10QSB 1 astro10qsb601.htm ASTOCOM 10Q-SB 6/30/01

United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)

[ X ]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
            For the quarterly period ended June 30, 2001
                                                                         or
[ ]         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
            For the transition period from ______________ to _________________

Commission file number 0-8482

ASTROCOM CORPORATION
(Exact name of small business issuer as specified in its charter)

          Minnesota                                                                                     41-0946755   
(State or other jurisdiction of                                                    (I.R.S. Employer Identification No.)
incorporation or organization)

3500 Holly Lane North, Suite 60, Plymouth, Minnesota 55447-1284
(Address of principal executive office)                             (Zip Code)

(612) 378-7800
(Issuer's telephone number)

___________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ____

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

                                                                                                    Yes ____       No ____

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 26,448,943

PART I. FINANCIAL INFORMATION

Astrocom Corporation

Balance Sheets
   

June 30, 2001

December 31, 2000
   

Unaudited

  
Assets      
Current assets:    
  Cash and cash equivalents

$           259,135

$             294,472
  Accounts receivable, less allowance 70,006 57,080
  Inventories 618,782 555,751
  Prepaid Expenses               43,047               77,812
Total current assets 990,970 985,115
     
Property and equipment    
  Property and equipment 759,216 748,376
  Accumulated depreciation           (682,449)           (654,571)
Net property & equipment 76,767 93,805
       
License agreements, net 22,259 42,991
       
Other assets             10,000                10,000
       
Total assets $           1,099,996 $            1,131,911
       
Liabilities and shareholders' equity    
Current liabilities:    
  Accounts payable $           124,575 $           121,885
  Accrued compensation 265,636 167,214
  Accrued expenses 78,881 74,411
  Convertible Notes 595,271 --
  Current portion of lease settlement costs                   4,960                 10,835
Total current liabilities 1,069,323 374,345
       
Shareholders' equity:    
  Preferred stock -- --
  Common stock 2,644,498 2,644,498
  Additional paid-in capital 9,475,148 9,223,398
  Accumulated deficit          (12,088,973)           (11,110,330)
Total shareholder's equity 30,673 757,566
     
Total liabilities and shareholder's equity $         1,099,996 $          1,131,911
       
See accompanying notes to financial statements.  

 

Item 1. Financial Statements

Astrocom Corporation

Statements of Operations (Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2001

2000

2001

2000

Net sales

$ 135,985

$ 192,173

$ 265,690

$ 384,187

Cost of products sold

       110,725

      180,573

      229,591

      339,969

Gross profit

25,260

11,600

36,099

44,218

Operating expenses

Selling and administrative

269,513

304,063

580,181

602,340

Research and development

        156,870

      146,569

     354,088

      293,486

Total operating expenses

       426,383

      450,632

     934,269

      895,826

Operating loss

(401,123)

(439,032)

(898,170)

(851,608)

Other income (expense)

Interest income

3,031

18,016

5,014

27,392

Interest expense

(82,756)

(616)

(84,285)

(1,397)

Other expense

            (467)

          (266)

           (705)

         (634)

Total other income (expense)

        (80,192)

        17,134

      (79,976)

       25,361

Net loss before taxes

(481,315)

(421,898)

(978,146)

(826,247)

Taxes

237

250

500

1,401

Net loss

(481,552)

(422,148)

(978,646)

(827,648)

Less preferred stock dividends

--

3,000

--

6,000

Loss applicable to common shares

$   (481,552)

$  (425,148)

$   (978,646)

$ (833,648)

Loss per common share - basic and diluted

$          (0.02)

$        (0.02)

$         (0.04)

$       (0.04)

Weighted average number of common shares outstanding

26,448,943

26,014,161

26,448,943

23,163,996

See accompanying notes to financial statements.


