Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-8482
ASTROCOM CORPORATION
(Exact name of small business issuer as specified in its charter)
Minnesota
(State or other jurisdiction of incorporation
or organization)
41-0946755
(I.R.S. Employer Identification No.)
2700 Summer Street N.E., Minneapolis, Minnesota 55413-2820
(Address and zip code of principal executive office)
(612) 378-7800
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the 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 $2,896,563.
As of March 19, 1999, the aggregate market value of the voting stock held by
non-affiliates was $4,419,719, computed by reference to the average of the bid
and asked prices on such date, as reported by the OTC Bulletin Board.
As of March 19, 1999, there were outstanding 14,999,161 shares of the
registrant's common stock, par value $.10 per share, and 200,000 shares of the
Company's preferred stock, par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the annual meeting
of shareholders to be held on May 20, 1999, are incorporated by reference into
Part III.
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
PART I
This Annual Report contains certain forward-looking statements that project or
estimate future events. For this purpose, any statements contained in this Form
10-KSB that are not statements of historical fact may be deemed to be forward-
looking statements. Without limiting the foregoing, the words "believes,"
"expects," "anticipates," "intends," and similar expressions are intended to
identify forward-looking statements. These statements involve various risks
and uncertainties that may cause actual results to differ materially from
historical results or those currently projected. Readers are cautioned not to
place undue reliance on these forward-looking statements.
Unless the context indicates otherwise, all references to the "Company",
"Astrocom", "Registrant" or the "Issuer" in this Annual Report on Form 10-KSB
relate to Astrocom Corporation.
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Astrocom Corporation ("Astrocom" or the "Company") 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 the Company
Products
The Company develops, manufactures, markets and services electronic devices
which address key areas of wide area data, voice and video communication
networks. The Company'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 the Company's products help organizations make better use
of their bandwidth and reduce capital costs.
The Company'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.
Sales and Distribution
The Company's customers include telephone companies, Internet Service
Providers (ISPs), corporate and institutional end-users, integrators and
distributors. The Company is also an original equipment manufacturer (OEM) for
a computer products catalog.
The sales activities for the Company'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,
the Company's sales force pursues direct business with sizable service providers
and end-user accounts. The Company 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 1998, the Company subcontracted over 95% of its manufacturing operations
to outside organizations specializing in manufacturing. The Company believes
that there are several outside organizations who could provide the specialized
manufacturing services required by the Company.
Competition
The business of the Company is highly competitive. Price competition and
service are the most significant features of the market in which the Company
competes. The Company competes on a nationwide basis with many other firms.
Almost all of its competitors are larger and financially stronger than the
Company. Management believes that the Company accounts for only a very small
portion of the respective national and local markets.
Sources and Availability of Raw Materials
The outside organizations with which the Company subcontracts to do its
manufacturing purchase the necessary components and raw materials. The Company
purchases a limited amount of components and raw materials from an assortment of
suppliers, manufacturers and distributors throughout the United States. The
Company believes that there are several sources of supply for the required
components and raw materials.
Significant Customers
In 1998 and 1997, PSINet accounted for approximately 38% and 18%,
respectively, of the Company's net sales. AT&T accounted for approximately 3%
and 20% of net sales in 1998 and 1997, and Comstor accounted for approximately
8% and 11% of net sales in 1998 and 1997, respectively. No other customer
accounted for more than 10% of the Company's net sales during this period.
Patents
The Company has no patents, exclusive licenses, franchises or concessions
which are of material importance to its business. The Company has registered
the trademark "WanMaster" with the United States Patent and Trademark Office and
is in the process of registering additional trademarks.
Government Regulation
Some of the Company'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 the Company 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 the Company's products.
Research and Development
The Company spent $325,067 in 1998 and $559,645 in 1997 for research and
development. The Company deducts internal research and development costs as
items of expense as they occur. The Company recognizes that the sale of
electronic products will require continuous development of new products and
refinement of established 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 the Company's operations.
Employees
As of March 19, 1999, the Company had a total of 17 full-time and no part-
time employees. The Company had three employees in sales; five in engineering;
five in operations; and four in finance and administration. No employees are
currently represented by labor organizations and there are no collective
bargaining agreements. The Company provides paid holidays and vacations. In
addition, the Company 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 the Company 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 the Company
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. The Company'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 the Company. This matter was
settled during 1993, and the landlord and the Company agreed upon a settlement
payment schedule. The Company continues to make payments pursuant to such
payment schedule. See Notes to Financial Statements.
Preferred Stock
On April 5, 1996, Hanrow Fund Five converted its $200,000 principal amount
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
the Company at $.46 per common share. The Preferred Stock is callable by the
Company at $2.00 per share on April 5, 2000.
Private Placement
In June 1998, the Company sold 4,191,143 shares of common stock to certain
accredited investors in a private placement, resulting in net proceeds of
$1,466,900. A portion of the proceeds were used to pay off the convertible
short-term notes due July 1998.
