SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: March 31, 1997 COMMISSION FILE #: 2-67918-NY
MIKROS SYSTEMS CORPORATION
--------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 14-1598-200
-------- -----------
(State or Other Jurisdiction of (I.R.S. Employer Identification#)
Incorporation or Organization)
3490 U.S. Route 1, Princeton, NJ 08540
--------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: 609-987-1513
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. [X]Yes [ ]No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS March 31, 1997
- ---------------------------- ----------------
COMMON STOCK, PAR VALUE $.01 12,190,702 SHARES
CONVERTIBLE PREFERRED STOCK, 1,005,000 SHARES
PAR VALUE $.01
SERIES B PREFERRED STOCK 1,131,663 SHARES
PAR VALUE $.01
SERIES C PREFERRED STOCK 5,000 SHARES
PAR VALUE $.01
SERIES D PREFERRED STOCK 690,000 SHARES
PAR VALUE $.01
- --------------------------------------------------------------------
<PAGE>
MIKROS SYSTEMS CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page #
ITEM I - FINANCIAL STATEMENTS
Balance Sheets at March 31, 1997 and December 31, 1996
(Unaudited)................................................. 1
Statements of Operations for the Three Months Ended
March 31, 1997 and 1996 (Unaudited) ........................ 3
Statements of Shareholders' Equity for the Years ended
1995 and 1996 and Three Months Ended March 31, 1997
(Unaudited)................................................. 4
Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 (Unaudited)......................... 5
Notes to the Financial Statements........................... 6
ITEM II
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
PART II - OTHER INFORMATION.................................... 12
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 322,999 $ 395,120
Accounts Receivable
Government 320,387 441,826
Trade 278,643 198,298
Inventories 187,189 153,192
Other Current Assets 21,376 16,508
------------ ------------
TOTAL CURRENT ASSETS 1,130,594 1,204,944
------------ ------------
FIXED ASSETS
Equipment 741,571 679,060
Furniture and Fixtures 61,655 59,207
Leasehold Improvements 8,396 3,408
------------ ------------
811,622 741,675
Less: Accumulated Depreciation
and Amortization (555,671) (535,547)
------------ ------------
FIXED ASSETS, NET 255,951 206,128
------------ ------------
OTHER ASSETS:
Unbilled Receivables 47,788 52,612
Patent Costs, Net 15,491 15,785
Other Assets 19,814 17,825
------------ ------------
TOTAL OTHER ASSETS 83,093 86,222
------------ ------------
TOTAL ASSETS $1,469,638 $1,497,294
============ ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND MARCH 31, DECEMBER 31,
SHAREHOLDERS' EQUITY (DEFICIENCY) 1997 1996
- ------------------------------------------ ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 512,537 $ 507,249
Notes Payable
Bank 9,271 9,271
Related Parties 134,166 20,000
Other 220,083 18,302
Obligations under Capital Leases 24,616 29,492
Accrued Payroll and Payroll Taxes 48,505 50,922
Accrued Interest 3,223 3,866
Accrued Vacations 67,304 55,285
Accrued Expenses 200,380 128,743
Unliquidated Progress Payments and Other
Customer Advances 649,564 507,471
------------ ------------
TOTAL CURRENT LIABILITIES 1,869,649 1,330,601
------------ ------------
NOTES PAYABLE
Bank 7,692 10,017
Related Parties 218,334 527,500
Others 427,667 446,500
OBLIGATIONS UNDER CAPITAL LEASES-NONCURRENT 9,528 15,585
------------ ------------
TOTAL LIABILITIES 2,532,870 2,330,203
------------ ------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
par value $.01 per share, authorized 150,000
shares, issued and outstanding 5,000 shares
in 1997 and 1996 80,450 80,450
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock, par value $.01 per share,
authorized 25,000,000 shares, issued and
outstanding 12,190,702 shares in 1997 and
11,846,952 in 1996 121,907 118,470
Preferred Stock, convertible,
par value $.01 per share, authorized 2,000,000
shares, issued and outstanding 1,005,000 shares
in 1997 and 1996 10,050 10,050
Preferred Stock, Series B convertible, par value
$.01 per share, authorized 1,200,000 shares, issued
and outstanding 1,131,663 shares in 1997 and 1996 11,316 11,316
Preferred Stock, Series D, par value $.01 per share
