MIKROS SYSTEMS CORPORATION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of The Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996. Commission file
number 2-67918
MIKROS SYSTEMS CORPORATION
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(Exact name of Registrant as specified in charter)
Delaware 14-1598-200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3490 U.S. Route 1 Building #5 Princeton, New Jersey 08540
(Address of principal executive offices, Including Zip Code)
Registrant's Telephone Number, including area code: 609-987-1513
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Common Stock, $.01 par value
Convertible Preferred 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K 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 Form 10-K or any amendment to this Form
10-K. [ X ]
<PAGE>
The aggregate market value of the voting stock held by
nonaffiliates of Registrant as of February 28, 1997, was
approximately $939,000, computed by multiplying the average of
the bid and asked price quoted by National Quotation Bureau, Inc.
for such stock by the amount that the total shares outstanding
exceeded the shares beneficially owned by officers, directors and
the principal shareholders of the registrant. Such determination
shall not, however, be deemed to be an admission that any such
shareholders are "affiliates" as defined in Rule 405 under the
Securities act of 1933. The number of shares outstanding of the
Registrant's $.01 par value common stock as of February 28, 1997
was 11,846,952.
The following documents are incorporated by reference into the
Annual Report on Form 10-K: Portions of the Registrant's
definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
report.
<PAGE>
PART I
Item 1. Description of Business
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Introduction
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Mikros Systems Corporation was founded in 1978 in Albany, New
York to exploit microprocessor technology developed at the
General Electric Research and Development Center. The Company was
incorporated under the laws of the State of Delaware in 1978 and
acquired all rights of General Electric Venture Capital Corp., a
subsidiary of General Electric Company, to certain microcomputer
technology. The Company's headquarters are located at 3490 US
Route 1, Princeton, New Jersey 08540, telephone (609) 987-1513.
Mikros Systems Corporation is a high-technology company in
Princeton, New Jersey with a successful record in the defense
communications business. The Company's strategy is to develop
algorithms and associated products which take advantage of
ongoing price/performance improvements in digital signal
processors (DSPs) and transmit the maximum of data possible over
a given frequency.
Since 1986, the Company has focussed on improving the
performance of digital communication systems used by the U.S.
Navy, particularly the "Link-11" digital radio network. More
recently, Mikros has begun to diversify and explore the
application of "dual-use" technologies to commercial wireless
communications applications.
In 1996 Mikros secured key development contracts in both the
defense and commercial segments of its business. The U.S. Navy
selected Mikros competitively to develop and manufacture its next
generation data terminal set, the successor to the system which
Mikros currently manufactures.
The commercial development program which Mikros initiated in 1994
accelerated in 1996. Mikros will soon be in a position to begin
production of its first generation of commercial products based
on advanced wireless communications technology originally
developed for the military. The high-speed wireless technology
for FM subcarrier datacasting, originally developed for Data
Broadcasting Corporation, was successfully field tested during
the fourth quarter of 1996. Mikros entered into a joint venture
with Safeguard Scientifics (Delaware), Inc to develop wireless
products and services using Mikros' Amplitude Modulation (AM)
technology.
Mikros believes that the global demand for leading edge wireless
communications and information technology will remain strong,
particularly for products which enable corporations to offer new
and more efficient communications solutions. Mikros believes
that it is well positioned to take advantage of these trends.
<PAGE>
Radio Frequency Data Links
- --------------------------
1997 will mark the tenth anniversary of Mikros involvement in the
U.S. Navy's Multi-Frequency Link-11 program. This program was
initiated by the U.S. Navy to improve wireless data
communications for Navy battle groups. Mikros' first generation
system, the AN/USQ-120, was jointly developed with the Applied
Physics Laboratory of Johns Hopkins University. The system,
based on technology developed under the Small Business Innovation
Research Program (SBIR) overcame problematic radio frequency
propagation anomalies by using simulcast techniques. Mikros used
its expertise in real-time systems design and digital signal
processing to achieve an unprecedented connectivity rate of 98%.
The development program which began in 1987 resulted in a first
production run in 1995. AN/USQ-120 systems have been deployed in
nine U.S. Navy Battle Groups, and the response from the fleet has
consistently been highly positive. In 1996 Mikros received
additional orders for further AN/USQ-120 systems, the majority of
which will be delivered during 1997.
In June 1996, Mikros was selected as one of the First Annual
Tibbets Award Winners from the Small Business Administration for
SBIR excellence for the innovative work performed.
In November 1996 Mikros was awarded a five year contract to
produce the next generation standard data terminal set for the
U.S. Navy. This digital wireless communications system is
referred to as the Common Shipboard Data Terminal Set (CSDTS).
Mikros based its design of CSDTS on its AN/USQ-120 system. This
award was the result of a competitive procurement. The initial
order has a value of $432,000.
This award was particularly important because the winner became
the exclusive source to the U.S. Navy of this mission critical
technology. Previously, Mikros was one of two suppliers of data
terminal sets to the U.S. Navy. Mikros' new status of sole
source will significantly strengthen its relationships with the
U.S. Navy and makes Mikros the defacto standard and the
compelling choice for allied navies which need a wireless intra-fleet
communications system.
In the wake of CSDTS, Mikros expects to broaden its relationship
with the U.S. Navy with new development contracts in the area of
digital wireless communications.
Acoustic Communications
- -----------------------
Mikros has also developed advanced digital signal processing
techniques, which cancel noise and interference, providing high-quality
underwater communications. Mikros participated in a SBIR
Program to develop a system which would allow U.S. Navy surface
ships to radio link with submerged submarines up to 100 miles
from the ships. This program concluded with encouraging "in-water"
test results. Mikros has now partnered with Lockheed
Sanders and expects to participate in an Advanced Technology
Demonstration in 1997.
<PAGE>
The Department of Defense is reviewing many possible applications
of this technology which include: underwater telephones, command
and control of unmanned underwater vehicles, and communication
with intelligent sensors.
Commercial applications include underwater voice for recreational
divers, control data links for off-shore drilling equipment,
control of underwater vehicles, and underwater transmission of
video images.
Commercial Programs
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In 1995, Mikros identified that the wireless communication
technology which it had originally developed for the military
could be modified for use in high-speed point to multi-point data
broadcasting via regular FM and AM radio frequencies. By
increasing the amount of data which may be transmitted over a
given frequency, Mikros' technology enables new and existing
service providers to increase the number and complexity of the
products which they offer to their customers.
AM development has also opened the door to a variety of new
business opportunities. In particular, it has enabled Mikros to
diversify into the area of providing broadcast data services via
its interest in a joint venture with Safeguard Scientifics
(Delaware), Inc.
The convergence of the media, computer, and telecommunication
industries continues unabated, and the use of digital wireless
transmission technology is increasing dramatically. Mikros is
confident that its FM and AM technologies will play an important
role in wireless communications solutions of the future. The
enormous coverage of the FM and AM radio network infrastructures
combined with the high-speed data rates achieved by Mikros'
technology offers service providers the ability to cost-effectively and
simultaneously transmit large amounts of data to a potentially unlimited
group of customers.
FM Data Broadcasting
- --------------------
Mikros selected FM data broadcasting as its first commercial
target market. Data broadcasting companies use ordinary FM radio
to provide mobile paging, real-time financial data and other
specialized wireless services. Under current Federal
Communication Commission (FCC) regulations, designated portions
of the FM radio broadcast spectrum, known as subcarriers, may be
used to transmit information in addition to normal station
programming. Listeners with specially equipped FM radios can
decode the subcarrier information, while standard FM radios
continue to receive normal radio station programs. Mikros'
technology allows service providers to broadcast at a much higher
data rate. Information providers are able to increase the
quantity and quality of the services, while paging companies can
service many more subscribers using the same network. In both
cases, the service provider is increasing the return on its
investment in network infrastructure.
<PAGE>
Recently the Company became aware of an emerging trend which
could create a higher level of demand for datacasting technology.
Internet service providers are increasingly broadcasting selected
data to their customers rather than requiring their customers to
retrieve it. Proper use of 57.6 kbps of broadcast (point to
multi-point) capacity could help to reduce congestion on the
Internet and free up capacity for point to point communication.
Mikros intends to vigorously pursue this market in the coming year.
AM Data Broadcasting
- --------------------
Mikros began developing its AM technology in 1995. This system
is also based on proprietary technology which Mikros originally
conceived for the U.S. Navy and subsequently patented. The
initial system was capable of transmitting between 1200 and 2400
bits per second (bps). However, new breakthroughs in 1996 have
yielded a version of this technology which may allow data to be
transmitted at rates as high as 28.8 kbps.
This development interested Safeguard Scientifics (Delaware),
Inc., a large, publicly traded (NYSE: SFE) company. Safeguard
invested directly in Mikros and together with Mikros founded a
new company, Mobile Broadcasting Corporation (MBC). MBC intends
to use the untapped AM resource and offer a wide array of
broadcast data services. Mikros will develop and manufacture
transmitters and receivers which incorporate the AM technology.
MBC currently has the exclusive right to use this technology in
North America. However, licenses can be granted to selected
companies on a case by case basis.
Department of Defense Contracts
- -------------------------------
The Company is dependent on Department of Defense contracts and
could be vulnerable to future budget cuts by the U.S. Navy
Department. The Company's present contracts are for equipment
related to ongoing shipbuilding programs and the Company has no
knowledge of budget cuts that would affect its present contracts.
There can be no assurance, however, that such programs will not
be subject to budget cuts.
Marketing
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In 1996, revenues from Link 11 programs and commercial wireless
communications amounted to 26% and 37%, respectively, of total
revenues. In 1995, revenues from Link 11 programs and underwater
communications amounted to 70% and 10%, respectively, of total
revenues.
The Company, like many small businesses, relies heavily on its
major customers and programs. During 1996, the loss of any of
the Company's prime contracts would have significantly slowed the
Company's growth and the Company believes that such a loss would
have materially adversely affected the Company's results of
operations.
<PAGE>
The Company does all its marketing using its own employees.
Backlog
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As of December 31 1996, the Company had a backlog of
approximately $3,800,000, compared to $50,000, at December 31,
1995 and $550,000 at December 31, 1994.
Engineering
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Engineering is a critical factor in the development of the
Company's present and future products. The Company currently
employs ten full-time engineers/programmers, one executive and
four technicians to work on design, development and production.
At present, the Company engages independent technical consultants
in its development effort from time to time. Each independent
technical consultant, as a condition of engagement, executes a
confidentiality agreement. The Company will continue to rely on
independent consultants for support in the development of
additional products. The Company intends to add to its
engineering staff as its needs grow.
Manufacturing
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A microcomputer generally consists of integrated circuits,
whether assembled on circuit boards or incorporated into medium
or large scale integrated chips which are then assembled on
circuit boards, and of peripheral equipment and computer programs
for making the circuits function for particular applications.
The Company uses subcontractors for the manufacturing of
integrated circuit chips and of printed circuit cards. Final
assembly and production testing of products are performed within
the Company. In addition, the Company integrates peripheral
equipment manufactured by others into its microcomputer systems.
The Company has agreements with several of its suppliers to
purchase critical components for its circuit cards. Many of the
Company's products are compatible with the industry-standard VME
bus interconnection scheme, and more than 100 different vendors
supply peripheral equipment compatible with this standard.
Research and Development
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In 1994, the Company began research on a method of optimizing
spectrum efficiency for wireless communications in radio data
broadcasting and Personal Communications Services (PCS) markets
and continued this effort through 1996.
Patents
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In addition to an already existing patent, the Company in 1994
filed a patent application on certain digital signal processing
technology.
<PAGE>
Competition
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High technology products such as microcomputers often require
large investments of both money and talent. Many large companies
with greater financial and human resources than the Company are
currently investing heavily in products that compete directly
with the Company's products. There is no assurance that the
Company's products can be successfully marketed against such
competition.
Being first in the market with new high technology is a critical
factor in a company's success in the market. There is no
assurance that the Company will be able to introduce new products
to the market before any of its competitors.
Employees
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As of February 28, 1997, the Company had twenty-three full time
and two part-time employees which consist of five executives, six
administrative, ten engineers/programmers and four technicians.
None of the Company's employees is represented by a union, and
the Company believes its relations with its employees are
satisfactory. Employees having access to proprietary information
have executed nondisclosure agreements.
Warranty
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The Company warrants that the equipment made by it will be free
from defects of material and workmanship. The Company normally
provides a limited warranty of 90 days from the date of shipment.
If during the warranty period any component part of the equipment
becomes defective by reason of material or workmanship and the
purchaser immediately notifies the Company of such defect, the
Company is obliged, at its option, either to supply a replacement
part, to request that such part be returned to the plant for
repair or to perform necessary repair at the purchaser's
location.
The Company's warranty expense has been minimal over the past
three years.
Inventories
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The Company's inventory at December 31, 1996 had an aggregate
value of approximately $153,000 and consisted primarily of raw
materials and work-in-process. This compares to inventories of
approximately $76,000 at December 31, 1995, which was comprised
totally of raw materials and work-in-process.
<PAGE>
Source of Supply
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The Company purchases all components and supplies for the
manufacture of its products from a variety of sources, domestic
and foreign.
Changing the supplier of a component may result in additional
cost and production delays. The Company has agreements with
several key suppliers for critical components for its circuit
cards.
<PAGE>
Item 2. Properties
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The Company owns no real property. The Company leases facilities
in Princeton, New Jersey totalling approximately 12,750 square
feet which contain all of the Company's administrative offices,
research and assembly facilities. The lease agreement for such
facilities expires in March, 1998 and the monthly rental is
$13,780. The Company also leases, on an annual basis, office
space in the Washington, D.C. area for $1,000 per month.
