<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 02532
FIFTH DIMENSION INC.
-----------------------------------------------------
(Name of Small Business Issuer in its Charter)
New Jersey 21-0717490
- --------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
801 New York Avenue, Trenton, New Jersey 08638-3982
- -----------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Issuer's Telephone Number (609)393-8350
-------------
SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE ACT:
Common Stock - $0.33-1/3
--------------------------
(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 Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes_______ No X
-----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Issuer'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]
The Issuer's revenues for its most recent fiscal year (1997) were $1,318,138.
As of April 24, 1998 the aggregate market value of the voting stock held by
non-affiliates of the Issuer was $126,784.
As of April 15, 1998, the Issuer has outstanding 1,093,636 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Shareholders Meeting to be held
June 11, 1998, are incorporated by reference into Part III.
Exhibit Index is located in Part IV, Pages 36 and 37.
<PAGE>
PART I
Item 1. Description of Business
- ----------------------------------
(a) Business Development
---------------------------
(1) The Issuer was incorporated under the laws of the State of New
Jersey on May 1, 1959.
(2) As a result of delays and, ultimately, work stoppage in the
Company's three major contracts, the Company incurred significant losses and
cash flow shortages in 1997 and was forced to significantly reduce its
operations.
On January 6, 1998 (the "Petition Date"), the Company filed a voluntary
petition (the "Bankruptcy Filing") for relief under Chapter 11 of the Bankruptcy
Code in the United States Bankruptcy Court for the District of New Jersey
(Chapter 11 Case No. 98-30111/SAS). The Company intends to file a plan of
reorganization on or around May 1998. The Company filed a Current Report on
Form 8-K with respect to its bankruptcy filing on January 9, 1998. Since the
Petition Date, the Company has continued to operate its business and manage its
properties as a debtor-in-possession while the reorganization case is pending.
(b) Business of Issuer
-------------------------
(1) The Issuer's business is limited to providing goods and services
relating to the electronics industry. The Issuer operates under two basic
product groups.
A. Development and manufacturing of
"telemetry" (Slip Ring Group);
B. Development and manufacturing of
"components" (Mercury Products Group).
TELEMETRY (SLIP RING GROUP)
---------------------------
Telemetry is the science of transmitting signals over a distance with
minimal distortion. Microwave transmission of telephone calls, information from
satellites, or the collection of data by a computer from sensors within a single
vehicle (an airplane for example) are examples of technologies using telemetric
science.
2
<PAGE>
PART I
Item 1. Description of Business
- ---------------------------------
(b) Business of Issuer (continued)
------------------------------------
The Issuer's Slip Ring Group manufacturers custom built slip rings for
Applications such as (Armored Vehicle Turrets, Inertial Measurement, Simulators,
Industrial Equipment, Radar Antennae, Aircraft and Fire Control Systems).
A typical Slip Ring consists of a brush or wiper that is always in sliding
electrical and mechanical contact with rings in rotation as part of a rotor
assembly, The Slip Ring assembly allows for the transmission of electrical
signals or power from a rotating member to a stationary member. In addition, in
some applications the transmission of pneumatic and/or hydraulic fluid in a
rotating member is also involved.
The Issuer is a manufacturer of custom slip ring assemblies for the Trident
Guidance System, the Abrams Tank Turret, radar pedestals, pharmaceutical
equipment sophisticated amusement rides, robots for automobile manufacturing,
paper converting equipment and various other rotating applications.
As a result of the company's applied research, the Issuer applied for a
patent on a new Brushless Slip Ring. The Issuer believes this new technology
offers significant performance and cost advantages over typical competitive slip
rings with brushes and rings.
In 1985, procurement responsibility for the Trident Slip Ring Assembly was
transferred from Draper Laboratories to Kearfott Guidance and Navigation
Corporation ("KG&N). The Issuer has negotiated production contracts with KG&N
periodically since 1985, and had contracts in place for final delivery in 1997
with no new contracts pending. During 1996 and 1997, revenues from these
contracts amounted to $3,256,090 or 76.8%, and $47,379 or 3.5% respectively, of
the Issuer's sales.
3
<PAGE>
PART I
Item 1. Description of Business
- ---------------------------------
(b) Business of Issuer (continued)
-------------------------------------
COMPONENTS (Mercury Products Group)
------------------------------------
The Issuer designs, manufacturers, and markets a family of Mercury
switches and relays to various military and commercial users. These switches
are of three types:
Tilt switches, which operate when the switch is physically rotated
about an axis, so that the Mercury makes or breaks an electrical contact as
required. Typical applications are for burglar alarms, telephones, household
appliances, etc.
Magnetically actuated switches which operate when a magnetic field is
applied, either by a permanent magnet, or by an electromagnet. When operated by
an electromagnet, these are called relays. The Issuer's magnetically operated
Mercury switches are unique in that they are position insensitive (i.e. they may
be mounted to operate in any position, even while moving).
Impulse Switches are components which provide an electrical signal in
the event a shock of sufficient magnitude is encountered, such as by sudden
starting or stopping. Typical applications include fusing for ordnance,
vibration sensors, motion and similar security devices.
In 1989, a development program was undertaken by this group to
manufacture a mercury level sensor for the Paveway system. Paveway is the
"smart" bomb guidance system developed by Texas Instruments. Development of
Paveway III was completed in 1993 and included a new sensor package resulting in
significant cost reductions and quality improvement. This was an ongoing
program with substantial products shipped. In 1997, this program was canceled
by Texas Instruments as a result of their customer's cancellation.
The Issuer has an Applied Research Program to develop a replacement
for mercury in tilt switches with two patents pending for this technology.
4
<PAGE>
PART I
Item 1. Description of Business
- ---------------------------------
(b) Business of Issuer (continued)
-------------------------------------
(2) All products manufactured by the Issuer are shipped from the
factory as specified by the customer, either standard carrier or special
services.
(3) A press release is generally issued as a form of advertising
newly developed products.
(4) The Issuer experiences intense competition with respect to most
areas of its business. The Issuer competes primarily on the basis of
performance and reliability of its products, the ability of its products to
perform in severe environments encountered in military, aerospace and high
reliability commercial applications, prompt and responsive contract performance,
price, and the Issuer's technical competence. The Issuer believes that its
product innovations and its ability to integrate its products into systems and
sub-systems, and to interface these systems with end-user applications, provide
the Issuer with an advantage over many of its competitors. In addition the
applied research funding since 1995 is believed to be key to developing products
with competitive advantages.