ITEM 2. DESCRIPTION OF PROPERTY
On June 1, 1992, the Company sold and assigned to The Crepeau Company
("Crepeau") all rights, duties and liabilities the Company 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. The Company remains contingently liable to the Port Authority in the
event that Crepeau defaults under the terms of the lease.
The Company 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, the Company 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 the Company pursuant to its lease with the Port
Authority.
On March 5, l993, the Company entered into a Lease Agreement with Summer
Business Center Partnership ("Summer") pursuant to which the Company leases
approximately 17,524 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 the Company to pay all taxes and insurance and
utility, maintenance and other costs.
On February 21, 1995, the Company 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.
The Company is currently negotiating a new lease agreement for a reduced
amount of office and manufacturing space in Plymouth, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
On July 27, 1983, the Board of the Minnesota Pollution Control Agency found
the Company 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 the Company during the period 1973 to 1978. On January
25, 1984, the Company 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 19, 1999, the
Company had paid approximately $171,000 pursuant to the agreement, none of which
was paid during 1998. The cleanup was completed on February 1, 1986. During
February, 1987, a judgment was obtained in favor of the Company and the 13 other
corporations against Carriere Properties and others. No estimate can be given as
to the collectibility of said judgment. The Company 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 the Company.
In June 1988, the Company was informed by Mibco, the owner and lessor of
the Minnetonka facility where the Company'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. The Company'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. The Company will continue
to monitor the site testing required by the MPCA. The Company 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's Common Stock is traded on the Over-the-Counter Bulletin Board
system under the symbol ATCC. The following table sets forth the high and low
selling prices for the Company's Common Stock for 1998 and 1997:
1998 1997
High Low High Low
First Quarter $15/16 $11/32 $3 13/16 $1 5/8
Second Quarter 11/16 13/32 2 1/8 5/8
Third Quarter 17/32 1/8 1 5/8 3/8
Fourth Quarter 15/32 3/16 1 1/16 11/32
(b) Holders
On March 19, 1999 the Company had approximately 712 shareholders of record.
(c) Dividends
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Overview
Astrocom Corporation, a public company (O.T.C, ATCC), was incorporated in 1968
to design, manufacture and distribute telecommunications 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 data 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.
<PAGE>
Results of Operation
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
1998 1997 1996
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 67.9 78.3 74.7
Write-off of Inventory -- 9.0 --
Gross Profit 32.1 12.7 25.3
Selling and Administrative 34.3 46.1 52.1
Research and Development 11.2 15.4 13.5
Operating Loss (13.4) (48.8) (40.3)
Other Income (Expense) (4.5) (3.1) (2.6)
Net Loss (17.9)% (51.9)% (42.9)%
Years ended December 31, 1998 Compared to 1997
Net Sales. Net sales for the year ended December 31, 1998 decreased by 21%
to $2,896,563 compared to $3,646,742 for the same period ended December 31,
1997. The decrease in sales was due to the delivery of a substantial contract
to one customer during the second half of 1997. The contract expanded the
customer's network and upgraded older Astrocom technology with new products. The
customer's deployment of the older technology precluded additional current
period sales.
Gross Profit. Gross profit for the year ended December 31, 1998 was
$930,724 compared to $464,324 in 1997 (32% and 13% of net sales, respectively).
The increase can be attributed to adjustments made to the pricing and product
costs of the new product lines that were introduced in 1997. The Company
expects the gross profit margins to remain at these higher levels, but also to
be affected by sales volume, product mix and the distribution channel used.
In the first quarter of 1997, the Company recorded a $329,430 write-down 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. There was no further
write-off of inventory in 1998.
Selling and Administrative Expenses. Selling and administrative expenses
decreased to $992,972 in 1998 from $1,679,736 in 1997. Selling and marketing
expenses decreased because of 1997's marketing activities related to the new
corporate image and product positioning. Administrative expenses decreased
because of a smaller management staff.
Research and Development Expenses. Research and development expenses
decreased by 42% to $325,067 in 1998 from $559,645 in 1997. These expense
reductions were due primarily to reduced staff. R&D expenses were also higher
during the same periods last year due to spending on product testing, prototype
parts and outside services in connection with the new product introduction. The
Company has hired additional engineering staff and expects to increase its
investment in product development in future periods.
Other Income and Expense. Other income and expense was $(127,779) for the
period ending December 31, 1998 compared to $(114,149) for the same period in
1997. High interest levels in both years reflected the cost of the bridge
financing raised during the third quarter of 1997 and repaid at the end of the
second quarter of 1998. Other expenses were lower in 1997 because they were
offset by a gain on the sale of a software license associated with the
intellectual property known as the Port Extender.
Net Loss. Net loss decreased 73% to $(517,094) in 1998 from $(1,890,563)
in 1997. The reduced loss is attributable to a higher gross profit and lower
operating expenses in 1998.
