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, 1998.
( ) 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 87-0467614
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13526 South 110 West 84020
Draper, Utah (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 filers 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. Yes | | No |_|
<PAGE>
The issuer's revenues for its most recent fiscal year totaled $2,605,952.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock as of December 31, 1998 was $6,650,350.
17,734,266 shares of the issuer's common stock were issued and outstanding as of
December 31, 1998.
Transitional Small Business Disclosure Format (Check one):
Yes |_| No |X|
TABLE OF CONTENTS
PART I
Item 1. Description of Business . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . .4
Item 3. Legal Proceedings . . . . . . . . . . . . . . . .5
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . .5
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . 6
Item 6. Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . 6
Item 7. Financial Statements . . . . . . . . . . . . . . . 8
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . .9
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16a of the Exchange
Act . . . . . . . . . . . . . . . . . . . . . . . .10
Item 10. Executive Compensation . . . . . . . . . . . . . .12
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . 13
Item 12 Certain Relationships and Related Transactions . 14
PART IV
Item 13 Exhibits and Reports on Form 8-K . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
<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 46.5% 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") organized in 1995 and
engaged in development of a proprietary, cargo-management systems for use with
helicopters. SkyHook's initial cargo-management product is the SkyHook External
Cargo Management System ("ECMS") which is a computer-controlled, multiple-hook
cargo carrying device that attaches to a long line beneath the helicopter. The
acquisition was accomplished through the exchange of 4,874,936 shares of
Magellan Common Stock in exchange for all issued and outstanding shares of
SkyHook Common Stock. SkyHook then 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.
In October 1997, the Company completed the acquisition of BioSource
Inc. ("BioSource"), 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 complementary 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") was formed as the surviving entity.
<PAGE>
In May 1998, the Company completed the sale of its 46.5% interest in
SIS, LLC to UICI of Dallas, Texas resulting in the complete divestiture of the
Company's involvement in image-based data entry services. The company completed
the sale primarily for the purpose of raising funds for the acquisition of
additional entities deemed strategically beneficial to the Company. The sale was
completed for $1,500,000 and resulted in a gain on sale of $180,023.
In May 1998 the Company completed the acquisition of certain licenses
and technology of Digital Health, LLC, a Utah limited liability company engaged
in a business similar to that of BioMeridian. This acquisition was completed in
an effort to improve the market share and market position of BioMeridian with
its technology based Meridian Stress Assessment ("MSA") equipment in the
complementary healthcare marketplace through the immediate acquisition of FDA
registration of the technology. The acquisition was accomplished through the
exchange of 1,375,000 shares of common stock and $250,000 in cash payable in
monthly installments of $15,000. The operations of Digital Health, LLC were then
combined with BioMeridian.
Business of the Company
BioMeridian
Products. BioMeridian manufactures and sells the BEST system to
healthcare practitioners. This equipment is used to assess stress and assist
healthcare practitioners in the analysis and treatment of certain conditions. If
stress or imbalance is detected, the BEST system 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 utilize the BEST system. The BEST
system is registered with the U.S. Food and Drug Administration as a
stress-monitoring device.
Markets. The emerging market for Meridian Stress Assessment equipment
is worldwide, crossing the boundaries of health care disciplines. The BEST
system 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 BEST system. 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 BEST system.
Manufacturing. BioMeridian currently contracts with a third party for
the assembly of the BEST system in a facility located in Orem, Utah. Other
subassemblies of the product are also currently subcontracted with various
vendors. BioMeridian is currently in the process of preparing for the in-house
manufacture and assembly of certain subassemblies for the BEST system in an
effort to gain efficiencies with cost and availability of the product.
Intellectual Property. BioMeridian is presently pursuing copyright
and other protection for the BEST software and other design property.
Government Regulation. Use of the BEST system internationally is
subject to various regulatory requirements on a country by country basis. The
product has received various forms of regulatory compliance for use in Canada,
Australia, South Africa and Germany. In the United States, the BEST system has
current FDA registration.
<PAGE>
Employees. BioMeridian currently employs 37 persons full-time with
three part-time employees. Ten employees are in administration and finance,
eleven in sales and marketing, five in training and education, three in customer
support, eight in engineering with five full-time and three part-time.
BioMeridian has established independent representatives in outlying geographical
locations domestically. The Company has current contracts with 25 domestic
independent representatives in various geographical locations across the United
States. The Company has also established relationships with 9 independent
international distributors.
SkyHook
Products. Since formation in February 1995, SkyHook has been engaged in
the development of computer-controlled multi-hook cargo transport devices that
SkyHook believes will improve the efficiency and 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
hhigh-quality chrome-moly steel. The air frame for the heavy lift device known
as the External Cargo Management System ("ECMS") 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 known
as the Light Aerial Delivery System ("LADS") 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 are
currently being tested and demonstrated with 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.
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.
<PAGE>
Manufacturing. In March 1998, SkyHook opened a facility in Draper, Utah
where the manufacture and assembly of both the ECMS and LADS will take place.
This has resulted in efficiencies with both cost and engineering improvements
better positioning SkyHook to adapt to and meet the needs of the marketplace.
Intellectual Property. SkyHook has been awarded two separate United
States patents that pertain to the ECMS. A third patent for unique features of
the LADS has been applied for. The validity and breadth of claims covered in
patents involve complex legal and factual questions and are, therefore,
uncertain. Whether or not 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 and received
approval on its 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.
Employees. SkyHook currently employs 3 persons full-time and 2 persons
part-time. The three full-time employees continue the sales and marketing effort
of the products to various potential customers including the U.S. military. The
two part-time employees continue to refine engineering, manufacturing and
assembly specifications. The Company intends to maintain a small staff by
outsourcing activities when possible. SkyHook also maintains sales offices
through independent representatives in Atlanta, Georgia; Seattle, Washington and
Washington, D.C.
