================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16672
POWER SPECTRA, INC.
(Exact name of Registrant as specified in its charter)
California 94-2687782
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
919 Hermosa Court
Sunnyvale, CA 94086
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (408) 737-7977
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)
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 ninety days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
As of March 20, 1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $9,197,468, based upon the average of the
closing ask and bid prices as reported on the non-Nasdaq over-the-counter
bulletin board. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock, and
shares held by officers and directors, have been excluded, in that such persons
may be deemed to be "affiliates" as that term is defined in the rules and
regulations promulgated under the Securities Exchange Act of 1934. This
determination is not necessarily conclusive for other purposes.
As of March 31, 1998, 24,016,036 shares of the Registrant's Common Stock were
issued and outstanding.
================================================================================
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
<PAGE>
PART I
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of various factors,
including the risk factors set forth under the heading "Factors Affecting
Operating Results" on page 21 of this Report and elsewhere in this Report. The
Company has attempted to identify forward-looking statements by placing an
asterisk immediately following the sentence or phrase that contains the
forward-looking statement. However, the omission of an asterisk does not mean
the statement is not a forward looking statement. All statements, other than
statements of historical fact, included in this Report that address activities,
events or developments that the Company expects, believes or anticipates will or
may occur in the future, including but not limited to such matters as future
product development, business development, marketing arrangements, future
revenues from contracts, business strategies, expansion and growth of the
Company's operations and other such matters, are forward-looking statements.
ITEM 1. BUSINESS
General
Power Spectra, Inc. ("Power Spectra," "PSI" or the "Company") is a high
technology California based corporation whose core competence is the design and
efficient fabrication of proprietary power semiconductor systems that switch
megawatt power levels at sub-nanosecond pulse durations with excellent pulse
integrity and repeatability. Power Spectra was organized in 1979 and operates as
a single business segment. Prior to the second half of 1996, the Company was
largely involved in R&D. Until 1996, the Company had primarily focused its
technology on military applications.
In mid-1996, the Company made a decision to focus the bulk of its
efforts on the development of Ground Penetrating Radar (GPR) technology and
systems for a variety of commercial applications. Power Spectra had launched a
comprehensive analysis of the commercial GPR systems marketplace and
simultaneously had successfully tested an application of its enabling technology
in a stand-off GPR system. Based on this demonstration and the subsequent market
assessment, the Company changed its principal business focus from the military
to the commercial sector.
PSI believes that it has identified important new market opportunities
for its new GPR products with the potential for significant growth and profit.
These opportunities could have application in the mining and petroleum
exploration and exploitation industires, the utilities industry, the oil and gas
transmission industry, the communications industry, and in the construction
industry. GPR initiatives which the Company has initiated or currently intends
to initiate include: 1) a joint venture for the development of commercial GPR
based mineral and petroleum exploration systems, of which its first product is
nearing completion; 2) the development of a vehicle-mounted GPR system for the
location and identification of underground utilities and pipelines, the
development of which is expected to be completed during 1998; and, 3) in the
future, a joint venture for the development of a helicopter-mounted GPR system
for the location and identification of buried pipelines and artifacts.- Other
potential applications may include such products as Borehole Radars for oil
exploration, distance measurement sensor systems, as well as products designed
to improve the performance of military radars, communications, and both
offensive and defensive information warfare systems.*
- -----------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
3
<PAGE>
Power Spectra develops, designs, manufactures and markets GPR sysems
and laser-based measurement products that utilize the Company's proprietary
Gallium Arsenide ("GaAs") semiconductor switching devices, which are capable of
generating extremely rapid, high-power electromagnetic impulses. The Company's
products are currently based on two GaAs switches, the Bulk Avlanche
Semiconductor Switch (BASS(TM)) and the PSIristor(TM). Since its inception,
nearly $70 million has been invested in developing the Company's proprietary
BASS(TM) and its companion thyristor (PSIristor(TM)) product technology. The
Company believes that one of the most important features of Power Spectra's
switches is that they are the enabling technology for high-power microwave
transmitters capable of generating signal strengths up to 1,000 times more
powerful than existing switching technologies. These semiconductor switching
devices represent the core enabling technology for the development of the
Company's mobile GPR systems which have demonstrated in test conditions their
capability to produce three-dimensional images of underground objects, including
non-metallic objects such as plastic pipe and plastic landmines.
The BASS(TM) is an optically triggered, high power GaAs switch that is
roughly the size of a conventional power transistor. In its "off" state, the
device exhibits a very high resistance due to the unique performance
characteristics of GaAs. The BASS(TM) changes from a non-conducting to a
conducting state in approximately 100 trillionths of a second (picoseconds),
with pulse durations of less than two billionths of a second (nanoseconds), and
can switch voltages in excess of 17 thousand volts (kilovolts). The
PSIristor(TM) is also a GaAs switch and has many of the BASS(TM)
characteristics. The primary differences are input power, cost and device size.
The PSIristor(TM) is smaller, less costly to manufacture, easier to use, and
operates at lower output power levels compared to the BASS(TM). From a customer
perspective, the PSIristor(TM) bridges the gap between the BASS(TM) and
conventional power semiconductors.
The use of GaAs for high speed applications has increased considerably
in recent years, especially with the proliferation of its use in cellular phone
circuitry. It should be noted, however, that the Company's technology is unique
in that the GaAs material the Company uses is typically five-to-ten times
thicker than that of conventional devices. As a result, although the Power
Spectra BASS(TM) devices are about the same physical size as a conventional
power transistor chip, the volume of GaAs material utilitzed in the actual
switching process is hundreds of times greater than that of a power transistor,
allowing the PSI devices to handle substantially higher voltages and
consequently higher power than conventional devices. The Company's devices
operate at up to 400 times the voltage levels of the more conventional planar
devices. Bulk devices, such as those produced by PSI, are only fabricated in
several government laboratories and universities, and thus far, have not been
commercially available.
Commercial Products
In 1996, when Power Spectra changed the main focus of its business
efforts from the military market to the commercial sector, the Company
identified and began internal initiatives to develop the products and services
for three separate commercial applications, each with what the Company believes
is a significant market potential.* These initiatives included: 1) the LandRay
joint venture for the development of commercial GPR based mineral and petroleum
exploration systems; 2) the PEAC joint venture for the development of a
helicopter-mounted GPR system for the location and identification of buried
pipelines and artifacts; and 3) completing the development of an electro-optical
rangefinder the E-OR 230(TM) for the industrial marketplace. Subsequently, to
minimize short-term expenses and to field an operating system earlier,
development of the helicopter-mounted GPR system was deferred, and the Company
has directed its efforts to a vehicle-mounted GPR system for location and
identification of buried pipelines, utilities, fiber optic cable bundles, and
artifacts. From a technical standpoint, the vehicle mounted system development
is a natural precursor to a helicopter mounted system.
- -------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
4
<PAGE>
Notwithstanding the fact that the applicability of both the Company's
BASS(TM) and PSIristor(TM) device technology to ground penetrating radar systems
has been technically demonstrated, at this early stage of its shift in strategic
business focus, the Company has not yet generated significant revenues from
sales of its commercial products. The first GPR product developed for LandRay,
the SEEKER(TM), is just currently entering initial production. The following
sections discuss potential future products and applications of the Company's
core technologies which the Company is considering pursuing, but which have not
yet been developed, tested or deployed. There can be no assurance that any of
the commercial products discussed below will be successfully developed or
accepted in their target markets, that revenues generated by such products will
be sufficient to return the cost of their development, that the Company will be
successful in developing additional new products, that the Company will not
experience delays in developing such products, or that such products will
achieve commercial success. A sustained failure to successfully develop and sell
new products would have a material adverse effect on the Company's business and
its results of operations.
Power Spectra currently has three business lines, all based on its core
technology: 1) Ground Penetrating Radar; 2) Industrial Sensors; and, 3) Military
and Government. Ground Penetrating Radar is expected to command the bulk of the
Company's attention for the foreseeable future and is expected to exploit the
technical advantages of the BASS(TM) and PSIristor(TM).* Although the
Military/Government line of business has historically generated the majority of
the Company's revenues, current management plans call for pursuing this business
on an opportunistic basis.
Ground Penetrating Radar (GPR) Business
Power Spectra is pursuing several potential business opportunities that
apply its technology to GPR systems designed to detect and render precise 3-D
images of buried materials. The Company's current efforts are largely focused in
two areas: a hand-held GPR system for use in gold mines, being developed through
the LandRay joint venture, and a vehicle-mounted GPR system for use in general
utility mapping, being developed internally.
In 1996, the Army Research Laboratory ("ARL") successfully demonstrated
an experimental GPR system, enabled by Power Spectra technology, that could
detect buried anti-personnel landmines from a stand-off range of 500 feet. This
event is significant in that all other GPR systems of which the Company is aware
can only operate in a ground contact or near ground contact mode. This technical
achievement encouraged Power Spectra to further develop its GPR system
technology for commercial applications. As a result of its GPR testing, the
Company believes that it is well positioned to make significant near-term
contributions in the areas of mineral resource detection and underground utility
detection.*
One of the advantages of the Power Spectra's GPR technology is the
ability to operate from a stand-off position, generally defined as an operating
position more than 18 inches above the area to be scanned. With other GPR
systems the antennas are literally dragged across the ground or are very close
to the ground, and as such, may be limited in the areas they can survey due to
obstacles such as vegetation and rocks.
The success of the ARL demonstration gave considerable impetus to Power
Spectra management to conduct the analysis leading to the decision to
concentrate the Company's efforts on GPR. As a result of this analysis, Power
Spectra believes that its GPR technology could potentially provide significant
advantages in the following business areas:*
- Mineral resource detection
- Underground pipe and conduit mapping
- Borehole radar for oil/gas exploration
- Unexploded ordnance detection
- Anti-personnel mine detection and classification
- Archeology and antiquity mapping
- --------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
5
<PAGE>
Remote sensing technologies such as seismic reflection, impulse and
stepped frequency GPR, resistivity and induction logging and other technologies
have been used for mineral exploration for many years with mixed results. The
limitations of poorly resolved imagery, coupled with expensive and cumbersome
techniques generally require expert interpretation, making seismic reflection
applicable to the characterization of large geologic features with high value
potential, such as oil and gas. GPR has not found wide use in mining and oil and
gas exploration due to its historically limited range, poor resolution, and
difficulty in interpreting the data.
The Company has conducted analysis and calculations which have led it
to believe that the benefits of the Power Spectra GPR to mineral exploration and
development include significantly increased range, improved resolution and
greater ease of data interpretation.*
LandRay Technology, Inc.
LandRay Technology, Inc. (LandRay), a Delaware corporation, was founded
in 1996 as a joint venture between Power Spectra and a group of private
investors to develop and commercialize the Company's proprietary GPR system
designs for sensing, detection, and location of subterranean metal deposits and
geophysical profiles to aid in the exploration for minerals and fossil fuels -
in essence, for mineral and petroleum exploration and exploitation. The Company
believes that these sensors could be deployed from ground-based, in-mine, and
in-borehole platforms.*
In exchange for GPR development contracts, LandRay received an
exclusive, royalty-free license to use the Company's GPR technology in the areas
of mineral and petroleum exploration and exploitation. Although Power Spectra
received an initial 50% shareholding in LandRay for this license, subsequent
LandRay fund raising activities have diluted the Company's position, as
contemplated by the originating agreements. LandRay contracted with Power
Spectra for a mining GPR concept demonstration ($550K) and subsequently the
Company negotiated a $3.0M LandRay contract for the development of a GPR
production system, of which only the first part has been defined, the SEEKER(TM)
contract ($1.2M), which included a full system verification in an operating gold
mine and the delivery of two production units. The SEEKER(TM) is the first fully
developed Power Spectra GPR product, and two units are now in production with
initial deliveries to LandRay scheduled for the second quarter of 1998.* To
date, the Company has received a total of $1.05M from the LandRay development
contracts.
As of December 31, 1997, Power Spectra held about a 31% stake in
LandRay, making Power Spectra the largest single shareholder. If LandRay
continues to raise additional funds through the issuance of equity, the
Company's ownership percentage in LandRay will continue to decrease. However,
the joint venture agreement stipulates that the Company's share will not be
diluted below 22.7% before LandRay raises equity capital totaling $3.55M. The
Company has no capital funding commitments to the LandRay venture, but could
elect to participate in future LandRay financings, if the Board deemed it to be
in the Company's best interests.
Witnessed and documented tests of the SEEKER(TM) system at the Original
Sixteen to One Mine in Alleghany, CA, which has been in almost continuous
operation for the past 100 years, have indicated that the Power Spectra
SEEKER(TM) product technology can see up to 20 feet into the quartz rock and
detect high grade gold ore. In the final test, which was performed under
stringent rules, the device detected more than 200 ounces of gold, thereby
exceeding the contractual requirements for gold deposit detection.
While LandRay is interested in exploiting the market for other selected
high value minerals, in the near-term it will focus on finding gold in hard-rock
mines. The world-wide gold production in 1996 was slightly under 2000 tons with
about 330 tons being mined in the United States. About 40% of the gold is
derived from hard-rock mining, with the balance from surface mining. The
SEEKER(TM) utility is currently limited to hard rock mining operations.
Hard-rock gold mining operations in the United States alone yield a revenue
stream exceeding $1 Billion per year. LandRay has informed the Company that
plans anticipate garnering a percentage of all gold found with the SEEKER(TM) in
hard rock gold mines.
- -------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
6
<PAGE>
Power Spectra believes that the benefits of this GPR system to mineral
exploration and development companies include both significantly improved
specificity of deposit location and improved characterization of subterranean
mineral deposits. The Company believes its proprietary technology is unique and
that it should prove to have high value to exploration companies who realize
these benefits.* Consequently, LandRay has informed tha Company that its
strategy calls for retaining ownership and control of all SEEKER(TM) GPR
equipment and to provide exploration support services for a share in the profits
gained.* PSI will benefit from both the manufacture and sale of SEEKER(TM)
systems and from its ownership in LandRay. In addition, Power Spectra retains
all intellectual property rights for all technology developed under the LandRay
contracts.
In addition, Power Spectra has conducted considerable analysis with the
objective of eventually developing a BoreHole Radar (BHR) for use in oil and gas
exploration wells. Technical and risk analysis is complete and LandRay is
contractually obligated to grant the Company a BHR development contract in
mid-to-late 1998 for concept definition and initial prototype exploration.* The
Company believes that, if successfully developed, a borehole radar using Power
Spectra technology could significantly enhance the performance of borehole or
well logging analytical tools.* Such a radar could be designed to directly
measure dielectric constant giving a true indication of the presence of oil or
gas.* Other borehole tools, with the exception of nuclear magnetic resonance
(NMR), measure only secondary parameters. NMR, however, is limited in its
capability by virtue of its very limited range. Detailed calculations show that
a Power Spectra borehole radar, if successfully developed, could make accurate
measurements at ranges 8-10 times those of NMR.*
Historically, GPR has not enjoyed widespread success in borehole
logging, primarily because of the need for high power for it to be effective and
the need to operate at temperatures generally in the range of 100-150(degree)C.
The Company believes that Power Spectra's GPR could overcome these obstacles
because the BASS(TM) is a highly efficient device which can operate for extended
periods on power from compact batteries.* Additionally, in documented tests, PSI
has demonstrated that the BASS(TM) suffered no detrimental effects when operated
at temperatures up to 130(degree)C without external cooling. Future tests are
planned for operation at higher temperatures.*
Typically a number of different sensors are employed in logging a
single well and, when all the data is reduced, the decision to encase a borehole
(which on average costs about $1,000,000) is frequently made on a subjective
basis. The Company believes that there is a need for better technology which can
provide more quantitative data. Since GPR provides for direct measurement of a
material (i.e., dielectric constant, which is a physical property of materials
that is directly measured by PSI's GPR systems) as opposed to secondary
parameters detected by other sensors, an effective GPR capable of operating in a
borehole environment would make a major contribution. There are several patents
for borehole radar concepts, but it appears that the results fall short because
of limited range and difficulty with operation under severe environmental
conditions. The Company believes that a system employing Power Spectra's GPR
technology concepts, if successfully developed, should overcome these
shortfalls.*
Vehicle Mounted System
Power Spectra is in the final stages of development of a vehicle
mounted GPR system designed to generate true 3-D images of underground pipes and
other buried objects in near-real time. Historically, GPR has played a
significant role in the utility industry as a tool to locate pipes, thereby
reducing the risk of damage during construction and repairs. Unfortunately,
existing systems generally require their antennas to have ground contact or near
ground contact. These systems generally have the following limitations:
- Large areas or stretches cannot be economically surveyed
- Detection of plastic pipes and fiber optic conduits is not reliable
- True 3-D mapping is generally not achievable
- The data is extremely difficult to interpret
- Penetration depth is limited
- -----------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
7
<PAGE>
The Power Spectra GPR system is designed to address all of the above
issues.* Additionally, the Company has already solved many of the technical R&D
problems associated with achieving true 3-D maps from a stand-off position,
including the detection of plastic pipes and conduits. The Company's BASS(TM)
has extremely high pulse-to-pulse fidelity and operates at more than 1000 times
the power of any known existing system. The Company believes that this, coupled
with advanced proprietary signal processing technology will result in increased
penetration depths when compared with existing systems.*
With respect to the development of a vehicle mounted GPR system, Power
Spectra's objectives are to demonstrate a system that would:
- Render precise 3-D images of underground objects,
- Detect and map underground infrastructures,
- Locate leaks in underground pipelines, and
- Eliminate unnecessary excavation expense.
The Company believes its proprietary GPR systems, if development is
successfully completed, will be both technologically and economically superior
to conventional detection and mapping methods, because as envisioned, they will
function from a "stand-off" position (more than 18" off the ground) and will
produce real-time images.* Power Spectra intends to complete the development and
initial testing of its vehicle-mounted GPR system during the first half of
1998.*
In recent years, the utility industry has employed horizontal or
directional boring in the laying of new pipes. Because of the serious
consequences of damage to other utilities, utility companies usually require
"potholing" every five-to-ten feet. This entails digging a hole and exposing
existing utility lines by hand or by evacuating the soil using large water or
air driven vacuum equipment mounted on trucks. This is a very expensive and time
consuming operation. Power Spectra believes that its vehicle mounted GPR system,
if successfully developed, could provide detailed 3-D maps with one pass along
the line of new construction, thereby reducing the need for "potholing".*
One construction company with whom the Company has spoken is currently
completing the laying of 13,000 miles of fiber optic conduits along railroad
rights of way. They report that it costs $3,000 per mile to examine existing
drawings of other utilities along those rights of way and that these drawings
often do not adequately portray the true locations. As a result they require two
engineers with each piece of digging equipment to minimize the disruption to
other lines. Even then, the damage rate to other utilities has been
unacceptable. This same company has plans to install more than 10,000 miles of
fiber optic conduits once their current project is completed. Power Spectra
believes that its GPR, whether mounted on a railroad vehicle or a truck, could
resolve these problems at a fraction of the cost.*
Many electric power companies employ high voltage transmission systems
in which power cables are encased in buried steel pipe that also contains an
insulating fluid under pressure. When this pressurized fluid leaks from the
pipe, which frequently occurs, considerable expense is entailed in locating and
repairing these leaks. If a particular GPR system could measure the dielectric
constant of the fluid, such a leak should be readily detectable. Calculations
have been completed which indicate that the Power Spectra GPR should be able to
readily detect such leaks.* In many areas, these transmission networks would be
amenable to being surveyed from an airborne GPR platform, while a sizable
portion would be better suited to a truck mounted system.*
- --------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
8
<PAGE>
The Power Spectra development work on a truck mounted GPR, currently in
the late stage of development, could provide the technical basis for an airborne
system on a helicopter platform. The antennas, array configuration and signal
processing architecture would be very similar, although certain modifications
would be required to satisfy the airborne environment and increased stand-off
range.
The Army Research Laboratory tests have shown that the Company's GPR
technology can detect buried anti-personnel mines at ranges compatible with
helicopter operations. However, one of the problems with such operations is that
of classifying the targets. Without a viable target recognition capability, the
false alarm problems could be substantial. Power Spectra has an ongoing
collaborative agreement with a division of Lockheed-Martin to develop the
capability to uniquely identify mines in a background that contains other
targets. This capability, if successfully developed, should be able to denote
the precise type of mine detected.*
Airborne GPR
A joint venture company, PEAC, was formed in 1996 between Power Spectra
and EAC Helicopter for the purpose of operating a helicopter mounted GPR system
for the detection and localization of buried objects, but this joint venture has
never been activated or funded.
A potential future business opportunity for an airborne system may be
in the mapping of pipelines in compliance with Federal legislation passed in
1996. There are more than 400,000 miles of oil and gas transmission lines in the
United States. About 60% of these lines transmit natural gas and the balance
transmit crude, gathering and finished petroleum products.
Because a ground based system is a natural step toward the evolution of
an airborne system, the decision was made to develop and market the Vehicle
Mounted GPR before embarking on the development of a helicopter mounted system.
In October 1997. Power Spectra and EAC Helicopter agreed to suspend further
activity, pending development of PSI's Vehicle Mounted Radar system.
Industrial Sensors Business
Power Spectra has developed and is just beginning commercial sales of
its Electro-Optic Rangefinder, E-OR 230(TM), the first in a potential product
family of industrial measuring sensors. The Company's E-OR(TM) electro-optical
rangefinder, an infrared (IR) laser-based sensing device that measures distance
and speed, is designed to provide industrial optical sensor customers with
important advantages in range, eye safety, beam spot size, stability, accuracy,
performance and cost-effectiveness. The heart of the E-OR 230(TM) is Power
Spectra's Pulsed Optical Source (POS(TM)), a PSIristor-switched pulsed laser,
which is designed to be eye safe, accurate and reliable.
Power Spectra's plans to market the E-OR 230(TM) to OEM's,
manufacturers and systems integrators as an innovative, attractive alternative
to ultrasonic proximity sensors and laser diode based photoelectric sensors.