Item 3. Legal Proceedings
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Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
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Inapplicable.
<PAGE>
PART II
Item 5. Market for the Registrants' Common Equity and Related
Shareholder Matters
- --------------------------------------------------------------
The following table sets forth the range of high and low closing
bid prices of the Common Stock for the periods indicated as
determined by the National Quotation Bureau, Inc. The quoted
prices represent only prices between dealers on each trading day
as submitted from time to time by certain of the securities
dealers wishing to trade in the Company's Common Stock, do not
reflect retail mark-ups, mark-downs or commissions, and may
differ substantially from prices in actual transactions.
Bid
High Low
1996
First Quarter $1.50 $ .3125
Second Quarter 1.00 .50
Third Quarter 2.75 .625
Fourth Quarter 3.375 1.875
1995
First Quarter $ .15 $ .05
Second Quarter .5625 .07
Third Quarter .875 .25
Fourth Quarter .875 .25
1994
First Quarter $ .10 $ .0625
Second Quarter .12 .05
Third Quarter .15 .08
Fourth Quarter .1875 .10
The Company has never paid cash dividends on its Common Stock.
Any payment of cash dividends in the future will depend upon the
Company's earnings (if any), financial condition, and capital
requirements.
In addition, the Company has executed certain loan agreements
which prohibit the payment of a dividend on the Common Stock as
long as such agreements are in place. (see "Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of
Operations - 1992-1993 Financing" and "1996 Financing" below).
As of February 28, 1997, the Company had 508 holders of record of
its Common Stock.
<PAGE>
Item 6. Selected Financial Data (1)
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
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<C> <C> <C> <C> <C>
INCOME STATEMENT
Total Revenue $ 859,100 $3,379,897 $4,445,468 $2,909,202 $2,899,810
Net Income(Loss) (1,447,641) (647,673) 151,635 447,140 116,636
Income (Loss) per
common share-Primary (.18) (.10) .01 .08 .02
Fully Diluted (.18) (.10) .01 .08 .02
Weighted average
number of common
shares outstanding-
Primary 8,382,383 7,285,441 8,415,576 5,407,994 5,368,671
Weighted average
number of common
shares outstanding-
Fulled Diluted 16,436,134 12,880,930 8,415,576 5,407,994 5,368,671
BALANCE SHEET
Current Assets 1,204,944 283,309 1,405,554 518,289 647,639
Current Liabilities 1,330,601 604,527 1,118,537 304,246 1,026,009
Total Assets 1,497,294 546,995 1,641,001 806,006 912,492
Long-Term Liabilities 1,080,052 423,319 368,142 500,323 580,976
Total liabilities 2,410,653 1,027,846 1,486,679 804,569 1,606,985
Shareholders' Equity
(Deficiency) (913,359) (480,851) 154,322 1,437 (688,843)
</TABLE>
(1) The above data should be read in conjunction with the financial
statements of the Company included elsewhere herein.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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Results of Operations, General: The Company since 1990 has
derived a significantly greater percentage of its revenue from
government R & D contracts. Once a contract is signed, the
government can not reduce the contract price. The government
may, however upon notice and for cause, terminate a contract at
any time. The government remains liable for all costs the
Company incurred in performing the contract through the date of
termination. All proprietary knowledge gained, even if the
contract is terminated, is retained by the Company and can be
used for future R & D contracts or production contracts. The
Company believes that as the application of the Company's R & D,
technology to commercial applications continues to broaden, the
effect of a termination, completion, or non-renewal of a specific
R & D contract on the Company's financial or operational
condition lessens.
The Company includes inflation and changing price provisions in
its contracts and the Company intends to continue to seek such
provisions in future contracts.
1996 vs. 1995:
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Total revenues in 1996 were approximately $859,000 compared to
$3,380,000 in 1995, a decrease of 74.5%.
In 1996, revenues from research and development contracts was
approximately $702,000 or 81.7% of total revenues as compared to
$1,990,000 or 58.9% of total revenues in 1995. Revenues from
equipment sales in 1996 were approximately $157,000 or 18.3% of
total revenues compared to $1,390,000 or 41.1% of total revenues
in 1995. The decrease in revenues in both categories in 1996 was
due to delays in U.S. Navy funding for development and equipment
contracts.
Total cost of sales in 1996 was approximately $826,000 or 96.1%
of total revenues as compared to $2,876,000 or 85.1% of total
revenues in 1995. Contract R & D cost of sales in 1996 was
approximately $713,000 or 101.6% of Contract R & D revenues
compared to $1,796,000 or 90.2% in 1995. In both 1996 and 1995
the high cost of sales percentages for Contract R & D sales are
due to a contract on which revenues exactly matched the costs.
Except for such contract, the cost of sales percentages for
Contract R & D sales would be 83.1% and 88.8% for 1996 and 1995,
respectively.
General and Administrative expenses were approximately $896,000
in 1996 compared to $860,000 in 1995. Interest expense in 1996
amounted to approximately $126,000 in 1996 versus $57,000 in
1995. This increase is due to the higher level of debt during
1996 and corresponding interest payments (see "1996 Financing).
<PAGE>
In 1996, the Company incurred $457,000, or 53% of total revenues,
for research and development expenditures on commercial
application of its FM technology compared to $238,000 or 7% of
total revenues in 1995.
The Company recorded a net loss for 1996 of approximately
$1,448,000 compared to a net loss for 1995 of approximately
$648,000. The greater loss in 1996 is due to the significantly
lower level of revenues in 1996 and to higher spending on
research and development than in 1995.
1995 vs 1994:
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Total revenues in 1995 were approximately $3,380,000 compared to
$4,445,000 in 1994, a decrease of 24.0%.
In 1995, revenues from research and development contracts was
approximately $1,990,000 or 58.9% of total revenues as compared
to $3,048,000 or 68.6% of total revenues in 1994. Revenues from
equipment sales in 1995 were approximately $1,390,000 or 41.1% of
total revenues compared to $1,397,000 or 31.4% of total revenues
in 1994. The decrease in contract research and development
revenues in 1995 versus 1994 is due primarily to a reduction in
U.S. Navy funding for such efforts.
Total cost of sales in 1995 was approximately $2,876,000 or 85.1%
of total revenues as compared to $3,383,000 or 76.1% of total
revenues in 1994. Contract R & D cost of sales in 1995 was
approximately $1,796,000 or 90.2% of Contract R & D revenues
compared to $2,341,000 or 76.8% in 1994. The higher cost of
sales ratio and resulting decreased gross margin in 1995 is
because approximately 12.9% of Contract R & D revenues resulted
from a development program on which cost was shared equally with
a commercial customer and a lower volume of orders received from
the U.S. Navy which resulted in an unfavorable absorption of
fixed overhead costs.
General and Administrative expenses were approximately $860,000
in 1995 compared to $850,000 in 1994. Interest expense in 1995
amounted to approximately $53,000 in 1995 versus approximately
$61,000 in 1994.
In 1995, the Company incurred $238,000, or 7.0% of total
revenues, for research and development in the area of optimizing
spectrum efficiency for wireless communications related to the
Company's expanded initiatives in commercial wireless
communications. Any such expenses incurred in 1994 were minimal.
There was a net loss for 1995 of approximately $648,000 compared
to net income in 1994 of approximately $152,000. The loss in
1995 is due to the lower revenue volume in 1995 for Contract R &
D and increased expenses for research and development related to
commercial wireless communications.
<PAGE>
1994 vs 1993:
- -------------
Total revenues in 1994 were approximately $4,445,000 compared to
$2,909,000 in 1993, an increase of 52.8%.
In 1994, revenues from research and development were
approximately $3,048,000 or 68.6% of total revenues compared to
$2,845,000 in 1993, or 97.8% of total revenues. Equipment
revenues in 1994 were $1,397,000 or 31.4% of total revenues
compared to $64,000 or 2.2% of total revenues in 1993. The
increase in equipment revenues in 1994 is due mainly to revenues
from a contract from the U.S. Navy for production of data
terminal sets; whereas in 1993 equipment sales consisted of SO5
computer boards to Bendix Test Systems Division.
Total cost of sales in 1994 was approximately $3,383,000 or 76.1%
of revenues versus $2,054,000 or 70.6% of revenue in 1993. R&D
cost of sales in 1994 was approximately $2,341,000 76.8% of R&D
revenue compared to $2,031,000 or 71.4% in 1993. Cost of sales
for equipment was $1,041,000 or 74.5% of equipment revenue in
1994 compared to $23,000 or 35.9% in 1993.
The decrease in the total gross margin and for equipment sales in
1994 is due to the higher costs of the data terminal sets sold in
1994 which comprised 100% of Equipment Sales as compared to the
SO5 computer boards sold in 1993 which comprised 100% of
Equipment Sales.
General and administrative expenses were approximately $850,000
in 1994 or 19.1% of revenue versus $679,000 or 23.3% of revenue.
Interest expense in 1994 was approximately $61,000 or 1.4% of
revenue compared to $25,000 in 1993 or 0.8% of revenue. Although
total debt outstanding during 1994 was less than in 1993, a debt
restructuring in 1993 called for a reduction in interest actually
owed and paid.
Net Income in 1994 was $151,635 or 3.4% of revenue versus
$447,140 or 15.4% of revenue in 1993. The difference is because
1993 included a gain of $295,893 from a restructuring of debt.
Without such gain, Net Income in 1993 would have been $151,245.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has financed its operations
through debt, private and public offerings of equity securities
and cash generated by operations.
In 1996, the Company had negative cash flow from operations of
approximately $1,089,000 compared to negative cash flow from
operations of $55,000 in 1995 and positive cash flow of $214,000
in 1994. There was negative working capital of $125,658 at
December 31, 1996, negative working capital of $321,000 in 1995
and working capital of $287,000 at December 31, 1994.
<PAGE>
A substantial portion of the Company's costs and expenses is
represented by labor and related benefits. Such costs are
recovered against R & D contracts with the government. They are
paid by the Company monthly prior to the submission of invoices
to the Federal government. Historically, any delays have not
been significant and have not had a detrimental effect on the
Company's operations. The Company believes that this will
continue to be the case. In 1996, the Company increased its
number of employees from 19 to 24.
The Company is dependent on Department of Defense contracts and
could be vulnerable to future budget cuts by the U.S. Navy
Department. The Company's present contracts are for equipment
related to ongoing shipbuilding programs and the Company has no
knowledge of budget cuts that would affect its present contracts.
There can be no assurance, however, that such programs will not
be subject to budget cuts.
1996 Financing
- --------------
In a series of events from February through May 1996, the Company
raised an aggregate of $641,500 in debt financing pursuant to the
issuance of secured promissory notes.
The promissory notes are for a term of approximately eighteen
months and include an interest rate of 12% on the unpaid balance.
The notes are convertible into Common Stock at a rate of one
Common Share for each dollar of debt. The first interest payment
is due on June 15, 1996 and quarterly thereafter. The principal
payments have been deferred until March 31, June 15, and
September 15, 1998. The notes are secured by the assets of the
Corporation. As additional consideration, warrants for the
purchase of common stock were granted (the number of shares were
based on the amount of the promissory note and equal to five
shares to each dollar). The warrant price is $.01 per share.
The following officers and directors participated in the 1996
financing: Wayne E. Meyer, Thomas J. Meaney, Frederick A. Tecce,
Deborah A. Montagna and Patricia A. Bird.
Strategic Alliance with Safeguard Scientifics (Delaware) Inc.
- ------------------------------------------------------------
On November 18, 1996, the Company consummated a Common Stock and
Warrant Agreement (the "Purchase Agreement") with Safeguard
Scientifics (Delaware), Inc., a Delaware corporation ("SSI"),
pursuant to which SSI purchased for an aggregate consideration of
$1,000,000: (i) 1,912,000 shares (the "Shares") of common stock
of the Company, $0.01 par value ("Common Stock"); (ii) a warrant
(the "First Warrant") to purchase 2,388,000 shares of Common
Stock at an exercise price of $0.65 per share; and (iii) a
warrant (the "Second Warrant") to purchase 3,071,000 shares of
Common Stock at an exercise price of $0.78 per share. The First
Warrant and the Second Warrant are referred to hereinafter
collectively as the "Warrants." The exercise prices of the
Warrants are subject to adjustment pursuant to customary
anti-dilution provisions.
<PAGE>
In connection with the sale of the Shares and the Warrants, the
Company granted to SSI certain piggyback and demand registration
rights with respect to the Shares 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 ten percent (10%) of the Shares.
Pursuant to the Purchase Agreement, as long as SSI owns one
percent (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; (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 (8) members. In addition, the Purchase Agreement also
provides that as long as SSI owns such one percent (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.
Also in connection with the transaction, certain of the Company's
AM and FM technology was transferred to a newly-formed company,
Data Design & Development Corporation, a Delaware corporation
("3D"), pursuant to a Contribution Agreement. Each of the
Company, SSI and certain debtholders of the Company (including
each of the Management Shareholders) owns one-third of the issued
and outstanding capital stock of 3D. Pursuant to a License
Agreement, 3D granted to the Company an exclusive, royalty-free
perpetual right and license in and to the development and marketing
of FM technology in the United States, Canada and Mexico. Pursuant
to a Technology License Agreement, 3D granted to Mobile Broadcasting
Corporation ("MBC"), a Delaware corporation, a royalty-free, exclusive,
perpetual right and license in and to the marketing of the AM technology
in the United States, Canada and Mexico. SSI owns 75% of the issued and
outstanding capital stock of MBC and the Company owns 25% of such
capital stock.
