respectively). The decrease can be
attributed to a combination of pricing pressures on the older product line and
higher initial costs in the production of the new product line. Adjustments to
pricing and product costs made during the second half of the year had a positive
impact on the final results and should continue to improve in 1998.
In the first quarter of 1997, the Company recorded a $329,000 writedown of
inventory due to: 1) reserves recorded from the loss of a contract and ongoing
product changes, and 2) inventory which could not be accounted for due to
changes in the Company's accounting system and personnel.
SELLING AND ADMINISTRATIVE EXPENSES decreased slightly to $1,681,000 in 1997
from $1,712,000 in 1996. Expenses of $1,082,000 were incurred in the first six
months of the year when the Company was pursuing marketing activities related to
development of a new corporate image and product positioning. Administrative
expenses were high in that six month period because of professional fees to
recruit new management and consulting expenses related to the implementation of
a new integrated management system and reconstruction of prior period financial
statements.
RESEARCH AND DEVELOPMENT EXPENSES increased by 26% to $560,000 in 1997 from
$445,000 in 1996. This increase was a direct result of the added personnel
expenses when the Company hired a team of experienced networking engineers in
the fourth quarter of 1996 in order to accelerate the new product development
process. R&D expenses were also increased in the first quarter of 1997 by
higher spending on product testing, prototype parts and outside services in
connection with the new product introduction. Most of these expenses were
eliminated with the reduction in personnel at the end of the second quarter.
OTHER INCOME (EXPENSE) was $(113,000) for the period ending December 31, 1997
compared to $(86,000) for the same period in 1996. The increase can be
attributed to the high effective interest rate associated with the bridge
financing raised during the third quarter. The Company raised $510,000 of 12%
convertible debt. Because the debt is convertible to common stock at a discount
from the market price and included detachable warrants, the debt was discounted
from its face value and will be accreted over the term of the loan as a non-cash
interest expense. Other income and expense reflected gains on the sale of
intangible assets and losses on the disposal of equipment.
NET LOSS increased 34% to $(1,891,000) in 1997 from $(1,411,000) in 1996. The
greater loss is attributable to the combination of lower gross margins, the
writedown of inventory, higher R&D expenses and the interest associated with the
bridge financing. All but $117,000 of this loss was incurred in the first six
months of the year.
1996 COMPARED TO 1995
NET SALES for the year ended December 31, 1996 increased 3% to $3,287,000 from
$3,178,000 for the same period ended December 31, 1995. This increase in sales
was primarily attributable to an increase in sales of the NX-1 product and the
introduction of the T-Series product in late 1996.
GROSS PROFIT for the year ended December 31, 1996 declined to $832,000 in 1996
from $1,141,000 (before inventory write-off) in 1995. The gross margin declined
to 25% in 1996 from 36% in 1995, because of a combination of competitive pricing
pressure and product cost issues related to the new product.
SELLING AND ADMINISTRATIVE EXPENSES increased by 34% to $1,711,000 in 1996 from
$1,274,000 in 1995. A combination of increased sales and marketing expenditures
and additions to staff accounted for the increases. Sales and marketing efforts
were enhanced by the addition of experienced sales personnel, reorganization of
the distributor network and increased advertising and promotional activities.
Increased administrative expenses stemmed from the addition of a chief operating
officer and other senior managers.
RESEARCH AND DEVELOPMENT EXPENSES increased slightly to $445,000 in 1996 from
$442,000 in 1995. The Company substantially increased its research and
development efforts in the fourth quarter of 1996 by recruiting a team of
experienced telecommunications engineers and accelerating development efforts on
the new product families, the T-1000 and SP100, which are full-featured T1 and
fractional T1 CSU/DSUs.
OTHER INCOME (EXPENSE) decreased 23% to ($86,000) in 1996 from ($112,000) in
1995. Lower interest expense was a result of lower levels of borrowing in the
final months of 1996, as a result of the Company's securities offering.
NET LOSS increased 30% to $(1,411,000) in 1996 from $(1,085,000) in 1995. The
net loss increased due to a combination of declining gross margin and the
increased operating expenses associated with additional staff and product
development and marketing expenses.
LIQUIDITY AND RESOURCES
During 1997 the Company's operations were funded primarily by cash on hand and
accounts payable. Accordingly, net working capital declined to $98,000 on
December 31, 1997 from $1,423,000 on December 31, 1996. In addition, cash from
financing activities included $510,000 raised through convertible debt and
detachable warrants, $146,000 from the exercise of options and warrants and
$63,000 from a factoring agreement.
