<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
MAY 31, 1995 0-1392OW
SYSTEMS TECHNOLOGY ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 54-0802071
(State of incorporation) (IRS Employer ID No.)
14 BRYANT COURT
STERLING, VIRGINIA 20166
(Address of Principal Executive Offices)
(703) 471-8000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, $.50 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 31, 1995 was approximately $428,045.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, to the best of registrant's knowledge in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (X)
The number of shares outstanding of the registrant's Common Stock, par value
$.50 per share, as of August 31, 1995 was 3,424,363, and the shares outstanding
of the registrant's Preferred Stock, par value $50.00 per share, was 2,000.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
PART I
Item 1. Business
General
The Company is a custom designer and manufacturer of electronic equipment used
in the international telephone and telegraph industry. The motivation for the
installation of international facilities is to increase international commerce
and industry. At present, the most prevalent means for providing international
telephone and telegraph is via commercial communication satellites. These
commercial satellites act as a mirror to provide connections between various
earth stations. However, for the service to be provided by any country
desiring to avail itself of this capability, it must erect and install earth
terminals. These are generally referred to as earth stations and serve as the
international gateway for telephone and telegraph service. The customer base
that STA serves is, in the main, government entities in each of the countries
that provide such service. The United States of America is unique in that
international telephone and telegraph is provided by commercial organizations.
These include American Telephone and Telegraph (AT&T), MCI, Sprint, IDB and
others. The rest of the world provides this service via government agencies
and in most cases the same agencies provide mail services. They are referred
to in the international telephone and telegraph communities as the Post,
Telephone and Telegraph organizations (PTT's). These organizations as well as
the United States commercial organizations are the customers that STA serves.
The products developed and manufactured for sale and service by the Company and
products of other company's resold by STA, are divided into four categories.
These are: (1) electronic switching equipment similar to the central offices of
the telephone company for both domestic and international telephone and
telegraph service, (2) equipment that enables the domestic telephone offices,
especially in the smaller countries, to originate and receive direct-dial
international service, (3) devices to digitalize analog telephone service and
transmit it over digital transmission facilities, and (4) equipment to support
and enhance telephone communications.
Since its inception, the Company has installed over 278 communications
satellite ground support systems in more than 110 countries. As a result, much
of the new business brought to the Company is repeat in nature from the same
customers. This is customary since PTT's by tradition purchase additional
equipment and expansion facilities from those suppliers with whom they are
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accustomed to doing business. It is the objective of the Company to continue to
upgrade its product lines so that it can remain competitive in the
international market. However, limited funds and a large debt load service
requirement greatly restrict the Company's research efforts.
Competition
The Company encounters competition in the sale of its products from both
international and domestic (U.S.) sources. Among the international
manufacturers which compete against STA are the Nippon Electric Company and
Smith Jones in England. In the United States, STA faces competition from two
companies, both of which are larger than STA.
The STA Product Family
STA is a supplier of switching equipment that provides service for management
of networks. The Company also manufactures and sells international gateway
telephone equipment and signaling converters. When new international gateway
facilities are erected, especially in an emerging country, their usefulness is
sometimes limited due to lack of access to the domestic network for voice and
data service. Often, the domestic system operates on a different dialing or
signaling scheme than the international system. This means that the signals
from the two systems must be made compatible. STA manufactures and offers a
family of signaling converters that make possible the automatic connection
between earth stations for international service and domestic networks. In
addition, STA has recently started to resell the product line of a company that
makes similar equipment. These devices permit either full automatic direct-dial
connections or semi-automatic as may be required and determined by the PTT's to
fit local practice.
The Needs of the Satellite Network
Geostationary satellites (satellites that appear to remain in one place above
the earth) are an important facility for long distance communications. Because
the satellite transmission path introduces a delay of several milliseconds, the
signaling systems used for terrestrial communications are not suitable. Many
of the user countries have not kept abreast of the available facilities and
latest technologies.
At present, there are many countries including those of the former Eastern Bloc
that require increased international gateway capacity for voice, telex and data
service. The signaling product lines sold by STA specifically address this
market. The need for capacity falls into two categories. For those countries
that have a suitable international gateway switching center, the limitation is
usually in the ability of that center to provide international connections
employing the Consultative Committee on International Telephone and Telegraph
(CCITT), a part of the
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United Nations, No. 5 Signaling method. The Company has developed the CCITT
No. 5 Signaling Converters to serve this market. In the second category, many
countries have limited switching capacity. These organizations will require
new international switching centers as well as special equipment for direct
access to the international services.
STA Product Development
During the fiscal year ended May 31, 1995, the Company expended
approximately $15,187 for research, development and software expense.
Item 2. Properties
The administrative offices and manufacturing facility of the Company are
located at 14 Bryant Court, Sterling, Virginia and during fiscal year 1995,
consisted of an aggregate of approximately 10,000 square feet. In December
1991, the Company renegotiated the lease to a month-to-month basis with a
current rate at May 1995 of $4,500 per month for 10,000 square feet. In
November 1995, the Company reduced its rent payment to $2,500 per month and
intends to occupy only 5,000 square feet of its existing space.
The Company believes that its present facilities are adequate for its
current operations. It is believed that the Company's manufacturing
facilities comply with all federal, state and local laws relating to the
protection of the environment.
Patents
The Company has developed expertise in the design and manufacture of its
products. However, the Company has no patents or applications for patents
pending. The Company prefers to protect its technology as proprietary software
and hardware.
Employees
As of May 31, 1995, the Company employed six(6) persons, none of whom were
represented by a union. The Company believes that its relationship with its
employees is good.
Item 3. Legal Proceedings
The Company had been in default on two bank notes totaling $254,708 since April
and May of 1989 with unpaid accrued interest of $92,092 as of December 31,
1992. The Bank had demanded payment of both notes which were secured by all of
the assets of the Company. On December 31, 1992, the Company and the Bank
reached an agreement referred to as the "Modified Debt Agreement" which, in
effect, substantially reduced the principal balance and eliminated accrued
interest if the Company made the required monthly payments and future principal
reductions on schedule.
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The Modified Debt Agreement called for a reduced loan balance of $175,000 to be
paid. Of that amount, $25,000 was paid immediately leaving a balance of
$150,000. If the Company defaulted or went into bankruptcy, the original loan
agreement and amounts originally owed then would have become enforceable. The
Company made all required interest-only payments and, in addition, reduced the
principal amount from $150,000 to $135,055 by August 1994.
