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, 1997. Commission file number 2-67918
MIKROS SYSTEMS CORPORATION
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(Exact name of Registrant as specified in charter)
Delaware 14-1598200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Alexander Road, Suite 208, 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. [ ] Yes [X] 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 November 9, 1998, was approximately
$1,140,000, 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 November 9, 1998 was 14,251,452.
The following documents are incorporated by reference into the Annual Report
on Form 10-K: None.
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
707 Alexander Road, Suite 208, Princeton, New Jersey; telephone (609)987-1513.
Mikros Systems Corporation became an established US Navy defense contractor in
1987 and continued to supply advanced technology and equipment for ten years
to the US Navy and Air Force. The Company was capitalized with more than $15
million to engage in engineering and manufacturing for these customers
supplying advanced communication equipment using cutting edge technology.
The knowledge base and proprietary technology developed was recognized as
applicable to the rapidly expanding wireless business in the commercial
sector. The rigorous radio transmission environment as well as the challenges
of underwater signal processing required Mikros employees to invent new
methods to optimize the bandwidth for a higher data throughput.
In 1995, the Company decided to also pursue commercial contracts which would
employ these advanced techniques to enhance the data transmission rates in the
AM and FM radio spectrum.
In 1996, Safeguard Scientifics (Delaware), Inc., invested $1 million in Mikros
in exchange for 10% ownership in the Company. At the same time, Mobile
Broadcasting Corporation (MBC) was created to exploit the AM radio technology,
particularly in mobile or portable platforms such as automobiles. Initially,
Safeguard invested $1 million in MBC for 75% ownership whereas Mikros owned
the remaining 25%. Mikros share in MBC was subsequently diluted to 18%, as a
result of an additional capital investment of $1,200,000 by Safeguard. (see
Note B of Notes to Financial Statements).
Data Design and Development Corporation (3D) was also founded in 1996 as part
of the Safeguard Scientific agreement and retains ownership of the AM and FM
technology. 3D has licensed the FM technology rights in North America to
Mikros and the AM technology rights in North America to MBC. Mikros owns 1/3
of 3D, certain Mikros shareholders own another 1/3, and Safeguard owns the
remaining 1/3.
The Common Shipboard Data Terminal System contract consumed most of the
technical resources of the Company in 1997. The contract with the US Navy
provided for the purchase of units periodically over the life of the contract.
The delivery of the initial units under the contract resulted in a severe
negative cash flow. This limitation of resources and the delays in the initial
delivery of units hampered the Company s ability to market such systems
internationally.
As a result, the Company s Board of Directors determined that it would be in
the best interest of the shareholders to sell the government contracts and use
the proceeds to focus exclusively on the commercial contracts, particularly
the AM radio data casting.
Mikros entered negotiations in late 1997 for the sale of the military
contracts to General Atronics Corporation(GAC).
The resulting transaction included a $600,000 cash payment and a 2% royalty to
be paid to Mikros over four years on all data terminal set sales. In addition,
GAC is obligated to supply $1 million in engineering services to Mikros which
will be expended on the AM data program with MBC. The Company believes these
development efforts should yield preliminary laboratory test results in
October, 1998, and allow commencement of alpha field trials at AM radio
stations in November 1998.
Mikros commercial business assets now consist of both the original FM
technology and the AM Radio technology. Continued development of the FM
technology has been postponed in order to direct all of the Company s
resources to the AM Radio technology.
The initial customer for the AM technology is MBC. MBC has the North American
rights and will be the first customer to apply the Mikros technology. 3D
Corporation owns the rights for other parts of the world and will license the
rights to MBC, Mikros or others.
Management believes Mikros program to develop high speed digital radio has
positioned the Company at the very cutting edge of digital radio. Digital
radio has been under development for a number of years by some corporations.
The proposed Mikros approach has the prospect of delivery of the data in a
robust manner that will have the same signal strength as the basic radio
signal.
The digital radio system Mikros is developing for AM radio data transmission
will allow simultaneous broadcasting of the present radio signal with a
digital channel to be used for the high quality FM music or additional clear
voice channels. This will be accomplished with no disturbance to the existing
radio channel. In effect the radio broadcaster will be able to provide more
channels or equivalent stations from the same radio transmitters. This
system will require a minor modification to the radio station transmitter
which will not require new FCC approvathe adjacent channel interference is
avoided.
While the new technology can be made available to all AM receivers, initially,
the automotive market will be addressed due to its size and its dependence on
wireless transmissions. A car radio equipped with the proposed AM technology
will be able to receive a variety of additional information such as traffic
alerts, weather, sports and financial information, books on tape. The Company
believes that eventually the digital receiver will be supplied in radios from
the original equipment manufacturer.
Other companies are pursuing compact disk quality sound for car radios by
using a constellation of satellites to relay the data to the car. However,
there are 5500 AM radio stations in the United States. Therefore, management
believes its technology is a low cost solution for the broadcasters using the
existing AM radio infrastructure.