Power Spectra's primary target market is the light measurement and
optical sensors market, which according to Frost & Sullivan is expected to total
over $3 billion in sales in 1998 (an average annual growth rate of about 11%
over the past five years). The ultrasonic and laser diode sensor market segments
are expected to grow to over $650 million, and these are the specific target
markets for PSI's Industrial Sensors Business. Power Spectra believes that its
laser-based industrial measurement sensors can address the requirements of
approximately 20-25% of the ultrasonic proximity sensor market segment and
10-15% of the laser diode sensor market segment.*
- -------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
9
<PAGE>
Laser diode based measurement sensors using short pulse or modulated
laser technology range in price between $5,000 and $10,000, and typically offer
very high performance characteristics: accuracy to 0.1 inch and range
measurements at distances in excess of 500 feet. In contrast, ultrasonic-based
measurement sensors range in price between $165 and $1,000, and typically they
offer lower performance characteristics: accuracy between 1-5 inches and target
range measurements from 6 inches to 30 feet.
The Company believes that with an estimated market entry price of under
$3,000 per unit, Power Spectra's electro-optical rangefinder, a pulsed
laser-based measurement sensor, provides many of the features of expensive laser
diode based sensors at a competitive price, while overcoming many of the
limitations of the less expensive ultrasonic based products.* The E-OR 230(TM)
product has an accuracy of 0.25 inch and measures target distances in excess of
100 feet. Power Spectra's product offers the accuracy of a laser diode sensor at
a much lower cost, and while it is more expensive than the lower priced
ultrasonic sensors, it offers greater range, smaller beam spot on the target,
greater accuracy, and greater temperature stability than most electronic sensors
and most importantly its accuracy is not affected by acoustic noise, humidity,
barometric pressure or turbulence. Power Spectra believes the E-OR 230(TM) can
fill the price/performance gap between ultrasonic and existing laser diode based
measurement sensors.*
The Power Spectra electro-optical rangefinder has been designed for the
following potential industrial applications: diameter measurements of material
rolls, liquid and material level sensing, equipment collision avoidance and
warning, container ship loading, speed and proximity sensing, manufacturing
process monitoring, robotics and automation, safety monitoring, article
profiling and dimensioning, and environmental monitoring.
Military & Government Business
Historically, Power Spectra has dedicated its technology development
toward defense market applications. Since 1988, the Company has supported dozens
of electronic warfare ("EW") systems tests with BASS- and PSIristor-based
impulse transmitters. Due to the thawing of the "cold war" and the resultant
decline in the emphasis on new technology developments for military
applications, the Company has not realized any significant business from its
commitment to this market sector since the ending of the Air Force contract in
1996. Power Spectra has ceased direct government business development and has
focused its military business activities on teaming with major defense systems
companies.
In August, 1996, Power Spectra executed a strategic alliance agreement
with AEL Industries covering the marketing of PSI Electronic Warfare (EW)
technology over a range of specific programs, where AEL will take the lead in
marketing the Company's technology to the government. AEL, a division of Tracor,
is well known for its work in electronic warfare and antenna systems. To date,
no contracts have resulted from this agreement.
Although the Company may in the future consider teaming with other
major defense systems contractors, it will evaluate all new program options on
an opportunistic basis, and enter into only those programs that will bring
sustainable and profitable business to the Company.
Boeing Program
On January 1, 1989, Power Spectra and The Boeing Company ("Boeing")
entered into a BASS(TM) products development and marketing agreement (the
"Boeing Agreement"). The Boeing research period of performance expired in June
1994. Under the terms of the amended agreement, Boeing continued to provide, on
a loan basis, $3.7 million of equipment and allowed the Company continued
rent-free use of this equipment, subject to annual review. In September 1997,
the terms of the agreement were amended to transfer all assets provided under
this agreement to Power Spectra in exchange for the Company's assumption of all
liability related to disposal of the equipment upon completion of its useful
life, including but not limited to environmental issues, if any, and restoration
of the building leased from Boeing, if and when the assets are removed.
- ------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
10
<PAGE>
Under the amended agreement, and in exchange for having provided $23.5
million in research and development funding, Boeing retains a perpetual,
non-exclusive license to use the technology developed during the term of the
agreement, and to market systems containing BASS(TM) devices. In addition, PSI
will pay Boeing a royalty of 4% of BASS(TM) product sales up to a maximum
cumulative royalty payment of $10 million. This royalty applies only to the
BASS(TM) device itself and not any system or sub-system of which the BASS(TM) is
a part.
Air Force Contract
In 1990, Power Spectra was awarded the first phase of a two-phase
competitive contract for the development of a solid-state high-power microwave
source for the United States Air Force (the "Air Force Contract"). This source
was designed to exploit the capabilities of the BASS(TM) device and was used by
the Air Force to test the effects of high power microwave pulses.
A Phase II option to the contract was exercised in 1993 and subsequent
amendments and modifications were added. The aggregate contract value, with the
addition of the Phase II option and all amendments and modifications, was
$10,517,881. PSI has delivered all items required by the contract and all items
were accepted by the government. The contract expired on June 1, 1996, but is
subject to an audit by the Defense Contract Audit Agency for overhead rates
applied to the contract for fiscal years 1994, 1995 and 1996. As such, the
Company may be subject to adjustments up or down on contract revenues. While
such audits are commonplace, the timetable for the audit is unknown at present,
and no assurances can be given that such audit will not result in a significant
payment obligation to the government.
Ioffe Agreement
In 1992, Power Spectra entered into a technology license, technology
transfer, and development agreement with the Ioffe (pronounced "yahf-ah")
Physical Institute ("Ioffe"), St. Petersberg, Russia (the "Ioffe Agreement").
Funded by the Soviet military, since the 1970's Ioffe had been trying to develop
a device which operated very similarly to the BASS(TM), but at substantially
lower power levels. Following the break-up of the former Soviet Union, Russian
scientists were brought to the Company's Sunnyvale facility, sponsored in part
by the U.S. Department of Commerce, for varying periods to facilitate the
transfer of this technology to the United States. The Company subsequently
obtained a perpetual license for the manufacture and use of this device, which
is valid worldwide, except for the territory encompassed by the former Soviet
Union, and it remains exclusive as long as the Company maintains royalty
payments under the terms of the agreement. This device is currently being
produced at Power Spectra's Sunnyvale facility as the Company's PSIristor(TM)
product. Over the past few years, PSI has continued to make further refinements
and improvements to the manufacturing process for this device. The Company
believes this product is complementary to the BASS(TM) and has significant
potential applications in military and commercial markets.*
Manufacturing
Power Spectra manufactures all of its products at its Sunnyvale,
California manufacturing facility, which it leases from Boeing.
In 1991, the Company completed the construction of and put into
operation a semiconductor fabrication facility for BASS(TM) development. Boeing
provided a significant portion of the funds to complete the construction of this
fabrication facility. The Company believes the facility and equipment is
suitable for moderate volume production of BASS(TM) and PSIristor(TM) devices to
meet current production requirements.*
- ------------
* This statement is a forward-looking statement reflecting current
expectations. Actual future performance may differ materially from the Company's
current expectations. The reader is advised to review "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Factors
Affecting Operating Results" for a discussion of factors that could affect
future performance.
11
<PAGE>
During 1994, Power Spectra installed an epitaxial furnace to a design
specified by Ioffe, which was the principal objective of the Ioffe Agreement.
The Company believes that additional manufacturing capacity, when required, will
be available through expansion within its existing building.* The Company's sole
manufacturing facility is located in an area adjacent to major earthquake
faults. The destruction of the Company's facility due to fire or earthquake
would have a material adverse effect on the Company's results of operations.
In late 1997, Company management successfully negotiated and completed
the transfer of title for all Boeing equipment at the Sunnyvale facility to
Power Spectra.
Materials and components used in the manufacture of devices are
generally available from a variety of sources.
Sales, Marketing, and Distribution
The Company has increased its focus on industrial or commercial
products, which the Company believes hold more promise for growth than the
military sector, where PSI believes weapons systems cutbacks have seriously
limited the near-term markets for systems in which the Company's BASS(TM) and
PSIristor(TM) technologies could make a major contribution.
Although the Company's marketing activities have been significantly
curtailed due to capital constraints and the focus on new GPR developments
during this period of transition from the military to the commercial sector, the
marketing goals of the Company include obtaining development contracts for new
GPR systems, while continuing to expand and market the industrial/commercial GPR
product line(s).
The bulk of the Company's marketing efforts during 1997 was focused on
interacting with potential future customers for the purpose of analyzing their
requirements and making them aware of the Company's intentions and progress.
These interactions included major utility companies, petroleum pipeline
companies, construction companies and petroleum exploration service companies.
Power Spectra currently has no marketing staff or salesforce. Senior
management has been handling marketing activities during the GPR development
period. The Company will only add marketing staff after GPR contract obligations
have been met and a GPR or industrial sensor product production backlog has been
built. Following the initial GPR system development period, PSI is planning to
market its GPR products through independent service providers.* The Company
anticipates that these service providers will typically provide GPR services on
a lease and toll basis, with the Company retaining title to the GPR products.*
With respect to the Company's industrial sensing products, PSI plans to fully
utilize the well established distributor and manufacturers representative
networks for such products.*
Several other products had previously been developed and marketed for
industrial or commercial markets, including: the BASS-0X(TM) series of impulse
generators, the PGS-400(TM) series of impulse generators, and the POS(TM) series
of pulsed lasers. These products, which are based on PSI's BASS(TM) and
PSIristor(TM) core technology, are used in the Company's GPR systems, Industrial
Sensor products, and Military and Government products. Promotion of these
products has included news releases, advertising in trade publications, direct
mailings, and exhibition at trade conferences.
- -------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
12
<PAGE>
Competition
While Power Spectra is not aware of any "in-kind" competition for its
enabling technology, numerous conventional technologies compete with the
Company's BASS(TM) and PSIristor(TM) based products in various market segments.
The Company believes that the competitive factors in its markets are price,
performance, technical innovation and size. While the Company believes that it
does, or will, compete favorably with respect to all of these factors, there can
be no assurance that the Company will be successful in achieving significant
commercial sales of its products under development.
Ground Penetrating Radar
The Company competes, or is expected to compete, with a variety of
companies in the area of GPR systems, including Geophysical Survey Systems, Inc.
(GSSI), Coleman Research, GEO Radar and EMRAD Limited (PIPEHAWK). All of these
companies have significantly greater financial and marketing resources and
products currently on the market.
Recently, several European organizations have commenced aggressive GPR
developments. The U.K. Defense Evaluation & Research Agency (DERA) has embarked
on a multi-year program to develop a helicopter-borne system for anti-personnel
mine location and identification along the lines of the PSI approach. The
details of this program are closely held, and data on the performance achieved
against mines are classified.
Another European initiative is the work commencing at the EU Joint
Research Center (JRC) aimed at developing a truck-mounted mine-finding GPR.
While little progress has been reported to date, the program is significant in
that it has a funded budget in excess of $40M.
Industrial Sensors
Power Spectra is addressing a niche market for industrial measurement
devices using short-pulse diode lasers which have integrated driver circuitry.
The industrial measurement market is currently served primarily by expensive
high-performance laser-based systems at the top end of the market, and by
inexpensive, lower performance ultrasonic-based systems on the lower performance
end of the market.
The Company's competitors in the pulsed-laser based measurement system
market include Laser Diode Products, Inc., which offers a product which, while
not a direct replacement, is a possible substitute for the Company's industrial
sensors. In addition, future competition is expected to develop from EG&G, Inc.
There can be no assurances that these companies or others will not attempt
technology development sufficient to become the technology leader in this niche.
Power Spectra also competes with the major proximity sensor vendors in
the industrial measurement market, including Electro, Micro Switch, Massa
Products, and Siemens, which had a combined share of 67% of the world market in
1993. All of these companies have significantly greater financial and marketing
resources and products currently on the market.
Impulse Generators
A number of companies have light-activated semiconductor technologies
which compete with the BASS(TM) device in this market. The major competitive
technology in this area is the linear-mode light-activated switch. In addition,
other companies and government laboratories are studying semiconductor devices
like the BASS(TM).
The Company faces intense competition for government contracts from
larger companies with conventional technology, which have substantially greater
financial and marketing resources than the Company. The largest competitors
include Hughes, Raytheon, Lockheed Martin, TRW, Tracor, and Northrop Grumman.
13
<PAGE>
Patents and Proprietary Rights
Power Spectra relies primarily on its technological and engineering
capabilities for the development of its business. The Company believes that
patents for concepts and processes developed by its employees are a critical
element for the protection of its future growth. The Company files patent
applications for certain concepts and processes as appropriate. Power Spectra
currently holds 5 patents with 2 additional patents pending on the laser
rangefinder product line. In addition, it has licenses on patents to key
technologies and software as well as an exclusive, world-wide license for the
PSIristor technology.
The Company has a patent for a nanosecond pulse generator (planer
triode) expiring in 2002, and three patents for various aspects of BASS(TM)
technology expiring in 2001, 2005, and 2006. The Company was also granted a
patent for its Bulk Avalanche Semiconductor Laser, which expires in 2007. The
Company also has a non-exclusive license to a U.S. Patent that covers a bulk
avalanche device operating at cryogenic temperatures that predates the BASS(TM)
patents. Additionally, the Company has a patent pending for its E-OR230(TM)
laser rangefinder and a patent pending for a SEEKER(TM) GPR that the Company
developed for LandRay in its underground mining exloration program. Any patent
which issues on technology developed for LandRay's programs will be owned by
Power Spectra and licensed exclusively to LandRay.
The patent positions of technology companies such as Power Spectra are
uncertain and involve complex legal issues and factual questions. No assurances
can be given that any future patent applications will issue as patents or that
any issued patents will provide the Company with adequate protection with
respect to the covered products, technology, or processes. Moreover, it is
possible that other companies may assert that their patents cover the Company's
technologies or expected products. If patents are issued to other companies that
contain claims that conflict with or cover the Company's technologies, products
or expected products, and such claims are ultimately determined to be valid, no
assurance can be given that the Company would be able to obtain licenses to any
such patents on acceptable terms, if at all, or develop or obtain alternative
non-infringing technology. In addition, there can be no assurance that
litigation will not be initiated against the Company or its customers,
regardless of merit, alleging infringement of patents held by others or
challenging the Company's patents. Such litigation could result in substantial
cost to and diversion of effort and management time by the Company, which could
have a material adverse effect on the Company, regardless of the results of the
litigation.
In an effort to maintain the confidentiality and ownership of trade
secrets and other confidential information, the Company requires employees,
consultants, and certain collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company. The
agreements are intended to enable the Company to protect the confidential
information by the disclosure and use of technology to which it has rights and
providing for ownership by or assignment to the Company of confidential
technology developed at the Company or with the Company's resources. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets or other confidential information in
the event of unauthorized use or disclosure of such information.
The Company does not believe that patents alone represent the complete
body of knowledge required to duplicate or reverse engineer its products. Power
Spectra has invested over ten years in research and development to fully
understand and develop the proper support subsystems and processes for its
products and technology. The Company believes that this understanding represents
a major competitive advantage.*
The Company has filed applications for other patents relating to its
GPR and electro-optical rangefinding systems technologies. There is no assurance
that such patents will issue or that the claims included in any such patents
will provide significant protection.
14
<PAGE>
Backlog
As of December 31, 1997, the Company's backlog was $450,000, versus
$113,606 at December 31, 1996, and $801,261 at December 31, 1995. The entire
backlog consisted of two incomplete milestones under the LandRay contract. To
date the Company has completed all milestones under the LandRay contract on
time. The Company expects to complete all of its current backlog within the next
twelve months.*
Commercial sales of the Company's products are typically made pursuant
to standard purchase orders that are cancelable without significant penalties.
In addition, purchase orders are subject to price renegotiations and to changes
in quantities or products and delivery schedules caused by changes in customers'
requirements. As a result of the foregoing factors, the Company does not believe
that backlog at any given time is a reliable indicator of future sales.
Government Contract Matters
Historically, a material portion of the Company's business has been
derived from contracts with or for federal government agencies. Government
contracts generally provide for the termination or adjustment of material terms
of such contracts at the election of the government, and the government may
pursue contractual, administrative, civil, and criminal remedies for improper or
illegal activities associated with obtaining and performing government contacts.
Administrative remedies include the suspension, debarment, or ineligibility of
all or part of a company from receiving government contracts and
government-approved subcontracts. As is the case with any company that performs
material amounts of business with the federal government, any such action by the
government could have a material impact upon the Company's business.
The Air Force contract expired on June 1, 1996, but the Company is
subject to an audit by the Defense Contract Audit Agency for overhead rates
applied to the contract for fiscal years 1994, 1995 and 1996. As such, the
Company may be subject to adjustments up or down on contract revenues. While
such audits are commonplace, the timetable for the audit is unknown at present,
and no assurances can be given that such audit will not result in a significant
payment obligation to the government.
Environmental Compliance
The nature of the business subjects the Company to a variety of
federal, state, and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment. In addition, the Company is
responsible for all environmental compliance associated with the equipment
recently acquired from Boeing, including any disposition of such equipment.
Although semiconductor manufacturing has some inherent environmental risks, the
number and quantity of hazardous substances used at the Company's facilities are
minimal and should pose little or no environmental threat.* Some parts of
specific equipment may be exposed to hazardous substances, but they can be
decontanimated or disposed of at sites designated to handle these materials. The
Company believes the maximum financial risk or expense for such disposal to be
less than $15,000.* The Company has not incurred any material operating expenses
nor been required to make any significant capital expenditures to comply with
these provisions. Management believes that the Company is not subject to any
outstanding issues on past non-compliance, and that the Company is currently in
compliance with all known environmental provisions. However, there can be no
assurance that the Company will not become subject to environmental claims in
the future, the cost of which could be material.
- -------------
* This statement is a forward-looking statement reflecting current expectations.
Actual future performance may differ materially from the Company's current
expectations. The reader is advised to review "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Operating Results" for a discussion of factors that could affect future
performance.
15
<PAGE>
Research and Development
For the fiscal years ending December 31, 1997, 1996, and 1995, the
Company's research and development expenses were $798,478, $714,368, and
$213,667, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for further discussion of this topic.
Employees
As of December 31, 1997, the Company had 18 full-time employees, with
13 in technical positions and 5 in administrative capacities. None of the
Company's employees is represented by a labor union. The Company considers its
relations with its employees to be good. The Company's success depends on its
ability to hire and retain highly specialized engineers, scientists, and
management personnel, and competition for such personnel is intense.
PSI has reduced internal staff costs by making effective use of
consultants and contract personnel on an "as needed" basis. The Company is
fortunate to be located in an area where highly specialized and skilled
individuals are available on a contractual or consulting basis. The availability
of such personnel has allowed the Company to continue its technological
development in a highly focused manner without the addition of permanent
headcount.
ITEM 2. PROPERTIES
The Company leased 25,000 square feet of space from Boeing located at
919 Hermosa Court, Sunnyvale, California, under a five-year lease (with an
option to renew for a two-year period) which commenced February 3, 1992, and
ended in 1997. The Company negotiated the renewal terms for one year at a fixed
rate and two years on a month to month basis at escalating rates. In return for
below market rates for approximately 20 months, the Company granted an option to
the landlord to lease back up to 9,000 square feet or the entire facility upon
proper notification. Payments under the lease in 1997 totaled $268,368. The
Company believes that, based upon its dealings with the landlord, the landlord
will not exercise its right to reclaim the entire facility during the month to
month arrangement. The Company believes that its current site is sufficient to
house the Company's operations for the next twelve months, regardless whether
the option is exercised by the landlord.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the non-Nasdaq over-the-counter
market and, prior to December 17, 1992, had been quoted on the Nasdaq Stock
Market. The Company's Preferred Stock is not publicly traded. On December 31,
1997, there were approximately 703 holders of record of the Company's Common
Stock, 13 holders of record of the Company's Series A Preferred Stock, and 34
holders of record of the Company's Series B Preferred Stock. The following table
sets forth the high, low, and closing bid prices for the Company's Common Stock
as reported by the National Quotation Bureau for each quarter of 1997 and 1996.
Prices reflect inter-dealer prices, without retail markup or commissions, and do
not necessarily represent actual transactions.
================================================================================
1997
- --------------------------------------------------------------------------------
Quarter Closing
Ended High Low Bid
================================================================================
Mar. 31 15/16 13/32 1/2
June.30 7/8 15/32 7/16
Sept.30 1 - 1/16 7/16 3/8
Dec. 31 1 9/32 13/32
================================================================================
1996
- --------------------------------------------------------------------------------
Quarter Closing
Ended High Low Bid
================================================================================
Mar. 31 2 - 1/8 11/16 1 - 11/16
June. 30 2 - 1/16 7/8 1 - 11/16
Sept. 30 1 - 13/16 1 1 - 3/8
Dec. 31 1 - 11/16 1/2 17/32
================================================================================
No cash dividends on Common Stock have been paid by the Company since
its inception. The Company has no plans for payment of cash dividends on Common
Stock in the foreseeable future, and intends to retain its earnings, if any, for
the development of its business. The Company is required to pay cash dividends
on its Series A Preferred Stock issued in 1994, and on its Series B Preferred
Stock issued in 1995. Dividends payable on both series of the Preferred Stock
for the 1997 fiscal year were $192,604.
In the fourth quarter of 1997, the Comapny issued 3,200,000 shares of
its common stock to certain investors. (see Management Discussion and Analysis,
Liquidity and Capital Resources)
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The following table reflects selected financial data for the five
fiscal years ended December 31, 1997. The selected financial data as of and for
each of the years in the five-year period ended December 31, 1997, are derived
from the audited financial statements of the Company. The financial statements
as of December 31, 1995, 1996, and 1997 and for the years then ended, have been
audited by Grant Thornton LLP, independent accountants, and are included
elsewhere in this Report. The 1995, 1994, and 1993 balance sheet data and the
1994 and 1993 statement of operations selected financial data presented below,
were derived from the Company's audited financial statements for those periods,
but are not presented elsewhere in this report. The data set forth below should
be read in conjunction with the financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report.
