SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended
September 30, 1998 Commission File No. 1-11020
MICEL CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2882297
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
445 Central Avenue, Cedarhurst, NY 11516
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number,
including area code: (516) 569-0606
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SB (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Registrant's revenues for fiscal year ended September 30, 1998 was $2,740,476.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $9,449,692 as of December 31, 1998.
The number of shares outstanding of the registrant's Common Stock as of December
31, 1998 is:
Class Outstanding at December 31, 1998
Common Stock, $.01 par value 6.100.380
Part 1
Item 1. Business
The Company, through its various subsidiaries, is engaged in the development,
manufacture and sale of radio frequency (RF) microwave components and custom
made integrated assemblies for commercial and military applications. These
wireless applications include radio communications, electronic warfare (EW) and
radar.
Other applications that the Company are developing are microwave products for
the commercial telecommunications field, such as radios for rural
telecommunications and point to point communications. The Company possesses the
product and technology base necessary for the production of certain microwave
components and complete subsystems.
The Company's corporate strategy has been to create a series of separate
operating divisions or partially owned subsidiaries to support the manufacture,
marketing/sales, and distribution of specific commercial technologies.
RadioTel, Ltd., located in Israel, was established to develop managed wireless
SDH (Synchronous Digital Hierarchy) transmission networks. Through the use of
novel techniques and state of the art technologies, the Company hopes to extend
wideband wireline/fiber services into the wireless domain. These wireless
networks are used to extend the existing and future infrastructure while at the
same time supplying full transparency of all protocols (i.e.) ATM (Asynchronous
Transfer Mode), IP (Internet Protocol), and SDH) with the same reliability and
uninterrupted service of wireline services.
On March 31,1998, RadioTel supplied an ISDN (Integrated Service Digital Network)
Multi-Link, for technology evaluation, to MadenTech Consulting Engineering Inc.
Upon the completion of the project, a continuation order is expected. The
financial statements of RadioTel are consolidated into the Company's financial
statements.
Since September 30, 1997, Clal Venture Capital Fund Limited Partnership (Clal),
H.B. Radio Investment Limited Partnership (HB), and ComSor Investment Fund LDS
(ComSor) purchased 95,000, 95,000 and 125,000 shares of RadioTel Ltd. Preferred
Stock, respectively, at a purchase price of $10 per share for a total investment
of $ 3,150,000. As a result, as of the date hereof, Clal, HB and ComSor own
11.69%, 11.69% and 15.38% respectively, and the Company owns 41.23%, of RadioTel
Ltd. The reminder of 20% was reserved to be issued to employees and consultants
of RadioTel Ltd. Of such 20%, Tuvia Barak, a consultant, and Rony Levy,
President, each received options to purchase 6% of RadioTel. In addition,
the Company granted an option to holders of 437,500 shares
of the Company's Common Stock which were purchased in a private placement in
fiscal 1997 and in fiscal 1998 at $2.00 per share, the right to convert these
shares, until December 29, 1999, into shares of RadioTel at the rate of
five shares of the Company for one share of
RadioTel.
Microkim, Ltd., a wholly-owned subsidiary located in Israel, acts as the
Company's manufacturing, research and development arm, in addition to
developing innovative technologies for commercial use by the other operating
divisions. Microkim has commercialized specialized RF and microwave products for
telecommunication applications, electronic warfare systems and radar systems.
Micel Wireless Corp., ("Micel Wireless") a joint venture between the Company and
Export Business & Services, Inc. ("EBS"), is an international telecommunications
company engaged in the sourcing, marketing and sales of wireless telephone
terminals and other related products. Micel Wireless has represented certain
manufacturing companies and telecom agencies as purchasing agents and sales
representatives.
Micel Wireless designs, manufactures and sells fixed cellular terminals for
Wireless Local Loop "WLL" applications in developing countries. The Company
capitalizes on the technical capabilities of RadioTel, the existing
knowledge of the cellular and wireless local loop markets
and a network of distribution channels. Micel Wireless' initial focus has been
in Latin America, where Micel Wireless expects to take immediate advantage of
existing WLL opportunities.
A majority of its sales have been made in Latin and South America.
Products
The Company began operations through its wholly owned Israeli subsidiary,
Microkim Ltd., by manufacturing microwave components such as ferrite devices
including isolators and control devices such as switches. Subsequently,
the Company developed a line of microwave circuit assemblies,
subsystems and subassemblies for advanced electronic defense and certain medical
products.
More recently, the Company has introduced stand-alone products to be marketed
directly to end users.
The Company maintains its technological knowhow and infrastructure for
manufacturing RF components to support its highly integrated products.
The Company focuses its activities in two main product lines:
- Products for the commercial market.
- Products for the military market.
I. Commercial Products
The following are the Company's products for the commercial communications
market.
PCS Antenna.
Passive PCS Antenna
Microkim had developed a low cost antenna for PCS application that requires easy
installation of point to point communication in hard environmental conditions.
The high performance of the antenna enables an improvement of the base station
range.
Active PCS Antenna
For PCS applications that demand a relatively long RF cable between the Antenna
and the subscriber unit, Microkim has developed an Active PCS Antenna for system
performance upgrading and system price reduction. This Antenna improves the
overall performance by placing the Low Noise Amplifier (LNA) inside the Antenna
(improving significantly the Noise Figure of the system) and also placing the
Power Amplifier (PA) inside the Antenna (overcoming the loss of the cable).
By using this Antenna, the coverage range can be greatly extended.
The only link between the Antenna and the Subscriber unit is by the RF cable
that carries the RF signals, the control signal and the DC power.
VXI Switch Matrix. State-of-the-art RF switch matrix allows for the automation
and computer supervision of testing in the manufacturing process of RF products
- - primarily wireless products. This product is targeted to the large volume
wireless product manufacturers including:
1. Wireless LANs (local area networks)
2. Cellular phones
3. GPS (Global positioning system) products
4. DBS, cellular, and data communication products
5. PCS (Personal Communication Service)
II.Military Products
The products for the military market include:
Radar Signal Simulator. The Company manufactures, markets and sells a portable
microwave Radar Signal Simulator RSS 2000 ("RSS") used for testing an
airplane's electronic warfare system's ability to detect the presence of threat
radar by simulating the electronic signals emanating from such radar. The RSS
is portable, weighing approximately 25 pounds and is light enough to be carried
by one person. The RSS operates from a rechargeable battery or from a 115
Volt/400 Hz external electrical source. It contains several microwave frequency
sources, switches, amplifiers, and other components as well as a
microprocessor and logic circuits which are programmed to control the unit.
It contains an optional remote control which enables the RSS to be operated
by one person from the cockpit of an airplane and operates independently from
the aircraft electronic system.
Several different simulated radar threats can be programmed into the RSS unit
that can simulate two radar threats simultaneously. During the fiscal year
ended September 30,1998 ("Fiscal 1998") the Company sold seventeen units to
three customers. The sales price for the RSS may vary depending on a
variety of factors including volume and market conditions. The Company
currently has permission from the Ministry of Defense of Israel to sell this
product to certain foreign countries.
The Company expects to continue sales of the RSS at the rate of eight to
twelve units per year
RSS-4000. The Company entered into a Memorandum of Understanding on
August 11, 1993 with Advanced Systems Development ("ASD"), a subsidiary of
Comptek , located in East Elmhurst, New York, to develop and market the next
generation of RSS. The new simulator was designed to enable the user to
select specific desired frequencies under computer program control.
The RSS 2000, currently being offered for sale by the Company, includes fixed
frequency sources whose frequencies are tuned at the factory level. The feature
of user-selected frequencies will expand the range of applications of the radar
simulator. The system was designed to cover all frequency bands from 0.5 to 18
GHz. Development continued in Fiscal 1994 through 1996. The Company delivered
four units in Fiscal 1997. There were no sales of this product in Fiscal 1998.
RSS-4000 is designed to be software compatible with a large simulator
called "AMES", manufactured by ASD. The Company believes that RSS-4000
addresses the U.S. and European military markets, especially users of state of
the art EW equipment. RSS-4000 will enable those customers to simulate
multiple emitter scenarios at the flight line and use scenarios developed in
the lab on the AMES system.
Altimeter Tester. The Company has developed under contract a device that
can be used to test a helicopter's altimeter on the flight deck without the
necessity of removing the altimeter from the helicopter and testing it in a
laboratory. In Fiscal 1996 and 1997, the Company sold two and four units,
respectively, to a customer. There were no sales of this product in fiscal 1998.
In addition to the above mentioned systems, the Company has developed a
product line of various frequency sources. These products serve as the building
blocks for the RF simulators and the infrastructure for the commercial
communication equipment.
The main products of this line are:
Frequency Synthesizers. The Company manufactures, markets and sells
various frequency synthesizers. Frequency synthesizers are used to generate
microwave signals having discrete frequencies which can be selected by an
external electronic digital command. The ability to switch promptly
from one given frequency to another selected frequency while maintaining a
stable selected frequency is a desirable feature in modern
electronic communication and detection systems. The Company has developed a
novel compact synthesizer on behalf of a customer. At the end of Fiscal 1993,
the Company received an order for six units from the customer. By the end of
1994, the Company completed the product development and delivered the
synthesizers to the customer in fiscal 1995. The Company developed a
synthesizer for commercial communication applications.
Digital Tuned Oscillator (DTO). The Company has developed a new highly
integrated assembly of 2-18GHz Digital Tuned Oscillator. The product is based
on the Company's ability to integrate various RF components such as: filters,
low-noise amplifiers, VCO's and switches into a highly integrated
assembly. The DTO is the main building block for the RSS-4000 and is sold
as a stand-alone device. The Company has delivered 25 units during Fiscal
1996, 28 units in Fiscal 1997 and 54 units in Fiscal 1998.
Voltage Controlled Oscillators (VCO). Voltage-controlled oscillators are
used to generate microwave energy having frequencies that can be varied by an
external variable voltage and in proportion to this voltage. Such devices are
used extensively in electronic warfare communications and radar systems to
vary the frequency so that the enemy cannot detect the carrier frequency in
which one transmits or receives information.
