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 for the fiscal year ended December 31, 1997
[ ]Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 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.)
13526 South 110 West
Draper, Utah 84020
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (801) 495-2211
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 to
this form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year totaled $319,611.
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 March 31, 1998 was $14,585,250
As of March 31, 1998 15,557,600 shares of the issuer's stock
were issued and outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes____ No _X_
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis or Plan of Operation 9
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . 12
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16a of the Exchange Act 12
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . 17
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Certain Relationships and Related Transactions . . . 20
PART IV
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Magellan Technology, Inc. (the "Company" or "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 contributed $3 million in cash and a
$2 million line of credit for working capital. The Company retained a 44%
interest in 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
External Cargo Management System or ECMS" 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 4,874,936
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.
In April 1997, the Company organized Magellan Service
Company ("MSC") as a wholly owned subsidiary to pursue avionics
integration contract opportunities that can utilize the experience and
skills of the personnel presently employed by SkyHook.
1
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In October 1997, the Company completed the acquisition of
BioSource Inc.("BioSoure"), a Utah S corporation organized in 1983 and engaged
in the development and sales of the "LISTEN" biofeedback information
system which is marketed and sold to healthcare practitioners in
the alternative healthcare marketplace. The acquisition was
ultimately accomplished through the exchange of $190,000 in cash and 225,000
shares of Magellan Common Stock in exchange for all issued and
outstanding shares of BioSource Common Stock. BioMeridian
International, Inc. ("BioMeridian" or "BII") was formed as the
surviving entity.
Business of the Company
SIS, LLC.
Products. SIS, LLC has developed proprietary systems
--------
and processes to provide document processing services for large
national and regional U.S. firms. SIS, LLC specializes in
healthcare claims document processing which it performs at its
various facilities in Castle Dale, Ephraim, and Price, Utah, Dallas, Texas
and in Jamaica. The work is performed using high-speed scanners,
digital modems, satellite communications, proprietary software
and OCR technology.
Markets. SIS, LLC has focused primarily on the health
-------
claims processing industry. This market is on the verge of
dynamic change from traditional paper claim processes which are
labor intensive, to automated electronic claims processing
systems. To process claims electronically requires that the
payer receive electronic claim submissions. Due to many issues,
including a lack of uniformity in healthcare claims, a natural
distrust between providers and insurance claim payers, and cost
of automation, most claims are still presented for payment on
paper. SIS, LLC functions as an enabler for electronic
claims processing. By converting paper claims into electronic
claims, at a price much lower than the payer's cost, SIS,LLC
provides payers with electronic claims ready for automatic claims
processing.
Competition. SIS, LLC believes that competition for
-----------
image-based entry services comes from four main sources:
existing domestic and overseas data entry service bureaus, in-
house data entry operations, optical character recognition
technology, and electronic capture of data.
Marketing and Distribution. SIS, LLC's primary marketing
--------------------------
efforts focus upon companies located in the United States.
Services are marketed directly and targeted to insurance
companies. The marketing efforts include direct mailings,
followed by on-site demonstrations and custom proposals for
individual clients.
2
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Government Regulation. SIS, LLC's primary business is
----------------------
data entry and, as a result, no specialized licenses are required
in either the United States or Jamaica. However, because SIS
utilizes high speed satellite communications for document
transmission, specific licenses and restrictions are required within
selected foreign jurisdictions.
Employees. SIS, LLC employs approximately 379 persons:
---------
47 in Salt Lake City, Utah, 59 in Castle Dale, Utah, 85 in
Price, Utah, 38 in Ephraim, Utah, 20 in Dallas, Texas, and 130 in
Montego Bay, Jamaica. Of the total number of employees, 24 are in
administration, 3 are executives, and 352 are in operations.
SkyHook.
Products. Since formation in February 1995, SkyHook
---------
has been engaged in the development of computer-controlled multi-
hook cargo transport devices 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. SkyHook also believes that its
devices 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 devices are
constructed of high-quality machined components. The air frame for
the heavy lift device is capable of lifting 27,000 pounds of
cargo in a three hook configuration or 36,000 pounds in a six
hook configuration. SkyHook has also developed a lighter
collapsible airframe in a three or four hook configuration
capable of lifting 12,000 pounds. These devices are
aerodynamically designed for stable flight, loaded or empty.
Product features include aggregate and individual hook payload
weight readouts, various fault condition warnings and safety
warnings and load release commands allowing the drop of one or
multiple loads simultaneously. Navigation, identification and
other lighting systems are controlled by the operator. The products
have been included in various tests with independent labs and
potential customers.
Markets. The market for the SkyHook device consists of
-------
utility helicopters worldwide with a cargo lift capacity ranging from 3,000
pounds to 36,000 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. SkyHook
expects to market its products directly in the United
States (principally to the U.S. military) and through independent
representatives in international markets. No devices have been
sold to date and, notwithstanding favorable test results, there
is no assurance that marketing of these products will be
successful.
3
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Competition. SkyHook 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. SkyHook
believes, however, that its products have been designed to
address significantly different markets requiring much greater
cargo capacities with an emphasis on military and industrial
applications.
Manufacturing. SkyHook 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. In late 1997 SkyHook concluded the manufacturing
contract arrangement with Tracor. Subsequent to year end,
SkyHook opened a facility to manufacture and assemble the
products.
Intellectual Property. On January 14, 1997, SkyHook
----------------------
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 products. 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 SkyHook'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 SkyHook's additional patent applications are granted,
others may receive patents which contain claims having a scope
broad enough to cover products developed by SkyHook. SkyHook
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 products are required to
comply with the Federal Aviation Administration Regulations
applicable to its products. Because the products are 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 the products 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 products and determined that they do not require
export licenses.
4
<PAGE>
Employees. SkyHook currently employs 17 persons full
---------
time, including four in administration, three in research and
development, five in operations and five in sales and marketing.
There are four part-time employees, one is employed in
administration, three are employed in operations. The Company
intends to maintain a small staff by outsourcing activities when
possible. SkyHook also maintains sales offices through
independent representatives in Atlanta, Georgia; San Diego,
California; Seattle, Washington and Washington, D.C.
BioMeridian
Products. BioMeridian has a license to sell an Electrodermal
----------
Screening ("EDS") product called the LISTEN. This product is
used by healthcare practitioners to measure the stress in
bioelectromagnetic systems (also known as "meridians") of the
human body. If stress or imbalance is detected, the LISTEN is
used to recommend a course of treatment or therapy to alleviate
the stress or to restore balance to the body's meridian systems.
BioMeridian also provides training classes and support services
for health care practitioners that subscribe to the LISTEN
system.
Markets. The emerging market for EDS equipment is
-------
worldwide, crossing the boundaries of health care disciplines.
The LISTEN is useful in the practice of medicine, osteopathy,
homeopathy, naturopathy, acupuncture, and other disciplines.
Competition. There are at least nine other devices
-----------
sold throughout the world that are somewhat similar to the
LISTEN. These products are grouped into two general categories:
(1) Simple electronic measurement devices, which are older and
less dynamic technology and (2) Computerized devices, which are
similar in approach to the LISTEN.
Manufacturing. BioMeridian currently assembles the
-------------
LISTEN product in its facility located in Orem, Utah. Various
subassemblies of the product have been out-sourced to subcontract
vendors.
Intellectual Property. BioMeridian has a perpetual, non-transferable
----------------------
royalty-free license to manufacture and sell the LISTEN product. Since
acquiring this license in connection with the acquisition of BioSource,
BioMeridian has developed a "Windows" based version of software for
the LISTEN product. BioMeridian is presently pursuing copyright
and other protection for the software enhancements.
5
<PAGE>
Government Regulation. Use of the LISTEN system
----------------------
internationally is subject to various regulatory requirements on
a country by country basis. The product has received various
forms of regulatory approval for use in Canada, Australia, South
Africa and Germany. In the United States, the LISTEN system has
been termed as a non-significant risk ("NSR") device and has been
issued an investigational device exemption ("IDE") for the entire
hardware/software system.
Employees. BioMeridian employs nine persons full time
---------
with one part time employee. Three employees are in
administration, two in sales and marketing, two in training, one
in engineering with one full time and one part time in
operations. BioMeridian intends to maintain a small staff by
establishing independent representatives in outlying geographical
locations domestically and independent distributors
internationally.
ITEM 2. DESCRIPTION OF PROPERTY
SIS, LLC.
SIS, LLC leases five facilities. The facility used as SIS's
headquarters and administrative offices contains approximately
5,800 square feet. The lease expires in November 1999. The
leased facility in Castle Dale, Utah contains approximately 3,600
square feet and expires in December 1998. The leased facility in
Price, Utah contains 1,350 square feet and expires in March 1999.
The leased facility in Ephraim, Utah contains 5,600 square feet
and is a month to month lease. The Dallas, Texas leased facility
contains 2,400 square feet and expires in December 1998. The
Montego Bay, Jamaica leased facility contains 5,000 square feet
and expires in February 1998.
SkyHook.
STI currently leases three facilities. The Draper, Utah
facility is the headquarters of Magellan and STI. It consists of
a 4,200 square-foot office and a 3,000 square-foot high-bay shop.
The lease term has an initial three year term commencing July
1997 and a three year option. A separate manufacturing and
assembly facility is also located in Draper, Utah. This facility
has a 1,800 square-foot office and 7,000 square foot
warehouse/manufacturing area. The lease term has an initial
thirty month term commencing January 1998 and a three year
option.
STI's Lexington, Kentucky sales office is 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.
6
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BioMeridian
BioMeridian currently leases one
facility in Orem, Utah. The facility consists of a 4,100 square-
foot office. The lease expires May 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 28, 1997, the Company held a special meeting of
shareholders (the "Special Meeting") at which the following
matters were submitted to a vote of the shareholders: Proposed
amendments to the Company's 1994 Stock Incentive Option Plan (the
"Option Plan") to increase by 1,800,000, from 700,000 to
2,500,000 the number of shares of Common Stock available for
issuance pursuant to grants under the Option Plan, to provide
that the Option Plan will be administered by the Board or a
Committee of non-employee Directors and to terminate the formula
award provision of the Option Plan.
The amendments to the Option Plan were proposed in order to
effect changes which the Board of Directors believes were
necessary to increase the number of shares available for making
grants of stock options under the Option Plan to adequately
attract and retain qualified individuals to manage and promote
the subsidiary operations of the Company. The proposed
amendments to the Option Plan were approved by the shareholders
with 10,552,635 shares voting in favor, no shares voting against,
and no broker non-votes.
