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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to ______
Commission File Number 0-12646
ANGSTROM TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 31-1065350
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1895 Airport Exchange Boulevard, Erlanger, KY 41018
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(Address of principal executive offices, including zip code)
(606) 282-0020
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value ("Common Stock"); 8% Redeemable Convertible Preferred Stock, $.01
par value ("Preferred Stock").
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__
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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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ending October 31, 1998 were
$1,968,032.
As of January 14, 1999, the aggregate market value, based on the
average bid and asked prices, of the issuer's voting stock (Common Stock) held
by non-affiliates was approximately $5,474,421. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership exceeds five percent of the Common Stock outstanding at January
14, 1999 were excluded. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of management or policies of the issuer, or
that such person is controlled by or under common control of the issuer.
As of January 14, 1999, there were 23,662,158 shares of Common Stock
and 1,294,230 shares of Preferred Stock, outstanding, respectively.
Documents incorporated by reference: NONE
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SPECIAL CAUTIONARY NOTICE REGARD FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions "Description of Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. The words "expect,"
"estimate," "anticipate," "predict," "may," "should," and similar expressions
are intended to identify forward-looking statements. All written or oral
forward-looking statements attributable to the Company are expressly qualified
as set forth herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Angstrom Technologies, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on June 3, 1983. The Company derived its name from
the Angstrom units of measurement of wavelengths of light.
The Company is engaged in the development, manufacture and sale of
Electro-Optical Control Systems, consisting of an ultraviolet optical scanner
and invisible fluorescent chemical compounds. The Company has developed and
markets six ultraviolet fluorescent scanning units of varying cost and
sophistication. These units can be used individually and some of the units can
be combined with several units, working in unison to provide statistical process
control for manufacturing lines. Individually, the unit can determine the
presence or absence of the fluorescent compound. When units are combined, a grid
code is formed where information is generated and stored, then later read for a
variety of applications. In addition, the Company produces a number of
fluorescent compounds, each of which emits its own wavelength. When printed,
sprayed, or stamped, the marking compounds are non-visible under normal lighting
conditions. This allows for marking over existing graphics or on different
materials without changing the appearance of the product. These compounds are
blended into a variety of materials to be applied to the customer's product. An
example of materials, among others, are printing inks, plastic films, over-print
varnish, adhesives, and hot plastic molding compounds. Also, due to the
invisible nature of the compound, the system can also be used in a variety of
security applications.
The Company's technology involves placing a mark, comprised of a
non-visible compound, on a product. These compounds emit a low level of visible
light when excited by ultraviolet light transmitted from a scanner designed and
sold by the Company. The scanner receives the visible light and converts it to
an electronic signal. Using one of the many outputs available, an operator
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can be notified, an ejection device activated, and a programmable controller or
computer can be signaled to take the appropriate action. The scanner works
independent of varying background, color, shape, size, or ambient lighting
conditions. These features are intended to overcome many of the disadvantages
associated with conventional photoelectrics.
The Company's products have historically been geared for use by the
pharmaceutical and automobile parts manufacturing industries in connection with
a variety of functions including: label verification, quality control,
inspection, alignment, adhesive tracing, safety seal verification, sorting,
automatic identification, matching and inserting. In addition to the foregoing
applications, the Company has also developed and is marketing applications to
subcontractors of the U.S. government and others in the document security field,
such as identification of counterfeit currency and verification of credit cards,
other identification cards and postal label sorting.
PRODUCTS
The Company's products have traditionally consisted of an ultraviolet
optical scanner and various chemical compounds. To produce its products, the
Company primarily uses outside production facilities to reduce the capital
expenditures necessary to effect production and help expedite full scale
production of the new units. The Company has made significant developments in
its scanners in recent years. As a result, the Company has enhanced the
scanners' capability and reliability.
The Company has developed improvements in its electronic components by
incorporating or "sweeping" support electronics into a CMOS semi-conductor chip,
which assists in the production of miniature or hand-held readers and further
developing the mechanical and optical portions of its scanner. The chip reduces
the amount of electronic noise and increases the sensitivity of the Company's
readers and scanners. The Company has also developed a universal card which
incorporates the semi-conductor chip. The universal card can be used in many of
the Company's readers and scanners. The Company believes this multiplicity of
use should help it in its efforts to reduce production costs.
The Company has also developed improved chemical compounds to be used
in document security applications. The Company is working on the commercialized
production of these compounds which are intended to be marketed in the security
industry for a wide array of end-use products that will incorporate
sophisticated wavelength and non-visible encoding.
The Company's scanners carry a sales price which varies depending on
the unit, and such prices are subject to volume discounts. The Company has found
that many customers or potential customers require specific customizing of these
scanning units, to meet the needs of the specific applications for which the
units are being purchased. Such customizing may result in an increase in the
price charged. In addition, existing customers who are using the Company's older
version scanners are offered a credit against the price of the new scanner for a
trade-in of their existing scanning devices.
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The Company has developed and now offers for sale six different
scanning devices:
1. Hand-held scanner used, among other things, for verifying
tickets to sporting and entertainment events;
2. Mid-range scanner used for a variety of commercial
applications;
3. High-end scanner, which has the ability to tie-into a
computer, and is being used for the U.S. Postal Office
Certified Mail Project;
4. High-end and high-security document scanner, which allows
modulation of upper and lower reading limits, to be used for
check sorting and check verification application;
5. Document reader, which is portable and easily moveable, to be
used for verifying tickets to sporting and entertainment
events, among other things;
6. High-End and high-security portable document reader which
could be used at bank teller stations to verify checks and
currency, among other things.
The Company has also been developing its chemical compounds to keep
pace with both scanner development and the needs of its customers and markets. A
significant achievement was the development of sub-micron compound number 6
which has been specified by the US Postal Service for incorporation in the
fluorescent ink used on certified mail labels. In addition, the Company is in
full commercial production of compound number 27, which is sold to a
subcontractor of the US government for security applications. The Company
believes compound number 27 has several advantages over existing compounds. The
Company is also conducting performance and related testing on over 100 new
ultraviolet compounds to determine which compounds will be placed into
manufacturing for commercial use.
During Fiscal 1997 and 1998, the Company spent approximately $286,000
and $206,000, respectively, on research and development of its products. While
the Company considers amounts spent on research and development in pricing its
products, the costs are not directly allocated to customers.
MANUFACTURE
The components of the Company's scanners are manufactured by outside
contractors, in accordance with the Company's standards, pursuant to purchase
orders issued by the Company on an as needed basis. No manufacturer has been
given an exclusive retention and the Company believes that there are numerous
alternative sources for securing production of such components.
Final assembly and quality control testing of the scanners are
performed on-site with Company personnel.
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The scanning compounds are manufactured off-site by a custom chemical
manufacturer under a confidentiality agreement, providing protection for the
Company's trade secrets. The custom chemical manufacturer is responsible for
EPA, NIOSH, and OSHA compliance to the extent such laws are applicable. The
Company has entered into this agreement to produce its chemicals, at a lower
unit cost and with enhanced capacity to meet the increasing production level
which may be required by the Company's marketing efforts, should the latter
result in sales increases. However, the Company believes that there are numerous
alternative sources for manufacturing its chemical compounds and that it is not
dependent on the arrangement presently in effect.
In an effort to enhance its optical and general development
laboratories, the Company employs a research chemist, at an annual compensation
of approximately $55,000, and is utilizing laboratory facilities for further
development of chemical compounds at a local university at a cost of
approximately $20,000 per annum. The Company has also retained a product
engineer, at an annual cost of approximately $80,000, whose activities involve,
among other things, developing improvements to the Company's scanners. The
anticipated source of funds for those expenses is the Company's working capital,
derived from its public offering in Fiscal 1994.
SALES AND MARKETING
The Company has been engaged in a program designed to upgrade its
products, expand its product lines and attempt to substantially increase its
customer base. In connection therewith, the Company commenced its sales and
marketing program in January, 1993 by the use of independent sales
representatives. Commencing in Fiscal 1994, the Company began a more intensive
sales and marketing program, which is ongoing.
