U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual Report under Section 13 of 15 (d) of the Securities Exchange Act
of 1934 (fee required) for the fiscal year ended December 31, 1996
[ ] Transition report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 (no fee required) for the transition period
from ____________ to ___________
Commission File No. 0-18271
MAGELLAN TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Utah 87-0493698
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1216 South 1580 West, Suite B
Orem, Utah 84058
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (801) 765-0040
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
Par Value $.0002 per Share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes _X_ No___
Check if there is no disclosure of delinquent fliers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment tot his form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year totalled $1,150,046.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of December 31, 1996 was
$5,885,617
As of December 31, 1996 13,620,838 shares of the issuer's stock were issued
and outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes____ No _X_
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TABLE OF CONTENTS
PART I
Item 1. Description of Business . . . . . . . . . . 1-3
Item 2. Description of Property . . . . . . . . . . 3
Item 3. Legal Proceedings . . . . . . . . . . . . 3
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 3
PART II
Item 5. Market for common Equity and Related
Stockholder Matters . . . . . . . . . . . . 4
Item 6. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . 5-7
Item 7. Financial Statements . . . . . . . . . . . . 7
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . 7
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16a
of the Exchange Act . . . . . . . . . . . 7-10
Item 10. Executive Compensation . . . . . . . . . . . 10-11
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 11-12
Item 12 Certain Relationships and Related Transactions 12
PART IV
Item 13 Exhibits and Reports on Form 8-K . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Magellan Technology, Inc. (the "Company"/"Magellan") was incorporated
under the laws of the State of Utah on June 16, 1989. Its founders
organized the Company for the purpose of raising capital and seeking
profitable business opportunities.
In February 1992, the Company completed the acquisition of Satellite
Image Systems, Inc. ("SIS"), a Utah corporation engaged in providing image-
based data entry services utilizing licensed and proprietary data entry and
communications software. The acquisition was accomplished by merging SIS
with and into the Company's wholly-owned subsidiary, SIS International,
Inc., with SIS being the surviving corporation. Through the merger, SIS
became a wholly-owned subsidiary of the Company. In August 1996, the
Company announced the formation of a joint venture with United Insurance
Companies, Inc. ("UICI") of Dallas, Texas to expand UICI's presence in the
medical claims processing business. SIS contributed its technology,
operations and management to a newly-formed entity, SIS, LLC. UICI
obtained a 51% interest in SIS, LLC, contributing $3 million in cash and a
$2 million line of credit for working capital. The Company retained a 44%
interest in the limited liability company after making provision for
ownership opportunities by key employees of SIS, LLC. Darwin D. Millet,
formerly President of SIS, became the Chief Executive Officer of the newly-
formed limited liability company. UICI is a financial company with
interest in life and health insurance and related services, including the
administration and delivery of managed health care programs to selected
markets.
In October 1996, the Company completed the acquisition of SkyHook
Technologies, Inc., a Utah corporation ("SkyHook" or "STI") organized in
1995 and engaged in development of a proprietary, cargo-management system
for use with helicopters. SkyHook's initial cargo-management product is
the "SkyHook," which is a computer-controlled, multiple-hook cargo carrying
device which attaches to a long line beneath the helicopter. The
acquisition was accomplished through the exchange of approximately
5,700,000 shares of Magellan Common Stock in exchange for all issued and
outstanding shares of SkyHook Common Stock and SkyHook became a wholly-
owned subsidiary of the Company.
Business of the Company
SIS, LLC. SIS, LLC has continued the image-based data entry business
of SIS with emphasis on growth made possible by the financial and other
resources provided through the relationship with UICI. During the 1996
year, operations were expanded in Castle Dale, Utah and in Jamaica while
new facilities were established in Price, Utah and Dallas, Texas. While
operations were profitable for the period prior to formation of the joint
venture, expenses incurred to grow SIS, LLC during the remainder of the
year resulted in a net loss for the year. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
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SkyHook.
Products. Since formation in February 1995, SkyHook has been
engaged in development of a computer-controlled multi-hook cargo transport
device which SkyHook believes will improve the safety of helicopter
missions by enabling the selective delivery and retrieval of multiple
external payloads during a single mission. The Company also believes that
the SkyHook device, which consists of three or six computer-controlled
cargo hooks, will allow an air crew to more fully utilize a helicopter's
load capacity while minimizing flight time.
The load-bearing components of the SkyHook device are constructed
of high-quality chrome-moly steel. The air frame is capable of lifting
27,000 pounds of cargo. The device is aerodynamically designed for stable
flight, loaded or empty. It can be maintained in the field and is
convertible from a three hook to a six hook unit in the field. Product
features include aggregate and individual hook payload weight readouts,
various fault condition warnings and safety warnings, load release commands
allowing the drop of one or multiple loads simultaneously and navigation,
identification and other lighting systems controlled by the operator.
The product is in late development stages with a production model
incorporating design changes and improvements from the testing process
expected to be available in mid-1997.
Markets. The market for the SkyHook device consists of utility
helicopters worldwide with a cargo lift capacity ranging from 3,000 pounds
to 27,000 pounds. Approximately 60% of utility helicopters are operated by
government entities, with the military being the principal operator. The
United States military is the largest single owner of utility helicopters,
with the U.S. Army owning more than any other entity, domestically or
internationally. Design changes to the device have resulted principally
from testing conducted with the U.S. military. The Company expects to
market the SkyHook device directly in the United States (principally to the
U.S. military) and through independent distributors in foreign markets. No
devices have been sold to date and, notwithstanding favorable test results,
there is no assurance that marketing of the device will be successful.
Competition. The Company is aware of one multi-hook cargo
transport device which is offered in four and nine hook configurations and
is a commercial-grade product offering with an electronically-activated
selective load release. The Company believes, however, that the SkyHook
device has been designed to address significantly different markets
requiring much greater cargo capacities with an emphasis on military and
industrial applications.
Manufacturing. SkyHook has entered into a contract with AEL-
Tracor located in Lansdale, Pennsylvania, a Tracor Aerospace company
("Tracor") for manufacture of the first 26 units of the SkyHook device.
Tracor is presently assisting in the manufacture and assembly of the first
three production units being assembled at SkyHook and has also agreed to
provide marketing support to the Company when marketing begins. Delivery
of the first 26 units is expected to begin in June 1997.
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Intellectual Property. The Company's success will depend in
large part on its ability to obtain patent protection for the SkyHook
products and to operate without infringing the proprietary rights of third
parties. On January 14, 1997, the Company received notice of allowance of
a United States patent which relates to the SkyHook device and has filed
applications related to additional features of the device. There can be no
assurance given that any additional patents will be issued or that the
scope of any patent obtained will exclude competitors or that any of the
Company's rights under the patent will be held valid if subsequently
challenged. The validity and breadth of claims covered in patents involve
complex legal and factual questions and, therefore, may be highly
uncertain. Whether or not the Company's patent applications are granted,
others may receive patents which contain claims having a scope broad enough
to cover products developed by the Company. The Company has also developed
proprietary software utilized in its cargo management system and has filed
an application to register the "SkyHook" logo as a United States trademark.
Government Regulation. In addition to military air worthiness
requirements, the SkyHook device will be required to comply with the
Federal Aviation Administration Regulations applicable to its products.
Because the product is exterior to the aircraft, can be operated with a
hand-held controller and can be jettisoned, the compliance process is not
expected to have a material adverse impact on the Company's business.
Military customers may purchase product as "commercial off-the-shelf" or
may seek a militarized version meeting certain military specifications.
The U.S. Department of Commerce has evaluated the SkyHook device and
determined that it does not require an export license.
Employees. SkyHook currently employs 12 persons full time and
six persons part time, including five in administration, seven in research
and development and six in sales and marketing. Of the six part-time
employees, two are employed in each of administration, research and
development and marketing. The Company intends to maintain a small staff
by outsourcing manufacturing.
ITEM 2. DESCRIPTION OF PROPERTY
MTI and STI currently lease two facilities. Their Orem, Utah facility
is the headquarters of Magellan and STI. It consists of a 2,400 square-
foot office and a 1,200 square-foot high-bay shop. The initial lease term
is one year, with three one year renewal options. The majority of space is
occupied by engineering and marketing personnel. The high-bay is used for
pre-production product assembly and testing.
STI's Lexington, Kentucky sales office is located in a 500-square-foot
office of the Blue Grass Station of the Kentucky National Guard, and is
leased from the Commonwealth of Kentucky. The initial lease term is one
year, with five one year renewal options. The Lexington staff is able to
economically support sales activities in the midwestern and eastern states.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's common stock is traded in the over-the-
counter market. The closing bid price of the Company's common stock on
December 31, 1996 was one dollar and twelve cents ($1.12) per share as
reported by the Company's principal market maker in Salt Lake City. The
following table sets forth the range of quotations for the Company's common
stock for the quarters indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
Fiscal Year Ended December 31, 1996
High Low
Bid Bid
First Quarter . . . . . . . . $ .42 $ .42
Second Quarter . . . . . . . . $ 1.00 $ .35
Third Quarter . . . . . . . . $ 1.00 $ .70
Fourth Quarter . . . . . . . . $ 1.37 $ .75
Fiscal Year Ended December 31, 1995
High Low
Bid Bid
First Quarter . . . . . . . . $ .25 $ .25
Second Quarter . . . . . . . . $ .25 $ .25
Third Quarter . . . . . . . . $ 1.36 $ .24
Fourth Quarter . .. . . . . . $ .50 $ .36
Shareholders. The approximate number of shareholders of record of the
Company's common stock as of December 31, 1996 was one hundred and thirty
nine (139), which does not include shareholders whose shares are held in
securities position listings.
Dividends. The Company has not paid any cash dividends on its common
stock, and does not anticipate paying dividends in the foreseeable future.
The Company presently intends to retain future earnings, if any, for
financing the growth and expansion of the Company.
Unregistered sale of securities. The Company completed a share
exchange pursuant to an Agreement and Plan of Share Exchange between the
Company, SkyHook Technologies, Inc. and the shareholders of SkyHook
Technologies, Inc. The issuance of shares of common stock of the Company
to individuals or entities pursuant to such share exchange was made in
reliance upon the exemption provided by section 4 (2) of the Securities Act
of 1933.
The Company sold 1,428,572 shares of stock for 35 cents per share to
seven individuals and four entities during 1996. The proceeds were used
to purchase shares of SkyHook Technologies, Inc. The issuance of the
shares of stock were made in reliance upon the exemption provided by
section 4 (2) of the Securities Act of 1933.
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The Company also exchanged shares of stock for services provided to
the Company. 164,727 shares were exchanged to satisfy $32,945 of accounts
payable. An additional 16,667 shares were exchanged for $6,167 of
services. The issuance of the shares of stock were made in reliance upon
the exemption provided by section 4 (2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During 1996 Magellan accomplished two significant strategic events
that management believes have positioned the Company for significant growth
opportunities.
During the second and third quarters of 1996 a joint venture was
formed between Satellite Image Systems, Inc. ("SIS") and United Insurance
Companies, Inc. ("UICI"). The newly created company was named Satellite
Image Systems Limited Liability Company ("SIS, LLC"). The effective date
of this transaction was August 1, 1996. Magellan contributed the assets,
liabilities and clients of SIS and UICI contributed $3,000,000 cash and a
$2,000,000 unsecured line of credit to form SIS, LLC. UICI holds a 51%
interest in the new LLC. The Company views UICI as a valuable partner in
providing services to the healthcare industry. The formation of the joint
venture was part of UICI's strategic plan pursuant to which it has
purchased controlling interest in several other healthcare service firms
complementary to SIS, LLC. The net effect of this transaction on the
Company's balance sheet was an increase of $1,380,765 to contributed
capital.
The Company completed its other significant strategic event in the
fourth quarter of 1996. Effective October 15, 1996 the Company completed a
transaction to acquire all of the outstanding common stock of SkyHook
Technologies, Inc. ("STI"). The net effect of this transaction included
the issuance of 4,874,936 (5,673,336 net of 798,400 shares held in escrow.
See "ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT") shares of Magellan common stock. In accordance with this
transaction, the Company recorded a one time charge of $2,557,114 to
purchased in-process research and development expense. This expense is the
difference between the value of the stock given to acquire STI and the
value of STI's net assets at the date of acquisition. STI has positioned
itself to achieve revenue growth through sales of its patented SkyHook
cargo management system into the vertical lift air cargo marketplace.