690,000 shares authorized, issued and outstanding in
1997 and 1996 6,900 6,900
Capital in excess of par 10,230,923 10,218,548
Accumulated deficit (11,524,778) (11,278,643)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (1,143,682) (913,359)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,469,638 $1,497,294
============ ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended,
March 31, 1997 March 31, 1996
-------------- --------------
(Restated)
Revenues:
Equipment Sales $ 385,404 $ 35,995
Contract Research and Development 190,284 107,680
----------- ----------
Total Revenues 575,688 143,675
----------- ----------
Cost of Sales:
Equipment Sales 297,714 32,312
Contract Research and Development 126,289 237,739
----------- ----------
Total Cost of Sales 424,003 270,051
----------- ----------
Gross Margin 151,685 (126,376)
----------- ----------
Expenses:
Research & Development 109,009 62,487
General & Administrative 256,267 197,953
Interest 32,544 16,918
----------- ----------
Total Expenses 397,820 277,358
----------- ----------
Net Income (Loss) ($246,135) ($403,734)
=========== ==========
Net Income (Loss) per share ($0.02) ($0.05)
=========== ==========
Weighted average number of
shares outstanding 12,018,827 7,357,108
=========== ===========
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION> Common Preferred Preferred
Stock Stock Stock B
$.01 PAR $.01 PAR $.01 PAR
VALUE VALUE VALUE
--------- ------- --------- -------- --------- --------
PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE
--------- ------- --------- -------- --------- --------
<C> <C> <C> <C> <C> <C>
Balance-December 31, 1994 7,152,108 $71,321 1,005,000 $10,050 1,131,663 $11,316
Year ended December 31, 1995:
Issuance of Common Stock 200,000 2,000
Net Loss
--------- ------- --------- -------- --------- --------
Balance December 31, 1995 7,352,108 71,521 1,005,000 10,050 1,131,663 11,316
Year Ended December 31, 1996:
Issuance of Common Stock 2,582,844 25,829
Sale of Common Stock 1,912,000 19,120
Net Loss
--------- ------- --------- -------- --------- --------
Balance-December 31, 1996 11,846,952 118,470 1,005,000 10,050 1,131,663 11,316
Three Months Ended
March 31, 1997
Issuance of Common Stock 343,750 3,437
Net Loss
--------- ------- --------- -------- --------- --------
Balance March 31, 1997 12,190,702 $121,907 1,005,000 $10,050 1,131,663 $11,316
========= ======= ========= ======= ========= ========
Preferred
Stock D Capital
$.01 PAR in excess Accumulated
VALUE of Par Deficit
--------- ------- --------- -----------
PAR
SHARES VALUE
--------- ------- --------- -----------
<C> <C> <C> <C>
Balance-December 31, 1994 690,000 $ 6,900 $9,237,864 ($9,183,329)
Year ended December 31, 1995:
Issuance of Common Stock 10,500
Net Loss (647,673)
--------- ------- ---------- ------------
Balance December 31, 1995 690,000 6,900 9,248,364 ( 9,831,002)
Year Ended December 31, 1996:
Issuance of Common Stock 29,304
Sale of Common Stock 940,880
Net Loss ( 1,447,641)
--------- ------- ---------- ------------
Balance-December 31, 1996 690,000 6,900 10,218,548 (11,278,643)
Three Months Ended
March 31, 1997
Issuance of Common Stock 12,375
Net Loss (246,135)
--------- ------- ---------- ------------
Balance March 31, 1997 690,000 $ 6,900 $10,230,923 ($11,524,778)
========= ======= ========== ============
</TABLE>
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
The Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Cash Flows Provided (Used) by Operating
Activities:
Net Loss ($246,135) ($403,734)
Adjustments to reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating
Activities:
Depreciation and Amortization 20,418 15,704
Net Changes in Operating Assets and
Liabilities:
(Increase) Decrease in:
Accounts Receivable 41,094 69,214
Unbilled Receivables 4,824 (318)
Inventories (33,997) (39,812)
Other Current Assets (4,868) (4,910)
Other Assets (1,989) 200
Increase (Decrease) in:
Accounts Payable 5,288 11,039
Accrued Payroll and Payroll Taxes (2,417) 5,706
Unliquidated Progress Billings and
Ohter Customer Advances 142,093 100,000
Other Liabilities and Interest 83,013 12,880
--------- ---------
Net Cash Provided (Used) by Operations 7,324 (234,031)
--------- ---------
Cash Flows Provided (Used) by Investing
Activities:
Fixed Asset Purchases (69,947) 0