In September 1994, the Company was approached by its lending bank to make an
offer to settle its existing $135,000 loan as the bank was planning to package
this loan with others and sell it at auction. The Company borrowed $82,500
($50,000 from Suburban National Bank) and applied $5,000 of its own funds
towards the existing loan balance. The lending bank accepted the offer in
complete satisfaction of the outstanding balance and the Company cancelled
$47,555 still owed on the Modified Debt Agreement and $171,800 still carried as
debt from the original loan for a total debt forgiveness of $219,355.
During most of 1991, the Company failed to pay its payroll tax withholding
obligation and its matching contribution. In October 1992, the Company reached
a tentative agreement with the IRS to make monthly payments on these
outstanding obligations. In early February 1993, the Company received final
IRS approval of the installment agreement, thereby removing a major concern
regarding the Company's continuing existence. The Company has paid all current
payroll tax obligations since January 1992 in full and on time and has paid all
of its past due payroll tax installments on time.
On December 3, 1992, Avnet Computer, a division of Avnet, Inc., was awarded a
Summary Judgment against Systems Technology Associates, Inc. for the sum of
$35,798 plus interest. The Judgement relates to goods purchased on account by
STA from Avnet in July 1991. In November 1993, STA reached an agreement with
Avnet Computer on a total liability of $45,000 with monthly payments without
interest to be made through July 1996. All payments have been made on time and
the balance due at the end of November 1995 was $ 16,000.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters placed before the shareholders for vote during the fiscal
year ended May 31, 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded in the over-the-counter market. The
following table sets forth the high and low bid prices for the Company's
Common Stock on the over-the-counter
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market as reported by the National Quotation Bureau from March 1994 until
November 1995. The quotations reflect inter-,dealers prices without retail
markups, markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
Fourth Quarter, FY94 1/4 1/8
First Quarter, FY95 1/2 1/4
Second Quarter, FY95 5/16 3/16
Third Quarter, FY95 3/16 1/8
Fourth Quarter, FY95 3/16 1/8
First Quarter, FY96 1/8 1/8
Second Quarter, FY96 1/8 1/8
</TABLE>
As of August 31, 1995, there were approximately 742 holders of record of the
Company's Common Stock.
The Company has never paid a cash dividend on its Common Stock and it presently
intends to retain any earnings for use in improving its capital position.
Accordingly, it is anticipated that no cash dividends will be paid to the
holders of Common Stock in the foreseeable future.
Item 6. Selected Financial Data
The following selected financial data for the periods indicated has been
derived from the financial statements of the Company. This information should
be read in conjunction with the related financial statements and notes thereto
included elsewhere in this report.
For the Period Ended
<TABLE>
<CAPTION>
Summary of May 31, May 31, May 31, May 25, May 26,
Operations 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Revenue $1,000,021 $1,085,534 $ 983,804 $1,122,135 $1,656,530
- ----------------------------------------------------------------------------------------------------------
Net Income
(Loss) $300,729 $222,691 $ 90,100 $(255,800) (710,631)
- ----------------------------------------------------------------------------------------------------------
Net Income
(Loss) Per
Common Share $ 0.09 $ 0.06 $ 0.03 $ (0.07) $ (0.21)
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Year-End Financial-Position:
<S> <C> <C> <C> <C> <C>
Total Assets $692,936 $ 561,014 $ 521,311 $ 646,104 $ 823,516
- ----------------------------------------------------------------------------------------------------------
Long-Term
Debt $285,192 $ 510,541 $ 519,431 0 0
- ----------------------------------------------------------------------------------------------------------
Stockholder
Equity at
Year-End $ 55,194 $(264,285) $(486,976) $(577,026) $(321,226)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1995 was a year marked with both progress, disappointment and change. While
the Company operated profitably for the third year in a row, both sales and
operating income were below our expectations. The product line acquired from
Coherent Communications did not achieve the sales level expected and the STA
product lines saw lower demand. Thus, while the Company had hoped to show a
substantial increase in sales over last year's $1,085,000, sales actually
decreased slightly to $1, 000,021 and Operating Income dropped from $102,625 to
$81,368. The Company believes it can improve and extend sales of the Coherent
product line by introducing more pricing flexibility and a broader sales
effort. Additionally, the Company will also focus on its existing installed
customer base to sell upgrades, expansions and spares of its own product lines.
In February 1995, Management met to assess the Company's strengths and
weaknesses and to set a course based on this analysis. It was becoming clear
that the old STA and Coherent product lines were becoming outmoded and, while
sales of these products would continue for some time, demand would taper off
instead of increasing over the next several years. Also, the Company did not
have an experienced degreed engineer who could upgrade these products nor the
funds to support such an effort as ongoing debt payments consume most of the
Company's cash flow. The Company did have a large prospect and customer base
which it felt it could successfully market to with newer or complimentary
products. Thus, in March, the Company approached Coherent Communications about
selling their digital Echo Canceller product line. Coherent accepted and this
product line is now contributing to STA's sales. The Company also approached
one of its former competitors about selling their products. The first sale of
these products occurred in May and now contribute to sales on a level equal to
STA's own product lines. With the change in sales mix, STA will manufacture
less of the products it sells and will place less emphasis on engineering and
more on building an aggressive sales organization.
In September 1994, the Company was approached by its lending bank, First Union,
to make an offer to settle its existing $135,000 loan as it was planning to
package this loan with other loans and auction them off. The Company was able
to borrow $82,500 ($50,000 from Tysons National Bank) and apply $5,000 of its
own funds in an offer to First Union to settle its existing loan balance.
First Union accepted the offer and the Company was able to cancel $47,555 still
owed on the Modified Debt Agreement and $171,800 still carried as debt from the
original loan for a total cancellation of $219,355.
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The combination of debt cancellation and the year's operating income produced
$300,729 of Net Income. The Company's tax loss carryforward allowed the
Company to forgo Income Tax payments of $111,600. Last year, the Company
stated it hoped to obtain a positive Net Worth within two years. The First
Union debt cancellation and earnings for this fiscal year has allowed the
Company to reach that goal this year with a Net Worth as of May 31, 1995 of
$55,194.
While the Company has operated profitably for the last three years, almost all
of these earnings have had to be applied to debt payments. This has largely
stifled development of the Company and opportunity for the Company's employees.
It has also kept Management under great stress as it has had to operate without
sufficient cash resources. The Company needs to push its sales to a higher
level to alleviate the debt payment pressures. Also, during the next year, in
addition to funds provided by earnings, the Company hopes to convert at least
some of its old product line inventory to cash through special and close-out
sales. In addition, it is believed that a substantial amount of that
inventory can be utilized through the acquired Coherent product line, also
improving cash flow. There will be, however, some inventory write-offs as the
Company assesses individual stock items over the next 12 to 18 months.