Finally, the Company entered into a Consulting Services Agreement
with MBC pursuant to which the Company will provide consulting
services to MBC in consideration for a fee of $200,000 for the
development of the AM technology.
<PAGE>
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 the investors 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 payment in sixteen quarterly payments beginning
January 1, 1994 and ending on October 1, 1997. Interest on the
unpaid principal balance is due in quarterly payments beginning
March 31, 1994 and the Company is current with such payments. 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. The Investors have
authorized deferral of principal payments until March 31, June 15
and September 15, 1998.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The financial statements required to be filed pursuant to this
Item 8 are appended to this report on Form 10-K. A list of the
financial statement schedules filed herewith is found at "Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K".
<PAGE>
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------
Not Applicable
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
- ---------------------------------------------------------
For information concerning this item, see the information under
"Election of Directors" and "Executive Officers" in the Company's
Proxy Statement to be filed with respect to the Annual meeting of
Shareholders to be held on June 17, 1997, which information is
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
For information concerning this item, see the information under
"Executive Compensation" in the Company's Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be
held on June 17, 1997, which information is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
For information concerning this item, see the information under
"Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement to be filed with respect to the
Annual Meeting of Shareholders to be held on June 17, 1997, which
information is incorporated herein by reference.
Item 13. Certain Relationship and Related Transactions
- -------------------------------------------------------
For information concerning this item, see the information under
"Certain Relationships and Related Transactions" in the Company's
Proxy Statement to be filed with respect to the Annual meeting of
Shareholders to be held on June 17, 1997, which information is
incorporated herein by reference.<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
- -----------------------------------------------------------------
(a) 1. Reference is made to financial statements included
under Item 8.
2. Reference is made to financial statements included
under Item 14(c).
3. Description of Exhibits (Pursuant to Item 601 of
Regulation S-K).
Note: All exhibits that were filed as exhibits (i) to the
Company's Registration Statement on Form S-18, File No.
2-67918-NY, as amended, (ii) or, if so specified, to previously
filed Annual Reports on Form 10-K or to previously filed Current
Reports on Form 8-K, are indicated by a parenthesis setting forth
the exhibit number by which the exhibits were identified in said
Registration Statement and are hereby incorporated by reference.
<PAGE>
3.1 Certificate of Incorporation [Exhibit 2(i)]
3.2 By-laws [Exhibit 2(ii)]
3.3 Form of Certificate of Amendment to Certificate of
Incorporation [Exhibit 2(iii)]
3.4 Form of Certificate of Amendment of Incorporation with
respect to increase of authorized shares [Exhibit 2iv)]
4.1 Certificate of Designations of Series B Preferred Stock
and Series C Preferred Stock [Exhibit 4.1 to Form 8-K
filed September 12, 1988]
4.2 Revised form of Series C Preferred Stock Purchase
Warrant issued to Bishop Capital, L.P. as assigned to
the Investors.
4.3 Form of Series C Preferred Stock Purchase Warrant
issued to Unicorn Ventures, Ltd., Renaissance Holdings
PLC and Gartmore Information and Financial Trust PLC.
[Exhibit 4.5 to Form 10-K for 1988 filed May 15, 1989]
4.4 Form of Series C Preferred Stock Purchase Warrant
assigned to the Investors. [Exhibit 4.10 to Form 10-K
for 1990 filed April 12, 1991]
4.5 Form of Series C Preferred Stock Purchase Warrant
assigned to the Investors [Exhibit 4.11 to Form 10-K
for 1990 filed April 12, 1991]
4.6 Assignment and Sale Agreement dated October 27, 1992 by
and among Renaissance Holdings PLC, acting by its
Receivers, the Company, and each of the Investors and,
as to Section 1.1 thereof only, the Chartfield Group,
acting by its Receivers [Exhibit 4.1 to Form 8-K filed
October 27, 1992]
4.7 Loan Modification and Intercreditor Agreement dated
October 27, 1992 by and among the Company and the
Investors [Exhibit 4.2 to Form 8-K filed October 27,
1992]
4.8 Certificate of Designations of Serial Preferred Stock
[Exhibit 4.16 to Form 10-K for 1993 filed March 30,
1994]
10.1 Loan Agreement dated April 26, 1988 between the Company
and Bishop Capital, L.P. as assigned to the Investors
[Exhibit 10.1 to Form 8-K filed September 12, 1988].
10.2 Security Agreement dated April 26, 1988 between the
Company and Bishop Capital, L.P. as assigned to the
Investors [Exhibit 10.2 to Form 8-K filed September 12,
1988]
10.3 Amendment to Loan Agreement and Promissory Note dated
as of January 27, 1989 between Bishop Capital, L.P. as
assigned to the Investors and the Company. [Exhibit
10.4 to Form 10-K for 1988 filed May 15, 1989]
10.4 Investment Agreement dated as of June 30, 1988 between
Unicorn Ventures, Ltd., Unicorn Ventures II, L.P., as
assigned to the Investors and the Company [Exhibit 10.6
to Form 8-K filed September 12, 1988]
10.5 Security Agreement dated June 30, 1988 from the Company
to Unicorn Ventures, Ltd. and Unicorn Ventures II, L.P.
as assigned to the Investors [Exhibit 10.9 to Form 8-K
filed September 12, 1988]
<PAGE>
10.6 Registration Agreement dated as of June 30, 1988
between Unicorn Ventures, Ltd., Unicorn Ventures II,
L.P., as assigned to the Investors and the Company
[Exhibit 10.10 to Form 8-K filed September 12, 1988]
10.7 Consent and Amendment Agreement dated March 31,1989 as
assigned to the Investors. [Exhibit 10.10 to Form 10-K
for 1988 filed May 15, 1989]
10.8 1988 Restricted Stock Award Plan. [Exhibit 10.20 to
Form 10-K for 1988 filed May 15, 1989]
10.9 Form of Restricted Stock Agreement. [Exhibit 10.21 to
Form 10-K for 1988 filed May 15, 1989]
10.10 Lease agreement with RUJIM, Inc. [Exhibit 10.25 to Form
10-K for 1988 filed May 15, 1989]
10.11 Incentive Stock Option [Exhibit 10(c)(iii) to Form 10-K
for the year ended December 13, 1981]
10.12 Amended and Restated Stock Option Plan (1988)[Exhibit
10.27 to Form 10-K for 1989 filed April 3, 1990]
10.13 Security Agreement dated April 19, 1990 from Mikros
to Bishop Capital, L.P. as assigned to the Investors
[Exhibit 10.35 to Form 10-K for 1990 filed April 12,
1991]
10.14 Security Agreement dated April 19, 1990 from Mikros to
Renaissance Holdings PLC as assigned to the Investors.
[Exhibit 10.36 to Form 10-K for 1990 filed April 12,
1991]
10.15 Consent and Amendment Agreement dated as of April 19,
1990 as assigned to the Investors. [Exhibit 10.37 to
Form 10-K for 1990 filed April 12, 1991]
10.16 Note Modification and Stock Purchase Agreement dated
December 31, 1993. [Exhibit 10.47 to Form 10-K for
1993 filed March 30, 1994]
10.17 Promissory Notes dated December 31, 1993 in the amount
of $100,000 to each of the Investors. [Exhibit 10.17 to
Form 10-K for 1994 filed March 29, 1995]
10.18 Authorizations for deferral of principal payments by
each of the Investors [Exhibit 10.18 to Form 10-K for
1995 filed May 16, 1996]
10.19 Common Stock and Warrant Purchase Agreement dated
November 15, 1996 by and between Mikros Systems
Corporation and Safeguard Scientifics (Delaware), Inc.
[Exhibit 10.1 to Form 8-K filed November 18, 1996]
10.20 License Agreement dated November 15, 1996 by and
between Mikros Systems Corporation and Data Design and
Development Corporation. [Exhibit 10.2 to Form 8-K
filed November 18, 1996]
10.21 Technology License Agreement dated November 15, 1996 by
and among Data Design and Development Corporation,
Mikros Systems Corporation and Mobile Broadcasting
Corporation. [Exhibit 10.3 to Form 8-K filed November
18, 1996]
10.22 Authorization for Deferral of principal payment by each
of the investors together with Schedule of Deferrals.
10.23 Form of Promissory Note together with Schedule of
Investors.
10.24 Form of 1996 Warrant with Schedule of Warrants.
11.0 Computation of earnings per share
<PAGE>
(b) On November 18, 1996 the Company filed a Current Report on
Form 8-K reporting the Company's strategic alliance with
Safeguard Scientifics (Delaware), Inc. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations - Strategic Alliance with Safeguard
Scientifics (Delaware), Inc."
(c) See (a)3 above
(d) Financial Statement Schedules
The following financial statements are incorporated herein:
Independent Auditors' Report
Balance Sheets at December 31, 1995 and 1996
Statements of Operations for the years ended December 31, 1994,
1995 and 1996
Statements of Shareholders' Equity (Deficiency) for the years
ended December 31, 1994, 1995 and 1996
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996
Notes to Financial Statements
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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.
MIKROS SYSTEMS CORPORATION
--------------------------
(Registrant)
Dated: February 28, 1997
By: /s/ Thomas J. Meaney
--------------------------------
Thomas J. Meaney, Vice Chairman
Chief Executive Officer
Pursuant to the requirements 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 indicated and
on the date indicated.
Signatures Date
/s/ Thomas J. Meaney February 28, 1997
- ------------------------------
Thomas J. Meaney, Vice Chairman,
Chief Executive Officer and Director
/s/ Joseph R. Burns February 28, 1997
- ------------------------------
Joseph R. Burns, Senior Vice President
and Director
/s/ William V. Goodwin February 28, 1997
- ------------------------------
William V. Goodwin, Director
/s/ F. Joseph Loeper February 28, 1997
- ------------------------------
F. Joseph Loeper, Director
/s/ Thomas C. Lynch February 28, 1997
- ------------------------------
Thomas C. Lynch, Director
/s/ Wayne E. Meyer February 28, 1997
- ------------------------------
Wayne E. Meyer, Chairman and Director
/s/ Frederick C. Tecce February 28, 1997
- ------------------------------
Frederick C. Tecce, Director
/s/ John B. Torkelsen February 28, 1997
- ------------------------------
John B. Torkelsen, Director
/s/ Joseph R. Benek February 28, 1997
- ------------------------------
Joseph R. Benek, Vice President, Treasurer,
and Assistant Secretary
<PAGE>
EXHIBIT 10.22
AUTHORIZATION FOR DEFERRAL OF PRINCIPAL PAYMENT BY EACH INVESTOR
INCLUDING SCHEDULE OF INVESTOR
October 29, 1996
Investor
Reference is hereby made to that certain Promissory Note dated
{date of investor's note} (the "Note") made by Mikros Systems
Corporation ("Mikros") in the principal amount of {amount of
Note} payable to you.
By executing the counterpart hereto, you hereby consent to the
deferral of all principal due as of and after the date hereof
under the Note until the following dates at which time Mikros
shall repay one-third of the principal on each of such dates:
March 31, 1998, June 15, 1998 and September 15, 1998.
At any time until the Note is fully repaid, you shall have the
right, upon written notice to Mikros, to convert any or all of
the principal outstanding under the Note into shares of
restricted Common Stock of Mikros at a conversion rate of $1.00
of principal for each share. You acknowledge and agree that such
shares of Common Stock are restricted shares and may be publicly
traded only under certain circumstances.
The Note is amended to the extent set forth herein. The Note, as
amended and set forth herein, is in full force and effect.
Very truly yours,
/s/ Thomas J. Meaney
- ---------------------------
Thomas J. Meaney, President
ACKNOWLEDGED AND AGREED ON THIS {date signed by investor}, 1996
/s/ Investor Signature
- ----------------------
Investor
<PAGE>
RELEASE
The undersigned, for good and valuable consideration, the receipt of which is
hereby acknowledged, hereby releases the security interest granted to the
undersigned by Mikros Systems Corporation ("Mikros" in the following
collateral:
inventions, improvements, enhancements, modifications,
discoveries, claims, formulae, processes, proprietary
procedures, apparatuses, source code, object code, mask
works, technical information, patents, copyrights,
trademarks, trade secrets, technologies and know-how,
whether or not covered by claims of proprietary rights,
owned or controlled by Mikros on the date hereof in
connection with transmission in the AM broadcast band
(AM = 550KHz to 1750KHz) and FM Broadcast Band (FM =
880MHz to 108MHz).
The collateral securing the promissory note or notes made payable by Mikros
dated {Date of Note} payable to the undersigned in the principal amount of
{Amount of Note}, is amended to the extent set forth herein with immediate
effect.
The undersigned represents and warrants that he has not filed, nor has he
assigned to any third person, any complaints, charges or claims for relief
against any of the Released Parties with any local, state or federal court or
administrative agency. The undersigned further agrees and covenants not to
sue or to bring, or assign to any third person, any claims or charges against
any of the Released Parties with respect to any matter arising before the date
of this Release or covered by the release set forth above, and not to assert
against any of the Released parties in any action, suite litigation or
proceeding any matter arising before the date of this Release or covered by
the release set forth above.
The undersigned represents that he has been provided the opportunity to review
and consider this Release, that he fully understands the meaning and intent of
this Release and the he has had an opportunity to discuss and review the terms
of this Release fully with his attorney.
The undersigned has the legal right to execute and deliver this Release and to
perform all of his obligations hereunder. This Release constitute a valid and
legally binding obligation of the undersigned, enforceable against the
undersigned in accordance with its terms.
