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, 1999
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.)
3500 Holly Lane North, Suite 60, Plymouth Minnesota 55447
(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
<PAGE>
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 $1,461,831.
As of March 23, 2000, the aggregate market value of the voting stock held by
non-affiliates was $28,469,080, 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 23, 2000, there were outstanding 26,014,161 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 registrant's definitive proxy statement for the annual meeting
of shareholders to be held on May 24, 2000, are incorporated by reference into
Part III.
Transitional Small Business Disclosure Format: Yes No X .
<PAGE>
<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.
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, Inverse Multiplexers 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 24 hours a
day, 7 days a week 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
<PAGE>
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 1999, the Company subcontracted over 92% 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 Company uses both turnkey and consigned manufacturing subcontractors.
(Under the turnkey approach, the subcontractor buys the material; under the
consigned approach, Astrocom buys and supplies the material to the
subcontractor.) Components and raw materials are purchased 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 1999 and 1998, the Company had two customers that accounted for
approximately 41% and 43%, respectively, of the Company's net sales. One
company accounted for approximately 30% and 38% of the Company's net sales in
1999 and 1998, respectively; the other accounted for approximately 11% and 5%
of net sales, 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.
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
<PAGE>
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 $496,877 in 1999 and $325,067 in 1998 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 23, 2000, the Company had a total of 17 employees. 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.
<PAGE>
Preferred Stock
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 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 Placements
On August 28, 1997, and September 17, 1997, the Company accepted subscription
agreements covering an aggregate $510,000 loaned to the Company by 17
accredited investors, and authorized the issuance of 12% Subordinated
Convertible Promissory Notes and five-year Warrants to such investors.
The Notes were convertible into common stock of the Company at 80% of the
quoted stock price on the date of conversion. The Warrants provide for the
issuance of an aggregate 765,000 shares of common stock, at $.50 per share.
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 aforementioned
convertible short-term notes.
From December 27, 1999, through March 13, 2000, the Company sold 11,000,000
shares of common stock to accredited investors in a Regulation D private
placement, resulting in net proceeds of $2,081,440. The proceeds will be used
primarily for working capital. Of said 11,000,000 shares, 4,560,000 shares
were sold by R.J. Steichen Co. pursuant to the terms of an Agency Agreement
under which the Company paid R.J. Steichen & Co. a commission of $118,560 and
issued to it an Agent's Warrant for 456,000 shares of the Company's common
stock.
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.
<PAGE>
On March 30, 1999, the Company entered into a five-year lease agreement with
Plymouth Ponds Development II,LLC, for 9,672 square feet of office and
manufacturing space at 3500 Holly Lane North, Suite 60, Plymouth, Minnesota.
The lease runs through March 31, 2004, and provides for rental payments of
$7,415.20 per month.
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 13, 1998, the Company 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
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 1999 and 1998:
1999 1998
High Low High Low
First Quarter 37/64 1/4 15/16 11/32
Second Quarter 7/16 1/4 11/16 13/32
Third Quarter 9/32 1/8 17/32 1/8
Fourth Quarter 19/64 3/32 15/32 3/16
(b) Holders
On March 23, 2000 the Company had approximately 650 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). Since 1989, the Company has developed several
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. In 1999, the Company began development of a line
of Inverse Multiplexers that enable the user to bundle multiple wide area
network (WAN) lines into a single data path. These Inverse Multiplexers allow
customers to increase WAN bandwidth in increments of slower speed, lower cost,
<PAGE>
more readily available lines; thus, reducing costs and providing increased
bandwidth where high speed lines may not be available or are too expensive.
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,
manufacturer's representatives and 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 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,
1999 1998 1997
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 75.2 67.9 78.3
Write-off of Inventory -- -- 9.0
Gross Profit 24.8 32.1 12.7
Selling and Administrative 64.4 34.3 46.1
Research and Development 34.0 11.2 15.3
Operating Loss (73.6) (13.4) (48.7)
Other Income (Expense) (2.1) (4.5) (3.1)
Net Loss (75.7)% (17.9)% (51.8)%
Years ended December 31, 1999 Compared to 1998
Net Sales. Net sales for the year ended December 31, 1999 decreased by 50% to
$1,461,831 compared to $2,896,563 for the same period ended December 31, 1998.