The Company, having achieved a positive net worth again, will now aggressively
pursue a plan to find a profitable entity that would find both the Company's
public status and $3.5 million tax loss carryforward attractive. Continued
profitability, it is hoped, will further increase the attractiveness of STA to
another company.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Financial Statements which are annexed hereto
immediately following the signature page of this report.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the directors,
executive officers and significant employees who held positions in the Company
during fiscal year 1995.
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<TABLE>
<CAPTION>
Name and Position Age Director Since
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Terry A. Scott 53 Dec 1991
Chairman of the Board
President (since May 15, 1993)
Edward P. Myers 56 May 1992
Director
Clyde C. Heasly, Jr. 71 Nov 1992*
Corporate Secretary/Director
</TABLE>
* Clyde C. Heasly, Jr. was elected to the Board of Directors and additionally
assumed the office of Corporate Secretary on November 6, 1992.
CLYDE C. HEASLY, JR., Director and Corporate Secretary, is retired from Data
Card Corporation, Minneapolis, Minnesota, the world leader in plastic cards
equipment and service. Mr. Heasly held various positions including Corporate
Senior Vice President, President of Data Card Addressograph, Managing Director
of Data Card Benelux, and President of Security Imprinter Corporation which he
founded. Other assignments were with Control Data Corporation, Farrington
Electronics and Intelligent Machines Research Corporation where he was involved
in the early development and commercialization of optical character recognition
(OCR). Mr. Heasly holds a Bachelor of Science degree in Electrical Engineering
from the University of California, Berkeley, and has done graduate electrical
engineering studies at George Washington University, Washington, DC.
EDWARD P. MYERS, Director, is an Associate Professor teaching Computer
Information Systems at the Alexandria campus of Northern Virginia Community
College. Mr. Myers has been an active educator and business consultant for the
past twelve years. Previously, he served in the United States Air Force
retiring as a Lt. Colonel. During his Air Force career, Lt. Colonel Myers
served on the Joint Chiefs of Staff, Air Staff, and Systems Command working
with computers and application software. He holds a B.A. from Ohio Wesleyan
and an M.B.A. from Michigan.
TERRY A. SCOTT, Chairman of the Board and Chief Executive Officer, has been
with the Company since December 11, 1991. Additionally, Mr. Scott was an
Associate Professor of Finance at the Alexandria campus of the Northern
Virginia Community College (NVCC) where he taught full time for eleven years.
Mr. Scott resigned from NVCC on May 15, 1993 to devote his full time to STA in
the position of President. Mr. Scott previously held positions as an Account
Executive with Merrill Lynch and as a commercial loan credit analyst for the
National Bank of Detroit. Mr. Scott holds a Bachelor degree in Business
Administration from the Miami University of Ohio and an M.B.A. from Ohio State
University. Mr. Scott also served in Vietnam as a Captain in the U.S. Army's
Fifth Special Forces Group (Airborne) from 1969 to 1971.
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*All directors are elected annually by the Company's shareholders and serve
until their successors are duly elected and qualified. Officers are elected by
the Board of Directors and serve at the discretion of the Board.
Item 11. Management Remuneration & Transactions, Executive Compensation
Management compensation for FY95 totaled $63,221, down from $73,355 in FY94 and
$66,942 in FY93. Mr. Terry A. Scott, Chairman and President, received a total
of $28,606 in FY94 and Mr. Furman A. McCormick, Vice President received
$34,615.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the equity security ownership of those persons
known to management to own beneficially 5% or more of the total outstanding
Common Stock as of the record date of August 31, 1995.
<TABLE>
<CAPTION>
Title of Name and Address Amount of Percent
Class of Beneficial Owner Ownership of Class
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Marvin S. Friedland 667,894 Shrs.* 19.5%
1134 Rivermont Dr. West
Melbourne, FL 32935
Preferred Marvin S. Friedland 2,000 Shrs. 100.00%
1134 Rivermont Dr. West
Melbourne, FL 32935
Common Stock Terry A. Scott 636,100 Shrs.** 18.6%
2348 Southgate Square
Reston, VA 22091
Common Stock Edward P. Myers 175,000 Shrs 5.1%
117 N. Payne St.
Alexandria, VA 22314
</TABLE>
*Includes 6,540 shares held by Mr. Friedland's wife, Jean C. Friedland, 600
shares held by Jean C. Friedland in trust for their son, Bruce Friedland, and
24,500 shares held by Metrology, Inc. Based on an agreement concluded on
October 26, 1993, STA has an option to acquire all of the shares owned by Mr.
Friedland and Metrology for three years at $0.0625 per share and for $0.10 per
share for two additional years. On June 1, 1994, Coherent Communications, as
an STA designate, received 100,000 of these shares as partial payment to
Coherent Communications Systems for inventory and equipment purchased and
prepaid expenses relating to two product lines STA was licensed to manufacture
and sell. While the change in Mr. Friedland's ownership was disclosed in STA's
FY94 10-K, Mr. Friedland did not file a Form 4 disclosing such.
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**Includes 60,000 shares owned by T.A. Scott & Company, Inc., 95% owned by Mr.
Scott and ownership of 7,100 shares in a limited partnership which owns 11,000
shares of STA Common Stock.
The following table indicates the equity securities of the Company beneficially
owned as of August 31, 1995 by the named Directors, and the Officers and
Directors of the Company as a group.
<TABLE>
<CAPTION>
Title of Name and Address Amount of Percent
Class of Beneficial Owner Ownership of Class
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Terry A. Scott 636,100 18.6%
Common Stock Edward P. Myers 175,000 5.1%
Common Stock Clyde C. Heasly, Jr. 100,000 2.9%
Common Stock All Officers & Directors 911,100 26.6%
as a Group
</TABLE>
Item 13. Certain Relationships and Related Transactions
Not Applicable.
PART IV
Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K
(a) 1. Report of Independent Certified Public Accountants
Systems Technology Associates, Inc.
(a) Balance Sheets at May 31, 1995 and 1994
(b) Statements of Income for the Years Ended May
31, 1993, 1994 and 1995
(c) Statements of Stockholders' Equity(Deficit)
for the Years Ended May 31, 1993, 1994 and
1995
(d) Statements of Cash Flows for the Years Ended
May 31, 1993, 1994, 1995
(e) Notes to Financial Statements
2. Exhibits
Reference is made to the Exhibit Index to this Report
immediately following the Financial Statement Schedules.
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(b) Form 8-K Reports
A Form 8-K was filed on June 17, 1994, stating that STA was in
substantive negotiations with another company for the
acquisition of a product line. (Nothing developed from those
discussions and they have been terminated)
A Form 8-K was filed on June 24, 1994, stating that STA had
terminated its audit relationship with Frederick S. Todman &
Co. and had retained Councilor, Buchanan & Mitchell, P.C. for
its 1994 audit. There were no outstanding disagreements with
Todman & Co. on any audit or accounting issues.