ITEM 2. DESCRIPTION OF PROPERTY
BioMeridian
BioMeridian currently leases four facilities. One in Orem, Utah and
three in Draper, Utah. The Orem facility consists of a 4,100 square-foot office.
The lease expires in May 1999 and will not be renewed. The primary Draper, Utah
facility is the headquarters for Magellan, SkyHook and BioMeridian. 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 and manufacturing area. The lease term has an initial thirty-month
term commencing January 1998 and a three-year option. An additional facility is
also located in Draper, Utah and consists of 2,850 square feet of office space.
The lease term has an initial two-year term commencing in June 1998 and three
one-year renewal options.
<PAGE>
SkyHook
SkyHook shares space for manufacturing and assembly in the facility
located in Draper, Utah that has a 1,800 square-foot office and 7,000 square
foot warehouse and manufacturing area. This lease term has an initial
thirty-month term commencing January 1998 and a three-year option.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to one proceeding that is not product related and
is considered by Management to be routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 25, 1998, the Company held its annual meeting of shareholders
(the "Annual Meeting") at which the following matters were submitted to a vote
of the shareholders: 1) Proposal to elect five directors of the Company, each to
serve until the next annual meeting of shareholders, 2) Proposal to amend the
Company's Articles of Incorporation to increase the number of shares of the
Common Stock of the Company which the Company is authorized to issue from
25,000,000 to 50,000,000 shares, 3) Proposal to amend the Company's Stock Option
Incentive Plan (the "Option Plan") to increase by 2,000,000, from 2,500,000 to
4,500,000 the number of shares of Common Stock available for issuance pursuant
to grants under the Option Plan, and 4) Proposal to ratify the appointment of
Tanner + Company as independent auditor of the Company for the year ending
December 31, 1998.
The proposal to elect five directors of the Company and the proposal to
appoint Tanner + Company as independent auditor were both approved by the
shareholders with 12,846,607 shares voting in favor, no shares voting against,
65,834 shares abstaining from voting, and no broker non-votes.
The proposal to amend the Company's Articles of Incorporation to
increase the number of shares of the Common Stock of the Company which the
Company is authorized to issue from 25,000,000 to 50,000,000 shares was approved
with 12,844,607 shares voting in favor, no shares voting against, 67,834 shares
abstaining from voting, and no broker non-votes.
The proposal to amend the Option Plan were approved by the shareholders
with 12,844,607 shares voting in favor, no shares voting against, 67,834 shares
abstaining from voting, and no broker non-votes. 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.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's common stock is traded on 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, 1998
High Low
Bid Bid
First Quarter . . . . . . . . . $1.50 $ .87
Second Quarter . . . . . . . . .$1.56 $ .69
Third Quarter . . . . . . . . . $1.69 $ .81
Fourth Quarter . . . . . . . . .$1.28 $ .37
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
Shareholders. The approximate number of shareholders of record of the
Company's common stock as of March 31, 1999 was approximately one hundred and
fifty (150). This number 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 June 1998 the Company completed the
acquisition of Digital Health, LLC through the issuance of 1,375,000 shares in
exchange for all the outstanding common stock of Digital Health, LLC. The shares
were issued at 87.5 cents per share.
The Company converted various notes payable due William A. Fresh or
entities controlled by him to common stock during the year ended December 31,
1998. The total amount of the notes payable prior to conversion was $1,150,000
and the number of shares of common stock exchanged by the Company was 1,533,333
at 75 cents per share. Accrued interest payable of $37,906 to William A. Fresh
or entities controlled by him was also converted to common stock through the
exercise of stock warrants. Warrants for 108,338 shares of common stock were
issued at 30 cents per share and 14,608 shares of common stock were issued at 37
cents per share.
<PAGE>
The Company converted one note payable due Richard I. Winwood to common
stock during the year ended December 31, 1998. The amount of the note payable
prior to conversion was $250,000 and the number of shares of common stock
exchanged by the Company was 333,333 at 75 cents per share. Accrued interest
payable of $8,645 to Richard I. Winwood or entities controlled by him was also
converted to common stock through the exercise of stock warrants. Warrants for
28,816 shares of common stock were issued at 30 cents per share.
The Company converted one note payable due Judith Edwards to common
stock during the year ended December 31, 1998. The amount of the note payable
prior to conversion was $250,000 and the number of shares of common stock
exchanged by the Company was 333,333 at 75 cents per share.
The Company sold 125,000 shares of stock for 81 cents per share to one
individual pursuant to the Company's stock incentive plan. During the year
ended December 31, 1998.
In October 1997 the Company completed a share exchange pursuant to an
Agreement and Plan of Share Exchange between the Company, 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.
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 operating purposes of the Company. The issuance of the shares
of stock were made in reliance upon the exemption provided by the section 4 (2)
of the Securities Act of 1933.
The preceding 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During 1998 Magellan continued its efforts to position the Company for
future growth opportunities.
In May 1998, the Company completed the sale of its 46.5% interest in
SIS, LLC to UICI of Dallas, Texas resulting in the complete divestiture of the
Company's involvement in image-based data entry services. The company completed
the sale primarily for the purpose of raising funds for the acquisition of
additional entities deemed strategically beneficial to the Company. The sale was
completed for $1,500,000 and resulted in a gain on sale of $180,023.