The Company's bank line of credit expired on September 30, 1997. This source of
financing was replaced by a factoring and security agreement with Principal
Resources, LLC on October 3, 1997. The commitment size is $1,000,000 and the
Company may assign 80% of eligible accounts receivable at prime plus 2.5% plus
1.5% of the monthly average gross face amount of assigned invoices. The
agreement extends through July 3, 1998 and is automatically renewable for
successive six month periods unless terminated by Principal Resources, LLC.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has experienced operating losses in each of fiscal years 1994 through
1997, depleting most of its available capital. The Company is dependent on
returning to profitable operations and future financing activities to continue
as a going concern. Management is evaluating financing alternatives; however,
there can be no assurance that the Company will be successful in obtaining
financing on terms favorable to the Company.
Management believes it will maintain short-term liquidity by factoring its
accounts receivable, continuing to manage its accounts payable, and controlling
its inventory levels. In the longer term, liquidity is dependent upon returning
to profitable operations that generate adequate cash flow to meet current
obligations on a timely basis. To that end, significant expense reductions have
been enacted, including a reduction in personnel and changes in pricing and
distributor agreements in order to improve gross margins.
To address the longer term goals of the Company, management has begun to explore
financing alternatives. Proceeds from a private placement of debt or equity
will replace the existing bridge financing. Additional funds will be used to
grow the business by restarting development activities and pursuing attractive
business opportunities as they arise.
Because of uncertainties regarding the achievability of management's plans, no
assurance can be given about the Company's ability to continue in existence.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from this uncertainty.
YEAR 2000 ISSUES
Computer programs have historically been written to abbreviate dates by using
two digits instead of four digits to identify a particular year. The so called
"Year 2000" problem or "millennium bug" is the inability of computer software or
hardware to recognize or properly process dates ending in "0". The Company has
reviewed its products and internal information systems and believes that the
costs and effort to address the Year 2000 problem will not be material to its
business, financial condition or results of operations.
<PAGE>
Financial Statements
Astrocom Corporation
December 31, 1997 and 1996
<PAGE>
Astrocom Corporation
Financial Statements
December 31, 1997 and 1996
Contents
Report of Independent Auditors
Audited Financial Statements
Balance Sheets
Statements of Operations
Statements of Shareholders Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
Report of Independent Auditors
Board of Directors
Astrocom Corporation
We have audited the accompanying balance sheets of Astrocom Corporation as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Astrocom Corporation at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming Astrocom
Corporation will continue as a going concern. As more fully described in Note 12
the Company has experienced continued operating losses in each of fiscal years
1994 through 1997, depleting most of its available capital. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Minneapolis, Minnesota
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Balance Sheet
December 31, 1997
December 31
<S> 1997 1996
<C>
Assets
Current assets:
Cash $ 32,000 $ 979,000
Accounts receivable, less allowance of $40,000
in 1997 and $15,000 in 1996 558,000 594,000
Inventories 521,000 728,000
Prepaid expenses 45,000 32,000
Total current assets 1,156,000 2,333,000
Buildings, machinery, and equipment:
Buildings 5,000 5,000
Machinery and equipment 1,262,000 1,243,000
Office furniture and fixtures 854,000 830,000
Total buildings, machinery and equipment 2,121,000 2,078,000
Accumulated depreciation (1,730,000) (1,638,000)
391,000 440,000
Demonstration inventory 22,000
Other assets 7,000 11,000
Total assets $1,554,000 $2,806,000
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Liabilities and shareholders' equity
December 31
1997 1996
<S> <C>
Current liabilities:
Notes payable to bank $ $ 444,000
Short-term notes payable 364,000
Accounts payable 507,000 367,000
Payable to factor 63,000
Accrued expenses 112,000 69,000
Current portion of lease settlement costs 12,000 30,000
Total current liabilities 1,058,000 910,000
Lease settlement costs 68,000 62,000
Long-term debt 1,000
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized share - 5,000,000
Issued and outstanding shares - 200,000 200,000 200,000