Dielectric Resonance Oscillators (DRO). These devices are used to generate
microwave energy at high frequencies using small dielectric cylinders that
determine the precise frequency desired. Such small dielectric materials are
replacing older technologies where the mechanical dimensions of certain
cavities were used to determine the frequencies.
The following table sets forth the approximate percentage of sales of the
Company's products in Fiscal 1997 and 1998.
PRODUCTS PERCENT OF SALES PERCENT OF SALES
1997 1998
DIGITAL RADIO 36% 0%
RADAR SIGNAL SIMULATOR 29% 38%
FREQUENCY SOURCES 14% 55%
OTHER PRODUCTS 21% 7%
TOTAL 100% 100%
Backlog. At September 30, 1998 the approximate backlog of orders of the
Company's products and services was approximately $1,000,000. The backlog at
September 30, 1997 was approximately $2,450,000. Backlog includes only those
customer commitments for which a delivery schedule has been established by the
Company and the customer. It is expected that most of the current
backlog will be shipped or completed within the ensuing twelve months.
In the Company's experience, its backlog at a given time is not necessarily
indicative of prospective revenue for any respective period.
Research and Development
The Company is engaged in a continuing program of research and development
aimed at developing certain new and improved products. Whenever possible, the
Company attempts to obtain customer funding to adapt the Company's basic
technology to specialized customer requirements.
In September 1996, Microkim signed an agreement with ArrayComm Inc., a
California Corporation located in San Jose, for the development of a family of
Subscriber Unit Antennas (SUA) to be part of a Wireless Local Loop (WLL) system
developed by ArrayComm. The family of the SUA products will be comprise of four
different types of passive and active antennas. Development of these
antennas was completed in Fiscal 1997.
In February 1998, Microkim signed an agreement with Radiotel, for the
development of the Out Door Unit (ODU) to be a part of a RF Link
that was developed by Radiotel. Development of ODU has been completed
in Fiscal 1998.
In July 1997, Microkim signed an agreement with Micel Wireless for the
development of an AMPS Rural Cellular Telephone, which is the main field of
interest of Micel Wireless.Development has been completed in Fiscal 1998.
Micel Wireless is expected to provide a distribution channel for
Microkim's AMPS Rural Cellular Telephone. In addition, Microkim will seek other
suppliers and operators to generate additional AMPS Rural Cellular Telephone
sales.
In December 1996, ArrayComm and Microkim received the approval from the
Israel-U.S. Binational Industrial Research and Development Foundation (BIRD) for
funding of its joint project. BIRD agreed to fund up to 50% of actual approved
expenditures. BIRD will receive a royalty from the sale of products developed
under this project up to 150% of the funds received.
The Company received approximately $209,500 from BIRD.
The development of the RSS and certain commercial microwave components have
been partly financed by the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade ("OCS").
A royalty of 2%-3% must be paid from the sales of products developed with grant
funds. The royalty repayment is limited by the total grant amounts.
During Fiscal 1997 and 1998, the Company's gross research and development
activities aggregated $759,567 and $1,706,573, respectively, including grants of
$355,558 and $185,688, respectively, received from the OCS.
Manufacturing and Suppliers
The Company offers both standard products manufactured and assembled by the
Company as well as customized systems, subsystems, components and subassemblies
in accordance with specific customer demands. The Company is currently
emphasizing subsystems and systems products. The Company is capable of
providing a full range of services including engineering design and
development, assembly and fabrication of circuits, subsystems and subassemblies.
The Company employs advanced manufacturing techniques geared towards production
to military, RF/microwave components and aerospace standards. The Company's
manufacturing facilities in Israel include a class 100,000 clean room.
The clean room area consists of laminar flow benches where the critical bonding
and dice-attaching processes and inspections are performed.
The Company's manufacturing facilities include electrical and RF test equipment
required for in-process and acceptance testing. Special equipment at the
Company's manufacturing facility also include broadband sweepers, automatic test
stations, bonding and dice attaching equipment.
In August 1991, Microkim was granted under the Israeli Law for
Encouragement of Capital Investment 1959, the approval to expand its production
capabilities and increase its working capital. The approval enables Microkim
Ltd. to receive a guarantee from the State of Israel of loans from Israeli
banks up to $1,240,000. These loans were used to purchase equipment. As
of September 30, 1998, a balance of approximately $23,004 of long term bank
loans has been guaranteed by the State of Israel.
The Company's product assurance and reliability programs are designed to
meet most applicable military standards. Established quality assurance programs
monitor the performance to specifications of all materials used and labor
performed in manufacturing. Monitoring begins with the inspection of incoming
materials and continues through the processing, assembly and testing of
final products. Since certain products are used for military purposes, the
Company's quality control requires that it inspects these products before they
are shipped to customers. The Company is required to keep detailed records of
the results of such inspections.
The Company has a number of sources of supply for most of the materials and
components necessary for the production of its products and systems. The
Company is constantly looking to qualify more than one supplier
for its necessary component parts. The Company generally purchases the
component parts necessary to complete an order as soon as the order is confirmed
thereby attempting to eliminate shortages or delays in the manufacturing process
without the necessity of maintaining excess inventory.
Marketing and Principal Customers
The focus of Micels commercial marketing effort will be to identify those
telecommunications service providers who require fixed wireless solutions in
their given territories and the cost benefits of wireless compared to copper
wire installation. The target markets are those emerging countries
where industry is rapidly developing but the countrys infrastructure and
communication systems are lagging behind. These emerging markets
include South and Central America, Eastern Europe, the Philippines, China,
India, Indonesia and Africa.
Approximately 58% of the Company's sales during the fiscal year ended
September 30, 1998, were made to customers in Israel directly by the Company's
sales staff. In Fiscal 1998,Elisra and Elta Electronics Industries Ltd.
represented approximately 26% and 13% of total sales, respectively.
In addition, ASDI represented approximately 31% of total sales during Fiscal
1998.
The Company markets its products in Israel through its sales and management
staff by calling upon customers or potential customers. In addition, the
Company is contacted directly by potential customers to provide them
with specifications and quotations on the development and manufacture of
specific components and subsystems. The Company has determined that the
preferred way to market its components outside Israel is through agents and
representatives located in the country where the customer is located,
since certain potential customers prefer to purchase their military
components from a local source. In addition, the Company's representatives
located in a country may be required to have the technical expertise to assist
the customer and repair any defective components.
Effective as of January 15, 1993, the Company entered into an agreement
with Quest Enterprise, Inc. ("Quest"), a marketing consulting company for
military and communication companies, to provide marketing, consulting
and other services as reasonably required by the Company for the purpose of
securing for the Company research and development contracts, joint development
programs, strategic partnerships, business opportunities and production and
sales contracts with North American companies and other entities on an exclusive
basis in North America. The Company has been paying Quest a fee in the amount
of $5,000 per month plus expenses. In addition, in the event that the services
provided by Quest to the Company result in a contract being awarded
to the Company, Quest will be entitled to a commission in the amount
of one percent of the revenues received. In the event that the
services provided by Quest result in a joint venture or other equity arrangement
between Micel Corp. and the potential partner, Quest will be entitled to a
reasonable equity position in such joint venture not to exceed 15% of the
equity of the joint venture or a commission. Quest is also entitled to 25% of
any royalties received by the Company from parties introduced to the
Company by Quest.
The Company entered into a consulting agreement with Crossways Consulting
Group, Inc. ("Crossways") commencing January 1, 1999, which will replace the
agreement with Quest. Crossways will provide marketing, consulting and other
services as reasonably required by the Company for the purpose of
securing for the Company joint development programs, strategic partnerships,
business opportunities and production and sales contracts with North American
companies.
The Company will pay Crossways a fee in the amount of $6,000 per month plus
expenses. In addition, in the event that the services provided by
Crossways to the Company result in sales in North America , Crossways will
be entitled to 1.5% of such sales. Crossways will be granted options to
purchase 220,000 shares of Common Stock at $2.00 per share until December 31,
2003, exercisable to the extent of 20% thereof each year.
Mr. Tuvia Barak, a principle in Quest is the principal of Crossways.
RadioTel Ltd. also has a consulting agreement with Crossway under which RadioTel
pays Crossways a monthly consulting fee of $5,000.
Competition
There are numerous manufacturers of microwave products in Israel, the
United States and elsewhere which compete with the Company. Many of these
competitors are much larger than the Company with substantially
greater financial resources, experience and more extensive engineering,
technical and research capabilities. In addition, many large
companies with substantially greater financial, technical and marketing
resources than the Company, including some companies that
are currently customers of the Company, have the capability to produce the
products made by the Company and could decide to enter the market in the
future and compete with the Company. The Company is not a major
competitor in the worldwide microwave market, although the Company believes
that it competes effectively in the Israeli market. The Company's largest
competitor in Israel is Elisra Ltd., a subsidiary of Tadiran Ltd.
The Company believes that it is able to compete based on its quality,
location, technical capability and experience. In addition, its products
have been field tested and the Company has the ability to produce and integrate
many different microwave components into subassemblies and end-user products.
The major competitor of the Company's RSS is A.A.I. which manufactures the
APM 427. The Company believes that the RSS is superior to the APM 427,
since the RSS is less expensive, is much smaller and can be operated by only
one person. Three additional companies are now offering portable units
which compete with the RSS 2000. Republic Electronics of N.Y. is
offering its MTS-300; Cal Corp. of Ontario, Canada has introduced its
Micro-Tass Product; and Anarem in the United Kingdom offers a similar product.
The major competitors of the Companys communication products are (i)
California Microwave Inc. which manufactures digital point-to-point radios,
medium haul radios for cellular communications and modems, and (ii) Digital
Microwave Corp. which manufactures digital microwave radios for short and medium
haul communications for multiple digital lines.
Patents
The Company believes its ability to compete depends primarily on the
technical competence, knowledge and experience of its management and personnel
and their abilities to develop, improve and market its products. Nevertheless,
others may be able to learn certain of the Company's trade secrets or copy its
product designs.