In May 1998 the Company completed the acquisition of certain licenses
and technology of Digital Health, LLC, a Utah limited liability company engaged
in a business similar to that of BioMeridian. This acquisition was completed in
an effort to improve the market share and market position of BioMeridian with
its technology based meridian stress assessment equipment in the complementary
healthcare marketplace through the immediate acquisition of FDA registration of
the technology. The acquisition was accomplished through the exchange of
1,375,000 shares of common stock and $250,000 in cash payable in monthly
installments of $15,000. The operations of Digital Health, LLC were then
combined with BioMeridian. As part of the transaction, the Company recorded an
asset for the Licenses & Technology of Digital Health, LLC in the amount of
$1,453,125. The combination of Digital Health, LLC into the Magellan family of
companies has effectively positioned BioMeridian to compete in the emerging
"Complementary Health Care" marketplace.
Results of Operations
BioMeridian
The 1998 financial statements of the Company reflect the operations of
BioMeridian for the entire year with the resulting effect of the operations of
Digital Health, LLC from May 1998 through December 31, 1998. During that period
BioMeridian achieved sales of $2,605,952 that resulted in an operating loss of
$1,001,063 for the year ended December 31, 1998.
<PAGE>
SkyHook
SkyHook did not have any revenues in 1998 or 1997. SkyHook continued
its marketing efforts of the SkyHook ECMS and LADS during 1998 through various
demonstrations and marketing pursuits. In addition to aggressively marketing the
system to potential customers, particularly the United States military, SkyHook
continued to refine its products. 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.
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.
SkyHook is still in the development stage, has not sold any products and has not
generated any revenue. Although BioMeridian has generated an increased amount of
revenues, it was not able to achieve profitable operations during the year ended
December 31, 1998.
As a result, the Company is currently relying heavily on debt and its
ability to raise additional debt and equity financing in order to finance the
continued marketing efforts of SkyHook and its respective products and services.
For the year ended December 31, 1998, BioMeridian incurred a loss of $1,001,063.
Management of the Company projects that BioMeridian will achieve positive cash
flow from operations in the second quarter of 1999. On-going operations of
SkyHook currently consume approximately $70,000 of cash each month and the
Company expects to continue to incur additional expenses in connection with the
marketing and introduction of the SkyHook products into the market place.
During 1998 and 1997 the Company entered into several agreements to
borrow necessary funds.
During 1998 a Director/Shareholder who also serves as the Chairman of
the Board loaned $2,590,000 to the Company through either himself or entities in
which he held a controlling interest. The notes bear interest at 12% and are
payable upon demand. During 1998, $1,150,000 of these notes payable were
converted to common stock of the Company. In addition, the interest payable of
$37,906 was used by the Director/Shareholder to exercise warrants to purchase
common stock.
During 1998 a Director/Shareholder converted $250,000 of notes payable
to common stock of the Company. In addition, the interest payable of $8,645 was
used by the Director/Shareholder to exercise warrants to purchase common stock.
Also, an additional note payable held by an individual of $250,000 was converted
to common stock.
During 1997 a Director/Shareholder who also served 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.
<PAGE>
The Company has entered into a revolving line-of-credit agreement. This
agreement is for a $3,000,000 line-of-credit. This line of credit bears interest
at a variable rate of prime plus 1.0% and matures on May 31, 1999. Inventory and
the personal guarantees of three individuals; the Company's Chairman of the
Board, another member of the Board, and a major shareholder have jointly and
severally personally guaranteed this line of credit. As of December 31, 1998 the
line of credit had an outstanding balance $2,996,153. This line of credit has
been used to fund the operations of the Company.
The Company had a deficit in working capital as of December 31, 1998 of
$5,742,685 as compared to a deficit in working capital of $3,136,800 as of
December 31, 1997. As indicated above, the Company will require additional
equity and/or debt financing in order to fund continued operations. 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.
Year 2000
The Company has conducted diagnostic examinations in an effort to assess
the potential impact of Year 2000 issues on its operations. Based upon the
preliminary examinations, the company does not believe the Year 2000 issue will
have a significant impact on the Company's internal operations or on products
sold by the Company. There can be no assurance, however, that the Company
will not experience interruptions of operations because of the Year 2000
problems or become involved in disputes with clients regarding Year 2000
problems involving solutions developed or implemented by the company or the
interaction of such solutions with other applications. Year 2000 problems
could require the company to incur unanticipated expenses and such expenses
could have a material adverse effect on the Company's business, financial
condition or results of operations. Furthermore, the purchasing patterns of
clients or potential clients may be affected by Year 2000 issues as companies
expend significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase services offered by this company.
Factors Affecting Future Results
The Company's future operations and liquidity will be affected by the
ability BioMeridian has to continue to sell and market the BEST system, compete
with existing competitors, and satisfy the needs of current and future customers
to the extent that profitability will be achieved.
Likewise, 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 the market, 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 debt or equity capital in
order to finance continued operations, BioMeridian is unable to achieve a
profitable level of operations, 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-21 of this Form
10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
<PAGE>
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. Each Director of the Company will serve until the next annual meeting
of the Shareholders.
Name Age Position
William A. Fresh 70 Chairman of the Board, MTI, STI,
PHI, BII and MSC
Chief Executive Officer, MTI
Reginald Hughes 54 Director; Vice President, BII
Darwin Millet 46 Director
Richard I. Winwood 56 Director, MTI
Blair K. Blacker 55 President and Chief Operating Officer, MTI
President and Chief Executive Officer STI,
PHI, BII, & MSC
Douglas M. Angus 39 Secretary, Vice President, and Chief Fin-
ancial Officer, MTI,STI, PHI, BII and MSC
Irving Monclova 67 Director
Robert S. Lawrence 48 Vice President of Engineering, BII & 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 a
Vice President for 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 to joining
Eyring Corporation, Mr. Hughes had a successful career as a Hospital
Administrator.