A Form 8-K was filed on October 12, 1994 stating that STA
received an opportunity to "buy out" its existing bank debt at
a substantial discount. STA was able to borrow $82,500 from
outside sources (including a bank loan of $50,000) and for
$87,500, the Company was able to extinguish the existing
$135,000 loan and $171,800 of contingency debt still carried
on the balance sheet.
(c) Indebtedness of Management
There were no loans of any kind of the Company to management.
(d) Transactions with Promoters
None.
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SIGNATURES
Pursuant to the requirement 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.
Systems Technology Associates, Inc.
Dated: December 29, 1995 By: /s/ TERRY A. SCOTT
-------------------- -----------------------
Terry A. Scott
Chairman of the Board
Dated: December 29, 1995 By: /s/ CLYDE C. HEASLY, JR.
--------------------- -------------------------
Clyde C. Heasley, Jr.
Corporate Secretary
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>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ TERRY A. SCOTT Chairman of the Board Dated 12/29/95
- ------------------ --------
Terry A. Scott
/s/ EDWARD P. MYERS Director Dated 12/29/95
- ------------------- --------
Edward P. Myers
/s/ CLYDE C. HEASLY, JR. Director Dated 12/29/95
- ------------------------ --------
Clyde C. Heasly, Jr.
</TABLE>
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EXHIBIT INDEX
Exhibits
*3(a) Articles of Incorporation of Registrant.
*3(b) By-Laws of Registrant.
*4(a) Specimen Common Stock Certificate.
*13 10Qs/Annual Report
*16 Letter Re: Change in Certifying Accountants
*Incorporated by reference from Exhibits to Registrants for S-18 Registration
Statement, Registration No. 2-94042W.
14
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SYSTEMS TECHNOLOGY ASSOCIATES, INC.
STERLING, VIRGINIA
---------------
FINANCIAL STATEMENTS
FOR THE YEAR ENDED MAY 31, 1995
<PAGE> 16
[COUNCILOR, BUCHANAN & MITCHELL, P.C. LETTERHEAD]
November 13, 1995
Independent Auditors' Report
The Board of Directors
Systems Technology Associates, Inc.
Sterling, Virginia
We have audited the accompanying balance sheets of Systems Technology
Associates, Inc. as of May 31, 1995 and 1994, and the related statements of
income, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The statements of income, stockholders' equity
(deficit), and cash flows for the year ended May 31, 1993, before the
restatement described in Note 10, were audited by other auditors whose report
dated July 23, 1993, expressed an unqualified opinion on those statements.
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 Systems Technology Associates,
Inc. as of May 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. As discussed in Note 2 to the
financial statements, prior to 1993, the Corporation suffered substantial
recurring losses from operations which resulted in a large net capital
deficiency. While the capital deficiency has been eliminated, total
stockholders' equity remains insufficient in comparison to outstanding debt,
which raises substantial doubt about the Corporation's ability to continue as a
going concern. Management's plans regarding those matters also are described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
<PAGE> 17
The Board of Directors
Systems Technology Associates, Inc.
We also audited the adjustments described in Note 11 that were applied to
restate the 1993 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied.
/s/ COUNCILOR, BUCHANAN & MITCHELL, P.C.
----------------------------------------
Certified Public Accountants
<PAGE> 18
SYSTEMS TECHNOLOGY ASSOCIATES, INC.
BALANCE SHEETS
MAY 31, 1995 AND 1994
<PAGE> 19
SYSTEMS TECHNOLOGY ASSOCIATES, INC.
BALANCE SHEETS
MAY 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
A S S E T S
-----------
CURRENT ASSETS:
- --------------
Cash $ 35,263 $ 54,700
Accounts Receivable - Net of Allowance for
Doubtful Accounts of $-0- and $308,702
at May 31, 1995 and 1994, Respectively
(Note 1) 127,964 109,431
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (Note 1) 180,526 118,159
Inventory (Note 1) 313,809 248,482
Prepaid Expenses and Miscellaneous 5,319 7,632
----------------------
Total Current Assets $ 662,881 $ 538,404
PROPERTY AND EQUIPMENT - NET OF
ACCUMULATED DEPRECIATION OF $440,232
AND $430,771 FOR MAY 31, 1995 AND
1994, RESPECTIVELY (Notes 1 and 3) 30,055 16,305
- -----------------------------------------------
DEPOSITS - 6,305
- --------
-----------------------
TOTAL ASSETS $ 692,936 $ 561,014
=======================
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 20
Exhibit A
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
- -------------------
Related Parties Notes Payable -
Current Portion (Note 4) $ 38,850 $ 35,000
Other Notes Payable - Current Portion (Note 4) 33,500 77,538
Advance from Customers 17,882 13,500
Accounts Payable - Trade 179,173 96,587
Payroll Taxes Payable (Note 5) 1,304 38,183
Accrued Expenses (Note 5) 81,841 53,950
---------------------------------------
Total Current Liabilities $ 352,550 $ 314,758
---------------------------------------
LONG-TERM LIABILITIES:
- ---------------------
Related Parties Notes Payable (Note 4) $ 164,233 $ 131,733
Other Notes Payable (Note 4) 32,392 178,909
Accrued Expenses (Note 5) 88,567 199,899
---------------------------------------
Total Long-term Liabilities $ 285,192 $ 510,541
---------------------------------------
Total Liabilities $ 637,742 $ 825,299
---------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 6 and 7):
- ---------------------------------------------
Redeemable Preferred Stock, $50 Par Value,
2,000 Shares Authorized, 2,000 Shares
Issued and Outstanding ($200,000
Aggregate Liquidation Preference) $ 100,000 $ 100,000
Common Stock, $.50 Par Value, 8,000,000
Shares Authorized, 3,425,269 Shares Issued,
and 3,424,363 Shares Outstanding 1,712,635 1,712,635
Capital in Excess of Par Value 2,330,162 2,311,412
Retained Deficit ( 4,087,553) ( 4,388,282)
---------------------------------------
$ 55,244 ( $ 264,235)
Treasury Stock, at Cost ( 50) ( 50)
---------------------------------------
Total Stockholders' Equity (Deficit) $ 55,194 ( $ 264,285)
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 692,936 $ 561,014
=======================================
</TABLE>
1
<PAGE> 21
SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit B
STATEMENTS OF INCOME
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
- --------
Contract Revenues Earned $ 1,000,021 $ 1,085,534 $ 983,804
Cost of Revenues Earned 681,518 743,516 711,474
---------------------------------------------------------------------