Years ended December 31, 1997 Compared to 1996
Net Sales. Net sales for the year ended December 31, 1997 increased by 11%
to $3,646,742 compared to $3,286,211 for the same period ended December 31,
1996. This increase was largely the result of strong market acceptance of the
Company's new T-1 products. Products introduced within the prior 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. Gross profit for the year ended December 31, 1997 was
$464,324 compared to $831,375 in 1996 (13% and 25% of net sales, respectively).
The decrease could 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.
In the first quarter of 1997, the Company recorded a $329,430 write-down 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. Selling and administrative expenses
decreased slightly to $1,679,736 in 1997 from $1,711,592 in 1996. Expenses of
$1,107,975 were incurred in the first six months of 1997 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. Research and development expenses
increased by 26% to $559,645 in 1997 from $444,843 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 also increased
in the first quarter of 1997 due to 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 and Expense. Other income and expense was $(114,149) for the
period ending December 31, 1997 compared to $(85,978) for the same period in
1996. The increase could 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 was
convertible to common stock at a discount from the market price and included
detachable warrants, the debt was discounted from its face value and was
accreted over the term of the loan as a non-cash interest expense. Other income
and expenses reflected gains on the sale of intangible assets and losses on the
disposal of equipment.
Net Loss. Net loss increased 34% to $(1,890,563) in 1997 from $(1,411,038)
in 1996. The greater loss was attributable to the combination of lower gross
margins, the write-down of inventory, higher R&D expenses and the interest
associated with the bridge financing. All but $116,770 of this loss was
incurred in the first six months of 1997.
Liquidity and Capital Resources
The Company completed a private placement of equity during the second
quarter of 1998. Proceeds from the equity placement were $1,466,900, of which
$435,000 was used to repay the short-term convertible debt. Net working capital
increased to $1,178,171 on December 31, 1998 from $104,269 on December 31,
1997. Cash increased to $549,337 on December 31, 1998 from $31,830 on
December 31, 1997.
Management chose not to renew its factoring agreement that expired on July
3, 1998. The Company plans to secure a less expensive, asset-based lending
facility during the 1999 fiscal year and has received assurances of financing
availability from a former lender. A credit facility would be used to fund
increased working capital requirements. The proceeds from the private placement
are intended to fund product development and other activities.
Management remains focused on running profitable operations that generate
adequate cash flow to meet current obligations on a timely basis. The Company
currently believes that its available sources of funds will be adequate to
finance current operations and anticipated investments for the next twelve
months.
Year 2000 Issues
The Company is aware of the Year 2000 problem resulting from the inability
of some computer software or hardware to recognize or properly process dates
ending in "00" because a computer program is written using two digits rather
than four to define the applicable year. The Company has examined its internal
information systems and has determined that all of its critical business
software and hardware are Year 2000 compliant. The Company also has determined
that all of its products are Year 2000 compliant. The Company has requested
assurances from its major suppliers that they are addressing this issue and will
achieve Year 2000 compliance. The Company is not aware of any suppliers with a
Year 2000 Issue that would materially impact the Company.
Based on information presently available, the Company does not believe that
the costs and efforts to address the Year 2000 problem will be material to its
business, financial condition or results of operation. If some unforeseen
problem does arise, the worst case scenario may result in delays of shipments
and possible lost sales. The Company could also be subject to litigation for
computer systems product failure. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time. The Company currently has no contingency
plans in place. Any unforeseen problems will be addressed by manual workarounds
and alternative suppliers.
The Company intends to continue monitoring Year 2000 compliance matters.