<PAGE>
Richard I. Winwood joined the Board of Directors of the Company in 1995.
Mr. Winwood is involved in several aviation business concerns. 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.
Darwin D. Millet has been a member of the Board since 1994. He is the
past 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 Magellan
Technology, Inc. He also serves as President and CEO of STI, PHI, BII, & MSC.
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 serves on Magellan's Board of Directors. 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 BioMeridian
International, Inc. and 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.
Committees and Meetings. The Board of Directors met 8 times during the 1998
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.
<PAGE>
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,
1998. 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, 1998. Its functions are to determine and approve compensation
arrangements for executive officers of the Company and to oversee any stock
option, stock award or other employee benefit plan or arrangement established by
the Board of Directors for the benefit of executive officers of the Company and
management.
Section 16(a) Beneficial Ownership Reporting. Section 16(a) of the Exchange Act
requires the Company's executive officers and directors and persons who own more
than 10% of the Common Stock, to file with the U.S. Securities and Exchange
Commission (the "Commission") initial reports of ownership and reports of
changes in ownership of the Common Stock and other securities from which shares
of the Common Stock may be derived. Such directors, officers and 10% owners are
required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely on a review of the copies of such
reports received by the Company, the Company believes that the following reports
were not filed on a timely basis: Douglas M. Angus's Form 3 due 6/12/97 was
filed on 2/17/98; Richard I. Winwood's Form 4 due 3/10/98 was filed on 3/11/98
(reflecting 9 transactions); Richard I. Winwood's Form 5 for 1994 due 2/14/95
was filed on 2/11/98 (reflecting 5 transactions); Richard I. Winwood's Form 5
for 1995 due 2/14/96 was filed 2/11/98 (reflecting 10 transactions); Richard I.
Winwood Revocable Living Trust's Form 3 due 7/10/98 was filed 11/6/98; and Blair
K. Blacker's Form 3 due 10/30/98 was filed on 12/29/98.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the
three fiscal years ended December 31, 1998, the compensation paid to the
Company's Chief Executive Officer. No executive officer of the Company received
salary and bonus compensation in excess of $100,000. The Chairman and CEO of the
Company has agreed to serve without salary compensation until the Company
achieves profitable operations. In April 1998, the Board granted a stock option
to the Company's CEO for 150,000 shares of common stock. In April 1997 the Board
granted a stock option to the Company's CEO for 250,000 shares of common stock.
<PAGE>
<TABLE>
<S> <C> <C>
Long-term
Annual Compensation Compensation
------------------------------------------ -----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Name Other
and Annual Securities
Principle Salary Bonus Compensation Underlying
Position Year ($) ($) ($) Options
---------------------------------------------------------------------- -----------
William A. Fresh 1998 -0- -0- -0- 150,000
Chief Executive Officer 1997 -0- -0- -0- 250,000
1996 -0- -0- -0- -0-
- ---------------------
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth the options granted by the Company 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 150,000 12% .87 April 2005
CEO
Douglas M. Angus 50,000 4% .87 June 2005
Vice President
Blair K. Blacker 75,000 4% .87 April 2005
President
- -------------------------------------------------------------------------------
<PAGE>
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, 1998.
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 400/400,400 0/0
(1) Calculated based on the difference between the exercise price and the price
of a share of the Company's Common Stock on December 31, 1998.
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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the number of shares of Common Stock
beneficially owned as of December 31, 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. The percentages set forth have been computed based on 17,724,266
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 December 31, 1998.
Beneficial Ownership
As of December 31, 1998
Percentage
Number of of Class
Name and Address of Beneficial Owner Shares Outstanding
- ------------------------------------ ----------- -------------
William A. Fresh 5,815,713 1 29.6%
2238 E. Gambel Oak Drive
Sandy, Utah 84092
Richard Winwood 3,647,715 2 18.6%
7069 S. Highland Drive, Suite 102
Salt Lake City, Utah 84121
Ballard Investments 1,724,987 3 8.8%
2611 East 1300 South
Salt Lake City, Utah 84108
Reginald Hughes 504,991 4 2.4%
1482 East 920 South
Provo, Utah 84606
Darwin D. Millet 302,170 5 1.7%
12090 South Woodridge Road
Sandy, Utah 84124
Irving Monclova 56,846 6 .3%
1064 Heather Gate Court
Lexington, KY 40511
Judith Edwards 1,144,169 5.8%
809 17th Ave.
Salt Lake City, Utah 84103
Digital Health, LLC 1,375,000 7 7.0%
253 East Bridge Road
Orem, Utah 84057
Other Executive Officers 388,517 8 2.0%
All officers and directors
as a group (7 persons) 10,715,952 54.55%
- --------------------------------
<PAGE>
1 Includes 1,603,417 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, 216,667 shares held by William A. and 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 limited partnership, of which Mr. Fresh is a general partner, 637,392
shares issuable upon the exercise of currently exercisable warrants, and 400,500
shares issuable upon presently exercisable options.
2 3,501,531 shares are held by Richard I. Winwood Revocable Living Trust.
Includes 146,184 shares issuable upon the exercise of currently exercisable
warrants.
3 Includes 185,837 shares issuable upon the exercise of currently 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 Includes 93,836 shares issuable upon presently exercisable warrants or
options that become exercisable in 60 days. The shares are held by a Utah
limited liability partnership of which Mr. Hughes is a general partner.
5 Includes 35,000 shares issuable upon presently exercisable warrants or
options that become exercisable in the next 60 days.
6 Includes 43,333 shares issuable upon presently exercisable options.
7 These shares are held by Digital Health LLC, a Utah Limited Liability
Company controlled by Mr. Vaughn Cook.