--------- ---------
Net Cash (Used) by Investing Activities: (69,947) 0
Cash Flows Provided (Used) by Financing
Activities:
Proceeds from Loans 0 238,000
Proceeds from Exercise of Options
And Warrants 15,812 375
Repayment of Debt and Capital Leases (25,310) (1,550)
--------- ---------
Net Cash Provided (Used) by Financing
Activities: (9,498) 236,825
--------- ---------
Net Increase (Decrease) in Cash (72,121) 2,794
Cash at Beginning of Period 395,120 77,276
--------- ---------
Cash at End of Period $322,999 $ 80,070
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the quarter for interest $ 31,507 $27,061
========= =========
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
- ------------------------------
As permitted by rules of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, these notes are condensed and do not contain
all disclosures required by generally accepted accounting principles.
Reference should be made to the financial statements and related notes
included in the Company's 1996 Annual Report on Form 10-K.
In the opinion of the management of Mikros Systems Corporation, the
accompanying financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Company's financial
position at March 31, 1997, the changes in deficiency in assets, and the
results of operations, and cash flows for the three-month periods ended
March 31, 1997 and 1996.
The results disclosed in the Statements of Operations for the three months
ended March 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE B - NOTES AND LOANS PAYABLE
- --------------------------------
1) Outstanding Debt is summarized as follows:
03/31/97 12/31/96
-------- --------
Notes Payable to Banks $ 16,963 $ 19,288
Other Notes Payable 452,750 464,802
Related Parties 547,500 547,500
-------- --------
$1,017,213 $1,031,590
========== ==========
2) Financing Transactions
- --------------------------
1996 Financing
- --------------
In a series of transactions from February through May 1996, the Company issued
secured promissory notes and warrants to raise an aggregate of $641,500
(including $131,250 from officers and directors).
The promissory notes are for a term of approximately eighteen months, bear
interest at 12% on the unpaid balance, and are secured by certain assets of
the Company. In addition, the Company issued warrants to purchase five (5)
shares of Common Stock at $0.01 per share for each dollar of debt. The value
of the warrants was immaterial and no accounting recognition was given to
their issuance.
<PAGE>
In October 1996 all of the noteholders of the 1996 and the 1992-93 financings
agreed to a deferral of principal payments in exchange for the right to
convert outstanding debt to Common Stock of the Company at a rate of one (1)
share of stock for $1.00 of debt. The Company determined that the fair value
of the conversion feature was immaterial. Accordingly, no accounting
recognition has been given to this modification of terms.
Safeguard Scientifics (Delaware) Inc. (SSI)
- ------------------------------------------------------------
On November 15, 1996, the Company, all of its secured creditors from its 1996
and 1992-93 financings and SSI entered into an agreement. Under the agreement
SSI paid $1,000,000 to the Company.
- - SSI received: 1) 1,912,000 shares of Common Stock of the
Company; 2) a warrant to purchase 2,388,000 shares of Common
Stock at $0.65 per share; 3) a warrant to purchase 3,071,000
shares at $0.78 per share; 4) a 75% interest in an
exclusive, royalty-free, perpetual license of the AM
technology in the United States, Canada and Mexico (through
SSI's ownership in MBC); and 5) a 33 1/3% interest in the FM
and AM technology (through SSI's ownership in 3D). This
transaction is more fully described below.
- - Two (2) new companies were formed, Data Design and
Development Corporation (3D) and Mobile Broadcasting
Corporation (MBC). The Company received one-third of 3D in
exchange for certain of its AM and FM technology. SSI
received one-third of 3D in exchange for a commitment to
invest up to $1,000,000 in MBC. The secured creditors
received one-third of 3D and released their security
interest in the technology transferred. The Company
received 25% of MBC for $50. SSI received 75% of MBC for
$200,000.