(5) The raw materials for the manufacture of the Issuer's products
are available from several sources, such as Carpenter Technology Corporation and
Engelhard Corporation, and generally are made to order.
(6) The Issuer's business and the products offered relate to the
electronics industry for use in defense, industrial and commercial applications.
Revenue from billings during 1997 and 1996, respectively on a series
of production contracts, currently in the Telemetry (Slip Ring) Group, with one
major domestic customer (Kearfott Guidance and Navigation Corporation), amounted
to 76.8% and 3.5% of total sales. The current contract is expected to be
finalized in 1998 and there are no anticipated additional contracts from
Kearfott Guidance and Navigation Corporation at this time.
5
<PAGE>
PART I
Item 1. Description of Business
- ---------------------------------
(b) Business of Issuer (continued)
-------------------------------------
(7) Many of the Issuer's products are patented. These include
patents on position insensitive mercury switches; normally open contact mercury
impulse sensors; and normally open or normally closed tilt switches.
In 1983, a Licensing Agreement was signed with Saunders-Roe
Developments Limited (England), (now known as Saunders-Roe, Limited (England),
for a ten year period, covering manufacture and sole source sales of the
Issuer's Tilt Switches, to Common Market countries, and non-sole source
marketing elsewhere, excluding the United States. The Issuer provided technical
data, equipment, engineering and start-up service in exchange for licensing fees
and an ongoing royalty. In 1987, the license was extended to include the
Issuer's LCII Switch. Revenues attributable to these royalties amounted to
$5,441 during 1996. Agreement was reached which would extend this license for a
period of ten years (August 2003). However, in 1996 Saunders-Roe Limited advised
that they no longer planned to manufacture Mercury Switches and a new license
was negotiated with Polaron Group, Advanced Switch and Sensor Division
(England).
(8) Where products are manufactured that may have a military
application, approval for export is required from the Commerce Department or the
State Department.
(9) The Issuer provides information to applicable federal, state,
and local governments regarding compliance with all applicable laws. These
regulations require an ever increasing cost of doing business and result in
increasing product costs.
(10) Approximately $ 207,414 was spent by the Issuer on Engineering
and Research activities during 1997 as compared with $215,000 in 1996. This
activity was primarily directed to new products for existing applications and
markets, specifically the Brushless Slip Ring and Environmentally Safe Switch.
The Issuer directly funds all Research and Development activity.
6
<PAGE>
PART I
Item 1. Description of Business
- ---------------------------------
(b) Business of Issuer (continued)
-------------------------------------
(11) Compliance with Federal, State and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment or the
Issuer's employees, has had a material effect on the Issuer's earnings based
upon increases in time spent by the Issuer's employees and fees paid for outside
services to monitor and review environmental control. It has not had a material
effect on capital expenditures and the competitive position of the Issuer. The
costs to the Issuer to comply with Environmental Protection Agency Regulations
in 1997 amounted to approximately $17,045 in labor, equipment and materials
compared with $53,000 in 1996.
(12) The Issuer has a total of 28 full time employees.
Item 2. Description of Property
- ---------------------------------
(a) On September 1, 1983, the Issuer acquired, the premises at 801
New York Avenue, Trenton, New Jersey. This property had been leased by the
Issuer since 1980, and serves as the sole manufacturing and office facility of
the Issuer. The premises was purchased from Princeton Commerce Center, Inc.,
which has no material relationship with the Issuer, at a purchase price of
$425,000.
In 1997 the Issuer mortgaged the building with Valley National Bank of
New Mexico for $652,000. The loan was guaranteed by Mr. Edward Gilbert. The
terms include an interest rate of 10.5 percent per annum, and payments of $6511
per month in interest and principal until the end of the year 2000, at which
time the principal balance is due.
The building is a one story brick building containing 18,000 square
feet in good condition located in an industrial section on a well traveled
street with an ongoing Maintenance Program in place. The Issuer feels that this
property is adequate to satisfy its requirements for the foreseeable future.
(b) The Issuer has made no Real Estate Investments.
7
<PAGE>
PART I
Item 3. Legal Proceedings
- ---------------------------
(a) The U.S. Environmental Protection Agency ("EPA") has filed suit
against Princeton Gamma Tech ("PGT"), an unrelated third party, alleging that
releases of hazardous substances by PGT have contaminated two sites in New
Jersey. The Issuer occupied a facility, destroyed by fire in 1974, which was
located in the general vicinity of the identified sites. PGT has filed a third
party complaint against the Issuer, among others, alleging that these parties
also caused the contamination.
Originally the EPA listed the Issuer as a potentially responsible
party; however, following their initial investigation, the EPA elected to file
suit against PGT only. In a January 17, 1996 letter, the United States
Environmental Protection Agency ("EPA") stated that it has information which
documents the release of hazardous substances from the property that Fifth
Dimension formerly occupied in Rocky Hill, New Jersey, that is affecting the
groundwater, and advised Fifth Dimension Inc. that it is potentially liable
under the Comprehensive Environmental Response, Compensation and Liability Act.
Based on the information, the EPA stated that Fifth Dimension should perform
some response action, at the minimum, an investigation to determine the nature,
extent and impact of contamination at the property. The Issuer has proposed to
undertake an additional investigation; however, it continues to believe that it
did not contribute to the contamination, and intends to vigorously defend this
action. As this case is still in discovery, the Issuer's special counsel is
unable to predict an outcome of this matter at this time.
The Issuer's insurance carriers have agreed to pay a portion of the
costs attributable to the defense of this matter, but has reserved its rights to
withdraw in the event they disclaim coverage. Management believes the insurance
company is liable for all costs and is actively seeking reimbursement.
Item 4. Submission of Matters to Vote of Security Holders
- -----------------------------------------------------------
None.
8
<PAGE>
PART II
Item 5. Market for Common Stock and Related Stockholder Matters
- -----------------------------------------------------------------
(a) Market Information
------------------------
The Issuer's Common Stock is traded in the Over-the-Counter Market.
Effective August 31, 1987, the Issuer was accepted for inclusion by NASDAQ,
trading under the symbol "FIVD." On December 9, 1997, the Issuer was delisted by
NASDAQ because the Issuer was unable to meet the minimum capital and surplus
requirements of the NASDAQ Stock Market.
The following table provides information with respect to the high and
low bid quotations of the Registrant's Common Stock for each quarter during the
past two years.