7
<PAGE>
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 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, 1997
High Low
Bid Bid
First Quarter . . . . . . . . . . . . $1.25 $ .75
Second Quarter . . . . . . . . . . . . $1.37 $ .87
Third Quarter . . . . . . . . . . . . $1.94 $ 1.00
Fourth Quarter . . . . . . . . . . . . $3.00 $ .87
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
Shareholders. The approximate number of shareholders of
------------
record of the Company's common stock as of March 31, 1998 was approximately
one hundred and fifty (150), 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. In October 1997 the Company completed a
--------------------------------
share exchange pursuant to an Agreement and Plan of Share
Exchange between the Company, BioSource, Inc. and the
shareholders of BioSource, 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.
8
<PAGE>
The Company sold 26,667 shares of stock for 37 cents per
share to two individuals pursuant to the Company's stock
incentive plan. The proceeds were used for the operating
purposes of the Company. 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 1997 Magellan continued its efforts to position the
Company for future growth opportunities.
Effective October 21, 1997 the Company completed a transaction through
its wholly owned subsidiary holding company,ProHealth, Inc. (formerly known
as SIS, Inc.) to acquire all of the outstanding common stock of BioSource. The
new and surviving entity was named BioMeridian. Subsequent to Dec. 31, 1997
the Company and the stockholders of BioSource entered into a settlement
agreement to further clarify their ongoing business relationship. The net effect
of these agreements included the issuance of 225,000 shares of Magellan common
stock, the payment of $190,000 in cash; $105,000 at closing and $85,000 in
various installments over a nine month period ending July 1998. As part of the
transaction, the Company recognized goodwill of $358,997.
The addition of BioMeridian to the Magellan family of
companies has effectively positioned BioMeridian to compete in the
emerging "Alternative Health Care" marketplace.
Results of Operations
SIS, LLC.
During 1997, SIS, LLC achieved sales of $4,015,000, compared
to $2,140,000 for combined sales of SIS, LLC and SIS during all of
calendar 1996. This represents an increase of 93%. The net loss
for the corresponding periods was $148,000 for 1997 and
$162,000 for 1996. The Company's share of these losses was $68,960
and $86,800 respectively. These losses are 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 continues to incur 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 affiliated companies;
joint-developing three new product offerings with new affiliated
companies; and hiring additional personnel in Project Management,
Programming Operations Management and Sales/Marketing.
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/(losses) of SIS, LLC after August 1, 1996.
9
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SkyHook.
SkyHook did not have any revenues in 1997 or 1996. SkyHook
began marketing the SkyHook external cargo management
system ("ECMS") during the summer of 1997. In addition to
aggressively marketing the system to potential customers,
particularly the United States Military, SkyHook continued to
develop and test its products. In late 1997 SkyHook
introduced the Light Ariel Delivery System or "LADS" to
compliment its original product, the ECMS. There can be no
assurance, however, that SkyHook will not encounter
unanticipated events or problems that could delay the marketing
and distribution of the SkyHook ECMS or LADS, that SkyHook
will be able to successfully market the SkyHook products, or that
these products will achieve significant market acceptance.
The 1996 financial statements of the Company reflect the
operations of STI from October 15, 1996 through December 31,
1996.
BioMeridian
The 1997 financial statements of the Company reflect the
operations of BioMeridian from October 21, 1997 through December
31, 1997. During that period the BioMeridian achieved sales of
$319,000 which resulted in an operating loss of $89,500 for that
period.
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, were the
Company's only source of cash from operations. Under the terms of the
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, SkyHook is still in the development
stage, has not sold any products and has not generated any
revenue, and BioMeridian was not profitable during the final
quarter of the year.
As a result, the Company is currently relying solely on debt and its
ability to raise additional debt and equity financing in order to
finance the continued development of the SkyHook products and
their introduction into the market place. On-going operations of
the Company are currently consuming approximately $250,000 of
cash each month and the Company expects to continue to incur
substantial additional expenses in connection with the marketing
and introduction of SkyHook products into the market place.
During 1997 and 1996 the Company entered into several
agreements to borrow necessary funds.
10
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During 1997 a Director/Shareholder who also serves as the Chief Executive
Officer loaned $500,000 to the Company through five separate $100,000 notes
through either himself or entities in which he held a controlling interest. The
notes bear interest at 12% and are payable upon demand. Effective February 27,
1998 these notes were converted to common stock of the Company. In addition,
the interest payable of approximately $35,500 was used by the
Director/Shareholder to exercise warrants to purchase common stock. In addition,
the Director/Shareholder loaned $400,000 to the Company subsequent to the year
ended December 31,1997. Effective February 27, 1998 the Director/Shareholder
converted these notes payable to common stock. The interest payable of
approximately $2,500 was used by the Director/Shareholder to exercise warrants
to purchase common stock.
During 1997 a Director/Shareholder loaned $250,000 to the Company throug
two separate notes of $100,000 and $150,000 respectively. The notes bear
interest at 12% and are payable upon demand. Effective February 27, 1998 these
notes were converted to common stock of the Company. In addition, the interest
payable of approximately $8,500 was used by the Director/Shareholder to exercise
warrants to purchase common stock.
The Company has entered into two separate revolving line-of-
credit agreements. Each agreement is for a $750,000 line-of-
credit. Each line of credit bears interest at a variable rate of
prime plus 1.5%. One line matures on April 30, 1998 and the other
matures on July 20, 1998. Both lines are secured by inventory
and the personal guarantees of the Company's Chief Executive
Officer, a Director and a principal shareholder. As of December 31, 1997 the
lines had balances outstanding of $745,000 and $740,000 respectively. The
lines are being used to fund the operations of the Company.
The Company entered into a non-revolving line-of credit
agreement during late 1997. The line is for $1,200,000 and
bears interest a variable rate of prime plus 1.0%. The line
matures on May 21, 1998. The line is secured by inventory and
the personal guarantees of the parties referred to above. As of December 31,
1997 the line had a balance outstanding of $700,000. The line is being used
to fund the operations of the Company.
During 1996 the Company entered into two agreements to borrow $500,000 in
unsecured notes payable from SIS, LLC. 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.
In connection with the acquisition of SkyHook, 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 director.
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The Company had a deficit in working capital as of December
31, 1997 of $3,136,800 as compared to a deficit in working
capital of $62,904 as of December 31, 1996. 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 its products and
services 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 products to market, the ability of the Company
to raise sufficient debt or equity in order to finance the
continued operations of the Company, new products introduced by
competitors, and the ability of the Company to successfully
market and sell the SkyHook products at acceptable prices. If
the Company is unable to raise sufficient capital, the market
acceptance of the SkyHook products is delayed, or if the SkyHook
products do 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-24
of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
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), ProHealth, Inc. (PHI), BioMeridian International, Inc.
(BII) and Magellan Service Company (MSC). The Board of Directors
of MTI also serve as the Board of Directors of STI, PHI, BII and
MSC.
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Name Age Position
- ----- ----- ---------
William A. Fresh 69 Chairman of the Board and Chief Executive
Officer MTI, STI, PHI, BII and MSC
Reginald Hughes 53 Director; President and Chief Operating
Officer, BII
Darwin Millet 45 Director; President and Chief Operating
Officer of SIS, LLC
Richard I. Winwood 55 Director
Blair K. Blacker 54 President and Chief Operating Officer, STI;
Executive Vice President, MSC
Douglas M. Angus 38 Secretary, Vice President, and Chief
Financial Officer, MTI, STI, PHI, BII and MSC
Irving Monclova 66 President, MSC
Robert S. Lawrence 47 Vice President of Engineering, STI
Christopher R. Redd 48 Vice President DoD Sales and Marketing, STI
Keith R. Gramke 38 Director of Operations, 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
President and Chief Operating Officer of BioMeridian International, Inc., and a
director of Magellan Technology, Inc.; He co-founded STI in 1995. 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 tojoining Eyring Corporation, Mr Hughes had a successful career as a
Hospital Administrator.
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 Covey Co., and subsequently served as its Executive Vice
President and Chief Operating Officer. Franklin Covey is a
multinational, time management training and products company
traded on the New York Stock Exchange. Prior to co-founding
Franklin Covey, Mr. Winwood had a successful career in the
computer services industry, working with General Electric Co.,
Automatic Data Processing, Inc. and Computer Sciences
Corporation.
13
<PAGE>
Darwin D. Millet has been a member of the Board since 1994.
Currently, he is President and Chief Operating Officer of SIS,
LLC. 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.
Blair K. Blacker is President and Chief Operating Officer of
SkyHook Technologies. He also serves as Executive Vice President
of Magellan Service Company. 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 serves as Secretary to the Board and Vice
President of Finance and Chief Financial Officer for Magellan
Technology Inc. and each of its subsidiaries. Mr. Angus joined
the Magellan family of companies in late 1996 as Vice President
and Chief Financial Officer. Prior to joining Magellan, 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.
Irving Monclova is President of Magellan Service Company.
He joined Magellan 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.
Robert S. Lawrence is Vice President of Engineering for
SkyHook Technologies, Inc. Prior to joining SkyHook in late 1997
Mr. Lawrence was employed with the Bluegrass Avionics Division of
Raytheon E-Systems where he served as Manager of Avionics
Integration. Mr. Lawrence enjoyed a twenty-two year career in
the U.S. Army where he received many awards and began the
development of his unparalleled experience in rotor wing avionics
and avionics integration.
14
<PAGE>
Christopher R. Redd serves as Vice President of DoD Sales
and Marketing for SkyHook Technologies, Inc. Mr. Redd joined
SkyHook in mid 1997. Chris served 20 years of active duty with
the U.S. Army in logistics and aviation management. He served
another 10 years as a civilian logistics management specialist,
with expertise in Blackhawk helicopter nonstandard programs, for
the Program Executive Office for Aviation, U.S. Army. Mr. Redd
is a highly decorated veteran of Vietnam, Grenada, and Panama.
He is also the most highly decorated civilian of Operation Desert
Storm for his service with the U.S. Army.
Keith R. Gramke, is Director of Operations for SkyHook
Technologies, Inc. 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 seven (7)
times during the 1997 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, 1997. 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 I. Winwood. The Committee met four (4) times
during the fiscal year ended December 31, 1997. 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.
15
<PAGE>
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: WAF Investments Form 3
due 6/5/95; filed 2/13/97, WAF Investments Form 5 due 2/14/96;
filed 2/13/97, Darwin Millet Form 5 due 2/14/95; filed 2/14/97, Darwin
Millet form 5 due 2/14/96; filed 2/14/97, Doug Angus Form 5 filed 2/17/98;
Form 4 due 9/10/97, Ballard Investments form 5 due 2/14/95; filed
2/27/97, Ballard Investments Form 5 due 2/14/96; filed 2/27/97,
William A. Fresh Form 5 filed 2/17/98; Form 4 due 9/10/97.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth,
for the three fiscal years ended December 31, 1997, the
compensation paid to the Company's Chief Executive Officer. No
executive officer of the Company received salary and bonus
compensation in excess of $100,000. The Chairman and CEO of the
Company has agreed to serve without salary compensation until the
Company achieves profitable operations. In April 1997 the Board
granted a stock option to the Company's CEO for 250,000 shares
of common stock.