17
<PAGE>
<CAPTION>
Statement of Operations Data:
=================================================================================================
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 942,128 $ 1,000,114 $ 1,429,625 $ 3,060,098 $ 6,052,692
- -------------------------------------------------------------------------------------------------
Net income (loss)
applicable to
common shares ($ 2,840,003) ($ 3,983,752) ($ 2,751,425) ($ 1,216,907) $ 146,293
- -------------------------------------------------------------------------------------------------
Net income (loss)
per common share ($0.14) ($0.26) ($0.25) ($0.12) $0.01
- -------------------------------------------------------------------------------------------------
Weighted average
shares outstanding 19,793,980 15,622,268 11,181,541 10,014,163 9,890,553
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
=================================================================================================
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $ 965,862 $ 1,205,439 $ 2,929,050 $ 661,045 $ 1,908,681
- -------------------------------------------------------------------------------------------------
Current liabilities $ 1,314,873 $ 992,441 $ 962,314 $ 585,769 $ 524,393
- -------------------------------------------------------------------------------------------------
Working capital(deficit) ($ 349,011) $ 212,998 $ 1,966,736 $ 75,276 $ 1,384,288
- -------------------------------------------------------------------------------------------------
Total assets $ 1,330,805 $ 1,672,827 $ 3,442,208 $ 1,289,955 $ 2,362,679
- -------------------------------------------------------------------------------------------------
Long term debt $0 $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------
Stockholders'
equity $ 15,932 $ 680,386 $ 2,479,894 $ 704,186 $ 1,838,286
=================================================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including the risk
factors set forth under the heading "Factors Affecting Operating Results" on
page 21 of this Report and elsewhere in this Report. The Company has attempted
to identify forward-looking statements by placing an asterisk immediately
following the sentence or phrase that contains the forward-looking statement.
Results of Operations
1997 Compared to 1996
Revenues for the year ended December 31, 1997 were $942,128, which were
$57,986 less than revenues of $1,000,114 for the prior year. The decrease in the
Company's revenues in 1997 compared to 1996 was primarily due to the completion
of the Air Force Contract in 1996. After adjustments for the lack of Air Force
Contract revenues, 1997 results reflect an actual increase in new contract and
commercial product revenues, mainly attributable to LandRay contract revenues.
The revenue recognized from the Company's Phase 1 and Phase 2
development contractual efforts with LandRay accounted for $750,000, or 80% of
the Company's revenues in 1997, compared to $550,000, or 55% of the Company's
revenues in 1996. During 1997, due to the Company's shift in business focus and
the resultant new GPR technology development efforts, the Company was unable to
add significant new contract revenues other than for the LandRay GPR product,
and as a result, although operating expenses were reduced 31% from 1996 levels,
the Company's results of operations, and financial condition have not materially
improved.
The net loss for the year ended December 31, 1997 was $2,647,399
compared to a net loss of $3,788,299 in 1996. After adjustment for dividends on
Preferred Stock of $192,604, the net loss applicable to common shares was
18
<PAGE>
$2,840,003 or $0.14 per share as compared with a net loss for the year ended
December 31, 1996 of $3,983,752, or $0.26 per share.
Cost of revenues decreased by $861,041, or 33% from 1996 levels, due to
personnel and associated fringe benefit reductions, lower consulting and
contract labor expenditures, reduced overhead, materials and outside services
purchases.
Sales and marketing costs decreased as compared to 1996 by $248,112 or
66% due to personnel reductions, and reduced travel, advertising and public
relations expenses. Research and development costs increased by $84,110 or 12%
primarily due to increased GPR technology development and increased PSIristor
switch process development efforts which resulted in production yields in excess
of anticipated 1998 requirements. General and administrative costs decreased
from 1996 by $246,290 or 20% due principally to lower severance expenses.
Approximately 75% of this decrease was related to extraordinary personnel costs,
particularly severence, incurred in 1996.
1996 Compared to 1995
Revenues for the year ended December 31, 1996 were $1,000,114, which
were $429,511 less than revenues of $1,429,625 for the prior year. The decrease
in the Company's revenues in 1996 compared to 1995 was primarily due to
expiration of the Air Force Contract on June 1, 1996, which provided $814,285 of
revenue in 1995, and $242,279 of revenue in 1996.
The revenue recognized under the Air Force Contract accounted for 24%
of the Company's revenue in 1996 and 57% in 1995. Revenues recognized from the
Company's Phase 1 development effort with the LandRay joint venture accounted
for $550,000 or 55% of the Company's revenues in 1996. During 1996, the Company
was unable to add significant new contract revenues other than from the LandRay
joint venture, which were a direct result of the shift in the Company's business
direction in mid-1996, and as a result, although operating expenses were
reduced, the Company's results from operations and financial condition were
adversely affected.
The net loss for the year ended December 31, 1996 was $3,788,299,
compared to a net loss of $2,562,230 in 1995. After adjustment for dividends on
Preferred Stock of $195,453, the net loss applicable to common shares was
$3,983,752 or $0.26 per share as compared with a net loss for the year ended
December 31, 1995 of 2,751,425 or $0.25 per share.
Sales and marketing expenses were $374,469 in 1996, representing a
decrease of $120,335 or 24% relative to sales and marketing expenses of $494,804
in 1995. Due to a reduced emphasis on government contract revenues, personnel
costs associated with marketing to government programs declined, while marketing
expenditures related to the Company's industrial and standard products continued
in 1996 in an attempt to establish a market for such products.
Research and development costs increased by $500,701 in 1996 to
$714,368 from $213,667 in 1995, a 334% increase, primarily because of increased
technical consulting costs due to the Company's redirection to industrial
sensing products and ground penetrating radar applications.
General and administrative expenses increased by 13% or $140,880 in
1996 to $1,203,469 from $1,062,589 in 1995 primarily due to increased personnel
costs.
The Company had no interest expense in 1996 compared to interest
expense of $18,126 in 1995, which was due to short-term financing. Interest
income increased by $57,469 or 155% to $94,552 in 1996 from $37,083 in 1995 as a
result of the short term investment of cash reserves which increased due to the
completion of a private placement of Common Stock in March, 1996.
Liquidity and Capital Resources
19
<PAGE>
Working capital at December 31, 1997 was a negative $349,011 compared
to a positive $212,998 at December 31, 1996, a decrease of $562,009. This
decrease was due primarily to net operating loss $2,647,399 partially offset by
the net proceeds of $2,090,549 from the sale of Common Stock in the first,
second and fourth quarters of 1997. At December 31, 1997, the Company had
$441,254 in cash and cash equivalents.
The Company completed an offering of its Common Stock with gross
proceeds to the Company of $1,092,500 on April 10, 1997. Another offering of the
Company's Common Stock with gross proceeds to the Company of $1,200,000 was
completed on November 11, 1997.
On April 10, 1997, the Company issued 4,370,000 shares of its Common
Stock to certain investors, for a aggregate gross purchase price of $1,092,500.
The investors included entities affiliated with the Travelers Group, which
purchased 2,000,000 shares for an aggregate purchase price of $500,000. The
Company employed multiple parties as placement agents in connnection with this
transaction. The Company agreed to pay the selling agents a cash placement fee
equal to 5% of the gross proceeds of the transaction. In addition, the Company
agreed to issue to the selling agents warrants exercisable for a number of
shares of Common Stock equal to 5% of the total number of shares sold in the
offering. The Common Stock was issued without registration under the Securities
Act in reliance on Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
On September 30, 1997, October 31, 1997 and November 13, 1997, the
Company issued an aggregate of 3,200,000 shares of its Common Stock to certain
investors, for an aggregate gross purchase price of $1,200,000. The Company
employed Morgan Fuller Capital Group as placement agent in connection with this
transaction. The Company agreed to pay the selling agent and its sub-agents a
cash placement fee equal to 8% of the gross proceeds of the transaction. The
Company has agreed to issue to the selling agent warrants exercisable for a
number of shares of Common Stock equal to 5% of the total number of shares sold
in the offering. In addition, in recognition of financial consulting services
previously rendered, the Company has agreed to sell the selling agent additional
five-year Common Stock purchase warrants, entitling the holder thereof to
purchase up to an aggregate of an additional 160,000 shares of Common Stock at
an exercise price of $0.375 per share. The purchase price for these warrants is
$400. The Company has agreed to register for resale the shares of Common Stock
issued in the private placement, as well as the shares issuable upon exercise of
the selling agent's warrants. The placement agreement provided that if the
Company fails to file and have the registration effective within 120 days of
November 13, 1997, the Company would be obligated to pay the purchasers of this
placement an additional 2% of shares purchased and that the Company would be
further obligated to pay an additional 2% of shares purchased in this placement
for each 30 day period delay until such registration becomes effective. Pursuant
to such provisions, the Company will issue an additional 128,000 shares to these
investors in April, 1998. The Common Stock was issued without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
Accounts receivable at December 31, 1997 increased by $193,106 over
year-end 1996, while unbilled accounts decreased by $25,813 over the same period
for a net increase of $167,293. The large net increase in accounts receivable
principally reflects a billing to LandRay resulting from the completion of a
contract milestone in the fourth quarter 1997.
Inventories increased by $14,624 over 1996 year-end levels due
primarily to completion of sub-assemblies for the Company's electro-optical
product line and ground penetrating radar. Other current assets decreased by
$19,444 primarily as a result of timing of payments on various insurance
contracts.
Accounts payable increased by $149,506 over 1996 year-end levels, as a
result of the timing of vendor payments related to the Company's annual holiday
plant closure. Accrued compensation expense decreased by $17,332 primarily as a
result of personnel using accrued vacation in conjuction with the holiday plant
closure and a reduced number of personnel.
Preferred stock dividends payable increased by $192,604 over 1996.
During 1997, the Company did not meet California statutory criteria for any
dividend distributions.
The Company's current cash position, together with anticipated cash
flows from operations and new debt or equity financings, are expected by
management to be sufficient to finance the Company's operations through December
31, 1998. However, the actual amount of time that the Company's cash resources
last is dependent upon
20
<PAGE>
a variety of factors including the timing of obtaining new contracts, the
resources applied by the Company to continued product development, timing of new
financings, success of its current joint venture, and competition with other
vendors. If the Company determines that it requires additional funds prior to
December 31, 1998, there can be no assurance that additional funds will be
obtainable on reasonable terms, if at all. Any additional equity financing may
adversely affect the rights and preferences of, and result in significant
dilution to, existing stockholders. Any failure to obtain adequate additional
funding could result in the Company becoming unable to meet its obligations as
they come due. Unless the Company is successful in adding new revenue and
replacing the revenue and cash flow recently generated by the LandRay contracts
and the Air Force Contract, the Company would continue to experience significant
operating losses. As a result of the accumulated substantial losses in past
years and the additional capital required to complete product developments of
current proposed product offerings and to extend its technology to new
applications, the Company's auditors have issued a modified audit report as to
the Company's ability to continue as a going concern, on the Company's 1997
financial statements.
The Company's strategy includes the successful completion of GPR
products under development, development of new product applications, and
development of new marketing strategies. The Company continues its efforts to
seek new strategic partner(s) and/or debt or equity investors. There can,
however, be no assurances that the Company will be able to successfully obtain
additional financing or strategic partners, or that the terms of any such
financing or partnership would be favorable to the Company.
FACTORS AFFECTING OPERATING RESULTS
Power Spectra operates in a rapidly changing environment which is
subject to numerous risks and uncertainties, many of which are beyond the
Company's control. Moreover, this Report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results of operations
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Report.
History of Losses; Accumulated Deficit. Since its inception, the
Company has generally operated at a loss since government contract revenues,
which represent most of the historical revenues of the Company, and other
sources of income were insufficient to cover general and administrative,
research and development and other costs incurred by the Company. The Company
recorded net losses of $2,647,399, $3,788,299 and $2,562,230 for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995, respectively. At
December 31, 1997, the Company had an accumulated deficit of approximately
$17,902,959 and a working capital deficit of $349,011. The Company expects that
it will continue to incur losses until its contract revenues increase
substantially from current levels or the Company begins to receive significant
product sales and license and/or royalty income. There is no assurance that the
Company will achieve profitable operations in the foreseeable future, if at all.
Although the Company has substantially reduced the size of its operations over
the last two years, there can be no assurance that the Company's revenues and
proceeds from the equity financings will be sufficient to allow the Company to
support its operating expenses.
Dependence on LandRay Contract. The Company's relationship with LandRay
Technology, Inc. ("LandRay") has been the Company's primary source of revenues
since the first contract was awarded to the Company in 1996. The Company's
relationship with LandRay was an extremely significant source of revenues during
1996 and 1997, and is expected to remain significant for the forseeable future.
The Company recognizes revenue from its contract with LandRay based upon
attainment of milestones delineated in the contract. Unless the current contract
with LandRay is extended, it will be necessary to find alternative sources of
revenue, and there is no assurance that the Company would be successful in
accomplishing this result.
Need to Successfully Launch and Fund New Ventures. The Company believes
it must continue to seek and obtain other sources of revenue to continue
operations. Since its inception nearly all of the Company's revenues have come
from defense-related research and development contracts related to the BASS(TM)
development and applications. The Company currently is seeking to exploit its
technology for applications in commercial and industrial markets to provide such
revenue. During 1996, the Company entered into two ventures, LandRay and PEAC
Airborne Technologies in order to develop and exploit new business opportunities
which the Company believes are possible based upon its ultra-wideband ground
penetrating radar ("UWB GPR") technology. As of the
21
<PAGE>
date hereof, the PEAC venture has been suspended. The LandRay venture and any
future ventures will require significant funding in order to enable the Company
and its strategic partners to carry out their respective plans of operations.
There can be no assurances that the LandRay venture will be able to raise
adequate funding on acceptable terms, that the Company will be able to
successfully enter into any additional suitable strategic partnership or joint
venture arrangements or that such arrangements, when entered into, will prove to
be beneficial for the Company and its shareholders. There also can be no
assurance that the proposed joint venture agreements, if consummated, will
generate sufficient revenues to replace the existing LandRay contract when it
expires. Failure to succeed in one or more strategic partnerships or joint
venture relationships could have a material adverse effect on the Company's plan
of operations and results.
Need for Additional Capital. In order to meet its objectives, including
entering into additional joint ventures, the Company will require substantial
additional capital. While the Company anticipates attempting to raise such
capital in the form of future private placements of its equity securities, there
can be no assurance that any such efforts will be successful, that such capital
will be available on acceptable terms, or at all. In addition, any such equity
financing would be dilutive in ownership to existing investors and could involve
creation of rights senior to existing investors, including rights upon
liquidation or sale of the Company. The failure of the Company to complete
additional financings in the future would have a material adverse effect on the
Company's business, financial condition and results of operations.
Expiration of Air Force Contract. The Company's contract with the
United States Air Force expired in June 1996 and final payments thereunder were
received by the Company during 1996. With the termination of the Air Force
Contract, the Company has found it necessary to shift its focus to industrial
products to find alternative sources of revenue, and there is no assurance that
the Company will be successful in accomplishing this result. If the Company is
not successful in replacing the revenue and cash generated by the Air Force
contract, the Company will continue to experience significant operating losses
and significant negative cash flow. Although the Company has substantially
reduced the size of its operations since expiration of the Air Force Contract,
there can be no assurance that the Company's revenues and proceeds from equity
financings, if any, will be sufficient to allow the Company to support its
operating expenses. The Air Force contract expired on June 1, 1996, but the
Company is subject to an audit by the Defense Contract Audit Agency for overhead
rates applied to the contract for fiscal years 1994, 1995 and 1996. As such, the
Company may be subject to adjustments up or down on contract revenues. While
such audits are commonplace, the timetable for the audit is unknown at present,
and no assurances can be given that such audit will not result in significant
payment obligation to the government.
Product Development and Enhancements. The development of GPR systems
and other remote sensing products as well as high power switching components and
products is a complex engineering effort involving significant risk. While the
Company believes it has completed development of its core technology,
significant additional development efforts must be made in order to achieve
commercial acceptance of its products. Such efforts will require substantial
additional capital, the source and timing of which is unknown. There is no
assurance that the Company will succeed in raising the needed capital or in the
product development efforts, even if the necessary funding is raised.
Complex Manufacturing Process; Manufacturing Capacity. The manufacture
of GPR systems and remote sensing products as well as semiconductor-based power
switching devices is highly complex and sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities
in the materials used and the performance of personnel as well as vendors and
suppliers. The Company has periodically experienced yield problems, and there
can be no assurance that these problems will not reoccur. Should the Company
experience protracted production delays attributable to manufacturing
complexity, its ability to deliver products would be materially affected. In the
event that the Company commences significant commercial shipments, it may be
required to obtain third party manufacturing services.
Dependence on Facilities. The Company does not expect to be able to
remain in its current facilities in the long-term. Appropriate manufacturing and
executive office space in Silicon Valley is extremely limited and there is no
assurance that the Company will be able to secure adequate facilities on terms
that are acceptable to the Company, if at all. This circumstance could cause
delays in the manufacture and delivery of the Company's products and could have
a material adverse impact on the Company's results of operations.
22
<PAGE>
Dependence on Government Contracts; Limited Commercial Sales to Date.
Historically, a material portion of the Company's business resulted from
contracts with or for government agencies. The Company expects that dependence
on such contracts for a portion of its revenues will decline in the foreseeable
future. Government contracts generally provide for the termination or adjustment
of material terms of such contracts at the election of the government, and the
government may pursue contractual, administrative, civil and criminal remedies
for improper or illegal activities associated with obtaining and performing
government contracts. Administrative remedies include suspension, debarment or
ineligibility of all or part of a company from receiving government contracts
and government-approved subcontracts. Any such action by the government could
have a material adverse impact upon the Company's business. Moreover, general
political and economic conditions, which cannot be accurately predicted,
directly and indirectly affect the quantity and allocation of expenditures by
governmental agencies. Therefore, cutbacks in the federal budget could have a
material adverse impact on the Company's results of operations so long as the
Company remains dependent on government contracts. Notwithstanding the fact that
the applicability of both the Company's BASS(TM) and PSIristor(TM) device
technology to ground penetrating radar systems has been technically
demonstrated, with the exception of development contract revenues from LandRay,
at this early stage of its shift in strategic business focus, the Company has
not yet generated significant revenues from sales of its commercial products.
The first GPR product developed for LandRay, the SEEKER(TM), is just currently
entering initial production. In addition, the previous sections of this report
discuss potential future products and applications of the Company's core
technologies which the Company is considering pursuing, but which have not yet
been developed, tested or deployed. There can be no assurance that any of the
commercial products discussed below will be successfully developed or accepted
in their target markets, that revenues generated by such products will be
sufficient to return the cost of their development, that the Company will be
successful in developing additional new products, that the Company will not
experience delays in developing such products, or that such products will
achieve commercial success. A sustained failure to successfully develop and sell
new products would have a material adverse effect on the Company's business and
its results of operations.
Limitations on Protection of Intellectual Property. The Company
believes its ability to compete effectively with other companies may be
materially dependent upon the proprietary nature of its technologies. The
Company holds a number of domestic patents covering various aspects of its
BASS(TM) technology but has no patents pending on its PSIristorTM technology as
it was transferred from Russia, and the Company holds an exclusive worldwide
license for its manufacture and use outside the former Soviet Union. The Company
has applied for multiple patents on its GPR system, the SEEKER(TM), and the
Electro-Optical Rangefinder, E-OR 230(TM). To date, one patent each has been
granted on these devices and several more are pending. There is no assurance
that any additional patents will be granted to the Company or that the Company's
patents will provide meaningful protection from competition. Moreover, there can
be no assurance that any patents will be upheld by a court should the Company
seek to enforce its rights against an infringer or that the Company will have
sufficient resources to prosecute its patent and other intellectual property
rights. Furthermore, issuance of a valid patent does not prevent other companies
from independently developing technology similar to the Company's, and there can
be no assurance that any particular aspect of the Company's technology will not
be found to infringe the claims of other existing patents. In addition to patent
protection, the Company relies to a significant extent on proprietary know-how
and trade secrets particularly with respect to its PSIristor(TM), which it
considers a highly proprietary invention.
Limited Sales and Marketing Capability; Future Reliance upon
Distributors. The Company currently has no marketing staff or salesforce. The
Company will be required to establish such marketing and sales staff in order to
execute its plans for increasing commercial sales. In addition, in order to
materially increase revenues and achieve sustained profitability (of which there
is no assurance) as the Company continues to commercialize its products, it
expects that it will be required to depend upon distributors. While any
particular distributor may have an extensive distribution network, distributors
typically represent other third-party suppliers, including competitors of the
Company, to whom they may devote greater time, effort and attention. There can
be no assurance that the Company will successfully establish the requisite
distribution relationships or that those relationships will result in increased
revenues.
Competition. The markets for the Company's products are competitive and
characterized by rapid technological change and changes in market demand. The
Company's competitive position is affected by all of these factors and by
industry competition for effective sales and distribution channels. The
Company's potential and existing competitors include major ultrasonic proximity
sensor vendors, a small number of which dominate the market. Most of the
Company's competitors have substantially greater financial, technical, marketing
and other
23
<PAGE>
resources than does the Company. The Company expects that its markets will
become more competitive in the future, and there is no assurance that the
Company will be able to successfully compete in its selected markets. See
"Business - Competition."
Ability to Continue as a Going Concern. The Company's independent
accountants, in their report regarding the Company's financial statements for
the year ended December 31, 1997, have included an explanatory paragraph noting
that the Company's recurring substantial losses from operations raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is contingent upon its
ability to secure additional financing, as to which the Company currently has
plans but no specific or definitive commitments. There is no assurance that the
Company will be able to secure adequate financing or to carry out its current
business plan.