The Company does not presently own any patents, however, the Company intends
to file patent applications for any patentable inventions, processes or
improvements that the Company may develop in the future when it believes that
meaningful patent protection can be obtained.
The Israeli Ministry of Defense ("IMOD") usually retains certain rights to
technologies and inventions resulting from the Company's performance as a
contractor under IMOD contracts and may generally disclose such information to
third parties, including other defense contractors who may be competitors of the
Company. When the IMOD funds research and development, it usually acquires
rights to data and title to inventions, and the Company may retain a
non-exclusive license for such inventions. The IMOD is, as a rule, entitled to
receive royalties on export sales, to the extent that such sales resulted from
IMOD-financed development. However, if the IMOD purchases only the end product,
the Company normally retains the principal rights to the technology.
Government Regulations
Many of the component parts of the Company's products are imported from the
United States. Accordingly, the Company and/or its suppliers may be
required to obtain an export license, preference rating or other government
authorization in connection with components purchased in the United States. To
date, the Company has not experienced any difficulty in obtaining such
authorizations or licenses. In addition, unless the Company obtains prior
authorizations from the Office of Export Administration of the Department of
Commerce of the United States, the Company will not be allowed to export or
reexport to certain restricted countries, directly or indirectly, any of the
Company's products containing components imported from the United States.
The Company does not expect that this will be detrimental to the Company's
business. In addition, the Company will require the permission of the Ministry
of Defense of Israel before the Company could export any military microwave
system. There can be no assurance that the Company will be able to obtain such
permission on a timely basis or at all. However, the Company has received such
permission for the export of the RSS, Altimeter tester and microwave
components to certain countries.
Product Warranty and Service
Generally, the Company provides the customer, at the time a purchase
contract is entered into, with a detailed list of Acceptance Test Procedures.
These procedures identify which tests the Company's products must undergo and
pass before the individual product would be delivered and accepted by the
customer. Certain customers require and pay for a Quality Test Procedure
("QTP") which is a specific procedure for testing the quality of certain of the
Company's products based on that customers specifications. The Company
generally provides a warranty for parts and labor for one year from delivery of
the product, although in some cases a longer warranty period may be given. The
Company currently services any warranty claims itself. The Company's rate of
returns for repair under the warranty on all products, other than on the Radio
Module, is similar to that prevailing in the industry and annually averages
between 1/2% and 1% of total sales.
Employees
At September 30, 1998, Microkim had a total of 25 employees in Israel
including 8 in research and development, 6 in general management,
administration and marketing and 11 in production. RadioTel had 17 employees,
3 in general and administrative and 14 in research and development.
Management believes that its relations with its employees are satisfactory.
The Company's employees do not belong to any labor organization.
Nevertheless, certain provisions of the collective bargaining agreements between
the Histadrut (General Federation of Labor in Israel) and the Coordination
Bureau of Economic Organizations (including the Industrialist's Association) are
applicable to the Company's Israeli employees by order of the Israeli Ministry
of Labor. These provisions concern mainly the length of the work day, minimum
daily wages for professional workers, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. The Company generally provides its Israeli
employees with benefits and working conditions beyond the required minimums.
A general practice followed by the Company, although not legally required,
is the contribution of monies on behalf of its senior Israeli employees to a
fund known as "Managers Insurance." This fund provides a combination of a
savings plan, insurance and severance pay benefits to the employee, giving the
employee a lump sum payment upon retiring and securing his right to receive
severance pay, if legally entitled, upon termination of employment.
The employee contributes an amount equal to 5% of his wages and the employer
contributes an additional 13 1/3% of his wages.
In addition, Israeli law generally requires severance pay (generally one
month's salary for each year of employment) upon the retirement or death of an
employee or termination of employment without due cause. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the
National Insurance Institute, which is similar to the United States Social
Security Administration. Payments, up to a ceiling, amount to approximately
12% of wages, with the employee contributing approximately 60% and the employer
approximately 40%.
Item 2
Legal Proceedings
The Company is unaware of any pending legal proceedings, the outcome of
which, in the Company's view, will have a material adverse effect on the
Company's consolidated financial position or results of operations.
In July 1994, the Company commenced a civil action in Israel in the
approximate amount of $3,000,000 against M/A Com and Hillel Weinstein for
false representations made by M/A Com and Dr. Weinstein in connection with
the purchase of Microkim Ltd. from M/A Com and for subsequent damages
resulting from such misrepresentations. Dr. Weinstein is no longer a defendant
or counter claimant in this action as a result of the agreement reached on May
27, 1996. M/A Com filed a motion for cancellation of the Companys request for
out of boundaries jurisdiction. This motion was granted. Micel reapplied to
the court for permission to serve M/A Com extraterritorially, submitting
additional affidavits in support of the application. The court rejected the out
of boundary jurisdiction and this suit is being discontinued.
Item 3
Properties
The Company's executive offices consist of approximately 400 square feet
located at 445 Central Ave. Cedarhurst, New York. Microkim's executive offices
and manufacturing facilities are located in a new light industrial area in the
city of Tirat Hacarmel, outscirts of Haifa, Israel. The new location contains
approximately 600 square meters at a monthly rental of approximately $8,750
exclusive of utilities. The rent is linked to the Consumer Price Index.
The new lease is for a period of five years. Microkim has an option to renew
the lease for an additional three years. RadioTel's executive offices
are located in Givat Shmuel, Israel. The Company believes that
its properties are sufficient for its needs at the present time.
Item 4
Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on November 2, 1998.
At the meeting, Heather Loren, Ron Levy and Barry Braunstein were each
re-elected as directors of the Company for a term of one year or until his/her
successor is duly elected and qualified.
Part II
Item 5
MARKET FOR THE COMPANY'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities were listed for trading on the OTC Bulletin Board
until May 1998 under the trading symbol MICE. Prior to November 25, 1996, the
effective date of the ten-for-one reverse stock split, the shares of Common
stock, $.001 par value, were trading under the symbol MICL. The following table
sets forth the range of high and low bid prices of the Company's Common Stock
for the fiscal quarters of 1997 and 1998. These quotations represent prices
between dealers in securities, do not include retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.
Fiscal Year Ended Fiscal Year Ended
September 30,1997 September 30, 1998
High Bid Low Bid High Bid Low Bid
COMMON STOCK (MICE)
First Quarter 3 3 3 2
Second Quarter 3 3 2.50 .50
Third Quarter 4 3 .50 .50
Fourth Quarter 3 2
_______________________
On December 31, 1998, the closing bid price of the Common Stock on OTC Bulletin
Board was $2.00.
The Company has not paid a dividend on its shares of common stock and does
not anticipate paying cash dividends in the foreseeable future.
Item 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
All of the Company's operations in Fiscal 1998 were conducted through its
Israeli subsidiaries, Microkim and RadioTel. Microkim and RadioTel
maintains their financial records in United States Dollars. Transactions and
balances originally denominated in dollars are presented at their original
amounts. Transactions and balances in currencies other than the dollar are
remeasured into dollars in accordance with the principles set forth in Statement
No. 52 of the Financial Accounting Standards Board.
Fluctuations in the rate of exchange between the dollar and such other
currencies result in the recognition of financial income or loss. The Company
manages its Israeli operations with the object of protecting against material
net financial loss in U.S. dollar terms from the impact of Israeli inflation and
currency devaluation on its non-U.S. dollar assets and liabilities. In the
twelve month period ended September 30, 1998 ("Fiscal 1998"), the Israeli
Consumer Price Index ("ICPI") increased by 4.66%, as compared with a 9.95%
aggregated devaluation of the shekel against the U.S. dollar. There can be no
assurance that the Government of Israel will devalue the shekel from time to
time to offset the effects of inflation in Israel. See Note 2 of the Notes to
the Consolidated Financial Statements.
In computing taxable income, the Company's Israeli subsidiary is entitled
under Israeli income tax rules to certain deductions designed to avoid taxation
of inflationary gains measured in Israeli currency. If these laws or
governmental programs were modified or terminated as they apply to the
Company, there could be an adverse effect on the results of operations of the
Company.
Financial Condition:
The Company's operations in Fiscal 1998 have been financed principally
by revenues from operations, proceeds from the sale of Common Stock in a
private placement and research and development grants.
In Fiscal 1998, the Company issued 150,000 shares of common stock at $2.00
per share and raised $400,000 in a private placement. A substantial portion of
these funds was used to fund the Company's financial commitment to
RadioTel which aggregated $1,749,970 through October 30, 1998.
The total amount of outstanding loans, credit facilities and guarantees
from banks at September 30, 1998 were approximately $351,360 and is
secured by liens on certain of Microkim's property and equipment, share capital
and insurance rights, and by a secured interest in all of Microkim's assets.
This amount includes approximately $23,004 of long term borrowings from Israel
Industrial Development Bank Ltd. to be repaid between 1998 and 2000. This
also includes approximately $98,640 of performance guarantees pursuant to
contracts with customers. The Company had approximately $87,770 unused
lines of credit.
The Company is committed to pay royalties to the Office of the Chief
Scientist of the State of Israel ("OCS") in respect to products under
development for which the OCS participated by way of grant. The royalty is
computed at the rate of 2%-5% of proceeds from sales of such products up to
the amount of such grant (approximately $1,113,738 as of September 30,
1998). Royalties paid during Fiscal 1998 amounted to approximately $23,223.
In the year ended September 30, 1998, net cash and cash equivalents
increased by $937,604 as a result of $2,496,548 issuance of subsidiary shares,
$400,000 from receipts on account of shares, $300,000 from issuance of
common stock and $222,098 from short-term bank credit. This was offset by
$1,834,549 from operating activities, $590,230 purchase of equipment,
$50,000 investment in affiliated company, $18,724 repayment of long term
debt .
As of September 30, 1998, $229,719 of short term bank credits were
denominated in New Israeli Shekels and $77,425 of cash and cash equivalents
are denominated in New Israeli Shekels.