However, there can be no assurances that unforseen problems will not arise in
connection with this issue.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included on the pages indicated:
Report of Independent Auditors............................. 09
Balance Sheets as of December 31, 1998 and 1997............ 10
Statements of Operations for the years ended
December 31, 1998 and 1997............................... 11
Statements of Shareholders Equity for the years
ended December 31, 1998 and 1997......................... 12
Statements of Cash Flows for the years ended
December 31, 1998 and 1997............................... 13
Notes to Financial Statements.............................. 14
<PAGE>
Report of Independent Auditors
Board of Directors
Astrocom Corporation
We have audited the accompanying balance sheets of Astrocom Corporation as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity 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
materia lmisstatement. 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, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
\s\ Ernst & Young LLP
Minneapolis, Minnesota
March 1, 1999
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Balance Sheets
December 31
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 549,337 $ 31,830
Accounts receivable, less allowance of $40,000 239,199 557,662
in 1998 and 1997
Inventories 566,751 521,085
Prepaid expenses 39,919 51,097
Total current assets 1,395,206 1,161,674
Buildings, machinery, and equipment:
Buildings 5,230 5,230
Machinery and equipment 1,258,887 1,255,237
Office furniture and fixtures 858,349 853,652
Total buildings, machinery and equipment 2,121,466 2,114,119
Accumulated depreciation (1,879,913) (1,729,976)
242,553 384,143
License agreements, less amortization of $21,875 65,625 -
Other assets 7,572 7,572
Total assets $1,710,956 $1,553,389
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Short-term notes payable - 364,016
Accounts payable 100,425 507,275
Payable to factor - 62,806
Accrued expenses 84,907 111,448
Current portion of lease settlement costs 31,703 11,859
Total current liabilities 217,035 1,057,405
Lease settlement costs 36,327 68,031
Shareholders' equity:
Preferred stock, $1.00 par value: 200,000 200,000
Authorized share - 5,000,000
Issued and outstanding shares - 200,000
Common stock, $.10 par value: 1,499,520 1,046,099
Authorized shares - 50,000,000
Issued and outstanding shares -14,999,161
(10,464,951 in 1997)
Additional paid-in capital 8,079,387 6,974,073
Accumulated deficit (8,321,313) (7,792,219)
Total shareholders' equity 1,457,594 427,953
Total liabilities and shareholders' equity $1,710,956 $1,553,389
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Operations
Year ended December 31
1998 1997
<S> <C> <C>
Net sales $ 2,896,563 $ 3,646,742
Cost of products sold 1,965,839 2,852,988
Inventory write-off - 329,430
Gross profit 930,724 464,324
Operating expenses
Selling and administrative 992,972 1,679,736
Research and development 325,067 559,645
Total operating expenses 1,318,039 2,239,381
Operating loss (387,315) (1,775,057)
Other income (expense)
Interest income 19,854 14,817
Interest expense (147,876) (147,471)
Other income 243 18,505
Net loss before income taxes (515,094) (1,889,206)
Income taxes 2,000 1,357
Net loss (517,094) (1,890,563)
Less preferred stock dividends 12,000 12,000
Loss applicable to common shares $ (529,094) $(1,920,563)
Loss per common share-basic and
diluted $ (.04) $ (.19)
Weighted average number of common
shares outstanding 13,032,042 10,050,564
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Additional
Preferred Common Stock Paid-In
Accumulated
Stock Shares Amount Capital
Deficit Total
<S> <C> <C> <C> <C>
<C>
<C>
Balance, December 31, 1996 $ 200,000 9,863,829 $985,987 $6,536,483
$(5,889,656) $ 1,832,814
Exercise of warrants and
stock options 363,772 36,337
109,080
145,458
Beneficial conversion features
of notes payable and
related warrants
164,535
164,535
Issuance of common stock, for
Directors' fees 43,750 4,375
28,437
32,812
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 8,645
51,355
60,000
Issuance of common stock for
debt conversion 107,150 10,715
40,183
50,898
Net loss
(1,890,563) (1,890,563)
Balance, December 31, 1997 200,000 10,464,951 1,046,099
6,974,073
(7,792,219) 427,953
Exercise of warrants and stock
options 100,000 10,000
20,000
30,000
Issuance of common stock for
debt conversion 72,479 7,248
19,026
26,274
Dividends on preferred stock
(12,000)
(12,000)
Issuance of common stock for
401K 20,588 2,059
3,502
5,561
Issuance of common stock for
services provided 150,000 15,000
15,000
30,000
Issuance of common stock for
private placement 4,191,143 419,114
1,047,786
1,466,900
Net loss
(517,094) (517,094)
Balance, December 31, 1998 $ 200,000 14,999,161 $1,499,520
$8,079,387
$(8,321,313) $1,457,594
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Cash Flows
Year ended
December 31
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss $ (517,094) $(1,890,564)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 172,134 95,169
Amortization of debt discount 95,984 68,551
Net gains on disposal of equipment (243) (14,606)
Issuance of stock to directors - 32,812
Issuance of stock for 401K match 5,561 -
Interest on debt converted to common stock 1,274 897
Professional fees paid in warrants and
stock 30,000 104,000
Changes in operating assets and liabilities:
Accounts receivable 318,463 36,638
Inventories (45,666) 207,288
Prepaid expenses 11,178 (19,331)
Other assets 25,384
Accounts payable (406,850) 140,320
Accrued expenses (38,543) 33,670
Net cash used in operating activities (373,802) (1,179,771)
Cash flows from investing activities
Purchases of equipment (12,216) (86,200)
Purchase of license agreements (87,500) -
Proceeds from sale of equipment 3,790 61,354
Net cash used in investing activities (95,926) (24,846)
Cash flows from financing activities
Proceeds from sale of stock 1,466,900
Proceeds from exercise of warrants
and options 30,000 145,458
Proceeds from issuance of convertible debt 510,000
Net proceeds from (payments for)
factoring arrangement (62,806) 62,806
Payments on convertible debt (435,000)
Payments on lease settlment
obligations and notes payable (11,859) (456,976)
Dividends paid (3,639)
Cash provided by financing activities 987,235 257,649
Increase (decrease) in cash 517,507 (946,968)
Cash at beginning of period 31,830 978,798
Cash at end of period $ 549,337 $ 31,830
Supplemental cash flow information
Conversion of notes payable into common $ 25,000 $ 50,000
stock
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<PAGE>
Astrocom Corporation
Notes to Financial Statements
December 31, 1998
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. All
cash equivalents are classified as available for sale and are carried at cost
which approximates market value.