<TABLE>
<CAPTION>
BID QUOTATIONS
--------------
1997 1996
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 3 1-1/16 2 1-1/2
Second Quarter 5-1/8 2-3/8 3-3/4 1-3/4
Third Quarter 3-3/4 2 2-1/2 1-1/2
Fourth Quarter 3 1/4 1-5/8 13/16
</TABLE>
The information provided above with respect to the bid quotations was
furnished by NASDAQ, 1735 K Street, Northwest, Washington, D.C. 20006, through
December 9, 1997 (the date the Issuer's Common Stock was delisted) and from a
third party quotation vendor for the period thereafter.
(b) Holders
-------------
The approximate number of stockholders of record as of April 24, 1998
is 422.
(c) Dividends
---------------
There was no dividend during the past two years. Payment of dividends
is not anticipated during the foreseeable future based on projections of the
capital requirements needed by the Issuer.
9
<PAGE>
Part II
Item 6. Management's Discussion and Analysis
- ----------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
The 1997 loss from operations significantly altered the financial condition of
the Company. The working capital of the Company declined from $1,098,976 at
December 31, 1996 to $130,664 at December 31, 1997. The filing of Chapter 11
bankruptcy protection as of January 6, 1998, has allowed the Company to delay
payment of approximately $400,000 of current payables. The available current
assets were redeployed to ongoing operations.
Current assets declined from $1,464,418 as of December 31, 1996 to $716,346 as
of December 31, 1997. As a result of the contract terminations, inventory
reserves, writedowns and lower production levels, the inventory balance declined
by $507,000. Cash balances and receivables also declined significantly due to
the operating loss and lower sales levels.
In 1997, no capital additions were funded, however, depreciation expense on
fixed assets purchased in prior years of $114,526 was recorded.
Current liabilities increased from $365,444 at December 31, 1996 to $585,682 at
December 31, 1997; primarily the result of increased unpaid vendor invoices that
subsequently became part of the Chapter 11 bankruptcy filing.
Long term liabilities increased to $1,125,050 as of December 31, 1997 tied to
the borrowing from various sources described below. These funds were used to
support the operating losses. The ability of the Company to survive and return
to profitable levels is dependent on its ability to secure additional financing.
Through March of 1998, the Company had borrowed $190,000 from Directors,
Shareholders and new Investors. These funds, plus the other potential funds to
be secured, will be convertible to conversion stock, at a specified rate through
a private offering, if approved by the Bankruptcy Court in 1998.
The Company has a deficit stockholder equity balance of $455,613 as of December
31, 1997 after ending 1996 with an equity balance of $1,704,680. This deficit
resulted in the inability of the Company to meet the minimum capital and surplus
requirements of the NASDAQ Stock Market and the Company's stock was delisted
from NASDAQ effective December 9, 1997.
RESULTS OF OPERATIONS
- ---------------------
Sales for 1997 were $1,318,138 as compared to 1996 sales of $4,241,236, The
reduction in sales was primarily the result of production delays on the Trident
IMU Slip Ring contract that had contributed $3,256,000 to 1996 sales. The
Company subsequently was advised of the intention to cancel the contract, and
the financial statement as of December 31, 1997 reflects a full reserve for all
remaining inventory associated with this contract. The Company is currently
negotiating and anticipates a settlement during 1998 in regards to the
termination of this contract. In addition, in 1997 the ACALA Tank Turret Slip
Ring contract and Raytheon TI Division Paveway contract were canceled. The
Company did experience modest sales increases in its other product lines and
anticipates growth,
10
<PAGE>
particularly in its commercial and defense slip ring product lines. Backlog of
all products as of the beginning of 1998 was $1,373,572.
Cost of sales as a percentage increased significantly during 1997 resulting in a
$1,546,537 loss after direct costs and manufacturing overhead. This loss was
primarily the result of write-offs of inventory on canceled contracts, write-
downs on slow moving inventory items and low profit margins on new products
introduced this year. The Company anticipates improvements in gross margins over
the course of 1998 and the future, as these new products mature and fixed
manufacturing overhead coverage improves as sales levels increase.
Selling, general and administrative expenses declined significantly during 1997
to $544,493, as compared to $1,224,507 in 1996. This decline was the result of
overhead reductions instituted by the Company in all departments and activities.
The overhead reached minimum levels in the last couple months of 1997 as the
full effect of all reductions instituted during the year took effect. These
reductions are expected to assist the Company in its recovery efforts.
Financing costs increased significantly to $50,520 in 1997 versus $12,518 in
1996. This is the result of borrowing from various sources during the year. The
Company anticipates financing costs to continue to increase in 1998, as
additional debt is incurred as required to cover the continued development, cost
of production implementation and marketing of the new products.
The sales decline and production problems resulted in a 1997 loss of $2,160,293
versus a 1996 loss of $144,166. No tax benefits were accrued during 1997 based
on the uncertainty of using these tax benefits in future years.
The Company is expected to report losses during 1998 although at significantly
lower levels than in 1997. However, the Company's survival is dependent on its
ability to secure the necessary funding and successful marketing of the patent
pending Brushless Slip Ring technology, which to date, has been favorably
received by a number of potential customers.
11
<PAGE>
PART II
Item 7. Financial Statements
- -----------------------------
FIFTH DIMENSION INC.
FINANCIAL STATEMENTS
AND INDEPENDENT AUDITOR'S REPORT
FORM 10-KSB-ITEM 7
YEARS ENDED DECEMBER 31, 1997 and 1996
PAGES 12 - 33
12
<PAGE>
FIFTH DIMENSION INC.