For its sales efforts, the Company utilizes Messrs. Marinello and Ryan,
its two executive officers, who allocate a significant portion of their time to
sales and marketing efforts. During Fiscal 1997 and Fiscal 1998, approximately
$228,000 and $293,000, respectively, was paid as sales commissions to executive
officers and $5,600 and $6,000, respectively, was paid as royalties to the
executive officers and a consultant to the Company. It is the Company's goal to
attempt to increase its sales and marketing by entering into strategic alliances
and joint venturing endeavors with well-placed firms in various business areas
rather than expending large sums in developing the Company's own independent
direct selling structure.
The Company's sales efforts were disappointing on a historical basis
until the third quarter of Fiscal 1995. In Fiscal 1995, net sales equaled
$1,050,281 compared to $531,339 in Fiscal 1994. This increase over prior years
was generated largely by sales to a sub-contractor for the U.S. postal service
in connection with production of labels for certified mail. These customer
orders covered both the purchase of chemical compounds for use in printing ink
to be utilized in labels for certified mail as well as the sale by the Company
of six scanners for use by the subcontractor in its internal verification system
in connection with the production of certified mail labels. Such labels are used
by the U.S. Postal Service in connection with an automation system, using
equipment of a third party, which among other things, automatically sorts
certified mail from other types of mail. During Fiscal 1996, the Company's
revenues decreased to $869,829 due in part to the completion of the
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Postal Service contract. During Fiscal 1997, the Postal contract entered a new
phase wherein the Company received orders for additional amounts of its chemical
compound which contributed to net sales of $1,523,559 for that year. During
Fiscal 1998, the Company had net sales of $1,968,032 including significant
sales of compounds to a subcontractor of the U.S. government for security
applications.
In Fiscal 1997, the Company entered into a Reseller Agreement (the
"Reseller Agreement") with Moore U.S.A., Inc. ("Moore"), pursuant to which the
Company appointed Moore as a non-exclusive reseller of certain of its
readers/scanners and florescent ink products (the "Products") on a world-wide
basis. Under the Reseller Agreement, Moore has the right, but is not required,
to distribute the Products. During Fiscal 1998, sales to Moore under the
Reseller Agreement were not material. The Reseller Agreement is for an initial
term of five years commencing on September 2, 1997 and thereafter is
automatically renewed for annual consecutive renewal periods of one year each
unless terminated by notice of non-renewal sent by either party, at least 90
days prior to the expiration of the initial term or any renewal term. The
Reseller Agreement also may be terminated by either party upon 30 days prior
written notice if a party breaches the Reseller Agreement and fails to cure said
breach within 30 days or becomes subject to bankruptcy or ceases to be actively
engaged in business.
The Company also entered into a Technology License Agreement with Moore
(the "License Agreement") in Fiscal 1997 pursuant to which the Company granted a
non-exclusive, non-transferable, non-assignable license (the "License") to Moore
to exploit the Company's technology relating to the Products (the "Technology"),
and to sell or otherwise provide the Products using the Technology. In exchange
for the License, Moore has agreed to pay a royalty to the Company based on a
percentage of sales of the Products based on the sales volume in any contract
year. During Fiscal 1998, royalties paid by Moore under the License Agreement
were not material. The Company also granted Moore a right of first refusal for
an exclusive license relating to the Technology prior to granting such a license
to a third party. The License Agreement is for an initial term of five years
commencing on September 2, 1997 and thereafter is automatically renewed for
consecutive renewal periods of three years each unless terminated by notice of
non-renewal sent by either party, at least 90 days prior to the expiration of
the initial term or any renewal term. The License Agreement also may be
terminated by either party upon 30 days prior written notice if a party breaches
the License Agreement and fails to cure said breach within 30 days or becomes
subject to bankruptcy or ceases to be actively engaged in business.
The relationship between the Company and Moore is non-exclusive, and
there can be no assurances that Moore will be successful in selling the
Products. Furthermore, there can be no assurance that if Moore is successful in
selling the Products that such sales will be a significant source of revenue for
the Company.
Products manufactured by the Company are presently sold to a limited
number of clients and customers under a relatively few contracts or purchase
orders. During fiscal 1998, sales to two customers accounted for approximately
74% of the Company's sales, with one customer representing 60% and the other
customer representing 14%. No other customer accounted for 10% or more of the
Company's sales. During Fiscal 1997, sales to these two customers were
approximately 24% and 33% of the Company's sales, respectively. The foregoing
percentages
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aggregate sales made to the named customer and to clients or sub-accounts of
that customer. There can be no assurance of revenue from these customers in the
future.
With the Company's new line of scanner and reader hardware and
broad-based chemicals to be used with these items, the Company is attempting to
broaden its sales base. There can be no assurance that the Company will be
successful in broadening it sales base, or that such an increase, if any, will
provide a significant source of revenue to the Company.
MARKETS
Among the principal industries which presently utilize or constitute
potential clients for the Company's products are the U.S. government and others
(for documentation, sorting and security applications), pharmaceutical firms
(for labels and bottling) and automobile parts manufacturers; incident thereto,
or, as markets for additional products, are adhesive manufacturers, label
manufacturers, and stamp and paper currency manufacturers. The foregoing
applications cover a wide variety of industrial processing including quality
assurance, manufacturing and product sorting.
In the pharmaceutical industry, the Company's products are used to
insure the correct label is placed on the correct pharmaceutical product. In
addition, in the food and drug industries the Company's products are used to
verify label alignment and safety seal presence.
In the automotive industry, the Company's products are used to identify
correct labels on assembly parts and the detection of adhesive presence in
sub-assembly components.
In the packaging industries, the Company's products are used to ensure
correct label placement, in the sorting of various products and in adhesive
detection.
Management believes the improved scanners developed by the Company, and
the compact reading devices incident thereto, have applications in various
facets of the document security industry, as well as in the process control
field previously serviced by the Company. Among such new applications, would be
the detection of counterfeiting of currencies, postage labels and tickets to
various sports and entertainment events, and marking of items being sold to
consumers through retail outlets. The Company is currently exploring potential
customers with an interest in a wide variety of security applications which have
been developed by the Company. Among other things, the Company is marketing its
technology to be used in connection with the identification of counterfeits and
sorting of bank checks. The Company has also sold its ultraviolet chemical for
use in inks being used on U.S. government documentation, such as passports.
COMPETITION
The Company competes with a number of companies, and many of such
competitors have greater financial and other resources. In the labeling and
parts identification business, among its competitors are Data Logic, Inc. and
Sick Optic Electronic, GmbH, both of which have readers capable of reading broad
(rather than specific) bands of light and neither of which provide either
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application engineering or scanning compounds. The Company's scanners are
capable of quantitative measurement, operating on a more defined basis. The
Company's scanners can differentiate among certain colors whereas many competing
scanners identify the presence or absence of a color, but do not differentiate
among colors. Accordingly, the Company believes that its scanner is capable of
sorting out various labels for different products whereas readers produced by
competitors are able to detect fluorescent chemicals on labels but cannot sort
out similar labels. The Company's existing products are generally comparable in
price to those of its competitors.
The Company also competes with the machine vision industry, which
utilizes solid state cameras and complex computer programs for similar
applications to similar markets, such as product and label identification. The
Company's ultraviolet detection systems, which can also be used for industrial
applications, range in price from approximately $700 for less sophisticated
scanners to approximately $8,000 per system for its most sophisticated systems.
The Company believes its ultraviolet detection systems are generally less
expensive than its competitors systems. Such competing video systems are
produced and sold by several companies, including (a) General Electric Vision
division of General Electric Corporation; (b) GM Fanuk, a joint venture of
General Motors Corporation and Fanuk Corporation (a Japanese firm); and (c) Penn
Video, Inc.