Volatility of Stock Price. The market price of Company's Common Stock
is highly volatile as the stock is thinly traded. Other factors such as
variations in the Company's operating results and announcements of technological
innovations or price reductions by the Company, its competitors or providers of
alternative products and processes may cause the market price of the Common
Stock to fluctuate. In addition, the securities markets have recently
experienced substantial price and volume fluctuations that have particularly
affected technology-based companies and resulted in changes in the market prices
of the stocks of many companies that have not been directly related to the
operating performance of those companies. The price of the Company's Common
Stock is particularly susceptable to extreme fluctuation because of thin trading
volume in the Common Stock and lack of widely available pricing information.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, in approximately eighteen months, computer systems and/or software
used by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with compliance. Although the Company believes that its systems will
be Year 2000 compliant, there can be no assurance that coding errors or other
defects will not be discovered in the future. Any Year 2000 compliance problem
of the Company, its customers or its suppliers could result in a material
adverse effect on the Company's business, financial conditions and operating
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference
herein from Part IV, Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 19, 1996, the Company dismissed the accounting firm of Ernst
& Young LLP, which had previously been engaged as the Company's independent
accountant to audit the Company's financial statements. Ernst & Young's reports
on the Company's financial condition for the fiscal years ended December 31,
1993 and December 31, 1994 did not contain any adverse opinion or disclaimer of
opinion, and such reports were not otherwise modified or qualified as to
uncertainty, audit scope or accounting principles, except that Ernst & Youngs's
report on the Company's financial condition for the fiscal year ended December
31, 1994 contained a going concern qualification. Furthermore, to the knowledge
of current management, during the 1994 and 1995 fiscal years, the Company had no
disagreements with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young, would have
caused it to make reference to the subject matter of the disagreements in
24
<PAGE>
connection with its report(s). The decision to dismiss Ernst & Young was
approved by the Company's Board of Directors.
On January 19, 1996 the Company retained the accounting firm of Grant
Thornton LLP as its principal accountant to audit the Company's financial
statements.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
<TABLE>
The Board of Directors, as presently constituted, has seven members.
The term of each director continues until the next Annual Meeting of
Shareholders. The names of the directors and certain information about them, are
set forth below.
<CAPTION>
Name of Director Age* Principal Occupation Director Since
- -------------------------- -------- ------------------------------------- -----------------
<S> <C> <C> <C>
Harold T. Bowling 63 Retired Executive of Aerospace July 1997
Corporation
James A. Glaze 60 Vice President of Semiconductor June 1995
Industry Association
Jay W. Hubbard 75 Retired Executive and retired July 1997
Brigadier General, U.S. Marine Corps
Gene J. Kennedy 56 Consultant / Counselor November 1990
James A. Lovell, Jr. 70 President of Promotions Company July 1997
John W. Pauly 75 Retired Executive and retired May 1990
General, U.S. Air Force
Gordon H. Smith 69 Chairman of the Board of the January 1995
Company, Chief Executive of the
Company, Retired Rear Admiral, U.S.
Navy
<FN>
* As of March 31, 1998
</FN>
</TABLE>
Except as set forth below, each of the directors has been engaged in
his principal occupation set forth above during the past five years. There are
no family relationships between any director or executive officer of the
Company.
Mr. Bowling joined the Board of Directors in July, 1997. He has served
in various executive positions at Lockheed Martin Company, a defense technology
developer and contractor, over a period of forty years. Before his retirement in
February 1997, Mr. Bowling was President of Lockheed Martin Aeronautics
International. He served as President of Lockheed Aircraft Services Company from
1987 to 1995, and previously as Vice President of Corporate Development of
Lockheed Corporation.
Mr. Glaze joined the Board of Directors in June, 1995. Since August
1993, Mr. Glaze has served as a Vice President of the Semiconductor Industry
Association. Prior to August 1993, Mr. Glaze was President of Jmar Technology,
Inc., a laser technology developer.
Mr. Hubbard joined the Board of Directors in July, 1997. Mr. Hubbard
served in the United States Marine Corps from 1940 to 1972 as a fighter attack
pilot. Mr. Hubbard retired as Brigadier General in December 1972. From December
1973 to June 1975, he served as Director of Police in Memphis, Tennessee. For a
period of three years,
26
<PAGE>
Mr. Hubbard was an independent real estate developer and founded Hubbard
Development Corporation. As a court appointed trustee, Mr. Hubbard served as
chief executive officer for Penn Pacific Corporation from 1983 to 1985, and from
1986 to 1987 he served as chief operating officer of Riccar of America. From
1989 to 1994, he was founder and chairman of the board of MCAS-El Toro
Historical Foundation, which is the sponsor of the Hubbard Museum of Marine
Aviation.
Mr. Kennedy joined the Board of Directors in November, 1990. Mr.
Kennedy has been in private practice related to organizational and individual
counseling and psychotherapy since 1974. In 1981 he was a founding investor and
Vice President of Beepers Northwest, Inc., a pager company which was later
purchased by McCaw Cellular Communications.
Mr. Lovell joined the Board of Directors in July, 1997. Mr. Lovell was
a former naval aviator and test pilot when selected for the space flight program
in 1962. Subsequently, he flew two Gemini and two Apollo missions in addition to
serving as back up in four others. His final space flight was as Commander of
the Apollo 13 mission. He then served as deputy director of space and technology
at Johnson Space Center. He left the space program in 1973. He then served as
president of Bay-Houston Towing Company. From January 1977 to March 1980, he was
President of Fisk Telephone Systems, and from March 1980 until January 1991, he
was Executive Vice President of Fisk's acquiror, Centel Corporation.
Subsequently, Mr Lovell founded and now is President of Lovell Communications, a
company dedicated to the promotion of space exploration-related programs.
General Pauly joined the Board of Directors in May, 1990. General Pauly
served as the Chairman of the Board and Chief Executive Officer of Systems
Control Technology, Inc., a software company, from 1982 until his retirement in
1994. General Pauly was a consultant/member of the Army Science Board from 1987
to 1997 and was a participant in the National Research Council Study on
strategic technologies in the Army.
Mr. Smith joined the Board of Directors in January, 1995. Mr. Smith has
served as President and Chief Executive Officer of the Company since June 1996.
He served in various executive positions in the Lockheed Corporation during the
1980's. From 1990 to 1995, he was President and CEO of Sargent Fletcher Company
and its successor, Sargent Fletcher, Inc., a military aircraft component
manufacturer.
Board Meeting and Committees
The Board of Directors of the Company held a total of ten meetings
during the fiscal year ended December 31, 1997 (the "Last Fiscal Year"). During
the Last Fiscal Year, no director attended fewer than 75% of the aggregate of
all meetings of the Board of Directors and committees on which he served, if
any, except Mr. Gamble who attended 71% of the meetings during the first half of
1997, when he was still a director of the Company.
The Board has established an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs. Glaze, Kennedy and Smith. The
Audit Committee recommends engagement of the Company's independent auditors and
approves the services performed by such auditors and reviews and evaluates the
Company's accounting policies and its systems of internal controls. The
Compensation Committee is comprised of Messrs. Pauly, Bowling, Hubbard and
Lovell. The Compensation Committee recommends to the Board of Directors the
compensation of the Company's Chief Executive Officer and determines the
compensation levels of the Company's other officers. In 1997, the Audit
Committee and the Compensation Committee held one meeting and four meetings,
respectively. The Company does not have a Nominating Committee or a committee
performing similar functions.
27
<PAGE>
Director Compensation
As compensation for their services as directors, non-employee directors
receive shares of the Company's Common Stock under the 1991 Director Stock Plan
described below as well as options to purchase Common Stock under the Director
Option Plan, also described below. See "Employee and Director Benefit Plans."
During 1997, shares of Common Stock were issued to each of the
following directors pursuant to the 1991 Director Stock Plan: John W. Pauly,
Gene J. Kennedy, and James A. Glaze each received 27,619 shares, Harold T.
Bowling, Jay W. Hubbard and James A. Lovell, Jr. each received 5,556 shares, and
retiring directors Michael Gamble, John Hewitt, Jr., and Richard A. Williams
each received 22,063 shares. Each director is reimbursed for reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors.
In addition, heads of committees of the Board of Directors are paid $250 per
quarter as compensation for serving in such positions.
Non-qualified stock options to purchase 10,000 shares of Common Stock
were issued to each of the non-employee Directors pursuant to the Director
Option Plan dated March 1997. See "Employee and Director Benefit Plans" below.
Executive Officers of the Registrant
The current executive officers of the Company and their ages as of
March 31, 1997 are as follows:
Name Age Position
- ----------------------------- ------- ------------------------------------
Gordon H. Smith 69 Chairman of the Board, Chief
Executive Officer
Charles C. Byer 53 President, Chief Operating Officer
Edward J. Lamb 50 Chief Financial Officer, Secretary
All executive officers serve at the discretion of the Board of
Directors and there are no family relationships between any director or
executive officer.
Mr. Byer joined the Company as Executive Vice President in May 1995 and
has served as President and Chief Operating Officer since May 1996. Prior to
joining Power Spectra, he was with Beta Phase, Inc., a high speed electrical
connector manufacturer, from August 1991 to January 1995, serving as its
President and CEO. From June 1990 to August 1991, he was founder and President
of Emerald Pacific Seafoods, a live seafood provider. Prior to that, from 1973
to 1990, Mr. Byer served in a variety of managerial positions with E. I. DuPont
DeNemours & Co., Inc., a diversified manufacturing company.
Mr. Lamb joined the Company as Controller in March 1992 and has served
as Chief Financial Officer since October 1993 and as Secretary since November
1994. Prior to joining Power Spectra, he was Division Controller for Quantic
Industries, Inc., a munitions manufacturer from August 1990 to February 1992,
and served as Finance Manager for CAE-Link Corporation, a flight simulation
systems supplier from June 1988 to August 1990.
See "Directors of the Registrant" above, for background information on
Mr. Smith.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth certain information regarding
compensation paid by the Company in the fiscal year ended December 31, 1997 (the
"Last Fiscal Year") to its Chief Executive Officer and the two other executive
officers whose total compensation in the Last Fiscal Year exceeded $100,000 (the
"Named Executive Officers").
<CAPTION>
Summary Compensation Table
Annual Other Annual Long-Term
Compensation Compensation Compensation
---------------- ---------------- -----------------
Securities
Underlying Options
(# of Shares)
Name Capacity Served Year Salary
- --------------------- -------------------- ------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Gordon H. Smith Chairman, Chief 1997 $170,273 0 240,000
Executive Officer 1996 $104,457(1) 7,632(2) 50,000
1995 $ 9,000 8,785(2) 10,000
Charles C. Byer President, Chief 1997 $153,365 0 150,000
Operating Officer 1996 $137,893 0 80,000
1995 $ 75,206 0 0
Edward J. Lamb Chief Financial 1997 $114,644 0 20,000
Officer, Secretary 1996 $107,072 0 0
1995 $ 94,630 0 4,764
<FN>
(1) Mr. Smith's cash compensation included $95,457 in salary and $9,000 paid to
him as non-executive Chairman in 1996. Mr. Smith joined the Board of
Directors in January 1995.
(2) Represents Mr. Smith's compensation received as a Board member, before he
became an employee of the Company.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
<TABLE>
The following table sets forth certain information regarding stock
options granted to the Named Executive Officers in the Last Fiscal Year.
<CAPTION>
Realizable Value At
Percent of Assumed Annual Rates
Number of Total Options of Stock Price
Securities Granted to Appreciation for
Underling Employees / Option Term
Options Directors in Exercise Expiration -----------
Name Granted (#) Fiscal Year Price ($/Sh) Date 5% 10%
---- ----------- ----------- ------------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Gordon H. Smith 240,000(1) 21.8% $0.5000 9/2007 $62,890 $159,370
Charles C. Byer 150,000(2) 13.6% $0.7188 6/2007 $67,808 $171,833
Edward J. Lamb 20,000(2) 1.8% $0.7188 6/2007 $ 9,041 $ 22,912
29
<PAGE>
<FN>
(1) Incentive Stock option granted under 1996 Stock Option Plan. Mr. Smith was
granted the option to purchase 40,000 shares of common stock pursuant to a
non-qualified stock option in 1996 and the option purchase 200,000 shares
of common stock pursuant to a qualified stock option in 1997. Both the 1996
and 1997 grants were cancelled and Mr. Smith was granted an option to
purchase 240,000 shares of common stock pursuant to a qualified stock
option in 1997. This option vests over a period of two quarters. The
exercise price of the Option equaled the fair market value of the
underlying securities as of the date of the grant.
(2) Incentive Stock option granted under 1996 Stock Option Plan. The Option
vests 20% on grant and the remainder over a period of four years. The
exercise price of the Option equaled the fair market value of the
underlying securities as of the date of the grant.
</FN>
</TABLE>
Fiscal Year-End Option Values
<TABLE>
The following table sets forth the value of all unexercised stock options held
on December 31, 1997 by the Named Executive Officers. No Named Executive Officer
exercised stock options during the Last Fiscal Year.
<CAPTION>
Number of Securities Underlying
Unexercised Options at Fiscal Value of Unexercised In-The-Money
Year End (#) Options at Fiscal Year End (#)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)
---- --------------------------- ---------------------------
<S> <C> <C>
Gordon H. Smith 180,008/79,992 0/0(1)
Charles C. Byer 85,000/145,000 0/0(1)
Edward J. Lamb 57,120/17,644 0/0(1)
- ----------------------------------------
<FN>
(1) Based on the over-the-counter bulletin board closing bid price of the
Company's Common Stock price as of December 31, 1997, which was $0.4063 per
share. The exercise prices of Messrs. Smith, Byer, and Lamb's exercisable and
unexercisable options granted under the 1996 Stock Option Plan and 1992 Director
Option Plan were greater than the closing bid. Consequently, all Named Executive
Officers' options were not in-the-money.
</FN>
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Change-In-Control Arrangements
All outstanding options held by the Chief Executive Officer and all the
Company's other executive officers and employees under the Company's 1996 Stock
Option Plan will automatically accelerate and become exercisable for fully
vested shares upon a change in control of the Company, whether effected through
merger, sale of substantially all of the Company's assets, the successful
completion of a hostile tender offer for 30% or more of the Company's
outstanding Common Stock, or a change in the majority of the Board as a result
of one or more contested elections for Board membership.
Compensation Committee Interlocks and Insider Participation
For the 1997 fiscal year, the Compensation and Stock Option Committee
of the Board was comprised of Messrs. Pauly, Gamble, and Kennedy from January 1
through July 24, 1997, and Messrs. Pauly, Bowling, Hubbard, and Lovell from July
25 through December 31, 1997.
30
<PAGE>
No executive officer of the Company serves as a member of the Board of
Directors or Compensation Committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
Employee and Director Benefit Plans
The following is a brief summary of plans in effect during the Last
Fiscal Year under which officers, directors and employees of the Company
received benefits.
1986 Stock Option Plan. The Company's 1986 Stock Option Plan (the "1986
Plan") was adopted by the Company's Board of Directors in March 1987 and
approved by the Company's shareholders in October 1987. A total of 1,690,000 of
Common Stock was reserved for issuance under the Option Plan.
The 1986 Plan is administered by the Board of Directors, which has the
authority to select the employees and consultants of the Company (including
officers and employee directors) who are to receive option grants and to
determine whether each option granted is to be an incentive stock option
satisfying the requirements of Section 422A of the Internal Revenue Code of
1986, as amended, or a nonstatuatory stock option. The exercise price of each
incentive stock option granted may not be less than 100% of the fair market
value of the Company's Common Stock on the date of the grant and the exercise
price of a nonstatuatory option may not be less than 85% of the fair market
value of the Company's Common Stock on the date of the grant. No option may have
a term in excess of ten years measured from the date of grant. The Board of
Directors selects the optionees, the number of shares to be subject to each
option and the vesting period of options granted under the 1986 Plan. In making
such determination, the Board of Directors takes into account the duties and
responsibilities of the employee or consultant, as the case may be, the value of
the optionee's services, his or her present and potential contribution to the
success of the Company and anticipated number of years of future service and
other relevant factors.
The 1986 Plan expired as to future grants upon adoption of the 1996
Stock Plan in June, 1996.
1996 Stock Plan. The Board of Directors adopted the 1996 Stock Plan
(the "1996 Plan") in April 1996 and the Plan was approved by the Company's
shareholders in June 1996. A total of 1,500,000 shares of Common Stock were
reserved for issuance upon exercise of options granted under the 1996 Plan, in
addition to the shares which remained available for issuance under the 1986
Plan. The plan provides for grants in a manner similar to the 1986 Plan and is
not a deferred compensation plan under Section 401(a) of the Code and is not
subject to the provisions of ERISA. In accordance with Section 162(m) of the
Code, the 1996 Plan imposes a limitation on grants to any optionee in any fiscal
year so that the aggregate grants in any one year to any optionee may not exceed
300,000 shares per fiscal year, provided, however, that new hires may receive
additional option grants for no more than 300,000 shares in the year they are
hired. In addition, there is a limit of $100,000 on the aggregate fair market
value of shares subject to all Incentive Stock Options which are exercisable for
the first time in any calendar year by an employee.
The 1996 Plan provides that, in the event of a merger of the Company
with or into another corporation, the sale of more than fifty perent (50%) of
the Company's voting stock, a sale of substantially all of the Company's assets
or a liquidation or dissolution of the Company ("Transfer of Control"), the
acquiring or successor corporation may assume or substitute substantially
equivalent awards for the awards outstanding. To the extent awards are not
assumed or substituted for, they will vest in full prior to the Transfer of
Control. To the extent options are not assumed, substituted for, or exercised
prior to the Transfer of Control, they will terminate.
1991 Director Stock Plan. The Company's 1991 Director Stock Plan (the
"Stock Plan") was adopted in March 1991 and approved by the Company's
shareholders in June 1991. The Company initially reserved 100,000 shares of
Common Stock for issuance under the Stock Plan. The shareholders approved
increases of 150,000 shares, 200,000 shares and 300,000 shares in the number of
shares available for issuance under the Stock Plan in June 1993, June 1995, and
June 1997, respectively. Under the Stock Plan, each director who is not an
employee or full-time consultant of the Company (an "Outside Director") receives
each quarter $3,125 in shares of Common Stock of the Company (based on a price
per share equal to the fair market value of the Common Stock on the last day of
such quarter). The Company currently has six Outside Directors.
31
<PAGE>
1992 Director Option Plan. The Company's Director Option Plan was
adopted in October 1992 by the Board of Directors, and approved by the
shareholders in June, 1993. An aggregate of 230,000 shares of Common Stock was
reserved for issuance under the 1992 Director Option Plan (the "Director Option
Plan"). Under the 1992 Director Option Plan each Outside Director is
automatically granted an option to purchase 10,000 shares each year on the third
trading day following the public announcement of the Company's financial results
for the preceeding fiscal year. Only Outside Directors are eligible to
participate in the Director Option Plan. The shareholders approved an increase
of 170,000 shares in the number of shares available for issuance under the
Director Option Plan in June 1996. Each Outside Director was automatically
granted an option for 10,000 shares in March 1997. Options granted under the
Director Option Plan are nonstatutory options, and do not qualify as "incentive
stock options," as defined in Section 422 of the Internal Revenue Code of 1986,
as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Security Ownership of Certain Persons
<TABLE>
The following table sets forth the beneficial ownership of Common Stock
of the Company as of March 31, 1998 by (1) each director, (2) the Named
Executive Officers, (3) all directors and executive officers as a group and (4)
each person known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock.
<CAPTION>
Shares of Common Stock Beneficially Owned (1)
------------------------------------------------------------------------------
Name No. of Shares Percent of Total
---- ------------- ----------------
<S> <C> <C>
Entities Affiliated with Travelers
Group, Inc.
388 Greenwich St.
New York, NY 10013 (2) 6,090,908 24.8%
Harold T. Bowling 26,753 *
Charles C. Byer (3) 96,666 *
James A. Glaze (4) 63,779 *
Jay W. Hubbard 13,253 *
Gene J. Kennedy (5) 589,256 2.6%
Edward J. Lamb (6) 59,346 *
James A. Lovell, Jr 43,253 *
John W. Pauly (7) 216,598 *
Gordon H. Smith (8) 301,416 1.1%
All directors and executive officers
as a group (9 persons) (9) 1,410,320 4.9%
<FN>
* Represents less than 1% of the 24,016,036 shares of Common Stock
outstanding on March 31, 1998.
(1) Except as indicated below, the persons named in the table, to the
Company's knowledge, have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
(2) As reported in Amendment No. 5 to Schedule 13G/A filed by Travelers
Group, Inc. on January 23, 1998. Includes shares held by Solomon Smith
Barney Holdings, Inc. and Mutual Management, Inc., and includes
1,363,636 shares issuable upon exercise of warrants exercisable within
60 days of March 31, 1998.
(3) Includes 96,500 shares issuable upon exercise of options exerisable
within 60 days of March 31, 1998.
(4) Includes 20,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998.
(5) Includes 50,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998 and 10,000 shares issuable upon
exercise of warrants exercisable within 60 days of March 31 1998.
(6) Includes 59,346 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998.
(7) Includes 50,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998.
32
<PAGE>
(8) Includes 260,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998 and 5,000 shares issuable upon
exercise of warrants exercisable within 60 days of March 31, 1998.
(9) Includes 380,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998 held by four directors, one of whom is
also an officer, 15,000 shares issuable to two directors, one of whom
is an officer, upon exercise of warrants exercisable within 60 days of
March 31, 1998, and 155,846 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1998 by two officers who are
not directors.
</FN>
</TABLE>
<TABLE>
The following table sets forth the beneficial ownership of Series A
Preferred Stock and Series B Preferred Stock of the Company as of March 5, 1998
by (1) each director and (2) each Named Executive Officer, (3) each holder of 5%
or more of the Series A Preferred Stock and Series B Preferred Stock, and (4)
all directors and executive officers as a group.