CONTENTS TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report of Withum, Smith & Brown 14
Independent Auditor's Report of Yohalem Gillman & Company, LLP 15
Balance Sheet
December 31, 1997 16, 17
Statements of Operations
For the Years Ended December 31, 1997 and 1996 18
Statements of Stockholders' Equity (Deficiency)
For the Years Ended December 31, 1997 and 1996 19
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996 20
Notes to Financial Statements 21-33
</TABLE>
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Fifth Dimension Inc.:
We have audited the accompanying balance sheet of Fifth Dimension Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
equity (deficiency) and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Fifth Dimension Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred net losses in 1997 and 1996,
experienced a significant sales decline from 1996 to 1997, and in addition, on
January 6, 1998, the Company filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. In the event a plan of
reorganization is accepted, continuation of the business thereafter is dependent
on the Company's ability to achieve sufficient cash flow to meet its
restructured debt obligations. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
/s/ WITHUM, SMITH & BROWN
Withum, Smith & Brown
Princeton, New Jersey
May 5, 1998
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Fifth Dimension Inc.:
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Fifth Dimension, Inc. for the year ended December 31, 1996.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Fifth
Dimension, Inc. for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ YOHALEM GILLMAN & COMPANY, LLP
Yohalem Gillman & Company, LLP
New York, New York
January 31, 1997
15
<PAGE>
FIFTH DIMENSION INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 23,959
Accounts receivable, less allowance for doubtful
accounts of $22,619 258,163
Inventory 395,855
Prepaid expenses and other current assets 38,369
--------
Total Current Assets 716,346
Property, Plant and Equipment, Net 510,648
Patent Costs, Net 28,125
--------
TOTAL ASSETS $ 1,255,119
===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
16
<PAGE>
FIFTH DIMENSION INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C>
Current Liabilities:
Current portion of long-term debt $ 45,121
Accounts payable 409,903
Accrued compensation 87,095
Accrued expenses 43,563
-----------
Total Current Liabilities 585,682
Long-Term Debt, Net of Current Portion 1,010,050
Related Party Debt - Subordinated 115,000
Stockholders' Deficiency:
Common stock, $.33-1/3 par value; authorized 1,800,000
shares; 1,094,761 shares issued outstanding 364,936
Additional paid in capital 403,663
Accumulated deficit (1,223,608)
-----------
(455,009)
Less: 1,125 shares of treasury stock at cost (604)
-----------
Total Stockholders' Deficiency (455,613)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 1,255,119
===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
17
<PAGE>
FIFTH DIMENSION INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 1,318,138 $4,241,236
Cost of Sales 2,568,033 3,117,011
----------- ----------
Gross Profit (Loss) (1,249,895) 1,124,225
Operating Expenses:
Selling, General and Administrative Expenses 861,758 1,224,507
Unusual items - environmental costs 2,280 2,115
Total Operating Expenses 864,038 1,226,622
Loss from Operations: (2,113,933) (102,397)
Other Expense (Income):
Interest expense 50,520 12,518
Interest and other income (4,160) (10,896)
Total Other Expense (Income), Net 46,360 1,622
----------- ----------
Loss Before Provision for Income Taxes (2,160,293) (104,019)
Provision for Income Taxes -- 40,147
Net Loss Applicable to Common Shareholders $(2,160,293) $ (144,166)
Net Loss Applicable Per Common Share:
Basic $(1.98) $(.13)
Diluted $(1.98) $(.13)
Shares Used in Per Share Calculation:
Basic 1,093,636 1,093,636
Diluted 1,093,636 1,093,636
=========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
18
<PAGE>
FIFTH DIMENSION INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Paid-in Retained Less
Common Stock Capital Earnings Treasury Stock Total
------------------------ ----------------- ------------- -------------------- -----------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 1,094,761 $ 364,936 $ 403,663 $ 1,080,851 1,125 $ 604 $ 1,848,846
Net Loss -- -- -- (144,166) -- -- (144,166)
---------- --------- ---------- ------------ ------ ------- ------------
Balance at
December 31, 1996 1,094,761 364,936 403,663 936,685 1,125 604 1,704,680
Net Loss -- -- -- (2,160,293) -- -- (2,160,293)
---------- --------- ---------- ------------ ------ ------- ------------
Balance at
December 31, 1997 1,094,761 $ 364,936 $ 403,663 $ (1,223,608) 1,125 $ 604 $ (455,613)
========== ========= ========= ============ ====== ======= ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
19
<PAGE>
FIFTH DIMENSION INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,160,293) $(144,166)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 123,509 124,611
Decrease (Increase) in accounts receivable (30,959) 518,080
Decrease (Increase) in inventory 507,119 (49,840)
Increase in prepaid expenses and other
current assets (904) (25,339)
Increase (Decrease) in accounts payable 274,730 (2,520)
Increase (Decrease) in accrued compensation
and expenses, income taxes payable and
deferred income taxes (49,613) 87,650
----------- ---------
Net Cash (Used In) Provided By
Operating Activities (1,336,411) 508,476
Cash Flows From Investing Activities:
Purchase of property, plant and equipment -- (122,128)
Increase in patent costs (23,245) (5,584)
----------- ---------
Net Cash Used In Investing Activities (23,245) (127,712)
Cash Flows From Financing Activities:
Proceeds from long-term debt 1,355,171 --
Repayment of long-term debt (383,333) (225,000)
Proceeds from related party debt - subordinated 115,000 --
----------- ---------
Net Cash Provided By (Used In)
Financing Activities 1,086,838 (225,000)
----------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (272,818) 155,764
Cash and Cash Equivalents - Beginning of Year 296,777 141,013
----------- ---------
Cash and Cash Equivalents - End of Year $ 23,959 $ 296,777
=========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 34,520 $ 14,080
Income taxes -- --
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
20
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
A. THE COMPANY
--------------
Fifth Dimension Inc. (the "Company") is a provider, to various
military and commercial users, of products relating to the electronics
industry. The Company designs, manufacturers and markets a variety of
products which include mercury switches, relays and signal processing
and data handling devices called commutators and slip rings.
B. INVENTORIES
--------------
Inventories are stated at the lower of cost or market determined by
the first-in, first-out method.
C. PROPERTY, PLANT AND EQUIPMENT
--------------------------------
Property, plant and equipment are stated at cost. Depreciation for
financial reporting purposes is calculated primarily on a straight-
line basis over the estimated useful lives of the asset which are as
follows:
Machinery, Office Furniture And Equipment 3-10 years
Building Improvements 10 years
Building 25 years
For income tax purposes, assets purchased after 1980 are depreciated
under either the accelerated cost recovery system (ACRS) or the
modified accelerated cost recovery system (MACRS).
It is the policy of the Company to charge costs of maintenance and
repairs to operations as incurred and to capitalize expenditures for
replacements or renewals, which extend the life of the asset. When
assets are sold or retired, the cost and related accumulated
depreciation are eliminated from the accounts, and any resulting gain
or loss is reelected in income for the period.
D. REVENUE RECOGNITION
----------------------
Sales are recognized upon passage of title to the customer, which
usually coincides with physical delivery or customer acceptance, as
specified by contractual terms. Such sales are recorded based on the
unit-selling price specified in the contract.