8 Includes 355,000 shares of presently exercisable options or options which
become exercisable in the next 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Revolving Line of Credit Guaranties. The Company has entered into a
revolving line-of-credit agreement. This agreement is for a $3,000,000 line of
credit. This line of credit bears interest at a variable rate of prime plus 1.0%
and matures on May 31, 1999. Inventory and the personal guarantee of three
individuals including the Company's Chairman of the Board, a director, and a
major shareholder jointly and severally personally guarantee this line of
credit. As of December 31, 1998 the line of credit had an outstanding balance
$2,996,153. This line of credit has been used to fund the operations of the
Company.
Notes Payable to Shareholders. During 1998 a Director/Shareholder who
also serves as the Chairman of the Board loaned $2,590,000 to the Company
through either himself or entities in which he held a controlling interest. The
notes bear interest at 12% and are payable upon demand. During 1998, $1,150,000
of these notes payable were converted to common stock of the Company. In
addition, the interest payable of $37,906 was used by the Director/Shareholder
to exercise warrants to purchase common stock. As of December 31, 1998, a total
of $1,740,000 of notes payable was outstanding and payable to this shareholder.
<PAGE>
During 1998 another Director/Shareholder converted $250,000 of notes payable to
common stock of the company. In addition, the interest payable of $8,645 was
used by the Director/Shareholder to exercise warrants to purchase common stock.
Notes Payable. As of December 31, 1998, the Company owed $27,693 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 SkyHook
officers, the director is also an officer of one of the Company's subsidiaries.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits. The following documents are furnished as exhibits to this
Form 10-KSB
S-B Incorporated Filed
Item No. Description by Reference Herewith
3-1 Articles of Incorporation of the Company (1)
3-2 Amendment to Articles of Incorporation
approved March 8, 1996 (2)
3-3 Bylaws 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
<PAGE>
- -----------------------
(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 June 30, 1998 and a Report on
Form 8-K / A dated August 14, 1998 reporting the acquisition and financial
position of Digital Health, LLC. The financial statements of Digital Health, LLC
were filed as part of the report.
<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/ Douglas M. Angus
-----------------------------------
Douglas M. Angus, Vice President & CFO
Date: March 29, 1999
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.
<TABLE>
<S> <C> <C>
Name Position Date
/s/ William A. Fresh Chairman of the Board of Directors and March 29, 1999
- ---------------------------
William A. Fresh Chief Executive Officer (Principal Executive
and Financial Officer)
/s/ Reginald Hughes Director March 29, 1999
- ---------------------------
Reginal Hughes
/s/ Richard I. Winwood Director March 29, 1999
- ---------------------------
Richard I. Winwood
/s/ Darwin D. Millet Director March 29, 1999
- ---------------------------
Darwin D. Millet
/s/ Irving Monclova Director March 29, 1999
- ---------------------------
Irving Monclova
/s/ Blair K. Blacker Director March 29, 1999
- ---------------------------
Blair K. Blacker
/s/ William Crouch Director March 29, 1999
William Crouch
</TABLE>
<PAGE>
EXHIBIT 22
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
EXHIBIT 27
FINANCIAL DATA
MAGELLAN TECHNOLOGY, INC.
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Index to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Page
Independent auditors' report F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of stockholders'
deficit F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
<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, 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1998 and 1997. 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, 1998, and the results of their operations and their cash
flows for the years ended December 31, 1998 and 1997, 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 23, 1999
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Balance Sheet
December 31, 1998
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 159,109
Accounts receivable, net 272,052
Inventories, net 938,999
Other current assets 172,230
------------------
Total current assets 1,542,390
Licenses and technology, net 1,283,593
Property and equipment, net 938,350
Goodwill, net 269,248
Long-term receivables 42,591
------------------
Total assets $ 4,076,172
------------------
- --------------------------------------------------------------------------------
<PAGE>
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,096,586
Accrued expenses 405,439
Related party notes payable 1,840,000
Notes payable 2,996,158
Current portion of long-term debt 667,225
------------------
Total current liabilities 7,005,408
Long-term debt 617,144
------------------
Total liabilities 7,622,552
------------------
Commitments -
Stockholders' deficit:
Common stock, par value $.0002 per share,
50,000,000 shares authorized, 17,724,266
shares issued and outstanding 3,545
Additional paid-in capital 9,890,574
Unearned compensation (130,868)
Accumulated deficit (13,309,631)
------------------
Total stockholders' deficit (3,546,380)
------------------
Total liabilities and stockholders' deficit $ 4,076,172
------------------
- --------------------------------------------------------------------------------
<PAGE>
Magellan Technology, Inc.