With respect to document security, the Company's later model scanners
compete with a number of other products used for this purpose, including
holograms (which are three-dimensional representations designed with certain
visual attributes for the purpose of thwarting counterfeits). The Company also
competes with technology which places water marks and/or fabric threads within
paper and currency. The Company believes that, if its later model scanner proves
commercially feasible, it will enjoy an advantage against counterfeiting over
these other technologies since the Company's non-visible specific frequency
ultra-violet chemical compounds will be more difficult to duplicate. The basis
for this belief is that the Company's products can differentiate its chemistry
within ten nanometers of the spectrum whereas its competitors have thus far
produced sensors which principally read in the blue area of the spectrum; by
having greater specificity in its reading capacity, the Company can blend other
colors into its blue spectrum inks and read such colors with greater
particularity, thereby giving the Company's products a broader range of
application. There can be no assurance that the Company's later model scanner
will be commercially feasible.
INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY PROTECTION
The Company has a trademark registration in the United States for
"Angstrom Technologies, Inc". The use and registration rights of a trademark
holder do not ensure that such holder has superior rights to others that may
have registered or used identical related marks on related goods or services.
The Angstrom trademark was registered on June 23, 1987, and remains in effect
through June 23, 2007.
The Company currently has rights to nine patents and three patent
applications are pending. Despite this fact, there can be no assurance that any
present or future patents which may issue in the Company's favor would
necessarily protect the Company from competition or potential competition.
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Accordingly, the Company anticipates reliance for the foreseeable future on both
its patents and on contractual rights, trade secrets and copyright laws.
Pursuant to its Executive Employment Agreement with Messrs. Marinello,
Liang (who is currently a consultant to the Company) and Ryan (See "Certain
Relationships and Related Transactions"), these individual are engaged, among
other things, in a plan of activity to expand patent and intellectual property
coverage for the Company. New patents are being developed and filed in the name
of the individuals, who have agreed to assign a two-thirds interest therein to
the Company, which is obligated to cover the cost of filing fees and fees of
patent counsel. The Company will have exclusive rights to use such patents for a
royalty fee of 5% of gross profits during the term of the aforesaid employment
agreements, and at a royalty equal to 10% of gross revenues thereafter. In
Fiscal 1998, the Company paid royalties of approximately $6,000 pursuant to said
employment agreement.
Employees
The Company presently employs two executives, three engineering
employees, a research chemist, an office manager and one full-time and one
part-time clerical person. It also retains an outside accounting firm to
supervise its financial records and independent consultants on business and
engineering matters, as necessary. The President assists Company personnel in
various engineering matters.
PUBLIC OFFERING AND PREFERRED STOCK DIVIDEND
On December 22, 1993 the Company consummated a public offering of its
securities consisting of 1,725,000 units. Each unit was comprised of one share
of 8% redeemable convertible preferred stock ("Preferred Stock"), convertible
into shares of the Company's Common Stock ("Common Stock") at a rate of $.50 per
share and one Class A redeemable common stock purchase warrant (the "Warrant").
The Company received net proceeds of approximately $2,838,000 from such
offering, after underwriting discounts and commissions and other expenses of the
offering. The Warrants expired on December 12, 1998.
The Company declared an initial cash dividend of .15 cents per share
upon its shares of Preferred Stock, such dividend being paid on December 5, 1994
to holders of record as of the close of business on November 30, 1994. In order
to conserve capital resources, the Board of Directors of the Company has
determined not to declare a dividend on the shares of Preferred Stock for the
subsequent period through the date hereof.
ITEM 2. PROPERTIES
The Company maintains its executive offices in Erlanger, Kentucky,
consisting of approximately 2,000 square feet. Such offices are leased for a
period through May 14, 1999 at a cost of approximately $15,000 per year, and
have been considered adequate to meet its present needs. The Company is
currently evaluating its options upon expiration of the current term. The
Company
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also leases adjacent storage space on a month-to-month basis at a rate of
approximately $900 per annum.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 17, 1998, the Company held its annual meeting of shareholders
to elect four directors. The voting by shareholders was as follows:
<TABLE>
<CAPTION>
Election of Directors For Against Abstain
- --------------------- --- ------- -------
<S> <C> <C> <C>
Daniel A. Marinello 18,721 0 0
Louis Liang 18,721 0 0
William J. Ryan 18,721 0 0
Douglas B. Kruger 18,721 0 0
</TABLE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The shares of Common Stock are traded in the over-the-counter market
and quoted in the "pink sheets" published by the National Quotation Bureau, Inc.
("NQB"). Such shares are presently listed on the OTC Bulletin Board. However,
since the shares have traded on an inactive basis during many of the periods set
forth below, the Company does not regard such price quotations as representing
prices at which sizable transactions could have been or were effected.
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The following table sets forth the range of high and low bid prices for
the Common Stock for each quarter during the period November 1, 1996 through
January 14, 1999, as furnished by the NQB. These quotations reflect inter-dealer
prices without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
BID
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1997
- -----------
11/1/96 to 1/31/97 $1.06 $.56
2/1/97 to 4/30/97 .97 .62
5/1/97 to 7/31/97 .72 .44
8/1/97 to 10/31/97 .78 .41
Fiscal 1998
- -----------
11/1/97 to 1/31/98 .78 .38
2/1/98 to 4/30/98 .72 .34
5/1/98 to 7/31/98 .62 .41
8/1/98 to 10/31/98 .53 .25
Fiscal 1999
- -----------
11/1/98 to 1/31/99
(through January 14, 1999) .38 .22
</TABLE>
On January 14, 1999, the high bid price for the Common Stock was $.29
per share. The number of holders of the Common Stock was approximately 479 on
January 14, 1999, computed by the number of record holders; this does not take
account of stockholders for whom shares are being held in the names of brokerage
houses and clearing agencies.
The Company has never paid a cash dividend upon the Common Stock and
does not presently anticipate doing so in the foreseeable future, but expects to
retain earnings, if any, for use in its business. The terms of the Preferred
Stock prohibit the Company from paying dividends on the Common Stock until all
accrued dividends on the Preferred Stock have been paid.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
SUMMARY OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998 ("FISCAL 1997") COMPARED TO YEAR ENDED OCTOBER 31,
1997 ("FISCAL 1997").
Net sales of $1,968,032 for Fiscal 1998 reflect an increase of 29.2%
from the $1,523,559 in net sales in Fiscal 1997. This increase in sales was a
result of significant sales of compounds made for US government security
applications to a subcontractor of the US government in the last three quarters
of Fiscal 1998. The Company expects to receive orders from this customer on an
on-going basis. However, there can be no assurances that such orders will be
forthcoming. The cost of sales, as a percentage of overall sales, decreased from
37.8% in Fiscal 1997 to 36.2% in Fiscal 1998 primarily as a result of a change
in the mix of compounds used by the Company, which have varying costs and
margins.
Selling, general and administrative expenses decreased 2.2% from
approximately $888,385 in Fiscal 1997 to approximately $868,728 in Fiscal 1998.
This decrease was primarily due to a reduction in costs associated with the
Company's securities offerings and in research and development expenses.
The Company generated net income of $403,508 before dividend
requirements during Fiscal 1998 as compared with net income of $86,852 for
Fiscal 1997, before dividend requirements. Continuing its policy of conserving
cash to meet operating requirements, the Company declined to accrue a preferred
stock dividend for Fiscal 1998.
Interest income of approximately $24,231 for Fiscal 1998 was less than
the interest income of approximately $36,960 in Fiscal 1997 as a result of lower
interest rates, which produced a lower return on investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for cash is to support its programs and its
ongoing operating activities. The Company's primary sources of liquidity have
historically been cash provided by financing activities. The Company has never
generated significant cash flows from its operations and has depended upon
financing from outside sources to maintain itself.