21
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D):
- ------------------------------------------------------------
E. CASH EQUIVALENTS
-------------------
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
F. INCOME TAXES
---------------
Deferred income tax assets and liabilities are recognized for the
differences between the financial and income tax reporting basis of
assets and liabilities based on enacted tax rates and laws. The
deferred income tax provision or benefit generally reflects the net
change in deferred income tax assets and liabilities during the year.
The current income tax provision reflects the tax consequences of
revenues and expenses currently taxable or deductible on the Company's
various income tax returns for the year ended.
G. RESEARCH AND DEVELOPMENT
---------------------------
Company-sponsored research and development expenditures are charged to
expense as incurred, the elements of which are allocated to cost of
sales and general and administrative expenses. Research and
development activities amounted to approximately $207,414 and $215,000
for the years ended December 31, 1997 and 1996, respectively.
H. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
-----------------------------------------
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 130,
"Comprehensive Income". The Company believes that this pronouncement
will not have a material impact on the Company's financial statement
disclosures in 1998 and future years.
I. NET LOSS PER COMMON SHARE
----------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings Per Share". SFAS No. 128 supersedes Accounting Principles
Board Opinion No.13 (APB No. 13). "Earnings Per Share," and other
related interpretations and is effective for the periods ending after
December 15, 1997. Under SFAS No. 128, all prior-period earnings per
share amounts have been restated. Basic earnings per share is based
upon weighted-average common shares outstanding. Diluted earnings per
share is computed using the weighted-average common shares outstanding
plus any potentially dilutive securities. For the Company's purposes,
dilutive securities represent stock options.
22
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D):
- ------------------------------------------------------------
I. NET LOSS PER COMMON SHARE (CONT'D)
------------------------------------
The following table sets forth the computation of basic and diluted
net loss per common share:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Numerator:
Net loss $(2,160,293) $ (144,166)
----------- ----------
Numerator For Basic And Diluted Net
Loss Per Common Share $(2,160,293) $ (144,166)
=========== ==========
Denominator:
Denominator for basic net loss
per common share; weighted -
average shares 1,093,636 1,093,636
Effect Of Dilutive Securities:
Employee stock options -- --
----------- ----------
Dilutive Potential Common Shares:
Denominator for diluted net
loss per common share; adjusted
weighted-average shares and
assumed conversions 1,093,636 1,093,636
=========== ==========
Basic Net Loss Per Common Share $ (1.98) $ (.13)
=========== ==========
Diluted Net Loss Per Common Share $ (1.98) $ (.13)
=========== ==========
</TABLE>
Options were outstanding during 1997 and 1996, but were not included
in the computation of diluted net loss per common share because the
effect in years with a net loss would be antidilutive.
23
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D):
- ------------------------------------------------------------
J. USE OF ESTIMATES IN FINANCIAL STATEMENTS
-------------------------------------------
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - GOING CONCERN:
- ----------------------
These financial statements are presented on the basis that the Company
will continue as a going concern. The going concern basis contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business over a reasonable length of time. The Company's
significant net loss in 1997 and its significant drop in sales volume from
1996 to 1997, raise substantial doubt about the Company's ability to
continue as a going concern. In addition, on January 6, 1998, the Company
filed for protection from its creditors under Chapter 11 of the Bankruptcy
Code with the Bankruptcy Court in Trenton, New Jersey. Management is
currently working on its reorganization plan, which it plans to present to
the Bankruptcy Court. The plan calls for various cost containment
measures, and an infusion of $880,000 of capital in the form of
convertible debt through a private placement, contingent upon the approval
of the bankruptcy court and sales increases in the areas of slip rings as
a result of its new patent pending brushless slip ring technology.
However, there can be no assurance that the Company will be successful in
these efforts. The financial statements do not include any adjustments
that might result from the outcome of this going concern uncertainty.
NOTE 3 - INVENTORIES:
- --------------------
Inventories at December 31, 1997 net of allowances are summarized as
follows:
<TABLE>
<S> <C>
Raw materials $ 258,449
Work in progress 261,082
Finished goods --
Less progress payments (123,676)
---------
Total $ 395,855
=========
</TABLE>
24
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
- --------------------------------------
The components of property, plant and equipment as of December 31, 1997
were as follows:
<TABLE>
<S> <C>
Land $ 49,111
Building 379,181
Machinery 987,089
Office furniture and equipment 276,406
Building improvements 251,524
Automobiles 7,946
----------
Total 1,951,257
Less accumulated depreciation and
amortization 1,440,609
----------
Net $ 510,648
==========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997 and 1996 was $114,526 and $116,745, respectively.
NOTE 5 - PATENTS:
- ----------------
The cost of patents is capitalized and amortized to operations on a straight-
line basis over a period of five (5) years. Accumulated amortization at
December 31, 1997 was $66,232 and amortization expense for the years ended
December 31, 1997 and 1996 was $8,983 and $7,866, respectively.
NOTE 6 - LONG-TERM DEBT:
- -----------------------
Long-term debt consists of the following as of December 31, 1997:
Term note payable to a bank maturing December,
1999, payable in equal monthly installments of
$2,000 per month through October, 1998, $5,000
per month through October, 1999, with a final
balloon payment due December, 1999. The note will
accrue interest at the rate of 8.75 percent per
annum. The note is secured by substantially all
of the Company's assets, except for the Company's
land and building for which the Company has
granted a second mortgage to the bank. $ 403,171
25
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - LONG-TERM DEBT (CONT'D):
- -------------------------------
<TABLE>
<S> <C>
Balance carried forward $ 403,171
Mortgage note payable to a bank, maturing
November, 2000, payable in equal monthly
installments of $6,511, which include
principal and interest at the fixed rate of
10.50 percent per annum. The note has a
balloon payment due on the maturity date. The
note is collateralized by the Company's land
and building. 652,000
----------
Total Long-Term Debt 1,055,171
Less: Current Portion of Long-Term Debt 45,121
----------
Long-Term Debt, Net of Current Portion $1,010,050
==========
Aggregate maturities of long-term debt due as of December 31, 1997,
are as follows:
1998 $ 45,121
1999 451,303
2000 513,626
----------
Total $1,010,050
==========
</TABLE>
NOTE 7 - RELATED PARTY TRANSACTIONS:
- -----------------------------------
At December 31,1997, the Company had loans from its directors that are
subordinate to bank term debt in the amount of $115,000. These loans are
unsecured with an interest rate of 9% per annum. As of December 31, 1997,
$1,316 of interest has been paid, with an additional $4,384 of interest
accrued. The loans have no stated maturity date.