<CAPTION>
Shares of Preferred Stock Beneficially Owned (1)
------------------------------------------------------------------------------
Name No. of Shares Percent of Class (2)
---- ------------- --------------------
<S> <C> <C>
Gene J. Kennedy 89 4.8%
Edward J. Lamb 10 *
First Interstate Bank, Custodian for
the benefit of James Ermet Haldan Trust
P.O. Box 30100
Reno, NV 89560 500 19.4%
David J. Holmgren (3)
30 Birch Lane
Coscob, CT 06807 308 18.7%
Estate of John C. Cahill (4)
284 President Avenue
Providence, RI 02906 185 11.2%
All directors and executive officers
as a group (9 persons) 99 5.4%
<FN>
* Represents less than 1% of the total number of shares of Preferred
Stock outstanding.
(1) Except as noted below, the persons named in the table, to the Company's
knowledge, have sole voting and investment power with respect to all
shares of Preferred Stock shown as beneficially owned by them, subject
to community property laws where applicable.
(2) Represents the percentage obtained by dividing the number of shares of
Common Stock into which shares of Series A Preferred Stock and Series B
Preferred Stock held by the beneficial owner are convertible by the
number of shares of Common Stock into which all outstanding Shares of
Series A Preferred Stock and Series B Preferred Stock are convertible.
(3) Includes 14 shares owned jointly by Mr. Holmgren and his spouse, Karen
C. Holmgren.
(4) Does not include 5 shares held by each of Ann Catherine Cahill and Mary
Elizabeth Cahill, Mr. Cahill's daughters.
</FN>
</TABLE>
Compliance with Section 16(a) of the Exchange Act
Based solely on its review of the copies of Forms 3, 4 and 5 received
by the Company, or written representations from certain reporting persons that
no Forms 5 were required for such persons, the Company believes that, during the
fiscal year ended December 31, 1997, all filing requirements under Section 16(a)
of the Securities Exchange Act applicable to its officers, directors and 10%
shareholders were complied with, except that Messrs. Byer, Glaze, Kennedy, Pauly
and Smith each filed a Form 5 report for the 1997 year after the due date.
33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sale of Common Stock
<TABLE>
The following officers, directors, and 5% shareholders purchased shares of the
Company's Common Stock in the two private placements closing in 1997.
<CAPTION>
Name Shares Acquired Amount Paid
---- --------------- -----------
<S> <C> <C>
Entities Affiliated with Travelers Group, Inc., a 5% shareholder 2,000,000 $ 500,000
Harold T. Bowling, a director 13,500 $ 5,062
Charles C. Byer, an officer 166 $ 63
Gene J. Kennedy, a director 66,000 $ 24,750
James A. Lovell, Jr., a director 30,000 $ 11,250
John W. Pauly, a director 13,333 $ 5,000
Gordon H. Smith, an officer and a director 10,000 $ 3,750
--------- ---------
Total 2,132,999 $ 549,875
========= =========
</TABLE>
PART IV
<TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
<CAPTION>
a) 1. Financial Statements Page Number
<S> <C> <C>
Report of Independent Auditors F-1
Balance Sheets F-2
December 31, 1997 and 1996
Statements of Operations F-3
For the years ended December 31, 1997, 1996, and 1995
Statement of Stockholders' Equity F-4
For the three years ended December 31, 1997
Statements of Cash Flows F-5
For the years ended December 31, 1997, 1996, and 1995
Notes to Financial Statements F-6
</TABLE>
2. Financial Statement Schedules
All schedules are omitted because they are not required, are
not applicable, or the information is included in the financial statements or
notes thereto.
34
<PAGE>
3. Exhibits
3.0 Amended and Restated Articles of Incorporation of
the Registrant, as filed with the California
Secretary of State, November 28, 1988. (1)
3.1 Certificate of Amendment of Amended and Restated
Articles of Incorporation of Power Spectra, Inc.,
as filed with the California Secretary of State,
August 30, 1993. (9)
3.2 Certificate of Determination of Preferences of
Series A Preferred Stock of Power Spectra, Inc., as
filed with the California Secretary of State,
August 30, 1993. (9)
3.3 Certificate of Determination of Preferences of
Series B Preferred Stock of Power Spectra, Inc., as
filed with the California Secretary of State,
January 4, 1995. (7)
3.4 Certificate of Amendment of Amended and Restated
Articles of Incorporation of the Registrant, as
filed with the California Secretary of State, April
7, 1997. (10)
3.5 By-Laws of Registrant. (3)
10.0 1986 Incentive Stock Option Plan as amended and
forms of incentive and non-statutory stock option
agreements. (2) (6)
10.1 Research Agreement between Registrant and The
Boeing Company. (4)
10.2 Form of Indemnification Agreement, entered into by
the Registrant with each of its executive officers
and directors. (3)
10.3 1989 Director Incentive Stock Plan. (3) (6)
10.4 1991 Director Stock Plan. (6) (8)
10.5 Director Option Plan. (5) (6)
10.6 Power Spectra, Inc. Series A Securities Purchase
Agreement, dated April 7, 1993. (9)
10.7 Power Spectra, Inc. Series B Securities Purchase
Agreement, dated January 13, 1995. (7)
10.8 Ground Penetrating Radar Development Agreement,
dated June 19, 1996, between the Registrant and
European Industries Associates. (10)
10.9 GPR Systems Development, Sale and License
Agreement, dated December 17, 1996 between
Registrant and LandRay Technologies, Inc. (10) (11)
10.10 Letter amending GPR Systems Development, Sale and
License Agreement, dated March 13, 1997. (10)
10.11 Registration Rights Agreement, dated April 11, 1997
(10)
10.12 Boeing Asset Transfer: Amendment Number 12 to
Research Agreement 9-1110-JET-103.
10.13 Lease Extension: Amendment #2 to ARGOSystems Lease
dated November 22, 1991.
35
<PAGE>
23.1 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule.
---------------------------
(1) Incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
(2) Incorporated by reference from the Registrant's
Registration Statement on Form S-8 filed September
1, 1989 (No. 33-30855).
(3) Incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.
(4) Incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1988. Confidential treatment
granted as to portions of this agreement.
(5) Incorporated by reference from the Registrant's
Registration Statement on Form S-8 filed on January
21, 1993 (No. 33-57280).
(6) Managerial contract or compensatory plan or
arrangement in which the Company's directors or
officers participate.
(7) Incorporated by reference from the Registrant's
Annual Report on From 10-K for the fiscal year
ended December 31, 1994.
(8) Incorporated by reference from the Registrant's
Registration Statement on Form S-8 filed on
December 26, 1996 (No. 333-18837).
(9) Incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(10) Incorporated by reference from the Registrant's
Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996.
(11) Confidential treatment has been requested as to
portions of this agreement.
b) Reports on Form 8-K
None.
c) Exhibits
See response to Item 14 (a) 3.
d) Financial Statement Schedules
See response to Item 14 (a) 2.
36
<PAGE>
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 on this 15th day of
April, 1998.
Power Spectra, Inc.
By: /s/ Gordon H. Smith
----------------------
Gordon H. Smith
Chairman of the Board,
Executive Officer
37
<PAGE>
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.
Dated: April 15, 1998 /s/ Gordon H. Smith
-------------------
Gordon H. Smith, Chairman of the Board
Chief Executive Officer
Principal Executive Officer
Dated: April 15, 1998 /s/ Harold T. Bowling
---------------------
Harold T. Bowling, Director
Dated: April 15, 1998 /s/ James A. Glaze
------------------
James A. Glaze, Director
Dated: April 15, 1998 /s/ Jay W. Hubbard
------------------
Jay W. Hubbard, Director
Dated: April 15, 1998 /s/ Gene J. Kennedy
-------------------
Gene J. Kennedy, Director
Dated: April 15, 1998 /s/ James A. Lovell, Jr.
------------------------
James A. Lovell, Jr., Director
Dated: April 15, 1998 /s/ John W. Pauly
-----------------
John W. Pauly, Director
Dated: April 15, 1998 /s/ Edward J. Lamb
------------------
Edward J. Lamb,
Controller, Chief Financial Officer
Principal Financial and Accounting Officer
38
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Power Spectra, Inc.
We have audited the accompanying balance sheets of Power Spectra, inc. (a
California corporation) as of December 31, 1997 and 1996 and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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 Power Spectra, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has accumulated substantial losses in recent years and will require
additional capital to complete product development of current proposed product
offerings and extend its technology to new applications. These factors, among
others, as discussed in Note 2 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
San Jose, California
March 20, 1998
F-1
<PAGE>
Power Spectra, Inc.
Balance Sheets
December 31,
------------------------------
1997 1996
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 441,254 $ 843,304
Accounts receivable 12,407 69,301
Receivable from affiliate 250,000 --
Unbilled accounts receivable 0 25,813
Inventories 232,368 217,744
Other current assets 29,833 49,277
----------- -----------
Total current assets 965,862 1,205,439
Equipment and improvements, at cost
Furniture and fixtures 196,574 196,574
Equipment 1,053,895 1,055,518
Leasehold improvements 70,487 70,487
----------- -----------
1,320,956 1,322,579
Accumulated depreciation and
amortization (1,061,197) (954,259)
----------- -----------
Net equipment and improvements 259,759 368,320
Patents, of $86,493 and
$67,415 in 1997 and
1996 respectively 78,428 72,993
Deposits 26,756 26,075
----------- -----------
$ 1,330,805 $ 1,672,827
=========== ===========
See accompanying notes
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 310,928 $ 161,422
Accrued compensation expense 127,717 145,049
Allowance for contract losses 100,000 100,000
Deferred contract revenue 433,177 433,177
Accrued professional fees 74,004 76,350
Preferred stock dividend payable 241,351 48,747
Other accrued expenses 27,696 27,696
------------ ------------
Total current liabilities 1,314,873 992,441
Stockholders' equity
Preferred stock, no par value; 5,000,000
shares authorized; issuable in series
Series A convertible, 1,500 shares
authorized, 1,044 shares issued,
791 outstanding (1996 - 791 )
liquidation preference of $791,000 667,720 667,720
Series B convertible, 1,200 shares
authorized, 1,153 shares issued,
1,143 outstanding (1996 - 1,143)
liquidation preference of $1,143,000 997,806 997,806
Common stock, no par value,
55,000,000 shares authorized;
23,969,854 shares issued and
outstanding (1996 - 16,125,699) 16,253,365 14,077,816
Accumulated deficit (17,902,959) (15,062,956)
------------ ------------
Total stockholders' equity 15,932 680,386
------------ ------------
$ 1,330,805 $ 1,672,827
============ ============
</TABLE>
F-2
<PAGE>
<TABLE>
Power Spectra, Inc.
Statements of Operations
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales $ 138,915 $ 35,932 $ 87,877
Contract revenue - affiliate 750,000 550,000 0
- other 53,213 414,182 1,341,748
------------ ------------ ------------
Total revenues 942,128 1,000,114 1,429,625
Costs and expenses
Cost of revenue 1,726,426 2,587,467 2,235,623
Sales and marketing 126,357 374,469 494,804
Research and development 798,478 714,368 213,667
General and administrative 957,179 1,203,469 1,062,589
------------ ------------ ------------
Total costs and expenses 3,608,440 4,879,773 4,006,683
------------ ------------ ------------
Loss from operations (2,666,312) (3,879,659) (2,577,058)
Interest expense (244) 0 (18,126)
Interest income 21,693 94,552 37,083
Other income (expense) (2,536) (3,192) (4,129)
------------ ------------ ------------
Net loss ($ 2,647,399) ($ 3,788,299) ($ 2,562,230)
============ ============ ============
Loss per common share -- basic and diluted ($ 0.14) ($ 0.26) ($ 0.25)
============ ============ ============
Weighted average common shares outstanding 19,793,980 15,622,268 11,181,541
============ ============ ============
<FN>
See accompanying notes
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
Power Spectra, Inc.
Statement of Stockholders' Equity
For the three years ended December 31, 1997
<CAPTION>
Preferred Stock
----------------------------------------------
Common Stock Class A Class B
----------------------------- ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount
------------- -------------- ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 10,047,550 8,150,676 1,044 881,289 -- --
Issuance of 1,153 shares of Series B Prererred
net of issuance costs of $31,164 and
finders fees of $115,300 paid, convertible
to common stock at $0.78 147,631 115,300 -- -- 1,153 1,006,536
Exercise of stock options:
at $0.88 to $1.13 per share 32,650 28,663 -- -- -- --
Common stock issued to directors for
directors' fees 89,065 84,375 -- -- -- --
Private placement of common stock at $1.10
less issuance costs of $407,900 3,358,326 3,292,259 -- -- -- --
Conversion of 245 shares of Class A
Preferred to common at $1.22 per share
net of allocated preferred issuance cost 200,013 206,816 (245) (206,816) -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
------------- -------------- ------- ------------ --------- -----------
Balances at December 31, 1995 13,875,235 11,878,089 799 674,473 1,153 1,006,536
Private placement of common stock at $1.10
less issuance costs of $258,044 2,060,046 2,008,007 -- -- -- --
Exercise of stock options:
at $0.88 to $1.28 per share 95,945 87,729 -- -- -- --
Common stock issued to directors for
directors' fees 72,138 85,415 -- -- -- --
Common stock issued in payment of services
at $1.03 per share 3,000 3,093 -- -- -- --
Conversion of 8 shares of Class A
Preferred to common at $1.22 per share
net of allocated preferred issuance cost 6,531 6,753 (8) (6,753) -- --
Conversion of 10 shares of Class B
Preferred to common at $0.78 per share
net of allocated preferred issuance cost 12,804 8,730 -- -- (10) (8,730)
Dividends on preferred stock -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
------------- -------------- ------- ------------ --------- -----------
Balances at December 31, 1996 16,125,699 $14,077,816 791 $667,720 1,143 $997,806
Private placement of common stock at $0.25
less issuance costs of $95,504 4,470,000 996,996 -- -- -- --
Private placement of common stock at $0.375
less issuance costs of $106,447 3,199,994 1,093,553 -- -- -- --
Common stock issued to directors for
directors' fees 165,714 75,000 -- -- -- --
Common stock issued in payment of services
at $0.375 per share 8,447 10,000 -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
------------- -------------- ------- ------------ --------- -----------
Balances at December 31, 1997 23,969,854 $16,253,365 791 $667,720 1,143 $997,806
============= ============== ======= ============ ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated stockholders'
deficit equity
-------------- ---------------
<S> <C> <C>
Balances at January 1, 1995 (8,327,779) 704,186
Issuance of 1,153 shares of Series B Prererred
net of issuance costs of $31,164 and
finders fees of $115,300 paid, convertible
to common stock at $0.78 -- 1,121,836
Exercise of stock options:
at $0.88 to $1.13 per share -- 28,663
Common stock issued to directors for
directors' fees -- 84,375
Private placement of common stock at $1.10
less issuance costs of $407,900 -- 3,292,259
Conversion of 245 shares of Class A
Preferred to common at $1.22 per share
net of allocated preferred issuance cost -- --
Dividends on preferred stock (189,195) (189,195)
Net loss for the year (2,562,230) (2,562,230)
-------------- ---------------
Balances at December 31, 1995 (11,079,204) 2,479,894
Private placement of common stock at $1.10
less issuance costs of $258,044 -- 2,008,007
Exercise of stock options:
at $0.88 to $1.28 per share -- 87,729
Common stock issued to directors for
directors' fees -- 85,415
Common stock issued in payment of services
at $1.03 per share -- 3,093
Conversion of 8 shares of Class A
Preferred to common at $1.22 per share
net of allocated preferred issuance cost -- --
Conversion of 10 shares of Class B
Preferred to common at $0.78 per share
net of allocated preferred issuance cost -- --
Dividends on preferred stock (195,453) (195,453)
Net loss for the year (3,788,299) (3,788,299)
-------------- ---------------
Balances at December 31, 1996 ($15,062,956) $680,386
Private placement of common stock at $0.25
less issuance costs of $95,504 -- 996,996
Private placement of common stock at $0.375
less issuance costs of $106,447 -- 1,093,553
Common stock issued to directors for
directors' fees -- 75,000
Common stock issued in payment of services
at $0.375 per share -- 10,000
Dividends on preferred stock (192,604) (192,604)
Net loss for the year (2,647,399) (2,647,399)
-------------- ---------------
Balances at December 31, 1997 ($17,902,959) $15,932
============== ===============
</TABLE>
F-4
<PAGE>
<TABLE>
Power Spectra, Inc.
Statements of Cash Flows
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net loss ($2,647,399) ($3,788,299) ($2,562,230)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 126,016 130,367 135,176
Common stock issued for services and
director compensation 85,000 88,508 84,375
Changes in operating assets and liabilities:
Accounts receivable - other 56,894 221,531 (260,418)
Accounts receivable - affiliate (250,000) -- --
Unbilled accounts receivable 25,813 19,176 65,762
Inventories (14,624) (92,926) 97,765
Other current assets 19,444 23,762 9,565
Accounts payable & accrued expenses 147,160 (58,177) 137,841
Accrued compensation expense (17,332) (33,099) --
Accrued dividend payable 192,604 (454) --
Deferred contract revenue -- 121,857 238,704
----------- ----------- -----------
Total adjustments 370,975 420,545 508,770
----------- ----------- -----------
Total cash used in operating activities (2,276,424) (3,367,754) (2,053,460)
Investing activities
Equipment and improvements
Additions -- (71,284) (18,349)
Disposals 1,623 11,687 --
Patent costs incurred (24,514) (25,000) --
Increase in deposits (680) -- (1,075)
----------- ----------- -----------
Total cash used in investing activities (23,571) (84,597) (19,424)
Financing activities
Proceeds from sale of common stock, net of stock
issuance costs and repurchases 2,090,549 2,095,736 3,320,922
Proceeds from sale of preferred stock, net of stock
issuance costs and repurchases -- -- 1,121,836
Dividends on preferred stock (192,604) (195,453) (189,195)
----------- ----------- -----------
Total cash provided by (used in) financing activities 1,897,945 1,900,283 4,253,563
----------- ----------- -----------
Increase (decrease) in cash (402,050) (1,552,068) 2,180,679
Cash and cash equivalents, beginning of period 843,304 2,395,372 214,693
----------- ----------- -----------
Cash and cash equivalents, end of period $ 441,254 $ 843,304 $ 2,395,372
=========== =========== ===========
Supplemental schedule of noncash financing activities:
Conversion of preferred stock to common stock $ -- $ 15,483 $ 206,816
=========== =========== ===========
Common stock and warrants issued in connection with
financing -- -- $ 115,300
=========== =========== ===========
Accrual of preferred stock dividends $ 192,604 $ 48,747 $ 49,201
=========== =========== ===========
Cash paid during the period for:
Interest $ 244 $ 0 $ 18,126
=========== =========== ===========
Income taxes $ 800 $ 800 $ 800
=========== =========== ===========
<FN>
See accompanying notes
</FN>
</TABLE>
F-5
<PAGE>
Power Spectra, Inc.
Notes to Financial Statements
December 31, 1997
1. The Company and summary of significant accounting policies
The Company develops, designs, and markets a family of products that use
proprietary high speed semiconductor devices which generate extremely rapid,
high-power electromagnetic impulses. The primary business of the Company is
related to the Bulk Avalanche Semiconductor Switch (BASS(TM)) and PSIristor(TM).
These switches have applicability in high-resolution radar, electronic warfare,
communications, and industrial applications such as ground penetrating radar for
use in geophysical exploration, underground mapping, and site remediation, level
control, positioning, velocity measurement, and obstacle detection and
avoidance. Historically, over 90% of the Company's revenues have come from
research and development contracts principally with U.S. Government agencies or
its contractors.
In preparing financial statements in conformity with generally accepted
accounting principles (GAAP), management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from these estimates.
The Company accounts for its long-term contracts using the
percentage-of-completion method when appropriate. For other long and short term
research and development contracts which call for meeting certain milestones
specified in those contracts for which certainty of delivery cannot be
preordained, the Company expenses costs as incurred and recognizes revenues only
upon completion of those milestones. The Company had one long-term contract
whose final deliverable was completed in the second quarter of 1996. A reserve
of $100,000 has been set up to handle any contingencies, which at this time are
unknown, related to this contract.
Affiliate receivable
Accounts receivable - affiliate consists of the following:
December 31,
---------------------------------
1997 1996
---- ----
LandRay Technology, Inc. $250,000 $0
======== ==
Inventories
Inventories, which are stated at the lower of cost (first-in, first-out basis)
or market, consist of the following:
December 31,
---------------------------------
1997 1996
---- ----
Work in progress $130,282 $112,949
Purchased Parts 102,086 104,795
-------- --------
$232,368 $217,744
======== ========
Depreciation
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets (3 to 10 years).
F-6
<PAGE>
1. The Company and summary of significant accounting policies (continued)
Patents
The cost of patents is being amortized over their statutory lives using the
straight-line method.
Investment in affiliate
The Company accounts for its investment in LandRay Technology, Inc. using the
equity method of accounting. The Company's cost basis in the investment is zero.
The excess of the Company's proportionate share of the net assets over its cost
basis, approximately $25,000 at inception of the joint venture, has not been
reflected in income. The resultant credit has been reflected as negative
goodwill. The two amounts offset for financial statement presentation purposes.
Likewise, any proportionate share of losses incurred by LandRay has been offset
by an identical amount of amortization of negative goodwill. The Company has not
guaranteed any obligations of LandRay and, therefore has not recognized any net
losses which would reduce its net investment in LandRay below zero. As of
December 31, 1997, the Company held an approximate 31% stake in LandRay, making
the Company the largest single shareholder.
Revenue from affiliate
The Company's contract with LandRay calls for the Company to provide research
and development services to LandRay and to be compensated for such services as
the company achieves certain milestones as called for in the contracts for which
certainty of delivery cannot be preordained. Under this arrangement, the Company
expenses the research and development costs as incurred. Since LandRay currently
has no revenue generating operations and funds required to meet its obligations
under the development contract have come entirely from various equity financing,
revenues are recognized only upon completion of those milestones and only after
the Company is satisfied that LandRay has the resources to pay the amount due.