Long-term
Annual Compensation Compensation
__________________________________________ ___________
Name Other
and Annual Securities
Principle Salary Bonus Compensation Underlying
Position Year ($) ($) ($) Options
_______________________________________________________________ ___________
William A. Fresh 1997 -0- -0- -0- 250,000
Chief Executive Officer 1996 -0- -0- -0- -0-
1995 -0- -0- -0- -0-
_____________________
17
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth the options granted to executive
officers in the last fiscal year.
%of Options
Name and Number Granted to
Principle of Options Employees in Exercise Expiration
Position Granted Fiscal Year Price Date
- ------------------------------------------------------------------------------
William A. Fresh 250,000 22% .37 April 2004
CEO
Douglas M. Angus 50,000 4% .37 June 2004
Vice President
- ------------------------------------------------------------------------------
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, 1997.
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 500/250,500 0/$156,250
____________________
(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, 1997.
Director Compensation. Directors of the Company are currently paid no
---------------------
fee for their service on the Board of Directors. Directors are
also not currently paid a fee for, or reimbursed for expenses incurred with
respect to, attendance at board or committee meetings.
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 March 31, 1998, 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.
18
<PAGE>
Beneficial Ownership
As of March 31, 1998
-----------------------
Percentage
Number of of Class
Name and Address of Beneficial Owner Shares Outstanding
- ----------------------------------------- --------- -------------
William A. Fresh 5,066,269(1) 30.8%
2238 E. Gambel Oak Drive
Sandy, Utah 84092
Richard Winwood 3,647,715(2) 22.2%
7069 S. Highland Drive, Suite 102
Salt Lake City, Utah 84121
Ballard Investments 1,709,987(3) 10.4%
2611 East 1300 South
Salt Lake City, Utah 84108
Reginald Hughes 504,991(4) 3.1%
1482 East 920 South
Provo, Utah 84606
Darwin D. Millet 285,503(5) 1.7%
12090 South Woodridge Road
Sandy, Utah 84124
Douglas M. Angus 84,167(6) .5%
589 East 2150 South
Bountiful, Utah 84010
All officers and directors as 9,588,645 58.31%
a group (5 persons)
The percentages set forth above have been computed based on
16,444,017 shares, which is the number of shares of the Common
Stock outstanding and exercisable warrants and options held by
officers and directors, excluding treasury shares held by the
Company, outstanding as of March 31, 1998.
________________________
(1) Includes 1,386,750 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, 100,000 shares held by William A. & Reva Luana
Fresh Charitable Remainder Trust, 60,000 shares held in trusts in
which Reva Luana Fresh is the custodian, 316,667 shares held
by Orem Tek Development, a Utah S Corporation, of which Mr. Fresh
is a shareholder, 163,393 share issuable upon the exercise of currently
exercisable warrants, and 250,500 shares issuable upon presently exercisable
options.
(2) 3,139,150 shares are held by Keystone Ventures, L.C., a Utah
limited liability company, of which Mr. Winwood is a member.
Includes 146,184 shares issuable upon the exercise of currently
exercisable warrants.
19
<PAGE>
(3) Includes 170,837 shares issuable upon presently
exercisable warrants. Craig Ballard, a general partner of
Ballard Investments, has the power to vote the shares and to make
investment decisions with respect to the shares on behalf of
Ballard Investments.
(4) The shares are held by a Utah limited liability
partnership of which Mr. Hughes is a general partner
(5) Includes 93,836 shares issuable upon presently
exercisable warrants or options which become exercisable in the
next 60 days.
(6) Includes 64,167 of presently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Revolving Line of Credit Guaranties. During 1997 the
--------------------------------------
Company entered into two separate line of credit agreements. Each
of these agreements is for a $750,000 revolving line of credit
secured by inventory and receivables. Three of the Company's
major stockholders have individually, personally guaranteed
$500,000 (one third of the total of the two lines which total
$1,500,000). Two of these individuals also serve as Directors,
one of which also serves as the Company's Chief Executive
Officer. The lines of credit bear interest at prime plus 1.5% .
As of December 31, 1997, $740,000 and $745,000 respectively were
outstanding under these line of credit agreements.
Non-Revolving Line of Credit Guaranties. During 1997 the
----------------------------------------
Company entered into a non-revolving line of credit agreement.
The agreement is for a $1,200,000 non-revolving line of credit
secured by inventory and receivables. Three of the Company's
major stockholders (two individuals and one entity) have
personally and jointly guaranteed up to $1,200,000. The two
individuals also serve as Directors, one of which also serves as
the Company's Chief Executive Officer. The line of credit bears
interest at prime plus 1.0%. As of December 31, 1997, $700,000
was outstanding under this non-revolving line of credit
agreement.
20
<PAGE>
Notes Payable to a Shareholder. During 1997 a Director/Shareholder
-------------------------------
who also serves as the Chief Executive Officer loaned $500,000 to the Company
through five separate $100,000 notes through either himself or entities in
which he held a controlling interest. The notes bear interest at 12% and are
payable upon demand. Effective February 27, 1998 these notes were converted
to common stock of the Company at 75 cents a share. In addition, the interest
payable of approximately $35,500 was used by the Director/Shareholder to
exercise warrants to purchase common stock, the warrants had exercise prices
of 20 cents to 37 cents a share. In addition, the Director/Shareholder loaned
$400,000 to the Company subsequent to the year ended December 31, 1997.
Effective February 27, 1998 the Director/Shareholder converted these
notes payable to common stock at 75 cents a share. The interest payable
of approximately $2,500 was used by the Director/Sharholder to exercise
warrants to purchase common stock, the warrants had exercise prices of
20 cents to 37 cents a share.
Notes Payable to a Shareholder. During 1997 a Director/Shareholder
-------------------------------
loaned $250,000 to the Company through two separate notes of $100,000 and
$150,000 respectively. The notes bear interest at 12% and are
payable upon demand. Effective February 27, 1998 these notes were converted
to common stock of the Company at 75 cents a share. In addition, the interest
payable of approximately $8,500 was used by the Director/Shareholder to
exercise warrants to purchase common stock, the warrants had exercise prices
of 20 cents to 37 cents a share.
Notes Payable. As of December 31, 1997, the Company owed
----------------
$42,389 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 a Director and two individuals. The two individuals are
former STI officers, the director is also an officer of one of
the Company's subsidiaries.
Payroll Guaranty. The president of BII has personally
------------------
guaranteed the monthly payroll of STI. The agreement is between
the president of STI and a third party employee leasing company.
21
<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 (2)
March 8, 1996
3-3 By-Laws of the Company (3)
10-1 Settlement Agreement with the Shareholders of
BioSource 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 November 3,
1997 reporting the acquisition BioSource, Inc. The financial
statements of BioSource, Inc. were filed as part of the report.
22
<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, 1998
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 Directors April 14, 1998
- ------------------- and Chief Executive Officer(Principal
William A. Fresh Executive and Financial Officer)
/s/Reginald Hughes Director April 14, 1998
- -------------------
Reginald Hughes
/s/Richard I. Winwood Director April 14, 1998
- ---------------------
Richard I. Winwood
/s/Darwin D. Millet Director April 14, 1998
- -------------------
Darwin D. Millet
23
<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 (deficit) 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, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1997 and 1996. 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, 1997, and the results of their operations and their cash
flows for the years ended December 31, 1997 and 1996, 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.
Salt Lake City, Utah
February 13, 1998 except for Note 19,
which is dated February 27, 1998
F-1
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Balance Sheet
December 31, 1997
- -----------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 111,402
Inventory 375,993
Prepaid expenses 194,815
-------------
Total current assets 682,210
Investment in joint venture 1,325,027
Property and equipment, net 336,421
Goodwill, net 344,039
-------------
Total assets $ 2,687,697
-------------
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 478,702
Accrued liabilities 206,749
Related party notes payable 750,000
Notes payable 2,210,022
Current portion of long-term debt 173,537
--------------
Total current liabilities 3,819,010
Long-term debt 591,717
--------------
Total liabilities 4,410,727
--------------
Commitments -
Stockholders' deficit:
Common stock, par value $.0002 per share, 25,000,000
shares authorized, 13,872,505 shares issued and
outstanding 2,774
Additional paid-in capital 6,890,419
Unearned compensation (236,000)
Accumulated deficit (8,380,223)
--------------
Total stockholders' deficit (1,723,030)
--------------
Total liabilities and stockholders' deficit $ 2,687,697
--------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements F-2
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Operations
Years Ended December 31,
1997 1996
----------------------
Net sales $ 319,611 $1,150,046
----------------------
Costs and expenses:
Costs of sales 57,180 742,759
General and administrative 2,764,150 632,677
Compensation expense - stock options 252,000 -
Purchased in-process research and development - 2,557,114
---------------------
3,073,330 3,932,550
---------------------
Loss from operations (2,753,719) (2,782,504)
---------------------
Other income (expense):
Equity in loss of joint venture (68,960) (86,804)
Interest expense (161,843) (47,644)
Other, net (12,870) (4,427)
---------------------
(243,673) (138,875)
---------------------
Loss before benefit for income taxes (2,997,392) (2,921,379)
Benefit for income taxes - -
--------------------
Net loss $(2,997,392) (2,921,379)
--------------------
Net loss per share $ (.22)$ (.33)
- -------------------------------------------------------------------------------
See Accompanying notes to consolidated financial statements. F-3
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Additional Unearned
-------------- Paid-In Compen- Accumulated
Shares Amount Capital sation Deficit Total
--------------------------------------------------------------------------------
Balance, January 1, 1996 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 164,727 333 2,912 - - 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
Issuance of common stock for:
Acquisition of subsidiary 225,000 45 83,205 - - 83,250
Cash 26,667 5 9,861 - - 9,866
Issuance of compensatory
stock options and amortization
of unearned compensation - - 488,000 (236,000) - 252,000
Net loss - - - - (2,997,392) (2,997,392)
----------------------------------------------------------------------------------
Balance, December 31, 1997 13,872,505 $ 2,774 $ 6,890,419 $ (236,000) $ (8,380,223) $ (1,723,030)
-----------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------
1997 1996
---------------------------
Cash flows from operating activities:
Net loss $ (2,997,392) $ (2,921,379)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 41,489 104,296
Equity in loss from joint venture 68,960 86,804
Stock compensation 252,000 -
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
Provision for losses on accounts receivable - (8,915)
Other non-cash expenses 74,946 -
(Increase) decrease in:
Accounts receivable 18,500 103,330
Inventories (367,993) -
Prepaid expense (188,690) (50,470)
Other assets - (54,654)
Increase (decrease) in:
Accounts payable 376,800 (23,618)
Accrued liabilities 117,362 (81,769)
Deferred revenue - (1,439)
--------------------------
Net cash used in
operating activities (2,604,018) (1,187,428)
--------------------------
Cash flows from investing activities:
Purchase of property and equipment (288,157) (210,577)
Net cash investment in joint venture - (17,634)
Net cash (paid) received in acquisition (102,890) 242,747
-------------------------
Net cash (used in) provided by
investing activities (391,047) 14,536
-------------------------
Cash flows from financing activities:
Increase in notes payable 2,185,000 344,642
Proceeds from related party notes payable 750,000 -
Proceeds from long-term debt 111,429 500,000
Payments on long-term debt (38,515) (232,841)
Proceeds from issuance of common stock 9,866 500,000
------------------------
Net cash provided by
financing activities 3,017,780 1,111,801
------------------------
Net increase (decrease) in cash 22,715 (61,091)
Cash, beginning of year 88,687 149,778
------------------------
Cash, end of year $ 111,402 $ 88,687
------------------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -----------------------------------------------------------------------------
1. Summary of The consolidated financial statements consist of Magellan
Significant Technology, Inc. (the Company) and its wholly owned
Accounting subsisidiaries, ProHealth, Inc. (ProHealth)
Policies (formerly Satellite Image Systems, Inc.), SIS Jamaica, LTD
Organization (SIS Jamaica), BioMeridian International, Inc.(BioMeridian)
(formerly BioSource, Inc.), which the Company acquired
effective October 15, 1997, and SkyHook Technologies, Inc.