In addition to the above, the Company has granted a second mortgage to
Edward M. Gilbert which is recorded in Mercer County, NJ in the amount of
$48,000. This is a second mortgage subject to the first mortgage held by
Valley National Bank. The terms stated in the mortgage are the principal
and interest thereon shall be paid by constant monthly payments based upon
a twenty (20) year amortization term with final payment of all outstanding
principal and accrued and unpaid interest due on November 18, 2000. The
Company has received no proceeds from this loan, therefore no principal or
interest are due as of December 31, 1997.
26
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 8 - INCOME TAXES:
- ---------------------
The provision for income taxes includes income taxes currently payable and
those deferred because of a temporary difference between the financial
statement and tax basis of assets and liabilities. The provision
(benefit) for income taxes consists of the following for the years ending
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal Income Taxes:
Current $ -- $ --
Deferred (708,982) (30,718)
State Income Taxes:
Current -- --
Deferred (193,865) (8,113)
Valuation Allowance For:
Deferred Tax Assets 902,847 78,978
--------- --------
Provision For Income Taxes -- $40,147
========= ========
</TABLE>
The difference between the statutory federal income tax based on a rate of
34% on the loss before income taxes and the Corporation's actual provision
for income taxes is summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory Federal Income Taxes $ (708,982) $ (35,366)
State Income Tax Benefit, Net
Of Federal Expense (193,865) (5,149)
Research And Other Credits -- (6,000)
Graduated Federal Income Tax Brackets
And Other -- 7,684
Valuation Allowance For Deferred Tax
Tax Assets 902,847 78,978
---------- ---------
Provision For Income Taxes -- $ 40,147
========== =========
</TABLE>
27
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 8 - INCOME TAXES (CONT'D):
- -----------------------------
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory rates, applicable to future
years, to differences between financial reporting and the tax basis of
existing assets and liabilities. Temporary differences and carryforwards
as of December 31, 1997 are as follows:
<TABLE>
Deferred Tax Assets:
<S> <C>
Allowance for doubtful accounts and
vacation pay accruals $ 14,370
State net operating loss carryforwards 248,944
Federal net operating loss carryforwards 771,744
Credits available for carryforward 57,792
----------
Deferred Tax Assets 1,092,850
Deferred Tax Liabilities:
Depreciation 27,305
Federal tax arising from state tax benefits 83,720
----------
Deferred Tax Liabilities 111,025
----------
Net Deferred Tax Asset 981,825
Valuation Allowance (981,825)
----------
Net deferred tax asset $ --
==========
</TABLE>
At December 31, 1997, the Company had available the following tax
carryforwards:
<TABLE>
<CAPTION>
Year of
Type Amount Expiration
---- ------ ----------
<S> <C> <C>
Federal Net Operating Loss $2,269,835 2010-2011
Federal Research Credit 19,524 2009
New Jersey Net Operating Loss 2,766,458 1999-2003
New Jersey Tax Credits 38,268 1998-2002
</TABLE>
28
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - EMPLOYEE BENEFIT PLANS:
- -------------------------------
A. 401(K) PLAN
--------------
Beginning July 1, 1995, the Company established a 401(k) plan to
replace the pension and profit sharing plans, which were terminated
during 1993. The plan covers all employees, ages 21 and over, with a
minimum of one year of service and provides for elective deferrals by
the employees up to 15% of compensation. Additionally, the Company, at
its sole discretion, may contribute additional amounts to the plan.
Employer contributions amounted to $16,252 and $20,713 for the years
ended December 31, 1997 and 1996, respectively.
B. COMPENSATION FOR FUTURE ABSENCES
-----------------------------------
Employees of the Company are entitled to paid vacation and sick days
depending on length of service and other factors. The Company
recognizes these costs when earned by the employees.
NOTE 10 - STOCK OPTIONS:
- -----------------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation" requires that the Company disclose
additional information about employee stock-based compensation plans.
The objective of SFAS No. 123 is to estimate the fair value, based on
the stock price at the grant date, of the Company's stock options to
which employees become entitled when they have rendered their requisite
service and satisfied any other conditions necessary to earn the right
to benefit from the stock options. The fair market value of a stock
option is to be estimated using an option-pricing model that takes into
account, as of the grant date, the exercise price and expected life of
the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest
rate for the expected term of the options.
As permitted under SFAS No. 123, the Company has elected to follow APB
25 and related interpretations in accounting for stock based awards to
employees. In addition, the Company has calculated the pro forma
financial results as required under SFAS No.123, and noted that the
impact on the net loss for the years ended December 31, 1997 and 1996,
was immaterial.
29
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCK OPTIONS (CONT'D):
- --------------------------------
In April 1988, the Company approved an incentive stock option plan whereby
eligible employees would be granted options to purchase up to 150,000
shares of the Company's common stock at the market value on the date of
the grant. The options are exercisable for a period beginning three years
and ending ten years after the date of the grant, subject to certain
limitations and other restrictions.
In August 1987, the Board granted options to each of the Company's five
directors serving at that time to purchase 15,000 shares of common stock,
at the price of $2.67 per share (the fair market value of the shares on
the date of grant), in recognition of past and ongoing service to the
Company. The options terminate ten years from the date of grant and are
exercisable at any time before then.
The Company's president and chief executive officer, pursuant to
employment agreements, was granted nonqualified stock options to purchase
shares of the Company's common stock (based on the fair market value on
the date of grant), as follows:
<TABLE>
<CAPTION>
Number of Exercise
Date Shares Allowed Price Per
of Grant to be Purchased Share Exercise Period
-------- --------------- --------- ------------------------
<S> <C> <C> <C>
July 27, 1993 15,000 $2.19 Expire on July 27, 2003
July 27, 1994 15,000 $3.75 Expire on July 27, 2004
July 27, 1994 75,000 $3.75 Subsequent to the first
fiscal year in which the
Company achieves net
sales of $10 million and
has net income;
expires July 27, 2004
July 27, 1994 75,000 $3.75 Subsequent to the first
year in which the
Company achieves net
sales of $15 million and
has net income; expires
July 27, 2004
</TABLE>
During 1994, the Board granted options to purchase 5,000 shares each of
the Company's common stock, to two key executives, at the price of $3.75
per share (the fair market value of the shares on July 27, 1994, the grant
date) as incentive for performance of services. These options expire ten
years from the date of the grant.