Results of Operations
During 1996, SIS and SIS, LLC achieved combined sales of $2,140,000,
compared to $1,560,000 for 1995. This represents an increase of 37%. The
net income of SIS, Inc. prior to the LLC formation was $15,000. SIS, LLC
recorded a net loss of $177,000 for the five months ended December 31,
1996. $86,800 of this loss was recorded as the Company's share of such
loss on its income statement. This loss is the result of new management's
intent to pursue rapid growth in the healthcare industry while aggressively
expensing costs associated with that growth. SIS, LLC incurred
considerable expenses in order to position itself for growth, including:
creating a new data capture facility in Dallas, Texas; developing strategic
selling relationships with four new sister companies; joint-developing
three new product offerings with new sister companies; and hiring
additional personnel in Project Management, Programming Operations
Management and Sales/Marketing.
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The 1996 financial statements of the Company reflect the operations of
SIS, Inc. through July 31, 1996 and then reflect its interest in the
earnings of SIS, LLC after August 1, 1996.
The 1996 financial statements of the Company reflect the operations of
STI from October 15, 1996 through December 31, 1996.
STI did not have any revenues in 1996. The company currently
anticipates that the SkyHook cargo management system ("CMS")will be ready
for marketing and distribution during the second half of this year. There
can be no assurance, however, that the Company will not encounter
unanticipated events or problems that could delay the marketing and
distribution of the SkyHook CMS, that the Company will be able to
successfully market the SkyHook CMS, or that the SkyHook CMS will achieve
significant market acceptance.
Liquidity and Capital Resources
The Company's sources of liquidity have historically been cash from
operations, working capital lines of credit and debt and equity financing.
Until August 1, 1996, the effective date of the formation of SIS, LLC, the
operations of SIS, was the Company's source of cash from operations. Under
the terms of the newly created joint venture, it is unlikely that the
Company will receive any cash from the operations of the joint venture in
the foreseeable future because it is anticipated that any cash will be
retained by the joint venture to fund the operations and growth of the
joint venture. In addition, STI is still in the development stage, has not
sold any products and has not generated any revenue.
As a result, the Company must rely solely on its working capital line
of credit and its ability to raise additional debt and equity financing in
order to finance the continued development of the SkyHook CMS and the
introduction of the SkyHook CMS into the market place. On-going operations
of the Company are currently consuming approximately $100,000 of cash each
month and the Company expects to continue to incur substantial additional
expenses in connection with the finalization of the development of the
SkyHook CMS and its introduction into the market place. The Company has
elected to outsource the manufacture of the SkyHook CMS pursuant to an
agreement with Tracor Aerospace. This has eliminated the substantial
financial requirements which would have been required if the Company were
to manufacture the SkyHook CMS.
During 1996 the Company entered into two agreements to borrow $500,000
in unsecured notes payable from SIS, LLC. See "ITEM 12--CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." The notes consist of a $350,000
note and a $150,000 note. These funds were used to complete the
acquisition of STI. Each note bears interest at a variable rate of Prime
minus 1%. Principal payments of $9,722 and $4,167 respectively on a
monthly basis commence October 1998. SIS, LLC has no obligation to
distribute future earnings to the Company.
The Company also entered into an agreement for a $750,000 line-of-
credit. The line of credit bears interest at a variable rate of prime plus
1.5%. The line matures on December 31, 1997 and is secured by inventory
and the personal guarantee of the Company's Chief Executive Officer. As of
March 31, 1997 $375,000 remained available under this line of credit. The
line is being used to fund the operations of the Company.
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In connection with the acquisition of STI, the Company assumed
responsibility for a note payable to a government entity. The balance of
the note was $65,906 at December 31, 1996. Terms of the note include
interest at 8% and monthly installments of $2,507. The note is secured by
inventory and personal guarantees of two former STI officers and one
present STI executive.
The Company had a deficit in working capital as of December 31, 1996
of $62,904, as compared to a deficit in working capital of $193,435 as of
December 31, 1995. As indicated above, the company will require additional
equity and/or debt financing in order to fund the continued operations of
the Company. There can be no assurance, however, that such financing will
be available on terms favorable to the Company, if at all. If the Company
is unable to raise additional capital, the ability of the Company to
successfully market and distribute the SkyHook CMS and its financial
condition would be materially adversely affected.
Factors Affecting Future Results
The Company's future operations and liquidity will be affected by
among other factors, the amount of time it takes to bring the SkyHook CMS
to market, the ability of the Company to raise sufficient debt or equity in
order to finance the continued operations of the Company, the market
acceptance of the SkyHook CMS, new products introduced by competitors, and
the ability of the Company to successfully market and sell the SkyHook CMS
at acceptable prices. If the Company is unable to raise sufficient
capital, the introduction of the SkyHook CMS is delayed, or if the SkyHook
CMS does not achieve market acceptance, this would have a material adverse
affect on the Company's financial condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its wholly-
owned subsidiaries can be found on pages F-1 through F-17 of this Form 10-
KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The table below sets forth the name, age and positions or offices of
each director and executive officer of Magellan Technology (MTI) and its
subsidiaries, SkyHook Technologies, Inc. (STI) and Satellite Image Systems,
Inc. (SIS). The Board of Directors of MTI also serve as the Board of
Directors of STI and SIS.
Name Age Position
- ---- --- --------
William A. Fresh 68 Chairman of the Board and Chief Executive
Officer MTI, STI and SIS
Reginald Hughes 52 Director & CFO of MTI; President and
Chief Operating Officer, STI
Darwin Millet 44 Director; President and Chief Operating
Officer of SIS
Richard I. Winwood 54 Director
Donald P. Cox 42 Director
Blair Blacker 53 Executive Vice President, Sales and
Marketing, STI
Douglas M. Angus 37 Vice President and Chief Financial Officer,
STI
Irving Monclova 65 Vice President of Services, STI
Keith R. Gramke 37 Program Manager, STI
William A. Fresh has served as Chairman of the Board and Chief
Executive Officer of Magellan since its incorporation in June of 1989. He
currently serves as a director of Cerprobe Corporation, a manufacturer of
probe cards utilized in the final test of ICs in the semi-conductor
industry. Mr. Fresh is a past director of EFI Electronics Corporation, a
Utah manufacturer and marketer of surge suppression equipment for computer,
industrial, medical and telecommunications devices. Mr. Fresh founded EFI
in 1981 and subsequently served as its chairman and president until 1986.
Mr. Fresh is currently chairman, president and owner of Orem Tek
Development Corporation, a Utah consulting and business park development
corporation. Mr. Fresh also serves on the Board of Directors of Sento
Technical Innovations Corporation, a publicly-traded software company.
Reginald Hughes was elected to the Board of Directors in 1996. He is
the Chief Financial Officer and a director of Magellan; and President and
Chief Operating Officer of SkyHook Technologies. He co-founded STI in
1994. From 1981 to 1994, he served in various capacities with Eyring
Corporation, a high tech firm in Provo, Utah, specializing in defense
contracting. While with Eyring, Mr Hughes was promoted to the positions of
Director and Vice President of Finance. Prior to joining Eyring
Corporation, Mr Hughes had a successful career as a Hospital Administrator.
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Richard I. Winwood joined the Board of Directors of the Company and
SIS early in 1995. Mr. Winwood is currently Chairman of the Board of
Keystone Aviation, a business aircraft services company based at the Salt
Lake International Airport. He also currently serves on the Board of
Directors of AVM Technology Inc. and Carbon Fibre Products, Inc. In 1983,
Mr. Winwood co-founded Franklin Quest Co., and subsequently served as its
Executive Vice President and Chief Operating officer. Franklin Quest is a
multinational, time management training and products company traded on the
New York Stock Exchange. Prior to co-founding Franklin Quest, Mr. Winwood
had a successful career in the computer services industry, working with
General Electric Co., Automatic Data Processing, Inc. and Computer Sciences
Corporation.
Darwin D. Millet has been a member of the Board since 1994.
Currently, he is President and Chief Operating Officer of SIS. Prior to
coming to SIS, Mr. Millet served as Executive Vice President of Layton
Construction Co., Inc. ("LCC") from 1992 to 1993, and as Chief Financial
Officer from 1986 to 1991.
Donald P. Cox joined the Board of Directors in 1996. Mr. Cox served
as President of SkyHook Technologies, Inc., which he co-founded in 1994.
Mr. Cox has over 20 years of experience in government and commercial
engineering, specializing in military and commercial computerized
electromechanical control and weapon systems.
Blair K. Blacker is Executive Vice President of Sales and Marketing of
SkyHook Technologies. From 1991 until joining SkyHook in 1996, Mr. Blacker
served as a Site Manager and Deputy Director of Raytheon E Systems' Serv-
Air in Lexington, Kentucky. Mr. Blacker served in the United States Army
for 26 years. His military career culminated in the command of an Aviation
Brigade consisting of over 200 helicopters and 1,700 soldiers. He retired
as a full Colonel.
Douglas M. Angus joined SkyHook Technologies in late 1996 as Vice
President and Chief Financial Officer. Prior to joining SkyHook, Mr. Angus
served as the General Manager of Arcadia International, a private
manufacturing concern. From 1991 to 1994 Mr. Angus was CFO and Treasurer
for Eyring Corporation (a high tech software defense contractor). Mr.
Angus also worked as a Certified Public Accountant for seven years with the
international accounting firm of Deloitte and Touche where he was promoted
to the position of Manager.
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Irving Monclova is Vice President of Services for SkyHook
Technologies, Inc. He joined SkyHook in late 1996. Mr. Monclova began
his career in the military. He had tours in Europe, Korea, Republic of
Vietnam, Panama and Puerto Rico. He culminated his military career as
Commander of readiness programs of the reserve forces. In 1982, he joined
Serv-Air, Inc. In 1989, he was promoted to Vice President of Operations
and Maintenance and transferred to Headquarters, Serv-Air, Inc.,
Greenville, Texas. In January 1993, he was promoted to the position of
Vice President and Chief of Special Operations Programs.
Keith R. Gramke, is SkyHook Program Manager for the Company. Prior to
joining SkyHook in 1996, Keith worked for two divisions of Raytheon E
Systems: first with Serv-Air, Inc. (SAI) as Aviation Trainer Program
Manager and later for Advanced Technical Systems Support (ATS2) as Program
Manager for aviation related programs. After graduating from the United
States Military Academy at West Point, NY in 1982, Keith served in the U.
S. Army for 9 years in various locations and positions. His military
service was characterized by increasing leadership and responsibility in
helicopter aviation-related operations, culminating in the successful
command of an attack helicopter company.
Committees and Meetings. The Board of Directors met six (6) times during
the 1996 fiscal year. Each of the directors attended at least 75% of the
meetings of the Board of Directors and of the committees on which he
served.
The Board of Directors maintains standing Audit and Compensation
Committees. The members of the Audit Committee are William A. Fresh and
Darwin Millet. The Committee met one (1) time during the fiscal year ended
December 31, 1996. Its functions are (i) to review and approve the
selection of, and all services performed by, the Company's independent
auditor; (ii) to review the Company's internal controls; and (iii) to
review accounting and financial controls of the Company.
The members of the Compensation Committee are William A. Fresh and
Richard Winwood. The Committee met one (1) time during the fiscal year
ended December 31, 1996. Its functions are to determine and approve
compensation arrangements for executive officers of the Company and to
oversee any stock option, stock award or other employee benefit plan or
arrangement established by the Board of Directors for the benefit of
executive officers of the Company and management.
Section 16(a) Beneficial Ownership Reporting. Section 16(a) of the
Exchange Act requires the Company's executive officers and directors and
persons who own more than 10% of the Common Stock, to file with the U.S.
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of the Common Stock and other
securities from which shares of the Common Stock may be derived. Such
directors, officers and 10% owners are required by Commission regulations
to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on a review of the copies of such reports received by the
Company, the Company believes that the following reports were not filed on
a timely basis: Form 4 (one transaction) for Jeffery L. Bailey due July
1996, filed December 2, 1996; Form 3 (one transaction) for Jeffery L.
Bailey due August 1996, filed December 2, 1996.
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ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the
three fiscal years ended December 31, 1996, the compensation paid to the
Company's Chief Executive Officer. No executive officer of the Company
received salary and bonus compensation in excess of $100,000. The Chairman
and CEO of the Company has agreed to serve without salary compensation
until the Company achieves profitable operations.