The decrease in sales was due to a significant decrease in orders during 1999
from the top three customers in 1998 and a general slowdown from all
customers. Management attributes the decrease in sales to the company's
limited product line competing against much larger companies with broader
product lines. New product development is targeted at a product strategy that
repositions the company in niche markets where manufacturing and sales channel
size are less important factors. In addition, the company is expanding the
sales force and signing up a network of Manufacturer's Representatives to
increase product visibility.
Gross Profit. Gross profit for the year ended December 31, 1999 was $362,681
compared to $930,724 in 1998 (25% and 32% of net sales, respectively). The
decrease in gross margin percentage is due to an increase in inventory
reserve. In the fourth quarter of 1999, the Company recorded a $107,397 net
increase in inventory reserves against cost of sales for slow moving
inventory. Without the increased inventory reserve the gross margin percentage
remained constant even with the lower sales volume due to a decrease in labor
and burden in manufacturing. The Company expects gross profit margins to
remain at these levels, but also to be effected by sales volume, product mix
and the distribution channel used.
<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses in
total decreased to $941,766 in 1999 from $992,972 in 1998. Selling and
marketing expenses, however, increased by 20% for the year; the increase was
primarily in the fourth quarter due to increased sales activity and additional
salary expenses. Administration expenses decreased compared to 1998 due to a
lower reliance on outside services and reduced staff .
Research and Development Expenses. Research and development expenses
increased by 53% to $496,877 in 1999 from $325,067 in 1998. These increases
were due to a larger engineering staff and increased costs associated with new
product development. The Company has hired additional staff and expects to
increase its investment in new product development in future periods.
Other Income and Expense. Other expense, net, was $30,404 for the period
ending December 31, 1999 compared to $127,776 for the same period in 1998.
Interest expense decreased to $6,005 from $147,877 in 1998. The higher
interest expense in 1998 was associated with the bridge financing that was
repaid in September 1998. The increase in other expenses in 1999 included the
disposal of $1,424,111 of obsolete equipment in the second quarter; most of
this equipment was fully depreciated, so the result was a loss amounting to
$35,979.
Net Loss. Net loss increased 114% to $1,107,305 in 1999 from $517,094 in
1998. The increased loss is attributable to the lower gross profit, with the
increased expenditures in product development and sales being offset by the
reduction in administrative and other income expenses.
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
<PAGE>
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 expense, net, 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.
Liquidity and Capital Resources
The Company began raising capital via private placement of equity during the
fourth quarter of 1999; at year-end an initial closing on $505,000 was
conducted. Net working capital decreased to $655,048 on December 31, 1999
from $1,178,171 on December 31, 1998. Cash increased to $557,637 on December
31, 1999 from $549,337 on December 31, 1998.
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.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors
throughout the Year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Astrocom Corporation
Financial Statements
December 31, 1999 and 1998
Contents
Report of Independent Auditors......................................13
Audited Financial Statements
Balance Sheets......................................................14
Statements of Operations............................................16
Statements of Shareholders' Equity..................................17
Statements of Cash Flows............................................18
Notes to Financial Statements.......................................19
<PAGE>
Report of Independent Auditors
Board of Directors
Astrocom Corporation
We have audited the accompanying balance sheets of Astrocom Corporation as of
December 31, 1999 and 1998, 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Astrocom Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States.