Consolidated Statement of Operations
Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
-----------------------------------
Net sales $ 2,605,952$ 319,611
-----------------------------------
Costs and expenses:
Costs of sales 521,931 57,180
General and administrative 6,126,123 2,764,150
Compensation expense - stock options 206,382 252,000
Impairment loss 687,500 -
-----------------------------------
7,541,936 3,073,330
-----------------------------------
Loss from operations (4,935,984) (2,753,719)
-----------------------------------
Other income (expense):
Equity in loss of joint venture (5,050) (68,960)
Gain on sale of investment 180,023 -
Interest expense (424,622) (161,843)
Other, net 256,225 (12,870)
-----------------------------------
6,576 (243,673)
-----------------------------------
Loss before benefit for income taxes (4,929,408) (2,997,392)
Benefit for income taxes - -
-----------------------------------
Net loss $ (4,929,408)$ (2,997,392)
-----------------------------------
Net loss per share -
basic and diluted $ (.29) (.22)
-----------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Additional Unearned
Common Stock Paid-In Accumulated
--------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shares Amount Capital Compensation Deficit Total
----------------------------------------------------------------------------------------
Balance, January 1, 1997 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)
Issuance of common stock for:
Debt 2,351,761 471 1,696,080 - - 1,696,551
Acquisition of subsidiary 1,375,000 275 1,202,850 - - 1,203,125
Services 125,000 25 101,225 - - 101,250
Amortization of unearned
compensation - - - 105,132 - 105,132
Net loss - - - - (4,929,408) (4,929,408)
----------------------------------------------------------------------------------------
Balance, December 31, 1998 17,724,266 $ 3,545 $ 9,890,574 $ (130,868) $ (13,309,631) $ (3,546,380)
----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Consolidated Statement of Cash Flows
Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1998 1997
-----------------------------------
Cash flows from operating activities:
Net loss $ (4,929,408) $ (2,997,392)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 375,401 41,489
Equity in loss from joint venture 5,050 68,960
Stock compensation 206,382 252,000
Gain on sale of interest in joint venture (180,023) -
Loss on disposal of property and equipment 4,578 -
Provision and reserves for losses on assets 358,800 -
Other non-cash expenses 687,500 74,946
(Increase) decrease in:
Accounts receivable (521,443) 18,500
Inventories (1,402,506) (367,993)
Other current assets 22,585 (188,690)
Increase (decrease) in:
Accounts payable 617,884 376,800
Accrued expenses 245,241 117,362
-----------------------------------
Net cash used in
operating activities (4,509,959) (2,604,018)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (737,585) (288,157)
Proceeds from sale of investment in joint venture 1,500,000 -
Net cash paid in acquisition - (102,890)
-----------------------------------
Net cash provided by (used in)
investing activities 762,415 (391,047)
-----------------------------------
Cash flows from financing activities:
Increase in notes payable 786,136 2,185,000
Proceeds from related party notes payable 2,940,000 750,000
Payments on related party notes payable (200,000) -
Proceeds from long-term debt 1,046,560 111,429
Payments on long-term debt (777,445) (38,515)
Proceeds from issuance of common stock - 9,866
-----------------------------------
Net cash provided by
financing activities 3,795,251 3,017,780
-----------------------------------
Net increase in cash 47,707 22,715
Cash, beginning of year 111,402 88,687
-----------------------------------
Cash, end of year $ 159,109 $ 111,402
-----------------------------------
</TABLE>
<PAGE>
Magellan Technology, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Organization
and
Accounting
Policies
Organization
The consolidated financial statements consist of Magellan Technology, Inc. (the
Company) and its wholly owned subsidiaries, ProHealth, Inc. (ProHealth),
BioMeridian International, Inc. (BioMeridian) (formerly BioSource, Inc.), which
the Company acquired effective October 15, 1997, and SkyHook Technologies, Inc.
(SkyHook).
On June 15, 1998, the Company acquired licenses and technology from Digital
Health, LLC (Digital). The acquisition included the issuance of 1,375,000 shares
of the Company's common stock and debt of $250,000. The Company recorded an
intangible asset in the amount of $1,453,125 related to this transaction.
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.
Business Activity
The Company's operations consist of: 1) manufacturing and distribution
of a medical device used by health care practitioners (conducted by
BioMeridian), and 2)manufacturing and distributing a helicopter cargo
management system (conducted by SkyHook).
Separate information concerning the assets, revenue and operations of each
segment are included in the financial statements.
Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its subsidiaries, Digital subsequent to June 15, 1998 and all
others. All significant intercompany balances and transactions have been
eliminated.
<PAGE>
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.
- --------------------------------------------------------------------------------
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization
and
Accounting
Policies
Continued
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
<PAGE>
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.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) method.
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 (formerly
BioSource, Inc.) over the fair value of the related net assets at the date of
acquisition, and is being amortized on the straight-line basis over five years.
Licenses and Technology
Licenses and technology reflects the issuance of common stock and debt in
exchange for certain assets of Digital Health, LLC and is being amortized on the
straight-line basis over five years.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization
and
Accounting
Policies
Continued
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.
2. Going
Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As of December 31, 1998, the
Company had a deficit in working capital of $5,463,018, and an accumulated
deficit of $13,309,631 and incurred a loss of $4,929,408 for the year ended
December 31, 1998. 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.
<PAGE>
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
1999. However, there can be no assurance they will be successful.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Detail of
Certain
Balance
Sheet
Accounts
Accounts receivable:
Trade receivables 251,073
Sales representative receivables 270,370
Less allowance for doubtful accounts (206,800)
-----------------
314,643
Less long-term portion (42,591)
-----------------
$ 272,052
-----------------
Inventories:
Raw materials 620,140
Finished goods 470,859
Less allowance for obsolescence (152,000)
-----------------
$ 938,999
-----------------
December 31
-----------------------------------
1998 1997
-----------------------------------
Licenses and technology:
Accumulated amortization $ 169,532$ -
Amortization expense $ 169,532$ -
Goodwill:
Accumulated amortization $ 89,749$ 14,958
Amortization expense $ 74,791$ 14,958
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property and
Equipment
Property and equipment consist of the following:
Equipment $ 966,857
Leasehold improvements 112,479
Software 46,921
-----------------
1,126,257
Accumulated depreciation and
amortization (187,907)
-----------------
$ 938,350
-----------------
5. Related
Party Notes
Payable
At December 31, 1998, the Company had unsecured notes payable due to
shareholders and entities owned by a shareholder totaling $1,840,000. Each note
has a stated interest rate of 12% and is payable on demand. As of December 31,
1998 accrued interest payable on these notes totaled approximately $49,000.