The Company had cash and cash equivalents, and investments, of $809,268
as at the end of Fiscal 1998 as compared with $686,492 as at the end of Fiscal
1997, resulting in an increase in these categories of $122,776. This is
primarily a result of the Company earning a profit in Fiscal 1998 and allocating
cash to accounts with lower fees and higher interest rates. The Company
experienced an increase in trade accounts receivable of $75,852, or 56.8%, an
increase in inventory of $203,049, or 31.9% and a decrease in accounts payable
of $42,807, or 49.8%. The increase in inventory
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reflects increased production to meet the sales increases experienced and to
afford the Company a lower cost of unit production and the ability to meet any
future orders on a timely basis. The decrease in accounts payable was primarily
a result of amounts the Company had set off against pre-paid expenses being
converted to accounts payable in late Fiscal 1996, requiring repayment in Fiscal
1997 and the timing of payments. Prepaid expenses at such dates decreased from
$41,268 to $22,588. The decrease was primarily a result of the Company paying a
retainer to a marketing consultant in Fiscal 1997 which was not paid in Fiscal
1998.
As indicated in Note 2 to these financial statements, no dividend has
been accrued for Fiscal 1998 since management has determined to conserve
available funds and maintain the Company's liquidity in light of its needs to
continue developmental and marketing expenditures referred to hereinabove. The
Company anticipates that existing funds will enable it to fund its operating and
capital needs through at least October 31, 1999, the end of its current fiscal
year, and for some time thereafter. The Company may require additional financing
after such time depending on the status of its sales efforts and whether
sufficient revenues and contractual commitments have been received from its
customers to enable it to function with sufficient liquidity. The Company is not
able at this time to predict the amount or potential source of such additional
funds and has no commitment to obtain such funds.
FEDERAL INCOME TAXES
The tax effects of temporary differences that give rise to deferred
income tax assets, a corresponding valuation allowance and deferred tax
liabilities at October 31, 1998 and October 31, 1997 is presented below.
<TABLE>
<CAPTION>
Deferred tax assets: October 31, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
Net Operating Loss $1,291,700 $1,468,000
Other, Net 9,700 7,100
---------- ----------
Total deferred tax assets 1,301,400 1,475,100
Less: Valuation allowance (1,301,400) (1,475,100)
----------- ----------
Net deferred tax asset 0 0
=========== ==========
</TABLE>
The Company has cumulative net operating loss carryforwards of
approximately $3,300,000 for federal income tax purposes which expire between
the years 2000 to 2011.
YEAR 2000 ISSUES
The following is a discussion of the Year 2000 date issue ("Year 2000
issue") as it affects the Company. The Year 2000 issue arises from the fact that
many computer programs and embedded chips in other forms of technology use only
the last two digits to identify a year in a date field.
The Company's State of Readiness
14
<PAGE> 15
The Company currently believes its potential exposure to problems
arising from the Year 2000 issue lies primarily in two areas: the Company's
internal operating systems which include both information technology ("IT") and
non-IT components (such as computer chips imbedded in hardware) and Year 2000
compliance by third parties with whom the Company has a material relationship.
Internal operating systems. The Company has completed an assessment of
its Year 2000 compliance for its products and critical internal systems and
identified no major issues. The Company purchased its internal computer system
from IBM in 1996 and IBM documented that the system is Year 2000 compliant. If
the Company experiences Year 2000 issues, the Company intends to manually
maintain the Company's internal records until such issues are resolved.
Third party relationships. Ultimately, the potential impact of the Year
2000 issue will depend not only on the actions taken by the Company, but also
how the Year 2000 issue is addressed by customers, vendors, service providers,
utilities, governmental agencies and other entities with which the Company does
business. Although the Company is rarely dependent on a single source of supply
for its components, and purchases most of them off the shelf, it intends to
communicate with the most significant of these third parties to obtain reports
of their Year 2000 readiness. If the Company determines it may experience a
shortage of supply, the Company has capacity to maintain additional inventory.
The Year 2000 efforts of third parties are not within the Company's control,
however, their failure to respond to year 2000 issues successfully could result
in business disruption and increased operating costs for the Company.
Costs to address the Company's Year 2000 issues
The Company has not incurred any significant costs in identifying or
remedying year 2000 issues. The Company cannot reasonably estimate costs which
may be required for remediation or for implementation of contingency plans with
respect to third party relationships. There can be no assurance that if
additional year 2000 issues are raised, the Company's costs to remediate such
issues will be consistent with its historical costs.
Risks of the Company's Year 2000 issues
The Company believes the most reasonably likely worst case Year 2000
scenario would include a combination of some or all of the following:
o Non-IT components in HVAC, lighting, telephone, security and similar
systems might fail.
o Communications with customers and vendors may fail or give erroneous
information. These types of problems could result in such difficulties
as the inability to receive or process customer orders, or shipping
delays.
o The unavailability of product as a result of Year 2000 problems
experienced by one or more vendors of the Company.
15
<PAGE> 16
The Company's contingency plans
The Company does not believe it will incur a material financial impact
from the risk of failure, or from the costs associated with assessing the risks
of failure, arising from the Year 2000 issue. Consequently, the Company does not
intend to create a contingency plan other than as set forth above.
The foregoing discussion regarding the Year 2000 project's timing,
effectiveness, implementation, and cost contains forward-looking statements
which are based on management's best estimates derived using assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited to,
the readiness of third parties and the Company's ability to respond to
unforeseen Year 2000 complications. Such material differences could result in,
among other things, business disruptions, operational problems, financial loss
and similar risks.
OTHER
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by this Item
are set forth at the pages indicated in Item 13(a)(1).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE> 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age
---- ---
<S> <C> <C>
Daniel A. Marinello 58 President, Chief Executive Officer and Chief
Financial Officer and a director
Louis Liang 55 Director and Consultant
William J. Ryan 59 Executive Vice President-Operations and a director
Douglas B. Kruger 55 Secretary and a director
</TABLE>
Daniel A. Marinello has been Chief Executive Officer and Chief
Financial Officer of the Company since October 28, 1992. Prior thereto and since
February, 1987, Mr. Marinello has been serving as a director of the Company and
as an advisory engineer thereto. Prior thereto, from February, 1966 through
July, 1992, he held several engineering, management and advisory positions for
the IBM Corporation in Essex Jct., Vermont.
Louis Liang has been a director since February 1, 1994 and has been a
consultant to the Company since 1996. Prior to this, beginning in May, 1994, Mr.
Liang served as the Executive Vice President - Strategic Business, a position he
held until becoming a consultant. From June 1993 until being formally employed
by the Company in May 1994, Mr. Liang acted as a consultant to the Company. Mr.
Liang was most recently Director of Subcontract Operations and Package
Development Technology of VLSI Technology Inc. for a four year period from May,
1989 to June, 1993. He has been employed, since 1972, in various capacities in
the electronic and semiconductor industries, including positions dealing with
research and development, engineering, operations and new venture and business
development matters. He has also been active as a technical, marketing and
management consultant to companies in the Silicon Valley. Mr. Liang has a B.A.
and M.S. degrees in Applied Physics from the University of California, San Diego
and Santa Barbara campuses.
William J. Ryan has been a director and Executive Vice President
Operations since April 1, 1994. He has served most recently, between July, 1992
and April, 1994, as an Executive Management Consultant to several high
technology semiconductor suppliers and equipment manufacturers. His
responsibilities included developing market strategy, product design and
implementing cost effective manufacturing processes. Prior to becoming engaged
in the consulting business, Mr. Ryan was employed at the IBM Corporation for 27
years in various senior engineering and technical management positions. His last
assignment with IBM was as Senior Engineering
17
<PAGE> 18
Manager of Advanced Semiconductor Equipment Engineering. Mr. Ryan holds a B.S.
degree in Mechanical Engineering from the University of Vermont and has
published technical papers and spoken extensively at executive management and
technical management seminars.
Douglas B. Kruger has been a director since November 2, 1992. On
January 18, 1993, Mr. Kruger was elected to serve as Secretary of the Company.
Mr. Kruger is presently and has since September, 1991 been an independent
business and marketing consultant. Prior thereto, from November, 1988 to its
sale in September, 1991, he was the Chief Executive Officer and sole stockholder
of Concept Surfaces Corp., a decorative surfacing company located in Florida.
Between June, 1964 and November, 1988, he held a variety of positions with the
IBM Corporation including manufacturing technician and as an executive with the
International Procurement Group of that firm.