Gross Profit $ 318,503 $ 342,018 $ 272,330
---------------------------------------------------------------------
Operating Expenses:
Research and Development
Costs $ 15,187 $ 47,304 $ 17,584
Inventory Markdown 10,024 - 33,508
Interest Expense 27,940 22,940 34,549
Rent Expense (Note 8) 54,000 54,000 54,000
Selling, General and
Administrative Expense 129,979 115,149 130,582
---------------------------------------------------------------------
Total Operating Expenses $ 237,130 $ 239,393 $ 270,223
---------------------------------------------------------------------
Operating Income $ 81,373 $ 102,625 $ 2,107
Other Revenue:
Interest - 960 -
---------------------------------------------------------------------
Income Before Provision
for Income Taxes and
Extraordinary Items $ 81,373 $ 103,585 $ 2,107
Provision for Income Tax
(Note 9) - - 400
---------------------------------------------------------------------
Income Before
Extraordinary Items $ 81,373 $ 103,585 $ 1,707
Extraordinary Items
(Notes 4, 10 and 11):
Forgiveness of Debt 219,356 119,106 57,793
Tax Benefit from Prior Year
Net Operating Loss
Carryforward - - 30,600
---------------------------------------------------------------------
NET INCOME $ 300,729 $ 222,691 $ 90,100
=====================================================================
Primary Earnings per Share:
Net Income Before
Extraordinary Item $ .02 $ .03 $ -
Extraordinary Item .07 .03 .03
---------------------------------------------------------------------
NET INCOME $ .09 $ .06 $ .03
=====================================================================
Weighted Average Number
of Shares Outstanding 3,424,363 3,424,363 3,424,363
===================================================================
</TABLE>
See accompanying Notes to Financial Statements. 2
<PAGE> 22
SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit C
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Common Stock Preferred Stock Capital in
-------------------------- -------------------- Excess
Shares Amount Shares Amount of Par
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1992 3,425,269 $ 1,712,635 2,000 $ 100,000 $ 2,311,412
Purchase of Treasury Stock - - - - -
Issuance of Treasury Stock - - - - -
Net Income - - - - -
--------------------------------------------------------------------
Balance, May 31, 1993 3,425,269 $ 1,712,635 2,000 $ 100,000 $ 2,311,412
Net Income - - - - -
--------------------------------------------------------------------
Balance, May 31, 1994 3,425,269 $ 1,712,635 2,000 $ 100,000 $ 2,311,412
Net Income - - - - -
Purchase of Treasury Stock - - - - -
Issuance of Treasury Stock - - - - 18,750
--------------------------------------------------------------------
BALANCE, MAY 31, 1995 3,425,269 $ 1,712,635 2,000 $ 100,000 $ 2,330,162
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Total
-------------------------- Stockholders'
Deficit Shares Amount Equity (Deficit)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 1, 1992 ( $ 4,701,073) - $ - ($ 577,026)
Purchase of Treasury Stock - ( 73,156) ( 5,351) ( 5,351)
Issuance of Treasury Stock - 72,250 5,301 5,301
Net Income 90,100 - - 90,100
------------------------------------------------------------
Balance, May 31, 1993 ( $ 4,610,973) ( 906) ($ 50) ($ 486,976)
Net Income 222,691 - - 222,691
------------------------------------------------------------
Balance, May 31, 1994 ( $ 4,388,282) ( 906) ($ 50) ($ 264,285)
Net Income 300,729 - - 300,729
Purchase of Treasury Stock - ( 100,000) ( 6,250) ( 6,250)
Issuance of Treasury Stock - 100,000 6,250 25,000
------------------------------------------------------------
BALANCE, MAY 31, 1995 ( $ 4,087,553) ( $ 906) ($ 50) $ 55,194
============================================================
</TABLE>
See accompanying Notes to Financial Statements. 3
<PAGE> 23
SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit D
Sheet 1
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
- --------------------
Net Income $ 300,729 $ 222,691 $ 90,100
Adjustments to Reconcile Net
Income to Net Cash
Provided by (Used in) Operating
Activities:
Depreciation and Amortization 9,461 7,078 14,847
Forgiveness of Debt ( 219,356) ( 119,106) ( 87,993)
Decrease (Increase) in Assets:
Accounts Receivable ( 18,533) 84,588 ( 161,263)
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts ( 62,367) ( 97,370) 161,647
Inventory ( 58,927) 15,157 67,690
Prepaid Expenses and
Miscellaneous 7,313 493 11,301
Deposits 6,305 ( 4,650) 6,892
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 82,586 ( 71,279) ( 143,917)
Payroll Taxes Payable ( 36,879) ( 10,864) 52,484
Accrued Expenses 27,891 ( 7,873) ( 203,614)
Advance from Customers 4,382 13,500 -
-------------------------------------------------------
Net Cash Provided by (Used in)
Operating Activities $ 42,605 $ 32,365 ( $ 191,826)
--------------------------------------------------------
INVESTING ACTIVITIES:
- --------------------
Acquisition of Property and
Equipment ( $ 9,611) ( $ 8,895) ( $ 10,396)
---------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements. 4
<PAGE> 24
SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit D
Sheet 2
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
- --------------------
Proceeds from Additional Borrowings $ 92,500 $ 80,000 $ 168,197
Repayment of Related Parties
Notes Payable ( 6,150) ( 6,000) -
Repayment of Other Notes Payable ( 113,291) ( 28,144) -
Purchase of Treasury Stock ( 6,250) - ( 50)
Net Decrease in Long-term
Accrued Expenses ( 19,240) ( 33,222) -
---------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities ( $ 52,431) $ 12,634 $ 168,147
--------------------------------------------------------
Net Increase (Decrease) in Cash ( $ 19,437) $ 36,104 ( $ 34,075)
Cash - Beginning of Year 54,700 18,596 52,671
--------------------------------------------------------
CASH - END OF YEAR $ 35,263 $ 54,700 $ 18,596
========================================================
Supplemental Disclosure of
Cash Flow information:
Cash Paid During the Year for Interest $ 26,286 $ 30,321 $ 4,643
</TABLE>
Noncash Transactions:
Accrued interest payable totalling $95,921 on the First Union Bank note was
reclassified from notes payable to accrued expenses to reflect the status of
the liability at May 31, 1994.
As part of Coherent Communications Systems Corporation's (Coherent)
agreement to acquire shares of the Corporation's stock, Coherent contributed
$6,400 in inventory, $13,600 in property and equipment and $5,000 in prepaid
expenses for no additional consideration (see Note 9). Accordingly, capital
in excess of par value was increased by $18,750 for these items, and
treasury stock was reduced by $6,250.