Minneapolis, MN
March 14, 2000
/s/ Ernst & Young, LLP
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Balance Sheets
December 31
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 557,637 $ 549,337
Accounts receivable, less allowance of
$5,000 in 1999 and $40,000 in 1998 57,639 239,199
Inventories 289,985 566,751
Prepaid expenses 28,780 39,919
Total current assets 934,041 1,395,206
Buildings, machinery, and equipment:
Buildings 6,298 5,230
Machinery and equipment 356,106 1,258,887
Office furniture and fixtures 358,238 858,349
Total buildings, machinery and equipment 720,642 2,122,466
Accumulated depreciation (597,394) (1,879,913)
123,248 242,553
Other assets 10,000 7,572
License agreements, less amortization of
$73,000 in 1999 and $22,000 in 1998 62,900 65,625
Total assets $1,130,189 $1,710,956
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
1999 1998
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 128,106 $ 100,425
Accrued compensation 53,674 32,120
Other accrued expenses 63,332 52,787
Current portion of lease settlement costs 33,881 31,703
Total current liabilities 278,993 217,035
Lease settlement costs 7,907 36,327
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized shares - 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 - 17,524,161
(14,999,161 in 1998) 1,752,020 1,499,520
Additional paid-in capital 8,331,887 8,079,387
Accumulated deficit (9,440,618) (8,321,313)
Total shareholders' equity 843,289 1,457,594
Total liabilities and shareholders' equity $1,130,189 $1,710,956
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Operations
Year ended December 31
1999 1998
<S> <C> <C>
Net sales $ 1,461,831 $2,896,563
Cost of products sold 1,099,150 1,965,839
Gross profit 362,681 930,724
Selling and administrative expenses 941,766 992,972
Research and development expenses 496,877 325,067
Operating expenses 1,438,643 1,318,039
Operating loss (1,075,962) (387,315)
Other income (expense):
Interest income 13,613 19,854
Other income (expense) (38,012) 243
Interest expense (6,005) (147,876)
Net loss before income taxes (1,106,366) (515,094)
Income taxes 939 2,000
Net loss (1,107,305) (517,094)
Less preferred stock dividends 12,000 12,000
Loss applicable to common shares $(1,119,305) $ (529,094)
Net loss per common share - basic
and diluted $(.07) $(.04)
Weighted average number of common
shares outstanding 15,006,079 13,032,042
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Shareholders' Equity
Additional
Preferred Common Stock Paid-In Accumulated
Stock Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
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 401(k) - 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
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
Issuance of common stock
private placement - 2,525,000 252,500 252,500 - 505,000
Dividends on preferred stock - - - - (12,000) (12,000)
Net loss - - - - (1,107,305) (1,107,305)
Balance, December 31, 1999 $200,000 17,524,161 $1,752,020 $8,331,887 $(9,440,618) $843,289
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Astrocom Corporation
Statements of Cash Flows
Year ended December 31
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,107,305) $ (517,094)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 153,807 172,134
Amortization of debt discount - 95,985
Net losses (gains) on disposal of equipment 38,012 (243)
Issuance of stock for 401(k) match - 5,561
Interest on debt converted to common stock - 1,274
Professional fees paid in warrants and stock - 30,000
Changes in assets and liabilities:
Accounts receivable 181,560 318,463
Inventories 276,766 (45,666)
Prepaid expenses 11,139 11,178
Other assets (2,428) -
Accounts payable 27,681 (406,851)
Accrued expenses 20,099 (38,543)
Net cash used in operating activities (400,669) (373,802)
Cash flows from investing activities
Purchases of equipment (21,739) (12,216)
Proceeds from sale of equipment - 3,790
Purchase of license agreements (48,050) (87,500)
Net cash used in investing activities (69,789) (95,926)
Cash flows from financing activities
Proceeds from sale of stock 505,000 1,466,900
Cash received from exercise of warrants and options - 30,000
Net payments for factoring arrangement - (62,806)
Payments on convertible debt - (435,000)
Payments on notes payable and lease
settlement obligations (26,242) (11,859)
Net cash provided by financing activities 478,758 987,235
Increase in cash 8,300 517,507
Cash at beginning of year 549,337 31,830
Cash at end of year $ 557,637 $ 549,337
Supplemental cash flow information
Conversion of notes payable into common stock $ - $ 25,000
See accompanying notes.