Long-term
Annual Compensation Compensation
__________________________________________ ____________
Name Other
and Annual Securities
Principle Salary Bonus Compensation Underlying
Position Year ($) ($) ($) Options
___________________________________________________________________________
William A. Fresh 1996 -0- -0- -0- -0-
Chief Executive 1995 -0- -0- -0- -0-
Officer 1994 -0- -0- -0- 1,000
_____________________
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth the aggregate value of options to
acquire shares of the Common Stock held by the Chief Executive Officer on
December 31, 1996.
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at FY-End(#) FY-End ($)(1)
Name Unexercisable/Exercisable Unexercisable/Exercisable
- ------------------------------------------------------------------------------
William A. Fresh . . . . . 700/300 $0/$0
__________________________
(1) Calculated based on the difference between the exercise price and the
price of a share of the Company's Common Stock on December 31, 1996.
Director Compensation. Directors of the Company are paid no fee for
their service on the Board of Directors. Directors are also not paid a fee
for, or reimbursed for expenses incurred with respect to, attendance at
board or committee meetings. Each director receives options to purchase
1,000 shares of Common Stock at board or committee meetings. Each director
receives options to purchase 1,000 shares of Common Stock following each
Annual Meeting of Shareholders at which he is elected or re-elected to the
Board of Directors.
11
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the number of shares of Common Stock
beneficially owned as of December 31, 1996, by each person known by the
Company to be the beneficial owner of more than five percent (5%) of the
Common Stock, by each director of the Company, by the Chief Executive
Officer, and by all officers and directors of the Company as a group.
Unless noted otherwise, each person named has sole voting and investment
power with respect to the shares indicated.
Beneficial Ownership
As of December 31, 1996
Percentage
Number of of Class
Name and Address of Beneficial Owner Shares Outstanding
- ------------------------------------------------------------------------
William A. Fresh 3,127,268 (1) 21.7%
2238 E. Gambel Oak Drive
Sandy, Utah 84092
Richard Winwood 3,176,882 (2) 22.0%
7069 S. Highland Drive, Suite 102
Salt Lake City, Utah 84121
Ballard Investment 1,574,155 (3) 10.9%
2611 East 1300 South
Salt Lake City, Utah 84108
Reginald Hughes 955,332 (4) 6.6%
1482 East 920 South
Provo, Utah 84606
Donald P. Cox 1,295,336 (5) 9.0%
509 South 590 East
Orem, Utah 84058
Steven E. Garner 942,932 (6) 6.5%
166 West 1440 North
Orem, Utah 84058
Judith F. Edwards 773,336 5.4%
809 17th Avenue
Salt Lake City, Utah 84103
Darwin D. Millet 376,002 (7) 2.6%
12090 South Woodridge Road
Sandy, Utah 84124
All officers and directors as 8,930,820 61.9%
a group (5 persons)
The percentages set forth above have been computed based on 14,419,238(a)
shares, which is the number of shares of the Common Stock, excluding
treasury shares held by the Company, outstanding as of December 31, 1996.
________________________
(a) Includes 801,899 shares owned by former and present STI management but
held in escrow. If certain operating results are not obtained through
October 1997, these shares will be forfeited to the Company.
11
<PAGE>
(1) Includes 800,000 shares held by WAF Investment Company, a Utah limited
partnership, of which Mr. Fresh is a general partner, 1,133,332 shares held
by Reva Luana Fresh, spouse, 50,000 shares held by the William A. and Reva
Luana Fresh Family Living Trust, 108,338 shares issuable upon the exercise
of currently exercisable warrants, and 300 shares issuable upon presently
exercisable options.
(2) The shares are held by Keystone Ventures, L.C., a Utah limited
liability company, of which Mr. Winwood is a member. Includes 37,500
shares issuable upon the exercise of currently exercisable warrants.
(3) Includes 70,837 shares issuable upon presently exercisable
warrants. Craig Ballard, a general partner of Ballard Investment, has the
power to vote the shares and to make investment decisions with respect to
the shares on behalf of Ballard Investment.
(4) The shares are held by a Utah limited liability partnership
of which Mr. Hughes is a general partner. 239,999 of these shares are held
in escrow. If certain operating results are not obtained through October
1997, the shares held in escrow will be forfeited to the Company.
(5) The shares are held by a Nevada Corporation, of which Mr. Cox
is a director. 325,000 of these shares are held in escrow. If certain
operating results are not obtained through October 1997, the shares held in
escrow will be forfeited to the Company.
(6) The shares are held by a family trust of which Mr. Garner is a
trustee. 236,900 of these shares are held in escrow. If certain operating
results are not obtained through October 1997, the shares held in escrow
will be forfeited to the Company.
(7) Includes 60,302 shares issuable upon presently exercisable warrants or
options which become exercisable in the next 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Line of Credit Guaranties. During 1996 the Company entered into an
agreement for a $750,000 non-revolving line of credit secured by inventory
and the personal guarantee of William A. Fresh, Chief Executive Officer of
the Company. The line of credit bears interest at prime plus 1.5% . As of
December 31, 1996, $ -0- was outstanding under the line of credit.
Notes Payable. As of December 31, 1996, the Company owed $65,906 to a
government entity. Terms of the note include interest at 8%, monthly
installments of $2,507. The note is secured by inventory and personal
guarantees from Reginald Hughes, Donald P. Cox and Stephen E. Garner.
Mr. Garner is a former STI officer, Mr. Hughes and Mr. Cox are directors
of the Company, and Mr. Hughes is an officer of the Company.
Payroll Guaranty. The president of STI has personally guaranteed the
monthly payroll of STI. The agreement is between the president of STI and
a third party employee leasing company.
12
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are furnished as exhibits to
this Form 10-KSB
S-B Incorporated Filed
Item No. Description by Reference Herewith
- -----------------------------------------------------------------------------
3-1 Articles of Incorporation of the Company (1)
3-2 Amendment to Articles of Incorporation
approved March 8, 1996 (2)
3-3 By-Laws of the Company (3)
10-1 Variable Rate Line of Credit Agreement X
10-2 Strategic Alliance Agreement with Tracor
Aerospace X
21-1 Subsidiaries of the Company X
27-1 Financial Data X
_______________________
(1) This exhibit was filed with the Commission as an exhibit to
the Company's Registration Statement on Form S-18, filed on September
20, 1989, and is incorporated herein by reference.
(2) This was incorporated with the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995 filed on March 29, 1996.
(3) This exhibit was filed previously with the Commission as an
exhibit to the Company's Annual Report on Form 10-KSB for the fiscal
year ending December 31, 1992, filed on October 15, 1993.
(b) Reports on Form 8-K.
(A) The Company filed a Report on Form 8-K dated October 25, 1996
reporting the acquisition of all of the shares of the capital stock of
SkyHook Technologies, Inc. The financial statements of SkyHook were filed
as part of the report.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAGELLAN TECHNOLOGY, INC.
By: /s/ William A. Fresh
------------------------------------
William A. Fresh,
Chief Executive Officer
Date: April 14, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Name Position Date
- ---------------------------------------------------------------------------
/s/ William A. Fresh Chairman of the Board of April 14, 1997
- ---------------------- Directors and Chief Executive
William A. Fresh Officer (Principal Executive
and Financial Officer)
/s/ Reginald Hughes Chief Operating Officer, April 14, 1997
- ---------------------- Chief Financial Officer and
Reginal Hughes Director
/s/ Richard I. Winwood Director April 14, 1997
- ----------------------
Richard I. Winwood
/s/ Darwin D. Millet Director April 14, 1997
- ----------------------
Darwin D. Millet
/s/ Donald P. Cox Director April 14, 1997
- ----------------------
Donald P. Cox
14
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Index to Consolidated Financial Statements
Page
Independent auditors' report F-1
Consolidated balance sheet F-2
Consolidated statement of operations F-3
Consolidated statement of stockholders'
equity F-4
Consolidated statement of cash flows F-5
Notes to consolidated financial statements F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Magellan Technology, Inc.
We have audited the consolidated balance sheet of Magellan
Technology, Inc. (the Company) as of December 31, 1996, and
the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended
December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Magellan Technology, Inc. as of
December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in note 2 to the consolidated
financial statements, there is substantial doubt about the
ability of the Company to continue as a going concern.
Management's plans in regard to that matter are also
described in note 2. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
TANNER+Co.
February 25, 1997
Salt Lake City, Utah
F-1
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Balance Sheet
December 31, 1996
Assets
Current assets:
Cash $ 88,687
Prepaid expenses 6,125
-------------
Total current assets 94,812
Property and equipment, net 65,607
Investment in joint venture 1,468,933
-------------
Total assets 1,629,352
=============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt 38,516
Accounts payable 43,947
Accrued liabilities 75,253
-------------
Total current liabilities 157,716
Long-term debt 542,390
-------------
Total liabilities 700,106
-------------
Commitments -
Stockholders' equity:
Common stock, par value $.0002 per share,
25,000,000 shares authorized, 13,620,838 shares
issued and outstanding 2,724
Additional paid-in capital 6,309,353
Accumulated deficit (5,382,831)
-------------
Total stockholders' equity 929,246
-------------
Total liabilities and stockholders' $ 1,629,352
=============
See accompanying notes to consolidated financial F-2
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Operations
Years Ended December 31,
1996 1995
Net sales $ 1,150,046 $ 1,560,284
-------------------------
Costs and expenses:
Costs of sales 742,759 1,039,380
General and administrative 632,677 521,860
Purchased in-process research and development 2,557,114 -
-------------------------
3,932,550 1,561,240
-------------------------
Loss from operations (2,782,504) (956)
Other income (expense):
Equity in loss of joint venture (86,804) -
Interest expense (47,644) (51,600)
Loss on sale of assets - (13,456)
Other, net (4,427) 3,344
-------------------------
Loss before income taxes and extraordinary item (2,921,379) (62,668)
Extraordinary item - forgiveness of debt net of
income taxes - 68,811
-------------------------
Net (loss) income before income taxes (2,921,379) 6,143
Provision for income taxes - -
-------------------------
Net (loss) income $ (2,921,379 $ 6,143
=========================
Net (loss) income per share $ (0.33)$ .00
=========================
Weighted average shares outstanding 8,984,000 5,709,000
=========================
See accompanying notes to consolidated financial statements. F-3
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1996 and 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------------------------------------------------
Balance, January 1, 1995 2,677,924 $ 535 $ 1,729,501 $(2,467,595) $ (737,559)
Conversion of debt to stock 1,398,012 280 246,158 - 246,438
Issuance of common stock
for cash 3,060,000 612 611,388 - 612,000
Net income - - - 6,143 6,143
-------------------------------------------------------
Balance, December 31, 1995 7,135,936 1,427 2,587,047 (2,461,452) 127,022
Issuance of common stock for:
Acquisition of subsidiary 4,874,936 975 1,802,751 - 1,803,726
Cash 1,428,572 286 499,714 - 500,000
Accounts payable 164,727 33 32,912 - 32,945
Services 16,667 3 6,164 - 6,167
Capital contribution from
joint venture - - 1,380,765 - 1,380,765
Net loss - - - (2,921,379) (2,921,379)
-------------------------------------------------------
Balance, December 31, 1996 13,620,838 $ 2,724 $ 6,309,353 $(5,382,831) $ 929,246
========================================================
</TABLE>
See accompanying notes to consolidated financial statements. F-4
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Cash Flows
Years Ended December 31,
1996 1995
-------------------------
Cash flows from operating activities:
Net (loss) income $(2,921,379)$ 6,143
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 104,296 123,499
Equity in loss from joint venture 86,804 -
Common stock issued for in-process research
and development 1,587,114 -
Common stock issued for services 6,167 -
Loss on disposal of property and equipment 67,105 13,456
Forgiveness of debt - (68,811)
Provision for losses on accounts receivable (8,915) 8,915
(Increase) decrease in:
Accounts receivable 103,330 (232,713)
Inventories - (87,346)
Prepaid expense (50,470) (7,088)
Other assets (54,654) 7,857
(Decrease) increase in:
Accounts payable (23,618) (179,961)
Accrued liabilities (81,769) (9,977)
Deferred revenue (1,439) (2,187)
-------------------------
Net cash used in
operating activities (1,187,428) (428,213)
-------------------------
Cash flows from investing activities:
Purchase of property and equipment (210,577) (177,090)
Net cash investment in joint venture (17,634) -
Net cash received in acquisition 242,747 -
-------------------------
Net cash used in
investing activities 14,536 (177,090)
-------------------------
Cash flows from financing activities:
Increase in notes payable 344,642 184,739
Proceeds from long-term debt 500,000 104,757
Payments on long-term debt (232,841) (162,720)
Proceeds from issuance of common stock 500,000 612,000
-------------------------
Net cash provided by
financing activities 1,111,801 738,776
-------------------------
Net (decrease) increase in cash (61,091) 133,473
Cash, beginning of year 149,778 16,305
-------------------------
Cash, end of year $ 88,687 $ 149,778
=========================
See accompanying notes to consolidated financial statements. F-5
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies
Organization
The consolidated financial statements consist of Magellan Technology,
Inc. (the Company) and its wholly owned subsidiaries, Satellite Image
Systems, Inc. (SIS, Inc.), SIS Jamaica, LTD (SIS Jamaica), and SkyHook
Technologies, Inc. (SkyHook) which the Company acquired effective
October 15, 1996. The acquisition of SkyHook included the issuance of
4,874,936 shares of Magellan common stock and cash for all of the
outstanding shares of SkyHook common stock. The transaction was
accounted for as a purchase transaction. As part of this transaction,
the Company recognized $2,557,114 as purchased in-process research and
development expense. In addition, on August 1, 1996 (see note 9), the
Company transferred its interest in the assets, liabilities, and
operations conducted by SIS, Inc. to Satellite Image Systems, LLC (SIS,
LLC), a joint venture. The Company received a 49% interest in SIS, LLC
whose assets include those transferred by the Company as well as
$3,000,000 cash transferred by the other party to the transaction.