- - 3D granted MBC an exclusive, royalty-free, perpetual license
to the AM technology in the United States, Canada and
Mexico. 3D granted the Company an exclusive, royalty-free,
perpetual license to the FM technology in the United States,
Canada and Mexico. 3D retained rights to the AM and FM technology
in the rest of the world. The Company and MBC entered into a
consulting arrangement under which the Company will be paid for
the development of the AM technology. 3D will own the
rights to such technology.
The Company is unable to assign fair values to these transactions. No amount
of cash consideration was considered attributable to a sale of the AM or FM
technology or to the license thereto. No gain was recognized on the transfer
of the technology. The entire amount of the cash consideration received from
SSI was recorded as a sale of Common Stock.
In connection with the sale of the Common Stock and the Warrants, the Company
granted to SSI certain piggyback and demand registration rights with respect
to the Common Stock and the Common Stock underlying the Warrants. In
addition, the Company granted to SSI a right of first refusal pursuant to
which, subject to certain conditions, in the event the Company issues,
sells or exchanges any securities, it must first offer such securities to SSI
and such offer must remain open and irrevocable for 30 days. Such right of
first refusal may only be waived in writing and terminates at such time as SSI
owns less than 10% of the Common Stock.
<PAGE>
Pursuant to the Purchase Agreement, as long as SSI owns 1% or more of the
Company's outstanding equity securities, on a fully-diluted basis, the Company
is obligated to, among other things: (i) maintain key man life insurance on
certain key employees of the Company, of which the Company is in the process
of obtaining such insurance; (ii) permit SSI to inspect the operations and
business of the Company; and (iii) fix and maintain the number of Directors on
the Board of Directors at eight members. In addition, the Purchase Agreement
also provides that as long as SSI owns such 1%, the Company is subject to
certain negative covenants, including, among other things, restrictions on:
(i) transactions with affiliates of the Company; (ii) certain indebtedness;
and (iii) amendments to the Company's Certificate of Incorporation and Bylaws.
In connection with the transaction, the Company entered into a voting
agreement pursuant to which each of Joseph R. Burns, Thomas J. Meaney, Wayne
E. Meyer, Frederick C. Tecce and John B. Torkelsen, each a director of the
Company (collectively, the "Management Shareholders"), agreed to vote an
aggregate of approximately 6,659,214 votes for the election of two designees
of SSI to the Board of Directors of the Company.
1992-93 Financing
- -----------------
In a series of transactions consummated on October 27, 1992 and April 27,
1993, Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick C. Tecce,
and John B. Torkelsen, individually and not as a group, (collectively referred
to herein as the "Investors") acquired certain loan and equity interests in
the Company from other debt and equity holders.
Pursuant to such transactions, each of the Investors acquired, in
consideration of an aggregate of $250,000 (each of the Investors individually
paying $50,000 in cash), twenty percent of (I) 50,000 shares of Common Stock,
$.01 par value ("Common Stock"), of the Company (ii) promissory notes of the
Company in the aggregate principal amount of $916,875 (collectively, the
"Investor Notes), (iii) warrants ("Series C Warrants") to purchase 97,500
shares of Series C Preferred Stock, $.01 par value, of the Company and (iv)
certain loan and equity rights in the Company, including without limitation,
rights under loan agreements, an investment agreement, a note purchase
agreement, and all documents related to such agreements.
Pursuant to such loan documents, among other things, the Company is prohibited
from paying dividends on its Common Stock, the Company has granted to the
Investors a security interest in all of the assets of the Company and the
Investors have the right to designate 2/7ths of the Board of Directors of the
Company, which right has not been exercised. Each of Messrs. Burns, Meaney,
Meyer and Torkelsen is a Director of the Company.
In December 1993, the Investors agreed to reduce the amounts owed by the
Company under the Investor Notes, including unpaid interest, in exchange for
shares of Common Stock and Preferred Stock issued by the Company. In return
for a reduction in debt of $416,875 and accrued interest of $273,125, the
Company issued 2,750,000 shares of Common Stock and 690,000 shares of Series D
Preferred Stock which provides for an annual cumulative dividend of $.10 per
share. The Investor Notes were modified to provide for principal payments in
sixteen quarterly installments beginning January 1, 1994 and ending on October
1, 1997.