Therefore, the Company does not receive any advance funding from LandRay for
which it would be liable to repay if the milestone is not met. The Company has
no obligation to repay any funds received from the LandRay contracts. Once
LandRay pays the Company, LandRay has assumed the financial risk involved in
that particular facet of the research and development.
Deferred Revenues
Deferred revenues are payments made by customers for which the Company has
deferred revenue recognition until the contract is closed out. Contracts with
the government call for audits of overhead rates for the years in which the
contract was performed. Currently the government has not audited for the years
1994, 1995, 1996, and 1997. No schedule has been set for these audits.
Income taxes
The Company accounts for income taxes using an asset and liability approach for
financial accounting and reporting purposes.
Recent Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which requires that an entity report, by major
components and as a single total, the change in its net assets from
non-shareholder sources during the period; and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which establishes annual and
interim reporting standards for an entity's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows. Both statements are effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
F-7
<PAGE>
1. The Company and summary of significant accounting policies (continued)
Loss per common share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." The
Company has adopted SFAS 128 for all periods presented. The addition of SFAS 128
had no impact on previously reported loss per share for the 1996 and 1995 fiscal
years. Under the provisions of SFAS 128, primary earnings per share is replaced
by basic earnings per share and the dilutive effect of stock options, warrants,
convertible stock, and contingent stock issuances are excluded from the
calculation. For companies like Power Spectra with potentially dilutive
securities such as stock options, warrants, convertible securities and
contingent stock issuances, fully diluted earnings per share is replaced by
diluted earnings per share. Loss per common share is based on the weighted
average of common shares outstanding for all periods presented, computed using
the net loss after deducting Series A and Series B Preferred Stock dividends in
1997 and 1996, and 1995. The assumed exercise of options and warrants and
assumed conversion of convertible securities have not been included in the
diluted loss per share computation as the effect would be anti-dilutive.
Cash and cash equivalents
The Company's cash and cash equivalents balance consists of bank demand deposits
and money market accounts, none of which has a maturity over three months. The
Company considers all highly liquid debt instruments purchased with an original
maturity date of three months or less to be cash equivalents.
401(k) plan
The Company has adopted a defined contribution plan under the provisions of
Section 401(k) of the Internal Revenue Code covering all employees. Employees
may contribute to the plan and Company contributions are determined annually by
the Board of Directors. For the year ended December 31, 1997, Company
contributions to the plan were $13,735 (1996--$12,660; 1995--$12,457).
2. Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
company as a going concern. The Company has accumulated substantial losses in
recent years and has not commenced revenue producing activities from its new
product offerings in amounts sufficient to fund current and future operations.
The Company will require significant additional funding to both complete product
development of current proposed product offerings and extend the use of its
technology to new applications. The Company, to date has not raised sufficient
funds to allow it to continue its present activities for the foreseeable future.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to raise sufficient debt or equity to allow
the Company to complete planned product development activities, continue its
research into new applications for its technology and succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
Management is continuing its efforts to raise additional funding through
issuance of stock or debt in amounts sufficient to fund current and future
operations. However, there can be no assurance that such efforts will be
successful.
F-8
<PAGE>
3. Series A Preferred Stock
In July 1993, the stockholders approved an amendment to the Company's Articles
of Incorporation to create 5,000,000 shares of Preferred Stock, and the Company
designated 1,500 shares of the Preferred Stock as Series A. On September 30,
1993, the Company issued 1,044 shares of Series A Preferred Stock of the Company
in exchange for all of the outstanding Convertible Debentures at a conversion
rate of one share of the Series A Preferred for each One Thousand Dollars
($1,000) principal amount of Debentures. The holders of the Series A Preferred
are entitled to receive cumulative dividends at the rate of 10% of the original
purchase price of the Series A Preferred per annum, payable on a calendar
quarterly basis, in preference to any dividends on the Common Stock.
The Series A Preferred is convertible, at the option of the holder, at any time
after the date of issuance, into shares of Common Stock at a conversion price of
$1.225. Each share of the Series A Preferred will be automatically converted
into Common Stock if at any time the holders of at least sixty-seven percent
(67%) of the outstanding Series A Preferred vote to convert all such Preferred
into Common Stock.
The Series A Preferred is now subject to redemption at the option of the
Company. In the event that the Company redeems the Series A Preferred on or
before April 7, 1998, the redemption price will be equal to 106% of the original
purchase price of the Series A Preferred ($1,000), plus accumulated but unpaid
dividends to the date of redemption; thereafter, the redemption price shall be
equal to the original price of the Series A Preferred plus accumulated but
unpaid dividends at the date of redemption.
Each holder of the Series A Preferred has the right to vote that number of
shares equal to the number of shares of Common Stock issuable upon conversion of
such holder's Series A Preferred. The Series A Preferred shall vote with the
Common Stock on all matters, except as may be required under applicable law and
as follows. The Company is precluded, without first obtaining the approval of a
majority of the outstanding shares of the Series A Preferred, voting as a
separate class, from (1) engaging in any merger, consolidation, sale of
substantially all of its assets, or other reorganization in which the holders of
Series A Preferred would not receive their full liquidation preference; (2)
declaring any dividends on the Common Stock (except dividends payable solely in
Common Stock) while any Series A Preferred is outstanding; (3) authorizing or
issuing shares of any class or series having rights, preferences, or privileges
senior to the Series A Preferred with respect to dividends, liquidation, or
redemption, or issuing any convertible debt instruments or debt instruments
together with warrants which if converted or exercised would have a preference
or priority as to dividends, liquidation, or redemption senior to the Series A
Preferred; (4) amending the rights, preferences, privileges, or restrictions of
the Series A Preferred; or (5) reclassifying any shares of Common Stock or any
other shares of capital stock into shares having any preference or priority as
to dividends, liquidation, or redemption superior to the Series A Preferred.
In the event of any liquidation or winding up of the Company, the holders of the
Series A Preferred are entitled to receive, in preference to the holders of
Common Stock, an amount equal to the original purchase price per share ($1,000)
of the Series A Preferred plus accumulated but unpaid dividends.
On December 31, 1995, 245 shares of the Series A Preferred Stock were converted
into 200,013 shares of Common Stock and on July 9, 1996, 8 shares of the Series
A Preferred Stock were converted into 6,531 shares of Common Stock.
F-9
<PAGE>
4. Series B Preferred Stock
In September 1994, the Company designated 1,200 shares of the Preferred Stock as
Series B. The Company closed new financing of its Series B Preferred Stock in
the aggregate amount of $1,153,000 (1,153 shares) in 1995. Costs incurred in
conjunction with the Series B issuance totaled $146,464, of which $31,164 was
paid in cash for services, and the remainder, $115,300, was paid in shares of
the Company's Common Stock at the Series B conversion price of $0.781 per share.
All holders of the Series B Preferred are entitled to receive cumulative
dividends at the rate of 10% of the original purchase price of the Series B
Preferred per annum, payable on a calendar quarterly basis, after any dividend
payments required to be made to the Series A Preferred Stock, and in preference
to any dividends on the Common Stock.
The Series B Preferred is convertible, at the option of the holder, at any time
after the date of issuance, into shares of Common Stock at a conversion price of
$0.781 per share. Each share of the Series B Preferred will be automatically
converted into Common Stock if at any time the holders of at least sixty-seven
percent (67%) of the outstanding Series B Preferred approve the conversion.
The Series B Preferred will be subject to redemption at the option of the
Company at any time on or after January 13, 1997. In the event that the Company
redeems the Series B Preferred on or after January 13, 1997, but not after
January 13, 2000, the redemption price will be equal to 106% of the original
purchase price of the Series B Preferred ($1,000), plus accumulated but unpaid
dividends to the date of redemption; thereafter, the redemption price shall be
equal to the original price of the Series B Preferred plus accumulated but
unpaid dividends to the date of redemption.
Each holder of the Series B Preferred has the right to vote that number of
shares equal to the number of shares of Common Stock issuable upon conversion.
The Series B Preferred Stockholders are entitled to vote with the holders of the
Series A Preferred Stock and holders of Common Stock together as a single class
on all matters, except as may be required under applicable law and as follows.
The Company is precluded, without first obtaining the approval of a majority of
the outstanding shares of the Series B Preferred, voting as a separate class,
from (1) engaging in any merger, consolidation, sale of substantially all of its
assets, or other reorganization in which the holders of Series B Preferred would
not receive their full liquidation preference; (2) declaring any dividends on
the Common Stock (except dividends payable solely in Common Stock) while any
Series B Preferred is outstanding; (3) authorizing or issuing shares of any
class or series having rights, preferences, or privileges senior to the Series B
Preferred with respect to dividends, liquidation, or redemption, or issuing any
convertible debt instruments or debt instruments together with warrants which if
converted or exercised would have a preference or priority as to dividends,
liquidation, or redemption senior to the Series B Preferred; (4) amending or
repealing any provision of, or adding any provision to, the Company's articles
of incorporation or by-laws if such action would alter or change the
preferences, rights, privileges, or powers of, or the restrictions provided for
the benefit of, the Series B Preferred materially and adversely; or (5)
reclassifying any shares of Common Stock or any other shares of capital stock
into shares having any preference or priority as to dividends, liquidation
preference, or redemption rights superior to any such preference or priority of
the Series B Preferred.
In the event of any liquidation or winding up of the Company, the holders of the
Series B Preferred are entitled to receive, in preference to the holders of
Common Stock but subject to the rights of the Series A Preferred Stock on
liquidation, an amount equal to the original purchase price per share ($1,000)
of the Series B Preferred plus accumulated but unpaid dividends.
On December 17, 1996, 10 shares of the Series B Preferred Stock were converted
into 12,804 shares of Common Stock.
F-10
<PAGE>
5. Taxes on income
<TABLE>
A reconciliation between the Company's effective tax rate and the United States
("U. S.") statutory rate (34%) is as follows:
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rate ($ 906,546) ($ 1,288,022) ($ 871,158)
Operating losses, not utilized 906,546 1,288,022 871,158
---------------- --------------- --------------
Provision for income taxes $ -- $ -- $ --
================ =============== ==============
</TABLE>
At December 31, 1997, the Company has net loss operating carryforwards for
federal and state income tax purposes of approximately $16,100,000 and
$4,800,000, respectively. The Company also has research and development credit
carryforwards for federal tax purposes of approximately $145,000. The net
operating loss and credit carryforwards expire in varying amounts through the
year 2011.
Pursuant to the Tax Reform Act of 1986, use of the Company's net operating loss
and research and development credit carryforwards may be substantially limited
if a cumulative change in ownership of more than 50% of the value of the
Company's stock occurs within any three-year period.
<TABLE>
Significant components of the Company's deferred tax assets and liabilities for
U. S. federal and state income taxes are as follows:
<CAPTION>
December 31,
------------------------------------
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Reserves not deductible for tax purposes $ 120,000 $ 120,000
Book and tax depreciation and
amortization differences ( 8,000) (12,000)
Net operating loss carryforwards 5,902,000 5,036,000
Tax credit carryforwards 145,000 145,000
State taxes ( 45,000) (158,000)
------------ ------------
Total deferred tax assets 6,114,000 5,131,000
Valuation allowance (6,114,000) (5,131,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
6. Common Stock
The Company closed a private placement on March 29, 1996. Gross proceeds raised
were $5,960,000. In this placement the Company issued units in lieu of single
shares of common stock. Each unit consists of one share of common stock and one
common stock purchase warrant ( the "units"). Each warrant entitles the holder
to purchase one-half of a share of common stock and is exercisable for ten years
from the date of original issuance of the warrants at the initial closing of the
private placement ( the "original issuance date"), subject to two vesting
conditions both of which have been met. Two warrants are required to purchase
one share. The units were offered to accredited investors only and were offered
at $1.10 per unit ( the "unit offering price"). There was no minimum offering
amount. The warrants, which were issued as a component of the units, are
exercisable at the following prices:
(i) 50% of the total number of warrants held by the investor are
exercisable because within three years of the original issuance
date, the Company issued common stock or securities convertible
into common stock at a price below the unit offering price. The
exercise price of such warrants vested in
F-11
<PAGE>
accordance with this paragraph (i) will be equal to the price
offered to the investors in the subsequent financing, i.e., $0.25
per share.
(ii) 50% of the total number of warrants held by the investor are
exercisable because within two years of the original issuance
date, the Company's common stock is not quoted on the NASDAQ
SmallCap Market or the NASDAQ National Market. The exercise price
of such warrants vested in accordance with this paragraph (ii)
will be equal to the unit offering price, i.e., $1.10 per share.
The shareholders have since amended an additional condition of the placement
which restricted the Company, for three years from the original issuance date,
from any grant of stock options under its existing or future stock option plans
at an exercise price less than 110% of the Unit Offering price. At the June 26,
1996 Annual Meeting of Shareholders, proposals to replace or amend the Company's
two option plans were presented for vote of the shareholders. Both proposals
specified the number of shares reserved for issuance, the types of grants
allowed, the eligibility, and the terms of the options including exercise price,
term and termination of options. Both proposals were approved by over 51% of the
shares eligible to vote at the meeting and by over 71% of those shares actually
voted.
The Company has reserved 652,299 shares of Common Stock for the conversion of
the Series A Preferred Stock, and 1,476,313 shares of Common Stock for the
conversion of the Series B Preferred Stock.
In connection with the private placement issuance of Common Stock in 1995, the
Company issued for services rendered warrants to acquire 64,184 shares of Common
Stock at $0.898 per share. The warrants are fully exercisable and expire June 8,
1998. In connection with the private placement issuance of Common Stock in 1995
and 1996, the Company issued for services rendered warrants to acquire 225,765
shares of Common Stock at $1.32 per share. The warrants are fully exercisable
and expire March 26, 2001. In connection with a private placement issuance of
Common Stock in 1997 , the Company issued for services rendered warrants to
acquire 218,500 shares of Common Stock at $0.25 per share. The warrants are
fully exercisable and expire March 26, 2002. In connection with a private
placement issuance of Common Stock in 1997, the Company issued for services
rendered warrants to acquire 320,000 shares of Common Stock at $0.375 per share.
The warrants are fully exercisable and expire November 13, 2002.
Common shares issued for services have been recorded at amounts that approximate
the fair value of the shares at time of issuance.
During 1989, 1991, 1993, and 1995, the Company reserved 30,000 shares, 100,000
shares, 150,000 shares, and 200,000 shares, respectively, of Common Stock for
issuance to certain non-employee directors under the 1989 and 1991 Director
Incentive Stock Plan (Director Plan). Directors must meet certain eligibility
requirements for stock awards under the Director Plan. All stock awards are
fully vested at the time of grant and are for services rendered to the Company.
The number of shares issued is calculated upon a fixed dollar amount and the
share price at the date of record.
During 1995 the Company reserved a total of 200,000 additional shares of Common
Stock under the 1991 Director Stock Plan. The Company issued 165,714 shares
under the Director Plan during 1997 (1996 -- 72,138 shares, 1995 --89,965
shares).
In 1993, the Company had reserved a total of 50,000 shares of Common Stock to
issue under the Advisory Board Stock Program. The terms of the Advisory Board
Stock Program are similar to those of the 1991 Director Stock Plan except that
advisory board members are awarded 1,000 shares per meeting attended. The
Company issued no shares of Common Stock under the Advisory Board Stock Program
in 1997 (1996 -- issued 3,000 shares at $1.03 per share, 1995 -- issued 4, 000
at $0.88 per share).
Under several stock option plans, the Company has granted options to key
employees, consultants, and directors to acquire shares of the Company's Common
Stock at prices that are generally equal to fair value at the date of grant.
Employees and consultants options generally vest over five years (three years
for grants prior to January 1, 1991)
F-12
<PAGE>
6. Common Stock (continued)
and expire if not exercised within ten years of the date of grant. On June 7,
1996 the Company's shareholders approved the 1996 Stock Plan. Under the plan
1,500,000 shares of Common Stock were reserved for issuance upon exercise of
options granted under the 1996 plan in addition to the shares which remain
available for issuance under the 1986 plan. Effective with the approval of the
1996 Plan, the entire reserve of shares for grants of future options pursuant to
the 1986 Plan were canceled. The 1986 Plan expired by its terms effective
February, 1997. Such termination will not affect the shares subject to options
currently outstanding under the 1986 Plan. At December 31, 1997, there were
1,373,186 options issued and outstanding under the various plans and 1,331,948
available for issuance.
The Director Option Plan provides for the granting of options to directors to
acquire shares of the Company's Common Stock at prices equal to fair value at
the date of grant. These options are fully exercisable upon grant and expire if
not exercised within ten years from the date of grant. The Company granted
options to acquire 60,000 stock shares of Common Stock under the Director Option
Plan in 1997 at $0.47 per share ( in 1996 granted 70,000 options at $1.85 per
share, and in 1995 granted 70,000 options at $1.16 per share).
<TABLE>
The exercise price of each option generally approximates the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
based on the fair value of the options at the grant dates consistent with the
method of Statement of Financial Accounting Standards 123, Accounting for
Stock-Based Compensation ("SFAS 123"), the Company's net loss and loss per share
would have been reduced to the pro forma amounts indicated below.
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $(2,751,425) $(3,983,752) $(2,840,003)
(applicable to Pro forma (2,779,525) (4,056,820) (2,997,904)
common shares)
Loss per share - As reported $(0.25) $(0.26) $(0.14)
basic & diluted Pro forma (0.25) (0.26) (0.15)
</TABLE>
<TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996, and 1997, and includes no expected
dividends:
<CAPTION>
Weighted Average
Risk-Free Interest
Year Expected Volatility Rate Expected Lives
- ------------------------ ---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
1997 225% 6.37% 5 years
1996 200% 6.55% 5 years
1995 200% 6.55% 5 years
</TABLE>
F-13
<PAGE>
6. Common Stock (continued)
A summary of the status of the company's stock option plan for the three years
ended December 31, 1997, and changes during the years ending on those dates is
presented below.
Weighted
Average
Exercise
Shares Price
----- -----
Outstanding at December 31, 1994 1,255,096 1.61
Granted 285,773 1.09
Exercised (38,650) 0.88
Forfeited (201,397) 1.80
-------
Outstanding at December 31, 1995 1,300,822 1.49
Granted 189,500 1.60
Exercised (95,945) 0.89
Forfeited (313,419) 1.81
-------
Outstanding at December 31, 1996 1,080,958 1.46
Granted 1,101,980 0.64
Exercised 0 0.00
Forfeited (489,752) 1.18
-------
Outstanding at December 31, 1997 1,693,186 1.01
The weighted-average fair value of options granted during the years ended
December 31, 1995, 1996 and 1997 is $0.97, $1.56 and $0.63, respectively.
<TABLE>
The following information applies to options outstanding at December 31, 1997
<CAPTION>
<S> <C> <C> <C>
Range of exercise prices $0.44 - $0.75 $0.91 - $1.44 $1.54-$3.75
Options outstanding 899,930 545,256 248,000
Weighted average exercise price $0.62 $1.20 $1.99
Weighted-average remaining
contractual life (years) 10 6 5
Options exercisable 479,488 456,370 248,000
Weighted average exercise price $0.59 $1.22 $1.99
</TABLE>
7. Development and marketing agreement
Starting in 1990, the Company received from The Boeing Company ("Boeing") over a
three year period, $3.7 million for equipment and the construction of a clean
room laboratory. In connection with the expiration of the agreement with Boeing
in 1994, Boeing agreed to allow the Company continued use of these assets at no
cost. In September 1997, Boeing transferred these assets to the Company with the
proviso that the Company assumes all costs and liabilities for disposition of
the assets upon completion of the Company's continuing need for the assets.
Accordingly, the Company has no basis in the assets transferred from Boeing, and
accordingly does not reflect them in the accompanying balance sheets. In
connection with the construction of the clean room laboratory, the Company
entered into an agreement to rent office and manufacturing space in a building
owned by Boeing. The original lease expired in February 1997. A revised lease
was negotiated with one year fixed and a month to month
F-14
<PAGE>
arrangement for an additional 24 months at varying cost per month. The Company
agreed that upon notice Boeing could occupy up to 9,000 square feet of the
building with per month costs adjusted accordingly.
12 months fixed to January 31, 1998 $22,500 per month
09 months month to month to October 31, 1998 $22,500 per month
03 months month to month to January 31, 1999 $27,500 per month
03 months month to month to April 30, 1999 $32,500 per month
03 months month to month to July 31, 1999 $37,500 per month
03 months month to month to October 31, 1999 $42,500 per month
03 months month to month to January 31, 2000 $45,000 per month
8. Operating leases
The Company has entered into operating leases for facilities and equipment. The
future minimum payments under these leases are as follows:
1998 $ 287,905
1999 462,905
2000 50,929
-----------
Total minimum payments $ 801,739
===========
For the year ended December 31, 1997, rent expense was $268,368 (1996 --
$250,413, 1995 -- $250,413).
9. Valuation and Qualifying Accounts
<TABLE>
The following are the valuation and qualifying accounts for deferred tax assets
for December 31, 1995, 1996, and 1997. (Dollars in thousands)
<CAPTION>
Additions
------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
beginning of costs and other at end of
period expenses accounts Deductions period
-------------- ---------------- --------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Valuation allowance on $5,131 $ 983 $ -- $ -- $6,114
deferred tax assets
Year ended December 31, 1996
Valuation allowance on $3,791 $1,340 $ -- $ -- $5,131
deferred tax assets
Year ended December 31, 1995
Valuation allowance on $2,864 $ 927 $ -- $ -- $3,791
deferred tax assets
</TABLE>
F-15
<PAGE>
10. Related party transactions
LandRay Technology, Inc. is a Delaware corporation incorporated in 1996. Power
Spectra was a founding stockholder in LandRay. Power Spectra's investment in
LandRay consisted of the grant of license to use Power Spectra's ground
penetrating radar technology in the area of mineral and fossil fuels exploration
and exploitation. Power Spectra has not invested any cash in LandRay. In return
for the license, Power Spectra received 50% of the initial stock issued.