Since the Company has no further obligation for funding of the
operations of SIS, LLC, a $1,380,764 contribution to capital was
recognized in accordance with the provisions of SEC Staff Accounting
Bulletin 51. The financial statements reflect the investment in SIS,
LLC under the equity method of accounting. Summarized financial
information for SIS, LLC is included in note 11.
Business Activity
The Company's principal business includes: 1) the manufacture and sale
of a helicopter cargo management system (conducted by SkyHook), and 2)
providing image-based data entry services (conducted by SIS, Inc. and
SIS, LLC).
Separate information concerning the assets, revenue and operation of
each segment are included in the financial statements. All operations
of the data entry segment are conducted by SIS, LLC an unconsolidated
subsidiary accounted for using the equity method of accounting.
Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its subsidiaries, SkyHook subsequent to October 15,
1996 and SIS, Inc. and SIS Jamaica prior to July 31, 1996. All
significant intercompany balances and transactions have been eliminated.
Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies - Continued
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. In
the normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing credit evaluations
of its customers and maintains allowances for possible losses which,
when realized, have been within the range of management's expectations.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less
to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined using the straight-line
method over the estimated useful lives of the assets. Expenditures for
maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and equipment are
reflected in operations.
Revenue Recognition
Revenue is recognized upon performance of services. Revenue from
equipment sales is recognized when equipment has been shipped and
installed.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect
to temporary differences between financial and tax reporting,
principally related to depreciation.
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares
outstanding during the year. Common stock equivalents are not included
in the earnings per share calculation when their effect is antidilutive.
Fully diluted earnings per share is the same or not materially different
than primary earnings per share, and, accordingly, is not presented.
Reclassification
Certain amounts in the 1995 financial statements have been reclassified
to conform with the 1996 presentation.
F-7
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
2. Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As of
December 31, 1996, the Company had a deficit in working capital of
$62,904, and an accumulated deficit of $5,382,831 and incurred a loss of
$2,921,379 for the year ended December 31, 1996. These conditions raise
substantial doubt about the ability of the Company to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from
outside sources. Management anticipates that a marketable version of
the helicopter cargo transport equipment will be available for sale in
1997 and that sales of this product will provide positive cash flow.
However, there can be no assurance they will be successful.
3. Property and Equipment
Property and equipment consists of the following:
Equipment $ 62,794
Leasehold improvements 9,590
-------------
72,384
Accumulated depreciation and
amortization (6,777)
-------------
$ 65,607
=============
4. Bank Line-of- Credit
The Company has a bank line-of-credit agreement which allows the Company
to borrow a maximum amount of $750,000 at an interest rate equal to the
banks prime rate plus 1.5% (9.75% at December 31, 1996). The line-of-
credit matures on December 31, 1997, is secured by inventory and the
personal guarantee of the Company's Chief Executive Officer, and had no
outstanding balance at December 31, 1996.
F-8
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
5. Long-term Debt
Long-term debt is comprised of the following:
Unsecured note payable to SIS, LLC,
interest payable quarterly at the prime
rate minus 1%, and commencing in October
1998, principal payments of $9,722 due
monthly until paid in full $ 350,000
Unsecured note payable to SIS, LLC,
interest payable quarterly at the prime
rate minus 1%, and commencing in October
1998, principal payments of $4,167 due
monthly until paid in full 150,000
Note payable to a governmental entity
due in monthly installments of $2,507,
including interest at 8%, secured by the
personal guarantees of certain
shareholders, inventory, equipment and
receivables 65,906
Unsecured note payable to an individual,
with interest at 25%, due December 31,
1997 15,000
-------------
580,906
Less current portion (38,516)
-------------
$ 542,390
=============
Future maturities of long-term debt are as follows:
Year Amount
---- ------------
1997 $ 38,516
1998 69,360
1999 181,364
2000 166,665
2001 125,001
------------
$ 580,906
============
F-9
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
6. Related Party Transactions
During 1996 and 1995, interest expense of approximately $8,675 and
$34,748, respectively, was recognized on obligations due to shareholders
of the Company.
Interest recognized to SIS, LLC for the year ended December 31, 1996 was
$8,889.
7. Income Taxes
The provision for income taxes is different than amounts which would be
provided by applying the statutory federal income tax rate to income
before provision for income taxes for the following reasons:
Year Ended
December 31,
1996 1995
-----------------------
Federal income tax benefit
(provision) at statutory rate $ 1,094,000 $ (2,000)
Change in valuation allowance (1,094,000) 2,000
------------------------
$ - $ -
========================
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforwards 1,935,000
Valuation allowance (1,935,000)
------------
$ -
============
At December 31, 1996, the Company has a net operating loss carryforward
available to offset future taxable income of approximately $5,690,000,
which will begin to expire in 2008. The utilization of the net
operating loss carryforwards is dependent upon the tax laws in effect at
the time the net operating loss carryforwards can be utilized. The Tax
Reform Act of 1986 significantly limits the annual amount that can be
utilized of certain of these carryforwards as a result of the change in
ownership.
F-10
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
8. Common Stock Split
On March 8, 1996, the Company's shareholders approved a 1 for 2 reverse
stock split. In addition, authorized shares were increased from
15,000,000 shares to 25,000,000 shares. All references in the financial
statements to number of shares, per share amounts and the exercise price
of warrants and stock options have been retroactively restated to
reflect the decreased number of shares outstanding.
9. Supplemental Cash Flow Information
During the year ended December 31, 1996:
On August 1, 1996, the Company transferred all of its assets and
liabilities in exchange for a 49% interest in SIS, LLC. The net
assets transferred consisted of the following:
Accounts receivable $ 260,848
Other current assets 148,306
Property and equipment, net 506,252
Other assets 179,586
Accounts payable (91,000)
Accrued expenses (86,322)
Debt (760,331)
-------------
Net assets purchased 157,339
Less investment in joint venture (174,973)
-------------
Net cash investment $ (17,634)
=============
The Company increased the investment in joint venture and increased
additional paid-in capital of $1,380,764 in accordance with the
provisions of SEC Staff Accounting Bulletin 51 (see note 1).
F-11
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
9. Supplemental Cash Flow Information - Continued
During 1996, the Company purchased 646,667 shares of SkyHook common
stock for $635,000 cash. On October 15, 1996, the Company acquired
the balance of the outstanding shares of SkyHook in a purchase
transaction. The Company issued 4,874,936 shares of its common stock
and $335,000 cash for SkyHook common stock. The net assets acquired
are as follows:
Prepaid expenses $ 96,873
Property and equipment, net 67,836
Accounts payable (23,265)
Accrued expenses (82,579)
Long-term debt (85,000)
Common stock (216,612)
-------------
Net cash received $ 242,747
=============
The Company reduced accounts payable in the amount of $32,945 in
exchange for the issuance of 164,727 shares of common stock.
During the year ended December 31, 1995:
The Company reduced notes payable in the amount of $246,438 in
exchange for the issuance of 1,398,012 shares of restricted common
stock.
Actual amounts paid for:
1996 1995
-------------------------
Interest $ 47,644 $ 60,757
=========================
Income taxes $ - $ -
=========================
10. Extraordinary Item
During 1995 certain shareholders agreed to forgive indebtness of the
Company due to the shareholders. The amount of indebtness forgiven was
$68,811 for the year ended December 31, 1995. This amount has been
recorded in net income.
F-12
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
11. Significant Unconsolidated Affiliate
Summarized financial information for SIS, LLC, a significant
unconsolidated affiliate of the Company, is as follows at December 31,
1996:
Results for the period August 1, 1996 to December 31, 1996:
Sales $ 990,049
Net loss $ (177,150)
Year-end financial position:
Current assets $ 1,898,399
Noncurrent assets $ 1,274,959
Current liabilities $ 118,128
Noncurrent liabilities $ 57,407
12. Fair Value of Financial Instruments
None of the Company's debt instruments are held for trading purposes.
The Company estimates that the fair value of all financial instruments
at December 31, 1996, does not differ materially from the aggregate
carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgement is
necessarily required in the interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in
a current market exchange.
F-13
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
13. Stock Options and Warrants
The Company has an incentive stock option plan wherein 2,250,000 shares
of the Company's common stock can be issued. The Company has granted
stock options to certain officers and shareholders of the Company to
purchase shares of the Company's restricted common stock. In addition,
the Company granted 233,342 warrants to related parties. The warrants
have a purchase price of $.30 per share. A schedule of the options and
warrants at December 31, 1996 is as follows:
Number of Price Per
Options Warrants Share
---------------------------------------
Outstanding at
December 31, 1995 413,598 233,342 $ .20 to 1.20
Granted 597,000 - .30 to .37
Exercised - - -
Expired 106,262 - .37
---------------------------------------
Outstanding at
December 31, 1996 90,4336 233,342 .37
=======================================
Stock options exercisable and available for future grant are as follows:
December 31,
1996 1995
----------------------
Options exercisable 92,868 28,735
Options available for grant 1,345,664 1,836,402
F-14
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
14. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) which established financial
accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for an employee
stock option or similar equity instrument. This statement gives
entities the choice between adopting the fair value method or continuing
to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects
if the fair value method had been adopted. The Company has opted for
the latter approach. Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation expense for the
Company's stock option plan been determined based on the fair value at
the grant date for awards in 1996 and 1995, consistent with the
provisions of FAS No. 123, the Company's results of operations would
have been reduced to the pro forma amounts indicated below:
December 31,
1996 1995
--------------------------
Net (loss) income - as reported $ (3,216,787) $ 6,143
Net (loss) income - pro forma $ (3,229,683) $ 6,143
(Loss) earnings per share - as reported $ (.36) $ .00
(Loss) earnings per share - pro forma $ (.36) $ .00
==========================
The fair value of each option grant is estimated in the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
December 31,
1996 1995
------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 280% 280%
Risk-free interest rate 5.5% 5.5%
Expected life of options 2, 3 & 5 years 3 & 5 years
==============================
The weighted average fair value of options granted during 1996 and 1995
are $.36 and $.29, respectively.
F-15
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
14. Stock-Based Compensation - Continued
The following table summarizes information about stock options and
warrants outstanding at December 31, 1996:
Outstanding Exercisable
---------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/96 (Years) Price 12/31/96 Price
-------------------------------------------------------------------------
$ .20 to .37 1,100,344 3.20 0.32 318,343 0.29
.60 33,334 3.40 0.60 6,667 0.60
1.20 4,000 2.70 1.20 1,200 1.20
-------------------------------------------------------------------------
$ .20 to 1.20 1,137,678 3.20 0.33 326,210 0.30
=========================================================================
15. Pro Forma Condensed Combined Statement of Operations
The following condensed pro forma combined statements of operations for
the years ended December 31, 1996 and 1995 for Magellan and SkyHook,
respectively, assumes the acquisition of SkyHook by Magellan as of the
beginning of the years then ended.