Marketing
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The Company is focused on developing interest in its AM technology. Other than
its relationship with MBC, there are no other programs being pursued.
Backlog
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As of December 31 1997, the Company had a backlog of $380,000 compared to
approximately $3,800,000 at December 31, 1996 and $50,000 at December 31,
1995.
Engineering
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Engineering is a critical factor in the development of the Company's present
and future products. The Company is presently subcontracting its development
work to General Atronics Corporation, a high technology company mainly
involved in communications and radar equipment for the US Department of
Defense and allied countries. GAC hired key Mikros engineers to continue the
AM project when Mikros downsized.
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 has continued this effort.
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. The patent was
issued in the third quarter of 1998.
Competition
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High technology products such as wireless technology 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 October 31, 1998, the Company had two executive and one administrative
employees.
None of the Company's employees is represented by a union, and the Company
believes its relations with its employees are satisfactory.
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, 1997 had an aggregate value of
approximately $5,000 and consisted of work-in-process. This compares to
inventories of approximately $153,000 at December 31, 1996, which was
comprised of raw materials and work-in-process.
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.
Year 2000 Compliance
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The Company s present accounting system is not Year 2000 compliant. The
Company plans to obtain an updated accounting system to remedy such non-
compliance. The Company does not anticipate such investment to have a
material adverse effect on the Company.
Risk Factors
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History of Losses, Lack of Liquidity; Working Capital Deficit. The Company
incurred a net loss of $604,500, $1,447,641 and $647,673 for the years ended
December 31, 1997, December 31, 1996 and 1995 respectively. As of December
31, 1997, the Company had an accumulated deficit of $11,883,193 and had
negative working capital of $1,518,961. In addition, the Company expects to
incur substantial expenditures to expand its commercial wireless
communications business. The Company s working capital, plus revenue from its
royalty agreement with GAC will not be sufficient to meet such objectives as
presently structured. There can be no assurance that the Company will achieve
a profitable level of operations in the future.
Additional Financing Requirement; Merger and Partnering Opportunities. In May
1996, the Company completed a series of debt financings that raised an
aggregate of $641,500. In November 1996, the Company consummated an equity
financing that raised an aggregate of $1,000,000. In addition, the Company
will consider the sale of additional debt and equity securities under
appropriate market conditions, alliances or other partnership agreements with
entities interested in supporting the Company s commercial programs, or other
business transactions which would generate resources sufficient to assure
continuation of the Company s operations and research programs. There can be
no assurance, assuming the Company successfully raises additional funds or
enters into business alliances, that the Company will achieve profitability or
positive cash flow. If the Company is unable to obtain additional adequate
financing or enter into such business alliances, management will be required
to further curtail its operations. Failure to obtain such additional
financing on terms acceptable to the Company, if coupled with a material
shortfall from the Company s current operating plan, may
Uncertainty of Market Acceptance. In 1995, the Company expanded its
initiatives in commercial wireless communications in the current and emerging
radio data broadcasting and the personal communications service markets.
Market acceptance of the Company s products in the commercial sector will be
determined in large part by the Company s ability to develop commercial
products based on advanced wireless communications technology originally
developed for the military and its ability to demonstrate the cost-
effectiveness and performance features of such products. To date, the Company
has limited evidence with which to evaluate the market reaction to its
products in the commercial sector because there has been limited commercial
experience with these products. There can be no assurance that the Company s
products will achieve market acceptance.
Limited Marketing Experience. The Company will be required to develop a
marketing and sales network that will effectively demonstrate the advantages
of its commercial sector products over competing products. The Company s
marketing experience with its new commercial products is limited, and the
Company has not yet sold any of these products. The Company currently
performs all its marketing through its own employees and through MBC. There
can be no assurance that the Company will be successful in its marketing
efforts, that it will be able to establish adequate sales and distribution
capabilities, or that it will be able to enter into marketing agreements or
relationships with third parties on financially acceptable terms.
Government Regulation. Under current Federal Communications 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. FM subcarrier broadcasting currently represents a
$100 million industry operating within well-established and stable FCC
regulatory guidelines. Any significant change in these regulatory requirements
or the enforcement thereof could adversely affect the Company s prospects.
Rapid Technological Change; Potential Infringement. The market for the
Company s products and planned products is characterized by rapid changes in
technology including the potential introduction of new types of wireless
communications and digital signal processor technologies which could have a
material adverse impact on the Company s business. The Company s future
success will depend in part on its ability to continually enhance its current
products and to develop or acquire new products that address the needs of its
customers. There can be no assurance that the Company will be successful in
developing such new products that respond to technological changes. There can
be no assurance that research and development by competitors will not render
the Company s technology obsolete or uncompetitive. In addition, in a
technology-based industry, there can be no assurance that a claim of patent or
other infringement will not be made against the Company. While the Company is
not aware of any such claims, no infringement studies have been conducted on
behalf of the Company.