Subsequent financing by LandRay has reduced Power Spectra's ownership to 31%,
and this ownership interest will be further diluted as Land Ray obtains
additional equity. It is anticipated that Land Ray will need to raise an
additional $2.5 million in 1998 in order to meet its contractual obligations to
the company, assuming the company is successful in meeting contract milestones.
On a contractual basis, Power Spectra develops and manufactures systems unique
to LandRay's licensed area of operations. Power Spectra retains all rights in
intellectual property developed for any LandRay oriented product.
The only affiliate of the Company with an ownership stake in LandRay is Gene J.
Kennedy, a director of the Company, who owned approximately 1.2% of the
outstanding shares of LandRay at December 31, 1997. Power Spectra has no
significant role in the management and operations of LandRay. Ridge Harlan is
LandRay's Chairman of the Board and Kenneth Smith is its Chief Executive
Officer. LandRay currently has two full time employees, three part time
employees, and is recruiting others.
The Company recognized revenues of $550,000 upon completion of contractual
milestones under the initial June 19, 1996 contract with LandRay's organizers,
European Industries Associates, and the Company recognized revenues of $750,000
for the year ended December 31, 1997, upon completion of contractual milestones
delineated in the contract dated December 17, 1996, as amended on March 13,
1997. To complete this contract, the Company must meet two additional milestones
with a total value of $450,000.
11. Computation of Loss Per Share
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ------------------
<S> <C> <C> <C>
Net loss ($2,647,399) ($3,788,299) ($2,562,230)
Less: accrual of preferred dividends 192,604 195,453 189,195
------------------- ------------------ ------------------
Net loss applicable to common shares ($2,840,003) ($3,983,752) ($2,751,425)
=================== ================== ==================
Loss per share - basic and Diluted ($0.14) ($0.26) ($0.25)
=================== ================== ==================
Weighted average shares of common stock outstanding
19,793,980 15,622,268 11,181,541
Common stock equivalent shares from stock options
using the treasury stock method -- -- --
------------------- ------------------ ------------------
Number of shares used in the per share computation 19,793,980 15,622,268 11,181,541
=================== ================== ==================
</TABLE>
F-16
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
3.0(1) Amended and Restated Articles of Incorporation of the
Registrant, as filed with the California Secretary of State,
November 28, 1988.
3.1(9) Certificate of Amendment of Amended and Restated
Articles of Incorporation of Power Spectra, Inc., as filed
with the California Secretary of State, August 30, 1993.
3.2(9) Certificate of Determination of Preferences of Series A
Preferred Stock of Power Spectra, Inc., as filed with the
California Secretary of State, August 30, 1993.
3.3(7) Certificate of Determination of Preferences of Series B
Preferred Stock of Power Spectra, Inc., as filed with the
California Secretary of State, January 4, 1995.
3.4 Certificate of Amendment of Amended and Restated Articles
of Incorporation of the Registrant, as filed with the
California Secretary of State, April 7, 1997
3.5(3) By-Laws of Registrant.
10.0(2)(6) 1986 Incentive Stock Option Plan as amended and forms
of incentive and non-statutory stock option agreements.
10.1(4) Research Agreement between Registrant and The Boeing
Company.
10.2(3) Form of Indemnification Agreement, entered into by the
Registrant with each of its executive officers and directors.
10.3(3)(6) 1989 Director Incentive Stock Plan.
10.4(6)(8) 1991 Director Stock Plan.
10.5(5)(6) Director Option Plan.
10.6(9) Power Spectra, Inc. Series A Securities Purchase
Agreement, dated April 7, 1993.
10.7(7) Power Spectra, Inc. Series B Securities Purchase
Agreement, dated January 13, 1995.
10.8(10) Ground Penetrating Radar Development Agreement
dated June 19, 1996, between the Registrant and
European Industries Associates
55
<PAGE>
10.9(10)(11) GPR Systems Development, Sale and License Agreement,
dated December 17, 1996 between Registrant and LandRay
Technologies, Inc.
10.10(10) Letter amending GPR Systems Development, Sale and
License Agreement dated March 13, 1997
10.11(10) Registration Rights Agreement, dated April 11, 1997.
10.12 Boeing Asset Transfer: Amendment No. 12 to Research
Agreement 9-1110-JET-103.
10.13 Lease Extension: Amendment #2 to ARGOSystems Lease
dated November 22, 1991.
23.1 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule.
<FN>
---------------------------------
(1) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1988.
(2) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed September 1, 1989 (No.
33-30855).
(3) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989.
(4) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1988. Confidential treatment granted as to portions of this
agreement.
(5) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed on January 21, 1993 (No.
33-57280).
(6) Managerial contract or compensatory plan or arrangement in
which the Company's directors or officers participate.
(7) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994.
(8) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed on December 26, 1996 (No.
33-18837).
(9) Incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993.
(10) Incorporated by reference from the Registrant's Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1996
(11) Confidential treatment has been requested as to portions of
this agreement.
</FN>
</TABLE>
56
AMENDMENT NUMBER 12 TO
RESEARCH AGREEMENT 9-1110-JET-103
This AMENDMENT, designated as AMENDMENT Number 12, effective as of 17 September
1997, is entered by and between POWER SPECTRA, INC., having a place of business
in Sunnyvale, California (hereinafter referred to as "PSI") and THE BOEING
COMPANY, (including its subsidiaries and affiliates) acting through its Defense
& Space Group, having a place of business at Seattle, Washington (hereinafter
referred to as "BOEING").
WHEREAS, the parties have previously entered into that certain Research
Agreement 9-1110-JET-103 dated September 21, 1989, and Amendments 1-11 thereto;
and
WHEREAS, since 1990, PSI has used on its premises certain capital and other
equipment owned by Boeing, all such equipment being now identified in Attachment
A hereto; and
WHEREAS, PSI is currently leasing commercial facilities and office space from
ARGOSystems, Inc., a wholly owned subsidiary of Boeing, pursuant to the
ARGOSystems/PSI Lease Agreement dated 22 November 1991, as amended;
WHEREAS, BOEING wishes to transfer to PSI, the capital and other equipment
identified in Exhibit A, for no consideration except as described herein, and
PSI wishes to accept such capital and other equipment under the terms described
herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Notwithstanding any other provision of Research Agreement 9-1110-JET-103,
as amended, effective on the date of this Amendment, BOEING transfers full
title, conveys, and gives to PSI, for the consideration described herein, the
capital and the other equipment described in Attachment A.
2. PSI is accepting this equipment for use and not for scrap or disposal.
Nonetheless, PSI assumes all responsibility to dispose of any capital and other
equipment of Attachment A which it may not wish to retain, such disposal to be
fully compliant with all federal, state, local, and community laws, regulations,
and requirements, at no cost or expense to BOEING or ARGOSystems. Upon
termination of the ARGOSystems/PSI lease agreement dated 22 November 1991, PSI,
as owner of the capital and other equipment in Attachment A, shall remove it all
completely from the leased premises, restoring such premises to its original
condition (with allowance for reasonable wear and tear), at no cost or expense
to BOEING or to ARGOSystems.
3. DISCLAIMER. PSI accepts this equipment "AS IS" and without any warranty.
PSI HEREBY WAIVES ALL OTHER WARRANTIES, GUARANTEES, OBLIGATIONS, LIABILITIES,
RIGHTS AND REMEDIES, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, INCLUDING
BUT NOT LIMITED TO THE IMPLIED WARRANTY OF MERCHANTABILITY, ANY IMPLIED WARRANTY
ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OR TRADE, ANY
IMPLIED WARRANTY OF FITNESS, AND ANY OBLIGATION OR LIABILITY OF BOEING, ITS
SUBSIDIARIES, AFFILIATES (AND RESPECTIVE DIRECTORS, OFFICERS AND EMPLOYEES)
ARISING FROM TORT, OR FOR LOSS OF USE, REVENUE OR PROFIT, OR FOR INCIDENTAL OR
CONSEQUENTIAL DAMAGES.
<PAGE>
Page 2, Amendment 12 to Research Agreement 9-1110-JET-103
4. SPECIAL TERMS REGARDING HAZARDOUS SUBSTANCES AND/OR RADIOACTIVE MATERIALS.
The capital and other equipment may contain hazardous substances and/or
radioactive materials which, upon the end of the equipment's useful life, may
require special handling for final disposition.
Release. PSI has satisfied itself regarding the condition of the capital and
other equipment covered by this Agreement. Upon taking title of this equipment,
PSI hereby agrees to assume complete responsibility for handling, management,
transport, and use of the capital and other equipment, and if undertaken by
Power Spectra, the removal and disposal of any hazardous substances and/or
radioactive materials therein or thereon, in accordance with existing federal,
state and local laws and regulations. Power Spectra further assumes all
responsibility to provide appropriate personal protective measures for itself,
its employees, agents and assigns, as well as any third parties potentially
exposed to any hazardous substances and/or radioactive materials from the
capital and other equipment. PSI releases The Boeing Company, its subsidiaries,
affiliates and their respective directors, officers, employees, agents from any
and all liability arising from or related to the hazardous substances and/or
radioactive materials now contained in or on the capital and other equipment
obtained hereunder.
Indemnity. PSI shall defend, indemnify and hold harmless The Boeing Company, its
subsidiaries, affiliates and their respective directors, officers, employees,
agents (hereinafter referred to as "Indemnitees") from and against all actions,
causes of action, liabilities, claims, liens, suits, judgments, awards, fines,
penalties, and damages, of any kind and nature whatsoever brought or claimed by
Boeing or any other party and expenses and costs of litigation and counsel fees
related thereto, or incident to establishing the right to indemnification,
arising out of or in any way connected with any cleanup, containment, remedial,
removal or restoration work required or performed by any federal, state or local
governmental agency or political subdivision, or performed by any
non-governmental entity or person, including The Boeing Company, because of the
presence or suspected presence, release or threatened or suspected release of
hazardous substances and/or radioactive materials in or into the environment at
on about under or within any property or any disposal site used by PSI, relating
to the capital equipment and any claims of third parties for loss, injury, or
damage to persons or property arising from or related to any residual hazardous
substances and/or radioactive materials now contained in or on the capital or
other equipment obtained hereunder.
5. All other provisions of the Research Agreement of September 21, 1989, as
amended, shall remain unchanged.
IN WITNESS WHEREOF, the authorized representatives of the parties hereto have
executed this Amendment No. 12 in duplicate originals.
The Boeing Company Power Spectra, Inc.
Defense & Space Group
By: /s/ J.C. Hart By: /s/ Edward Lamb
------------------ ------------------
J.C. Hart Edward Lamb
Title: Contracts Manager Title: Contracts Manager
Research & Technology
Date: 9-12-97 Date: 9-17-97
---------------- ----------------
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9008 30267539 DRAFT MASTER PLOTTER POWER SPECTRA HP HPE1595A 52509XX01916 6,065.00 .00
9008 30267540 TIME INERVAL COUNTER POWER SPECTRA STANFORD SR620/I 52509XX01916 4,802.87 322.63
9008 30267542 VIDEO COPIER POWER SPECTRA TEKTRONIX HCOI 52509XX01916 1,235.63 83.07
9008 30267543 SAMPLING HEAD POWER SPECTRA TEKTRONIX SD24 52509XX01916 4,853.93 326.05
9008 30267544 SAMPLING HEAD POWER SPECTRA TEKTRONIX SD24 52509XX01916 4,853.94 326.05
9008 30267545 DIGITIZING CAMERA SY POWER SPECTRA TEKTRONIX DCSO1 52509XX01916 6,400.35 429.96
9008 30267607 EVEREX 386/25 PC POWER SPECTRA EVEREX 386/25 52509XX01916 6,774.00 .00
9008 30267608 EVEREX 386/25 PC POWER SPECTRA EVEREX 386/25 52509XX01916 6,772.00 .00
9008 30267609 EVEREX 386/25 PC POWER SPECTRA EVEREX 386/25 52509XX01916 7,138.00 .00
9008 30267610 OPTICAL TABLE POWER SPECTRA NEWPORT NONE 52509XX01916 3,891.31 261.42
9008 30267611 OPTICAL TABLE POWER SPECTRA NEWPORT NONE 52509XX01916 5,991.31 402.42
9008 30267612 EVEREX 286 PC POWER SPECTRA EVEREX EV2700B 52509XX01916 2,245.00 .00
9008 30267613 EVEREX 286 PC POWER SPECTRA EVEREX EV2700B 52509XX01916 2,760.90 .00
9008 30267614 EVEREX 286 PC POWER SPECTRA EVEREX EV2700B 52509XX01916 2,760.90 .00
9008 30267615 EVEREX 386 PC POWER SPECTRA EVEREX EV2700A 52509XX01916 4,051.80 .00
9008 30267616 EVEREX 389/33 PC POWER SPECTRA EVEREX EV2700D 52509XX01916 8,657.00 .00
9008 30267703 IO CLEAN SYSTEM POWER SPECTRA JA CURRIER NONE 52509XX01916 2,105.44 .00
9008 30267704 IO CLEAN SYSTEM POWER SPECTRA JA CURRIER NONE 52509XX01916 2,105.44 .00
9008 30267705 IO CLEAN SYSTEM POWER SPECTRA JA CURRIER NONE 52509XX01916 2,105.44 .00
9008 30267706 IO CLEAN SYSTEM POWER SPECTRA JA CURRIER NONE 52509XX01916 2,105.44 .00
9008 30267707 INFRARED ELECTVIEWER POWER SPECTRA E-PHYSICS 7215 52509XX01916 1,049.50 70.49
9008 30267708 INFRARED ELECTVIEWER POWER SPECTRA E-PHYSICS 7215 52509XX01916 1,049.50 70.49
9008 30267730 PHOTODETECTOR POWER SPECTRA OPTO ELECT P050-G 52509XX01916 5,408.50 363.23
9207 30267541 TRANSIENT DIGITIZER POWER SPECTRA TEKTRONIX 7256 52509XX01916 113,055.00 7,593.57
9207 30269216 CLEAN ROOM STRUCTURE KSC CONSTR 52509XX01916 29,376.88 4,148.05
</TABLE>
<PAGE>
<TABLE>
eps128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9208 30267731 POWER SUPPLY HIGH VOLTAGE KAISER S1-20-50N 52509XX01916 5,142.96 345.47
9208 30267732 HIPOT TEST SET HIPOTRONIC HD100 52509XX01916 2,550.00 171.34
9208 30267763 BONDER, DIE HYBOND 52509XX01916 6,190.00 415.85
9208 30267777 MEASURER, THICKNESS VLSI 52509XX01916 2,207.00 148.27
9208 30267778 ROOM, SCREEN LINDGREN 14W 52509XX01916 12,686.80 852.15
9208 30267779 JOULEMETER DISPLAY MOLECTRON JD1000 52509XX01916 3,184.25 213.93
9208 30267801 PHOTOMICROSCOPE ZEISS NA 52509XX01916 44,660.00 3,000.15
9208 30267802 CONTROL PANEL, CAMERA ZEISS NA 52509XX01916 6,202.00 416.65
9208 30267803 CAMERA, VIDEO SONY NA 52509XX01916 2,000.00 134.40
9208 30267804 MONITOR, COLOR SONY NA 52509XX01916 1,115.00 74.97
9208 30267973 DIGITIZER, SAMPLING HYPRESS PSP750 52509XX01916 59,295.00 3,982.67
9208 30267974 GENERATOR, STEP PICOSECOND 45000 52509XX01916 9,235.92 620.39
9208 30268556 OSCILLOSCOPE TEKTRONIX 11801 52509XX01916 22,805.92 1,531.84
9208 30269117 MODULE, SINGLE CHANNEL HYPRES 52509XX01916 14,990.00 1,006.85
9208 30269118 CONNECTOR, RF HYPRES 52509XX01916 3,190.00 214.35
9208 30269119 TIMEBASE VERIFICATION HYPRES 52509XX01916 2,980.00 200.20
9208 30269212 COUNTER, PARTICLE ATCOR NET2300 52509XX01916 4,646.99 656.16
9208 30269213 POWER SUPPLY, UVC UNIV.VOLT. BRC-20-50R 52509XX01916 5,905.93 833.99
9208 30269214 POWER SUPPLY, UVC UNIV.VOLT. BRC-20-50R 52509XX01916 5,848.02 825.83
9208 30269215 STEPPROFILER, ALPHA TENCOR INS 002399 52509XX01916 20,078.41 1,348.61
9208 30269217 PROGR PULSE GENERATOR TEKTRONIX PFG5505 52509XX01916 3,600.26 508.38
9208 30269218 ANALYZER, OPTICAL SPECTRUM ANRITSU MS90016 52509XX01916 34,389.85 2,309.93
9208 30269219 MINI RACK ENCLOSURE HYPRES 750-R01 52509XX01916 1,360.00 117.49
9208 30269316 CALIBRATOR, WAVELENGTH ANRITSU MG9601A 52509XX01916 14,178.16 2,001.89
9208 30269317 INPUT MODULE HYPRES TDR2-2 52509XX01916 13,640.00 .00
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9208 30269318 DESSICATOR TERRA UNIV 1111-38 52509XX01916 2,667.91 379.55
9208 30269319 DESSICATOR TERRA UNIV 1111-39 52509XX01916 3,313.91 467.94
9208 30269320 DESSICATOR TERRA UNIV 1111-40 52509XX01916 1,125.38 158.96
9208 30269335 LASER SYSTEM LIGHT AGE LA1101PAL 52509XX01916 85,767.00 9,266.32
9208 30269336 DRIVER Q SWITCH LIGHT AGE LA1101PAL 52509XX01916 6,273.16 685.79
9208 30269338 CONVERTER, RAMAN LIGHT AGE LA1101PAL 52509XX01916 4,856.64 685.85
9208 30269339 MODULE, LAMINAR FLOW CURRIER 4X30 52509XX01916 2,393.00 337.92
9208 30269395 ATTENUATOR SET HP NARDA 52509XX01916 3,257.00 218.83
9208 30270297 OSCILLOSCOPE TEKTRONIX 11801 52509XX01916 23,500.00 3,318.20
9208 30270298 SAMPLING HEAD TEKTRONIX 5D24 52509XX01916 5,040.00 711.70
9208 30270299 SAMPLING HEAD TEKTRONIX 5D24 52509XX01916 5,040.00 711.70
9208 30270300 GENERATOR, PULSE SYSTRON 101 52509XX01916 1,497.96 211.54
9208 30270301 GENERATOR, PULSE SYSTRON 101 52509XX01916 1,497.96 211.54
9208 30270302 DISK DRIVE HP 9121C 52509XX01916 2,674.00 377.61
9208 30270303 SLICER PULSE LIGHT AGE 101 PAL 52509XX01916 10,060.25 1,420.59
9208 32001044 SAW, DICING DICING TEC N/A 52509XX01916 39,438.41 9,584.91
9208 32001045 GUAGE STRESS IONIC SYS N/A 52509XX01916 21,607.11 5,251.29
9208 32001046 COMPUTER EVEREX 286/16 52509XX01916 2,632.70 639.87
9208 32001620 COUNTER LIQUID PARTICLE CLIMET CI2202 52509XX01916 19,649.97 4,775.67
9208 32001641 SPINNER MANUEL SOLITEC SAS 5110 52509XX01916 25,133.68 6,108.41
9208 32001642 CHAMBER MASTER PLANAR PLASMATECH N/A 52509XX01916 79,933.09 19,426.46
9208 32001643 SYSTEM PLATING DYNATRONIX DUP103W/T 52509XX01916 2,734.93 664.76
9208 32001647 SYSTEM IOCLEAN SIMCO 4102098 52509XX01916 2,228.36 517.27
9208 32001654 ALIGNER, MASK KARL SUSS 1001R002 52509XX01916 125,688.64 30,546.60
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9208 32005563 MONITOR SONY TRINITRON 52509XX01916 1,550.00 577.69
9208 32005564 COMPUTER CAD 486/33 52509XX01916 3,638.47 586.14
9208 32005565 AMPLIFIER DUAL CHANNEL TEKTRONIX 11A72 52509XX01916 4,671.20 1,740.80
9208 32005566 ANALYZER SIGNAL TEKTRONIX DSA602A 52509XX01916 32,500.29 12,111.85
9208 32005567 AMPLIFIER FOUR TRACE TEKTRONIX 11A34 52509XX01916 5,709.86 2,127.93
9208 32005568 PROBE DIFF PAIR TEKTRONIX 11A33 52509XX01916 6,034.75 2,248.97
9208 32005569 CONTROLLER TEMPERATURE ILX LTWAVE LDT59108 52509XX01916 2,805.00 1,045.40
9208 32005570 ANALYZER SPECTRAL 3M 1100-0508 52509XX01916 2,695.00 1,004.40
9208 32005571 DIGITIZER TEKTRONIX SCD5000 52509XX01916 52,134.88 19,428.93
9208 32005576 ANALYZER SIGNAL TEKTRONIX CSA 803 52509XX01916 25,919.88 6,299.48
9208 32005577 HEAD SAMPLING TEKTRONIX SD24 52509XX01916 5,448.71 1,324.29
9208 32005619 ASSEMBLY CHASIS NEWPORT FNC400 52509XX01916 6,153.89 1,981.73
9208 32005620 ACTUATOR NEWPORT 52509XX01916 2,739.93 665.90
9208 32005629 ANALYZER SIGNAL TEKTRONIX 52509XX01916 25,194.88 6,123.25
9211 32007356 STAND LIGHTWELDER DYMAX 5000EC 52509XX01916 2,767.55 1,031.33