The pro forma results of operations are not necessarily indicative of
the results of operations that would actually have been obtained if the
transactions had occurred as of the beginning of the years then ended.
These statements should be read in conjunction with the historical
financial statements and related notes.
Pro forma information for the year ended December 31, 1996 is as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Magellan SkyHook
Technology Technologies
Inc. Inc. Total Adjustments Combined
----------------------------------------------------------------
Net sales $ 1,150,046 $ - $ 1,150,046 $ - $ 1,150,046
Costs and expenses (1,356,279) (1,087,855) (2,444,134) (2,557,114) (5,001,248)
----------------------------------------------------------------
Net loss $ (206,233)$ (1,087,855)$ (1,294,088)$ (2,557,114)$ (3,851,202)
================================================================
Net loss per share $ (.03) $ (.30)
============ =============
Weighted average
number of common
shares outstanding 7,943,000 12,818,000
============ =============
</TABLE>
F-16
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
15. Pro Forma Condensed Combined Statement of Operations - Continued
Pro forma information for the year ended December 31, 1995 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Magellan SkyHook
Technology Technologies
Inc. Inc. Total Adjustments Combined
----------------------------------------------------------------
Net sales $ 1,560,284 $ 483 $ 1,560,767 $ - $ 1,560,767
Costs and expenses (1,554,141) (168,348) (1,722,489) (2,557,114) (4,279,603)
----------------------------------------------------------------
Net income (loss) 6,143 $ (167,865)$ (161,722)$ (2,557,114)$ (2,718,836)
================================================================
Net income (loss)
per share $ .00 $ (.26)
============ =============
Weighted average
number of common
shares outstanding 5,709,000 10,633,000
============ =============
</TABLE>
F-17
<PAGE>
Exhibit 10-1
LINE OF CREDIT
LOAN AGREEMENT
In consideration of the covenants and conditions hereafter contained,
BANK ONE, UTAH, NA ("Bank" hereafter) and SKYHOOK TECHNOLOGIES, INC.
("Borrower" hereafter), agree as follows:
1. REPRESENTATIONS.
A. To fund current operations and growth, Borrower has requested that
Bank extend to Borrower a revolving line of credit (hereinafter "Line of
Credit").
B. Bank desires to lend to Borrower, on a revolving line of credit
basis, the amount set forth herein as the Line of Credit Limit, pursuant to
the terms and conditions of this Agreement and pursuant to the Loan Documents
executed in connection herewith.
C. All advances made to Borrower under this Line of Credit shall be
secured by the Collateral described herein or in a Security Agreement executed
in connection herewith.
2. DEFINITIONS AND ACCOUNTING TERMS.
A. Defined Terms. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
"Accounts" means "accounts" as defined in the Utah Uniform Commercial
Code adopted in the state of Utah.
"Advance" means a borrowing under this Agreement.
"Affiliated" means any Person, (1) which directly or indirectly
controls, or is controlled by, or is under common control with the Borrower or
a subsidiary; (2) which directly or indirectly beneficially owns or holds five
percent (5%) or more of any class of voting stock of the Borrower or any
Subsidiary; or (3) five percent (5%) or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Borrower or a
Subsidiary. The term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies
of a Person, whether through the ownership of voting securities, by contract,
or otherwise.
"Agreement" means this Line of Credit Loan Agreement, as amended,
supplemented, or modified from time to time.
"Authorized Agent" means the Person or Persons authorized to execute and
deliver this Agreement or any instrument or agreement required hereunder on
behalf of the Borrower, as well as the Person or Persons authorized to obtain
Advances on behalf of Borrower as described in this Agreement.
<PAGE>
"Business Day" means any day other than a Saturday, Sunday, or other day
on which commercial banks in Salt Lake City, Utah are authorized or required
to close under the laws of the State of Utah.
"Collateral" means all property which is subject to the Lien granted by
a Security Agreement or any other lien instrument.
"Debt" means (1) indebtedness or liability for borrowed money;
(2) obligations evidenced by bonds, debentures, notes, or other
similar instruments; (3) obligations for the deferred purchase price of
property or services (including trade obligations); (4) obligations as lessee
under capital leases; (5) current liabilities in respect of unfunded vested
benefits under Plans covered by ERISA; (6) obligations under letters of
credit; (7) obligations under acceptable facilities; and (8) all guaranties,
endorsements (other than for collection or deposit in the ordinary course of
business), and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person or entity, or otherwise to
assure a creditor against loss; and, (9) obligations secured by any Liens,
whether or not the obligations have been assumed.
"Default" means any of the events specified in this Agreement under
"Events of Default; Remedies," whether or not any requirement for the giving
of notice, the lapse of time, or both, or any other condition, has been
satisfied.
"Event of Default" means any of the events specified in this Agreement
under "Events of Default; Remedies", provided that any requirement for the
giving of notice, the lapse of time, or both, or any other condition, has been
satisfied.
"GAAP" means generally accepted accounting principles in the United
States.
"Guarantor" means William A. Fresh and Magellan Technology, Inc.
"Guaranty" means the Guaranty to be delivered by the Guarantors under
the terms of this Agreement.
"Inventory" means "inventory" as defined in the Uniform Commercial Code,
adopted in the State of Utah.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory
or other) , or preference, priority, or other security agreement or
preferential arrangement, charge, or encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention
-2-
<PAGE>
agreement, any financing lease having substantially the same economic effect
as any of the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction to evidence any
of the foregoing).
"Line of Credit Limit" means $750,000.00.
"Loan Document" means this Agreement, any Security Agreement, Guaranty,
or hypothecation or other document executed in connection with this Agreement.
"Loan Index Rate" means the rate per annum charged and announced by
Bank One, Columbus, NA, or its successors, from time to time as its "prime
rate", which rate is not intended to be the lowest rate of interest charged by
the Bank to its borrowers. The Loan Index Rate will change on each day that
the "prime rate" changes.
"Loan Interest Rate" means a variable interest rate which shall at all
times during the term of this Agreement be equal to the total of the Loan
Index Rate plus the applicable Margin as defined herein.
"Margin" means the percentage points added to the Loan Index Rate to
determine the Loan Interest Rate pursuant to this Agreement. The Margin is
set forth above the signatures to this Agreement.
"Maturity Date" means December 15, 1997.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority, or other entity of whatever nature.
"Security Agreement" means the Security Agreement to be delivered by the
Borrower under the terms of this Agreement.
"Subsidiary" means, as to the Borrower, a other corporation of which
shares of stock having ordinary voting power (other than stock having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation are at the time
owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by the Borrower.
B. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistent with those applied in the preparation of the financial
statements and all financial data
-3-
<PAGE>
submitted pursuant to this Agreement shall be prepared in accordance with such
principles.
3. TERMS OF LINE OF CREDIT.
A. Bank agrees to lend and Advance to Borrower f rom the date hereof
amounts which do not exceed the Line of Credit Limit. Borrower agrees to
repay all amounts borrowed and advanced in accordance with the terms described
herein. The Line of Credit Limit is the maximum amount Bank may be required
to advance to Borrower under this Agreement.
B. It is understood that the amount available to Borrower will vary
in accordance with Advances to Borrower and payments by Borrower.
C. All funds available to Borrower under this Line of Credit will be
advanced on oral or written demand of Borrower or
Authorized Agent, and Bank shall not have the right to deny any such Advance
unless this Agreement has been terminated prior to an Advance request. If
indicated above the signatures to this Agreement, Borrower shall obtain
Advances solely by delivering to Bank a written ADVANCE REQUEST FORM in a form
approved by Bank.
D. Borrower may obtain Advances on the Line of Credit asfollows:
(1) Bank will maintain a written or computerized ledger which
will reflect all Advances, charges and payments made on the Line of
Credit.
(2) All of Borrower's transactions on the Line of Credit shall
be executed solely through Authorized Agents. These are the only
persons authorized to execute transactions for Borrower under this
Agreement and Borrower shall cause these Authorized Agents to provide a
specimen of their signatures. Borrower shall revoke the authority of
its Authorized Agents or appoint other Authorized Agents only upon
written notice to Bank given in accordance with this Agreement. Two (2)
Authorized Agents are required are required to execute transactions for
the Borrower.
(3) All Advances made to Borrower under the Line of Credit shall
be deposited immediately, but in no event later than the next regular
banking day, into the deposit account designated by Borrower above the
signatures to this Agreement.
E. Loan Interest Rate. Borrower shall pay to Bank interest on the
outstanding principal balance of all Advances obtained under the Line of
Credit. The interest rate shall be the Loan Interest Rate. The Loan Interest
Rate may change from time to time and the
-4-
<PAGE>
interest payable on the outstanding principal balance will fluctuate with
changes in the Loan Interest Rate. Interest shall be computed daily on the
basis of a 360 day year and charged on the number of actual days Advances are
outstanding.
F. Interest Payments. Bank will bill Borrower each month for
interest due for the preceding month on total outstanding Advances
from the Line of Credit. Interest will be due in arrears and the
interest due must be paid to Bank on the due date shown on each billing
statement. If payment is not received within ten (10) Business Days after the
due date shown on the billing statement, Borrower authorizes Bank to charge
the Line of Credit for the amount of the interest due for the preceding month
so long as such charge does not cause the outstanding principal balance to
exceed the Line of Credit Limit or the Borrowing Base, whichever is less.
Bank, in failing to render an interest statement, does not waive its right to
receive or collect interest payments.
G. Principal Payments. Until Bank declares a termination of the Line
of Credit following the occurrence and during the continuance of an Event of
Default, or otherwise notifies Borrower in writing, Borrower may make payments
on the principal balance of Advances outstanding on the Line of Credit in
amounts and at such times as Borrower, in its sole discretion, determines.
There shall be no pre-payment penalty.
H. Origination and Amendment Fee. At the time of closing this
Agreement, Borrower shall pay to Bank a loan origination fee of $1,875.00. All
other fees and costs of documenting this Agreement, will be paid for by
Borrower at the time of closing.
I. Other Fees. Borrower shall pay to Bank a reasonable fee,
including outside attorneys' fees, to amend the Loan Agreement or any of the
Loan Documents. A reasonable fee may also be charged for Bank's review of any
request by the Borrower to modify or waive any restrictive covenants. A fee
charged to modify or waive a restrictive covenant does not imply that Bank
consented to the modification or waiver, but is only to reimburse Bank for its
time and effort in reviewing the request by Borrower. Bank shall issue a
statement for these fees. If the fees are not paid by the 15th day of the
following month, Borrower directs Bank to add the amount to the principal
balance of the Loan. Failing to render a statement does not waive the right
to receive or collect these fees.
4. COLLATERAL.
A. The Collateral for all Advances made to Borrower under the Line of
Credit and all accrued interest, costs and fees shall be all of the Borrower's
Inventory and all rights to payment of money including but not limited to
Accounts, contract rights,
-5-
<PAGE>
chattel paper, instruments, general intangibles and choses in action now owned
or hereafter acquired and as further described in a Security Agreement or
other lien instrument executed at any time prior to or in connection with this
Agreement. In enforcing the terms of any Security Agreement, following
Borrower's default, Bank shall not be required to liquidate the Collateral in
any particular order. The Collateral is provided in consideration of the
availability of funds under this Agreement, and no security interest shall be
released or be deemed released until this Agreement has been terminated and
all amounts Advanced have been paid in full. No junior Lien on any of Bank's
Collateral shall affect the priority of any Advance made to Borrower under
this Agreement.
5. TERMINATION.
A. Termination by Borrower. Borrower may terminate this Agreement at
any time by furnishing Bank with a written notice that this Agreement 'is
terminated and coincidentally therewith paying all Advances, including
interest, fees and charges, outstanding under the Line of Credit.
B. Termination by Bank. In the event of Borrower's Default, and
following notice and failure by Borrower to cure as required herein, Bank may
terminate its obligation to make further Advances under this Agreement.
Borrower's default is not waived by any action of Bank other than by a written
waiver of Default.
6. MATURITY.
Notwithstanding any provision herein to the contrary, all outstanding
Advances together with accrued and unpaid interest, fees and charges shall
mature and be due and payable in full on the Maturity Date.
7. PLEDGE.
Borrower does hereby pledge to Bank and grant to Bank a security
interest, perfected by possession, on all of Borrower's accounts, credits,
assets or things of value that from time to time are in the possession and/or
control of Bank. In the event of Default, as defined herein, and Borrower's
failure to cure the Default, Bank may exercise its rights under the pledge and
apply the pledged property to the outstanding balance of Advances due to
Bank.