Due to the weakness of the defense market, the Company intends to place
emphasis on increasing its commercial line of products and commercial market
base. It is the policy of the Company to accept only those orders which are
worthwhile economically and the Company has also tended to accept mainly
larger orders for a limited number of projects, the most important of which
tend to be with strategic partners as with the projects with ASDI and ArrayComm.
A significant portion of the future revenues of the Company will be dependent
on the success of these two projects.
Results of Operations
Year ended September 30, 1998 compared to the year ended September 30,
1997.
Sales in the Fiscal year ended September 30, 1998 ("Fiscal 1998") were
$2,740,476 as compared with $3,720,760 in the year ended September 30,
1997 ("Fiscal 1997").The decrease in sales compared to Fiscal 1997, resulted
from the completion of a certain project in 1997 representing sales of
$1,189,000 and no follow up sales of radios developed in this project took
place in Fiscal 1998.
Cost of sales in Fiscal 1998 was 58% of sales or $1,595,035, as compared
with 72% or $2,688,709 in the same period in 1997. In Fiscal 1998, cost of
materials was approximately 36% of sales compared to approximately 46% of
sales in Fiscal 1997, subcontractor expenses were approximately 2% of sales in
Fiscal 1998 compared to approximately 1% of sales in Fiscal 1997, salaries
were approximately 21% of sales in Fiscal 1998 compared to approximately
16% in Fiscal 1997 and other expenses and depreciation were approximately
1% of sales in Fiscal 1998 compared to approximately 4% of sales in Fiscal
1997.
Research and Development expenses net of government subsidies increased
from $404,009 or 11% of sales in Fiscal 1997 to $1,520,885 or 55% of sales in
Fiscal 1998. The increase was caused primarily by an increase in the scale of
the Company's research and development activities by RadioTel.
Selling and Marketing expenses increased from $118,206 or 3% of sales in
Fiscal 1997 to $218,525 or 8% of sales in Fiscal 1998. The increase resulted
primarily from an increase in marketing activities .
General and Administrative expenses increased from $680,976 or 18% of
sales in Fiscal 1997 to $1,145,392 or 42% of sales in Fiscal 1998, primarily as
a result of the increase of operations of RadioTel .
The Company's results of operations include its equity in the loss of its
affiliate, Micel Wireless Corp., amounting to $24,041. This affiliate
commenced operations October 1, 1996.
In Fiscal 1998, Interest expenses were $68,819 or 2% of sales as compared
with $75,497 or 2% of sales in Fiscal 1997.
In Fiscal 1998, Interest income increased to $45,472 compared with
$18,366 in Fiscal 1997,mainly as a result of interest from RadioTel's
fixed-term deposits.
Due to the above, in Fiscal 1998, the Company reported a net loss of
$1,117,654 or $.019 per common share and in Fiscal 1997, the Company
reported a net loss of $209,026. The minority interest in losses of subsidiaries
in fiscal 1998 was $649,095.
Management and Control Systems; Year 2000 Compliance
The Company has taken steps to ensure that its systems, controls, and
computer systems are adequate to address its current needs and to adequately
address the Year 2000 operational problems.
ITEM 7. Financial Statements
See Pages F-1 through F-21.
ITEM 8. Changes in and disagreements with Accountants on Accounting and
FinancialDisclosure
Not Applicable
ITEM 9. Directors and Executive Officers:
The officers and directors of the Company are as follows:
Name Age Position
Ron Levy 50 President and Director
David Selengut 43 Secretary
Barry Braunstein 39 Director
Heather Loren 30 Director
Ron Levy has been President and Director of the Company since October 1,
1996 he has also been the President of RadioTel since October 1, 1996 . Prior to
that time he was a consultant to Microkim Ltd, the Company's wholly owned
subsidiary. From October 1992 to November 1995 he was President and Chief
Executive Officer at EUROM Flash Ware Solutions Ltd. and from September
1990 to September 1992 he was Project Manager at SanDisk Corporation in
Santa Clara, CA. From September 1982 until September 1990 he was a
manager of Tadiran Communication Micro Electronic Center. Mr. Levy has
received his B.S. degree in Electrical Engineering and Computer Science from
the University of California in Berkeley.
David Selengut has been the secretary of the Company since November 1997.
Mr. Selengut has been a member of the law firm Ellenoff Grossman & Schole
LLP since May 1998, a partner in the Law Firm of Bernstein & Wasserman,
LLP from July 1997 to May 1998and was a Partner at the Law Firm of Singer,
Bienenstock, Zamansky, Ogele & Selengut, LLP from May 1995 until April
1997. Those firms have acted as counsel to the Company with respect to
certain matters. From May 1988 until April 1995, he was an associate at the
Law Firm of Neiman Ginsburg & Mairanz P.C., New York, New York.
Barry Braunstein has been a director of the Company since April, 1994. From
1983 to the present, he has been the administrator of Laconia Nursing Home in
Bronx, New York. Mr. Braunstein received his B.A. Degree from Adelphi
University in 1985.
Heather Loren has been a director of the Company since August 1995. From
September 1994 until the present, Ms. Loren has been a consultant with the
firm of Price Waterhouse Coopers, LLP. From December 1991 until August of
1992, she was in geriatric research at Hadasa Hospital in Jerusalem. From
June 1989 until December 1991 she held various managerial positions at the
Bridgeport Healthcare Center and White Plains Nursing Home. She received
her Masters degree in management from Northwestern University in 1994 and
a B.A. degree from Columbia University.
Each of the Company's Directors has been elected to serve until the next annual
meeting of the Shareholders. The Company's executive officers are appointed
annually by the Company's Directors. The Secretary is a non-executive
position. Each of the Company's Directors and Officers continues to serve
until his successor has been duly elected and qualified. The outside directors
are entitled to receive $6,000 per year from the Company. The directors of
Microkim are Ron Levy and Tzvi Siegel. To the Company's knowledge, there
were no delinquent Section 16(a) filers for transactions in the Company's
securities during fiscal year ended September 30, 1998.
Item 10. Executive Compensation:
Executive Compensation
The following table sets forth all compensation received for services
rendered to the Company by certain executive officers during each of the past
three fiscal years ended September 30, 1998. No other executive officer
received compensation in excess of $100,000 during any of the last three fiscal
years.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
Name and Principal Other Annual Awards
Position Year salary ($) Compensation Options#
1998 $106,883 $24,797 (1) 0(2)
Ron Levy,
President, Chief Executive
Officer
1997 $95,149 $25,883 (1) -0-(2)
___________________________
(1) Total value of non-cash compensation.
(2) Mr. Levy receives his salary from RadioTel Ltd. He also
received options to purchase six percent of the stock of RadioTel
Ltd., a subsidiary of the Company, exercisable for a nominal
amount. The option vests to the extent of one-half at the end of
two years from the date of commencement of employment and
the remainder at the rate of two percent per month commencing
on the 25th month from the date of employment.
OPTION GRANTS IN 1998
Precent of Total
Options Granted
Name (a) Options To Employees in Exercise Expiration
Granted (b) Fiscal Year 1998(C) Price (d) Date
Ron Levy 0 (1) - 0 - - 0 -
Benjamin
Sporn (2) 100000 100% $2.00 October 5, 2007
___________________________
(1) See Note (2) to the Summary Compensation Table
(2) Mr. Sporn was Chairman of the Board until November 14, 1997.
AGGREGATED OPTION EXERCISES IN 1998 AND FOR YEAR-END VALUES
Number of In-the-Money
Unexercised Options Options at Fiscal
at Fiscal-Year End Year-End ($)
Name Shares Acquired Value Exercisable/ Exercisable/
on Exercise (#) (b) Realized ($) Unexercisable(d) Unexercisable(e)
Ron
Levy -0- -0- 50,000/50,000(1) -0-/-0-
(1) Does not include the option described in note (2) to the Summary
Compensation Table.
Stock Option Plan
In November 1990, the Company's Board of Directors adopted, and
its Shareholders approved, the 1990 Stock Option Plan (the "Plan"), which
was amended by the Shareholders at the 1996 annual meeting and provides
for the grant of incentive and/or non-qualified stock options to purchase up
to 800,000 (post split) shares of Common Stock to any officer, director,
consultant or employee when the Board, in its sole discretion, determines
that a grant of options to such person would be in the best interests of the
Company. Incentive stock options granted under the Plan shall be pursuant
to a written agreement for a term not exceeding ten (10) years (five (5) years
for Shareholders owning more than ten percent (10%) of the Common
Stock of the Company). The exercise price of the options shall be
established by the Board at the time of grant of the option but cannot be less
than one hundred percent (100%) of the fair market value at the time of
grant of the option. If the recipient owns more than ten percent (10%) of
the Common Stock of the Company, the exercise price must be at least one
hundred and ten percent (110%) of the fair market value of the underlying
Common Stock at the time of grant. The aggregate fair market value
(determined as of the date of grant) of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an employee during any calendar year may not exceed $100,000. Other
terms and conditions of options granted under the Plan, which expires
November 2000, are determined by the Board of Directors. The number of
shares subject to outstanding options will be appropriately adjusted upon
the happening of any stock split, stock dividend, recapitalization,
combination, subdivision, issuance of rights or other similar corporate
change. Persons who are residents of the State of Israel for the purpose of
the Israeli Currency Control Regulations, who own more than 5% of the
total outstanding shares of the Company would be required to get the
consent of the Bank of Israel to accept offers of stock options from the
Company. To date the Company has granted options to purchase 527,120
shares of Common Stock, $.01 par value. None of the options previously
granted under the Plan has been exercised.