IN WITNESS WHEREOF, the undersigned has duly executed this Release as of the
{Date Signed by Investor}, 1996.
/s/ Investor
- ---------------------
Investor
<PAGE>
EXHIBIT 10.22a
SCHEDULE OF DEFERRALS OF PRINCIPAL PAYMENTS
DATE OF
NAME DEFERRAL
- -------------------------------------------------------
Meaney, Thomas J. 11-04-96
Meaney, Thomas J. 11-04-96
Meyer, Wayne E. 11-04-96
Meyer, Wayne E. 11-04-96
MLPFS fbo Tecce, Frederick C., IRA 11-04-96
Tecce, Frederick C. 11-04-96
Sullivan, Glory L. 11-11-96
Goodwin, Evelyn L. 10-30-96
Asher, Robert 11-01-96
Holland, Michael J. 10-31-96
Bird, Patricia A. 11-05-96
Dyson, Timothy F. 10-29-96
Montagna, Deborah A. 10-30-96
Meyer, Wayne E. 11-04-96
Mignatti, Ted J. Jr. 11-08-96
Mignatti, Ted J. III 11-08-96
Robins, Charles 11-11-96
MLPFS fbo Flanigan, James B., IRA 11-05-96
Cohen, Alfred L. 11-01-96
Hansen, Richard A. 11-05-96
DL&JSC Custodian fbo Campbell, Frank J. III 11-04-96
Trans European Trading c/o William Fretz 11-01-96
DiMarino, Kroop Gastrointestinal Assoc.
Money Purchase Pension Plan 11-02-96
DL&JSC Custodian fbo Brown, William P. 11-01-96
MLPFS fbo Pirquet, Herbert (Bret) P., IRA 10-31-96
Meyer, William F., Meyer Associates 10-31-96
Compass Management Partners 11-04-96
Compass Technology Partners 11-04-96
Tecce, Frederick A. 11-04-96
Tecce, John F. 11-07-96
Tecce, Marc A. 11-06-96
Tecce, Susan J. 11-06-96
Tecce-Johnson, Pamela 11-12-96
Tecce, James C. 11-07-96
Torkelsen, John B. 11-05-96
Burns, Joseph R. 11-04-96
<PAGE>
EXHIBIT 10.23
PROMISSORY NOTE
THIS NOTE HAS BEEN ISSUED PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF FEDERAL AND STATE SECURITIES LAWS
AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH SUCH
REQUIREMENTS OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE
OBLIGOR THAT SUCH TRANSFER WILL NOT RESULT IN ANY VIOLATION OF
SUCH LAWS OR AFFECT THE LEGALITY OF ITS ISSUANCE.
SECURED PROMISSORY NOTE
{Amount of Note} {Date of Note}
FOR VALUE RECEIVED, the undersigned, MIKROS SYSTEMS CORPORATION,
a Delaware corporation (the "Obligor"), hereby promises to pay to
the order of {Name of Investor} (the "Holder"), the principal
amount of {Amount of Note} Dollars ($XX,XXX.XX) payable as
follows: the Obligor will make equal principal payments of {One
Third of Principal} on the 15th day of each of March 1997, June
1997 and September 1997. The Obligor also promises to pay to the
Holder interest on the principal amount hereof at a rate per
annum equal to twelve percent (12%), which interest shall be
payable as set forth below and at such time as the principal is
due hereunder. Interest shall be calculated on the basis of a
year of 365 days and for the number of days actually elapsed.
The payments of principal and interest hereunder shall be made in
coin or currency of the United States of America which at the
time of payment shall be legal tender therein for the payment of
public and private debts.
This Note shall be subject to the following additional terms and
conditions:
1. Interest Payments.
- ----------------------
Interest hereunder shall be payable at such time as the principal
is due hereunder and on the fifteenth day of each September,
December and March, commencing September 15, 1996. If all or a
portion of the principal or interest outstanding hereunder shall
not be paid when due (whether after demand, stated maturity,
acceleration or otherwise), such amount, to the extent permitted
by applicable law, shall bear interest at a rate of 2% per annum
in excess of the rate hereinbefore provided, but in no event in
excess of the maximum rate of interest permitted under applicable
law.
<PAGE>
2. Prepayment.
- ---------------
The Obligor shall have the right at any time to prepay the
principal hereof in whole or in part, without premium or penalty,
upon giving at least three days' prior written notice of such
prepayment to the Holder, provided that interest on the principal
hereof to be so prepaid, accrued to the date of such prepayment,
shall be paid concurrently therewith. In case this Note is to be
prepaid in part only, the notice of prepayment shall specify the
principal amount hereof to be prepaid.
3. No Waiver.
- --------------
No failure or delay by the Holder in exercising any right, power
or privilege under this Note shall operate as a waiver thereof
nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law. No course of dealing between the
Obligor and the Holder shall operate as a waiver of any rights by
the Holder.
4. Waiver of Presentment and Notice of Dishonor.
- -------------------------------------------------
The Obligor and all endorsers, guarantors and other parties that
may be liable under this Note hereby waive presentment, notice of
dishonor, protest and all other demands and notices in connection
with the delivery, acceptance, performance or enforcement of this
Note.
5. Place of Payment; Business Day.
- -----------------------------------
All payments of principal of this Note and interest thereon shall
be made at the office of the Holder at {Address of Investor}, or
at such other place as the Holder may from time to time designate
in writing. If any payment or action to be made or taken
hereunder shall be stated to be or become due on a day which is
not a business day, such payment or action shall be made or taken
on the next following business day and such extension of time
shall be included in computing interest or fees, if any, in
connection with such payment or action.
6. Events of Default.
- ----------------------
The entire unpaid principal amount of this Note, together with
all accrued interest hereon, shall, at the option of the Holder
exercised by written notice to the Obligor, forthwith become and
be due and payable, without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived, if
any one or more of the following events (herein called "Events of
<PAGE>
Default") shall have occurred (for any reason whatsoever and
whether such happening shall be voluntary or involuntary or come
about or be effected by operation of law or pursuant to or in
compliance with any judgment, decree or order of any court or any
order, rule or regulation of any administrative or governmental
body) and be continuing at the time of such notice, that is to
say:
a) if default shall be made in the due and punctual payment of
the principal of and/or the interest on this Note when and as the
same shall become due and payable, whether at maturity, by
acceleration or otherwise, and such default shall have continued
for a period of five days;
b) if default shall be made in the performance or observance of
any of the covenants, agreements or conditions of the Obligor
contained in this Note as such may be amended from time to time,
and such default shall have continued for a period of ten days
after written notice to the Obligor from the Holder;
c) if the Obligor shall:
i) admit in writing its inability to pay its debts
generally as they become due;
ii) file a petition in bankruptcy or a petition to take
advantage of any insolvency act;
iii) make an assignment for the benefit of creditors;
iv) consent to the appointment of a receiver of the whole
or any substantial part of its property;
v) on a petition in bankruptcy filed against it, be
adjudicated a bankrupt; or
vi) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any
other applicable law or statute of the United States of
America or any State, district or territory thereof;
d) if a court of competent jurisdiction shall enter an order,
judgment, or decree appointing, without the consent of the
Obligor, a receiver of the whole or any substantial part of its
property, and such order, judgment or decree shall not be vacated
or set aside or stayed within 120 days from the date of entry
thereof;
e) if, under the provisions of any other law for the relief or
aid of debtors, any court of competent jurisdiction shall assume
custody or control of the whole or any substantial part of his
property and such custody or control shall not be terminated or
stayed within 90 days from the date of assumption of such custody
or control; or
<PAGE>
f) if default shall be made in the performance or observance of
any of the covenants, agreements or conditions of the Obligor
contained in the Security Agreement dated the date hereof (the
"Security Agreement") between the Holder and other lenders to the
Obligor, and the Obligor.
7. Remedies.
- -------------
In case of any Events of Default hereunder, the Holder may
proceed to protect and enforce its rights either by suit in
equity and/or by action at law, whether for the specific
performance of any covenant or agreement contained in this Note
or in aid of the exercise of any power granted in this Note, or
the Holder may proceed to enforce the payment of all sums due
upon this Note or to enforce any other legal or equitable right
of the Holder.
8. Security Agreement.
- -----------------------
The obligations of the Holder hereunder are secured pursuant to
the terms of the Security Agreement. This Note and the Security
Agreement are subject to the terms and conditions of that certain
Intercreditor Agreement dated the date hereof among the Holder,
the other Current Lenders and the Prior Lenders (as such terms
are defined in such Intercreditor Agreement).
9. Binding Effect.
- -------------------
This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and each of their respective
successors and assigns.
10. Severability.
- ------------------
In the event that one or more of the provisions of this Note
shall for any reason be held invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Note, but this Note
shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
11. Governing Law.
- -------------------
This Note and the rights and obligations of the Obligor and the
Holder shall be governed by and construed in accordance with the
laws of the State of New Jersey applicable to agreements made and
to be performed entirely within such jurisdiction.
<PAGE>
12. Modifications.
- -------------------
No modification, amendment, change or supplement shall be
effective unless in writing and signed by the party against which
it is sought to be enforced.
IN WITNESS WHEREOF, the undersigned has duly executed this Note
on the date first above written.
MIKROS SYSTEMS CORPORATION
By: /s/ Thomas J. Meaney
- ---------------------------
Thomas J. Meaney, President
and Chief Executive Officer
<PAGE>
EXHIBIT 10.23a
SCHEDULE OF PROMISSORY NOTES
AMOUNT OF
NOTE EQUAL
INVESTOR AMOUNT DATE PAYMENTS
- --------------------------------------------------------------
Meaney, Thomas J. $35,000.00 02-15-96 $11,666,67
Meyer, Wayne E. 35,000.00 02-22-96 11,666.67
MLPFS fbo Tecce,
Frederick C., IRA 35,000.00 03-22-96 11,666.67
Sullivan, Glory L. 35,000.00 02-25-96 11,666.67
Goodwin, Evelyn L. 35,000.00 03-25-96 11,666.67
Asher, Robert 18,000.00 03-26-96 6,000.00
Holland, Michael J. 35,000.00 03-27-96 11,666.67
Bird, Patricia A. 8,750.00 04-01-96 2,916.67
Dyson, Timothy F. 8,750.00 04-01-96 2,916.67
Montagna, Deborah A. 8,750.00 04-02-96 2,916.67
Meyer, Wayne E. 8,750.00 04-08-96 2,916.67
Mignatti, Ted J. Jr. 25,000.00 04-12-96 8,333.34
Mignatti, Ted J. III 10,000.00 04-12-96 3,333.34
Robins, Charles 10,000.00 04-12-96 3,333.34
MLPFS fbo Flanigan,
James B., IRA 35,000.00 04-22-96 11,666.67
Cohen, Alfred L. 35,000.00 04-22-96 11,666.67
Hansen, Richard A. 35,000.00 04-25-96 11,666.67
DL&JSC Custodian fbo
Campbell, Frank J. III 35,000.00 04-29-96 11,666.67
Trans European Trading
c/o William Fretz 10,000.00 04-30-96 3,333.34
DiMarino, Kroop Gastro-
intestinal Assoc. Money
Purchase Pension Plan 35,000.00 05-06-96 11,666.67
DL&JSC Custodian fbo
Brown, William P. 5,000.00 05-03-96 1,666.67
MLPFS fbo Pirquet, Herbert
(Bret) P., IRA 20,000.00 05-08-96 6,666.67
Meyer, William F., Meyer
Associates 17,500.00 05-24-96 5,833.34
Compass Management Partners 10,000.00 05-29-96 3,333.34
Compass Technology Partners 60,000.00 05-29-96 20,000.00
Tecce, Frederick A. 6,000.00 05-29-96 2,000.00
Tecce, John F. 6,000.00 05-29-96 2,000.00
Tecce, Marc A. 6,000.00 05-29-96 2,000.00
Tecce, Susan J. 6,000.00 05-29-96 2,000.00
Tecce-Johnson, Pamela 6,000.00 05-29-96 2,000.00
Tecce, James C. 6,000.00 05-29-96 2,000.00
<PAGE>
EXHIBIT 10.24
Form of 1996 Warrant
Void after {Date of Individuals Promissory Note}, 2001
MIKROS SYSTEMS CORPORATION
COMMON STOCK PURCHASE WARRANT
MIKROS SYSTEMS CORPORATION (the "Company"), a Delaware
corporation, hereby certifies that {Investor} assigns, is
entitled, subject to the terms set forth below, to purchase from
the Company at any time on or from time to time after the
Commencement Date, as defined below, and before 5:00 P.M., New
York City time, on {Date of Individual's Promissory Note}, 2001,
175,000 fully paid and non-assessable shares of Common Stock of
the Company, at the price per share (the "Purchase Price") of
{Price of Warrant}. The number of such shares of Common Stock
and the Purchase Price are subject to adjustment as provided
herein.
1. Definitions
- ---------------
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
a) The term "Commencement Date" shall mean the date of issuance
of this Warrant.
b) The term "Common Stock" includes all stock of any class or
classes (however designated) of the Company, authorized upon the
Original Issue Date or thereafter, the holders of which shall
have the right, without limitation as to amount, either to all or
to a share of the balance of current dividends and liquidating
dividends, after the payment of dividends and distributions on
any shares entitled to preference, and the holders of which shall
ordinarily, in the absence of contingencies, be entitled to vote
for the election of a majority of directors of the Company (even
though the right so to vote has been suspended by the happening
of such a contingency).
c) The term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder.
d) The "Original Issue Date" is {Date of Warrant}, the date as
of which the Warrant is first issued.