See accompanying Notes to Financial Statements. 5
<PAGE> 25
SYSTEMS TECHNOLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Corporation's Activities
Systems Technology Associates, Inc. (the "Corporation") provides
services and equipment in the telecommunications, data systems, and automated
instrumentation fields to governments and the public sector.
The following is a summary of significant accounting policies
followed in the preparation and presentation of the accompanying financial
statements. These policies conform to generally accepted accounting principles.
Accounts Receivable
Accounts receivable are reviewed periodically for consideration as to
their collectibility. An allowance for doubtful accounts is established on
those accounts deemed uncollectible under the specific write-off method. For
the years ended May 31, 1995, 1994 and 1993, the Corporation charged $6,732,
$4,704, and $-0-, respectively, against earnings to recognize those accounts
whose collection was doubtful.
Inventory
Inventory is comprised of computer components and electronic
equipment materials used in the manufacture of telephone system devices and is
valued at the lower of cost or market with cost determined on a first-in,
first-out (FIFO) basis. During the years ended May 31, 1995, 1994 and 1993,
the Corporation marked down its inventory by $10,024, $-0-, and $33,508,
respectively, as a result of obsolescence and lower of cost or market
adjustment of certain items. Inventory is pledged as security against
outstanding bank loans.
6
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
over the five year estimated useful lives of the assets under a method which
approximates straight-line.
Use of Estimates
Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
Revenue and Cost Recognition
Revenues on sales contracts are recognized under the percentage of
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. That method is used because management
considers total cost to be the best available measure of progress on the
contracts. All of the Corporation's sales contracts are for a fixed price. The
percentage of completion on each sales contract is reviewed periodically for a
determination as to the revenue to be recognized. Because of inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates will change in the near term.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. Selling, general, and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the
7
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue and Cost Recognition (Continued)
period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed.
New Accounting Pronouncements
In May 1991, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments" which requires disclosure of the fair
value of all financial instruments, both assets and liabilities, for which it
is practicable to estimate fair value. This statement is effective for fiscal
years ending after December 15, 1995, for entities with less than $150 million
in total assets t the time the Statement was issued.
Management is currently reviewing the impact of SFAS 107. As of May
31, 1995, management does not expect it to have a material impact on the
Corporation.
NOTE 2 - GOING CONCERN
The Corporation has incurred substantial operating losses since its
public offering in 1985, which raises substantial doubt about its ability to
continue as a going concern. The Corporation has negotiated with its creditors
to arrive at reasonable payment terms and has been able to obtain forgiveness
of certain portions of its liabilities. In addition to funds provided by
earnings, the Corporation plans to convert
8
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 2 - GOING CONCERN (Continued)
at least some of its old product line inventory to cash through special and
close-out sales. The Corporation will also aggressively pursue a plan to
increase its attractiveness to another company. Despite these efforts, there
is no assurance that management will be successful in both meeting its debt
obligations and funding current operations. The financial statements do not
include any adjustments pertaining to the recoverability or classification of
recorded assets or the amounts or classification of liabilities if such plans
are not sufficient to fund operating cash shortfalls.
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment as of May 31, 1995 and 1994, is
as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Furniture and Fixtures $ 84,089 $ 82,051
Laboratory Equipment 386,198 365,025
----------------------
Total Cost $470,287 $447,076
Less Accumulated Depreciation 440,232 430,771
----------------------
Book Value $ 30,055 $ 16,305
-----------------------
</TABLE>
Depreciation expense for the years ended May 31, 1995, 1994
and 1993, was $9,461, $7,078 and $14,847, respectively. The property and
equipment are pledged as security against the outstanding bank loan.
9
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4 - NOTES PAYABLE
Related parties and other notes payable as of May 31, 1995 and
1994, consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------
<S> <C> <C>
Related Parties Notes:
Metrology, Inc. $ 25,000 $ 25,000
Marvin S. Friedland 51,000 51,000
June Benning 10,733 10,733
Walter Benning 40,000 40,000
Daniel N. Carter 23,500 15,000
Edward P. Myers 8,500 10,000
Terry A. Scott 30,850 10,000
John D. Sanders 5,000 5,000
John F. Erickson 8,500 -
---------------------------------------
$ 203,083 $ 166,733
---------------------------------------
Other Notes:
First Union Bank $ - $ 214,764
Tysons National Bank 39,209 -
Michael S. Juhasz 4,683 7,683
Avnet, Inc. 22,000 34,000
---------------------------------------
$ 65,892 $ 256,447
---------------------------------------
Total Notes Payable $ 268,975 $ 423,180
---------------------------------------
</TABLE>
Terms of the notes payable are as follows:
First Union Bank - $200,000 and $90,000 notes payable,
originally dated January 1985 and May 1987, respectively. At December 31,
1992, total unpaid principal of $254,708 and accrued interest of $92,092 were
addressed in a Settlement Agreement. When the Corporation performs in
accordance with the terms of the Settlement Agreement, described hereinafter,
the entire indebtedness will be settled for $175,000 (the "Modified
Indebtedness" amount). The notes were secured by inventory, property and
equipment, accounts receivable, and all other assets of the Corporation.
Interest on the modified indebtedness was payable monthly at 8% through
December 31, 1993;
10
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4 - NOTES PAYABLE (Continued)
First Union Bank (Continued)
at prime as of January 1, 1994 (6%), plus 2% for January 1 through December 31,
1994; at prime as of January 1, 1995, plus 2% for January 1 through December
31, 1995. A $25,000 principal payment was due and was paid on or before
December 31, 1992; principal payments of $1,500 were due monthly beginning
March 1994; additional principal payments equal to 20% of net income before
provision for income taxes and extraordinary items are due within one month of
receipt of annual audited financial statements.
At October 7, 1994, total unpaid principal of $135,056 and
accrued of interest of $932 was addressed in a Release and Settlement
Agreement. The Corporation agreed to pay $88,460 to extinguish the remaining
balance of the Modified Indebtedness amount.
Tysons National Bank - $50,000 note payable dated October 7,
1994. Interest is variable and payable monthly at prime plus 2.25%. Principal
payments of $1,042 are due monthly beginning November 1994, with payment in
full due October 1998. The note is guaranteed by Mr. Terry A. Scott, an
officer of the Corporation, and is collateralized by all business assets of the
Corporation.
Friedland and Metrology, Inc. Notes
Metrology, Inc. - $25,000 unsecured demand note payable,
issued December 1987, originally bearing interest at 10%. Metrology, Inc. is
controlled by Mr. Friedland, formerly an officer and director of the
Corporation.