8. CONDITIONS PRECEDENT.
A. Condition Precedent to the Loan. The obligation of Bank to make
the Line of Credit Loan to Borrower is subject to the condition
precedent that the Bank shall have received on or before
-6-
<PAGE>
the date of such Line of Credit each of the following, in form and substance
satisfactory to Bank and its counsel:
(i) Agreement. This Agreement duly executed by the Borrower.
(ii) Security Agreement. A Security Agreement, duly executed
by the Borrower, together with acknowledged copies of Financing
Statements (UCC-1) duly filed under the Uniform Commercial Code of all
jurisdictions necessary or, in the opinion of the Bank, desirable to
perfect the security interest created by the Security Agreement.
(iii) Evidence of all corporate action by the Borrower.
Certified (as of the date of this Agreement) copies of all corporate
action taken by the Borrower, including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of
this Agreement and each other document to be delivered pursuant to
this Agreement.
(iv) Evidence of all corporate action by the Guarantor.
Certified (as of the date of this Agreement) copies of all corporate
action taken by the Guarantor, including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of the
Guaranty.
(v) Arbitration Agreement. An Arbitration Agreement duly
executed by Borrower and the Guarantors.
(vi) Guaranty, Guarantees duly executed by theGuarantors.
(vii) Insurance and Landlord's Waiver. Evidence of insurance
covering the Collateral in amounts and form acceptable to Bank and an
executed Landlord's Waiver withregard to Inventory.
(viii) Fees. All costs and fees required in connection with
this Agreement have been paid.
(ix) Additional Documentation. The Bank shall have received
such other approvals, opinions, or documents as the Bank may
reasonably request.
9. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Bank that:
A. Incorporation, Good Standing and Due Qualification. The
-7-
<PAGE>
Borrower and each of its Subsidiaries is a corporation duly incorporated,
validly existing, and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own its assets and
to transact the business in which it is now engaged or proposed to be engaged
in; and is duly qualified as a foreign corporation and in good standing under
the laws of each other jurisdiction in which such qualification is required.
B. Corporate Power and Authority. The execution, delivery, and
performance by the Borrower of this Agreement have been duly authorized by all
necessary action and do not and will not (1) require any consent or approval
of the stockholders of Borrower; (2) contravene Borrower's charter or bylaws;
(3) violate any provision of any law, rule, regulation (including, without
limitation, Regulations U and X of the Board of Governors of the Federal
Reserve System) , order, writ, judgment, injunction, decree, determination, or
award presently in effect having applicability to Borrower; (4) result in a
breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease, or instrument to which Borrower is a
party or by which it or its properties -may be bound or affected; (5) result
in, or require, the creation or imposition of any Lien, upon or with respect
to any of the properties now owned or hereafter acquired by Borrower; and, (6)
cause Borrower to be in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination, or award or any such
indenture, agreement, lease, or instrument.
C. Legally Enforceable Agreement. This Agreement is, and each of
the other Loan Documents when delivered under this Agreement will be, legal,
valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, except to the extent
that such enforcement may be limited by applicable bankruptcy, insolvency,
and other similar laws affecting creditors' rights generally.
D. Financial Statements. The balance sheet of the Borrower and its
Subsidiaries as of December 31, 1995, and the related statements of income
and retained earnings of the Borrower and its Subsidiaries for the fiscal
year then ended, copies of which have been furnished to the Bank, are
complete and correct and fairly present the financial condition of the
Borrower and its Subsidiaries as at such dates and the results of the
operations of the Borrower and its Subsidiaries for the periods covered by
such statements, all in accordance with GAAP consistently applied (subject
to year-end adjustments in the case of the interim financial statements),
and since October 31, 1996, there has been no material adverse change in the
condition (financial, or otherwise), business, or operations of the Borrower
or any Subsidiary. Except as stated above, there are no liabilities of
-8-
<PAGE>
the Borrower or any Subsidiary, fixed or contingent, which are material but
are not reflected in the financial statements or in the notes thereto, other
than liabilities arising in the ordinary course of business. No information,
exhibit, or report furnished by the Borrower to the Bank in connection with
the negotiation of this Agreement contained any material misstatement of f act
or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading.
E. Other Agreements. Neither the Borrower, nor any Subsidiary, is
a party to any indenture, loan, or credit agreement, or to any lease or
other agreement or instrument, or subject to any charter or corporate
restriction which could have a material adverse effect on the business,
properties, assets, operations or conditions, financial or otherwise, of the
Borrower or any Subsidiary, or the ability of the Borrower to carry out its
obligations under this Agreement. Neither the Borrower nor any Subsidiary
is in default in any respect in the performance, observance, or fulfillment
of any of the obligations, covenants or conditions contained in any
agreement or instrument material to its business to which it is a party.
F. Litigation. There is no pending or threatened action or
proceeding against or affecting the Borrower or any of its Subsidiaries
before any court, governmental agency, or arbitrator, which may, in any one
case or in the aggregate, materially adversely affect the financial
condition, operations, properties, or business of the Borrower to perform
its obligation under this
Agreement.
G. No Defaults on Outstanding Judgments or Orders. The
Borrower and its Subsidiaries have satisfied all judgments, and
neither the Borrower nor any Subsidiary is in default with respect to any
judgment, writ, injunction, decree, rule, or regulation of any court,
arbitrator, or federal, state, municipal, or other governmental authority,
commission, board, bureau, agency, or instrumentality, domestic or foreign.
H. Ownership and Liens. The Borrower and each Subsidiary have
title to, or valid leasehold interests in, all of their properties and
assets, real and personal, including the properties and assets and leasehold
interest reflected in the financial statements referred to herein (other
than any properties or assets disposed of in the ordinary course of
business), and none of the properties and assets owned by the Borrower or
any Subsidiary and none of their leasehold interests is subject to any Lien,
except such as may be permitted pursuant to this Agreement.
I. Operation of Business. The Borrower and its Subsidiaries
possess all licenses, permits, franchises, patents, copyrights, trademarks,
and trade names, or rights thereto, to conduct their
-9-
<PAGE>
respective businesses substantially as now conducted and as presently proposed
to be conducted, and the Borrower and its subsidiaries are not in violation of
any valid rights of others with respect to any of the foregoing.
J. Taxes. The Borrower and each of its Subsidiaries have filed all
tax returns (federal, state and local) required to be filed and have paid all
taxes, assessments, and governmental charges and levies thereon to be due,
including interest and penalties.
10. AFFIRMATIVE COVENANTS.
So long as this Agreement shall remain in effect, the Borrower will:
A. Maintenance of Existence. Preserve and maintain, and cause each
Subsidiary to preserve and maintain, its corporate existence and good standing
in the jurisdiction of its incorporation, and qualify and remain qualified,
and cause each Subsidiary to qualify and remain qualified, as a foreign
corporation in each jurisdiction in which such qualification is required.
B. Maintenance of Records. Keep, and cause each Subsidiary to keep,
adequate records and books of account, in which complete entries will be made
in accordance with GAAP consistently applied, reflecting all financial
transactions of the Borrower and its Subsidiaries.
C. Maintenance of Properties. Maintain, keep, and preserve, and
cause each Subsidiary to maintain, keep, and preserve, all of its properties
(tangible and intangible) necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
D. Conduct of Business. Continue, and cause each Subsidiary to
continue, to engage in an efficient and economical manner in a business of the
same general type as now conducted by it on the date of this Agreement.
E. Maintenance of Insurance. Maintain, and cause each Subsidiary to
maintain, insurance with financially sound and reputable insurance companies
or associations in such amounts and covering such risks as are usually carried
by companies engaged in the same or a similar business and similarly situated,
which insurance may provide for reasonable deductibility from coverage
thereof.
F. Compliance with Laws. Comply, and cause each Subsidiary to
comply, in all respects with all applicable laws, rules,
-10-
<PAGE>
regulations, and orders, such compliance to include, without limitation,
paying before the same become delinquent all taxes, assessments, and
governmental charges imposed upon it or upon its property.
G. Right of Inspection. At any reasonable time and f rom time to
time, permit the Bank or any agent or representative thereof to examine and
make copies of and abstracts f rom the records and books of account of, and
visit the properties of, the Borrower and any Subsidiary, and to discuss the
affairs, finances, and accounts of the Borrower and any Subsidiary with any of
their respective officers and directors and the Borrower I s independent
accountants.
H. Reporting Requirements. Furnish to the Bank:
(1) Annual financial statements of Borrower. As soon as
available and in any event within 90 days after the end of each fiscal
year of the Borrower, balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal year and statements of income
and retained earnings of the Borrower and its Subsidiaries for such
fiscal year and statements of cash flows of the Borrower and its
Subsidiaries for such fiscal year, all in reasonable detail and stating
in comparative form the respective figures for the corresponding date
and period in the prior fiscal year and all prepared in accordance with
GAAP consistently applied and certified correct by an officer of the
Borrower.
(2) Annual financial statements of Magellan. As soon as
available and in any event within 90 days after the end of each fiscal
year of the Borrower, balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal year and statements of income
and retained earnings of the Borrower and its Subsidiaries for such
fiscal year and statements of cash flows of the Borrower and its
Subsidiaries for such fiscal year, all in reasonable detail and stating
in comparative form the respective figures for the corresponding. date
and period in the prior fiscal year and all prepared in accordance with
GAAP consistently applied and as to the consolidated statements
accompanied by an opinion thereon acceptable to the Bank by certified
public accountants selected by the Borrower and acceptable to the Bank.
(3) Financial Statements and Tax Returns of Fresh. Annual
financial statements of William A. Fresh and a copy of his prior year's
federal income tax return within 30 days of filing said tax return.
(4) Notice of litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any court
or governmental department, commission, board, bureau, agency, or
instrumentality, domestic or foreign, affecting the Borrower or any
Subsidiary which, if determined adversely to the Borrower or such
Subsidiary, could have a material adverse effect on the financial
condition, properties, or operations of the Borrower or such Subsidiary.
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<PAGE>
(5) Notice of Default and Events of Default. As soon as possible
and in any event within fifteen (15) days after the occurrence of each
Default or Event of Default, a written notice setting forth the details
of such Default or Event of Default and the action which is proposed to
be taken by the Borrower with respect thereto.
(6) General information. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower or any
Subsidiary as the Bank may from time to time reasonably request.
I. Environment. Be and remain, and cause each Subsidiary to be and
remain, in compliance with the provisions of all federal, state, and local
environmental, health, and safety laws, codes and ordinances, and all rules
and regulations issued thereunder, notify the Bank immediately of any notice
of a hazardous discharge or environmental complaint received from any
governmental agency or any other party; notify the Bank immediately of any
hazardous discharge from or affecting its premises; immediately contain and
remove the same, in compliance with all applicable laws; promptly pay any fine
or penalty assessed in connection therewith; permit the Bank to inspect the
premises, to conduct tests thereon, and to inspect all books, correspondence,
and records pertaining thereto; and at the Bank's request, and at the
Borrower's expense, provide a report of a qualified environmental engineer,
satisfactory in scope, form, and content to the Bank, and such other and
further assurances reasonably satisfactory to the Bank that the condition has
been corrected.
11. NEGATIVE COVENANTS.
So long as any Advance shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will not:
A. Liens. Create, incur, assume, or suffer to exist, or permit any
subsidiary to create, incur, assume, or suffer to exist, any Lien upon or with
respect to any of its properties, now owned or hereafter acquired, except:
(1) Liens in favor of the Bank;
(2) Liens for taxes and assessments or other governmental
charges or levies if not yet due and payable or,
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<PAGE>
if due and payable, if they are being contested in good faith by appropriate
proceedings and f or which appropriate reserves are maintained;
(3) Liens imposed by law, such as mechanics', materialmen's,
landlord's, warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than ninety (90) days or which are being contested in good
faith in appropriate proceedings and for which appropriate reserves have been
established;
(4) Liens under workers' compensation, unemployment insurance, Social
Security, or similar legislation;
(5) Liens, deposits, or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money),
leases (permitted under the terms of this Agreement), public or
statutory obligations, surety, stay, appeal, indemnity, performance, or
other similar bonds, or other similar obligations arising in the
ordinary course of business;
(6) Liens existing as of the date of this Agreement.