 

Astrocom Corporation

Statement of Cashflows (Unaudited)

Six Months Ended June 30,

2001

2000
Cash flows from operating activities
Net loss

$       (978,646)

$      (827,648)
Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization

110,631

64,899
      Loss on disposal of equipment

--

299
      Changes in operating assets and liabilities:
            Accounts receivable (12,927) (38,557)
            Inventories (63,031) (246,372)
            Prepaid expenses 34,765 (7,807)
            Other Assets -- --
            Accounts payable 2,690 3,559
            Accrued expenses 102,898 (7,174)
Net cash used in operating activities (803,620) (1,058,801)
Cash flows from investing activities
      Purchases of equipment (10,842) (13,929)
      Purchase of license agreements -- (39,829)
      Proceeds from sale of equipment -- --
Net cash used in investing activities (10,842) (53,758)
Cash flows from financing activities
      Proceeds from sale of stock -- 1,583,990
      Net proceeds from issuance of convertible debt 785,000 --
      Payments on lease settlement obligations (5,875) (16,603)
Cash provided by financing activities 779,125 1,567,387
Net increase in cash (35,337) 454,828
Cash at beginning of period 294,472 557,637
Cash at end of period $           259,135 $      1,012,465
See accompanying notes to financial statements.

 

Astrocom Corporation
                                                Notes to Financial Statements
                                                               June 30, 2001

1. Basis of Presentation

The financial statements in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with the financial statements and notes included in the Company's annual report on Form 10-KSB for the year ended December 31, 2000.

2. Inventories

Inventories are stated at the lower of cost or market, determined on an average cost basis. Inventories consisted of the following:

June 30, 2001
(Unaudited)		 December 31, 2000
Raw materials

$474,776

 $503,059
Work in process 275,788 184,037
Finished goods 126,840 109,905
Less obsolescence reserve (258,622) (241,250)
$618,782 $555,751

3. Loss Per Share

The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic earnings per share exclude the dilutive effect of options, warrants and convertible securities, while diluted earnings per share include such effects. For all periods presented, the Company's basic and diluted loss per share are the same because the effects of all options, warrants and convertible securities were antidilutive.

4. Current Liabilities - Convertible Notes Payable

During the first half of 2001, the Company borrowed $790,000 through issuance of subordinated convertible promissory notes payable and warrants to purchase 1,975,000 shares of common stock at $.40 per share. The notes payable bear interest at a rate of 12% payable at maturity 12 months from date of issue. The notes payable are convertible into common stock of the Company at the lower of $.20 per share or 80% of the lowest price per share for which the Company has sold shares of its common stock (in a minimum offering amount of 100,000 shares) during the term of the note.

The beneficial conversion feature and the warrants were valued and recorded as a discount to the notes payable which is being accreted as interest expense over the term of the notes. The carrying value of the notes at June 30, 2001 was $595,271, net of a $194,729 discount.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Report contains certain forward-looking statements that project or estimate future events. When used in this Form 10-QSB, the words "believes," "expects," "anticipates," "intends," and similar expressions are intended to identify forward-looking statements. These statements are subject to various risks and uncertainties which could cause actual results to differ materially from historical results or those currently projected. Readers are cautioned not to place undue reliance on these forward-looking statements.

Results of Operations

        The following table sets forth selected information derived from the Company's interim statement of operations expressed as percentages of net sales:

Three Months Ended June 30, % Increase (Decrease) Six Months Ended June 30, % Increase (Decrease)
2001 2000 2001 2000
Net Sales 100.0% 100.0% (29.2)% 100.0% 100.0% (30.8)%
Cost of Sales 81.4 94.0 (38.7) 86.4 88.5 (32.5)
Gross Profit 18.6 6.0 117.8 13.6 11.5 (18.4)
Selling and Administrative 198.2 158.2 (11.4) 218.4 156.8 (3.7)
Research and Development 115.4 76.3 7.0 133.3 76.4 20.6
Operating Loss (295.0) (228.5) (8.6) (338.1) (221.7) 5.5
Other Expense (59.0) 8.9 (568.0) (30.1) 6.6 (415.4)
Net Loss (354.0)% (219.6)% 14.1% (368.2)% (215.1)% 18.3

        Net Sales. Net sales for the three month and six month periods ended June 30, 2001 were $135,985 and $265,690, reflecting decreases of 29.2% and 30.8%, respectively, over the comparable periods of 2000. The decline in sales is the result of a continued slowdown from customers for our legacy CSU/DSU products. Late in March, the Company began shipment of customer evaluation and pre-production units of the new PowerLinkTM DSL Aggregator - a product that facilitates the increase of WAN (Wide Area Network) bandwidth in increments of slower speed, lower cost, more readily available lines. As intended, Astrocom received invaluable feedback from these early users; much of that feedback has led to enhancements in the product line. Subsequently, on August 2, 2001, Astrocom announced general availability of the PowerLink-IplusTM with Session Load Balancing and Automatic Line/ISP Fail-Over. The Company believes that its investment in this product line will lead to increased revenues over the coming months.