Marvin S. Friedland - $20,000, $25,000 and $6,000 unsecured
demand notes payable, issued September - October 1989, originally bearing
interest at 15%. Mr. Friedland was formerly an officer and director of the
Corporation.
11
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4 - NOTES PAYABLE (Continued)
In October 1993, the Corporation entered into an agreement
regarding these notes whereby the interest rate from date of issuance was
reduced to 2% per annum. Accrued interest from the date of issuance was
reduced through a $2,000 payment at the time of the modification and continued
monthly payments of $1,000 beginning February 1994 until paid in full. For the
year ended May 31, 1995, no principal payments were made. Interest accrues at
2% from September 1, 1993, until the outstanding balance due to IRS (see Note
6) is satisfied and then at 8% until the notes are paid in full. Principal
payments will be made monthly at $2,000 beginning one month after the balance
due to IRS is satisfied. Payments will be allocated between the Friedland and
Metrology notes in proportion to the dollar values of the notes due each party.
June Benning - $10,733 unsecured note payable, originally
accruing interest at 15%. On May 5, 1993, an agreement was signed whereby
interest prior to January 1, 1993, was forgiven; interest accrues at 10% after
that date. Principal payments of no less than $1,000 per month will begin no
later than one month after satisfaction of the balance due to IRS (Note 6).
Mrs. Benning is the wife of a former officer and director of the Corporation.
Walter Benning - $40,000 unsecured note payable, originally
accruing interest at 15%. On May 5, 1993, an agreement was signed whereby
interest will accrue at 8% beginning July 1, 1994; interest prior to that date
is forgiven. Principal payments of not less than $1,000 per month will begin
in the month following payoff of the balance due to IRS (Note 6) and payoff of
the balance due to June Benning. Mr. Benning is a former officer and director
of the Corporation.
12
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4 - NOTES PAYABLE (Continued)
Daniel N. Carter - $15,000 and $10,000 unsecured notes payable
dated May 20, 1994, and October 1, 1994, respectively. Interest is payable
monthly at 8% and 10% per annum, respectively; principal payments of $500 per
month are due on the $15,000 note beginning September 30, 1994, with payment in
full due May 20, 1995, and October 1, 1996, respectively. For the year ended
May 31, 1995, three principal payments were made.
Edward P. Myers - $10,000 unsecured note payable dated May 24,
1994. Interest is payable monthly at 8% per annum; principal payments of $500
per month are due beginning September 30, 1994, with payment in full due May
20, 1995. For the year ended May 31, 1995, three principal payments were made.
Mr. Myers is a director of the Corporation.
Terry A. Scott - $10,000, $12,500 and $10,000 unsecured notes
payable dated May 24, 1994, October 7, 1994, and October 7, 1994. Interest is
payable monthly at 8%, 10% and 10% per annum; principal payments of $500 per
month are due beginning September 30, 1994, with payment in full due May 20,
1995, October 7, 1996, and October 7, 1995. For the year ended May 31, 1995,
$1,650 in principal payments were made. Mr. Scott is an officer of the
Corporation.
John D. Sanders - $5,000 unsecured note payable, modified
March 30, 1994, so that no interest will accrue until the outstanding balance
due to IRS (Note 6) is satisfied. Interest will then accrue at prime plus 2%
and reasonable efforts are to be made to pay off the loan and accrued interest
as soon as possible. Mr. Sanders is a shareholder and former director of the
Corporation.
13
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4 - NOTES PAYABLE (Continued)
Michael S. Juhasz - $18,600 unsecured note payable dated
October 1, 1992, with principal originally due December 31, 1992, was orally
modified so that monthly principal payments of $250 will be made until the
entire debt is satisfied. Interest accrues at 5% on this debt.
Avnet, Inc. - $45,000 payable in settlement of a judgment
against the Corporation was established in November 1993. After an initial
$5,000 payment in November 1993, monthly payments of $1,000 will be due through
November 1995; monthly payments of $2,000 will be due through July 1996.
Liability is secured by a lien on all assets of the Corporation.
John F. Erickson - $10,000 unsecured note payable. Interest
is payable monthly at 8% per annum; principal payments of $500 per month are
due beginning September 25, 1994, with full payment due May 24, 1995. For the
year ended May 31, 1995, three principal payments were made. Mr. Erickson is a
shareholder of the Corporation.
The principal maturities of related parties and notes payable
for the subsequent five years are as follows:
<TABLE>
<CAPTION>
Related
Year Parties Other Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 38,850 $ 33,500 $ 72,350
1997 32,500 18,183 50,683
1998 11,000 12,500 23,500
1999 35,733 1,709 37,442
2000 85,000 - 85,000
</TABLE>
14
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 5 - PAYROLL TAX OBLIGATION
In October 1992, the Corporation signed an installment agreement
with the Internal Revenue Service to pay delinquent payroll taxes and related
penalties and interest. The Corporation is to make monthly payments of
$3,000 for 36 months beginning October 1992, after which time the Corporation's
financial circumstances will be reevaluated. At May 31, 1995, substantially
all of the delinquent taxes were paid and $80,194 of penalties and interest are
included in accrued expenses. In September 1995, the Internal Revenue Service
ruled that the Corporation is to make monthly payments of $3,000 until all
penalties and interest are paid in full.
In March 1993, the Corporation and the Commonwealth of Virginia
agreed upon a payment plan regarding delinquent payroll taxes and
related penalties and interest. At May 31, 1995, no payroll taxes remain
payable under this plan and $5,451 of penalties and interest are included in
accrued expenses.
NOTE 6 - STOCK OPTIONS
The Corporation has issued stock options to various directors,
an officer and a lender. Under the terms of the options, also discussed in
Note 9, options for 30,000 and 77,500 shares are outstanding and exercisable at
$.10 and $.25 per share, respectively.
15
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 6 - STOCK OPTIONS (Continued)
A summary of stock option activity as of May 31, 1995 and 1994, is
as follows:
<TABLE>
<CAPTION>
1995 1994
-----------------------------------
<S> <C> <C>
Options Outstanding, Beginning of Year $ 65,000 $ 30,000
Options Granted at $.25 per Share 42,500 35,000
Options Exercised at:
$.10 per Share - -
$.25 per Share - -
----------------------------------
Options Outstanding, End of Year $ 107,500 $ 65,000
----------------------------------
</TABLE>
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - The Corporation has issued 2,000 shares of
preferred stock, $50 par value. The stock is nonvoting, may pay noncumulative
dividends not to exceed $6 per annum, as set by the Board of Directors, and is
redeemable at any time at the option of the Corporation at $100 per share.