30
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCK OPTIONS (CONT'D):
- -------------------------------
The following is a summary of stock option activity and related
information:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Options:
Outstanding at 334,000 $3.11 310,000 $3.21
beginning of year -- -- 24,000 1.88
Granted (126,250) 2.49 -- --
Canceled -- -- -- --
Exercised ------- ---------- ----------- --------
207,750 $3.48 334,000 $3.11
======= ========== =========== ========
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Contractual Exercisable Weighted-Average
Exercise Prices at 12/31/97 Life (Years) at 12/31/97 Exercise Price
- --------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
$2.19 - 3.75 207,750 5.96 43,750 $3.09
</TABLE>
NOTE 11 - EXECUTIVE COMPENSATION:
- --------------------------------
The Company has a Board-approved incentive compensation arrangement with
certain executive officers whereby each officer receives a certain
percentage of pre-tax or post-tax earnings in addition to base pay. Such
incentives, in total, amounted to $-0- for the years ended December 31,
1997 and 1996.
The Company has an employment agreement with a key executive for a two
year term with an expiration date of December 31, 1998. Among other
provisions, the agreement provides for base compensation and incentives
based on pre-tax profits.
31
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 11 - EXECUTIVE COMPENSATION (CONT'D):
- -----------------------------------------
During 1994, the Company entered into an employment agreement with its new
president and chief executive officer, which continues through April 1999.
Among other provisions, the agreement provides for a base compensation,
incentives based on post-tax profits and stock options (see Note 10).
NOTE 12 - UNUSUAL ITEMS - ENVIRONMENTAL COSTS
- ---------------------------------------------
The Company incurred legal costs of $2,280 and $2,115 during 1997 and
1996, respectively, in connection with the environmental suit more fully
described in Note 13.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
A. ENVIRONMENTAL ISSUE
----------------------
The U.S. Environmental Protection Agency ("EPA") has filed suit against
Princeton Gamma Tech ("PGT"), an unrelated third party, alleging that
releases of hazardous substances by PGT have contaminated two sites in New
Jersey. Fifth Dimension Inc. occupied a facility, destroyed by fire in
1974, which was located in the general vicinity of the identified sites.
PGT has filed a third party complaint against the Company, among others,
alleging that these parties also caused the contamination.
Originally, the EPA listed the Company as a potentially responsible party;
however, following their initial investigation, the EPA elected to file
suit against PGT only. In a January 17, 1996 letter, the United States
Environmental Protection Agency ("EPA") stated that it has information
which documents the release of hazardous substances from the property that
Fifth Dimension Inc. formerly occupied in Rocky Hill, New Jersey, that is
affecting the groundwater, and advised Fifth Dimension Inc. that it is
potentially liable under the Comprehensive Environmental Response,
Compensation and Liability Act. Based on the information, the EPA stated
that Fifth Dimension Inc. should perform some response action, at the
minimum an investigation to determine the nature, extent and impact of
contamination at the property. The Company has proposed to undertake an
additional investigation; however, they continue to believe that it did
not contribute to the contamination, and they intend to vigorously defend
this action. As this case is still in discovery, the Company's legal
counsel is unable to predict an outcome of this matter at this time.
The Company's insurance carrier has agreed to pay a portion of the cost
attributable to the defense of this matter but has reserved its rights to
withdraw in the event they disclaim coverage. Management believes the
insurance company is liable for all costs and is actively seeking
reimbursement.
32
<PAGE>
FIFTH DIMENSION INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 14 - CONCENTRATIONS OF REVENUE AND CREDIT RISK:
- ---------------------------------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and
trade accounts receivable.
The Company maintains cash balances at a bank located in the northeastern
United States. As part of its cash management process, the Company
periodically reviews the relative credit standing of these banks.
Net sales during 1997 and 1996 resulting from a series of production
contracts with one major domestic customer amounted to 3.6% and 76.8% of
total sales, respectively. Accounts receivable from the Company's major
customer amounted to 12% of total accounts receivable at December 31,
1997.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
- ---------------------------------------------
With the exception of long-term debt, the Company records all financial
investments including accounts receivable and accounts payable at cost,
which approximates market value.
The Company believes that at December 31, 1997, the fair value of its
long-term debt approximates its recorded value due to the terms of the
long-term debt being comparable to what would be available to the Company
as of December 31, 1997.
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED):
- ---------------------------------------
The Company received loan proceeds amounting to $305,000 subsequent to
year end. The debt is convertible into shares of common stock at a price
of $.40 per share, if approved by the bankruptcy court.
33
<PAGE>
PART II
Item 8. Changes in and Disagreements With Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
--------------------
On January 26, 1998, the Registrant was informed by its independent auditors,
Yohalem, Gillman & Company LLP of their resignation.
The reports of Yohalem, Gillman & Company LLP on the financial statements of the
Registrant for each of the two fiscal years in the period ended December 31,
1996 did not contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
There was no disagreement between Yohalem Gillman & Company LLP and the
Registrant. The resignation is the result of the auditors lack of independence
as the Registrant filed Chapter 11 on January 6, 1998 with a past due account.
The Registrant engaged Withum, Smith & Brown for the 1997 year end audit.
34
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- -----------------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act
--------------------------------------------------
(a) Directors and persons chosen to become Directors.
The information contained on Pages 5 and 6 of Fifth Dimension Inc.'s
Proxy Statement dated May 21, 1998, with respect to Directors of the Issuer, is
incorporated herein by reference in response to this item
(b) Executive Officers of the Issuer
CRAIG E. EBNER, 58, has been President and Chief Executive Officer of the
Corporation since April, 1993.
ALFRED R. SENNI, 69, has been Vice President, Slip Rings since April, 1993.
Prior to this appointment, Mr. Senni served as Chief Executive Officer of the
Corporation.
MICHAEL FAITH, 35, was employed by Fifth Dimension from 1995 until February
1998; from May 1997 - February 1998 as Vice President and Secretary, and from
1995 - 1997 as Product Manager. From 1993 - 1995 Mr. Faith was Manager
Mechanisms Manufacturing, Lockheed Martin Astrospace, and from 1988 - 1993
Project Engineer, Hughes Aircraft Space 7 Communication. Mr. Faith resigned as
officer of the Company on February 27, 1998.
CATHERINE MARTIN, 48, has been employed by Fifth Dimension since October, 1981
in various administrative positions, most recently, October, 1997 - April, 1998
as Administrative Supervisor, and from April, 1998 Administrative Supervisor and
Assistant Secretary of the Corporation.