Common stock, $.10 par value:
Authorized shares - 50,000,000
Issued and outstanding shares -10,464,951
(9,863,829 in 1996) 1,046,000 986,000
Additional paid-in capital 6,975,000 6,537,000
Accumulated deficit (7,793,000) (5,890,000)
Total shareholders' equity 428,000 1,833,000
Total liabilities and shareholders' equity $1,554,000 $2,806,000
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Operations
Year ended December 31
1997 1996
<S> <C> <C>
Net sales $ 3,646,000 $ 3,287,000
Cost of products sold 3,182,000 2,455,000
Gross profit 464,000 832,000
Selling and administrative expenses 1,681,000 1,712,000
Research and development expenses 560,000 445,000
Operating expenses 2,241,000 2,157,000
Operating loss (1,777,000) (1,325,000)
Other income (expense):
Interest income 15,000 11,000
Interest expense (147,000) (97,000)
Other income 19,000
Net loss before income taxes (1,890,000) (1,411,000)
Income taxes 1,000
Net loss (1,891,000) (1,411,000)
Less preferred stock dividends 12,000 9,000
Loss applicable to common stock $(1,903,000) $(1,420,000)
Net loss per common share $ (.19) $ (.22)
basic and diluted
Weighted average number of common
shares outstanding 10,050,564 6,296,494
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Shareholders' Equity (Deficit)
Additional
Prefered Common Stock Paid-In Accumulated
Stock Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
<C>
Balance, December 31, 1995 $ $6,015,702 $ 601,000 $3,660,000 $(4,470,000) $(209,000)
Issuance of common stock, net of
offering costs of $455,000 3,501,000 350,000 2,696,000 3,046,000
Issuance of preferred stock for
debt conversion 200,000 200,000
Issuance of common stock for
retirement plan 3,961 8,000 8,000
Issuance of common stock 66,666 7,000 43,000 50,000
Exercise of warrants 231,500 23,000 77,000 100,000
Issuance of common stock for
Directors' fees 45,000 5,000 53,000 58,000
Dividends on preferred stock (9,000) (9,000)
Net loss (1,411,000)(1,411,000)
Balance, December 31, 1996 $ 200,000 $9,863,829 $ 986,000 $6,537,000 $(5,890,000)(1,833,000)
Exercise of warrants and stock
options 363,772 36,000 110,000 146,000
Beneficial conversion features
of notes payable and
related warrants 165,000 165,000
Issuance of common stock for
Director's fees 43,750 4,000 28,000 32,000
Dividends on preferred stock (12,000) (12,000)
Issuance of warrants for services
provided 44,000 44,000
Issuance of common stock for
services provided 86,450 9,000 51,000 60,000
Issuance of common stock for
debt conversion 107,150 11,000 40,000 51,000
Net loss (1,891,000)(1,891,000)
Balance, December 31, 1997 $ 200,000 10,464,951 $1,046,000 $6,975,000 $(7,793,000) $ 428,000
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Cash Flows
Year ended
December 31
1997 1996
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,891,000) $(1,411,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 95,000 135,000
Amortization of debt discount 69,000
Net gains on disposal of equipment (14,000)
Issuance of stock to directors and
employees 32,000 66,000
Interest on debt converted to common stock 1,000
Professional fees paid in warrants and
stock 104,000
Changes in assets and liabilities:
Accounts receivable 36,000 22,000
Inventories 207,000 (408,000)
Prepaid expenses (13,000) (18,000)
Other assets 26,000 (4,000)
Accounts payable 140,000 (237,000)
Accrued expenses 34,000 3,000
Net cash used in operating activities (1,174,000) (1,852,000)
Cash flows from investing activities
Purchases of equipment (92,000) (206,000)
Proceeds from sale of equipment 60,000
Net cash used in investing activities (32,000) (206,000)
Cash flows from financing activities
Proceeds from sale of stock 3,096,000
Cash received from exercise of warrants 146,000 100,000
Dividends paid (3,000) (9,000)
Net proceeds from factoring arrangement 63,000
Proceeds from issuance of convertible debt 510,000
Payments on notes payable and lease
settlement obligations (457,000) (231,000)
Net cash provided by financing activities 259,000 2,956,000
Decrease in cash (947,000) 898,000
Cash at beginning of year 979,000 81,000
Cash at end of year $ 32,000 $ 979,000
Supplemental cash flow information
Conversion of subordinated debt into
preferred stock $ $ 200,000
Conversion of notes payable into common
stock 51,000
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
1. Nature of Business and Significant Accounting Policies
Nature of Business and Operations
Astrocom Corporation (the Company ) designs, manufactures, and markets
advanced digital communications equipment for the data transmission needs
of corporations and other large organizations. The principal markets for the
Company's products are the United States, Europe and Asia.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all investments
with a maturity of three months or less when purchased to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market, determined on an
average cost basis.