During 1998 and 1997, interest expense of approximately, $81,000 and $30,000,
respectively, was recognized on obligations due to shareholders of the Company.
6. Notes
Payable
The Company has a revolving line-of-credit agreement with a bank. The agreement
allows the Company to borrow up to $3,000,000 at an interest rate equal to the
bank's prime rate plus 1% (8.75% at December 31, 1998). The balance, including
all unpaid interest, is due May 19, 1999. The line-of-credit is secured by the
assets of the Company and guaranteed by certain shareholders. At December 31,
1998 the balance outstanding on the line-of-credit totaled $2,996,158.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Long-term
Debt
Long-term debt is comprised of the following:
Unsecured notes payable to a former subsidiary,
principal due in aggregate monthly installments
of $13,889 and interest payable quarterly at the
prime rate minus 1% $ 500,000
Note payable to a bank due in monthly installments
of $6,346, including interest at 9.5% secured by
the personal guarantees of certain
shareholders and equipment 285,992
Unsecured notes payable to a company, due on
demand, with interest at prime rate plus 2% 195,212
Unsecured, non-interest bearing note payable to a
company, due in monthly installments of $15,000 160,000
Unsecured note payable to a company due in
monthly installments of $1,210, including interest at
9% 23,354
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 14,697
Capital lease obligation (see note 8) 105,114
-----------------
1,284,369
Less current portion (667,225)
-----------------
$ 617,144
-----------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Long-term
Debt
Continued
Future maturities of long-term debt are as follows:
Year Ended December 31: Amount
------------------
1999 $ 667,225
2000 256,066
2001 214,230
2002 98,081
2003 48,767
------------------
$ 1,284,369
------------------
<PAGE>
8. Capital
Lease
Obligation
The Company leases equipment under a noncancellable lease agreement. The lease
provides the Company the option to purchase the equipment at the end of the
initial lease term. The equipment under capital lease is included in property
and equipment at a cost of $125,750 and accumulated amortization of $13,473.
Depreciation and amortization expense for the equipment under capital lease for
the year ended December 31, 1998 was $13,473.
The capital lease obligation has an imputed interest rate of 9% and is payable
in monthly installments through December 2002. Future minimum payments on the
capital lease obligation are as follows:
Year Amount
------ ------------------
1999 $ 31,680
2000 31,680
2001 31,680
2002 31,661
------------------
$ 126,701
Less amount representing interest (21,587)
------------------
Present value of future minimum capital lease $105,114
------------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Income
Taxes
The benefit for income taxes is different than amounts which 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,
-----------------------------------
1998 1997
-----------------------------------
Federal income tax benefit
at statutory rate $ 1,675,000 $ 1,019,000
Meals and entertainment (13,000) (2,000)
Change in valuation allowance (1,662,000) (1,017,000)
-----------------------------------
$ - $ -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforwards $ 2,916,000
Subsidiaries stock basis 869,000
Stock options and warrants 86,000
Amortization of intangibles 69,000
Valuation allowance (3,940,000)
-----------------
$ -
-----------------
At December 31, 1998, the Company has a net operating loss carryforwards
available to offset future taxable income of approximately $8,575,000, which
will begin to expire in 2008. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect at the time the net
operating loss carryforwards can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of the change in ownership.
<PAGE>
- --------------------------------------------------------------------------------
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Impairment
Loss
During 1998, the Company made significant changes in the design of certain
products available for sale. Management has determined that certain inventory
related to the old design is now impaired. Consequently, an adjustment totaling
$687,500 was made to write-down inventory to its estimated realizable value.
11. Supplemental
Cash Flow
Information
During the year ended December 31, 1998:
o The Company purchased licenses and technology totaling $1,453,125 in
exchange for a $250,000 note payable and common stock of $1,203,125.
o Notes payable to certain shareholders totaling $1,650,000 were converted to
common stock. In addition, accrued interest payable to shareholders
totaling $46,551 was exchanged by the shareholders to exercise warrants for
common stock.
During 1997, the Company purchased all of the outstanding common
stock of BioMeridian International, Inc. (formerly 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
-----------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Supplemental
Cash Flow
Information
Continued
Actual amounts paid for:
Years Ended
December 31,
-----------------------------------
1998 1997
-----------------------------------
Interest $ 400,132 $ 161,843
-----------------------------------
Income taxes $ - $ -
-----------------------------------
12. Stock Options
and Warrants
The Company has a stock option plan (the Option Plan), which allows a maximum of
4,500,000 options to be granted to purchase common stock at prices generally not
less than the fair market value of common stock at the date of grant. Under the
Option Plan, grants of options may be made to selected officers and key
employees without regard to any performance measures. The options may be
immediately exercisable or may vest over time as determined by the Board of
Directors. However, the maximum term of an option may not exceed five years.