(SkyHook) which the Company acquired effective October 15,
1996.
The acquisition of BioSource included the issuance of
225,000 shares of Magellan common stock and cash for all
of the outstanding shares of BioSource common stock. The
transaction was accounted for as a purchase transaction.
As part of the transaction, the Company recognized goodwill
of $358,997.
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 th
is transaction, the Company recognized $2,557,114 as
purchased in-process research and development expense.
In addition, on August 1, 1996, 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 14.
Business Activity
The Company's operations consist of: 1) manufacturing and
distribution of a medical device used by health care
practitioners (conducted by BioMeridian), 2) manufacturing
and distributing a helicopter cargo management system
(conducted by SkyHook), and 3) providing image-based data
entry services (conducted by ProHealth and SIS,LLC).
- -------------------------------------------------------------------------------
F-6
<PAGE>
1. Summary of Business Activity-Continued
Significant Separate information concerning the assets, revenue and
Accounting operation of each segment are included in the financial
Policies statments. All operations of the data entry segment are
Continued 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, BioMeridian
subsequent to October 15, 1997, SkyHook subsequent to October
15, 1996 and SIS Jamaica prior to July 31, 1996. All
significant intercompany balances and transactions have been
eliminated.
Estimates in the Preparation of 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.
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.
- -------------------------------------------------------------------------------
F-7
<PAGE>
1. Summary of Inventories
Significant Inventories are recorded at the lower of cost or market,
Accounting cost being determined on a first-in, first-out (FIFO)
Policies method. Substantially, all items included in inventory
Continued at December 31, 1997 are finished goods.
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.
Goodwill
Goodwill reflects the excess of the costs of purchasing
BioMeridian over the fair value of the related net assets at
the date of acquisition, and is being amortized on the
straight-line basis over 5 years. At December 31, 1997, the
accumulated amortization and amortization expense was
$14,958.
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
The computation of basic earnings per common share is
computed using the weighted average number of common shares
outstanding during the year.
The computation of diluted earnings per common share is based
on the weighted average number of shares outstanding during
the year plus common stock equivalents which would arise from
the exercise of stock options and warrants outstanding using
the treasury stock method and the average market price per
share during the year. Common stock equivalents are not
included in the diluted earnings per share calculation when
their effect is antidilutive.
- -------------------------------------------------------------------------------
F-8
<PAGE>
2. Going The accompanying consolidated financial statements have been
Concern prepared assuming that the Company will continue as a going
concern. As of December 31, 1997, the Company had a deficit
in working capital of $3,136,800, and an accumulated deficit
of$8,380,223 and incurred a loss of $2,997,392 for the year
ended December 31,1997. 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 sales of the helicopter cargo
transport equipment and operations of BioMeridian will
provide positive cash flow during 1998. However, there can
be no assurance they will be successful.
3. Property and Property and equipment consists of the following:
Equipment
Equipment $ 246,944
Furniture and fixtures 140,484
Leasehold improvements 6,883
--------------
394,311
Accumulated depreciation and
amortization (57,890)
---------------
$ 336,421
---------------
4. Related At December 31, 1997, the Company has unsecured notes payable
Party Notes due to shareholders and entities owned by a shareholder
Payable totaling $750,000. Each note has a stated interest rate of
12% and is payable on demand.
- -----------------------------------------------------------------------------
F-9
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statments
Continued
- ------------------------------------------------------------------------------
5. Notes At December 31, 1997, notes payable consist of various
Payable revolving and non-revolving lines-of-credit. The terms of
those agreements are as follows:
Revolving line-of-credit which allows
the Company to borrow up to $750,000 at
an interest rate equal to the bank's
prime rate plus 1.5% (10% at December
31, 1997), due April 15, 1998, secured
by the assets of SkyHook and guaranteed
by certain shareholders. $ 745,000
Revolving line-of-credit which allows
the Company to borrow up to $750,000 at
an interest rate equal to the bank's
prime rate plus 1.0% (9.5% at December 31,
1997), due July 20, 1998 and guaranteed
by certain shareholders 740,000
Non-revolving line-of-credit which allows
the Company to borrow up to $1,200,000 at
an interest rate equal to the bank's prime
rate plus 1.0% (9.5% at December 31, 1997),
due May 21, 1998 and guaranteed by certain
shareholders 700,000
Revolving line-of-credit which allows the
Company to borrow up to $25,050 at an
interest rate equal to the bank's prime
rate plus 2.0% (10.5% at December 31, 1997).
The note is due June 14, 1998 and guaranteed
by a shareholder 25,022
----------
$ 2,210,022
- -------------------------------------------------------------------------------
F-10
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to the Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Long-term Long-term debt is comprised of the following:
Debt 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 42,389
Unsecured, non-interest bearing notes
payable to the former shareholders of
BioMeridian, payable in monthly installments
of $7,500 77,500
Unsecured note payable to and individual,
payable in monthly installments of $2,000
including interest at 10% 19,615
Capital lease obligation (see note 7) 125,750
-------------
765,254
Less current portion (173,537)
-------------
$ 591,717
-------------
- ------------------------------------------------------------------------------
F-11
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Long-term Future maturities of long-term debt are as follows:
Debt
Continued Year Amount
----- -------
1998 $ 173,537
1999 204,917
2000 206,492
2001 152,616
2002 27,692
-------------
$ 765,254
-------------
7. Capital The Company leases certain equipment under a noncancellable
Lease lease agreement. The lease provides the Company the option
Obligation to purchase the leased asset at the end of the initial lease
term. The asset under capital lease at December 31, 1997 is
included in property and equipment as follows:
Equipment $ 125,750
Less accumulated amortization (99)
------------
$ 125,651
Depreciation and amortization expense for the asset under
capital lease for the period ended December 31, 1997 was $99.
The capital lease obligation has an imputed interest rate of
9% and is payable in monthly installments through December
2002. Future maturities and minimum payments on capital
lease obligations are as follows:
Amounts due $ 158,400
Less amount representing interest (32,650)
------------
Present value of future minimum capital lease $ 125,750
------------
- ------------------------------------------------------------------------------
F-12
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
8. Income The benefit for income taxes is different than amounts which
Taxes would be provided by applying the statutory federal income
tax rate to loss before benefit for income taxes for the
following reasons:
Years Ended
December 31,
-----------------------------------
1997 1996
-----------------------------------
Federal income tax benefit
at statutory rate $ 1,019,000 $ 993,000
Meals and entertainment (2,000) (2,000)
Change in valuation allowance (1,017,000) (991,000)
----------------------------------
$ - $ -
----------------------------------
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforwards $ 2,179,000
Subsidiaries stock basis 874,000
Stock options and warrants 86,000
Valuation allowance (3,139,000)
-------------
$ -
-------------
At December 31, 1997, the Company has a net operating loss
carryforwards available to offset future taxable income of
approximately $6,400,000, 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 beutilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for
certain of these carryforwards as a result of the change in
ownership.
- ------------------------------------------------------------------------------
F-13
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
9. Related During 1997 and 1996, interest expense of approximately
Party $30,068 and $8,675, respectively, was recognized on
Transactions obligations due to shareholders of the Company.
Interest expense related to notes payable to SIS, LLC for
the years ended December 31, 1997 and 1996 totaled $37,500
and $8,889, respectively.
10. Supplemental During 1997, the Company purchased all of the outstanding
Cash Flow common stock of BioMeridian International, Inc. (formerly
Information BioSource, Inc.) in a purchase transaction. The Company
paid cash of $105,000 for the common stock and recorded net
assets from the acquisition as follows:
Cash $ 2,110
Accounts receivable 18,500
Inventory 8,000
Property and equipment, net 9,188
Intangibles 358,997
Accounts payable (57,955)
Accrued expenses (14,132)
Long-term debt (26,436)
Notes payable (25,022)
--------------
273,250
Less amount financed with long-term debt (85,000)
Less common stock issued (83,250)
Less cash received (2,110)
--------------
Net cash paid $ 102,890
--------------
- ------------------------------------------------------------------------------
F-14
<PAGE>
10. Supplemental During the year ended December 31, 1996:
Cash Flow
Information On August 1, 1996, the Company transferred all of its
Continued 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).
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
--------------
- ------------------------------------------------------------------------------
F-15
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
10. Supplemental The Company reduced accounts payable in the amount of $32,945
Cash Flow in exchange for the issuance of 164,727 shares of common
Information stock.