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.
Licenses Acquired
The cost of licenses acquired are capitalized and amortized over their estimated
useful life of two to four years.
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 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
Basic loss per share is based on the weighted average common shares outstanding
and excludes the dilutive effect of options, warrants and convertible
securities, while diluted loss per share includes such effects if dilutive. 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.
2. Inventories
Inventories consisted of the following:
1998 1997
Purchased parts, materials and supplies $169,666 $328,042
Work in process 431,172 61,155
Finished products 104,067 237,927
Less obsolescence reserve (138,154) (106,049)
$566,751 $521,085
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 was accreted as interest expense over the
term of the notes. Notes for $50,000 and $25,000, plus accrued interest were
converted into 107,150 and 72,479 shares during 1998 and 1997, respectively. The
carrying value of the notes at December 31, 1997 was $364,016, net of a $95,984
discount. The remaining notes totaling $435,000 were paid off in June 1998.
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 remained
liable for all receivables advanced until collection. The agreement was
terminated by the Company during 1998.
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:
1999 $31,702
2000 31,368
2001 4,960
Total minimum settlement payments 68,030
Less current portion 31,703
Long-term portion $36,327
The carrying amounts of the Company's debt instruments in the balance sheets at
December 31, 1998 and 1997 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, 1998 and 1997 totaled $123,584 and $133,134,
respectively. Future minimum rentals under the operating lease agreement are as
follows:
Year ending:
1999 $22,789
5. Shareholders' Equity
Preferred Stock
In March 1996, the Company converted a $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, 1998 were $20,361 and are included in accrued expenses.
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 warrants at $.01 per
warrant 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.
In 1998, the Company sold 4,191,143 shares in a private placement of its common
stock, resulting in net proceeds of $1,466,900. A portion of the proceeds were
used to pay off the convertible short-term notes due in July 1998.
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>
A summary of outstanding options is as follows:
Shares Weighted
Reserved Options Exercise Price
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
Granted (373,167) 373,167 .43
Exercised - (100,000) .30
Canceled/expired 64,000 (64,000) .53
Net decrease in shares reserved
for grant (184,875)
Balance, December 31, 1998 1,191,833 892,667 $ .54
As of December 31, 1998 there were 496,000 options outstanding with exercise
prices between $.30 and $.50, and 396,667 options outstanding with exercise
prices between $.55 and $3.53. At December 31, 1998 outstanding options had a
weighted-average remaining contractual life of 3 years.
The number of options exercisable as of December 31, 1998 and 1997 was 418,667
and 348,625, respectively, at weighted average exercise prices of $.58 and $.51
per share, respectively.
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 was $.35 and $.67 per share, respectively.
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 1998
and 1997, 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
1.207% and 1.633%; and a weighted-average expected life of the option of 5
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:
1998 1997
Pro forma loss applicable to common shares $(1,802,889) $(2,372,161)
Pro forma loss per common share - basic and diluted $(.14) $(.24)
Note: the pro forma effect on the net loss for 1998 and 1997 is not
representative of the pro forma effecton 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.
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 2008.
Information with respect to warrants granted as of December 31, 1998 and 1997 is
summarized as follows:
Shares Warrant Price
Per Share
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
Granted 739,613 .35
Canceled (62,235) .30 to 1.88
Exercised - -
Outstanding at December 31, 1998 9,339,686 $.29 to $1.94
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 vested on
January 2, 1998. The warrant expires in July 2007.
In August 1998, the Company issued an additional warrant to its President for
the purchase of 739,613 shares of common stock at $.35 per share. The warrant
vested immediately. The warrant expires in August 2008.
<PAGE>
7. Income Taxes
Deferred tax assets and liabilities consisted of the following:
1998 1997
Net operating loss carryforwards $3,147,268 $3,618,633
Inventory 42,154 36,057
Other 72,855 75,826
Deferred tax assets 3,262,277 3,730,516
Depreciation 51,088 61,873
Deferred tax liability 51,088 61,873
3,211,189 3,668,643
Less valuation allowance (3,211,189) (3,668,643)
Net deferred tax assets $ - $ -
The Company has net operating loss carryforwards at December 31, 1998 of
approximately $9,256,670, which are available to reduce income taxes payable in
future years. These carryforwards will expire at various times through the year
2012. Carryforwards of $1,915,900 expired in 1998.
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 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 1998 was 20,588 shares of common stock, with fair market value of $5,561 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, 1998, the Company had net sales to three
customers which totaled 53% of the total net sales for the year. The receivable
balance due from these customers was $146,271 at December 31, 1998.