Buildings, Machinery and Equipment
Buildings, machinery and equipment, including assets under capital leases,
are carried at cost and depreciated over 5 to 10 years using the straight-line
or double declining balance methods.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), but applies Accounting Principles Board
Opinion No. 25 (APB 25) and related interpretations in accounting for<PAGE>
1. Nature
of Business and Significant Accounting Policies (continued)
its plans. Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the
date of grant, no compensation is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share
In 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128, Earnings Per Share, which replaces the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share exclude the dilutive effect of options,
warrants and convertible securities, while diluted earnings per share include
such effects. All earnings per share amounts for all periods have been
presented to conform with Statement No. 128 requirements and are
unchanged from those previously reported. For all years presented, the
Company's basic and diluted loss per share are the same because the effects
of all options, warrants and convertible securities were antidilutive.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
<PAGE>
2. Inventories
Inventories consisted of the following: 1997 1996
Purchased parts, materials and supplies $328,000 $392,000
Work in process 61,000 107,000
Finished products 211,000 264,000
Less obsolescence reserve (79,000) (35,000)
$521,000 $728,000
3. Debt
Short-term Notes Payable:
During 1997, the Company borrowed $510,000 through issuance of
subordinated convertible promissory notes payable and warrants to purchase
765,000 shares of common stock at $.50 per share. The notes payable bear
interest at a rate of 12%, payable at maturity on July 31, 1998. The notes
payable are convertible into common stock of the Company at 80% of the
quoted stock price on the date of conversion.
The beneficial conversion feature and the warrants were valued and recorded
as a discount to the notes payable which is being accreted as interest expense
over the term of the notes. Notes for $50,000 plus accrued interest were
converted into 107,150 shares during 1997. The carrying value of the notes at
December 31, 1997 was $364,000, net of a $96,000 discount.
During 1997 a portion of the proceeds raised from the issuance of the short-
term notes payable was used to repay a bank line of credit.
Factoring Agreement:
During 1997, the Company began factoring certain receivables under an
agreement with a finance company with interest at the bank reference rate
plus 2.5% (11% at December 31, 1997), plus a monthly processing fee. The
Company remains liable for all receivables advanced until collection.
3. Debt (continued)
Lease Settlement Costs:
During 1993, the Company assumed lease guarantees for certain operations
sold in 1990 when the buyer filed bankruptcy. The settlement with lessors
was recorded at its present value of $125,000 using an 8% interest rate.
During 1997, the Company renegotiated the settlement agreement extending
the payment terms through 2001. Future settlement payments are as follows:
1998 $12,000
1999 32,000
2000 32,000
2001 4,000
Total minimum settlement payments 80,000
Less current portion 12,000
Long-term portion $68,000
The carrying amounts of the Company's debt instruments in the balance
sheets at December 31, 1997 and 1996 approximate their fair value.
4. Operating Leases
The Company has a non-cancelable operating lease agreement for a building
that expires in March 1999. Rental expense included in operations for this
lease for the years ended December 31, 1997 and 1996 totaled $133,134 and
$82,033, respectively. Future minimum rentals under the operating lease
agreement are as follows:
Years ending:
1998 $ 90,000
1999 24,000
$114,000
5. Shareholders' Equity
Preferred Stock
In March 1996, the Company converted the Hanrow Financial Group
$200,000 subordinated note into 200,000 shares of preferred stock. The
preferred stock is callable by the Company on April 5, 2000. The preferred
stock bears a coupon rate of 6% payable quarterly and is convertible into
common stock at $.46 per share. Dividends in arrears at December 31, 1997
were $9,000.
Common Stock
In 1996, the Company sold 3,501,000 units in a private placement of its
common stock, resulting in net proceeds to the Company of $3,046,000. Each
unit sold in the private placement consisted of one share of common stock
and one redeemable warrant. Each redeemable warrant entitles the holder to
purchase one share of common stock at $1.50 per share. The Company may
redeem the redeemable warrants at $.01 per share of common stock at any
time subsequent to 180 days after the issuance of the redeemable warrant if
the closing price of the Company's common stock is above $2.00 per share
for twenty consecutive days subsequent to the date the redeemable warrants
are first redeemable. The redeemable warrants expire in September 1999. In
connection with the private placement, the Company granted the selling agent
a warrant to purchase 350,100 shares of common stock at an exercise price of
$1.00 per share. The warrant expires five years after the date of grant.