<PAGE>
Interest on the unpaid principal balance is due in quarterly installments
beginning on March 31, 1994. As additional consideration for the modification
of such loans, the Company extended the exercise period for the Series C
Warrants until April 25, 1999. As of December 31, 1996, the Company was in
arrears on six quarterly principal payments. In October 1996, the Investors
authorized deferral of the remaining $312,500 of principal payments until 1998
(See Note D).
NOTE C - INVENTORIES
- --------------------
Inventories at March 31, 1997 are stated at the lower of cost or market,
computed on the first-in, first-out method.
NOTE D - RECLASSIFICATION
- -------------------------
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
<PAGE>
Part I. Item II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUE
- -------
Total revenues were $575,688 for the first quarter ended March 31, 1997
compared to $143,675 for the same period in 1996.
In 1997 revenues from equipment sales were $385,404 or 66.9% of total revenue
compared to $35,995 or 25.1% of total revenue for the first quarter in 1996.
Research and development revenues in 1997 were $190,284 or 33.1% for the first
quarter and $107,680 or 74.9% of total revenue for the first quarter in 1996.
COST OF SALES
- -------------
Total Cost of Sales for the quarter ended March 31, 1997 was $424,003 or 73.7%
of total revenue compared to $270,051 or 188.0% of total revenue for the same
period in 1996. Equipment Cost of Sales was $297,714 or 77.2% of equipment
revenue in the 1997 first quarter compared to $32,312 or 89.8% of equipment
revenue in the first quarter of 1996. Cost of Sales of contract R & D was
$126,289 or 66.4% of contract R & D revenue and $237,739 or 220.8% of contract
R & D revenue in the first quarters of 1997 and 1996, respectively. In 1996
the higher Cost of Sales percentages were mainly because of unabsorption of
fixed overhead costs due to low volume of revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, General and Administrative expenses for the quarter ended March 31,
1997 was $256,267 versus $197,953 in the quarter ended March 31, 1996, an
increase of of 29.5%. This increase is due mainly to higher costs for travel,
payroll and legal expenses.
INTEREST EXPENSE
- ----------------
Interest expense was $32,544 in the quarter ended March 31, 1997 compared to
$16,918 for the same quarter in 1996. The increase is due to an increase in
notes payable.
NET LOSS
- -----------------
Net Loss for the quarter ended March 31, 1997 was $246,135 versus a net loss
of $403,734 for the same period in 1996. The lower loss is because of the
higher revenue volume in the 1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's financial statements for the quarter ended March 31, 1997 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course
of business.
<PAGE>
The Company incurred a net loss of $246,135 for the quarter ended March 31,
1997, and as of March 31, 1997 had an accumulated deficit of $11,254,778. At
March 31, 1997 the Company had negative working capital of $739,055 compared
to negative working capital of $125,658 at December 31, 1996. For the quarter
ended March 31, 1997 the Company provided $7,324 from operating activities.
For the same period in 1996, the Company used $234,031. The Company expects
to continue to incur substantial expenditures to expand its commercial
wireless communications business and has formed a strategic alliance with
Safeguard Scientifics (Delaware), Inc, as well as entered into a consulting
services agreement with Mobile Broadcasting Corporation (see 1996 Financing).
In 1996, the Company completed a debt financing of $641,500 (see 1996
Financing). In addition, the Company will consider the sale of additional
equity securities under appropriate market conditions, alliances or other
partnership agreements with entities interested in supporting the Company's
commercial and military programs, or other business transactions which would
generate resources sufficient to assure continuation of the Company's
operations and research programs. At March 31, 1997 notes payable included
$954,000 to creditors who have authorized deferral to 1998 of any principal
repayment.
<PAGE>
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. None.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the
quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MIKROS SYSTEMS CORPORATION
(Registrant)
Dated: May 13, 1995
/s/ Thomas J. Meaney
-----------------------
Thomas J. Meaney
Chief Executive Officer