Mr. Tuvia Barak, a principal in Crossways Consulting Group, Inc.
and Mr. Ron Levy, President of the Company, each received an option,
exercisable for nominal value, to purchase up to 6% of the equity of
RadioTel Ltd., a subsidiary of the Company, the options vest to the extent of
one half at the end of two years and the remainder at the rate of 2% per
month commencing on the 25th month from date of commencement of
employment. The options will only vest if such persons are still an employee
or a consultant to RadioTel.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of November 30, 1998, certain
information as to the stock ownership of each person known by the
Company to beneficially own 5% or more of the Company's outstanding
Common Stock, by each director of the Company who owns any shares of
the Company's Common Stock and by all officers and directors as a group:
Percentage of
Name of Amount and Nature of Class as of
Beneficial Owner Beneficial Ownership(1 November 30, 1998
Bonnie Septimus (2) 460,600 7.4%
72 Lord Avenue
Lawrence, New York
Barry Septimus (3) 578,746 9.1%
72 Lord Avenue
Lawrence, New York
Heather Loren (4) 178,125 2.9%
Barry Braunstein (5) 243,500 4.0%
Ron Levy (6) 50,000 *
Tuvia Barak (7) 319,183 5.1%
All officers and directors
as a group
(4 persons) 434,125 6.9%
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned,
and sole voting and investment power is held by the persons named.
(2) This includes 6,000 shares of Common Stock owned by certain of
her children but does not include shares listed below owned by her
husband, Barry Septimus, shares of Common Stock held in trust for
her children where she is not the Trustee or shares owned by her
independent children.
(3) Does not include Shares owned by Mr. Septimus' children or his
wife, Bonnie Septimus, listed above. Includes 132,465 shares of
Common Stock issuable upon exercise of options owned by Quest
Enterprises, Inc which is 50% owned by Mr. Septimus and 30,718
shares issuable upon exercise of a warrant.
(4) Includes 16,500 Shares issuable upon exercise of stock options.
(5) Includes 18,500 Shares issuable upon exercise of stock options and
Shares which have been purchased by Mr. Braunstein and his family in
private placements.
(6) Consists of shares issuable upon exercise of stock options.
(7) Includes 176,465 shares issuable upon exercise of options owned by
companies in which Mr. Barak is a principal and 30,718 shares issuable
upon exercise of a warrant.
Item 12. Certain Relations and Related Transactions
In January 1993, the Company entered into an agreement with
Quest Enterprises, Inc. ("Quest"), of which Barry Septimus, a principal
shareholder of the Company, and Tuvia Barak each owns 50%, to
provide marketing, consulting and other services as reasonably required
by the Company for the purpose of securing for the Company research
and development contracts, joint development programs, strategic
partnerships, business opportunities and production and sales contracts
with North American Companies and other entities on an exclusive basis
in North America. The Company has been paying Quest a fee in the
amount of $5,000 per month plus expenses (reduced from $6,000 per
month). In addition, in the event that the services provided by Quest to
the Company result in a contract being awarded to the Company, Quest
will be entitled to a commission in the amount of 1.5% of the revenues
received. In September 1996, Quest voluntarily reduced this percentage
to 1% at the same time as the Company employed Ron Levy who is to
receive .05% of U.S. sales. In the event that the services provided by
Quest result in a joint venture or other equity arrangement between
Micel Corp. and the potential partner, Quest will be entitled as a
commission to a reasonable equity position in such joint venture not to
exceed 15% of the equity of the joint venture. Quest is also entitled to
25% of any royalties received by the Company from parties introduced
to the Company by Quest. This agreement will expire December 31,
1998 and has been replaced with an agreement with Crossways
Consulting Group Inc. described below.
The Company entered into a consulting agreement with
Crossways Consulting Group, Inc. ("Crossways") commencing January
1, 1999, which will replace the agreement with Quest. Mr. Tuvia Barak
is the principal of Crossways. Crossways will provide marketing,
consulting and other services as reasonably required by the Company
for the purpose of securing for the Company joint development
programs, strategic partnerships, business opportunities and production
and sales contracts with North American companies. The Company will
pay Crossways a fee in the amount of $6,000 per month plus expenses.
In addition, in the event that the services provided by Crossways to the
Company result in sales in North America , Crossways will be entitled to
1.5% of such sales.Crossways will be granted options to purchase
220,000 shares of Common Stock at $2.00 per share until December 31,
2003, exercisable to the extent of 20% thereof each year. RadioTel Ltd.
also has a consulting agreement with Crossways Consulting Group, Inc.
under which RadioTel pays Crossways a monthly consulting fee of
$5,000.
Mr. Tuvia Barak, and Mr. Ron Levy, President of the Company,
each received an option, exercisable for nominal value, to purchase up to
6% of the equity of RadioTel Ltd., a subsidiary of the Company. The
options vest to the extent of one half at the end of two years and the
remainder at the rate of 2% per month commencing on the 25th month
from date of commencement of employment. The options will only vest
if such persons are still an employee or a consultant to RadioTel.
In addition, the Company has been informed that Mr. Barak
and Mr. Levy collectively own 10% of EBS, Inc., the other Shareholder
of Micel Wireless Corp.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits.
3.1 - Certificate of Incorporation of Registrant (1)
3.2 - Certificates of Amendment to the Certificate of Incorporation of
Registrant (1)
3.3 - By-Laws (1)
4.1 - Form of Warrant Agreement (1)
4.2 - Form of Unit Purchase Option (1)
10.3 - 1990 Stock Option Plan (1)
10.4 - Agreement with Quest Enterprises, Inc. (2)
10.5 - Representative Agreement with RF Electronic Sales, Inc. (5)
10.6 - Memorandum of Understanding with Advanced Systems Development
Inc. (5)
10.7 - Organization Agreement among Microkim Ltd, Fairchild Data Inc.,
Teuza - A Fairchild
Technology Venture Ltd. and Misat Ltd. (3)
10.8 - Agreements dated as of October 1, 1995 between Teledata
Communications Ltd., Mikrokim Ltd. and - AIL Systems, Inc. (6)
10.9 - Shareholders Agreement with Export Business & Services, Inc.(7)
10.10 - Agreement with ArrayComm, Inc. (7)
10.11 - Stock Purchase Agreement between the Company, RadioTel Ltd. and Clal
Ventures Capital Fund Limited Partnership. (8)
10.12- Agreement between the Company and Crossways Consulting Group, Inc.
(1) Filed with Registration Statement 33-40512
(2) Filed with Form 10-Q for the quarter ended June 30, 1993
(3) Filed with Form 10-K for year ended September 30, 1992
(4) Filed with Form 10-KSB for the year ended September 30, 1993
(5) Filed with Form 10-KSB for the year ended September 30, 1994
(6) Filed with Form 10-KSB for year ended September 30, 1995
Reports on Form 8-K
(7) Filed with Form 10-KSB for year ended September 30, 1996
None
(8) Filed with Form 10-KSB for year ended September 30, 1997
MICEL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998
IN U.S. DOLLARS
INDEX
Page
Report of Independent Auditors F-2
Consolidated Balance Sheet F3 - F4
Consolidated Statements of Operations F5
Statements of Changes in Shareholders' Equity F6
Consolidated Statements of Cash Flows F7 - F8
Notes to Consolidated Financial Statements F9 -F25
Signatures F26
- - - - - - - - -
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
MICEL CORP. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of Micel Corp.
("the Company") and its subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of September 30, 1998, and the consolidated
results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Tel Aviv, Israel KOST, FORER and GABBAY
January 12, 1999
F - 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Micel Corp.:
We have audited the accompanying consolidated balance sheet of Micel Corp.
(a New York corporation) and subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Micel Corp. and
subsidiaries as of September 30, 1997, and the results of their operations and
their cash flows for the years ended September 30, 1997 and 1996, in
conformity with generally accepted accounting principles.
New York, New York ARTHUR ANDERSEN LLP.
January 9, 1998
MICEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
In U.S. dollars
September 30, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,428,604
Trade receivables (less allowance for doubtful accounts
of $ 42,000) 727,332
Other accounts receivable 183,821
Inventories (Note 3) 665,071
Total current assets 3,004,828
INVESTMENT IN AFFILIATED COMPANY (Note 4) 145,704
DEPOSITS WITH INSURANCE COMPANIES
AND PENSION FUNDS (Note 8) 350,855
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) 684,120
Total assets $ 4,185,507
F - 3
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (note 6) $ 229,719
Current maturities of long-term debt 15,500
Accounts payable and accrued liabilities 830,966
Advances from customers 43,900
Total current liabilities 1,120,085
ACCRUED SEVERANCE PAY (Note 8) 429,431
LONG-TERM DEBT, (Note 7) 7,504
PREFERED SHARES OF SUBSIDIARY 1,159,222
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTEREST 688,231
SHAREHOLDERS' EQUITY (Note 11):
Common stock, $ 0.01 par value -
25,000,000 shares authorized; 5,900,380
shares issued and outstanding 59,004
Additional paid-in capital 7,723,842
Receipts on account of shares 400,000
Accumulated deficit (6,966,466)
Deferred compensation (435,346)
Total shareholders' equity 781,034
$ 4,185,507
The accompanying notes are an integral part of the financial statements.
F - 4
MICEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In U.S. dollars
Year ended September 30,
1998 1997
Sales $ 2,740,476 $ 3,720,760
Cost of sales 1,595,035 2,688,709
Gross profit 1,145,441 1,032,051
Research and development expenses, net 1,520,885 404,009
Selling expenses 218,525 118,206
General and administrative expenses 1,145,392 680,976
Total operating expenses 2,884,802 1,203,191
Operating loss 1,739,361 (171,140)
Interest and other income 45,472 18,366
Interest and other expense (48,819) (75,497)
Loss before income (losses) from
affiliated companyand minority interest 1,742,708 228,271
Income (losses) from affiliated company (24,041) 19,245
Minority interest in losses of subsidiary 649,095 -
Net loss $ (1,117,654) $ (209,026)
Basic and diluted net loss per share $ (0.19) $ (0.04)
Number of Shares used in computing
basic and diluted net loss per share 5,862,366 5,560,630
The accompanying notes are an integral part of the financial statements.