6. Stock Options and Warrants
The Company's stock option plans authorize the granting of incentive and
non-qualified stock options. Incentive stock options may be granted to key
employees at prices equal to the fair market value at the date of grant. Non-
qualified stock options may be granted to employees, members of the Board
of Directors, consultants, and other persons who provide services to the
Company. Non-qualified options may be granted at prices not less than 85%
of the fair market value at the date of grant. Options granted generally vest
over a period of 48 months.
<PAGE>
6. Stock Options and Warrants (continued)
A summary of outstanding options is as follows:
Options
Outstanding
Shares Weighted
Reserved Average Price Per
for Grant Exercise Share
Balance, December 31, 1994 453,750 570,000 $ .39
Granted (677,500) 677,500 .49
Terminated 179,250 (179,250) .36
Exercised (1,250) .27
Increase in shares reserved
for grant 1,000,000
Balance, December 31, 1995 955,500 1,067,000 .46
Granted (367,500) 367,500 1.32
Terminated 204,000 (204,000) .55
Canceled/expired 10,000 (10,000) .88
Increase in shares reserved
for grant 500,000
Balance, December 31, 1996 1,302,000 1,220,500 .70
Granted (289,000) 289,000 .72
Exercised (153,125) .41
Canceled/expired 672,875 (672,875) .92
Balance, December 31, 1997 1,685,875 683,500 $ .56
As of December 31, 1997 there were 392,500 options outstanding with
exercise prices between $.30 and $.50, and 291,000 options outstanding with
exercise prices between $.56 and $3.53. At December 31, 1997 outstanding
options had a weighted-average remaining contractual life of 5 years.
The number of options exercisable as of December 31, 1997 and 1996 were
348,625 and 673,875, respectively, at weighted average exercise prices of
$.51 and $.54 per share, respectively.
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $.67 and $.92 per share, respectively.
6. Stock Options and Warrants (continued)
Pro Forma Disclosures
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1997 and 1996, respectively: risk-free interest rate
of 5.5%; no dividend yield; volatility factor of the expected market price of
the Company's common stock of 1.633% and .846%; and a weighted-average
expected life of the option of 5 years and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1997 1996
Pro forma loss applicable to common shares $(1,996,000) $(1,483,000)
Pro forma loss per common share - basic and
diluted $(.20) $(.24)
Note: the pro forma effect on the net loss for 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in the future years
because it does not take into consideration pro forma compensation expense
related to option grants made prior to 1995.
6. Stock Options and Warrants (continued)
Warrants
The Company has granted warrants for the purchase of shares of the
Company s common stock to directors and certain debt and equity holders.
With the exception of warrants granted to the President of the Company, the
warrants are fully vested upon issuance and expire in varying amounts
through 2007. Information with respect to warrants granted as of December
31, 1997 and 1996 is summarized as follows:
Shares Warrant Price
Per Share
Outstanding at December 31, 1995 1,293,070 $.30 to $1.00
Granted 4,143,335 .88 to 1.88
Canceled
Exercised (231,500) .38 to .50
Outstanding at December 31, 1996 5,204,905 .30 to 1.88
Granted 3,772,403 .47 to 1.94
Canceled (104,353) .375
Exercised (210,647) .29 to .69
Outstanding at December 31, 1997 8,662,308 .29 to 1.94
7. Income Taxes
Deferred tax assets and liabilities consisted of the following:
1997 1996
Net operating loss carryforwards $ 3,619,000 $ 3,708,000
Tax credit carryforwards 130,000
Inventory 36,000 14,000
Other 76,000 51,000
Deferred tax assets 3,731,000 3,903,000
Depreciation 62,000 73,000
Deferred tax liability 62,000 73,000
3,669,000 3,830,000
Less valuation allowance (3,669,000) (3,830,000)
Net deferred tax assets $ 0 $ 0
7. Income Taxes (continued)
The Company has net operating loss carryforwards at December 31, 1997 of
approximately $10,644,000, which are available to reduce income taxes
payable in future years. These carryforwards will expire at various times
through the year 2012.
The annual usage of the Company's net operating loss carryforwards may be
limited by provisions of the Tax Reform Act of 1986 ("TRA"). Under TRA,
if a company experiences a change in ownership of more than 50% (by value)
of its outstanding stock over a three year period, the use of its pre-change
in ownership net operating loss carryforwards may be limited each year until
the loss is exhausted or the carryover period expires.
Income tax expense for the current year relates to state taxes.