(7) Judgment and other similar Liens arising in connection with
Court proceedings, provided the execution or other enforcement of such
Liens is effectively stayed and the claims secured thereby are being
actively contested in good faith and by appropriate proceedings;
(8) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere with
the occupation, use, and enjoyment by the Borrower or any Subsidiary of
the property or assets encumbered thereby in the normal course of its
business or materially impair the value of the property subject thereto;
(9) Liens securing obligations of a Subsidiary to the Borrower
or another subsidiary.
B. Debt. Create, incur, assume, or suffer to exist, or permit any
Subsidiary to create, incur, assume, or suffer to exist, any Debt, except:
(1) Debt of the Borrower under this Agreement;
(2) Debt as of the date of this Agreement as shown on the financial
statement dated October 31, 1996;
(3) Debt of the Borrower subordinated on terms
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<PAGE>
satisfactory to the Bank to the Borrower's obligations under this
Agreement;
(4) Debt of the Borrower to any subsidiary or of any Subsidiary
to the Borrower or another subsidiary;
(5) Accounts payable to trade creditors for goods or services
which are acquired in the ordinary course of Borrower's and Subsidiaries
business.
C. Mergers, Etc. wind up, liquidate or dissolve itself, reorganize,
merge or consolidate with or into, or convey, sell, assign, transfer, lease,
or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person, or permit any Subsidiary to do so,
except that (1) any Subsidiary may merge into or transfer assets to the
Borrower and (2) any Subsidiary may merge into or consolidate with or transfer
assets to any other Subsidiary.
D. Leases. Create, incur, assume, or suffer to exist, or permit
any subsidiary to create, incur, assume, or suffer to exist, any obligation
as lessee f or the rental or hire of any real or personal property, except:
(1) leases existing on the date of this Agreement and any extensions or
renewals thereof; (2) leases which do not in the aggregate require the
Borrower and its Subsidiaries on a consolidated basis to make payments
(including taxes, insurance, maintenance, and similar expenses which the
Borrower or any subsidiary is required to pay under the terms of any lease)
in any fiscal year of the Borrower in excess of $60,000; and, (3) leases
between the Borrower and any Subsidiary or between any Subsidiaries.
E. Sale and Leaseback. Sell, transfer, or otherwise dispose of, or
permit any subsidiary to sell, transfer, or otherwise dispose of, any real
or personal property to any Person and thereafter directly or indirectly
lease back the same or similar property.
F. Dividends. Declare or pay any dividends; or purchase, redeem,
retire, or otherwise acquire for value any of its capital stock now or
hereafter outstanding; or make any distribution of assets to its
stockholders as such whether in cash, assets, or obligations of the
Borrower; or allocate or otherwise set apart any sum for the payment of any
dividend or distribution on, or for the purchase, redemption, or retirement
of any shares of its capital stock; or make any other distribution by
reduction of capital or otherwise in respect of any shares of its capital
stock; or permit any of its Subsidiaries to purchase or otherwise acquire
for value any stock of the Borrower or another Subsidiary, except
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<PAGE>
that the Borrower (1) may declare and deliver dividends and make distributions
payable solely in common stock of the Borrower and (2) may purchase or
otherwise acquire shares of its capital stock by exchange for or out of the
proceeds received from a substantially concurrent issue of new shares of its
capital stock.
G. Sale of Assets. Sell, lease, assign, transfer, or otherwise
dispose of, or permit any Subsidiary to sell, lease, assign, transfer or
otherwise dispose of, any of its now owned or hereafter acquired assets
(including, without limitation, shares of stock and indebtedness of
Subsidiaries, receivables, and leasehold interests), except: (1) inventory
disposed of in the ordinary course of business; (2) the sale or other
disposition of assets no longer used or useful in the conduct of its
business; and (3) that any Subsidiary may sell, lease, assign, or otherwise
transfer its assets to the Borrower.
H. Investments. Make, or permit any Subsidiary to make, any loan
or advance to any Person, or purchase or otherwise acquire, or permit any
Subsidiary to purchase or otherwise acquire, any capital stock, assets,
obligations, or other securities of, make any capital contribution to, or
otherwise invest in or acquire any interest in any Person, or participate as
a partner or joint venturer with any other Person, except: (1) direct
obligations of the United States or any agency thereof with maturities of
one year or less from the date of acquisition; (2) commercial paper of a
domestic issuer rated at least "A-111 by Standard & Poor's Corporation or
"P-111 by Moody's Investors Service, Inc.; (3) certificates of deposit with
maturities of one year or less from the date of acquisition issued by any
commercial bank having capital and surplus in excess of Fifty Million
Dollars $50,000,000); and, (4) stock, obligations, or securities received in
settlement of debts (created in the ordinary course of business) owing to
the Borrower or any subsidiary.
I. Guaranties, Etc. Assume, guaranty, endorse, or otherwise be or
become directly or contingently responsible or liable, or permit any
Subsidiary to assume, guaranty, endorse, or otherwise be or become directly
or contingently responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods, or services, or
an agreement to maintain or cause such Person to maintain a minimum working
capital or net work, or otherwise to assure the creditors of any Person
against loss) for obligations of any Person, except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business.
J. Transactions With Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale, or exchange of property
or the rendering of any service, with any Affiliate, or permit any
Subsidiary to enter into any transaction, including,
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<PAGE>
without limitation, the purchase, sale, or exchange of property or the
rendering of any service, with any Affiliate, except in the ordinary course of
and pursuant to the reasonable requirements of the Borrower's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower or such Subsidiary than would obtain in a comparable arm's length
transaction with a Person not an Affiliate.
12. EVENTS OF DEFAULT; REMEDIES.
If one or more of the following events shall occur ("Events of Default"
or an "Event of Default"):
A. Borrower shall default in the due and punctual payment of
principal or interest on the Line of Credit or any other of its obligations
due to Bank or any part thereof, when the same become due and payable, whether
at maturity or otherwise; or
B. Borrower shall fail to pay any other of its debts or fail to
perform or observe any other of the terms, provisions, covenants,
restrictions, agreements or obligations to be performed by it under this
Agreement, or under agreements or instruments given under this Agreement; or
C. Any representation or warranty made in writing by or on behalf of
Borrower herein or pursuant hereto or otherwise in any report, certificate or
other instrument furnished in connection with this Agreement shall prove to
have been inaccurate or incomplete in any material respect on the date which
it was made; or
D. Borrower shall be adjudicated bankrupt or insolvent, or generally
not pay its debts as they become due, or make an assignment for the benefit of
creditors; or Borrower shall apply for or consent to the appointment of a
custodian, receiver, trustee, or similar officer for it or for all or
substantially all of its property.
THEN, Bank, upon the occurrence of any Event(s) of Default, may
terminate this Agreement and, in addition, without presentment, demand,
protest, or notice of any kind, all of which are hereby expressly waived by
Borrower:
(a) declare the unpaid principal balance, and all-interest
thereon and all other amounts payable under this Agreement immediately
due and payable.
(b) immediately, without expiration of any further period of
grace, enforce payment of all obligations of Borrower to Bank under this
Agreement and under agreements executed in connection herewith and may
exercise any and all
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<PAGE>
other remedies granted to Bank at law, in equity or otherwise.
(c) exercise all of Bank's rights under the terms of any
security agreement, assignment, trust deed, pledge or other lien
document executed in connection herewith.
E. Borrower agrees that after the exercise by Bank of the remedies
specified above and both before and after judgment, the obligations due
hereunder shall accrue interest until paid at the rate of eighteen percent
(18%) per annum.
F. After default, Borrower agrees to pay all reasonable expenses and
fees including reasonable attorney's fees and court costs incurred in the
collection of the obligations and/or incurred in any bankruptcy or insolvency
proceedings or in any arbitration proceedings.
13. MISCELLANEOUS.
A. Amendments, Etc. No amendment, modification, termination, or
waiver of any provision of any Loan Document to which the Borrower is a party,
nor consent to any departure by the Borrower from any Loan Document to which
it is a party, shall in any event be effective unless the same shall be in
writing and signed by the Bank, and then such waiver or consent shall be
effective only in the specific instance and f or the specific purpose f or
which given.
B. Notices, Etc. All notices and other communications
provided for under this Agreement and under the other Loan Documents
to which the Borrower is a party shall be in writing (including telegraphic,
telex, and facsimile transmissions) and mailed or transmitted or delivered,
if to the Borrower, at its address shown above the signatures to this
Agreement, and if to the Bank, at its address shown above the signatures to
this Agreement; or, as to each party, at such other address as shall be
designated by such party in a written notice to the other party complying as
to delivery with the terms of this Section. Except as otherwise provided in
this Agreement, all such notices and communications shall be effective when
deposited in the mails or delivered to the telegraph company, or sent,
answerback received, respectively, addressed as aforesaid.
C. No Waiver. No failure or delay on the part of the Bank in
exercising any right, power, or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power, or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power, or remedy hereunder. The rights and remedies provided
herein are cumulative, and are not exclusive of any other rights, powers,
privileges, or remedies, now or hereafter existing, at law or in equity or
otherwise.
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<PAGE>
D. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower may not assign or transfer
any of its rights under this Agreement or document to which the Borrower is a
party without the prior written consent of the Bank.
E. Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses incurred by the Bank in connection with the preparation,
execution, delivery, filing, and administration of this Agreement, and of any
amendment, modification, or supplement to this Agreement, including, without
limitation, the fees and out-of-pocket expenses of counsel for the Bank
incurred in connection with advising the Bank as to its rights and
responsibilities hereunder. The Borrower also agrees to pay all such costs
and expenses, including court costs, incurred in connection with enforcement
of this Agreement, or any amendment, modification, or supplement thereto,
whether by negotiation, legal proceedings, or otherwise.
F. Integration. This Agreement contains the entire agreement between
the parties relating to the subject matter, hereof and supersedes all oral
statements and prior writings with respect thereto.
G. Indemnity. The Borrower hereby agrees to defend, indemnify, and hold
the Bank harmless from and against any and all claims, damages, judgments,
penalties, costs and expenses (including attorney fees and court costs now or
hereafter arising from the aforesaid enforcement of this clause) arising
directly or indirectly from the activities of the Borrower and its
subsidiaries', its predecessors in interest, or third parties with whom it
has a contractual relationship, or arising directly or indirectly from the
violation of any environmental protection, health, or safety law, whether
such claims are asserted by any governmental agency or other person.
This indemnity shall survive termination of this Agreement.
H. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Utah.
I. Severability of Provisions. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Document or affecting the validity or enforceability of such provision in any.
other jurisdiction.
J. Jury Trial Waiver. THE BANK AND THE BORROWER HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING, CLAIM, OR
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COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF
OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN DOCUMENTS. NO OFFICER OF
THE BANK HAS AUTHORITY TO WAIVE, CONDITION, OR MODIFY THIS PROVISION.
The Agents authorized to act for Borrower under this Agreement are:
NAME SIGNATURE
---- ---------
William A. Fresh /s/ William A. Fresh
- ------------------------ --------------------------
Reginald Hughes /s/ Reginald Hughes
- ------------------------ --------------------------
The additional percentage points ("Margin") to be added to the Loan Index
Rate are 1.5 percentage points. The initial Loan Interest Rate payable on
Advances made under the Line of Credit is 9.75% per annum.
A written Advance Request Form shall be required: X Yes ___ No. Signatures
of two (2) agents required.
All advances on the Line of Credit shall be deposited into Account No.
1368-7673.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by authority duly given as of this 27th day of December, 1996.
BANK: BORROWER:
BANK ONE, UTAH, NA SKYHOOK TECHNOLOGIES, INC.
By: /s/ Stephen A. Cazier By: /s/ Reginald Hughes
------------------------ -------------------------
Title: V.P. Title: President & COO
---------------------- ----------------------
Address: Address:
80 West Broadway #200 1216 South 1580 West Suite B
Salt Lake City, Utah 84101 Orem, Utah 84058
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Exhibit 10-2
STRATEGIC ALLLIANCE
BETWEEN
SKYHOOK TECHNOLOGIES, INC. AND TRACOR AEROSPACE, INC.
I
This Strategic Alliance (herein referred to as the "AGREEMENT") is made
and entered into as of 18 September 1996 between SkyHook Technologies, Inc.
(herein referred to as "STI"), a Utah corporation, and Tracor Aerospace, Inc.