Continued Actual amounts paid for:
Years Ended
December 31,
----------------------------
1997 1996
----------------------------
Interest $ 161,843 $ 47,644
----------------------------
Income taxes $ - $ -
----------------------------
- ------------------------------------------------------------------------------
F-16
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
11. Stock Options The Company has an incentive stock option plan wherein
and Warrants 2,500,000 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 warrants to related parties. Generally
stock options issued to employees are subject to vesting
provisions for several years. Upon issuance of stock
options/warrants, unearned compensation equivalent to the
difference between the option/warrant exercise price and the
market value at the date of grant is charged to stockholders'
equity and subsequently amortized over the period during
which the option/warrant vests. Amortization of $252,000
was recorded in 1997. A schedule of the options and warrants
at December 31, 1997 is as follows:
Number of
-------------------------- Price Per
Options Warrants Share
-------------------------------------------------------
Outstanding at
January 1, 1996 413,598 233,342 $ .20 to 1.20
Granted 597,000 - .30 to .37
Exercised - - -
Expired (106,262) - .37
-------------------------------------------------------
Outstanding at
December 31, 1996 904,336 233,342 .20 to 1.20
Granted 1,159,000 412,500 .37 to 1.00
Exercised (26,667) - .37
Forfeited (13,333) - .37
------------------------------------------------------
Outstanding at
December 31, 1997 2,023,336 645,842 $ .20 to 1.20
-------------------------------------------------------
- ------------------------------------------------------------------------------
F-17
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12. Stock-Based The Financial Accounting Standards Board has issued
Compensation Compensation Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 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, compensation expense has
been recognized for the stock option plans based on the
intrinsic value method. Had compensation expense for the
Company's stock option plan been determined based on the fair
value at the grant date for awards in 1997 and 1996,
consistent with the provisions of SFAS No. 123, the
Company's results of operations would have been reduced to
the pro forma amounts indicated below:
Years Ended
December 31,
----------------------------
1997 1996
----------------------------
Net loss - as reported $ 2,997,392 $ (3,216,787)
Net loss - pro forma $ (4,166,227) $ (3,229,683)
Loss per share - as reported $ (.22) $ (.33)
Loss per share - pro forma $ (.30) $ (.33)
-----------------------------
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,
---------------------------
1997 1996
---------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 203% 280%
Risk-free interest rate 5.5% 5.5%
Expected life of options 5 to 10 years 2 to 5 years
--------------------------
The weighted average fair value of options granted during
1997 and 1996 are $1.55 and $.36, respectively.
- ------------------------------------------------------------------------------
F-18
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12. Stock-Based The following table summarizes information about stock
Compensation options and warrants outstanding at December 31, 1997:
Continued
Outstanding Exercisable
--------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Wieghted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/97 (Years) Price 12/31/97 Price
--------------------------------------------------------------------------
$.20 to.37 $2,345,844 4.4 $0.35 1,192,010 $0.34
.60 33,334 2.4 0.60 13,334 0.60
1.00 to 1.20 290,000 6.8 1.00 8,000 1.05
---------------------------------------------------------------------------
$.20 to 1.20 2,669,178 4.6 $0.42 1,213,344 $0.35
13. Earnings Per In February 1997, the Financial Accounting Standards Board
Share issued Statement of Financial Accounting Standards No. 128
(SFAS128) "Earnings Per Share," which requires companies to
present basic earnings per share (EPS) and diluted earnings
per share,instead of the primary and fully diluted EPS as
previously required. The new standard also requires
additional informational disclosures, and makes certain
modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new
standard is required to be adopted by all public companies
for reporting periods ending after December 15, 1997, and
requires restatement of EPS for all prior periods
reported. During the year ended December 31, 1997, the
Company adopted this standard.
- -------------------------------------------------------------------------------
F-19
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- -------------------------------------------------------------------------------
13. Earnings Per Earnings per share information is as follows:
Share
Continued Years Ended
December 31,
-------------------------------
1997 1996
-------------------------------
Net loss available to common
stockholders $ (2,997,392) $ (2,921,379)
-------------------------------
Average equivalent shares
(basic and diluted) $ 13,685,000 $ 8,984,000
Net loss per share -------------------------------
(basic and diluted) $ (.22) $ (.33)
-------------------------------
14. Significant Summarized financial information for SIS, LLC, a significant
Unconsolidated unconsolidated affiliate of the Company, is as follows:
Affiliate
December 31
--------------------------------
Year-end financial position: 1997 1996
--------------------------------
Current assets $ 1,166,600 $ 1,898,399
Noncurrent assets $ 1,954,725 $ 1,274,959
Current liabilities $ 225,508 $ 118,128
Noncurrent liabilities $ 46,296 $ 57,407
Results of operations:
Period
Year August 1
Ended 1996 to
December 31, December 31,
1997 1996
-------------------------------
Sales $ 4,015,220 $ 990,049
Net loss $ (148,302) $ (177,150)
- -------------------------------------------------------------------------------
F-20
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- -------------------------------------------------------------------------------
15. Business The Company operates in three business segments:
Segments 1) Image-based data entry services, 2) Medical device
manufacture and distribution , 3) Helicopter cargo management
systems manufacture and distribution.
The following tables present financial information by
business segment for the years ended December 31, 1997 and
1996. Subsequent to October 15, 1996, the operations of
SIS, LLC have been accounting for using the equity method
of accounting.
Helicopter
Image- Cargo
Based Data Manage- Corporate
Entry Medical ment and Elimi- Consoli
1997 Services Devices Systems nations dated
- -------------------------------------------------------------------------------
Sales to
unaffiliated
customers $ - $ 319,611 $ - $ - $ 319,611
Operating loss - (89,501) (2,254,339) (409,879) (2,753,719)
Equity in loss
of joint venture (68,960) - - - (68,960)
Identifiable
assets - 119,796 900,882 1,667,019 2,687,697
Capital
expenditures - 49,958 238,199 - 288,157
Depreciation - 4,709 21,822 14,958 41,489
Helicopter
Image- Cargo
Based Data Manage- Corporate
Entry Medical ment and Elimi- Consoli
1997 Services Devices Systems nations dated
- -------------------------------------------------------------------------------
Sales to
unaffiliated
customers $ 1,150,046 $ - $ - $ - $ 1,150,046
Operating
loss 49,065 - (225,404) (2,606,165) (2,782,504)
Equity in
loss of
joint venture (86,804) - - - (86,804)
Identifiable
assets 1,468,933 - 141,278 19,141 1,629,352
Capital
expenditures 138,735 - 71,842 - 210,577
Depreciation 97,611 - 6,685 - 104,296
- ------------------------------------------------------------------------------
F-21
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial statements
Continued
- -------------------------------------------------------------------------------
16. Fair Value of None of the Company's debt instruments are held for trading
Financial purposes. The Company estimates that the fair value of all
Instruments financial instruments at December 31, 1997, 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.
17. Commitments Operating Leases
The Company is obligated under certain non-cancelable
operating leases for rental of office and manufacturing
space. Total lease expense for the years ended December 31,
1997 and 1996 was approximately $58,000 and $99,000,
respectively. Future minimum lease payments under
noncancellable operating leases with initial terms of one
year or more are as follows at December 31, 1997:
Years Ended December 31, Amount
------------------------ ---------------
1998 $ 172,776
1999 143,270
2000 61,531
----------------
$ 377,577
----------------
18. Pro Forma The following condensed pro forma combined statements of
Condensed operations for the years ended December 31, 1997 and 1996
Combined for Magellan and BioMeridian assumes the acquisition of
Statement of BioMeridian by Magellan as of the beginning of the years
Operations then ended.
- -------------------------------------------------------------------------------
F-22
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- -------------------------------------------------------------------------------
18. Pro Forma The pro forma results of operations are not necessarily
Condensed indicative of the results of operations that would actually
Combined have been obtained if the transactions had occurred as of
Statement of the beginning of the years then ended. These statements
Operations should be read in conjunction with the historical financial
Continued statements and related notes.
Pro forma information for the year ended December 31, 1997
is as follows:
Magellan BioMeridian
Technology International
Inc. Inc. Total Adjustments Combined
-------------------------------------------------------------
Net sales $ - $ 1,006,762 $1,006,762 $ - $ 1,006,762
Costs and
expenses (1,798,680) (819,323) (2,618,003) - (2,618,003)
-------------------------------------------------------------
Net (loss)
income $(1,798,680) $ 187,439 $(1,611,241) $ - $(1,611,241)
--------------------------------------------------------------
Net loss per
share (.13) (.12)
------------- -----------
Weighted average
number of common
shares
outstanding 13,638,000 13,863,000
------------- -----------
Pro forma information for the year ended December 31, 1996
is as follows:
Magellan BioMeridian
Technology International
Inc. Inc. Total Adjustments Combined
-------------------------------------------------------------
Net sales $ 1,150,046 $ 947,798 $2,097,844 $ - $ 2,097,844
Costs and
expenses (4,071,425) (679,138) (4,750,563) - (4,750,563)
-------------------------------------------------------------
Net (loss)
income $(2,921,379) $ 268,660 $(2,652,719) $ - $(2,652,719)
--------------------------------------------------------------
Net loss per
share (.33) (.29)
------------- -----------
Weighted average
number of common
shares
outstanding 8,984,000 9,209,047
------------- -----------
- -------------------------------------------------------------------------------
F-23
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to consolidated Financial Statements
Continued
- -------------------------------------------------------------------------------
19. Subsequent Effective February 27, 1998, the related party notes payable
Events (see note 4), in the amount of $750,000, were converted to
common stock of the ompany. In addition, the interest
payable of approximately $44,000 was used by the shareholders
to exercise warrants to purchase common stock.
In addition, a shareholder loaned $400,000 to the Company
subsequent to the year ended December 31, 1997. And
effective February 27, 1998, the shareholder converted
these notes payable to common stock. The interest payable
of approximately $2,500 was used by the shareholder
to exercise warrants to purchase common stock.
- ------------------------------------------------------------------------------
F-24
<PAGE>
Exhibit 10.1
SEPARATION/SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS
-------------------------------------------------------
THIS SEPARATION/SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS (the
"Agreement") is entered into this 27th day of March, 1998 by and
among Magellan Technologies, Inc., a Utah corporation
("Magellan"), ProHealth, Inc., a Utah corporation ("ProHealth"),
BioMeridian International, Inc., a Utah corporation
("BioMeridian") [Magellan, ProHealth, and BioMeridian are
collectively referred to as the "Magellan Parties"], James H.
Clark, an individual ("J. Clark"), Willis H. Clark, an individual
("W. Clark") and Joe S. Galloway, an individual ("Galloway") [J.
Clark, W. Clark and Galloway are collectively referred to as the
"Stockholders"].
Recitals
--------
A. Magellan, ProHealth and the Stockholders entered into
that certain Merger Agreement dated as of the 1st day of October,
1997 (the "Merger Agreement") pursuant to which BioSource, Inc.,
an entity owned 100% by the Stockholders ("BioSource"), was
merged with and into ProHealth. In connection with such merger
(the "Merger"), each of the Stockholders entered into separate
Employment Agreements dated October 20, 1997 (collectively, the
"Employment Agreements") and Royalty Agreements dated October 20,
1997 (collectively the "Royalty Agreements") with ProHealth.
Subsequent to the Merger, the business of BioSource acquired in
the Merger, including the rights and obligations under the
Employment and Royalty Agreements, was transferred to
BioMeridian, a newly formed, wholly-owned subsidiary of
ProHealth.
B. Various disputes have arisen between the parties with
respect to the Merger Agreement, the Employment Agreements and
the Royalty Agreements, and the transactions, covenants,
representations and warranties, and indemnification obligations
set forth therein.