<PAGE>
e) The term "Other Securities" refers to any stock (other than
Common Stock) and other securities of the Company or any other
person (corporate or otherwise) which the holders of the Warrant
at any time shall be entitled to receive, or shall have received,
upon the exercise of the Warrant, in lieu of or in addition to
Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 or otherwise.
f) The term "Purchase Price per share" shall be the then
applicable exercise price for one share of Common Stock.
g) The term "Market Value" of any security means the average of
the closing prices of such security's sales on all securities
exchanges on which such security may at the time be listed, or,
if there has been no sale on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security
is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 P.M., New York
time, or, if on any day such security is not quoted in the NASDAQ
System, the average of the high and low bid and asked prices on
such day in the domestic over-the-counter market as reported by
the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period
of 21 days consisting of the day as of which "Market Value" is
being determined and the 20 consecutive business days prior to
such day. If at any time such security is not listed on any
securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the "Market Value" will be the fair value
thereof determined in good faith by the Corporation. If the
holder hereof objects to the Company's determination, such fair
value will be determined by appraisers jointly selected by the
Corporation and the holder hereof.
h) The term "Securities Act" means the Securities Act of 1933 as
The same shall be in effect at the time.
2. Exercise, Sale, Assignment, Transfer, Surrender or Exchange
- ---------------------------------------------------------------
2.1 Exercise, Sale, Assignment, Transfer, Surrender, or Exchange
without Registration.
- -----------------------------------------------------------------
If, at the time of any exercise, sale, assignment, transfer,
surrender or exchange of this Warrant or of Common Stock (or
Other Securities) previously issued upon the exercise of this
Warrant, the Warrant or Common Stock (or Other Securities) shall
not be registered under the Securities Act, such exercise, sale,
assignment, transfer, surrender or exchange may be effected only
in compliance with all applicable federal and state securities
laws, and the Company may require, as a condition of allowing
such exercise, sale, assignment, transfer, surrender or exchange,
that the holder or transferee of the Warrant or Common Stock (or
Other Securities), as the case may be, furnish to the Company a
satisfactory opinion of counsel to the effect that such exercise,
sale, assignment, transfer, surrender or exchange may be made
without registration under the Securities Act and any applicable
state securities laws.
<PAGE>
2.2 Representation of Holder.
- ------------------------------
The holder of this Warrant represents to the Company that it is
acquiring this Warrant for investment and not with a view to the
distribution thereof.
3. Exercise of Warrant; Partial Exercise.
- ------------------------------------------
3.1 Exercise in Full.
- ----------------------
Subject to the provisions hereof, this Warrant may be exercised
in full by the holder hereof by surrender of this Warrant, with
the form of subscription at the end hereof duly executed by such
holder, to the Company at its principal offices in Princeton, New
Jersey, accompanied by payment, in cash or by certified or
official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common
Stock called for on the face of this Warrant by the Purchase
Price.
3.2 Partial Exercise.
- ----------------------
Subject to the provisions hereof, this Warrant may be exercised
in part by surrender of this Warrant in the manner and at the
place provided in subsection 3.1 except that the amount payable
by the holder upon any partial exercise shall be the amount
obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by
(b) the Purchase Price. Upon any such partial exercise, the
Company at its expense will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant or Warrants of
like tenor, in the name of the holder hereof, calling in the
aggregate on the face or faces thereof for the number of shares
of Common Stock equal to the number of shares called for on the
face of this Warrant minus the number of such shares designated
by the holder in the subscription at the end hereof.
3.3 Company to Reaffirm Obligations.
- -------------------------------------
The Company will, at the time of any exercise of this Warrant,
upon the request of the holder thereof, acknowledge in writing
its continuing obligation to afford to such holder any rights to
which such holder shall continue to be entitled after such
exercise in accordance with the provisions of this Warrant,
provided that if the holder of this Warrant shall fail to make
any such request, such failure shall not affect the continuing
obligation of the Company to afford such holder any such rights.
4. Delivery of Stock Certificates, etc. on Exercise.
- -----------------------------------------------------
As soon as practicable after the exercise of this Warrant in full
or in part the Company at its expense (including the payment by
it of any applicable issue taxes) will cause to be issued in the
name of and delivered to the holder hereof, a certificate or
<PAGE>
certificates for the number of fully paid and non-assessable
shares of Common Stock (or Other Securities) to which such holder
shall be entitled upon such exercise, plus, in lieu of any
fractional shares to which such holder would otherwise be
entitled, cash equal to such fraction multiplied by the then
current Market Value of one full share, together with any other
stock or other securities and property (including cash, where
applicable) to which such holder is entitled upon such exercise
pursuant to section 6 or otherwise.
5. Adjustments.
- ----------------
5.1 Adjustment for Stock Splits and Reverse Splits.
- ----------------------------------------------------
In case at any time the Company shall divide or subdivide its
outstanding shares of Common Stock (or Other Securities) into a
greater number of shares, the Purchase Price in effect
immediately prior to such subdivision shall be proportionately
reduced and the number of shares of Common Stock (or Other
Securities) purchasable pursuant to this Warrant immediately
prior to such subdivision shall be proportionately increased, and
conversely, in case at any time the Company shall combine its
outstanding shares of Common Stock (or Other Securities) into a
smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately
increased and the number of shares of Common Stock (or Other
Securities) purchasable upon the exercise of this Warrant
immediately prior to such combination shall be proportionately
reduced. Except as provided in this subsection 5.1, no
adjustment in the Purchase Price and no change in the number of
shares of Common Stock (or Other Securities) so purchasable shall
be made pursuant to this Section 5 as a result of or by reason of
any such subdivision or combination.
5.2 Sale of Shares Below Purchase Price.
- -----------------------------------------
a) If at any time after the Commencement Date, the Company shall
issue or sell shares of Common Stock (or in accordance with
paragraph 5.2(b) shall be deemed to have issued or sold shares of
Common Stock), other than upon a subdivision or combination of
shares of Common Stock, for a consideration per share that is
less than the then existing Purchase Price for such shares of
Common Stock as provided in this Warrant, then and in each case,
the Purchase price shall be reduced, as of the opening of
business on the date of such issue or sale, to equal the price
per share of said transaction regardless of the number of shares
involved. If an adjustment of the Purchase Price occurs, the
number of shares issuable upon exercise of this Warrant shall be
increased to that number of shares determined by multiplying the
Purchase Price in effect immediately prior to such adjustment by
the number of shares of Common Stock acquirable upon exercise of
this Warrant immediately prior to such adjustment and dividing
the product thereof by the Purchase Price resulting from such
adjustment.
<PAGE>
b) For the purpose of making any adjustment in the Purchase
Price or number of shares of Common Stock purchasable on the
exercise of this Warrant as provided above, the following shall
be applicable:
i) Issuance of Rights or Options. If the Company in any manner
grants any right or option to subscribe for or to purchase Common
Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being
herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities")
and the lowest price per share for which any one share of Common
Stock is issuable upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security is less
than the Purchase price in effect immediately prior to the time
of the granting of such Option, then such share of Common Stock
will be deemed to have been issued and sold by the Company for
such price per share. For purposes of this paragraph, the
"lowest price per share for which any one share of Common Stock
is issuable" will be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the granting of the
Option, upon exercise of the Option and upon conversion or
exchange of the Convertible Security. No further adjustment of
the Purchase Price will be made upon the actual issue of such
Common Stock or of such Convertible Security upon the exercise of
such Options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Security.
ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest
price per share for which any one share of Common Stock is
issuable upon conversion or exchange thereof is less than the
Purchase Price in effect immediately prior to the time of such
issue or sale, then such share or shares of Common Stock will be
deemed to have been issued and sold by the Company for such price
per share. For the purposes of this paragraph, the "lowest price
per share for which any one share of Common Stock is issuable"
will be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to
any one share of Common Stock upon the issuance of the
Convertible Security and upon the conversion or exchange or such
Convertible Security. No further adjustment of the Purchase
Price will be made upon the actual issue of such Common Stock
upon conversion or exchange of any Convertible Security, and if
any such issue or sale of such Convertible Security is made upon
exercise of any Options for which adjustments of the Purchase
Price had been or are to be made pursuant to other provisions of
this paragraph 5.2(b), no further adjustment of the Purchase
Price will be made by reasons of such issue or sale.
iii) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any
Convertible Securities, or the rate at which any Convertible
<PAGE>
Securities are convertible into or exchangeable for Common Stock
changes at any time, the Purchase Price in effect at the time of
such change will be readjusted to the Purchase Price which would
have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase
price, additional consideration or changed conversion rate, as
the case may be, at the time initially granted, issued or sold;
provided that if such adjustment would result in an increase of
the Purchase Price then in effect, such adjustment will not be
effective until 30 days after written notice thereof has been
given by the Company to the holder of this Warrant.
iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination
of any right to convert or exchange any Convertible Securities
without the exercise of such Option or right, the Purchase Price
then in effect will be adjusted to the Purchase Price which would
have been in effect at the time of such expiration or termination
had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination,
never been issued.
v) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the
Company therefor. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration
other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such
consideration, except where such consideration consists of
securities, in which case the amount of consideration received by
the Company will be the Market Value thereof as of the date of
receipt. In case any Common Stock, Options or Convertible
Securities are issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration
therefore will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined in
good faith by the Company. If the holder hereof objects to the
Company's determination, such fair value will be determined by an
appraiser selected jointly by the Company and holder hereof. All
expenses of such appraisal shall be shared equally between the
parties unless one party's (and not the other party's) estimate
of the fair value of such consideration differs from the fair
value determined by the appraiser by more than 25%, in which
event such overreaching party shall bear the full cost of the
expenses of such appraisal.
vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which
no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued
without consideration.
<PAGE>
vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or
held by or for the account of the Company or any Subsidiary, and
the disposition of any shares so owned or held will be considered
an issue or sale of Common Stock.
viii) Record Date. If the Company takes a record of the holders
of Common Stock for the purpose of entitling them (A) to receive
a dividend or other distribution payable in Common Stock, Options
or in Convertible Securities or (B) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record
date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon
the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6. Reorganization, Reclassification, Consolidation, Merger or
Sale.
- --------------------------------------------------------------
Any capital reorganization, reclassification, consolidation,
merger or sale of all or substantially all of the Company's
assets to another Person that is effected in such a way that
holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock is referred to herein
as "Organic Change." Prior to the consummation of any Organic
Change, the Company will make appropriate provision (in form and
substance satisfactory to the holder hereof) to insure that the
holder of this Warrant will thereafter have the right to acquire
and receive in lieu of or addition to the shares of Common Stock
immediately theretofore acquirable and receivable upon the
exercise of such holder's Warrant, such shares of stock,
securities or assets as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock
immediately theretofore acquirable and receivable upon exercise
of such holder's Warrant had such Organic Change not taken place.
In any such case, the Company will make appropriate provision (in
form and substance satisfactory to the holder hereof with respect
to such holder's rights and interests to insure that the
provisions of Sections 5, 6, 7, 8, 9, and 10 hereof will
thereafter be applicable to the Warrants (including, in the case
of any such consolidation, merger on sales in which the successor
corporation or purchasing corporation is other than the Company,
an immediate adjustment of the Purchase Price to the value of the
Common Stock reflected by the terms of such consolidation, merger
or sale, and a corresponding immediate adjustment in the number
of shares of Common Stock acquirable and receivable upon exercise
of the Warrants, if the value so reflected is less than the
Purchase Price in effect immediately prior to such consolidation,
merger or sale). The Company will not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof, the successor corporation (if other than the Company)
resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form and
<PAGE>
substance satisfactory to the holder hereof) the obligation to
deliver to each such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such
holder may be entitled to acquire.
7. Certain Events.
- -------------------
If any event occurs of the type contemplated by the provisions of
Sections 5, 6, 9, or 10 but not expressly provided for by such
provisions, the Company's board of directors will make an
appropriate adjustment in the Purchase Price and the number of
shares of Common Stock obtainable upon exercise of this Warrant
so as to protect the rights of the holders of the Warrants;
provided that no such adjustment will increase the Purchase Price
or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Warrant.
8. Notice.
- -----------
i) Immediately upon any adjustment of the Purchase Price, the
Company will give written notice thereof to the holder hereof.
ii) The Company will give written notice to the holder hereof at
least 20 days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Organic Change,
dissolution or liquidation.
iii) The Company will also give written notice to the holder
hereof at least 20 days prior to the date on which any Organic
Change, dissolution or liquidation will take place.
9. Liquidating Dividends.
- --------------------------
If the Company declares or pays a dividend upon the Common Stock
payable otherwise than in cash out of earnings or earned surplus
(determined in accordance with generally accepted accounting
principles, consistently applied) except for a stock dividend
payable in shares of Common Stock (a "Liquidating Dividend"), the
Company will pay to the holder of this Warrant at the time of
payment thereof the Liquidating Dividend which would have been
paid to such holder on the Common Stock had this Warrant been
fully exercised immediately prior to the date on which a record
is taken for such Liquidating Dividend, or, if no record it
taken, the date as of which the record holders of Common Stock
entitled to such dividends are to be determined.
10. Purchase Rights.
- ----------------------
If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants,
<PAGE>
securities or other property pro rata to the record holders of
any class of Common Stock (the "Purchase Rights"), then the
holder of this Warrant will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the aggregate Purchase
Rights that such holder could have acquired if such holder had
held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant immediately before the date on
which a record is taken for the grant, issuance or sale of such
Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
11. Further Assurances.
- ------------------------
The Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares of stock upon the
exercise of any Warrant from time to time outstanding.