F-5
MICEL CORP. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In U.S. dollars
Deferred
compensation
Common stock Additional Receipts from issuance of
Number of paid-in on account Accumulated stock options
shares Value capital of shares deficit to employees Total
Balance as of October
1, 1996
5,365,380 $ 53,654 $5,785,986 $- $ (5,639,786) $- $ 199,854
Issuance of common stock
(net of issuance expenses)
in a private placement
385,000 3,850 747,400 - - - 751,250
Deferred compensation from
issuance of stock options
to employees
- - 498,240 - - (498,240) -
Amortization of deferred
compensation from issuance
of stock options to
employees
- - - - - 134,940 134,940
Net loss
- - - - (209,026) - (209,026)
Balance as of September
30, 1997
5,750,380 57,504 7,031,626 - (5,848,812) (363,300) 877,018
Issuance of common stock
150,000 1500 298,500 - - - 300,000
Receipts on account of
shares
- - - 400,000 - 400,000
Compensation from issuance
of options to consultants
- - 135,000 - - - 135,000
Deferred compensation from
issuance of stock options
to employees
- - 258,716 - - (258,716) -
Amortization of deferred
compensation from issuance
of stock options to
employees
- - - - - 186,670 186,670
Net loss
- - - (1,117,654) - (1,117,654)
Balance as of September 30,
1998
5,900,380 $59,004 $7,723,842 $400,000 $(6,966,466) $(435,346) $781,034
The accompanying notes are an integral part of the financial statements.
F - 6
MICEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In U.S. dollars
Year ended September 30,
1998 1997
Cash flows from operating activities:
Net loss (1,117,654) (209,026)
Adjustments to reconcile loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 112,552 84,468
Equity in (income) losses of
affiliated company 24,041 (19,245)
Compensation from issuance of
options to consultants 135,000 -
Amortization of deferred compensation from
issuance of stock options to
employees 186,670 134,940
Gain on sale of fixed assets (8,505) -
Minority interest in losses of
subsidiary (649,095) -
Shares issued for consulting fees - 6,250
Provision for allowance for doubtful
accounts - 12,000
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable (389,821) 805,827
Decrease (increase) in inventories 229,921 (186,067)
Decrease in accounts payable
and accrued liabilities (102,222) (510,616)
Increase (decrease) in advances
from customers (279,938) 146,729
Increase in accrued severance pay,net 24,502 8,861
Net cash provided by (used in)
operating activities (1,834,549) 274,121
Cash flows from investing activities:
Purchase of fixed assets (590,270) (85,537)
Proceeds from sale of fixed assets 12,501 -
Investment in affiliated company (50,000) (100,500)
Net cash used in investing activities (627,769) (186,037)
F - 7
Cash flows from financing activities:
Repayment of long-term debt $ (18,724) $ (109,737)
Net change in short-term bank
overdraft facilities 222,098 (313,436)
Proceeds from issuance of common
shares, net 300,000 745,000
Receipts on account of shares 400,000 -
Issuance of subsidiary shares to a
third party 2,496,548 -
Net cash provided by financing
activities 3,399,922 321,827
Increase in cash and cash equivalents 937,604 409,911
Cash and cash equivalents at the
beginning of the year 491,000 81,089
Cash and cash equivalents at
the end of the year $ 1,428,604 $ 491,000
Supplemental cash flow information
Interest paid $ 24,862 $ 33,010
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock in exchange for consulting
services rendered to the Company. $- $ 6,250
The accompanying notes are an integral part of the financial statements.
F - 8
MICEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
Micel Corp. ("the Parent") was incorporated on June 25, 1987 and
operates in the United States of America and in Israel through its Israeli
subsidiaries (collectively the "Company"). The principal business
activities of the Company are the production, development and
marketing of electronic equipment. The Company markets its products
in the United States and in Israel.
Micel's subsidiaries:
a. Microkim Ltd. ("Microkim")
Founded in 1972 in Israel, by M/A Comm, Microkim is dedicated to
providing advanced products for a broad range of military and
commercial applications. The Company is a leading supplier of
portable field testers and simulators, RF and microwave systems,
sub-systems and components for application in communication,
electronic warfare, radar, test equipment, and simulators/Testers.
Microkim is 100% held by the parent.
b. RadioTel Ltd. ("RadioTel")
RadioTel Ltd., was established in 1996 in Israel to develop a managed
wireless Synchronous Digital Hierarchy (SDH) transmission network.
Through the use of novel techniques and state of the art technologies,
the company's mission is to extend wideband wireline/fiber services
into the wireless domain. These wireless networks are used to extend
the existing and future infrastructure while at the same time supplying
full transparency of all protocols with the same reliability and
uninterrupted service of wireline services.
RadioTel is 51.5% held by the parent.
The financial statements of RadioTel are consolidated with the
Company's financial statements.
c. Micel Wireless Corp.
Micel Wireless Corp., a U.S. corporation located in Florida , is an
international telecommunications company engaged in the sourcing,
marketing and sales of wireless telephone terminals and other related
products. Micel Wireless currently represents certain manufacturing
companies and telecom agencies as a purchasing agent and sales
representative.
Micel Wireless Corp. designs, manufactures, and sells fixed cellular
terminals for wireless local loop ("WLL") applications in developing
countries.
Micel Wireless is jointly held by the Parent and by Export Business &
Services, Inc. ("EBS").
F - 9
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the financial statements
are as follows:
a. Principles of consolidation:
The consolidated financial statements include the accounts of the
parent and its subsidiaries and have been prepared in accordance with
generally accepted accounting principles in the United States.
Significant intercompany accounts and transactions have been
eliminated on consolidation. The Company's 50% interest in Micel
Wireless is accounted for by the equity method.
b. Foreign currency transactions:
Most of Microkim's sales are either in, or, linked to the U.S. dollar. In
addition, a substantial portion of the parent's costs are incurred in dollars.
Company's management believes that the dollar is a primary currency in
the economic environment in which it operates, therefore the dollar is its
functional currency, and, accordingly, monetary accounts maintained in
currencies other than the dollar (principally cash and liabilities) are
remeasured using the foreign exchange rate at the balance sheet date.
Operational accounts and non-monetary balance sheet accounts are
measured and recorded at the rate in effect at the date of the transaction.
The effects of foreign currency remeasurement are reported in current
operations.
c. Use of estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
d. Cash and cash equivalents:
The Company considers all highly liquid investments, originally
purchased with maturities of three months or less, to be cash equivalents.
F - 10
e. Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined as follows:
Raw materials: using the weighted average basis.
In Process Inventories: Raw materials and components - on the
weighted average basis. Labor and
overhead - on the basis of actual costs.
f. Property, Plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method, over the estimated useful lives
of the assets as follows.
Years
Machinery and equipment 5 - 6
Computers and related equipment 3 - 5
Motor Vehicles 6
Office furniture and equipment 6 - 14
Leashold improvements are amortized on the straight-line basis, over the
shorter of either the estimated useful life or the lease term.
g. Income taxes:
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) 109, Accounting for Income
Taxes. This statement prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
F - 11
h. Warranty Costs:
The provision for product warranties is recorded for probable costs, in
connection with warranties based on the company's experience and
Company's managers and engineering estimates.
The Company generally provides a warranty for parts and labor for one
year from delivery of the product, although in some cases a longer
warranty period may be given.
i. Revenue recognition:
Revenues from sales of products are recognized upon delivery, provided
that no significant vendor obligations remain and the collection of the
related receivable is probable.
j. Research and development costs:
Research and development costs are charged to the statement of
operations as incurred. Statement of Financial Accounting Standard
("SFAS") No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed", requires capitalization of certain
software development costs subsequent to the establishment of
technological feasibility with respect to software development.
k. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for funding of
approved research projects are recognized at the time the Company is
entitled to such grants on the basis of the related costs incurred.
l. Basic and diluted net loss per share:
Basic net loss per share is computed based on the weighted average
number of common share outstanding during each year. Diluted net loss
per share is computed based on the weighted average number of common
shares outstanding during each year, plus the dilutive potential of
common shares considered outstanding during the year, in accordance
with FASB Statement No. 128, "Earnings Per Share".
m. Advertising expenses:
Advertising expenses are charged to the statement of operations as
incurred. Advertising expenses for the years ending September 30, 1998
and 1997, were not material.
n. Concentration of credit risks:
Financial instruments that potentially subject the Company to
concentrations of credit risks consist principally of cash equivalents and
trade receivables.
The Company's cash and cash equivalents are invested in deposits with
major U.S and Israeli banks. Management believes that the financial
institutions that hold the Company's investments are financially sound,
and accordingly, minimal credit risks exist with respect to these
investments.
The Company's accounts receivable are derived from sales to customers
located primarily in Israel and the United States. The Company performs
ongoing credit valuations of its customers and, to date, has not
experienced major losses from bad debts. In management's opinion, the
allowance for doubtful accounts adequately covers anticipated losses in
respect of its accounts receivable credit risks.
F - 12
o. Fair value of financial instruments:
The financial instruments of the Company at September 30, 1998 and
1997 consist of non-derivative financial instruments included in working
capital: cash and cash equivalents, accounts receivable, loan to affiliated
company, short-term bank credit, accounts payable and accruals and long
term debt Due to the short-term maturities of these financial instruments,
their fair value is usually equivalent to or approximately their carrying
amount.
p. Stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), in accounting for its employee stock options plan. Under APB 25
when the exercise price equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
In accounting for options granted to persons other than employees, the
provisions of Statement No. 123, "Accounting for Stock Based
Compensation" were applied. According to FASB 123 the fair value of
these options was estimated at the grant date using Black-Scholes option
pricing model.
The Company recorded an expense in accordance with APB 25 in the
amount of $ 186,670 and $ 134,940 for the years ending September 30,
1998 and 1997, respectively.
q. Comprehensive Income
Comprehensive Income, is required to be adopted for fiscal years
beginning on or after December 15, 1997. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Reclassification of financial statements for earlier periods presented is
required. SFAS 130 does not currently apply to the Company as there are
no items of comprehensive income in any period presented.
r. Impact of recently issued accounting standards:
1. In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosure About Segments of an Enterprise and
Related Information." This statement is effective for fiscal years
beginning after December 15, 1997. This statement does not have a
measurement effect on the financial statements. However, it does require
additional disclosure.
