MIKROS SYSTEMS CORPORATION
3490 U.S. Route #1, Bldg. #5
Princeton, NJ 08540
(609) 987-1513
May 13, 1996
SECURITIES AND EXCHANGE COMMISSION
450 5th Street, NW
Judiciary Plaza
Washington, DC 20549
RE: MIKROS SYSTEMS CORPORATION/10K-A
Dear Sirs:
Pursuant to the Securities Exchange Act of 1934, as amended, Mikros Systems
Corporation, a Delaware corporation (the "Corporation"), hereby encloses
herewith amended pages for form 10K filed on March 27, 1997 for the fiscal
year ended December 31, 1996.
This filing is being effected by direct transmission to the Securities and
Exchange Commission's (the "Commission") EDGAR System.
If you have any questions or comments concerning this filing, kindly contact
the undersigned.
Very truly yours,
/s/ Joseph R. Benek
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Joseph R. Benek
Vice President Finance & Treasurer
Enc.
<PAGE>
B. FINANCING TRANSACTIONS
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1996 Financing
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In a series of transactions from February through May 1996, the Company issued
secured promissory notes and warrants to raise an aggregate of $641,500
(including $131,250 from officers and directors).
The promissory notes are for a term of approximately eighteen months, bear
interest at 12% on the unpaid balance, and are secured by certain assets of
the Company. In addition, the Company issued warrants to purchase five (5)
shares of Common Stock at $0.01 per share for each dollar of debt. The value
of the warrants was immaterial and no accounting recognition was given to
their issuance.
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)
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On November 15, 1996, the Company, all of its secured creditors from its 1996
and 1992-93 financings and SSI entered into an agreement. Under the agreement
SSI paid $1,000,000 to the Company.
- - SSI received: 1) 1,912,000 shares of Common Stock of the Company; 2) a
warrant to purchase 2,388,000 shares of Common Stock at $0.65 per share;
3) a warrant to purchase 3,071,000 shares at $0.78 per share; 4) a 75%
interest in an exclusive, royalty-free, perpetual license of the AM
technology in the United States, Canada and Mexico (through SSI's
ownership in MBC); and 5) a 33 1/3% interest in the FM and AM technology
(through SSI's ownership in 3D). This transaction is more fully
described below.
- - Two (2) new companies were formed, Data Design and Development
Corporation (3D) and Mobile Broadcasting Corporation (MBC). The Company
received one-third of 3D in exchange for certain of its AM and FM
technology. SSI received one-third of 3D in exchange for a commitment
to invest up to $1,000,000 in MBC. The secured creditors received
one-third of 3D and released their security interest in the technology
transferred. The Company received 25% of MBC for $50. SSI received 75%
of MBC for $200,000.
- - 3D granted MBC an exclusive, royalty-free, perpetual license to the AM
technology in the United States, Canada and Mexico. 3D granted the
Company an exclusive, royalty-free, perpetual license to the FM
technology in the United States, Canada and Mexico. 3D retained rights
to the AM and FM technology in the rest of the world. The Company and
MBC entered into a consulting arrangement under which the Company will
be paid for the development of the AM technology. 3D will own the
rights to such technology.
<PAGE>
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.
1992-93 Financing
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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.
<PAGE>
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).
I. RELATED PARTY TRANSACTIONS
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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 $131,250 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.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS
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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.
<PAGE>
<TABLE>
December 31, 1996 December 31, 1995
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Carrying Carrying
Amount Fair Value Amount Fair Value
<C> <C> <C> <C>
Assets
Cash $ 395,120 $ 395,120 $ 77,000 $ 77,000
Unbilled receivables 52,612 See Note (A) Below 59,000 See Note (A) Below
Liabilities
Notes payable - Current 47,573 47,573 164,000 164,000
Long-term debt 984,017 See Note (A) Below 331,000 See Note (A) Below
Mandatorily redeemable
preferred stock 80,450 See Note (A) Below 80,450 See Note (A) Below
</TABLE>
(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.