12. Accountants' Certificate as to Adjustments.
- ------------------------------------------------
In each case of any adjustment or readjustment in the shares of
Common Stock (or Other Securities) issuable upon the exercise of
the Warrant, the Company at its expense will promptly cause the
Company's regularly retained auditor to compute such adjustment
or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, and the number of shares of
Common Stock outstanding or deemed to be outstanding. The
Company will forthwith mail a copy of the such certificate to
each holder of this Warrant.
13. Reservation of Stock, etc., Issuable on Exercise of Warrant.
- -----------------------------------------------------------------
The Company will at all times reserve and keep available, solely
for issuance and delivery upon the exercise of this Warrant, all
shares of Common Stock (or other Securities) from time to time
issuable upon the exercise of this Warrant.
14. Exchange of the Warrant.
- -----------------------------
Subject to the provisions of section 2 hereof, upon surrender or
exchange of this Warrant, properly endorsed, to the Company, the
Company at its own expense will issue and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like
tenor, in the name of such holder, calling in the aggregate on
the face or faces thereof for the number of shares of Common
Stock called for on the face or faces of the Warrant or Warrants
so surrendered.
<PAGE>
15. Replacement of Warrant.
- ----------------------------
Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant, the
Company at its expense will execute and deliver, in lieu thereof,
a new Warrant of like tenor.
16. Warrant Agent.
- -------------------
The Company may, by written notice to the holder of this Warrant,
appoint an agent for the purposes of issuing Common Stock (or
Other Securities) upon the exercise of this Warrant pursuant to
section 3, exchanging this Warrant pursuant to section 14, and
replacing this Warrant pursuant to section 15, or any of the
foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made by such agent.
17. Remedies.
- --------------
The Company stipulates that the remedies at law of the holder of
this Warrant in the event of any default or threatened default by
the Company in the performance of or compliance with any of the
terms of this Warrant are not and will not be adequate, and that
such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof
otherwise.
18. Notices.
- -------------
All notices and other communications from the Company to the
holder or this Warrant shall be mailed by first class registered
or certified mail, postage prepaid, at such address as may have
been furnished to the Company in writing by such holder, or,
until an address is so furnished, to and at the address of the
last holder of this Warrant who has so furnished an address to
the Company.
19. Miscellaneous.
- -------------------
This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed
by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Warrant is being
delivered in the State of New Jersey and shall be construed and
enforced in accordance with and governed by the laws of such
State. The headings in this Warrant are for reference only, and
shall not limit or otherwise affect any of the terms hereof. For
the purposes of this Warrant terms appearing in the singular
include the plural and terms appearing in the masculine gender
include the feminine gender.
<PAGE>
Dated: {Date of Warrant}, 1996
MIKROS SYSTEMS CORPORATION
By: /s/ Thomas J. Meaney
--------------------------
Thomas J. Meaney, President
[ Corporate Seal ]
Attest:
/s/ Patricia A. Bird, Secretary
- -------------------------------
<PAGE>
EXHIBIT 10.24a
SCHEDULE OF WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
WARRANTS AMOUNT
WARRANT COMMON WARRANT EXERCISED EXERCISED OUTSTANDING
WARRANT HOLDER DATE STOCK PRICE DATE AMOUNT 12-31-96
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Meaney, Thomas J. 02-15-96 175,000 $0.01 175,000
Meyer, Wayne E. 02-22-96 175,000 $0.01 175,000
MLPFS fbo Tecce, Frederick C., IRA 03-22-96 175,000 $0.01 175,000
Sullivan, Glory L. 02-25-96 175,000 $0.01 175,000
Goodwin, Evelyn L. 03-25-96 175,000 $0.01 07-15-96 175,000
Asher, Robert 03-26-96 90,000 $0.01 06-01-96 90,000
Holland, Michael J. 03-27-96 175,000 $0.01 11-08-96 175,000
Bird, Patricia A. 04-01-96 43,750 $0.01 04-02-96 43,750
Dyson, Timothy F. 04-01-96 43,750 $0.01 04-02-96 43,750
Montagna, Deborah A. 04-02-96 43,750 $0.01 43,750
Meyer, Wayne E. 04-08-96 43,750 $0.01 43,750
Mignatti, Ted J. Jr. 04-12-96 125,000 $0.01 05-28-96 125,000
Mignatti, Ted J. III 04-12-96 50,000 $0.01 05-28-96 50,000
Robins, Charles 04-12-96 50,000 $0.01 07-01-96 50,000
MLPFS fbo Flanigan, James B., IRA 04-22-96 175,000 $0.01 175,000
Cohen, Alfred L. 04-22-96 175,000 $0.01 05-01-96 175,000
Hansen, Richard A. 04-25-96 175,000 $0.01 07-01-96 175,000
DL&JSC Custodian fbo Campbell,
Frank J. III 04-29-96 175,000 $0.01 10-03-96 175,000
Trans European Trading c/o
William Fretz 04-30-96 50,000 $0.01 07-30-96 50,000
DiMarino, Kroop Gastrointestinal
Assoc. Money Purchase Pension Plan 05-06-96 175,000 $0.01 07-03-96 175,000
DL&JSC Custodian fbo Brown, William P. 05-03-96 25,000 $0.01 07-30-96 25,000
MLPFS fbo Pirquet, Herbert
(Bret) P., IRA 05-08-96 100,000 $0.01 08-08-96 100,000
Meyer, William F., Meyer Associates 05-24-96 87,500 $0.01 87,500
Compass Management Partners 05-29-96 50,000 $0.01 12-12-96 50,000
Compass Technology Partners 05-29-96 300,000 $0.01 12-12-96 300,000
Tecce, Frederick A. 05-29-96 30,000 $0.01 11-13-96 30,000
Tecce, John F. 05-29-96 30,000 $0.01 11-26-96 30,000
Tecce, Marc A. 05-29-96 30,000 $0.01 11-06-96 30,000
Tecce, Susan J. 05-29-96 30,000 $0.01 11-18-96 30,000
Tecce-Johnson, Pamela 05-29-96 30,000 $0.01 11-18-96 30,000
Tecce, James C. 05-29-96 30,000 $0.01 11-08-96 30,000
Burns, Joseph R. 01-01-96 100,000 $0.10 100,000
Meaney, Thomas J. 01-01-96 100,000 $0.10 100,000
Tecce, Frederick C. 01-01-96 100,000 $0.10 100,000
Meyer, Wayne E. 01-01-96 100,000 $0.10 100,000
Pennsylvania Merchant Group 01-15-96 125,000 $0.001 10-11-96 125,000
</TABLE>
<PAGE>
EXHIBIT 11.0
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------- --------- --------
<C> <C> <C>
Primary
(Loss) Income ($1,447,641) ($ 647,673) $ 151,635
Deduct dividends on Series D Preferred Shares 69,000 69,000 69,000
---------- ---------- -----------
(Loss) Income attributable to Common Shares ( 1,516,641) ( 716,763) 82,635
Shares
Weighted average number of common shares outstanding 8,382,383 7,285,441 7,135,441
Common Stock Equivalents:
shares issuable from assumed exercise of options
and warrants* 3,664,587 1,195,500 275,135
shares issuable from assumed exercise of Preferred
Stock* 3,435,164 1,005,000 1,005,000
---------- ---------- ----------
Total weighted average of Common Stock and Common
Stock equivalents 15,482,134 9,485,941 8,415,576
========== ========== ==========
Shares used in calculating Primary Earnings Per Share 8,382,383 7,285,441 8,415,576
Primary (Loss) earnings per Common Share ($0.18) ($0.10) $0.01
========== ========== ==========
Assuming full dilution
Earnings ($1,447,641) ($ 647,673) $ 151,635
Deduct Dividends on Preferred Shares 69,000 69,000 69,000
Add foregone interest expense upon assumed conversion
of Convertible Notes 15,091 - -
---------- ---------- ----------
Net (Loss) Income Attributable to Common Shares ($1,501,550) ($ 716,673) $ 82,635
========== ========== ===========
Shares
Total Common Stock and Common Stock equivalents
from above 15,482,134 9,485,941 8,415,576
Add shares issuable upon assumed conversion of
convertible notes 954,000 - -
Add shares issuable upon assumed conversion of
Series B Preferred Shares - 3,394,989 -
---------- ---------- ----------
Total weighted average of Common and Common Stock
equivalents as adjusted 16,436,134 12,880,930 8,415,576
========== ========== ==========
Fully Diluted (Loss) Earnings per Common Share** ($0.09) ($0.05) $0.01
</TABLE>
* These Common Stock Equivalents are anti-dilutive and are therefore
excluded from the calculation of Primary Earnings per Share in 1996 and
1995.
** Fully diluted (Loss) Earnings per Common Share is anti-dilutive and not
presented in the statements of income.
<PAGE>
DRUKER, RAHL & FEIN
Business Consultants
Certified Public Accountants
200 Canal Pointe Boulevard
Princeton, NJ 08540-5998
(609) 243-9700
FAX (609) 243-9799
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Mikros Systems Corporation
Princeton, New Jersey
We have audited the balance sheets of Mikros Systems Corporation
(the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity (deficiency) and
cash flows for each of the three years in the period ended
December 31, 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 Mikros Systems Corporation, as of December 31, 1996 and 1995,
and the results of its operations, shareholders' equity
(deficiency) and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Druker, Rahl & Fein
Princeton, New Jersey
February 13, 1997
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1996 1995
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 395,120 $ 77,276
Accounts Receivable
Government 441,826 65,186
Trade 198,298 52,967
Inventories 153,192 76,321
Other Current Assets 16,508 11,559
------------ ------------
TOTAL CURRENT ASSETS 1,204,944 283,309
------------ ------------
FIXED ASSETS
Equipment 679,060 574,397
Furniture and Fixtures 59,207 59,207
Leasehold Improvements 3,408 3,408
------------ ------------
741,675 637,012
Less: Accumulated Depreciation
and Amortization (535,547) (465,955)
------------ ------------
FIXED ASSETS, NET 206,128 171,057
------------ ------------
UNBILLED RECEIVABLES 52,612 58,681
PATENT COSTS, NET 15,785 16,962
OTHER ASSETS 17,825 16,986
------------ ------------
TOTAL OTHER ASSETS 86,222 92,629
------------ ------------
TOTAL ASSETS $1,497,294 $ 546,995
============ ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS (continued)
LIABILITIES AND DECEMBER 31,
SHAREHOLDERS' EQUITY (DEFICIENCY) 1996 1995
- ---------------------------------- ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 507,249 $ 268,933
Notes Payable
Bank 9,271 134,271
Related Parties 20,000 30,000
Other 18,302 -
Obligations under Capital Leases 29,492 6,403
Accrued Payroll and Payroll Taxes 50,922 14,308
Accrued Interest 3,866 11,442
Accrued Vacations 55,285 49,188
Accrued Expenses 128,743 89,982
Unliquidated Progress Payments and
Other Customer Advances 507,471 -
------------ ------------
TOTAL CURRENT LIABILITIES 1,330,601 604,527
------------ ------------
NOTES PAYABLE
Bank 10,017 18,542
Related Parties 527,500 312,500
Other 446,500 -
OBLIGATIONS UNDER CAPITAL LEASES-NONCURRENT 15,585 11,827
------------ ------------
TOTAL LIABILITIES 2,330,203 947,396
------------ ------------
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 1996 and 1995 80,450 80,450
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock, par value $.01 per share,
authorized 25,000,000 shares, issued and
outstanding 11,846,952 shares in 1996 and
7,352,108 in 1995 118,470 73,521
Preferred Stock, convertible, par value $.01
per share, authorized 2,000,000 shares, issued
and outstanding 1,005,000 shares in 1996 and 1995 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 1996 and 1995 11,316 11,316
Preferred Stock, Series D, par value $.01 per share
690,000 shares authorized, issued and outstanding
in 1996 and 1995 6,900 6,900
Capital in excess of par 10,218,548 9,248,364
Accumulated deficit (11,278,643) (9,831,002)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (913,359) (480,851)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY) $1,497,294 $ 546,995
============ ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Preferred Preferred
Stock Stock Stock B
$.01 $.01 $.01
Par Value Par Value Par Value
----------------------------------------------------------
Number Par Number Par Number Par
of shares Value of shares Value of shares Value
<C> <C> <C> <C> <C> <C>
Balance-December 31, 1993 7,132,108 $71,321 1,005,000 $10,050 1,131,663 $11,316
Year ended December 31, 1994:
Issuance of Common Stock 20,000 200
Net Income
--------- ------- --------- ------- --------- -------
Balance December 31, 1994 7,152,108 71,521 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 73,521 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
========= ======= ========= ======= ========= =======
Preferred
Stock D Capital in
$.01 excess of Accumulated
Par Value Par Value Deficit
------------------------------------------------
Number Par
of shares Value
Balance-December 31, 1993 690,000 $6,900 $9,236,814 ($9,334,964)
Year ended December 31, 1994:
Issuance of Common Stock 1,050
Net Income 151,635
--------- ------- --------- ------------
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)
========= ======= =========== ============
</TABLE>
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1996 1995 1994
------------ ---------- ----------
Revenues:
Equipment Sales $ 157,364 $1,390,085 $1,397,000
Contract Research and Development
(including $30,409 to
Related Parties in 1996) 701,736 1,989,812 3,048,468
------------ ----------- -----------
Total Revenues 859,100 3,379,897 4,445,468
------------ ----------- -----------
Cost of Sales:
Equipment Sales 113,992 1,079,873 1,041,195
Contract Research and Development 712,836 1,796,168 2,341,474
------------ ----------- -----------
Total Cost of Sales 826,828 2,876,041 3,382,669
------------ ----------- -----------
Gross Margin 32,272 503,856 1,062,799
------------ ----------- -----------
Expenses:
Research and Development 456,991 238,120 -
General and Administrative 895,900 855,925 850,091
Interest 126,572 57,334 60,973
------------ ----------- -----------
Total Expenses 1,479,463 1,151,379 911,064
------------ ----------- -----------
(Loss) Income before Provision
for Income Taxes (1,447,191) (647,523) 151,735
Provision for Income Taxes 450 150 100
------------ ----------- -----------
Net (Loss) Income ($1,447,641) ($647,673) $151,635
============ =========== ===========
Earnings per share:
Primary:
Net (Loss) Income ($0.18) ($0.10) $0.01
=========== =========== ==========
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> For the Year Ended December 31,
1996 1995 1994
---------- ----------- -----------
<C> <C> <C>
Cash Flow From Operating Activities:
Net (Loss) Income ($1,447,641) ($647,673) $ 151,635
Adjustments to reconcile Net (Loss) Income
to Cash Provided (Used) by Operations:
Depreciation and Amortization 72,730 68,961 68,590
Provision for Inventory Obsolescence - 15,000 -
Net Changes in Operating Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable (521,971) 1,001,818 (836,766)
Unbilled Receivables 6,069 (26,593) 92,108
Inventories (977,748) 47,825 (83,128)
Other Current Assets (4,949) 16,285 (5,028)
Other Assets (840) (5,692) 412
Increase (Decrease) in:
Accounts Payable 302,373 (85,706) 319,137
Accrued Payroll and Payroll Taxes 36,614 (40,077) 40,091
Unliquidated Progress Billings and
Other Customer Advances 1,408,348 - -
Other Liabilities and Interest 37,282 (398,962) 466,775
----------- --------- ----------
Net Cash Provided (Used) by Operations (1,089,733) (54,814) 213,826
----------- --------- ----------
Cash Flows From Investing Activities:
Fixed Asset Purchases (56,052) (47,107) (93,735)
----------- ---------- ----------
Net Cash Used by Investing Activities: (56,052) (47,107) (93,735)
----------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from Loans 651,500 30,000 21,600
Proceeds from Sale of Common Stock 960,000 - -
Proceeds from Exercise of Options and Warrants 27,877 12,500 1,250
Net Payments/Borrowings - Line of Credit (125,000) 180,603 -
Repayment of Debt and Capital Leases (50,748) (162,499) (145,590)
----------- ---------- ----------
Net Cash Provided (Used) by Financing Activities 1,463,629 60,604 (122,740)
----------- ---------- ----------
Net Increase (Decrease) in Cash 317,844 (41,317) (2,649)
Cash at Beginning of Year 77,276 118,593 121,242
----------- ---------- ----------
Cash at End of Year $ 395,120 $ 77,276 $ 118,593
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 135,411 $ 41,231 $ 75,465
=========== ========== ==========
Acquisition of Fixed Assets through
Capital lease Obligations $ 50,571 $ 17,808 $ 15,105
=========== ========== ==========
Notes Issued in Settlement of Accounts
Payable Obligations $ 36,802 - -
=========== ========== ==========
Stock Issued in Settlement of Accounts
Payable Obligations $ 27,256 - -
=========== ========== ==========
</TABLE>
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. COMPANY OVERVIEW
- ---------------------
1. THE COMPANY
- ----------------
Mikros Systems Corporation (the "Company") was founded in 1978 as
a spin-off of the General Electric Corporate Research and
Development Center in upstate New York. In the early 1980's the
Company focused on the development and application of proprietary
microprocessor technology, in particular the Department of
Defense's Military Standard "1750A" computer. Since 1986 the
Company has specialized in technology insertion, applying
advanced microprocessor and signal processing techniques to
defense communications and control applications.