C. The parties now desire to resolve such disputes.
To resolve the disputes between them and for other good and
valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by each party, the parties hereby agree as
follows:
Agreement
---------
1. Cancellation of Shares. The Stockholders hereby agree
-----------------------
that a total of 1,275,000 shares of the Common Stock of Magellan
(the "Magellan Common Stock") that was issued to the Stockholders
pursuant to the terms of the Merger shall be returned to Magellan
and cancelled. Each Stockholder shall return 425,000 shares of
the Magellan Common Stock. The Magellan Parties and the
Stockholders mutually agree that the Escrow Agreement dated
October 20, 1997 is terminated and all shares of the Magellan
Common Stock held by the Escrow Agent pursuant to the Escrow
Agreement shall be delivered to Magellan and cancelled pursuant
to this Section 1.
1
<PAGE>
2. Termination of Employment Agreement--J. Clark. The
-----------------------------------
Magellan Parties and J. Clark mutually agree J. Clark shall
resign his employment and that the employment of J. Clark with
any Magellan Party is terminated and that the Employment
Agreement dated October 20, 1997 between J. Clark and ProHealth
and its assigns is terminated effective March 15, 1998, including
any and all rights to any bonus or other incentive compensation
(including the bonus contemplated by Section 3.2 thereunder).
Notwithstanding the termination of the Employment Agreement, the
provisions of Sections 2.5 (assignment of intellectual property),
5.1 (return of property) and Section 6 (confidentiality, non-
compete and related provisions) of the Employment Agreement shall
remain in full force and effect (provided, that J. Clark shall be
released from the non-compete provisions as set forth in Section
10 below), and J. Clark shall receive that portion of his base
salary that would have accrued through the date of execution of
this Agreement.
3. Termination of Employment Agreement--W. Clark. The
-----------------------------------
Magellan Parties and W. Clark mutually agree that W. Clark shall
resign his employment and the employment of W. Clark with any
Magellan Party is terminated and that the Employment Agreement
dated October 20, 1997 between W. Clark and ProHealth and its
assigns is terminated effective upon March 15, 1998, including
any and all rights to any bonus or other incentive compensation
(including the bonus contemplated by Section 3.2 thereunder).
Notwithstanding the termination of the Employment Agreement, the
provisions of Sections 2.5 (assignment of intellectual property),
5.1 (return of property) and Section 6 (confidentiality, non-
compete and related provisions) of the Employment Agreement shall
remain in full force and effect (provided, that W. Clark shall be
released from the non-compete provisions as set forth in Section
10 below), and W. Clark shall receive that portion of his base
salary that would have accrued through the date of execution of
this Agreement.
4. Royalty Agreement. Each of the Stockholders and the
-----------------
Magellan Parties agree that each of the Royalty Agreements, which
by their terms are to terminate upon the termination of the
employment of J. Clark, shall terminate upon the execution of
this Agreement.
5. Medical Coverage. The Magellan Parties will make
-----------------
available medical benefit coverage to J. Clark and W. Clark,
pursuant to COBRA for the period prescribed by law. Any premiums
required to maintain such medical benefit coverage shall be paid
by J. Clark and W. Clark, respectively.
2
<PAGE>
6. License Agreement. The Magellan Parties shall
------------------
return ownership of and title to the technology received from the
Stockholders pursuant to the Merger Agreement. The Magellan
Parties, however, shall retain all right, title and interest in
and to any technology developed by the Magellan Parties after
October 1, 1997. The Stockholders will enter into a license
agreement ("License Agreement") with BioMeridian. The License
Agreement shall entitle BioMeridian to distribute, manufacture,
and further develop the technology acquired by the Magellan
Parties from BioSource in the Merger Agreement and reconveyed to
the Stockholders pursuant to this Section, which includes a DOS
system software, 3.1 software, and DCM units. The form of
License Agreement is attached hereto as Exhibit "A," and
provides, among other things, that:
(a) BioMeridian shall pay no royalties on the technology covered
by the license, (b) the license shall be perpetual, (c)
the license shall be non-exclusive, (d) the license shall
be nontransferrable, (e) any enhancements or developments of the
technology made by the Stockholders after the date of this
Agreement shall inure to their benefit and shall not be made
available to the Magellan Parties, and (f) any enhancements or
developments of the technology made
by the Magellan Parties after the date of this Agreement shall
inure to their benefit and shall not be made available to the
Stockholders. The Stockholders shall not represent that they are
identified with, a part of, or in any way affiliated with the
Magellan Parties in the manufacture, distribution, or marketing
of their products and services under the License Agreements.
7. Technical Documents. The Magellan Parties received
--------------------
certain technical documentation from the Stockholders for a
Windows95 product as part of the Magellan Parties' acquisition of
BioSource. The Magellan Parties agree to provide each of the
Stockholders with a copy of the technical documentation received
by the Magellan Parties from BioSource at the time of the
acquisition. The Magellan Parties shall have no obligation to
provide the Stockholders with any technical information regarding
development of the Windows95 product or any other technology
since the time of the acquisition. The Magellan Parties retain
all right, title and interest in and to the Windows95 software
and hardware products and any technology that has been developed
since the time of the Merger Agreement and the Stockholders shall
have no right, title or interest to development of the Windows95
product or any other technology developed since October 1, 1997.
8. BioSource Name. The Magellan Parties hereby relinquish
--------------
all right, title and interest in and to the name "BioSource" and
agree that they shall not use the "BioSource" name for their
business or products, except insofar as may be required to
identify the former identity or derivation of their product or
business or as may be required by law. The Magellan Parties,
however, retain all rights to the "LISTEN" name and the
"BioMeridian" name and Stockholders shall have no right or
license to use such names.
3
<PAGE>
9. Cash Payments to Stockholders. Pursuant to Section
------------------------------
1.6(d) of the Merger Agreement, the Magellan Parties agreed to
pay each of the Stockholders $50,000 as part of the acquisition
of BioSource. The Magellan Parties agree that any portion of the
$50,000 payments to each of the Stockholders that have not yet
been paid shall be paid by the Magellan Parties upon execution of
this Agreement. The Magellan Parties further agree to pay J.
Clark and W. Clark $20,000 each as severance pay. This sum shall
be paid in an initial payment of $10,000 to each of J. Clark and
W. Clark on or before April 10, 1998. The balance of $10,000
each shall be paid to J. Clark and W. Clark on or before July 20,
1998.
10. Non-Competition. Each Stockholder shall be free to
---------------
compete with the Magellan Parties in the manufacture,
distribution, and sale of the technology conveyed to the Magellan
Parties in the Merger Agreement, and reconveyed to the
Stockholders in Section 6 above.
11. Share of Inventory. BioMeridian agrees to give J.
-------------------
Clark and W. Clark that portion of BioMeridian's inventory of
equipment identified on Exhibit "B" attached hereto. For a
period of six (6) months after execution of this Agreement,
BioMeridian further agrees to sell equipment and parts that are
within the scope of the License Agreement described in Section 6
above, from its inventory to J. Clark and W. Clark to the extent
available and consistent with the Magellan Parties' own business
needs. Any such sales to J. Clark and W. Clark as provided in
this Section 11 shall be at BioMeridian's cost. Payment shall be
cash, payable at the time of purchase.
12. Customer Responsibility. The Magellan Parties shall
-----------------------
have the responsibility for customer communication, training, and
support for all of BioSource's or BioMeridian's current customer
base whether arising before or after the merger. The Magellan
Parties acknowledge, however, that each customer or user of its
system shall be free to choose its own future support
relationships as between the Magellan Parties and the
Stockholders.
13. Releases.
(a) Definitions. For the purposes of this Section 13,
-----------
the following terms shall have the meanings set forth below:
"Claim" shall mean and refer to any and all
claims, liabilities, charges, demands, grievances, and
causes of action of any kind or nature whatsoever
(including without limitation claims for contribution,
subrogation, or indemnification), whether known or
unknown, suspected or unsuspected, liquidated or
unliquidated.
4
<PAGE>
"Magellan Affiliates" shall mean and refer,
-------------------
either individually or in any combination, to any past
or present officer, director, shareholder, employee, or
agent of a Magellan Party; any individual or entity
(including without limitation any past or present
officer, director, shareholder, employee or agent of
such entity) that owns, directly or indirectly, a legal
or beneficial interest (whether in whole or in part) in
a Magellan Party; or any entity (including without
limitation any past or present officer, director,
shareholder employee, or agent of such entity) in which
a Magellan Party owns, directly or indirectly, a legal
or beneficial interest (whether in whole or in part),
including without limitation, any other partnership,
joint venture, corporation, or limited liability
company.
Except as previously set forth herein, all employee
benefits available to J. Clark and W. Clark under current
policies of any Magellan Party or to which J. Clark and W.
Clark may claim to be entitled under the Employment
Agreement ceased at 11:59 p.m. on the date of execution of
this Agreement.
(b) Release by Stockholders. In consideration of the
-----------------------
release of Claims by the Magellan Parties set forth herein,
and the other covenants and obligations of the Magellan
Parties set forth herein, each of the Stockholders, for
himself and for all persons or entities claiming by,
through, or under him, hereby irrevocably, unconditionally,
and completely releases each of the other Stockholders and
the Magellan Parties and any and all Magellan Affiliates of
and from any Claim that such Stockholder had, has, or may
claim to have against any other Stockholder and any Magellan
Party or any Magellan Affiliate: (1) arising from or
relating in any respect to the Merger Agreement, the Escrow
Agreement,the Employment Agreements, the Royalty Agreements
or the transactions contemplated by such agreements; (2)
arising from or relating to the termination of the
Employment Agreements and the Royalty Agreements; (3) any
and all claims arising out of or related to each of
Stockholder's employment with the Magellan Parties or any
Magellan Affiliate or the termination of that employment;
(4) for any Claim of breach of any warranty or
representation made in connection with the Merger Agreement,
the Escrow Agreement, the Employment Agreement or the
Original Royalty Agreement or the transactions contemplated
thereby; or (5) for any other Claims in any way related to
the Merger, the terminated Employment Agreements and Royalty
Agreements. Notwithstanding the foregoing, the Stockholders
do not release the Magellan Parties from their obligations
under this Agreement.
5
<PAGE>
(c) Covenant Not to Sue. Each of the Stockholders
--------------------
promises not to file, or permit to be filed on his behalf,
any lawsuit, charge, or complaint against any Magellan Party
or any Magellan Affiliate with any administrative agency
(except as allowed by law) or with any state or federal
court asserting any Claim released in Paragraph 13(b) above.
In addition, each Stockholder waives any right to recover
damages, costs, and attorney's fees in any action brought by
such Stockholder or by any other party or entity (including
without limitation the Equal Employment Opportunity
Commission, the Utah Anti-Discrimination Division, or any
equal employment opportunity or anti-discrimination agency
of any other state) on such Stockholder's behalf asserting
any Claim released by Paragraph 13(b).