F - 13
2. In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging
Activities' ('SFAS No. 133'). This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the item in the income statement, and requires that a
company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999 and cannot
be applied retroactively. The Company does not expect the impact of
this new statement on the Company's consolidated balance sheets or
results of operations to be material.
NOTE 3: - INVENTORIES
Inventories consist of the following:
September 30, 1998
Raw materials $ 482,062
In-process inventories 183,009
$ 665,071
In-process inventories include labor and overhead costs of approximately
$ 56,000.
F - 14
NOTE 4: - INVESTMENT IN AFFILIATED COMPANY
The company applies the equity method of accounting to its investment in Micel
Wireless Corp.
According to the shareholders' agreement between EBS, the Company and Micel
Wireless Corp., the Company granted a loan in the amount of $150,000 to Micel
Wireless Corp., which bears interest at the rate of 12% per annum, payable
annually. The loan will become due at a mutually agreed upon time between EBS
and the Company.
September 30,1998
Investment in capital $500
Loan (see above) 150,000
Accumulated loss (4,796)
$145,704
NOTE 5: PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following:
September 30, 1998
Machinery and equipment $ 2,056,662
Computers and related equipment 278,942
Motor Vehicles 133,994
Office furniture and equipment 76,375
Leasehold improvements 13,212
2,559,185
Less - accumulated depreciation (1,875,065)
$ 684,120
Depreciation expenses amounted to $ 112,552 and $ 84,468 for the years ended
September 30, 1998 and 1997, respectively.
F - 15
NOTE 6:- SHORT-TERM BANK CREDIT
As of September 30, 1998, the Company has a line of credit in the amount of
$ 234,000, denominated in NIS, which bears interest at an annual rate of 15%.
NOTE 7: LONG-TERM DEBT
As of September 30, 1998, long-term debt consists of the following:
Annual Interest Rate Principal Outstanding
Israel Industrial Development
Bank Ltd. LIBOR +1.375% $ 23,004
Less - current maturities 15,500
$ 7,504
As of September 30, 1998, the LIBOR interest rate was 6%.
The obligation is secured by inventory and related equipment.
NOTE 8: - ACCRUED SEVERANCE PAY, NET
Under Israeli Law, the Company's subsidiaries are required to make
severance payments to dismissed employees (including officers) and to
employees leaving employment under certain other circumstances. This
liability is calculated based on the salary of each employee for the month
prior to the balance sheet date multiplied by the periods of employment
of each employee. Micel Corp.'s liability for required severance
payments is covered by funding into approved severance pay funds,
insurance policies and by an accrual.
Severance pay expenses amounted to $ 67,790 and $ 38,140 for the years
ended September 30, 1998, and 1997, respectively.
NOTE 9: - TAXES ON INCOME
a. Domestic (U.S.A.):
As of September 30, 1998, the Company had approximately $ 1.4 million in
federal and state net operating losses carryforward to offset against future
taxable income. The net operating losses carryforward expire in the years
2003 through 2018.
F -16
b. Foreign (Israel - subsidiaries):
1. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Under this law, taxable income is measured in real terms, in
accordance with the changes in the Israeli CPI. The Company's Israeli
subsidiaries elected to measure their results on the basis of changes in the
Israeli CPI. The difference between the annual change in the Israeli CPI
and in the NIS/dollar exchange rate causes a further difference between
taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the
Company has not provided deferred income taxes on the difference
between the reporting currency and the tax bases of assets and liabilities.
2. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (hereinafter - the "Law"):
The production facilities and expansion programs of the subsidiaries
in Israel have been granted the status of "approved enterprise", under the
Law. According to the provisions of the Law, Microkim has elected to
enjoy "alternative benefits" - waiver of grants in return for tax exemption
- - and, accordingly, Microkim's income is tax-exempt for a period of two
years commencing with the year in which it first earns taxable income. In
the remaining 8 years of benefits, it will be subject to a corporate tax of
10% to 25%, depending upon the rate of investment of foreign investors.
If a dividend is distributed out of such tax-exempt profits, the subsidiaries
will be liable for corporate tax at the rate of 15%.
The period of tax benefits, detailed above, is subject to limits of 12 years
from the commencement of production, or 14 years from the approval date,
whichever is earlier.
The law also grants entitlement to claim accelerated depreciation on
buildings, machinery and equipment used by the "approved enterprise",
during the first five tax years.
Microkim has not yet commenced its benefits period, since it has not yet
earned taxable income. The company can utilize the benefits period up to
August 28, 2005.
Israeli taxable income not eligible for the "Approved Enterprise" benefits is
taxed at the regular corporate tax rate of 36%.
3. The subsidiaries has accumulated foreign net operating losses
carryforward for tax purposes as of September 30, 1998, which may offset
taxable income for an indefinite period in the amount of approximately $ 6.6
million.
F - 17
c. Final tax assessments:
Microkim has received final tax assessments up to and including the tax
year ended September 30, 1995. RadioTel has not yet been assessed.
d. Deferred tax assets:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
September 30,1998
Various accrued liabilities $ 233,600
Net operating loss carryforward 2,824,980
3,058,580
Valuation allowance 3,058,580
Net deferred tax asset $ -
The Company has valuation allowances against the full amount of the
tax benefits in the accompanying consolidated financial statements due to its
history of operating losses and the uncertainty as to when these benefits will
be utilized. Management currently believes that it is more likely than not that
the deferred tax regarding the loss carryforwards and other temporary
differences will not be realized.
e. Income tax reconciliation:
A reconciliation of the theoretical tax expense, assuming all income is
taxed at the statutory rate applicable to income of the Company, and the
actual tax expense are as follows:
Year ended September 30,
1998 1997
Theoretical tax (benefit) computed at the
statutory rate of 35% $ (609,948) $ (79,894)
Increase (decrease) in income taxes resulting from:
Non-deductible expenses 21,398 26,422
Losses for which benefits are not recognized 588,550 53,472
Income tax expense $ - $ -
F - 18
f. Loss before taxes on income consists of the following:
Domestic $ (156,522) $ (66,901)
Foreign $ (1,586,186) $ (161,370)
$ (1,742,708) $ (228,271)
NOTE 10: - COMMITMENTS AND CONTINGENCIES
a. Lease commitment
Microkim has entered into an operating lease agreement for the space it
occupies, which expires in December 2002. The rental payments through the
lease expiration date in 2002 (which are linked to the CPI) approximate
$ 8,750 per month. Rent expense for the years ended September 30, 1998 and
1997 was approximately $ 90,000 and $ 63,000, respectively.
RadioTel entered into a two and a half year operating lease agreement
beginning October 1997 for the space it occupies. The rental payments
through the lease expiration date (which are linked to the Israeli CPI)
approximate $4,800 per month. Rent expense for the years ended September
30, 1998 and 1997 was approximately $74,000 and $9,300 respectively.
Future minimum rental payments under non-cancelable leases at September
30, 1998, are as follows:
1999 $ 162,000
2000 $ 138,600
2001 $ 105,000
2002 $ 105,000
$ 511,200
In fiscal year 1996, Microkim reached an agreement with its lessor to repay
approximately $110,000 in back rent in monthly payments through April 1,
1999. In January 1997, the Company reached a final settlement with its
lessor whereby the Company paid $50,000 as full payment of the remaining
obligation of $75,292.
F - 19
b. Royalty commitment:
Microkim is committed to pay royalties to the Government of Israel and the
BIRD Foundation in respect of products under development for which they
participated by way of grant. The royalty is computed at the rate of 2% to
5% of proceeds from sales of such products, up to 100%-150% of the
aggregate amount of such grants ($ 1,114,000 as of September 30, 1998)
Royalties paid during the years ended September 30, 1998 and 1997 totaled
$ 23,223 and $12,517, respectively.
As security for compliance with the terms of an investment grant received
from the State of Israel, Microkim registered floating security interests on
all of its assets.
c. Bank guarantees:
In connection with certain contracts entered into with customers, Microkim
is required to obtain performance guarantees. The total performance
guarantees outstanding at September 30, 1998 amounted approximately $
94,500.
d. Consulting agreement
In August 1997, RadioTel contracted the services of Crossways Consulting
Group Inc. ("CCG") for a period of 40 months beginning September 1, 1997.
CCG will assist the Company with marketing strategies, by obtaining equity
investments and project financing and by introducing RadioTel to potential
customers, partners for mergers or acquisitions and strategic alliances.
e. Legal proceedings:
In July 1994, the Company commenced a civil action in Israel in the
approximate amount of $3,000,000 against the former owner of Microkim
and the former president for false representations made by them in
connection with the purchase of Microkim and for damages resulting from
such misrepresentations.
On September 8 1998, the lawsuit proceedings were rescinded.
F - 20
NOTE 11: - SHAREHOLDERS' EQUITY
a. Common stock:
During fiscal year 1998 and 1997, the Company issued $ 150,000 and $
372,500 shares of common stock at $2.00 per share, in private placements,
respectively.
In addition, during fiscal year 1997, the Company issued 12,500 shares of
common stock at $ 0.50 per share in exchange for consulting services
rendered to the Company.
b. Receipts on account of shares.
During fiscal year 1998, the Company raised $400,000 on account of
common stock in a private placement.
c. Issuance of subsidiary shares to a third party:
During fiscal year 1997, RadioTel issued 239,130 shares of common stock
to the Parent and 252,141 shares of preferred stock to other investors in
consideration of approximately $ 3,750,000.
As a result, the Parent recorded a liability the aggregate amount of $
1,159,222.
d. Stock option plan:
1. The Parent stock option plan:
In November 1990, the Company's Board of Directors (the "Board")
adopted, along with its shareholders' approval, the 1990 Stock Option Plan
(the "Plan"), as amended through November 1996, which provides for the
grant of incentive and/or nonqualified stock options to purchase up to
800,000 shares of common stock to any officer, director, consultant or
employee at the Board's discretion. Generally, these options become
exercisable over specified vesting periods but may not be exercised after ten
years from the date of grant. The exercise price of the qualified options
cannot be less than the fair market value of the Company's common stock at
the time of grant.