Since 1987 the Company has been working closely with the U.S.
Navy on improvements to the "Link-11" communications system, used
by ships in a naval battle group to exchange digital tactical
information by radio. In conjunction with the Johns Hopkins
University Applied Physics Laboratory, Mikros has developed the
"Multi-Frequency" Link-11 system, which improves the performance
of the network. The Multi-Frequency system was deployed at-sea
during Operation Desert Storm.
Ongoing Link-11 work at Mikros, funded by the U.S. Navy, is
concentrated on continuing enhancement and performance
improvement of the Link-11 system. As an outgrowth of this
development, Mikros has also produced standard Link-11 modem
equipment products which offer cost and performance benefits over
the competition.
During 1995 and 1996 Mikros expanded its initiatives in
commercial wireless communications to provide technology which
optimize spectrum efficiency for wireless communications in
current and emerging radio data broadcasting and personal
communications services markets. As part of its strategy to
apply elements of the technology which it has developed for the
military to the commercial sector, Mikros has successfully
secured its first customer for its leading edge FM data
transmission technology. In March 1996, Data Broadcasting
Corporation, the industry leader in wireless on-line stock market
and sports data services, announced that it is adopting Mikros'
FM technology for its next generation of products and services.
Mikros is actively marketing this technology to other data
broadcasting companies which use FM frequencies. In parallel,
Mikros is furthering the development of its AM data transmission
technology for which the marketplace has shown substantial
interest and has secured a development contract from Mobile
Broadcasting Corporation (MBC), a company owned 25% by Mikros.
Mikros plans to extend the scope of its research to include all
areas which transmit data over AM and FM frequencies, including
PCS.
<PAGE>
It is Mikros' intention to develop application specific
integrated circuits (ASICs) for its wireless data transmission
technology as soon as it is justified by the volume of customer
orders.
The Company's U.S. Navy related business originates in the
Baltimore/Washington area while commercial marketing is
nationwide.
2. SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
1. Basis of Presentation
--------------------------
The Company's financial statements have been prepared on a
historical cost basis which assumes the Company's assets
will be realized and its liabilities settled in the normal
course of business. As shown in the accompanying financial
statements, the Company incurred a net loss of $1,447,641
for the year ended December 31, 1996, and as of December 31,
1996 had an accumulated deficit of $11,278,643. The Company
expects to incur substantial expenditures to expand its
commercial wireless communications business.
Although these factors might indicate an uncertainty as to
the Company's ability to continue as a going concern, the
Company has taken action to mitigate these concerns as
follows: it has formed a strategic alliance with Safeguard
Scientifics (Delaware) Inc. (see Footnote B), it has secured
long-term contracts with the U.S. Navy, and has entered into
a Consulting Services Agreement with MBC (see Footnote B and
I). These activities have resulted in a $3.8 million
backlog at December 31, 1996.
2. Inventories
----------------
Inventories, other than inventoried costs relating to long-term
contracts and programs, are stated at the lower of cost
(principally first-in, first-out) or market. Inventoried
costs relating to long-term contracts and programs are
stated at the actual production costs which includes
materials and supplies, labor and allocated materials and
labor overhead. General and administrative costs are
charged to expense as incurred. Included in inventories is
approximately $776,000 (see Note E) of material which have
been paid for and are under protective title to the U.S.
Navy. Inventoried costs relating to long-term contracts and
programs are reduced by charging any amounts in excess of
estimated realizable value to cost of sales. The costs
attributed to units delivered under long-term contracts and
programs are based upon the average cost of all units
expected to be produced.
<PAGE>
3. Fixed Assets
-----------------
Fixed Assets are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful
lives which range from 3 to 7 years. Depreciation expense
amounted to $71,552, $67,785 and $67,414 for 1996, 1995 and
1994, respectively.
4. Accounts and Unbilled Receivables
--------------------------------------
Unbilled Receivables represent revenue recognized, which
primarily because of retainage provisions on certain
government contracts, are not billed until completion of the
contracts or until year-end defense contract audits are
performed.
In the opinion of management, no provision for doubtful
accounts is required in connection with receivables
reflected in the accompanying balance sheets.
5. Earnings per Common Share
------------------------------
Primary Earnings per common share is computed using the
average number of common and dilutive common equivalent
shares outstanding. For purposes of the fully diluted
computations the number of common shares that would be
issued from the exercise of stock options and warrants, and
the conversion of convertible preferred shares has been
reduced by the number of shares that could have been
purchased from the proceeds at the market price of the
company's stock on December 31, 1996, 1995 and 1994, because
those prices were higher than the average market prices for
those years. Total shares used in calculating primary
earnings per share are 8,382,383, 7,285,441 and 8,415,576 in
1996, 1995 and 1994, respectively. Fully diluted earnings
per share is not presented because it would be anti-dilutive.
6. Revenue Recognition
------------------------
Revenues related to long-term fixed-price contracts, which
principally provide for the manufacture and delivery of
finished units, are recognized as shipments are made. The
estimated profits applicable to such shipments are recorded
pro rata based upon estimated total profit at completion of
the contracts.
Revenues on contracts with significant engineering as well
as production requirements are recorded using the
percentage-of-completion method measured by the costs
incurred on each contract to estimated total contract costs
at completion (cost-to-cost) with consideration given for
risk of performance and estimated profit.
Revenues on equipment sales are recognized as shipments are
made.
<PAGE>
7. Patents
------------
Patent costs are amortized over a 17-year life.
Amortization expense amounted to $1,178 for each of 1996,
1995, and 1994.
8. Warranty Costs
-------------------
The Company currently expects warranty costs to be minimal.
However, if within a 90-day period from date of shipment the
Company is notified of a component part that is defective
due to material or workmanship, it will repair or replace
the part, at its option.
9. Use of Estimates
---------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
10. Cash
---------
The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash
equivalents.
11. Reclassifications
----------------------
Certain prior year amounts have been reclassified to conform
with the 1996 presentation.
12. Unliquidated Progress Payments and Other Customer
Advances
------------------------------------------------------
Unliquidated progress payments represent partial billings to
customers of costs incurred on contracts for future
deliveries. Other customer advances represent payments
received from customers prior to cost being incurred on
certain contracts.
<PAGE>
B. 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 $140,000 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.
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.
<PAGE>
- - 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.
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.
<PAGE>
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.
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).
<PAGE>
C. DIVIDENDS
- --------------
As of December 31, 1996 and December 31, 1995 there were
dividends in arrears on shares of Series D Preferred Stock of
$207,000 ($.10 per share) and $138,000, respectively.
D. NOTES PAYABLE
- ------------------
As of December 31,
1996 1995
--------- ---------
Bank Equipment Loan 36 monthly
payments; starting February 1996 $ 19,288 $152,813
Related Parties 547,500 342,500
Others 464,802 -
--------- ---------
1,031,590 495,313
--------- ---------
Less Current Maturities
Banks 9,271 134,271
Related Parties 20,000 30,000
Others 18,302 -
--------- ---------
47,573 164,271
--------- ---------
Notes Payable-Noncurrent $ 984,017 $ 331,042
========= =========
Maturities of the Notes Payable are as follows:
1997 $ 47,573
1998 984,017
--------
$1,031,590
========
Interest rates on the notes range from 1% over prime to 14% per
annum. The prime rate at December 31, 1996 and 1995 was 8.25%
and 8.5% respectively. In October 1996 noteholders aggregating
$954,000 agreed to a deferral of principal payments to 1998 in
exchange for the right to convert outstanding debt to Common
Stock of the Company at a rate of one 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.
<PAGE>
E. INVENTORIES
- ----------------
December 31,
1996 1995
----------- ---------
Raw materials $ 15,985 $ 34,516
Finished goods 12,567 25,067
Work-in-process 1,025,517 16,738
----------- ---------
Sub-Total 1,054,069 76,321
----------- ----------
Unliquidated Progress
Payments (900,877) -
----------- ----------
TOTAL $ 153,192 $ 76,321
=========== ==========
F. REVENUES
- -------------
Revenues from two federal government agencies amounted to 41% of
total revenues in 1996, as compared to 76% in 1995 and 96% in
1994. Revenues from a commercial customer were 35% of total
revenues in 1996, compared to 7% in 1995 and 0% in 1994.
G. INCOME TAXES
- -----------------
Income taxes are recorded in accordance with FASB Statement 109
on accounting for income taxes.
The provision for income taxes before extraordinary items for the
years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
--------- --------- ---------
Income Taxes:
Current tax expense-State $ 450 $ 150 $ 100
Deferred tax expense - 45,047
Deferred tax benefit
Utilization of net
operating loss - - (45,047)
--------- --------- ---------
Total Provision for
Income Taxes $ 450 $ 150 $ 100
========= ========= =========
The deferred tax asset and deferred tax liability consist of the
following:
<PAGE>
Deferred tax asset:
Net Operating Loss Carry
Forward $2,966,608 $2,869,450 $2,892,570
Valuation Allowance ( 2,966,608) ( 2,869,450) ( 2,892,570)
---------- ---------- ----------
Net deferred tax asset $ - $ - $ -
========== ========== ==========
Deferred tax liability $ - $ - $ -
========== ========== ==========
The valuation allowance was reduced by utilization of net
operating loss of $166,507 in 1994.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable
or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Total available Net Operating Loss Carry Forwards are reflected
in the following schedule:
YEAR AVAILABLE FOR AVAILABLE FOR
OF FEDERAL STATE
EXPIRATION TAX PURPOSES TAX PURPOSES
1997 $1,040,000 $ 81,000
1998 587,000 -
1999 704,000 -
2000 1,143,000 -
2001 1,141,000 -
2002 923,000 513,000
2003 606,000 1,403,000
2004 147,000 -
2005 81,000 -
2010 602,000 -
2011 1,403,000 -
---------- ----------
$8,377,000 $1,997,000
========== ==========
H. OBLIGATIONS UNDER CAPITAL LEASES
- -------------------------------------
The Company is the lessee of equipment under capital leases
expiring in 1998. The equipment is recorded on the books at the
present value of the minimum lease payments; the capitalized
value at December 31, 1996 and December 31, 1995 was $45,077 and
$17,479, respectively. Accumulated amortization as of December
31, 1996 and 1995 was $27,015 and $15,800, respectively.