Dividends on preferred stock shall be payable out of retained earnings prior to
the payment of any dividends on common stock. In the event of any corporate
liquidation or dissolution, the preferred shareholders are entitled to be paid
$100 per share of preferred stock, together with any declared but unpaid
dividends on such shares, prior to any payment or distribution of assets to the
common shareholders.
Treasury Stock - During the year ended May 31, 1993, the
Corporation purchased 10,250 and 62,906 shares of its stock at $.18 and $.055
plus commissions, respectively. During the year ended May 31, 1993, a total of
72,250 shares were issued to various employees as bonuses. During the year
ended May 31, 1995, the
16
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Corporation purchased 100,000 shares of its common stock from a former officer
and director at $.0625 per share. This block of stock was then reissued to
Coherent Communications System Corporation ("Coherent") in exchange for
inventory of $6,400, equipment for 13,600 and prepaid expenses of $5,000. The
difference between the acquisition price ($6,250) and the subsequent sales
price ($25,000) has been reflected as capital in excess of par value. At May
31, 1995 and 1994, the Corporation owned 906 shares with a carrying value of
$50.
NOTE 8 - OPERATING LEASE
The Corporation leases its facilities under a month-to-month
operating lease. Minimum annual rents for the years ended May 31, 1995, 1994
and 1993 were $54,000 for each year. In November 1995, the Corporation reduced
its space by approximately 50%, with a proportionate decrease in minimum
monthly rent.
NOTE 9 - INCOME TAXES
The Corporation has available net operating loss carryforwards
approximating $3.5 million to apply against future taxable income. These
carryforwards will expire over the years 2002 to 2008.
The FASB released a statement on the method of accounting for
income taxes, SFAS 109, which addresses the accounting problems faced when
revenues, expenses, gains or losses are included in taxable income of an
earlier or later year than the year in which they are recognized for financial
statement purposes. The amounts of current taxes payable or refundable and
deferred tax liabilities or assets to be
17
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 9 - INCOME TAXES (Continued)
recognized at the date of the financial statements are the amounts which result
from all events which have been recognized in the financial statements or tax
returns as measured by the provisions of currently enacted tax laws. The
Corporation's management has implemented this new standard effective June 1,
1993. There was no cumulative effect of the change in accounting principle to
be recorded in determining net income for the year ended May 31, 1994, as a net
operating loss carryforward was the only item which would have created a
deferred tax asset to be recognized, and projected future net income was not
considered realizable to offset the loss carryforward.
The provision for income taxes attributable to continuing
operations consists of the following components:
<TABLE>
<CAPTION>
May 31
----------------------------------
1995 1994
----------------------------------
<S> <C> <C>
Current Tax Expense $ 19,200 $ 44,400
Benefit of Operating Loss Carryforward ( 19,200) ( 44,400)
---------------------------------
$ - $ -
---------------------------------
</TABLE>
The net deferred tax benefits in the accompanying balance
sheets include the following components:
<TABLE>
<CAPTION>
May 31
----------------------------------
1995 1994
----------------------------------
<S> <C> <C>
Deferred Tax Assets $ 18,550 $ 27,200
Deferred Tax Asset Valuation Allowance ( 18,550) ( 27,200)
---------------------------------
Net Deferred Tax Asset $ - $ -
---------------------------------
</TABLE>
18
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 9 - INCOME TAXES (Continued)
The provision for income taxes attributable to extraordinary
items consists of the following components:
<TABLE>
<CAPTION>
May 31,
-------------------------------
1995 1994
-------------------------------
<S> <C> <C>
Current Tax Expense $ 92,400 $ 34,000
Benefit of Operating Loss Carryforward ( 92,400) ( 34,000)
----------------------------
$ - $ -
------------------------------
</TABLE>
NOTE 10 - RELATED PARTIES TRANSACTIONS
Under an agreement dated October 25, 1993, the Corporation has
an agreement with two shareholders whereby the Corporation or its designate has
a three- year option to purchase the 636,213 shares held by the shareholders at
$.0625 per share and an option for the following two years to purchase the
shares at $.10 per share. The Corporation must exercise its option in blocks
of 10,000 or more shares. As discussed in Note 8, the Corporation purchased
100,000 of its shares from a former officer and director at $.0625 per share.
The Corporation entered into a License Agreement effective
June 1, 1994, with Coherent whereby the Corporation acquired nonexclusive
rights to use technology in connection with the manufacture and sale of
telecommunications products. In consideration for these rights and the
acquisition of certain inventory and equipment, the Corporation facilitated the
transfer, through the exercise of options by Coherent as the Corporation's
designate, of 100,000 common shares held by a shareholder to Coherent and paid
$45,000.
19
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 10 - RELATED PARTIES TRANSACTIONS (Continued)
In consideration for the advancement of funds under various
promissory note agreements with an officer, a director and a vendor, options
regarding the purchase of stock were granted to the lenders. The options grant
the right to purchase a total of 77,500 shares of stock at $.25 per share for a
two-year period ending October 1996.
In July 1993, the Board authorized the issuance of options to
purchase a total of 30,000 shares at $.10 per share to three Directors.
As further described in Note 4, various related parties have
loaned funds to the Corporation.
A corporation controlled by a former officer and director of the
Corporation forgave a claim in the amount of $112,500 during the year ended May
31, 1994.
NOTE 11 - RESTATEMENT OF FORGIVENESS OF DEBT REVENUE
Forgiveness of debt for the year ended May 31, 1993, presented
on Exhibit B has been restated to reflect the revenue as an extraordinary item,
net of related income tax effect. This restatement has no effect on income
before extraordinary items or net income; earnings per share from extraordinary
items increased from $.01 to $.03, while earnings per share from net income
before extraordinary item decreased from $.02 to $.00.
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 35,263
<SECURITIES> 0
<RECEIVABLES> 308,490
<ALLOWANCES> 0
<INVENTORY> 313,809
<CURRENT-ASSETS> 662,881
<PP&E> 470,287
<DEPRECIATION> 440,232
<TOTAL-ASSETS> 692,936
<CURRENT-LIABILITIES> 352,550
<BONDS> 285,192
0
100,000
<COMMON> 1,712,635
<OTHER-SE> (1,757,441)
<TOTAL-LIABILITY-AND-EQUITY> 692,936
<SALES> 1,000,021
<TOTAL-REVENUES> 1,000,021
<CGS> 681,518
<TOTAL-COSTS> 918,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,940
<INCOME-PRETAX> 81,373
<INCOME-TAX> 0
<INCOME-CONTINUING> 81,373
<DISCONTINUED> 0
<EXTRAORDINARY> 219,356
<CHANGES> 0
<NET-INCOME> 300,729
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