(herein referred to as "TRACOR'), a Texas corporation, who are the PARTIES
(each being a PARTY) to this AGREEMENT. The companies desire to enter into a
long-term business relationship wherein TRACOR will manufacture STI's multi-
hook Cargo Management System (CMS) for delivery to domestic and foreign
customers. In consideration of the mutual promises contained herein, the
parties agree as follows:
I . STRATEGIC TEAM RESPONSIBILITIES.
(a) STI has completed the design of the PRODUCT (as defined in
Paragraph 2 below) in its present, form and will continue to be responsible
for the engineering development of the PRODUCT to meet customer needs and to
respond to competitive considerations. The engineering function will include
hardware and software development and configuration management. STI will be
responsible for marketing the PRODUCT to foreign and domestic customers.
(b) TRACOR will be the manufacturer and installer of the PRODUCT and
will make its expertise in this area available to STI to optimize such
activities. TRACOR may provide sales and marketing assistance to STI for
domestic and foreign sales. Such assistance may include development of
strategic marketing plans, identification of potential customers, distribution
of sales literature, introduction of STI sales personnel to potential
customers and recommending other strategic sales and marketing activities.
2. PRODUCT DEFINED.
The PRODUCT to be manufactured by TRACOR for STI is STI's proprietary,
patented Cargo Management System (CMS). It is a multi-hook helicopter cargo
transport device consisting of hardware, software and electronics. The PRODUCT
is currently offered in three and six hook configurations. TRACOR shall be
provided with updated engineering drawings, specifications and any other
pertinent information prior to commencing the manufacture of the PRODUCT. STI
represents and warrants that such engineering drawings, specifications and
other pertinent information are sufficiently complete and accurate so as to
enable a reasonably skilled manufacturer of the type of equipment delineated
therein to manufacture the PRODUCT in accordance with the specifications
applicable thereto. In the event any discrepancies or shortcomings in such
documents come to light STI will promptly take appropriate action to
<PAGE>
correct or supplement such documents; TRACOR will assist in such corrective
actions as required. STI will maintain configuration control and shall be
responsible for configuration management of the PRODUCT.
3. PROCUREMENT PROCEDURE.
The PARTIES will develop a format for a purchase order to be issued by STI
to TRACOR for each batch of PRODUCT to be manufactured and/or installed. Each
purchase order will provide all of the information required to manufacture
and/or install the PRODUCT.
4. PRICING.
Initial prices will be those quoted by TRACOR in its "SkyHook CMS Pricing"
quote dated 8/2/96 at 3:36 PM (see Exhibit A), plus or minus any adjustments
made for final design changes, test requirements and scope changes, as
required. Price adjustments will be made following the same pricing
methodology used by TRACOR to price the original quote shown in Attachment A.
The price for other PRODUCT configurations will be calculated by TRACOR
following the same pricing methodology used by TRACOR to price the three-hook
unit. Once the prices have been adjusted as defined above and agreed to by
the PARTIES, those prices shall remain in effect for a period of eighteen (I8)
months. Prices shall be renegotiated by the PARTIES from time to time
thereafter in good faith, consistent with the original pricing methodology.
5. LEAD TIME.
TRACOR will make the first shipment of PRODUCT 90 days after receipt of
order, but will use its best efforts to reduce this delivery time. The
PARTIES will mutually agree on the delivery rate for subsequent deliveries on
each purchase order placed by STI.
6. PAYMENT TERMS.
During the first 18 month period of this AGREEMENT, STI will pay TRACOR the
net amount due ninety days ("Net 90") from the date TRACOR ships PRODUCT.
Payment terms on subsequent deliveries will be determined by mutual agreement
of the PARTIES, consistent with business conditions and customer payment terms.
7. FOB POINT AND SHIPPING.
The FOB point is TRACOR's plant. On the day TRACOR ships PRODUCT, it win
fax to STI the shipping information, including cost, and STI will bill
the customer for shipping costs. TRACOR will drop-ship PRODUCT to any non-
restricted country, per Purchase Order instructions. STI will abide by any
export restrictions placed upon it by any United States government entity with
export jurisdiction.
2
<PAGE>
8. EXPORT/IMPORT.
TRACOR will assist STI with all domestic and foreign export/import
requirements, with details to be worked out between the PARTIES as soon as
possible. As seller of the PRODUCT, STI will retain primary responsibility
for export/import requirements.
9. WARRANTY.
As the manufacturer of the PRODUCT, TRACOR provides a one-year warranty
on materials and workmanship. The standard warranty is attached hereto as
Exhibit B.
10. ADDITIONAL INSURED.
TRACOR shall name STI as additional insured under its product liability
insurance with respect to that portion of the PRODUCT manufactured by TRACOR,
with liability limits per occurrence of $ 10 million.
11. QTP AND ATP.
TRACOR shall fabricate and test the PRODUCT in accordance with test
procedures to be jointly developed and approved by STI and TRACOR. The
PARTIES anticipate that one standard QTP (to be defined by the PARTIES)
will apply to all or most PRODUCT manufactured, and a standard ATP
(to be defined by the PARTIES) will apply to each customer's order. However,
the PARTIES recognize that unique tests may be required by some customers, and
that customer-specific ATP's will be developed in such circumstances.
12. CONFIDENTIALITY.
On 2 August 1996, the PARTIES hereto signed an "Agreement for Non-
Disclosure of Proprietary Information (Mutual Exchange)" which is made a part
of this AGREEMENT by reference. Terms of this Non-Disclosure Agreement shall
remain in effect for two years after the termination of this AGREEMENT.
13. ASSIGNMENT.
The PARTIES shall not assign, contract, grant a license or otherwise
transfer any or all of their rights or obligations arising under this
AGREEMENT without the prior written consent of the other PARTY, except that
either PARTY may subcontract work to its affiliated companies.
3
<PAGE>
14. INTELLECTUAL PROPERTY RIGHTS
(a) STI hereby establishes TRACOR as the exclusive manufacturer and
installer of the PRODUCT throughout the term of this Agreement and consents to
TRACOR's use of the engineering drawings, specifications and other documents
referred to in paragraph 2 of this Agreement in the manufacture and
installation of the PRODUCT. TRACOR shall not be required to make any payment
to STI for the use of such documents. Except for the right to manufacture and
install the PRODUCT, TRACOR shall not acquire any intellectual property rights
to the PRODUCT or enhancements thereto existing on the date of this AGREEMENT
PRODUCT modifications resulting after the date of this Agreement from the
normal process of re-engineering shall be the sole and exclusive property of
STI, regardless of whether STI or TRACOR recommends such modifications.
(b) In the event TRACOR offers technology to STI for use in connection
with the PRODUCT and STI wishes to utilize such technology, the PARTIES will
jointly determine an equitable basis for compensating TRACOR for the use of
such technology prior to its implementation by STI.
15. ATTORNEYS FEES.
In the event that either PARTY hereto shall be found in default or breach
of this AGREEMENT by a court of competent jurisdiction, said PARTY shall be
liable to pay all reasonable attorneys' fees, court costs and other related
collection costs and expenses incurred by the non-defaulting or non-breaching
PARTY in prosecuting its rights hereunder.
16. GOVERNING LAW AND DISPUTES.
This AGREEMENT, and all matters relating hereto, including any matter
or dispute arising out of the AGREE , shall be interpreted, governed and
enforced according to the laws of the State of Utah. The PARTIES shall use
their best efforts to resolve any disputes regarding the performance of this
AGREE by good faith mutual consultation. If both PARTIES agree, disputes may
be submitted for determination by arbitration, mediation or other means of
alternative dispute resolution.
17. AMENDMENT
This AGREEMENT may be amended at any time upon agreement of the
PARTIES hereto, which amendment(s) must be reduced to writing and signed by
both PARTIES in order to become effective.
4
<PAGE>
18. SEVERABILITY.
In the event that any provision of this AGREEMENT, or any operation
contemplated hereunder, is found by a court of competent jurisdiction to be
inconsistent with, or contrary to any law, ordinance or regulation, the latter
shall be deemed to control and the A shall be regarded as modified accordingly
and, in any event, the remainder of this AGREEMENT shall continue in full
force and effect.
19. ENTIRE AGREEMENT.
This AGREEMENT constitutes and represents the entire AGREEMENT of the
parties hereto with respect to the subject matter hereof, and all other prior
agreements, covenants, promises and conditions verbal or written between these
parties are incorporated herein. No PARTY hereto has relied upon any other
pronuse, representation or warranty, other than those contained herein, in
executing this AGREEMENT.
20. TERM AND TERMINATION.
The initial term of this Agreement shall be three years, and it shall
automatically renew for successive three-year periods thereafter unless either
PARTY shall have given the other written notice of cancellation at least
twelve months prior to the renewal date. During the period after either PARTY
shall have given such notice of cancellation both PARTIES shall continue to
fulfill their obligations hereunder.
21. NOTICE AND REPRESENTATIVES.
Any notice required by this AGREEMENT to be given in writing shall be
sent via facsimile transmission with receipt confirmed by telephone, or sent
by registered mail, return receipt requested, using the phone and fax numbers
and addresses listed below:
SkyHook Technologies, Inc. Tracor Aerospace,Inc.
1216 South 1580 West, Suite B 6500 Tracor Lane
Orem, Utah 84058 Austin, Texas 78725-2070
Attn.: General Counsel
Telephone: 801-765-0040 Telephone: 215-822-2929
Fax: 801-765-0045 Fax: 215-822-6056
Routine written and verbal correspondence between the PARTIES shall be
directed to the following individuals or to their designated representative:
FOR STI: Phil Dietz, Manufacturing Manager
FOR TRACOR: Scott Wolf, Program Manager
5
<PAGE>
22. BINDING EFFECT.
This AGREEMENT shall be binding upon and inure to the benefit of the
PARTIES hereto, their successors and permitted assigns.
The individuals signing below in their official capacities warrant that
they are fully authorized by the Articles, Bylaws and/or board resolutions of
their respective corporations to execute this AGREEMENT for and in behalf of
their respective corporations, and that said corporations are fully bound
thereby.
SKYHOOK TECHNOLOGIES, INC. TRACOR AEROSPACE, INC.
By: /s/ Reginald Hughes By: /s/ George R. Melton
------------------------------- ----------------------------
Name: Reginald Hughes Name: George R. Melton
Title: President Title: President
Date: 26 Sept 96 Date: 26 Sept. 96
------------------------------ ---------------------------
6
<PAGE>
EXHIBIT A
SKYHOOK CMS PRICING
Quantity Unit Price
-------- ----------
5 $39,000
10-15 $36,000
16-25 $33,000
26-50 $28,000
51-100 $26,000
101-200 $22,000
201-500 $20,000
<PAGE>
EXHIBIT B
---------
Warranty
--------
TRACOR warrants that each PRODUCT manufactured by TRACOR will be new and
unused and will be delivered free from defects in material and workmanship and
will satisfy the requirements specified in the PRODUCT specifications. This
warranty will be effective for one year from the date of receipt by STI or
STI's customer, whichever occurs earlier. If a defect appears in the PRODUCT
within one year from the date of delivery by TRACOR and STI notifies TRACOR
within such one year period plus 15 days and returns the defective equipment
or part thereof with transportation charges prepaid, TRACOR shall thereupon
correct any defect, including nonconformance with the specifications, at its
option, either by repairing or replacing any defective part or parts, and
shall deliver the repaired or replaced part to STI with transportation charges
prepaid.
The foregoing warranty shall not apply to any PRODUCT that has been subject to
misuse, neglect, accident, improper application, or exposure to an environment
beyond the limits described in the specification, nor to any product that has
been altered or repaired outside of TRACOR's factory without TRACOR's written
consent, nor to any product component that is consumed in ordinary use such
as, but not limited to, lamps, knobs, and gaskets. Nor shall the warranty
extend to anyone other than STI and STI's immediate customer.
THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE AND ANY WARRANTY AGAINST INFRINGEMENT, AND ALL SUCH OTHER
WARRANTIES ARE HEREBY DISCLAIMED AND EXCLUDED BY TRACOR.
All failures caused by and attributed to normal wear and tear or improper
maintenance, use or repairs by STI or third parties are not defects and are
excluded from the warranty.
In no event shall TRACOR be liable for consequential damages of any nature.
LIST OF SUBSIDIARIES
1. SkyHook Technologies, Inc. a Utah corporation
2. Satellite Image Systems, Inc. a Utah corporation
3. Satellite Image Systems (Jamaica) Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGELLAN
TECHNOLOGY, INC. DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
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