9211 32007357 TRACER CURVE TEKTRONIX 571 52509XX01916 3,094.30 1,153.15
9211 32007360 PUMP VACUUM & FILTER EDWARDS E2M80 52509XX01916 27,388.00 10,206.60
9302 32008031 MONITOR DC SOURCE HP 4142B 52509XX01916 54,785.60 20,416.80
9302 32008094 POWER SUPPLY HP 6209B 52509XX01916 1,270.00 308.74
9302 32008095 POWER SUPPLY HP 6209B 52509XX01916 1,270.00 308.74
9302 32008096 BREADBOARD NEWPORT XSN-34 52509XX01916 1,279.00 180.56
9302 32008097 BREADBOARD NEWPORT XSN-34 52509XX01916 1,279.00 180.56
9302 32008098 VIEWER & ADAPTER TR ELECTROPHY 7215 52509XX01916 1,034.00 69.45
9302 32008099 VIEWER & ADAPTER TR ELECTROPHY 7215 52509XX01916 1,034.00 69.45
9304 32001766 SYSTEM FILM DEV MICROSCIEN 202 52509XX01916 245,139.29 61,764.36
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9207 32001397 SCOPE DIGITAL TEKTRONIX 2440 52509XX01916 10,794.43 4,022.82
9207 32005799 ROTARY STAGE W/ SOLID INSERT NEWPORT 495 SERIES 52509XX01916 4,039.77 1,505.49
9207 32005800 SAW WIRE LASER TECH 2008-001 52509XX01916 10,605.00 3,952.50
9207 32006051 OSCILLOSCOPE SAMPLING TEKTRONIX 11801 52509XX01916 27,000.00 10,082.00
9207 32006052 POWER SUPPLY GLASSMAN PG40 A25 52509XX01916 6,127.50 2,203.54
9207 32006053 POWER SUPPLY GLASSMAN PG40 A25 52509XX01916 6,127.50 2,203.54
9207 32006054 POWER SUPPLY GLASSMAN PG40 A25 52509XX01916 6,127.50 2,203.54
9207 32006056 COMPUTER EVEREX EXC-2801C-00 52509XX01916 7,557.00 1,217.40
9207 32006057 PHOTO TUBE HAMAMAISU R1328U-01 52509XX01916 3,675.00 893.20
9207 32006058 POL & ADAPTER OPTICAL FIBER BUEHLER 69-3000 FIBRMET 52509XX01916 3,818.50 1,347.75
9207 32006059 BONDER HOT GAS DIE MEI 709 52509XX01916 13,896.40 5,178.80
9207 32006060 CONTROLLER TEMPERATURE ILA LTWAVE LOT 59108 52509XX01916 2,813.00 1,048.40
9208 10249337 ANNEALER, THERMAL AET ADBAX RM4V 52509XX01916 94,982.00 6,379.85
9208 30267498 SYSTEM, CAD EVEREX EV2800C386125 52509XX01916 9,596.00 .00
9208 30287499 MONITOR, 19 INCH MITSUBISHI HL6905 52509XX01916 1,620.00 .00
9208 30267500 PC EVEREX EV2700A-IS 52509XX01916 3,490.30 .00
9208 30267501 PC EVEREX EV2700A-IS 52509XX01916 3,940.20 .00
9208 30267502 PC EVEREX EV2700A-IS 52509XX01916 3,940.20 .00
9208 30267533 COUNTER, FREQUENCY HP HE5384A 52509XX01916 1,500.00 100.80
9208 30267534 COUNTER, FREQUENCY HP HE5384A 52509XX01916 1,500.00 100.80
9208 30267535 ANALYZER, LOGIC TEKTRONIX 1230 52509XX01916 4,116.17 276.52
9208 30267530 ISOLATOR, GROUND TEKTRONIX A6932B 52509XX01916 2,589.28 173.96
9208 30267537 PRINTER, LASERJET HP HP33440A 52509XX01916 1,657.00 .00
9208 30267538 SCOPE, DIGITAL TEKTRONIX 2430A 52509XX01916 7,703.32 517.40
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9208 32001857 MICROSCOPE METALLURGICAL OLYMPUS 095343 52509XX01916 24,834.10 8,035.00
9208 32005859 CAMERA COLOR COHU 4815-500/0400 52509XX01916 2,276.50 553.30
9208 32001681 MONITOR COLOR SONY 13" 52509XX01916 1,300.00 315.96
9208 32002488 SYSTEM PLASMA CLEANING YIELD ENG CLF-500 52509XX01916 17,800.00 4,326.05
9208 32002489 INPUT GAS YIELD ENG YES-R3 52509XX01916 1,200.00 291.64
9208 32002490 PUMP VACUUM YIELD ENG 2008A 52509XX01916 3,130.00 760.74
9208 32002541 INJECTOR DICING FLUID DICING TEC DFI-201 52509XX01916 1,300.00 315.96
9208 32002542 OVEN SIZE BLUE M 208S1ZEOVEN 52509XX01916 6,408.00 1,557.36
9208 32002543 OVEN SIZE BLUE M 208S1ZEOVEN 52509XX01916 6,408.00 1,557.36
9208 32002544 SYSTEM PRIME YIELD ENG YES-3 52509XX01916 19,808.68 4,766.63
9208 32002545 PUMP VACUUM YIELD ENG 2008A 52509XX01916 1,450.00 352.43
9208 32002547 CHROMATOGRAPHY ADVANCED DIONEX NA 52509XX01916 5,462.00 1,327.50
9208 32002548 PUMP GRADIENT DIONEX NA 52509XX01916 9,750.00 2,369.59
9208 30262570 SYSTEM DEMO DIONEX 45001 52509XX01916 51,667.00 12,556.88
9208 30282577 CONTROLLER HI-LO PRESSURE AMER GAS EM-5000 52509XX01916 16,059.00 3,902.86
9208 30262578 CONTROLLER PORT PURGE AMER GAS CPU-5500 52509XX01916 4,500.00 1,093.70
9208 30262579 CONTROLLER HI-LO PRESSURE AMER GAS EM-5000 52509XX01916 10,139.00 2,464.17
9208 30262582 SINK ACID POLYTEC NA 52509XX01916 10,360.00 2,517.88
9208 30262583 SINK ACID POLYTEC NA 52509XX01916 10,025.00 2,436.47
9208 30262584 SINK ETCH POLYTEC NA 52509XX01916 11,445.00 2,781.60
9208 30262585 SINK SOLVENT POLYTEC NA 52509XX01916 10,394.00 2,574.74
9208 30262586 SINK SOLVENT POLYTEC NA 52509XX01916 14,219.00 3,455.74
9208 30262587 SINK SOLVENT POLYTEC NA 52509XX01916 13,670.00 3,322.32
9208 30262588 CONTROLLER HI-LO PRESSURE AMER GAS EM-5000 52509XX01916 10,089.00 2,452.00
9208 30262589 PUMP GRADIENT DIONEX NA 52509XX01916 9,150.00 2,369.59
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9208 32002590 DETECTOR CONDUCTIVITY DIONEX NA 52509XX01916 4,950.00 1,203.03
9208 32002607 STAGE HE SAMPLE WATERLOO 8001 52509XX01916 60,000.00 14,582.00
9208 32002608 TABLE NTA 1086 52509XX01916 2,054.25 499.33
9208 32002609 TABLE NTA 1086 52509XX01916 2,054.25 499.33
9208 32002610 TABLE NTA 1086 52509XX01916 2,054.25 499.33
9208 32002611 TABLE NTA 1086 52509XX01916 2,054.25 499.33
9208 32002612 TABLE NTA 1071 52509XX01916 1,350.00 328.11
9208 32002613 TABLE NTA 1071 52509XX01916 1,350.00 328.11
9208 32002693 STATION GOLD PLATING ULTRA FAB FAS-072 52509XX01916 13,050.65 3,171.78
9208 32002694 MAPPING OPTION MEAS WATERLOO EL 2 52509XX01916 13,000.00 3,159.50
9208 32002695 CABINET VERSATILE 3'X5'X2' 52509XX01916 2,613.00 635.13
9208 32002821 SYSTEM PHOTOLUMIN WATERLOO SPM-200 52509XX01916 237,475.79 57,714.59
9208 32002622 PRINTER COLOR TOYO TPG-4300 52509XX01916 15,729.96 3,822.95
9208 32002963 ROOM CLEAN THERMA CLASS 10 52509XX01916 991,046.36 240,857.80
9208 32002968 SYSTEM WATER DEIONIZED THORTON NA 52509XX01916 20,000.00 4,860.70
9208 32002967 GENERATOR TRACETEK NA 52509XX01916 40,000.00 9,721.40
9208 32005555 PHOTODETECTOR HAMAMATSU R132BU-01 52509XX01916 1,876.91 456.17
9208 32006550 ANALYZER SIGNAL TEKTRONIX 52509XX01916 22,648.00 5,504.29
9208 32005557 HEAD SAMPLING TEKTRONIX SD24 52509XX01916 4,725.00 1,148.41
9208 32005558 HEAD SAMPLING TEKTRONIX SD24 52509XX01916 4,725.00 1,148.41
9208 32005559 HEAD SAMPLING TEKTRONIX SD24 52509XX01916 5,258.38 1,280.48
9208 32005560 HEAD SAMPLING TEKTRONIX SD24 52509XX01916 5,258.38 1,280.48
9208 32005561 CAMERA PEARPOINT ICCC525 52509XX01916 16,313.50 6,079.55
9208 32005562 SYS IMAGE ENHANC MEMORY HAMMATSU DVS-3000 52509XX01916 15,870.00 5,914.30
</TABLE>
<PAGE>
<TABLE>
EPS128 NOV. 02, 1995 REPORT: RECON95
BUILDING INVENTORY DETAIL REPORT FOR PERSONAL PROPERTY PAGE
95710 oooo NOTE: UPDATE & RETURN TO CAPITAL ASSET ACCOUNTING AT M/S: 80-HF oooo
<CAPTION>
ORGN INV. PROPERTY PNDESC MANFTR MODEL LOCATION COST BOOK CHANGES
DATE # VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
95710 9304 32008100 UV SOURCE CANON 501 52509XX01916 14,000.00 5,217.40
9304 32008291 TABLE LAB NIA INDST. 1079C1 52509XX01916 2,590.00 965.30
9304 32008292 RADIOMETER MIMIR INST 120 52509XX01916 1,962.87 731.54
9304 32008865 PRINTER MITSUBISHI CP11OU 52509XX01916 2,569.32 870.71
9305 32005198 LENS 105MM NIKON UV NIKKOR 52509XX01916 2,657.57 1,405.66
9305 32007041 MICROSCOPE SCIENTIFIC SZ11 52509XX01916 4,507.80 1,680.00
9308 32001658 MICORSCOPE METALLURGICAL OLYMPUS 095343 52509XX01916 19,633.89 4,771.58
9308 32002961 SPINNER MANUAL SOLITEC SAS 5110 52509XX01916 25,133.66 6,108.41
9308 32002962 SPINNER MANUAL SOLITEC SAS 5110 52509XX01916 25,133.66 6,108.41
9308 32002964 SYSTEM IOCLEAN SIMCO 4102098 52509XX01916 2,128.36 517.27
9308 32002965 SYSTEM IOCLEAN SIMCO 4102098 52509XX01916 2,128.36 517.27
9308 32007043 CONTROLLER VAT PM-5 52509XX01916 2,730.51 1,107.65
9308 32007044 PUMP COMPOUND MOLECULAR OSAKA TC1300BS 52509XX01916 10,788.00 6,248.91
9308 32007045 POWER SUPPLY OSAKA TC1300 52509XX01916 2,500.00 931.70
9309 32008380 FUME HOOD 6' ULTRA FAB FXH-072 52509XX01916 14,875.00 7,885.33
N 95710 3,663,641.32 806,441.92
</TABLE>
AMENDMENT #2 TO LEASE
DATED NOVEMBER 22, 1991 BY AND BETWEEN
ARGOSystems, INC., A WHOLLY OWNED SUBSIDIARY
OF THE BOEING COMPANY, AS LESSOR
AND POWER SPECTRA, INC. A CALIFORNIA CORPORATION, AS LESSEE
THIS AMENDMENT #2 TO LEASE, entered into and made as of the 9th day of
October, 1997, by and between ARGOSystems, Inc. as Lessor, and Power Spectra,
Inc., a California corporation, as Lessee.
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain lease,
dated November 22, 1991, as amended by Amendment No. 1 dated July 23, 1993
(collectively, the "Lease"), of certain space at 919 Hermosa Court, Sunnyvale,
CA, (the "Premises"), upon terms and conditions described in said Lease; and
WHEREAS, Lessor and Lessee desire to amend said Lease as described below;
NOW THEREFORE, in consideration of the rents reserved and of the covenant
and agreements herein set forth, it is agreed that the Lease be hereby amended
from and after the date hereof as follows:
1. The Option Term set forth in Section 3. "OPTION TO RENEW" of the Lease,
is reduced in duration from 2 years to 1 year ("Revised Option Term"). The
Revised Option Term is deemed to have commenced as of the first day following
the date upon which the original term ended, or February 1, 1997, and shall end
on January 31, 1998.
2. The provisions of Section 3., paragraph b. of the Lease with regard to
the method for setting the basic monthly rental rate for the Option Term are
hereby amended to provide that the monthly basic rent payable during the Revised
Option Term shall be fixed at $22,500 per month ("Revised Option Term Basic
Rent"), plus operating expenses.
3. Lessor shall have an option, exercisable upon Sixty (60) days prior
written notice to Lessee, to occupy certain premises (the "Take-back Premises")
constituting a portion of the Premises as defined in Article 1., "PREMISES" of
the Lease. The Take-back Premises approximate 9,000 square feet of the Premises
and are delineated on Exhibit "A", to this Amendment #2, attached hereto and by
this reference made a part hereof.
<PAGE>
4. In the event that Lessor shall exercise its option to occupy the
Take-back Premises in accordance with this Amendment #2, Lessee shall promptly
surrender the Take-back Premises to Lessor in accordance with the terms of
Article 27., "SURRENDER" of the Lease and with the provisions of Paragraph 5. of
this Amendment #2; except that, solely with respect to the Take-back Premises,
Lessee shall not be obligated to paint or clean interior walls, clean carpets,
service air conditioning and heating systems, or clean and wax floors within the
Take-back Premises.
5. a. Lessor and Lessee acknowledge that certain capital equipment located
on the Premises at the date of this Amendment #2 has been transferred to Lessee
by the Boeing Corporation pursuant to a certain agreement entitled "Draft
Amendment Number 12 to Research Agreement 9-1110-JET-103" (the "Boeing
Amendment"). The capital equipment transferred pursuant to the Boeing Amendment
is listed on the Attachment thereto ("Attachment A"). A copy of the Boeing
Amendment with Attachment A is attached as Exhibit "B" to this Amendment #2 and
incorporated herein by this reference.
b. Lessee agrees, notwithstanding any other or different provisions in
the Lease proper regarding condition of the Premises upon surrender at
termination of Lessee's occupancy, that Lessee shall:
(i) remove from the Take-back Premises all items listed on
Attachment A to the Boeing Amendment within 30 days of receiving Lessor's notice
pursuant to Paragraph 3 of this Amendment #2; and
(ii) remove from the Premises all items listed on Attachment A to
the Boeing Amendment promptly upon termination of Lessee's occupancy of the
remainder of the Premises for any reason.
c. with respect to the capital equipment set forth on Attachment A to
the Boeing Amendment, Lessee hereby assumes all cost and expense and all legal
responsibility and liability therefor, whenever arising, including, without
limitation, the payment of all costs and expenses of: (1) removal from all or
any portions of the Premises; and (2) prompt restoration of such portions of the
Premises to the condition they were in prior to the installation thereof; and
(3) disposal or other disposition thereof after such removal.
d. Lessee agrees to defend, indemnify and hold Lessor harmless from any
and all loss, damage, cost or expense directly or indirectly caused to Lessor as
a result of Lessee's failure refusal or neglect to perform in full the
obligations assumed
-2-
<PAGE>
under subparagraph 5.(c), above.
Lessor and Lessee agree that except as specifically stated in Paragraphs 4.
and 5. of this Amendment #2, nothing herein shall be deemed to alter or amend
the obligations of Lessee under the terms of Article 27 of the Lease with
respect to the condition of the Premises at the time of Leasee's surrender.
6. From and after the date of Lessor's written exercise of its option set
forth herein, Lessee shall use its best efforts to surrender the Take-back
Premises to Lessor within sixty (60) days of the serving of Lessor's notice.
Failure of Lessee to surrender the Take-back Premises to Lessor within the time
provided shall entitle the Lessor to declare a default of the Lease, to serve
Lessee with a Notice to Quit, and, unless Lessee shall cure such default by
surrendering the Take-back Premises in accordance herewith prior to the
institution of unlawful detainer or other legal proceedings, to pursue, without
limitation, all remedies set forth in the Lease and otherwise provided to
Lessors under the laws of California in cases of default.
7. In the event that Lessee shall timely surrender the Take-back Premises
to Lessor in the condition specified under paragraphs 4 and 5 of this Amendment
#2, following Lessor's exercise of its option as set forth herein, all
post-surrender expenses of preparing the Take-back Premises for Lessor's
occupancy shall be borne by Lessor. Lessor's obligation for expenses of
occupying the Take-back Premises shall not include costs, if any, of Leesee's
preparations for occupancy, upgrades, alterations, reconfigurations, or other
improvements ("Improvements") to any portion of the Premises remaining occupied
by Lessee, which Lessee may wish to perform in connection with Lessee's
surrender of the Take-back Premises, regardless of whether caused, or claimed to
have been caused, by reason of Lessor's exercise of the option. All such
Improvements, if any, to the Premises which Lessee shall continue to occupy
shall be at Leasee's sole cost and expense.
8. Upon Leasee's surrender of the Take-back Premises after Lessor shall
have exercised its option set forth in Paragraph 3 of this Amendment #2,
thereafter monthly obligations for Revised Option Term Basic Rent and operating
expenses (and for Month-to-Month Extended Term, if any, as hereinafter defined)
shall be apportioned on a dollar-for-dollar basis between the Lessor and Lessee
according to a ratio of 9 (Lessor's share) to 16 (Leasee's share) ("Shared
Occupancy Ratio"). For example, if Revised Option Term Basic Rent for a
hypothetical month were $22,500 and an ordinary operating building expense line
item were $4,200 for the same hypothetical month, Leasee's share of such rent
payments for such month according to the Shared Occupancy Ratio would be $17,088
and Lessor's share of such rent payments for such month
-3-
<PAGE>
according to the Shared Occupancy Ratio would be $9,612. The parties stipulate
that the foregoing Shared Occupancy Ratio is a fair and reasonable approximation
which the parties have agreed to in consideration of the mutual agreements,
covenants, conditions, and undertakings of this Amendment #2 and of the Lease,
for other good and valuable consideration, and after negotiations conducted
having regard for all the relevant commercial circumstances. Accordingly, each
party waives any right, claim, or action it may have or assert at any time
hereafter to seek a re-computation of the foregoing ratio as the basis for
apportioning rent and operating expenses after Lessee surrenders the Take-back
Premises to Lessor upon Lessor's exercise of its option as set forth herein.
9. The provisions of Section 3., paragraph c. of the Lease are hereby
amended to provide that after January 31, 1998, the end of the Revised Option
Term, the Lessee may continue to occupy the Premises (exclusive of the Take-back
Premises, if Lessor shall have exercised the option provided for in this
Amendment #2) on a month-to-month basis for a duration not to exceed twenty-four
(24) months ("Month-to-month Extended Term"). The Month-to-month Extended Term
may be terminated prior to the end thereof by either party without cause on 90
days' written notice to the other. Basic rent and operating expenses shall be
payable monthly by the Lessee (subject to sharing with Lessor according to the
Shared Occupancy Ratio, if applicable) prior to the termination of the
Month-to-Month Extended Term. Basic rent during the Month-to-Month Extended Term
shall not exceed the following amounts for the following indicated periods
during the Month-to-month Extended Term:
Months 10, 11, 12: $27,500.00
Months 13, 14, 15: $32,500.00
Months 16, 17, 18: $37,500.00
Months 19, 20, 21: $42,500.00
Months 22, 23, 24: $45,000.00
(All such amounts are stated without application of the Shared Occupancy
Ratio, which would apply if Lessor shall have exercised its option set forth in
Paragraph 3 of this Amendment #2.)
Except as is hereinabove set forth, all terms, provisions and covenants of
the Lease shall remain unchanged and in full force and effect.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written
LESSEE: LESSOR:
POWER SPECTRA, INC., a ARGOSystems, INC., a wholly-owned
California corporation subsidiary of the BOEING COMPANY
By: /s/ EDWARD J. LAMB By: /s/ ALLEN F. SAULN
-------------------- --------------------
Its: Chief Financial Officer Its: Vice President
-------------------- --------------------
-5-
Exhibit 23.1
Consent Of Grant Thornton LLP, Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-57280) pertaining to the 1991 Director Stock Plan, Director
Option Plan, and Advisor Board Stock Program of Power Spectra, Inc., and in the
Registration Statement (Form S-8 No. 33-30855) pertaining to the Power Spectra,
Inc., 1986 Incentive Stock Option Plan, of our report dated March 20, 1998, with
respect to the financial statements of Power Spectra, Inc. included in the
Annual Report (10-K) for the year ended December 31, 1997.
GRANT THORNTON LLP
San Jose, California
March 20, 1998
58
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the Annual Report on Form 10-K of Power Spectra, Inc.
for the year ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000777527
<NAME> Power Spectra, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 441
<SECURITIES> 0
<RECEIVABLES> 262
<ALLOWANCES> 0
<INVENTORY> 232
<CURRENT-ASSETS> 966
<PP&E> 1,321
<DEPRECIATION> 1,061
<TOTAL-ASSETS> 1,331
<CURRENT-LIABILITIES> 1,315
<BONDS> 0
<COMMON> 16,253
0
1,666
<OTHER-SE> (17,903)
<TOTAL-LIABILITY-AND-EQUITY> 1,331
<SALES> 942
<TOTAL-REVENUES> 942
<CGS> 1,726
<TOTAL-COSTS> 3,608
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,646)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2,647)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,647)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