        Gross Profit. Gross profit margin for the three and six month periods ended June 30, 2001 was 18.6% and 13.6%, respectively, as compared to 6.0% and 11.5% for the comparable periods of 2000. This increase is reflective of higher margin sales in general as well as an improved price structure for the PowerLinkTM family. While the Company has reduced labor and subcontract expenses in production, gross margins will continue to be affected by sales volume, product mix and the sales channel used.

        Operating Expenses. Selling and administrative expenses were $269,513 for the three month period ended June 30, 2001, a decrease of 11.4% from the comparable period of 2000. For the six month period ended June 30, 2001, selling and administrative expenses were $580,181, a decrease of 3.7% from the comparable period of 2000. Sales and marketing expenses increased by 15.5% and decreased by 22.9% in the first and second quarters, respectively, compared to the same quarters in 2000. These differences are primarily due to timing of marketing campaigns and participation in trade shows. Administrative expenses remained relatively constant for each of the first two quarters of 2001 when compared to the same periods in 2000.

        Research and development expenses were $156,870 for the three month period ended June 30, 2001, an increase of 7.0% from the comparable period in 2000. For the six month period ended June 30, 2001, research and development expenses were $354,088, an increase of 20.6% from the comparable period of 2000; the increase was due to engineering service costs associated with new product development. The Company expects research and development expenses to continue to increase in future quarters as it further enhances the PowerLinkTM and invests in new product development.

        Other Income and Expense. Other income, net, for the three month period ended June 30, 2001 decreased to $(80,192) from $17,134 in the comparable period in 2000. For the six month period ended June 30, 2001, other income, net, decreased to $(79,976) from $25,361 in the comparable period in 2000. The increase in expenses for 2001 is reflective of the interest expenses associated with the bridge financing obtained in the first and second quarters.

        Net Loss. The Company reported a net loss of $481,552 and $978,646, respectively, for the three and six month periods ended June 30, 2001, compared to a net loss of $422,148 and $827,648 for the comparable periods of 2000. The increase loss is primarily the result of lower sales revenue, increased expenditures in new product development and sales and marketing, and bridge loan expenses.

Liquidity and Capital Resources

    Net working capital decreased to a deficit of $78,353 for the second quarter from $308,443 on March 31, 2001. Cash decreased to $259,135 from $458,806 on March 31, 2001.

    During the first half of 2001, the Company raised $785,000 (net) via convertible bridge financing. The Company intends to raise additional funds over the next twelve months to allow pursuit of the opportunities that it has with the new product line of WAN line aggregators. The additional funds are required to expand the product line with added features, to increase marketing and sales efforts and to prepare for full product production. Without these additional funds, management believes that the Company may be unable to adequately promote the new product line due to lack of market visibility and potential manufacturing constraints.

        The Company currently believes that its available sources of funds will be adequate to finance operations for the year.

PART II. OTHER INFORMATION

Item 5. Other Information

        a)     In the annual reports for both 1999 and 2000 under the 'Common Stock' subtitle of Note 5. of the 'Notes to Financial Statements', it is incorrectly stated that the 3,501,000 redeemable warrants associated with the1996 private placement of common stock was extended from September 1999 to September 2004. Per notification that was sent to the respective holders, the correct date is September 2001.

        None.

Item 6. Exhibits and Reports on Form 8-K

        None

SIGNATURES

Pursuant to the requirement 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: 13 August 2001

ASTROCOM CORPORATION

By:_______________________
Ronald B. Thomas
President and Chief Executive Officer


By:_______________________
John M. Bucher
Director of Operations and Corporate Controller