Each of the Company's directors has been elected at the last Annual
Meeting of Stockholders to serve until the next such Annual Meeting and until
his successor has been elected and qualified. The Company's executive officers
are appointed annually by the Company's directors. Each of the Company's
officers continue to serve until their successors have been appointed.
Under federal securities laws, the Company's directors, its executive
officers and any person holding more than 10% of the Company's Common Stock are
required to report their ownership of the Company's Common Stock and any changes
in that ownership to the Securities and Exchange Commission ("SEC") on the SEC's
Forms 3, 4 and 5. Due to administrative oversight, Messrs. Marinello and Liang
did not report extensions of the expiration date of stock options which occurred
in Fiscal 1997 and Messrs. Marinello and Ryan filed late reports of exercises of
stock options which occurred in Fiscal 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the
Company for services rendered during Fiscal Years 1998, 1997 and 1996 for Daniel
A. Marinello, who was the Chief Executive Officer and President and Chief
Operating Officer at the end of such fiscal years. No other executive officers
of the Company received salary and bonus compensation which exceeded $100,000 in
such fiscal years.
18
<PAGE> 19
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Award
Name and All Other
Principal Position Year Salary Options Compensation
- ----------------------------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C>
Daniel A. Marinello Chief 1998 --- $205,914(1)
Executive Officer and Chief 1997 --- --- 161,256(1)
Financial and Accounting 1996 --- --- 94,169(1)
Officer
</TABLE>
- -------------
(1) Comprised of commissions and royalties.
Executive Employment Agreement between the Company and Messrs. Marinello, Liang
and Ryan
The Company and Messrs. Marinello and Ryan, its two highest ranking
executive officers, and Mr. Liang, who is currently a consultant to the Company,
as a team (the "Team"), are parties to an Executive Employment Agreement (the
"Employment Agreement"). The initial term of the Employment Agreement was a
three year period commencing November 1, 1994 and ending October 31, 1997. The
Employment Agreement currently is automatically renewed for annual consecutive
renewal periods of one year each unless terminated by notice of non-renewal sent
either by the Company or the Team, at least sixty (60) days prior to the
expiration of any renewal term; provided, however, that the Company may
terminate the Employment Agreement in the event that its net profits after taxes
during the preceding twelve (12) months is either a negative number or does not
equal or exceed at least $150,000 more than the Company's net profits after
taxes for the prior twelve (12) month period, or its sales do not show at least
a fifteen percent (15%) increase between such periods.
The Employment Agreement provides that the Team shall receive,
allocated among them, an aggregate of 15% of gross sales plus 10% of the first
$1,000,000 of pre-tax profits in each year (so long as pre-tax profits for such
year equal or exceed $1,000,000), with a reduced percentage of pre-tax profits
in excess of this figure. Since Mr. Liang is compensated as a consultant, he no
longer receives commissions. Consequently, the gross sales component of
compensation is divided among Messrs. Marinello and Ryan in the amounts of 10.5%
and 4.5%, respectively, while the 10% of the first million dollars in pre-tax
profits is apportioned 6.25% and 3.75%, respectively, and maintained in the same
ratio, as such percentage may be reduced. During Fiscal 1998, aggregate
commissions of approximately $293,000 were paid to Messrs. Marinello and Ryan
pursuant to the Employment Agreement.
The Team is required to assign to the Company a two-thirds interest in
any patents or other intellectual property created by it which is used in the
Company's business. The Company is
19
<PAGE> 20
required to pay the Team a royalty computed by 5% of the gross profit
(difference between selling price and direct manufacturing cost, exclusive of
overhead) from use of such intellectual property. The royalty is divided among
Messrs. Marinello, Ryan and Liang in the amounts of 1.5%, 1.75% and 1.75%,
respectively. Mr. Liang continues to receive royalty payments since he consults
with the Company on intellectual property matters. In the event of termination
of the Employment Agreement by the Company, the Company shall have the right to
continue to retain exclusive use of the patents and other intellectual
properties by paying the Team an amount equal to 10% of gross revenues from
products sold which utilize such intellectual property; otherwise, the Company
may retain a non-exclusive license to use such intellectual property for a fee
of 5% of gross revenues from products sold utilizing such patents. During Fiscal
1998, aggregate royalties of approximately $6,000 were paid to the Team pursuant
to the Employment Agreement.
1983 AND 1985 STOCK OPTION PLANS
Under the Company's Amended 1983 Stock Option Plan and 1985 Stock
Option Plan (the "Plans"), officers and other key employees who perform services
on behalf of the Company may be granted either nonqualified stock options or
incentive stock options for the purchase of up to 700,000 shares of the
Company's Common Stock. The Plans also provide for the issuance of stock
appreciation rights in connection with the granting of stock options. The Plans
are administered by a stock option committee of the Board of Directors. No
options were granted under the Plans in Fiscal 1998.
1994 STOCK OPTION PLAN
Under the Company's 1994 Stock Option Plan (the "1994 Plan"), a total
of 6,300,000 Shares are reserved for issuance to employees, including directors
and officers who may not be salaried employees ("Eligible Participants"). Both
incentive stock options and nonstatutory stock options may be granted under the
1994 Plan to Eligible Participants, at a price to be determined by the option
committee, provided, however, that incentive stock options must be granted at an
exercise price not less than the fair market value of the Shares on the date of
the grant. The term of any option may not exceed ten years from the date of
grant. No options were granted under the 1994 Plan in Fiscal 1998.
OPTION GRANTS IN FISCAL 1998
No options were granted to the named executive officer in Fiscal 1998.
20
<PAGE> 21
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The following table sets forth information concerning exercise of
options and all unexercised options (whether or not issued under one of the
Company's Plans) held by the named executive officer at October 31, 1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-
Underlying Unexercised the-Money Options at FY-
Shares Acquired Value Options at FY-End (#) End ($) Exercisable/
Name on Exercise (#) Realized ($)(1) Exercisable/Unexercisable Unexercisable (2)
- ---- --------------- --------------- ------------------------- -----------------
<S> <C> <C> <C> <C>
Daniel Marinello 150,000 $80,750 1,300,000/0 $284,375/$0
</TABLE>
- ----------------
(1) The Value Realized represents the difference between the fair market value
on the date of exercise (the average of the high and low sales prices ($.625) on
May 1, 1998) and the option exercise prices. The exercise price with respect to
50,000 Shares was $.01 per share. The exercise price with respect to 100,000
shares was $.125 per share.
(2) Based on the average of the high and low sales price ($.34375) on October
31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth information regarding
the beneficial ownership of the Company's shares of Common Stock as of October
31, 1998 by (i) each person known by the Company to be the beneficial owner of
more than 5% of such voting security, (ii) each director, (iii) the named
executive officer of the Company, and (iv) all executive officers and directors
of the Company as a group. The percentages have been calculated by taking into
account all shares of Common Stock owned on such date as well as all such shares
with respect to which such person has the right to acquire beneficial ownership
at such date or within 60 days thereafter. Unless otherwise indicated, all
persons listed below have sole voting and sole investment power over the shares
of Common Stock owned.
21
<PAGE> 22
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP CLASS (2)
- ---------------------- -------------------- ---------
<S> <C> <C>
Kenneth J. Koock 3,309,846(3) 13.9%
2 Robin Hill Road
North Caldwell, New Jersey 07006
Daniel A. Marinello 2,115,000(4) 8.5%
Louis Liang 1,235,000(5) 5.0%
William J. Ryan 1,200,000(6) 4.9%
Douglas Kruger 475,000(7) 2.0%
All officers and directors as a
group (four persons) 5,025,000(8) 19.1%
</TABLE>
- ----------
(1) Unless otherwise indicated, address is c/o the Company.
(2) Based on a total of 23,662,158 shares of Common Stock issued and
outstanding as of October 31, 1998.
(3) All shares are owned directly, except for 50,000 shares held as
custodian for a family member of Mr. Koock and 100,000 shares owned by
Mr. Koock's spouse which are included in this total; he disclaims
beneficial ownership of such shares as well as of any shares which may
be owned by other officers and/or stockholders of M.H. Meyerson & Co.,
Inc.