F - 21
The following is a summary of the options granted under the plan:
Year ended September 30,
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 546,620 $ 1.51 564,120 $ 1.48
Granted 100,000 $ 2.00 - -
Exercised - -
Forfeited 19,500 0.60 17,500 0.60
Outstanding at end of year 627,120 1.61 546,620 1.51
Contractual Life 3.45 3.54
Exercisable at the end of year 435,483 1.53 210,465 1.21
2. RadioTel's stock option plan
In July 1997, RadioTel's Board of Directors ("RadioTel's Board")
adopted, along with its shareholders' approval, the key employee share
incentive plan, 1997 ("RadioTel's Plan"), as amended through September
1997, which provides for the grant of incentive and/or nonqualified stock
options to purchase up to 162,500 shares of common stock to any officer,
director, consultant or employee at RadioTel's Board's discretion.
Generally, these options become exercisable over specified vesting periods
but may not be exercised after ten years (or any shorter period as set forth
in the notice of grant) from the date of grant. The exercise price of the
qualified options cannot be less than the par value of the shares into which
such options are exercisable.
Under FAS 123 pro forma information regarding net income and earnings
per share is required (for grants issued after December 1995), and has been
determined as if the Company had accounted for its employee stock option
under the fair value method of the statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1998:
risk-free interest rate of 5.6%, dividend yields of 0%, volatility factors of
the expected market price of the Company's common stock shares of
63.6% and a weighted-average expected life of the options of five years.
F -22
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those traded options, and
because changes in the subject input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because Statement
123 is applicable only to options granted subsequent to December 31, 1995,
its pro forma effect will not be fully reflected until 2000.
Year ended September 30,
1998 1997
Net loss as reported $ (1,117,654) $ (209,026)
Pro forma net loss for SFAS123 $ (1,303,052) $ (345,061)
Pro forma basic net loss per share
for SFAS 123 (0.22) (0.06)
e. Warrants:
1. In November 1994, the shareholders approved the issuance of a warrant
to Quest (a related party, see Note 13) to purchase 61,437 shares of common
stock at $.60 per share.
2. In August 1996, the Company issued options to consultants to purchase
170,000 shares of common stock at $ 2.00 per share. The Company recorded
an expense in accordance with FASB 123, in the amount of $ 135,000.
F - 23
NOTE 12: - SELECTED STATEMENTS OF OPERATIONS DATA
Summary of operations within geographical areas:
Year ended September 30,
1998 1997
Sales to unaffiliated customers:
North America $ 1,049,089 $ 2,383,086
Israel 1,691,387 1,337,674
$ 2,740,476 $ 3,720,760
Operating loss:
North America $ 174,094 $ 92,244
Israel 1,565,267 78,896
$ 1,739,361 $ 171,140
September 30,1998
Identifiable assets:
North America $ 196,396
Israel 3,989,111
$ 4,185,507
NOTE 13:- RELATED PARTY TRANSACTIONS
a. In fiscal 1997, in connection with a series of private placements, the
Company issued 100,000 shares of common stock to a director and principal
shareholder at $ 2.00 per share.
b. During January 1993, the Company contracted the services of Quest
Enterprises Inc. ("Quest"), a marketing specialist, for a period of three years.
The term of the agreement has been extended through December 31, 1998.
Quest is 50% owned by the Company's former chairman. In August 1994, the
agreement between the Company and Quest was amended to provide that Quest
will assist the Company with the operation and management of Microkim. The
Company pays Quest a consulting fee of $ 5,000 per month plus expenses.
F - 24
In addition, in the event that the services provided by Quest to the Company
result in a contract being awarded to the Company, Quest will be entitled to a
commission in the amount of 1% of the revenues received. In the event that the
services provided by Quest result in a joint venture or other equity arrangement
between the Company and the potential partner, Quest will be entitled to a
reasonable equity position in such joint venture not to exceed 15% of the equity
of the joint venture or a commission. Quest is also entitled to 25% of any
royalties received by the Company from parties introduced to the Company by
Quest.
Consulting fees paid for the year ended September 30, 1998 and 1997
amounted to $ 83,114 and $ 83,742, respectively.
NOTE 14:- SUBSEQUENT EVENTS
On December 30, 1998, the Company contracted the services of
Crossways Consulting Group Inc. ("CCG"), for a period of four years
beginning January 1, 1999. CCG will assist the Company with marketing
strategies, by conducting Microkim's operations, and by introducing Micel
to potential customers.
The Company pays CCG consulting fees in the amount of $ 6,000 per
month. In addition, the Company will pay CCG 15% on the sales of its
products or services to customers in North America that are provided by
CCG during the term of the agreement and 18 months after the effective
termination date of the agreement.
CCG granted 220,000 options of the Company, at the price of $ 2.00 each,
exercisable for a period of five years after the termination of the
agreement, and vesting at the rate of 25%, commencing January 1, 1999.
F - 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: January 13 , 1999
MICEL CORP.
By:
Ron Levy, President
Pursuant to the Requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and dates indicated.
SIGNATURE TITLE
DATE
Ron Levy
Ron Levy Director, President and Chief
Executive and Financial Officer
January 13 , 1999
Heather Loren Director
Heather Loren
January 13 , 1999
Barry Braunstein Director
Barry Braunstein
January 13 , 1999
F - 26
10.12- Agreement between the Company and Crossways Consulting Group, Inc.:
AGREEMENT FOR SERVICES
In consideration of the mutual promises and covenants herein, it is hereby
agreed by Micel, Corp., 445 Central Ave. Cedarhurst, NY 11516 [hereinafter
referred to as "Micel"], and Crossways Consulting Group Inc., 136 Washington
Spring Road, palisades, NY 10964 [hereinafter referred to as "CCG"], that
CCG will perform the following projects and/or services for Micel
[hereinafter referred to as 'Services']:
1. Support the management of Micel in developing and executing its marketing
strategy.
2. Assist Micel in conducting its Microkim operations.
3. Assist in developing Micel strategic plans.
4. Introduce Micel to potential customers /teammates.
5. Assist Micel in identifying potential partners for mergers, acquisitions and
strategic alliances.
6. Assist Micel in conducting investor relationship activities.
1. CCG shall perform such services as an independent contractor and not as an
employee of Micel. As such, CCG shall not be entitled to or claim any benefits
or right accorded to the employees of Micel.
2. Performance of the Services will be paid for in the following manner:
a. Micel shall pay CCG a monthly fee of $6,000 per month. CCG shall invoice
Micel each month for the time expended during the preceding month.
b. Micel shall pay CCG 1.5% sales of its products or services to customers in
North America. CCG will be entitled to this fee for any sales closed during the
term of this Agreement and during a period of 18 months
after the effective termination date of this Agreement, provided that the
introduction or sale of such customers took place prior to termination.
c. CCG is hereby granted 220,000 options of Micel Corp. at $2.00 which is the
market price, exercisable for a period of 5 years after the termination of
this Agreement and vesting at the rate of 20% starting January 1, 1999,
January 1, 2000, January 1, 2001, January 2002 and December 31, 2002.
The option will have piggy back registration rights, unless the
underwriter of proposed offering for which registration is being made does not
allow such piggy back registration.
3. Performance of Services under this agreement shall commence on January 1,
1999 and continue until December 31, 2002. Thereafter
Services will be continued on a month to month basis. However, Micel or CCG may
terminate this agreement at anytime in accordance with the terms of Paragraph 7
hereof.
4. REIMBURSABLE EXPENSES
Expenses incurred by CCG or arising out of the Services to be performed
hereunder shall be reimbursed, but only to the extent as expressly provided
herein.
Micel shall reimburse CCG for travel and miscellaneous business
expenses to the extent same shall be incurred by CCG in connection
with providing Services under this Agreement.
Expenses shall be reimbursed by Micel in accordance with the same rules and
procedures by which Micel reimburse its own employees.
Reimbursable expenses shall be invoiced by CCG at the same time it shall invoice
Micel for the work and services performed under this agreement. Reimbursable
expense invoices shall be accompanied by such documentation as shall be
reasonably necessary to verify the amount claimed.
5. PROPRIETARY INFORMATION
Any information obtained by either party in the course of performing this
Agreement including, but not limited to, information, which is of proprietary
nature and is not publicly available, shall be kept confidential and not
released by such party without the authorization of the other party.
Both Micel and CCG shall use their best efforts not to divulge, in whole
or in part, such propriety information to any third party without
receiving a written consent from the party disclosing the information.
The party receiving the proprietary information agrees to handle
such proprietary information with the same degree of care it uses to handle
such proprietary information, but in no event with less than reasonable care.
6. CONFLICTS OF INTEREST
It is hereby acknowledge and agreed by Micel that CCG is providing consulting
services to the entities listed in Attachment 1.
7. TERMINATION
Furnishing of Services under this Agreement may be terminated by either party
upon sixty days prior written notice. Notwithstanding termination of
the Agreement, the right of CCG to compensation in accordance with
Paragraphs 2b and 2c will survive.
8. INDEMNIFICTION
Micel will indemnify CCG, its officers and employees and hole
them harmless in connection with their activities pursuant to this Agreement.
9. SURVIVABILITY
If any provision of this Agreement is found to be void, the remainder of the
Agreement shall remain in full force and shall not thereby be terminated.
10. APPLICABLE LAW
This Agreement shall be interpreted and governed by the laws of the State of New
York. Any dispute arising out or relating to this agreement which can not be
resolved amicable, shall be determined by binding arbitration
conducted by the American Arbitration Association in New York.
11. ENTIRE AGREEMENT
This document contains the entire agreement of the parties hereto, and no
modifications thereto shall be binding upon the parties hereto
unless the modification is in writing and signed by both parties.
Micel Corp. Crossways Consulting Group Inc.
By: Rony Levy By: Tuvia Barak
Title: President and CEO Title: President
Date: Dec 30, 1998 Date: Dec 30, 1998
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