(d) Damages. Each Stockholder understands and agrees
--------
that, if such Stockholder breaches the terms of this
Agreement, including without limitation the covenant not to
sue set forth in Paragraph 13(c), such breach will entitle
the Magellan Party or Magellan Affiliate against whom any
lawsuit, claim, or charge is brought to recover all legal
fees and costs (including expert fees) incurred by such
Magellan Party or Magellan Affiliate in defending against
any action or charge brought against such Magellan Party or
Magellan Affiliate seeking recovery based on or arising from
any Claim released by this Agreement.
(e) Release by Magellan. In consideration of the
--------------------
release of Claims by the Stockholders set forth herein, and
the other covenants and obligations of the Stockholders set
forth herein, each of the Magellan Parties, for itself and
for all persons or entities claiming by, through, or under
it, hereby irrevocably, unconditionally, and completely
releases each of the Stockholders of and from any Claim that
such Magellan Party had, has, or may claim to have against
any Stockholder: (1) arising from or relating in any
respect to the Merger Agreement, the Escrow Agreement, the
Employment Agreements, the Royalty Agreements or the
transactions contemplated by such agreements; (2) arising
from or relating to the termination of the Employment
Agreements and the Royalty Agreements; (3) any and all
claims arising out of or related to each of Stockholder's
employment with the Magellan Parties or any Magellan
Affiliate or the termination of that employment, (4) for any
Claim of breach of any warranty or representation made in
connection with the Merger Agreement, the Escrow Agreement,
the Employment Agreement or the Original Royalty Agreement
or the transactions contemplated thereby; or (5) for any
other Claims in any way related to the Merger, the
terminated Employment Agreements and Royalty Agreements.
Notwithstanding the foregoing, the Magellan Parties do not
release the Stockholders from their obligations under this
Agreement.
6
<PAGE>
14. Covenants of the Parties.
-------------------------
(a) Non-Disparagement Agreement. Each Stockholder
----------------------------
agrees that he will not make any statement or remarks,
whether written or oral, about any Magellan Party or any
Magellan Affiliate or take any action whatsoever that is
false or could be considered to be disparaging or otherwise
detrimental to the reputation of any Magellan Party or any
Magellan Affiliate or that is or could negatively affect or
otherwise interfere with the business relationship of a
Magellan Party or of any Magellan Affiliate with any of its
current or potential employees, shareholders, directors,
customers, business associates, or federal or state
regulatory agencies, except as required by law and in
response to a subpoena issued by an agency or court of
competent jurisdiction.
(b) Non-Disparagement/Non-Disclosure. Each Magellan
---------------------------------
Party agrees to cause its executive officers not to make any
statements or remarks, whether written or oral, about any
Stockholder or take any action whatsoever that is false or
could be considered to be disparaging or otherwise
detrimental to the reputation of any Stockholder, except as
required by law and in response to a subpoena issued by an
agency or court of competent jurisdiction. Each Magellan
Party further agrees that they will not disclose information
contained in their personnel file regarding a Stockholder to
any third party except as required by law or at the written
request of such Stockholder.
(c) Confidentiality. Each Stockholder hereby
---------------
acknowledges and agrees that during his employment with any
Magellan Party (including BioSource which was acquired
pursuant to the Merger), such Stockholder had access to or
acquired information relating to the products, services,
trade secrets, technology, ideas, copyrights, trademarks,
service marks, methods, processes, research and development,
hardware, software, purchasing, accounting, business methods
and techniques (including without limitation all customer
lists, records of customer usage and requirements, and
similar information relating to customers or to prospective
customers), marketing and/or sales plans or proposals, cost
information, financial information, pricing materials, and
business communications of each Magellan Party and the
Magellan Affiliates (including those of BioSource acquired
in the Merger) (the "Confidential Information"). To protect
the Confidential Information of each Magellan Party and each
Magellan Affiliate, each Stockholder agrees that he will
not, without the express prior written consent of the
President of Magellan:
7
<PAGE>
(i) ever directly or indirectly,
intentionally or unintentionally, reveal, disclose, or
disseminate to any person or entity any Confidential
Information or any other information of any Magellan Party
or of any Magellan Affiliate or any other matters concerning
the business affairs of any Magellan Party or of any
Magellan Affiliate or (ii) ever use or exploit for any
purpose, including without limitation for the personal or
financial gain of such Stockholder or of any other person or
entity, any of the Confidential Information or any other
information of any Magellan Party or of any Magellan
Affiliate except as expressly permitted by the License
Agreement. Each of J. Clark and W. Clark agrees that,
within five (5) business days of his execution and delivery
of this Agreement to Magellan, he will return to Magellan,
without retaining any copy or duplicate of any type thereof,
any Confidential Information or any other information of any
Magellan Party or of any Magellan Affiliate.
(d) Injunctive Relief. In the event of an actual or
-----------------
threatened breach by a Stockholder of this Section 14, each
Stockholder specifically acknowledges that the Magellan
Party or any Magellan Affiliate will incur incalculable and
irreparable damage for each such actual or threatened breach
and that any Magellan Party or any Magellan Affiliate has no
adequate remedy at law for any such actual or threatened
breach. Therefore, each Stockholder acknowledges that any
Magellan Party or any Magellan Affiliate shall be entitled
to injunctive relief immediately and permanently restraining
the Stockholders from such continuing or threatened breach.
The rights and remedies of the parties hereto shall not be
mutually exclusive, and the exercise of one or more of the
rights or remedies provided for by this Agreement shall not
preclude the exercise of the other rights or remedies
provided for by this Agreement or by law, equity, statute,
or otherwise.
15. Indemnities. Each of the Stockholders agrees to
------------
indemnify and hold harmless the Magellan Parties from any claim
or cause of action arising from products or services provided by
the Stockholders or BioSource prior to October 20, 1997,
irrespective of whether the Claim arose before or after October
20, 1997. The Magellan Parties agree to indemnify and hold
harmless the Stockholders from any claim or cause of action
arising from products or services provided by the Magellan
Parties from October 20, 1997 to the date of execution of this
Agreement irrespective of whether the Claim arose before or after
the date of execution of this Agreement.
8
<PAGE>
16. Acknowledgment. Except as provided in the License
---------------
Agreement and Sections 6, 7 and 8 above, the Magellan Parties
hereby acknowledge and confirm that they do not have any rights
to or interest in any of the intellectual property, inventions,
secret processes, copyrights, trade secrets, patents, trade
names, service marks and other intellectual property rights
related to the LISTEN system or any other intellectual property
rights associated with the LISTEN system or otherwise utilized by
the Stockholders, and that such rights are owned exclusively by
Stockholders. The Magellan Parties hereby assign to the
Stockholders any and all right, title and interest that the
Magellan Parties may have in and to such intellectual property.
The Magellan Parties agree to execute such further documents and
to take such further actions as may be necessary to verify and
establish title to such intellectual property with The
Stockholders.
17. No Admission. This Agreement is NOT an admission by
------------
any Magellan Party or any Magellan Affiliate, and each Magellan
Party and any and all Magellan Affiliates specifically deny, that
it or s/he has violated any contract, law, or regulation or that
it or s/he has discriminated against the Stockholders or
otherwise infringed on their rights and privileges or done any
other wrongful act.
18. Payment. Each of J. Clark and W. Clark acknowledges
--------
that upon receipt of the payment of the amounts set forth in
Section 9 above, he has received all monies due and owing to him
from any Magellan Party or any Magellan Affiliate under the terms
of the Employment Agreement and Royalty Agreement, including but
not limited to all wages earned by him through his last day of
employment with the Magellan Parties. Each of J. Clark and W.
Clark acknowledges that, except as provided in Section 9 above,
neither any Magellan Party nor any Magellan Affiliate has any
obligation to make severance, golden parachute, bonus, salary, or
other payments to him with respect to his employment with the
Magellan Parties.
19. Notices. Any notice required or permitted to be given
--------
under this Agreement shall be given at the following address:
To Magellan: Magellan Technologies, Inc.
13526 South 110 West
Draper, Utah 84020
Attn: Doug Angus
To the Stockholders: The addresses set forth on Exhibit "C."
9
<PAGE>
20. Entire Agreement. This Agreement is the entire
-----------------
agreement between the parties. No other promises or agreements
have been made to the Stockholders other than those contained in
this Agreement. This Agreement may not be modified except by a
document signed by Magellan and each Stockholder. Each
Stockholder warrants that he has not assigned any Claim released
by this Agreement, or any interest therein, to any third party.
This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of Utah, and each party submits himself
or itself to the exclusive, personal jurisdiction of the courts
situated in Salt Lake County, Utah to resolve any dispute among
them, including without limitation any dispute arising under this
Agreement. Any waiver by any party hereto of any breach of any
kind or character whatsoever by any other party, whether such
waiver be direct or implied, shall not be construed as a
continuing waiver of, or consent to, any subsequent breach of
this Agreement on the part of the other party. In addition, no
course of dealing between the parties, nor any delay in
exercising any rights or remedies hereunder or otherwise, shall
operate as a waiver of any of the rights or remedies of the
parties. The provisions of the Agreement are severable. If any
part of this Agreement is found to be unenforceable, the other
provisions shall remain fully valid and enforceable. It is the
intention and agreement of the parties that all of the terms and
conditions hereof be enforced to the fullest extent permitted by
law. This Agreement shall inure to and bind the heirs, devisees,
executors, administrators, personal representatives, successors,
and assigns of the respective parties hereto.
21. Legal Fees. If a proceeding is brought to enforce this
-----------
Agreement, the prevailing party shall be entitled to recover
reasonable attorney's fees, costs, and expenses incurred, in
addition to any other relief to which such party may be entitled.
22. Acknowledgement. Each Stockholder acknowledges that he
---------------
has read this Agreement carefully and fully understands the
meaning of the terms of this Agreement. Each Stockholder
acknowledges that he has executed this Agreement voluntarily and
of his own free will and that he is knowingly and voluntarily
releasing and waiving all Claims that he has or may have against
any Magellan Party or any Magellan Affiliate to the extent
provided above.
23. Consultation with Legal Counsel. Each Stockholder
--------------------------------
further acknowledges that he has been advised, by this Agreement,
to consult with an attorney of his choice prior to signing this
Agreement. Each party agrees that he or it shall be solely
responsible for any attorney's fees incurred by that party in the
negotiation and execution of this Agreement.
10
<PAGE>
24. Counterparts. This Agreement may be signed in one or
------------
more counterparts, each of which shall be considered an original,
and all of which together shall constitute one document. This
Agreement may be signed by facsimile signature; provided,
however, that if any party to this Agreement signs by facsimile
signature, within 20 days of signing by facsimile, such party
shall provide to the other party to this Agreement a duplicate
original bearing the party's original signature, written in ink.
25. Waiver of Jury Trial. The parties hereto hereby
------------------------
irrevocably waive the right to a trial by jury in any and all
actions or proceedings brought with respect to any provision of
this Release or the enforceability thereof or to any other claims
or disputes between them.