(4) Includes presently exercisable options to acquire 1,300,000 shares.
(5) Includes presently exercisable options to acquire 1,000,000 shares.
(6) Includes presently exercisable options to acquire 1,075,000 shares.
(7) Includes presently exercisable options to acquire 175,000 shares.
(8) Includes 3,550,000 shares of Common Stock issuable upon the exercise of
presently exercisable stock options (both qualified under the Plans and
non-qualified options issued apart from such Plans) by the officers and
directors as a group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since November 1, 1994 Messrs. Marinello and Ryan have been employed
under an Employment Agreement. (See "Executive Compensation"). During Fiscal
1998, the Company paid aggregate commissions of approximately $293,000 to
Messrs. Marinello and Ryan pursuant to the Employment Agreement. In addition,
pursuant to the 1994 Stock Option Plan the Company granted each such individual
options to acquire one million shares of Common Stock at a price of $.125 per
share. Mr. Liang, who was formerly an employee of and is currently a consultant
to the Company and a director, also received options to acquire one million
shares.
Messrs. Marinello, Liang and Ryan have been jointly engaged in a plan
of activity designed to establish and expand the patent and other intellectual
property coverage afforded the Company's products and developments. While the
applications are filed in the names of the individuals, they have agreed to
assign a two-thirds interest therein to the Company when any patents issue. The
Company has been paying filing fees and fees of patent counsel in connection
with this endeavor.
22
<PAGE> 23
The Company has exclusive rights to use such patents during the term of the
Employment Agreement for an aggregate royalty fee of 5% of the gross profits of
products sold utilizing such patents or other such intellectual property;
following termination of such Employment Agreement, the Company may retain
exclusive use of the patents and other intellectual property, by payment of a
royalty equal to 10% of the gross revenues of products sold utilizing the same.
The Company paid royalties of approximately $6,000 in Fiscal 1998 pursuant to
the Employment Agreement.
On November 7, 1994, the Board of Directors of the Company adopted a
form of Indemnity Agreement to be entered into with all executive officers and
directors of the Company, providing for indemnification to be made to them for
expenses and liabilities relating to their services for the Company, to the
fullest extent permitted under Delaware law.
23
<PAGE> 24
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements:.........................................Page
Report of Independent Auditors.............................F-1
Balance Sheet as of October 31, 1998.......................F-2
Statements of Operations for the
Years ended October 31, 1998 and 1997...................F-4
Statements of Capital for the
Years ended October 31, 1998 and 1997...................F-5
Statements of Cash Flows for the
Years ended October 31, 1998 and 1997...................F-6
Notes to Financial Statements..............................F-7
2. Exhibits Filed Herewith
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
3. Exhibits and Index:
The following were filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-86754) and are incorporated by reference
herein:
10.7 1994 Stock Option Plan.
10.8 Form of Employment Agreement between the Company and
executive team of Messrs Marinello, Liang and Ryan.
10.9 Form of Indemnity Agreement between the Company and its
executive officers and directors.
The following were filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-69190) and are incorporated by reference
herein:
3.1 Restated Certificate of Incorporation of the Company.
3.2 Form of Amendment to Certificate of Incorporation.
3.3 By-Laws of the Company.
24
<PAGE> 25
4.1 Form of Warrant Agreement between the Company and American Stock
Transfer & Trust Company, including forms of Class A and Class B Warrants.
10.5 Form of Underwriter's Unit Purchase Option between the Company
and the Underwriter (M.H. Meyerson & Co., Inc.).
The following were filed as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 2-85945) and are incorporated by reference
herein:
3(a) Certificate of Incorporation
3(b) By-laws
10(c) Incentive Stock Option Plan (1983)
10(d) Form of Option under Incentive Stock Option Plan
The following were filed as an Exhibit to the Company's Annual Report
on Form 10-KSB for its year ended October 31, 1991 and are incorporated by
reference herein:
3 Certificate of Incorporation and Bylaws
10.1 1983 Stock Option Plan
10.2 1985 Stock Option Plan
The following was filed as an exhibit to the Company's annual report on
Form 10-KSB for its year ending October 31, 1994 and is incorporated by
reference herein:
2. Stock Option Grants dated November 7, 1994 between the Company
each of Messrs. Marinello, Liang and Ryan.
The following were filed as exhibits to the Company's annual report on
Form 10-KSB for its year ending October 31, 1997 and are incorporated herein by
reference.
10(a) Reseller Agreement between the Company and Moore U.S.A., Inc.
dated September 2, 1997.
10(b) Amendment to Reseller Agreement dated September 24, 1997.
10(c) Technology License Agreement between the Company and Moore
U.S.A., Inc. dated September 2, 1997.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
October 31, 1997.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: January 15, 1999 ANGSTROM TECHNOLOGIES, INC.
By: /s/ Daniel A. Marinello
-------------------------------------------
Daniel A. Marinello, Chief Executive Officer
and Chief Financial Officer
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 dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Daniel A. Marinello Chief Executive Officer, January 15, 1999
- ---------------------------------- Chief Financial Officer and a
Daniel A. Marinello Director (Principal Executive
Officer, Principal Financial
Officer and Principal Accounting
Officer)
/s/ Louis Liang Director January 15, 1999
- ----------------------------------
Louis Liang
/s/ William J. Ryan Executive Vice President - January 15, 1999
- ---------------------------------- Operations and a Director
William J. Ryan
/s/ Douglas B. Kruger Secretary and a Director January 15, 1999
- ----------------------------------
Douglas B. Kruger
</TABLE>
26
<PAGE> 27
Angstrom Technologies, Inc.
Financial Statements
Years ended October 31, 1998 and 1997
CONTENTS
Report of Independent Auditors...............................................F-1
Audited Financial Statements
Balance Sheet................................................................F-2
Statements of Operations.....................................................F-4
Statements of Capital........................................................F-5
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
<PAGE> 28
Financial Statements
Angstrom Technologies, Inc.
Years ended
October 31, 1998 and 1997
with Report of Independent Auditors
<PAGE> 29
Report of Independent Auditors
The Board of Directors
Angstrom Technologies, Inc.
We have audited the accompanying balance sheet of Angstrom Technologies, Inc. as
of October 31, 1998, and the related statements of operations, capital and cash
flows for each of the two years in the period ended October 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Angstrom Technologies, Inc. at
October 31, 1998, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles.
Cincinnati, Ohio
December 4, 1998
F-1
<PAGE> 30
Angstrom Technologies, Inc.
Balance Sheet
October 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 809,268
Accounts receivable, less allowance for doubtful accounts of $4,615 209,448
Inventories:
Finished goods 111,596
Work in process 9,119
Raw materials and parts 719,370
----------
840,085
Prepaid expenses 22,588
----------
Total current assets 1,881,389
Furniture and equipment, at cost 173,820
Less accumulated depreciation 125,217
----------
Net furniture and equipment 48,603
Patents, less accumulated amortization of $17,233 125,672
----------
Total assets $2,055,664
==========
</TABLE>
F-2
<PAGE> 31
<TABLE>
<S> <C>
LIABILITIES AND CAPITAL
Current liabilities:
Accounts payable $ 43,185
Accrued liabilities 71,427
Long-term debt due within one year 33,100
----------
Total current liabilities 147,712
Long-term debt 5,911
Capital:
Preferred stock, $.01 par value; 5,000,000 shares authorized, 1,294,230
shares issued and outstanding (liquidation
preference of $2.00 per share) 2,128,780
Common stock, $.01 par value; 45,000,000 shares authorized,
23,637,158 shares issued and outstanding 236,372
Additional paid in capital 5,059,732
Accumulated deficit (5,522,843)
----------
Net capital 1,902,041
----------
Total liabilities and capital $2,055,664
==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 32
Angstrom Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1998 1997
----------------------------
<S> <C> <C>
Net sales $ 1,968,032 $ 1,523,559
Cost of sales 713,401 575,350
----------------------------
Gross profit 1,254,631 948,209
Selling, general and administrative expenses 868,728 888,385
Interest expense 6,626 9,932
Interest income (24,231) (36,960)
----------------------------
851,123 861,357
----------------------------
Net income 403,508 86,852
Less dividend requirement on preferred stock (207,077) (213,758)
----------------------------
Net income (loss) applicable to common stock $ 196,431 $ (126,906)
============================
Net income (loss) per common share (basic and diluted) $ 0.01 $ (0.01)
============================
Weighted average number of shares outstanding 23,449,728 22,862,028
============================
</TABLE>
See accompanying notes.