10. Supplemental Cash Flow Information
The Company made interest payments of $52,261 and $60,620 for the years ended
December 31, 1998 and 1997, respectively.
<PAGE>
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, 1998, 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 the Company [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 the Company [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 the Company 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 the Company
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 the Company 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 the Company 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 the Company
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 the Company 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 the Company 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 the Company 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 the Company 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 the Company'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 the
Company 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 the Company 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 the Company 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 the Company 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 the Company 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) Warrant issued to Ronald B. Thomas, dated July 2, 1997.
[incorporated by reference to Exhibit 10(xv) to Form 10-KSB Report
for the year ended December 31, 1997 (File 0-8482)].
10(xiv) Warrant issued to Ronald B. Thomas, dated August 27, 1998.
[incorporated by reference to Exhibit 10(i) to Form 10-QSB Report
for the quarter ended Sepember 30, 1009 (File 0-8482)].
10(xv) 1998 Stock Option Plan of the Company as approved by shareholders
at May 28, 1998 meeting.
23 Consent of Independent Auditors.
(b) Reports on Form 8-K:
The registrant did not file any reports of Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of 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
Dated: March 30, 1999. By: s/ Ronald B. Thomas
Ronald B. Thomas,
President and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant on March 30, 1999 in
the capacities indicated.
s/ S. Albert D. Hanser Chairman
S. Albert D. Hanser
s/ Ronald B. Thomas President, Chief Executive Officer and
Ronald B. Thomas Director
s/ Sarah B. Fjelstul Vice President and Corporate Controller
Sarah B. Fjelstul
s/ Duane Carlson Director
Duane Carlson
s/ Gary Deaner Director
Gary Deaner
s/ Douglas M. Pihl Director
Douglas M. Pihl
<PAGE>
Exhibit 10(xv) 1998 Stock Option Plan of the Company as approved by
shareholders at May 28, 1998 meeting.
Exhibit 23 Consent of Independent Auditors
<PAGE>
EXHIBIT 10(xv)
1998 STOCK OPTION PLAN OF ASTROCOM CORPORATION
1. Purpose. The purpose of this 1998 Stock Option Plan (the "Plan")
is to encourage personnel of Astrocom Corporation (the "Company") to acquire a
proprietary interest in the Company, thereby creating an additional incentive to
such personnel to promote the Company's best interests and to continue in its
employ, and further to provide an additional inducement for the acquisition of
the services of persons capable of contributing to the future success of the
Company. Options granted under this Plan may be either "incentive stock options"
within the provisions of Section 422 of the Internal Revenue Code of 1986 and
any amendments thereto, or options which do not qualify as incentive stock
options.
2. Administration.
A. This Plan shall be administered by the Stock Option Committee
(the "Committee") of the Board of Directors of the Company (the "Board"). The
Committee shall be comprised of the entire Board or, if the Board so determines,
of two or more "non-employee directors" as defined in Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934.
B. The Committee shall have full authority and discretion to
determine, consistent with the provisions of this Plan, the employees and others
to be granted options, the times at which options shall be granted, the option
price of the shares subject to each option (subject to Section 6), the number of
shares subject to each option (subject to Section 3), the period during which
each option becomes exercisable (subject to Section 7), and the terms to be set
forth in each option agreement. The Committee shall also have full authority
and discretion to adopt and revise such rules and procedures as it shall deem
necessary for the administration of this Plan.
C. The Committee's interpretation and construction of any
provisions of this Plan or any option granted hereunder shall be final,
conclusive and binding on the Company, the optionee and all other persons.
3. Eligibility.
A. The Committee shall from time to time determine the individuals
who shall be granted options under this Plan. Incentive stock options may only
be granted under this Plan to any full or part-time employee (which term
includes, but is not limited to, officers and directors who are also employees)
of the Company or of its present and future subsidiary corporations. Options
which do not qualify as incentive stock options may be granted under this Plan
to other persons designated by the Committee, including, but not limited to,
members of the Board of Directors, consultants or independent contractors
providing services to the Company or its present and future subsidiary
corporations. The term "subsidiary corporation" shall, for purposes of this
Plan, be defined in the same manner as such term is defined in Section 425(f) of
the Internal Revenue Code.
B. An individual who has been granted an option may be granted an
additional option or options under this Plan if the Committee shall so
determine, with the restriction that no individual employee may receive
incentive stock options (under this Plan and all incentive stock option plans of
the Company and its subsidiary corporations) which are exercisable for the first
time during any calendar year for shares having an aggregate Fair Market Value
(determined as of the time the option is granted) in excess of $100,000.
C. The granting of an option under this Plan shall not affect any
outstanding stock option previously granted to an optionee under this Plan or
any other plan of the Company.