26. Cooperation. Each party hereto agrees to execute and
------------
deliver such additional documents and instruments and to perform
such additional acts as any party may reasonably request or as
may be reasonably necessary or appropriate to effectuate,
consummate or perform any of the terms, provisions or conditions
of this Agreement.
27. Debt to Ruth Clark. The Magellan Parties agree that
------------------
the debt owing to Ruth Clark from BioMeridian will be paid in
full in monthly payments as previously agreed, on time, with
proof of payment provided to Stockholders by the Magellan
Parties. The Magellan Parties will hold harmless and indemnify
Stockholders against any liability to Ruth Clark for this debt.
28. Transfer of Property. The Magellan Parties agree to
---------------------
give J. Clark and W. Clark the books, records, pictures, and
office equipment on Exhibit "D" attached hereto.
29. Patent Cooperation. The Magellan Parties agree
--------------------
reasonably to cooperate with the Stockholders in seeking patent
protection of the technology covered by the License Agreement.
The Stockholders shall bear all expenses associated with attempts
to secure patent protection. All right, title, goodwill and
interest, including ownership of any patents that may be issued
covering the technology covered by the License Agreement shall be
the property of the Stockholders except for such rights as are
granted to the Magellan Parties under the License Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Severance/Settlement Agreement and Release of Claims on the dates
set forth below to be effective as of March 27, 1998.
STOCKHOLDERS
DATED: 27 Mar 1998 /s/ James H. Clark
------------------------- ------------------------------------
James H. Clark
DATED: 27 Mar 1998 /s/ Willis H. Clark
------------------------- ------------------------------------
Willis H. Clark
DATED: 27 Mar 1998 /s/ Joe S. Galloway
------------------------- ------------------------------------
Joe S. Galloway
MAGELLAN TECHNOLOGIES, INC.,
a Utah corporation
DATED: 27 Mar 1998 By: /s/ William A. Fresh
------------------------- ------------------------------------
Its: CEO
PROHEALTH, INC.,
a Utah corporation
DATED: 3/27/98 By: /s/ William A. Fresh
------------------------- ------------------------------------
Its: CEO
BIOMERIDIAN INTERNATIONAL,INC.,
a Utah corporation
DATED: 3/27/98 By: /s/ William A. Fresh
Its: CEO
12
<PAGE>
STATE OF UTAH )
: ss.
COUNTY OF UTAH )
On the 27th day of March, 1998, personally appeared before
me James H. Clark, who duly acknowledged to me that he executed
the foregoing Separation/Settlement Agreement and Release of
Claims.
DATED: 3/27/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
12
<PAGE>
STATE OF UTAH )
: ss.
COUNTY OF UTAH )
On the 27th day of March, 1998, personally appeared before
me Willis H. Clark, who duly acknowledged to me that he executed
the foregoing Separation/Settlement Agreement and Release of
Claims.
DATED: 3/27/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
STATE OF UTAH )
: ss.
COUNTY OF UTAH )
On the 26th day of March, 1998, personally appeared before
me Joe S. Galloway, who duly acknowledged to me that he executed
the foregoing Separation/Settlement Agreement and Release of
Claims.
DATED: 3/26/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
13
<PAGE>
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On the 27th day of March, 1998, personally appeared before me William A.
Fresh, who duly acknowledged to me that he is the Presiden/CEO of Magellan
Technologies, Inc., that he has the power and authority to execute the above
Separation Agreement and Release of Claims on behalf of Magellan Technologies,
Inc., and that he executed the foregoing Separation Agreement and Release of
Claims on behalf of Magellan Technologies, Inc.
DATED: 3/27/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On the 27th day of March, 1998, personally appeared before me William A.
Fresh, who duly acknowledged to me that he is the CEO of ProHealth, Inc., that
he has the power and authority to execute the above Separation Agreement and
Release of Claims on behalf of ProHealth, Inc., and that he executed the
foregoing Separation Agreement and Release of Claims on behalf of ProHealth,
Inc.
DATED: 3/27/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
On the 27th day of March, 1998, personally appeared before me William A.
Fresh, who duly acknowledged to me that he is the CEO of BioMeridian
International, Inc., that he has the power and authority to execute the above
Separation Agreement and Release of Claims on behalf of BioMeridian
International, Inc., and that he executed the foregoing Separation Agreement and
Release of Claims on behalf of BioMeridian International, Inc.
DATED: 3/27/98 /s/ Lynnea Lund
------------------------- ------------------------------------
Notary Public
Residing at: SLC, Utah
14
<PAGE>
"EXHIBIT A"
INTELLECTUAL PROPERTY LICENSE AGREEMENT
---------------------------------------
THIS AGREEMENT, dated as of March 27th, 1998, (hereinafter
the "Effective Date") is between BioMeridian International, Inc.,
a Utah corporation whose principal place of business is located
at 216 North Orem Boulevard, Orem, Utah 84057, (hereinafter
"BIOMERIDIAN"), and James Hoyt Clark, an individual residing at
432 N 750 E Lindon UT 84042, Willis H. Clark, an
individual residing at 1065 N 1500 W Provo, UT 84604
and Joe S. Galloway, an individual residing at
1636 N. Murdock Dr. Pleasant (hereinafter "LICENSORS").
W I T N E S S E T H
WHEREAS, Licensors are the owners of patent applications,
patent rights, trade secrets, know how, copyrights, trademarks,
service marks, and other intellectual property relating to
electrodermal diagnosis and treatment equipment, and techniques,
and have the right to license this intellectual property to
others; and
WHEREAS, BioMeridian desires to acquire perpetual, non-
exclusive, royalty free licenses of some of the intellectual
property developed before October 20, 1997;
NOW THEREFORE, in consideration of the promises and mutual
covenants herein contained, BIOMERIDIAN and LICENSORS agree as
follows:
1. DEFINITIONS
-----------
"Licensed Technology" means LISTEN DOS-based operation
software, LISTEN Windows 3.1-based operating software and related
portable Digital Conductance Meter (DCM) units.
2. LICENSES
--------
Subject to the terms and conditions of this Agreement,
Licensors grant to BioMeridian a perpetual, non-exclusive,
nontransferrable royalty-free license to distribute, manufacture,
sell, and further develop the Licensed Technology. The license
granted herein specifically does not encompass and excludes any
improvements made to the Licensed Technology by either party
after the effective date of this Agreement. Any enhancements or
developments of the Licensed Technology after the effective date
of this Agreement shall inure solely to the benefit of the
developing individual or entity and is not subject to the terms
of this Agreement.
15
<PAGE>
3. TRADEMARKS
----------
BioMeridian relinquishes, assigns, and transfers to
Licensors all right, title goodwill and interest in and to the
trademark, service mark and logo for the "BIOSOURCE" mark.
Licensors hereby relinquish, assign and transfer all right,
title, goodwill, and interest in and to the "LISTEN, BIOMERIDIAN,
HUMAN CALIBRATION, VIRTUAL LIBRARY, IMPRINTING REMEDIES, and
MERIDIANSCAN" trademarks, service marks, and logos. A six (6)
month phase-out period shall begin upon the execution of this
Agreement during which each party will be allowed to exhaust
their supplies of items bearing the aforementioned marks assigned
to others in this agreement.
4. COOPERATION
-----------
BioMeridian will cooperate in the filing and prosecution of
patents and other intellectual property by executing in a timely
manner all documentation necessary for the transfer and
protection of the intellectual property set forth in this
Agreement.
5. NOTICES AND OTHER COMMUNICATIONS
--------------------------------
Any notices or other communication required or permitted to
be given to any party shall be sufficiently given on the date of
mailing if sent to such party by registered or certified mail,
postage prepaid, addressed to it as its address set forth below,
or to such other address as it may designate by written notice
given to the other party.
In the case of BioMeridian:
216 North Orem Boulevard
Orem, Utah 84057
In the case of Licensors:
James Clark
432 N 750 E
Lindon UT 84042
16
<PAGE>
IN WITNESS WHEREOF the parties hereby have caused this
Agreement to be duly executed as follows:
BIOMERIDIAN INTERNATIONAL, INC. LICENSORS
By: /s/ William A. Fresh By: /s/ James H. Clark
------------------------------- --------------------------
James H. Clark
Dated: 27 Mar 1998 Dated: 27 Mar 1998
By: /s/ Willis H. Clark
------------------------
Willis H. Clark
Dated: 27 Mar 1998
By: /s/ Joe S. Galloway
-----------------------
Joe S. Galloway
Date: 26 Mar 1998
<PAGE>
"EXHIBIT D"
BOOKS, RECORDS, PICTURES AND OFFICE EQUIPMENT
---------------------------------------------
TO BE TRANSFERRED BY THE MAGELLAN PARTIES
-----------------------------------------
TO J. CLARK AND W. CLARK
------------------------
1. Copies of files and records relating to education,
training, and reference materials, currently stored in
filing cabinets in the BioMeridian north storage
kitchen/breakroom.
2. Copies of records and documents related to FDA
documentation regarding all previous EDS systems
developed by J. Clark and the current systems developed
by BioSource, covering Acupath, Interro, Prophyle,
Biopath, Data Touch, Digital Conductance Meter ("DCM"),
AIM 65 and the LISTEN System. These files are also
currently stored in the filing cabinets in the north
storage kitchen/breakroom at BioMeridian.
3. The homeopathic picture currently hanging in the
foyer of BioMeridian.
4. All books and other items in the bookshelves of
the BioMeridian library belonging to J. Clark and W.
Clark.
5. Files and file cabinets in the BioMeridian storage
shed.
17
<PAGE>
6. The rocking chair currently stored in the
BioMeridian storage shed.
7. One drill press received from BioSource currently
at SkyHook, to be returned to J. Clark.
8. The microwave at BioMeridian, is to be returned to
W. Clark.
9. The following historical devices at the
BioMeridian Training Center: Acupath 1000, Interro
Profile and Data Touch systems.
10. Pictures at the BioMeridian Training Center
belonging to J. Clark and W. Clark may remain at the
Training Center and used as reference material for the
time being. J. Clark and W. Clark will request the
return of these pictures when they desire them.
11. Several of the book shelves in the BioMeridian
Library.
12. Copies of the software and hardware that was in
the possession of BioSource at the time of the merger
of BioSource with Magellan in October 1997. This
hardware and software will be provided to J. Clark and
W. Clark when the Magellan Parties' patent attorney
determines that the software and hardware are no longer
needed for purposes of securing a patent.
18
<PAGE>
LIST OF SUBSIDIARIES
1. SkyHook Technologies, Inc. a Utah corporation
2. ProHealth, Inc. a Utah corporation
3. Satellite Image Systems (Jamaica) Ltd.
4. Magellan Service Company, a Utah corporation
5. BioMeridian International, Inc. a Utah corporation
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THIS SCHEDULE CONTAIN SUMMARIZED FINANCIAL INFORMATION EXTRACTED FROM MAGELLAN
TECHNOLOGY, INC. DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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