Item 10. Executive Compensation
- ---------------------------------
The information contained on Pages 7 through 9 of the Issuer's Proxy
Statement dated May 21, 1998, with respect to executive compensation and
transactions, is incorporated herein by reference in response to this item.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information contained on Pages 3 and 4 of the Issuer's Proxy
Statement dated May 21, 1998, with respect to security ownership of certain
beneficial owners and management, is incorporated herein by reference in
response to this item.
12. Certain Relationships and Related Transactions
- ----------------------------------------------------
The information contained on Page 7 of the Issuer's Proxy Statement
dated May 21, 1998, with respect to Certain Relationships and Related
Transactions, is incorporated herein by reference in response to this item.
35
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8K
- ------------------------------------------
2. (a) Exhibits
------------
Exhibit (3) Articles of Incorporation and By-Laws
--------------------------------------------------
(a) Articles of Incorporation
------------------------------
3.1 Certificate of Incorporation of the Issuer filed
May 1, 1959**
3.2 Amendment to the Certificate of Incorporation of
the Issuer filed May 14, 1959**
3.3. Amendment to the Certificate of Incorporation of
the Issuer filed June 25, 1959**
3.4 Amendment to the Certificate of Incorporation of
the Issuer filed April 5, 1961**
3.5 Amendment to the Certificate of Incorporation of
the Issuer filed May 23, 1961**
3.6 Amendment to the Certificate of Incorporation of
the Issuer filed May 10, 1988**
(b) By-Laws
------------
3.7 By-Laws of the Issuer as adopted and re-stated as
of February 23, 1991 filed under Form 8-K March 11,
1991***
____________________________________________________________________
** Incorporated by reference to Exhibits to the Issuer's
Report on Form 10-K for the fiscal year ended December
31, 1988.
*** Incorporated by reference to the Issuer's Report on Form
10-K for the fiscal year ended December 31, 1991.
36
<PAGE>
PART IV
Exhibit (10) Material Contracts
-------------------------------
10.1 Purchase Order Number P109020703 dated January 7, 1993
between Fifth Dimension Inc., and Texas Instruments**
10.2 Purchase Order Number NG5527 dated July 5, 1994 between
Fifth Dimension Inc. and Kearfott Guidance and
Navigation Corporation***
Exhibit (11) Statement Regarding Computation of Per Share
---------------------------------------------------------
Earnings
--------
11.1 Statement of Computation of Per Share Earnings*
Exhibit (23) Consent of Experts and Counsel
-------------------------------------------
23.1 Consent of Independent Certified Public Accountants*
____________________________________________________________________
* Exhibits filed herewith
** Incorporation by reference to Exhibits to the Issuer's
Report on Form 10-KSB for the fiscal year ended 1993
*** Incorporation by reference to Exhibits to the Issuer's
Report on Form 10-KSB for the fiscal year ended 1994
3. (b) Reports on Form 8-K
------------------------
During the quarter ended December 31, 1997, the Issurer
filed the following Current Reports on Form 8-K:
DATE FILED SUBJECT MATTER
---------- --------------
December 10, 1997 NASDAQ Delisting/ACALA Contract
Canceled/ Mortgage Loan
Finalized/Credit Line Negotiations
December 13, 1997 Suspended Production of IMU Slip
Rings
37
<PAGE>
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIFTH DIMENSION INC.
- --------------------
(Registrant)
------------
By: /s/ CRAIG E. EBNER By: /s/ ALFRED R. SENNI
------------------------------ --------------------------------
CRAIG E. EBNER ALFRED R. SENNI
President and Chief Executive Vice President, Slip Rings
Officer Director
Director
DATED: May 26, 1998 By: /s/ SHELDON BITKO
--------------------------------
SHELDON BITKO
Vice President, Mercury Products
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
FIFTH DIMENSION INC.
--------------------
(Registrant)
By: /s/ CHARLES DAVIDOFF By: /s/ LEE R. MARKS
------------------------------ --------------------------------
CHARLES DAVIDOFF LEE R. MARKS
Director Director
By: /s/ PETER N. HEYDON By: /s/ FREDERIC S. PAPERT
------------------------------ --------------------------------
PETER N. HEYDON FREDERIC S. PAPERT
Director Director
By: /s/ FRED KOLBER By: /s/ FREDERICK C. SCHERER
------------------------------ --------------------------------
FRED KOLBER FREDERICK C. SCHERER
Director Director
DATED: May 26, 1998
38
<PAGE>
FIFTH DIMENSION INC.
EXHIBITS
Exhibit 11.1 COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRIMARY
-------
1997 1996
---- ----
<S> <C> <C>
Net Loss $(2,160,293) $ (144,166)
Weighted Average Number of Common 1,093,636 1,093,636
outstanding during the year
Primary loss per common share $ (1.98) $ (.13)
FULLY DILUTED
-------------
Net Loss $(2,160,293) $ (144,166)
Weighted average number of shares used in 1,093,636 1,093,636
calculating primary income per common
share
Fully diluted loss per common share $ (1.98) $ (.13)
</TABLE>
39
<PAGE>
Exhibit 23 CONSENT OF EXPERTS AND COUNSEL
- ------------------------------------------
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement
Number 33-91882 (Form S-8) pertaining to the Employee Incentive Stock Plan and
the Board of Directors Stock Option Plan of Fifth Dimension Inc., and the
related Prospectuses of our report dated May 5, 1998 included and incorporated
by reference in this Form 10-K for the year ended December 31, 1997.
/s/ WITHUM, SMITH & BROWN
Withum, Smith & Brown
Princeton, New Jersey
May 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH
DIMENSION INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996, STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996,
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, BALANCE SHEET DATED
DECEMBER 31, 1997 AND IS QUALIFIED AND IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<CASH> 23,959
<SECURITIES> 364,936
<RECEIVABLES> 258,163
<ALLOWANCES> 22,619
<INVENTORY> 395,855
<CURRENT-ASSETS> 716,346
<PP&E> 510,648
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,255,119
<CURRENT-LIABILITIES> 585,682
<BONDS> 0
0
0
<COMMON> 364,836
<OTHER-SE> (820,549)
<TOTAL-LIABILITY-AND-EQUITY> 1,255,199
<SALES> 1,318,138
<TOTAL-REVENUES> 1,313,978
<CGS> 2,568,033
<TOTAL-COSTS> 3,429,791
<OTHER-EXPENSES> 2,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,520
<INCOME-PRETAX> (2,160,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,160,293)
<EPS-PRIMARY> (1.98)
<EPS-DILUTED> (1.98)
</TABLE>