</TABLE>
<PAGE>
Astrocom Corporation
Notes to Financial Statements
December 31, 1999
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. Primary sales for the Company's
products are based in the domestic and Canadian markets.
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 two to four year useful life.
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.
<PAGE>
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:
1999 1998
Purchased parts, materials and supplies $228,430 $169,666
Work in process 208,144 431,172
Finished products 98,962 104,067
Less obsolescence reserve (245,551) (138,154)
$289,985 $566,751
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 beneficial conversion feature and the
warrants were valued and recorded as a discount to the notes payable which was
<PAGE>
accreted as interest expense over the term of the notes. Notes for $25,000,
plus accrued interest, were converted into 72,479 shares during 1998. The then
remaining notes totaling $435,000 were paid off in June 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:
2000 $33,881
2001 7,907
Total minimum settlement payments 41,788
Less current portion 33,881
Long-term portion $ 7,907
4. Operating Leases
The Company's non-cancelable operating lease agreement for an office building
expired during the year. The Company moved offices and signed a new lease
agreement which expires March 2004. Rental expense included in operations for
the leases for the years ended December 31, 1999 and 1998 totaled $119,540 and
$123,584, respectively. Future minimum rentals under the operating lease
agreement are as follows:
Year ending:
2000 $ 88,982
2001 88,982
2002 88,982
2003 88,982
Thereafter 22,246
$378,174
5. Shareholders' Equity
Preferred Stock
On April 5, 2000, each share of the preferred stock is callable at the option
of the Company at a price of $2.00 per share. The preferred stock bears a
coupon rate of 6% payable quarterly and is convertible into common stock at
$.46 per share. Cumulative dividends in arrears at December 31, 1999 and 1998
were $32,361 and $20,361, respectively, 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 entitled the holder to purchase
one share of common stock at $1.50 per share. During 1999, the Company
<PAGE>
extended the expiration date of the redeemable warrants from September 1999 to
September 2004 and reduced the exercise price to $.75 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. 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.
In 1999, the Company commenced a private placement for the sale of 11,000,000
shares of common stock. During 1999, the Company received $505,000 in proceeds
for 2,525,000 shares. The remaining net proceeds of $1,576,000 were received
subsequent to year-end. In connection with the private placement, the Company
granted the selling agent a warrant to purchase 456,000 shares of common stock
at an exercise price of $.20 per share. The warrant expires five years from
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 generally at exercise prices equal to the grant date
market value of the underlying stock. Options granted generally vest over a
period of 48 months with a 5 year term.
A summary of outstanding options is as follows:
Weighted
Shares Average
Reserved Options Exercise
for Grant Outstanding Price Per
Share
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
Granted (700,000) 700,000 .21
Canceled/expired 316,500 (316,500) .53
Balance, December 31, 1999 808,333 1,276,167 $ .36
As of December 31, 1999 there were 1,084,500 options outstanding with exercise
prices between $.20 and $.50, and 191,667 options outstanding with exercise
prices between $.53 and $3.53. At December 31, 1999 outstanding options had a
weighted-average remaining contractual life of 4 years.
<PAGE>
The number of options exercisable as of December 31, 1999 and 1998 was 448,667
and 418,667, respectively, at weighted average exercise prices of $.54 and
$.58 per share, respectively.
The weighted average fair value of options granted during the years ended
December 31, 1999 and 1998 was $.19 and $.35 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 1999 and 1998, 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 1.829% and 1.207%.
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:
1999 1998
Pro forma loss application to common shares $ (1,133,446) $ (1,798,199)
Pro forma loss per common share - basic $ (.08) $ (.14)
and diluted
Note: The pro forma effect on the net loss for 1999 and 1998 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.