F-4
<PAGE> 33
Angstrom Technologies, Inc.
Statements of Capital
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------------------------- PAID IN ACCUMULATED NET
SHARES AMOUNT SHARES PAR VALUE CAPITAL DEFICIT CAPITAL
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996 1,482,535 $2,439,483 22,468,938 $224,690 $4,726,086 $(6,013,203) $1,377,056
Conversion of preferred stock (146,545) (241,799) 586,180 5,862 235,937 -
Exercise of stock options 200,000 2,000 11,500 13,500
Net income 86,852 86,852
------------------------------------------------------------------------------------------
Balance at October 31, 1997 1,335,990 2,197,684 23,255,118 232,552 4,973,523 (5,926,351) 1,477,408
Conversion of preferred stock (41,760) (68,904) 167,040 1,670 67,234 -
Exercise of stock options 215,000 2,150 18,975 21,125
Net income 403,508 403,508
------------------------------------------------------------------------------------------
Balance at October 31, 1998 1,294,230 $2,128,780 23,637,158 $236,372 $5,059,732 $(5,522,843) $1,902,041
==========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 34
Angstrom Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
1998 1997
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 403,508 $ 86,852
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 40,584 38,023
Amortization 7,673 3,534
Changes in operating assets and liabilities:
Accounts receivable (75,852) (22,656)
Interest receivable 1,207 4,886
Inventories (203,049) (71,031)
Prepaid expenses 18,680 (40,087)
Accounts payable (42,807) (104,946)
Accrued liabilities 1,484 17,730
--------------------------
Net cash provided (used) by operating activities 151,428 (87,695)
INVESTING ACTIVITIES
Purchases of furniture and equipment (14,155) (17,876)
Proceeds from sale of available-for-sale investments 613,380 203,137
Capitalization of patents (6,247) (32,754)
--------------------------
Net cash provided by investing activities 592,978 152,507
FINANCING ACTIVITIES
Proceeds from stock option exercises 21,125 13,500
Principal repayments of long-term debt (29,375) (29,375)
--------------------------
Net cash used by financing activities (8,250) (15,875)
--------------------------
Net increase in cash 736,156 48,937
Cash and cash equivalents at beginning of year 73,112 24,175
--------------------------
Cash and cash equivalents at end of year $ 809,268 $ 73,112
==========================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 6,626 $ 9,932
Conversion of preferred stock to common stock 68,904 241,799
</TABLE>
See accompanying notes.
F-6
<PAGE> 35
Angstrom Technologies, Inc.
Notes to Financial Statements
October 31, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Angstrom Technologies, Inc. (the Company), is a developer and manufacturer of
electro-optical scanning devices and related ultraviolet chemical compounds. The
Company sells primarily to Fortune 500 companies in a variety of industries, and
generally does not require collateral for credit sales. Credit losses are
provided for in the financial statements when necessary and have been
consistently within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis. The Company periodically reviews inventory levels for
obsolete, slow-moving and non-salable inventory and records a reserve against
those inventories when deemed necessary.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is provided using the
straight-line method over the useful life of the assets.
PATENTS
The Company has been awarded nine patents from the U.S. Patent office. The legal
fees associated with the application and approval of these patent applications
for U.S. and foreign patents have been capitalized. These patent costs are being
amortized over a life not to exceed 20 years which is deemed to be the economic
life of the patents.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less at date of
purchase to be cash equivalents.
F-7
<PAGE> 36
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME/(LOSS) PER COMMON SHARE (BASIC AND DILUTED)
Calculations of net income/(loss) per common share are based on the weighted
average number of shares outstanding during each year. The weighted average
number of shares outstanding was 23,449,728 for 1998 and 22,862,028 for 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for the
participants' options because the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing such options. However, the effect of applying Statement No. 123's fair
value would result in net earnings that are not materially different from
amounts reported.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 "Earnings per Share." Statement No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of stock options and convertible
securities. Diluted earnings per share are very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary restated to conform to
Statement No. 128 requirements.
REVENUE RECOGNITION
Revenues are recognized when a product is shipped or a service is performed. The
Company provides for product returns and warranties based on historical
experience.
F-8
<PAGE> 37
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements using generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts recorded in the financial statements and accompanying notes. Actual
results could differ from those estimates.
2. PREFERRED STOCK
On December 22, 1993, the Company completed the issuance of 1,725,000 units of
its securities through a public offering, resulting in net proceeds of
approximately $2,838,000 after offering expenses. Each unit consists of one
share of the Company's 8% redeemable convertible preferred stock and one Class A
redeemable common stock purchase warrant. Each share of preferred stock is
convertible into four shares of the Company's common stock and each Class A
warrant entitles the holder to purchase one share of the Company's common stock
for $1.00 and to receive one Class B redeemable common stock purchase warrant
which entitles the holder to purchase one share of the Company's common stock
for $1.50. The preferred stock has a cumulative dividend rate of $0.16 per share
per annum and carries a liquidation preference of $2.00 per share plus any
dividends in arrears.
In 1998 and 1997, Management has determined that available funds are more
prudently utilized in its ongoing research and development efforts and as a
result no accrual or payment of dividends will be made until such time as
sufficient cash flows are generated from operations. Management intends to hold
the dividend payable as of October 31, 1998 ($924,193) and 1997 ($717,116), in
arrears. No dividend has been accrued for the year ended October 31, 1998 and
1997. The amount that would have been recorded at October 31, 1998 and 1997, if
a dividend had been declared, would have been $207,077 and $213,758,
respectively. The preferred stock is subject to redemption at the company's
option at $2.00 per share on 30-60 days written notice, provided that the
closing high bid price for common stock shares is at least $1.00 per share for
10 consecutive trading days.
F-9
<PAGE> 38
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT
Long-term debt at October 31, 1998 consists of the following:
Promissory note, payable in monthly installments through January 1, 2000,
imputed at an annual rate of 12%
$39,011
Less current maturities 33,100
-------
$ 5,911
=======
The following payments of principal are required subsequent to October 31, 1998:
1999 $33,100
2000 5,911
-------
$39,011
=======
4. LEASES
Minimum future rental payments under commitments for noncancelable operating
leases in effect at October 31, 1998, principally for facilities is
approximately $8,500 in 1998.
Total rent expense under operating leases was $25,794 and $26,107 for the years
ended October 31, 1998 and 1997, respectively.
5. RESEARCH AND DEVELOPMENT COSTS
Research and development costs charged to expense during the fiscal years ended
October 31, 1998 and 1997 were approximately $206,000 and $286,000,
respectively.
F-10
<PAGE> 39
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS
Under the Company's Amended 1983 Stock Option Plan and 1985 Stock Option Plan
(the Plans), officers and other key employees who perform services on behalf of
the Company may be granted either non-qualified stock options or incentive stock
options for the purchase of up to 700,000 shares of the Company's common stock.
The Plans also provide for the issuance of stock appreciation rights in
connection with the granting of stock options. Option prices may not be less
than 100% of the fair market value of the common stock on the date of grant and
unexercised options expire not more than 10 years from date of grant. The Plans
are administered by a Stock Option Committee (the Committee) of the Board of
Directors. Subject to the guidelines of the Plans, the Committee determines who
options will be granted to, the type of options to be granted, the number of
shares, the option price per share, and the time when the options may be
exercised.