8. Retirement Plan
The Company has a Retirement Savings Plan for its employees which allows
participants to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. The Company may match up to 25% of
the employees contributions to a maximum of 3% of the employee's annual
salary. Employees vest immediately in their contribution and vest in the
Company s contribution after one year of service. The Company's
contribution to the plan in 1996 was 3,961 shares of common stock, with fair
market value of approximately $8,000, at the date of contribution. There were
no contributions to the Plan during 1997. Future matching contributions will
be determined annually by the Board of Directors.
9. Major Customers
For the year ended December 31, 1997, the Company had net sales to two
customers which totaled 37% of the total net sales for the year. The
receivable balance due from these customers was $259,900 at December 31,
1997.
10. Supplemental Cash Flow Information
The Company made interest payments of $61,000 and $104,000 for the years
ended December 31, 1997 and 1996, respectively.
11. Related Party Transaction
In July 1997 the Company issued a warrant to its president for the purchase
of 2,892,403 shares of common stock at $.47 per share. The warrant vests in
equal parts on January 2, 1998, July 2, 1998 and July 2, 1999 assuming
continued employment. The exercise dates can be accelerated if the Company
meets certain performance benchmarks.
12. Going Concern
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has experienced operating losses in each of
fiscal years 1994 through 1997, depleting most of its available capital. The
Company is dependent on future financing activities to continue as a going
concern. Management is evaluating financing alternatives; however, there can
be no assurance that the Company will be successful in obtaining financing on
terms favorable to the Company.
<PAGE>
CORPORATE DATA
OFFICERS:
S. Albert D. Hanser
Chairman
Ronald B. Thomas
President, Secretary and Treasurer
Sarah B. Fjelstul
Assistant Secretary
DIRECTORS:
Ronald B. Thomas
S. Albert D. Hanser
Dennis E. Evans
President and Chief Executive Officer, Hanrow Financial Group, Ltd.
Douglas M. Pihl
Special Technical Adviser to Ascend Communications, Inc.
Roger V. Stageberg
Attorney at Law, Lommen, Nelson, Cole & Stageberg, P.A.
SHAREHOLDER INFORMATION
AUDITORS
Ernst & Young LLP
1400 Pillsbury Center
Minneapolis, MN 55402
LEGAL COUNSEL
Lommen, Nelson, Cole & Stageberg, P.A.
1800 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
REGISTRAR/TRANSFER AGENT
Norwest Stock Transfer
161 N. Concord Exchange
South St. Paul, MN 55075
FACILITY
Corporate Office
2700 Summer Street NE
Minneapolis, MN 55413
ANNUAL MEETING
The annual meeting of Astrocom shareholders will be held at 3:00 p.m. May 28,
1998 at Minneapolis Club, 729 Second Avenue South, Minneapolis,
Minnesota. Shareholders and other interested parties are encouraged to
attend.
FORM 10-KSB
A copy of the annual report filed with the Securities and Exchange Commission
of Form 10-KSB is available to shareholders, without charge, upon written
request to Sarah B. Fjelstul, Astrocom Corporation, 2700 Summer Street N.E.,
Minneapolis, Minnesota 55413.
MARKET AND DIVIDEND DATA:
The Common Stock of Astrocom Corporation was traded during 1997 on the
over-the-counter Bulletin Board under the symbol ATCC. The high and low
selling prices for the Common Stock were as follows:
1997 1996
High Low High Low
First Quarter 3 13/16 1 5/8 1 1/8 1/4
Second Quarter 2 1/8 5/8 1 3/8 3/4
Third Quarter 1 5/8 3/8 1 3/4 7/8
Fourth Quarter 1 1/16 11/32 2 1 3/8
The Company has never paid a cash dividend and is restricted from paying
dividends pursuant to a subordinated debt agreement dated April 5, 1991. The
Company intends to retain any earnings to finance the development of its
business and, accordingly, does not anticipate payment of a cash dividend in
the foreseeable future.
On March 13, 1998 the Company had approximately 723 shareholders of record.
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-299184) pertaining to the 1988 Incentive Stock Option Plan
of Astrocom Corporation of our report dated February 27, 1998, with respect
to the financial statements of Astrocom Corporation incorporated by reference
in the Annual Report on Form 10-KSB of Astrocom Corporation for the year ended
December 31, 1997.
s/Ernst & Young LLP
Ernst & Young LLP
Minneapolis, Minnesota
March 31, 1998