<PAGE>
Warrants
The Company has granted warrants for the purchase of shares of the Company's
common stock to officers, directors and certain debt and equity holders. With
the exception of warrants granted to certain officers, the warrants are fully
vested upon issuance and expire in varying amounts through 2008. Information
with respect to warrants granted as of December 31, 1999 and 1998 is
summarized as follows:
Warrant
Price Per
Shares Share
Outstanding at December 31, 1997 8,662,308 $.29 to $1.94
Granted 739,613 .35
Canceled (62,235) .30 to 1.88
Outstanding at December 31, 1998 9,339,686 .29 to 1.94
Granted 764,000 .19 to .20
Canceled (711,570) .50 to 1.00
Outstanding at December 31, 1999 9,392,116 $.19 to $1.94
In August 1998, the Company issued a warrant to its President for the purchase
of 739,613 shares of common stock at $.35 per share. The warrant vested
immediately and expires in August 2008.
In September 1999, the Company issued a warrant to its Vice President of Sales
and Marketing for the purchase of 64,000 shares of common stock at $.19 per
share. The warrant vested immediately and expires September 1, 2004.
In November 1999, the Company issued an additional warrant to its Vice
President of Sales and Marketing for the purchase of 700,000 shares of common
stock at $.20 per share. The warrants vest 25% semiannually beginning on May
1, 2000 and expire November 1, 2006.
7. Income Taxes
Deferred tax assets and liabilities consisted of the following:
1999 1998
Net operating loss carry forwards $3,278,000 $3,147,000
Inventory 83,000 42,000
Other 49,000 73,000
Deferred tax assets 3,410,000 3,262,000
Depreciation 35,000 51,000
Deferred tax liability 35,000 51,000
3,375,000 3,211,000
Less valuation allowance (3,375,000) (3,211,000)
Net deferred tax assets $ - $ -
<PAGE>
The Company has net operating loss carryforwards at December 31, 1999 of
approximately $9,600,000, which are available to reduce income taxes payable
in future years. These carryforwards will expire at various times through the
year 2020. Carryforwards of approximately $565,000 expired in 1999.
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. There were no contributions to the
Plan during 1999. 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. Future matching contributions will be determined annually by the
Board of Directors.
9. Major Customers
For the year ended December 31, 1999, the Company had net sales to two
customers which totaled 37.9% of the total net sales for the year. The
receivable balance due from these customers was $17,384 at December 31, 1999.
For the year ended December 31, 1998, the Company had sales to three customers
which totaled 53% of total 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 $6,005 and $52,261 for the years ended
December 31, 1999 and 1998, respectively.
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, 1999, which required reporting on Form 8-K.
<PAGE>
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)].
<PAGE>
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)].
<PAGE>
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 Plymouth Ponds
Development II, LLC, dated March 30, 1999 (incorporated by
reference to Exhibit 10 to Form 10-QSB Report for the quarter
ended March 31, 1999 (File 0-8482)]
10(xi) Warrant issued to Ronald B. Thomas, dated July 2, 1999
[incorporated by reference to Exhibit 10(xv) to Form 10-KSB
Report for the year ended December 31, 1997 (File 0-8482)].
10(xii) 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 September 30, 1998 (File 0-8482)].
10(xiii) 1998 Stock Option Plan of the Company as approved by Shareholders
at May 28, 1998 meeting [incorporated by reference to Exhibit
10(xv) to Form 10-KSB Report for the year ended December 31, 1998
(File 0-8482)].
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, 1999.
<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, 2000. 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/ Ronald B. Thomas President, Chief Executive Officer and
Ronald B. Thomas Director
s/ John M. Bucher Director of Operations and Corporate
John M. Bucher Controller
s/ Duane S. Carlson Director
Duane S. Carlson
s/ Gary L. Deaner Director
Gary L. Deaner
s/ S. Albert D. Hanser Chairman
S. Albert D. Hanser
s/ Douglas M. Pihl Director
Douglas M. Pihl
<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 14, 2000, with respect to the
financial statements of Astrocom Corporation included in this Annual Report on
Form 10-KSB of Astrocom Corporation for the year ended December 31, 1999
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 2000