Information regarding the stock options and warrants is summarized below:
Number of Price Per
--------------------------------
Options Warrants Share
------------------------------------------------
Outstanding at
January 1, 1997 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
Granted 1,264,000 441,000 .01 to 1.19
Exercised (125,000) - .01
Forfeited (309,669) (151,762) .30 to .37
------------------------------------------------
Outstanding at
December 31, 1998 2,852,667 935,080 $ .01 to 1.20
------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock-Based
Compensation
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date for awards in 1998 and
1997, 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,
------------------------------------
1998 1997
------------------------------------
Net loss - as reported $ (4,929,408) $ (2,997,392)
Net loss - pro forma $ (6,053,299) $ (4,166,227)
Loss per share - as reported $ (.$9) (.22)
Loss per share - pro forma $ (.$6) (.30)
------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - -
Expected stock price volatility 188% 203%
Risk-free interest rate 5.0% 5.5%
Expected life of options 2 to 10 years 5 to 10 years
-----------------------------------
The weighted average fair value of each option granted during 1998 and 1997 are
$.82 and $1.55, respectively.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock-Based
Compensation
Continued
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/98 (Years) Price 12/31/98 Price
- --------------------------------------------------------------------------------
$.20 to .30 374,855 4.75 $ 0.26 374,855 $ 0.26
.35 to .50 2,099,892 4.89 0.38 1,501,225 0.37
.75 to 1.00 1,149,000 4.99 0.91 312,800 0.92
1.19 to 1.20 164,000 6.49 1.19 2,800 1.20
- --------------------------------------------------------------------------------
$.20 to 1.20 3,787,747 $4.97 0.56 2,191,680 $ 0.43
- --------------------------------------------------------------------------------
14. Earnings Per
Share
Financial accounting standards require companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows (in
thousands, except per share amounts):
Years Ended
December 31,
------------------------------------
1998 1997
------------------------------------
Basic EPS and Diluted:
Net loss available to common
stockholders $ (4,929,408) $ (2,997,392)
------------------------------------
Weighted average common shares 16,752,000 13,685,000
------------------------------------
Net loss per share $ (.29) (.22)
------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Business
Segments
The Company operates in two business segments: 1) Medical device
manufacture and distribution, 2) Helicopter cargo management systems
manufacture and distribution.
The following tables present financial information by business segment for the
years ended December 31, 1998 and 1997.
Helicopter
Cargo
Manage- Corporate
Medical ment and Elimi- Consoli-
1998 Devices Systems nations dated
- --------------------------------------------------------------------------
Sales to unaffiliated
customers $ 2,605,952 - - $ 2,605,952
Operating loss (991,675) (3,314,166) (630,143) (4,935,984)
Identifiable assets 697,863 1,797,736 1,580,573 4,076,172
Capital expenditures 159,132 578,453 - 737,585
Depreciation and amortization 29,579 101,499 244,323 375,401
Helicopter
Cargo
Manage- Corporate
Medical ment and Elimi- Consoli-
1997 Devices Systems nations dated
- ---------------------------------------------------------------------------
Sales to unaffiliated
customers $ 319,611 $ - $ - $ 319,611
Operating loss (89,501) (2,254,339) (409,879) (2,753,719)
Identifiable assets 119,796 900,882 1,667,019 2,687,697
Capital expenditures 49,958 238,199 - 288,157
Depreciation and amortization 4,709 21,822 14,958 41,489
16. Fair Value of
Financial
Instruments
None of the Company's debt instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at December
31, 1998, 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.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
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, 1998 and 1997, 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,
1998:
Years Ended December 31, Amount
-----------------
1999 $ 206,334
2000 96,096
-----------------
$ 302,430
-----------------
Royalty Agreement
During 1998, the Company entered into a license agreement which grants the
Company the right to include certain software in its medical device product.
Under the agreement, the Company is obligated to pay $28 for each unit produced.
During the year ended December 31, 1998 royalties expense related to this
agreement totaled $16,268.
Employment Agreement
The Company has an employment agreement with one of its employees which requires
annual payments of $75,000 and a bonus based on earnings of the Company's
medical device division. The agreement expires on September 30, 2000.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, product liability, commercial transactions,
etc. The Company is currently not aware of any such items which it believes
could have a material effect on its financial position.
18. Pro Forma
Condensed
Combined
Statement of
Operations
The following condensed pro forma combined statements of operations for the
years ended December 31, 1998 assumes the acquisition of Digital Health, LLC, by
Magellan as of the beginning of the years then ended.
- --------------------------------------------------------------------------------
<PAGE>
MAGELLAN TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Pro Forma
Condensed
Combined
Statement of
Operations
Continued
The pro forma results of operations are not necessarily indicative of the
results of operations that would actually have been obtained if the transactions
had occurred as of the beginning of the years then ended. These statements
should be read in conjunction with the historical financial statements and
related notes.
Pro forma information for the year ended December 31, 1998 is as follows:
Magellan
Technology Digital
Inc. Health, LLC Total Adjustments Combined
--------------------------------------------------------------
Net sales $ - $ 3,140,114 $ 3,140,114 $ - $ 3,140,114
Other income 440,580 - 440,580 - 440,580
Costs and
expenses (4,368,925) (4,163,221) (8,532,146) - (8,532,146)
--------------------------------------------------------------
Net loss $(3,928,345) $(1,023,107)$(4,951,452)$ - $(4,951,452)
--------------------------------------------------------------
Net loss
per share $ (.25) $ (.29)
------------ -------------
Weighted average
number of common
shares outstanding 15,833,000 17,208,000
------------ -------------
19. Recent
Accounting
Pronounce-
ments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
- -
- -------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MAGELLAN TECHNOLOGY, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 159,109
<SECURITIES> 0
<RECEIVABLES> 478,852
<ALLOWANCES> 206,800
<INVENTORY> 938,999
<CURRENT-ASSETS> 1,542,390
<PP&E> 1,126,257
<DEPRECIATION> 187,907
<TOTAL-ASSETS> 4,076,172
<CURRENT-LIABILITIES> 7,005,408
<BONDS> 617,144
0
0
<COMMON> 3,545
<OTHER-SE> (3,549,925)
<TOTAL-LIABILITY-AND-EQUITY> 4,076,172
<SALES> 2,605,952
<TOTAL-REVENUES> 2,605,952
<CGS> 521,931
<TOTAL-COSTS> 6,661,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 358,800
<INTEREST-EXPENSE> 424,622
<INCOME-PRETAX> (4,929,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,929,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,929,408)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