Under the 1994 Plan, a total of 6,300,000 shares are reserved for issuance to
employees, including directors and officers who may not be salaried employees
("Eligible Participants"). The 1994 Plan provides that the number of shares
subject thereto and outstanding options and their exercise prices, are to be
appropriately adjusted for mergers, consolidations, recapitalizations, stock
dividends, stock splits or combination of shares. Shares allocated to options
and stock appreciation rights which have terminated for reasons other than the
exercise thereof may be reallocated to other options and/or stock appreciation
rights. Ratification and approval of the 1994 Plan with stockholders also
constituted ratification and approval of the options to be granted thereunder to
the Company's executive officers and directors.
Certain key executives (the Team) received grants under the 1994 Stock Option
Plan to acquire one million shares of the common stock of the Company at a price
per share equal to $.125. Such options are exercisable to the extent of 500,000
shares immediately, an additional 250,000 on the first anniversary of the date
of grant and the balance of 250,000 shares exercisable from and after the second
anniversary of the date of grant, with such options expiring ten years from the
date of grant unless sooner terminated in accordance with its provisions.
F-11
<PAGE> 40
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
Options expire through 2007 based upon the date of grant. Changes in options
outstanding under the Plans are as follows:
STOCK OPTION
SHARES PRICE RANGE
--------------------------------------
Balance at October 31, 1996 3,565,000 $0.01 and $.125
Granted 130,000 $.438
Exercised (100,000)
----------
Balance at October 31, 1997 3,595,000 $0.01 to $.438
Granted 0
Exercised (240,000)
----------
Balance at October 31, 1998 3,355,000 $0.01 to $.438
==========
At October 31, 1998, 6,800,000 shares of common stock are reserved for issuance
under the Plans.
At a special meeting of the Company's shareholders on January 20, 1992, options
were granted to the chief executive officer to purchase 400,000 shares of common
stock. The option price of each grant is $0.125 per share and the options expire
on April 14, 2003.
At a special meeting of the Board of Directors on September 14, 1993, options
were granted outside of the Company's stock option plans to the Team to purchase
a total of 300,000 shares of common stock at an option price of $0.125 per share
for a period expiring September 14, 2002. In 1997, 100,000 of these options were
exercised
All options outstanding at October 31, 1998 are fully exercisable.
7. FEDERAL INCOME TAXES
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" requires the use of the liability method to recognize deferred income tax
assets and liabilities, using expected future tax rates. The tax effects of
temporary differences at October 31, 1998 is presented below:
F-12
<PAGE> 41
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
7. FEDERAL INCOME TAXES (CONTINUED)
OCTOBER 31,
1998
-----------
Noncurrent deferred tax assets:
Net operating loss $ 1,291,700
Other, net 9,700
-----------
Total deferred tax assets 1,301,400
Less: valuation allowance (1,301,400)
-----------
Net deferred tax asset $ -
===========
The Company has cumulative net operating loss carryforwards of approximately
$3,300,000 for federal income tax purposes which expire in the years 2000 to
2011.
The reconciliation of income tax at the U.S. Federal statutory rate to income
tax expense is:
YEAR ENDED OCTOBER 31
1998 1997
--------------------------
Tax at U.S. statutory rate $ 160,000 $ 14,000
Tax benefit of net operating loss carryforward (160,000) (14,000)
--------------------------
Actual tax provision $ -0- $ -0-
==========================
8. RELATED PARTY TRANSACTIONS
During the fiscal year ended October 31, 1998 the Company paid approximately
$293,000 ($228,000 in 1997) in commissions to the Team in accordance with the
employment agreements with the Team which provides that the team receive an
aggregate of 15% of gross sales plus 10% of the first $1,000,000 of pre-tax
profits in each year (so long as pre-tax profits for such year equal or exceed
$1,000,000), with a reduced percentage of pre-tax profits in excess of this
figure. The Company paid consulting fees of approximately $30,000 in 1997 to
various members of the Board of Directors and/or corporate officers or to
entities controlled by them for Board of Directors fees, technical, research and
development and sales and marketing services rendered during the year. No such
consulting fees were paid in 1998.
F-13
<PAGE> 42
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company is required to assign to the Team a 1/3rd interest in any patents or
other intellectual property created by the Team which is used in the Company's
business. The Company is required to pay the Team a royalty computed at 5% of
the gross profit (difference between selling price and direct manufacturing
cost, exclusive of overhead) from use of such intellectual property. In the
event of termination of the Agreement by the Company, the Company shall have the
right to continue to retain exclusive use of the patents and other intellectual
properties by paying the Team an amount equal to 10% of gross revenues from
products sold which utilize such intellectual property; otherwise, the Company
may retain a non-exclusive license to use such intellectual property for a fee
of 5% of gross revenues from products sold utilizing such patents. During the
year ended October 31, 1998 the Company paid royalties of approximately $6,000
to the Team ($5,500 in 1997).
9. SIGNIFICANT CUSTOMERS
Customers in excess of 10% of net sales for each respective year is as follows:
YEAR ENDED OCTOBER 31
1998 1997
----------------------
Customer A 60% 24%
Customer B 14% 33%
10. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the Year 2000. Management estimates that amounts spent on Year 2000
issues will not have a material impact on the financial position of the Company
or the results of its operations.
F-14
<PAGE> 43
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
11. BASIC AND DILUTED EARNINGS PER SHARE
The computation of basic and diluted earnings per share is shown below:
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1997
------------------------------
<S> <C> <C>
Numerator:
Net income $ 403,508 $ 86,852
Preferred stock dividend requirement (207,077) (213,758)
------------------------------
Numerator for basic earnings per share - net income
applicable to common stock 196,431 (126,906)
Effect of dilutive securities - preferred stock dividends
and adjustments resulting from assumed conversions -- --
------------------------------
Numerator for diluted earnings per share - net income
applicable to common stock after assumed conversion $ 196,431 $ (126,906)
==============================
Denominator:
Denominator for basic earnings per share - weighted
average shares outstanding 23,449,728 22,862,028
Effect of dilutive securities:
Convertible preferred stock -- --
Assumed issuance of stock under stock
plans based on treasury stock method 2,134,827 3,554,383
------------------------------
Denominator for diluted earnings per share -
weighted average shares outstanding and
impact of dilutive securities 25,584,555 26,416,411
==============================
Basic earnings per common share $ .01 $ (.01)
==============================
Diluted earnings per common share $ .01 --
==============================
</TABLE>
F-15
<PAGE> 44
Angstrom Technologies, Inc.
Notes to Financial Statements (continued)
11. BASIC AND DILUTED EARNINGS PER SHARE (CONTINUED)
Securities that could potentially dilute basic earnings per share in the future
that were not included in the computation of diluted earnings per share above
because to do so would have been antidulitive are as follows: convertible
preferred stock (5,176,920 and 5,343,960 shares at October 31, 1998 and 1997,
respectively).
F-16
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in Post Effective Amendment No. 1
to the Registration Statement (Form S-8 No. 33-1432) pertaining to the 1983 and
1985 Stock Option Plans of Angstrom Technologies, Inc. of our report dated
December 4, 1998, with respect to the financial statements of Angstrom
Technologies, Inc. included in the Annual Report (Form 10-KSB) for the year
ended October 31, 1998.
ERNST & YOUNG LLP
Cincinnati, Ohio
January 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 809,288
<SECURITIES> 0
<RECEIVABLES> 214,063
<ALLOWANCES> 4,515
<INVENTORY> 840,085
<CURRENT-ASSETS> 1,881,389
<PP&E> 173,820
<DEPRECIATION> 125,217
<TOTAL-ASSETS> 2,055,684
<CURRENT-LIABILITIES> 147,712
<BONDS> 5,911
0
2,128,780
<COMMON> 238,372
<OTHER-SE> 5,059,732
<TOTAL-LIABILITY-AND-EQUITY> 2,055,064
<SALES> 1,968,032
<TOTAL-REVENUES> 1,992,263
<CGS> 713,401
<TOTAL-COSTS> 1,552,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,626
<INCOME-PRETAX> 403,508
<INCOME-TAX> 0
<INCOME-CONTINUING> 403,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403,508
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