Amortization of assets held under capital leases is included in
depreciation expense.
<PAGE>
The following is a schedule of minimum lease payments due under
capital leases as of December 31, 1996.
Year Ending December 31,
1997 $36,968
1998 17,093
--------
Total Net Minimum Lease Payments $54,061
Less Amounts Representing Interest at 13% 8,984
--------
Present Value of Net Minimum
Lease Payments $45,077
========
I. RELATED PARTY TRANSACTIONS
- -------------------------------
The Company retained the services of a member of its board of
directors to provide engineering and management consulting
services to the Company. In 1996 the Company issued 30,750
shares of Common Stock and $2,619 of cash in payment for $17,994
for services rendered. In 1995 and 1994, the Company paid $9,000
and $15,000, respectively for such services.
In addition, from January 1993 through December 1994, such
director cumulatively received $24,000 from the Company for
office rent expenses.
The Company retained the services of another member of its board
of directors to provide operations management and technical
consulting services. In 1996 this director was issued 23,760
shares of Common Stock in payment of $11,880 for services
rendered. In 1995 and 1994 this director received $8,400 and
$13,600, respectively, for such services. As of December 31,
1996 and 1995, accounts payable owed to these two related parties
amounted to $19,160 and $18,767, respectively.
In 1996 the Company had revenues of $30,409 from Mobile
Broadcasting Corporation, 25% of whose outstanding capital stock
is owned by the Company.
Certain directors and officers participated in the "1996
Financing" (see Footnote B). As a result, the Company issued a
total of $140,000 in promissory notes payable to those directors
and officers.
In addition, in 1996 a director loaned $10,000 to the Company.
The note bears interest at 14% per annum. Principal is to be
repaid in four quarterly installments beginning September 30,
1997. In 1995, other directors owned loaned a total of $30,000
to the Company on identical terms.
<PAGE>
J. SERIES B CONVERTIBLE PREFERRED STOCK
- -----------------------------------------
The Series B Preferred Stock, together with the Series C
Preferred Stock, was issued in 1988 in order to satisfy notes
payable and other trade accounts payable pursuant to a debt
restructuring. Each share of Series B Preferred Stock is
convertible into three shares of the Company's common stock at a
price of $.33 per share of common stock to be received upon
conversion and entitles the holder thereof to cast three votes on
all matters to be voted on by the Company's Shareholders. Upon
any liquidation, dissolution, or winding up of the Company, each
holder of Series B Preferred Stock will be entitled to be paid,
after all distributions of payments are made upon the Series C
Preferred Stock and before any payment is made upon the Company's
Convertible Preferred Stock, an amount in cash equal to $1.00 for
each share of Series B Preferred Stock held, and such holders
will not be entitled to any further payment.
K. MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
- ----------------------------------------------------
The Series C Preferred Stock, together with the Series B
Preferred Stock, was issued in 1988 in order to satisfy notes
payable and other trade accounts payable pursuant to a debt
restructuring. The Series C Preferred Stock is not convertible
into any other class of the Company's stock and is subject to
redemption at the Company's option at any time and redemption is
mandatory if certain events occur, such as capital
reorganizations, consolidations, mergers, or sale of all or
substantially all of the Company's assets. Upon any liquidation,
dissolution or winding up of the Company, each holder of Series C
Preferred Stock will be entitled to be paid, before any
distribution or payment is made upon any other class of stock of
the Company, an amount in cash equal to the redemption price for
each share of Series C Preferred Stock held by such holder, and
the holders of Series C Preferred Stock will not be entitled to
any further payment. The redemption price per share is $16.09.
L. SERIES D PREFERRED STOCK
- -----------------------------
The Series D Preferred Stock was issued in 1993 in order to
partially satisfy notes payable and accrued interest thereon
pursuant to a debt restructuring. The Series D Preferred Stock
provides for an annual cumulative dividend of $.10 per share.
The shares are not convertible into any other class of stock and
are subject to redemption at the Company's option at any time at
a redemption price of $1.00 per share plus all unpaid cumulative
dividends. Upon liquidation, dissolution or winding up of the
Corporation, each holder of Series D Preferred Stock will be
entitled to be paid, after all distributions or payments are made
upon the Corporation's Convertible Preferred Stock, Series B
Preferred Stock, and Series C Preferred Stock, an amount in cash
equal to the Redemption Price for each share of Series D
Preferred Stock held by such holder. The holders of Series D
Preferred Stock will not be entitled to any further payment.
<PAGE>
M. STOCK OPTIONS AND WARRANTS
- -------------------------------
In 1992, the Company adopted the Incentive Stock Option Plan,
replacing the previous plan. The stock option plan, as amended
provides for ten-year options to purchase up to 2,000,000 shares
of Common Stock at a price equal to the market price of the
shares on date of grant, exercisable at the cumulative rate of
25% per annum.
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", but applies
APB Opinion 25 and related interpretations in accounting for its
various stock option plans. There was no compensation cost for
the three years ended December 31, 1996. Had compensation cost
been recognized consistent with the method prescribed by FASB
123, the Company's net (loss) income and (loss) earnings per
share would have been changed to the pro forma amounts indicated
below:
1996 1995
----------- -----------
Net Loss As Reported ($1,447,641) ($647,673)
========== ========
Proforma ($1,485,794) ($656,470)
========== ========
Primary earnings per share
As Reported ($0.18) ($0.10)
===== =====
Proforma ($0.19) ($0.10)
===== =====
The fair value of the Company's stock options used to compute
proforma net (loss) income and (loss) earnings per share
disclosures is the estimated present value at grant date using
the Black-Scholes option-pricing model with the following
weighted average assumptions:
ASSUMPTION 1996 1995
-------- --------
Dividend yield 0% 0%
Risk free interest rate 6.48% 5.98%
Expected life 5 years 5 years
Expected volatility 235% 289%
The per share weighted-average value of stock options issued by
the Company during 1996 and 1995 was $0.1873 and $0.4963 on the
date of grant using the Black-Scholes option pricing model.
Accordingly, the stock option values presented herein are not
necessarily indicative of amounts that could be realized in a
current market exchange.
<PAGE>
Proforma net (loss) income reflects only options granted in 1996
and 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the
proforma net (loss) income amounts presented above because
compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to January 1,
1995 is not considered.
Option activity under the Company's Plan is summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Common Stock Options: 1996 Price 1995 Price 1994 Price
------- -------- ------- -------- ------- --------
<C> <C> <C> <C> <C> <C>
Options outstanding beginning of year 1,087,500 $0.1101 997,500 $0.0605 842,500 $0.0471
Granted 485,000 0.50 417,500 0.1875 175,000 0.1250
Exercised (162,500) 0.0375 (200,000) 0.0625 (20,000) 0.0625
Cancelled (297,500) 0.17 (127,500) 0.0529 - -
---------- -------- --------
Options outstanding, end of year 1,112,500 0.273 1,087,500 0.1101 997,500 0.605
========== ========== =========
Options exercisable, end of year 333,750 0.1056 431,250 0.0469 544,375 0.0515
========== ========== =========
</TABLE>
The following summarizes information about the Company's stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/96 Contractual Life Price as 12/31/96 Price
-------- ----------- ---------------- ------------- ------------ -------------
<C> <C> <C> <C> <C> <C>
$0.025 - 0.0625 207,500 5.9 years $0.058 190,625 $0.0605
$0.125 - 0.1875 495,000 8.5 years $0.175 143,125 $0.1657
$0.50 410,000 9.6 years $0.50 - -
</TABLE>
<PAGE>
As of December 31,
Common Stock Warrants: 1996 1995 1994
------- ------- -------
Warrants Outstanding at
beginning of year 437,500 187,500 700,000
Granted 9,066,500 250,000 -
Exercised 2,365,834 - -
Expired or Terminated - - (512,500)
---------- --------- ---------
Warrants outstanding and
exercisable, end of year 7,138,166 437,500 187,500
========== ========= =========
Exercise price per warrant $0.001 $0.001 $0.10
& $0.01 & $0.01
As of December 31,
Series C Preferred
Stock Warrants 1996 1995 1994
------- ------- -------
Warrants Outstanding,
at beginning of year 97,500 97,500 104,500
Granted - - -
Exercised - - -
Expired or Terminated - - (7,000)
------- -------- --------
Warrants outstanding and
exercisable, end of year 97,500 97,500 97,500
======= ======== ========
Exercise price per warrant $1.00 $1.00 $1.00
The number of Common Shares issued, reserved for issuance
pursuant to the 1992 Stock Option Plan or potentially issuable
pursuant to outstanding warrants, convertible preferred shares
and other convertible instruments (collectively, the "Convertible
Securities") presently exceeds the number of shares of Common
Stock authorized by the Company's Certificate of Incorporation.
The Company intends to seek shareholder approval for the
authorization of additional shares of Common Stock at its Annual
Meeting of Shareholders scheduled for June 17, 1997.
Management believes that it is unlikely that the number of
Convertible Securities that may be exercised or converted before
said Annual Meeting would cause the number of issued and
outstanding shares of Common Stock to exceed the amount
authorized.
The following table summarizes the number of shares of Common
Stock issued, reserved for issuance or potentially issuable as of
December 31, 1996:
<PAGE>
Shares of
Common Stock
------------
Common Stock Outstanding 11,846,952
Convertible Preferred Stock 1,005,000
Series B Preferred Stock 3,394,989
Common Stock Warrants 7,138,166
1992 Stock Option Plan 2,000,000
Convertible Notes 954,000
N. 1988 RESTRICTED STOCK AWARD PLAN
- -------------------------------------
On September 29, 1988, the Company's Board of Directors awarded
2,035,000 shares of Common Stock under the 1988 Restricted Stock
Agreement to the Company's employees in consideration of services
rendered to the Company. Under the terms of the Agreement, the
recipient shall have all of the rights of a Shareholder with
respect to all shares issued to the recipient, or until such time
said shares can be and are disposed of by the recipient or the
Company exercises its right to acquire any of said shares. All
shares issued were vested as of September 30, 1991.
O. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
The Company leases its principal offices and research facilities
in Princeton, New Jersey and an automobile. The lease for the
facilities is due to expire in March 1998. Rent expense,
including space in Washington and Connecticut, for the years
ended December 31, 1996, 1995 and 1994 was $187,166, $164,610 and
$140,873 respectively. The lease for the automobile expires in
March 2000.
Minimum annual lease payments for the next five years are as
follows:
Year Ended December 31
1997 $ 185,592
1998 35,798
1999 8,232
2000 1,372
---------
$ 230,994
=========
<PAGE>
P. PROFIT SHARING PLAN
- ------------------------
The Company maintains a 401(K) Profit Sharing Plan. For those
employees who meet the eligibility requirements of being 21 years
of age and have completed one full year of service, the Company
will match employee contributions to the plan up to a limit of
one and one-half percent (1.5%) of annual compensation.
The Company also provides for a 401(K) profit sharing
contribution which is at the discretion of the Board of
Directors. The Company recorded expense for matching
contributions of $14,944 in 1996, $20,246 in 1995 and $3,100 in
1994. In addition, the Company made a profit sharing
contribution in 1994 of $96,900.
Q. CONCENTRATION OF RISK
- --------------------------
The Company relies heavily on Department of Defense contracts and
could be vulnerable to future budget cuts by the U.S. Navy
Department. The Company's present contracts are for equipment
related to ongoing shipbuilding programs and the Company has no
knowledge of budget cuts that would affect its present contracts.
However, there can be no assurance that such programs will not be
subject to budget cuts.
The Company maintains bank accounts which may exceed federally
insured limits at one financial institution. Historically no
credit related losses have been experienced.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ----------------------------------------
The carrying amounts reflected in the financial statements for
cash, loans and notes payable approximate the respective fair
values due to the short maturities of those instruments.
Carrying
Amount Fair Value
Assets
Cash $ 395,120 $ 395,120
Unbilled receivables 52,612 See Note (A) Below
Liabilities
Notes payable - Current 47,573 47,573
Long-term debt 984,017 See Note (A) Below
Mandatorily redeemable
preferred stock 80,450 See Note (A) Below
(A) It is not practicable to estimate the fair value of
unbilled receivables, long-term debt and mandatorily
redeemable preferred stock because of the inability to
estimate fair value without incurring excessive costs.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 395,120
<SECURITIES> 0
<RECEIVABLES> 640,124
<ALLOWANCES> 0
<INVENTORY> 153,192
<CURRENT-ASSETS> 1,204,944
<PP&E> 741,675
<DEPRECIATION> 535,547
<TOTAL-ASSETS> 1,497,294
<CURRENT-LIABILITIES> 1,330,601
<BONDS> 0
80,450
28,266
<COMMON> 118,470
<OTHER-SE> (1,060,095)
<TOTAL-LIABILITY-AND-EQUITY> 1,497,294
<SALES> 859,100
<TOTAL-REVENUES> 859,100
<CGS> 826,828
<TOTAL-COSTS> 826,828
<OTHER-EXPENSES> 1,352,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,572
<INCOME-PRETAX> (1,447,191)
<INCOME-TAX> 450
<INCOME-CONTINUING> (1,447,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447,641)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