D. (i) Each non-employee director of the Company shall
automatically be granted a non-qualified option under this Plan providing for
the purchase of 10,000 shares of the Company's Common Stock at 100% of the Fair
Market Value of such Common Stock on the date of his/her first election to the
Board (whether such election shall be by the shareholders or otherwise), or on
the date that an employee director of the Company becomes a non-employee
director of the Company.
(ii) Each non-employee director of the Company, serving as of
the beginning of each calendar year, shall automatically be granted a non-
qualified option under this Plan providing for the purchase of 20,000 shares of
the Company's Common Stock at 100% of the Fair Market Value of such Common Stock
on the date of grant for his/her services to the Company during such year. Such
non-qualified option received by a non-employee director shall vest as to 1/12th
of the 20,000 shares of the Company's Common Stock at the end of each calendar
month during such year, as long as such non-employee director has continued to
serve as a director of the Company. Each non-employee director of the Company
first elected after the beginning of any calendar year shall automatically be
granted, on the date of his/her election, a non-qualified option for the
purchase of a pro rata portion of 20,000 shares of the Company's Common Stock
based upon the remaining full calendar months of the year following his/her
election, which option shall be granted at 100% of the Fair Market Value of such
Common Stock on the date of grant and shall vest in equal portions at the end of
each calendar month during such calendar year, as long as such non-employee
director has continued to serve as a director of the Company.
(iii) The Board may from time to time amend Section 3.D.(i)
and/or Section 3.D.(ii) to increase or decrease the number of shares of Common
Stock that may be purchased pursuant to the options to be automatically granted
pursuant to such Sections.
4. Shares of Stock Subject to This Plan. The number of shares which
may be issued pursuant to the options granted by the Committee under this Plan
shall not exceed 1,500,000 shares of the common voting stock of the Company (the
"Common Stock"), subject to adjustment as provided in this Plan. Any shares
subject to an option which expires for any reason or is terminated unexercised
as to such shares may again be subject to an option under this Plan.
5. Issuance and Terms of Option Agreements. Each option granted under
this Plan shall be evidenced by a written Option Agreement, which shall be
subject to the provisions of this Plan and to such other terms and conditions as
the Committee may deem appropriate.
6. Option Price.
A. Each Option Agreement shall state the number of shares to which
it pertains and shall state the option price. The option price for each share
of Common Stock covered by an incentive stock option granted under this Plan
shall not be less than 100% of the Fair Market Value of the Common Stock on the
date the option is granted; provided that if the employee, at the time the
option is granted, owns more than 10% of the total combined voting power of all
classes of stock of the Company, the option price shall not be less than 110% of
the Fair Market Value of the Common Stock on the date the option is granted.
The purchase price for options granted under this Plan which do not qualify as
incentive stock options may be equal to, greater than or less than the Fair
Market Value of the Common Stock on the date the option is granted. "Fair
Market Value," as used in this Plan, shall mean the value of the Common Stock on
a pertinent date as determined by the Committee, using such valuation methods as
it, in its sole discretion, shall deem appropriate.
B. Upon the exercise of the option, the option price shall be
payable (i) in United States dollars, in cash or by check, or (ii) if the
Committee, in its sole discretion, shall so authorize, in shares of the Common
Stock of the Company then owned by the optionee, which shares shall be valued at
their Fair Market Value on the date of delivery. The Committee, in its sole
discretion, may permit the optionee to authorize a third party to sell shares of
the Common Stock (or a sufficient portion of the shares) acquired upon the
exercise of the option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire option price and any tax withholding resulting from
such exercise.
C. The proceeds of the sale of the Common Stock subject to option
shall be added to the general funds of the Company and used for its corporate
purposes.
7. Terms and Exercise of Options. Each option granted under this Plan
shall be exercisable during the periods and for the number of shares as shall be
provided in the Option Agreement evidencing the option granted by the Committee
and the terms thereof. In no event, however, shall any option be exercisable by
its terms after the expiration of ten years from the date of grant, nor shall
any incentive stock option granted to a person then owning more than 10% of the
total combined voting power of all classes of stock of the Company be
exercisable by its terms after the expiration of five years from the date of
grant.
8. Withholding Taxes.
A. The Company shall have the right to require the payment
(through withholding from the optionee's salary or otherwise) of any federal,
state or local taxes required by law to be withheld with respect to the issuance
of shares upon the exercise of an option or with respect to any disposition of
such shares by the optionee.
B. In order to assist an optionee in paying federal and state
income taxes required to be withheld upon the exercise of a non-qualified option
granted hereunder, the Committee in its discretion and subject to such
additional terms and conditions as it may adopt, may permit the optionee to
elect to satisfy such income tax withholding obligation by having the Company
withhold a portion of the shares of Common Stock otherwise to be delivered upon
exercise of such option with a Fair Market Value equal to the taxes required to
be withheld.
9. Requirement of Law. The granting of options and the issuance of
shares of Common Stock upon the exercise of an option shall be subject to all
applicable laws, rules and regulations, and shares shall not be issued except
upon approval of proper government agencies or stock exchanges as may be
required. The exercise of any option will be contingent upon receipt from the
optionee of a representation in writing that at the time of such exercise it is
the optionee's intention to acquire the shares being purchased for investment
and not for resale or other distribution thereof to the public.
10. Non-Transferability. Except as otherwise provided by the
Committee, awards under this Plan are not transferable other than as designated
by the optionee by will or by the laws of descent and distribution, and then
only as provided in the Option Agreement.
11. Early Termination of Incentive Stock Options. Unless otherwise
stated in the Option Agreement, if an optionee shall cease to be employed by the
Company, or a subsidiary of the Company, for whatever reason and at whatever
time, all incentive stock options held by the optionee shall be cancelled as of
the date of such termination of employment.
12. Early Termination of Non-Qualified Options. Unless otherwise
stated in the Option Agreement, a non-qualified option granted under this Plan
will continue for its full term without early termination.
13. Adjustments; Reorganization; Liquidation.
A. In the event of any change in the outstanding shares of Common
Stock by reason of any stock dividend or split, recapitalization,
reclassification, merger, consolidation, combination or exchange of shares, or
other similar corporate change, then if the Board shall determine, in its sole
discretion, that such change necessarily or equitably requires an adjustment in
the number of shares subject to each outstanding option and the option prices or
in the maximum number of shares subject to this Plan, such adjustments shall be
made by the Board and shall be conclusive and binding for all purposes of this
Plan. No adjustment shall be made in connection with the issuance by the
Company of any warrants, rights or options to acquire additional shares of
Common Stock or of securities convertible into Common Stock.
B. If the Company shall become a party to any corporate merger,
consolidation, major acquisition of property for stock, sale of all or
substantially all of its common stock, reorganization or liquidation, the Board
shall have power to make any arrangement it deems advisable with respect to
outstanding options, which shall be binding for all purposes of this Plan,
including, but not limited to, the substitution of new options for any options
then outstanding, the assumption of any such options and the termination of any
such options.
C. Neither this Plan nor the grant of any option pursuant to this
Plan shall affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or to dissolve, liquidate or sell or transfer all
or any part of its business or assets, or issue additional shares of Common
Stock or options.
14. Claim to Stock Option, Ownership or Employment Rights. No employee
or other person shall have any claim or right to be granted options under this
Plan. Prior to issuance of the stock, no optionee, his/her personal
representative, heirs or legatees shall be entitled to voting rights, dividends
or other rights of shareholders except as otherwise provided in this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any employee any right to be retained in the employ of the Company.
15. Expense of Plan. The expenses of administering this Plan shall be
borne by the Company.
16. Reliance on Reports. Each member of the Board shall be fully
justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company and upon any other information
furnished in connection with this Plan by any person or persons other than
himself. In no event shall any person who is or shall have been a member of the
Board be liable for any determination made or other action taken, or any
omission to act, in reliance upon any such report or information, or for any
action taken, including the furnishing of information, or failure to act, if in
good faith.
17. Indemnification. Each person who is or shall have been a member of
the Board shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by such person in connection with or resulting from any claim, action,
suit or proceeding to which he may be a party or in which he may be involved by
reason of any action taken or failure to act under this Plan and against and
from any and all amounts paid by such person in settlement thereof, with the
Company's approval, or paid by such person in satisfaction of a judgment in any
such action, suit or proceeding against him, provided he shall give the Company
an opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such person may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify him or hold him harmless.
18. Amendment and Termination. No options may be granted under this
Plan after March 25, 2008, or earlier termination of this Plan as hereinafter
provided. The Board may terminate this Plan or modify or amend this Plan in
such respect as it shall deem advisable; provided, however, that the Board may
not, without further approval within 12 months by the Company's shareholders,
(a) increase the maximum aggregate number of shares of Common Stock as to which
options may be granted under this Plan except as provided in Section 13, (b)
change the provisions of this Plan regarding the option price, (c) extend the
period during which options may be granted, or (d) extend the maximum period of
ten years after the date of grant during which options may be exercised. No
termination or amendment of this Plan may, without the consent of an individual
to whom an option shall theretofore have been granted, adversely affect the
rights of such individual under such option. Further, this Plan may not,
without the approval of the Company's shareholders, be amended in any manner
that will cause incentive stock options issued under it to fail to meet the
requirements of incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986 or any amendments thereto.
19. Gender. Any masculine terminology used in this Plan shall also
include the feminine gender.
20. Effective Date. The effective date of this Plan is the date of its
adoption by the Board; provided, however, that it and any and all options
granted hereunder shall be and become null and void if the shareholders of the
Company shall fail to approve this Plan within 12 months from the date of its
adoption.
<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 our report dated March 1, 1999, with respect
to the financial statements of Astrocom Corporation incorporated by
reference in this Annual Report on Form 10-KSB of Astrocom Corporation
for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 30, 1999