Competition. High technology products such as the products made and being
developed by the Company often require large investments of both money and
talent. Many large entities with greater financial, technical 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. In
addition 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. As the markets in which the Company competes mature and new and
existing companies compete for customers, price competition is likely to
intensify, and such price competition could adversely affect the Company s
results of operations.
Potential Dilutive Effect of Preferred Stock, Warrants and Options; Possible
Adverse Effect on the Company s Ability to Obtain Additional Financing. The
outstanding securities of the Company include shares of convertible preferred
stock, options and warrants. During the respective terms of the options and
warrants, and when the preferred stock is outstanding, the holders thereof are
given an opportunity to profit from a rise in the market price of the Common
Stock, causing a dilution of the interests of existing stockholders. Thus,
the terms on which the Company may obtain additional financing during that
period may be adversely affected. The holders of preferred stock, options,
and warrants might be expected to exercise their respective rights to acquire
Common Stock at a time when the Company would, in all likelihood, obtain
needed capital through a new offering of securities on terms more favorable
than those provided by these outstanding securities. In the event that such
holders exercise their rights to acquire shares of Common Stock at such time,
the net tangible book value per share of the Common Stock might be subject to
dilution.
Potential Future Sales. Future sales of shares by existing stockholders under
Rule 144 of the Securities Act or through the exercise of outstanding options
or otherwise could have a negative impact on the market price of the Common
Stock. The Company is unable to estimate the number of shares that may be
sold under Rule 144 because such sales depend on the market price for the
Common Stock of the Company, the personal circumstances of the sellers and a
variety of other factors. Any sale of substantial amounts of Common Stock or
other securities of the Company in the open market may adversely affect the
market price of the securities offered hereby and may adversely affect the
Company s ability to obtain future financing in the capital markets as well as
create a potential market overhang.
No Dividends. 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.
Accordingly, any potential investor who anticipates the need for current
dividends from its investment should not purchase any of the securities
offered hereby.
Public Market; Possible Volatility of Stock Price. The Company s Common Stock
currently is traded over-the-counter on the NASD Bulletin Board. There can be
no assurance that an active market in any of the Company s securities will be
sustained. Absent a public trading market, an investor may be unable to
liquidate its investment. The Company believes that factors such as the
Company s and its competitors announcements of the availability of new
services and new contracts, quarterly fluctuations in the Company s financial
results and general conditions in the communications industry could cause the
price of the Common Stock to fluctuate substantially. In addition, stock
markets have experienced extreme price volatility in recent years. This
volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies.
Concentration of Share Ownership. The Company s directors, officers and
principal stockholders, and certain of their affiliates, beneficially own
approximately 56.4% (without giving effect to any outstanding options,
warrants or other convertible securities) of the outstanding Common Stock and
will have significant influence over the outcome of all matters submitted to
the stockholders for approval, including the election of directors of the
Company. In addition, such influence by management could have the effect of
discouraging others from attempting to take-over the Company, thereby
increasing the likelihood that the market price of the Common Stock will not
reflect a premium for control.
Anti-Takeover Provisions. The Company has authorized 4,040,000 shares of
preferred stock, which may be issued by the Board of Directors on such terms,
and with such rights, preferences and designations as the Board may determine.
Issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, may have the effect of delaying, deterring or preventing
a change in control of the company. The 2,281,663 shares of issued and
outstanding preferred stock have certain rights and preferences, including
dividend and liquidation preferences, which also may have the effect of
delaying, deterring or preventing a change in control of the Company. In
addition, certain anti-takeover provisions of the Delaware General
Corporation Law (the DGCL ), among other things, restrict the ability of
stockholders to effect a merger or business combination or obtain control of
the Company, and may be considered disadvantageous by a stockholder.
<PAGE>
Item 2. Properties
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The Company owns no real property. The company is currently leasing office
space from Daily Plan It (see Exhibit 10.27).
Item 3. Legal Proceedings
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The Company was notified during 1998 of two pending lawsuits. The total amount
of the claims under such lawsuits equals $17,312. The amount is included in
accrued expenses and obligations under capital leases on the balance sheet and
relates to back wages and leased equipment.
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
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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
1997
First Quarter $2.9375 $1.375
Second Quarter 1.5625 .59375
Third Quarter .8125 .3125
Fourth Quarter .5625 .1875
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
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 November 9, 1998, the Company had 487 holders of record of its Common
Stock.
The following information relates to all securities of the Company sold
by the Company within the year ended December 31, 1997 which were not
registered under the securities laws at the time of grant, issuance and/or
sale:
1. The Company has, during the year ended December 31, 1997, issued
945,500 shares of Common Stock pursuant to the terms of outstanding
options and warrants, which, at the time of issuance, had not yet
been registered under the securities laws.
The Company did not employ an underwriter in connection with the issuance of the
securities described above. The Company believes that the issuance of the
foregoing securities was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Act"), as transactions not
involving any public offering and such securities having been acquired for
investment and not with a view to distribution.
Item 6. Selected Financial Data (1)
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YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
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INCOME STATEMENT
Total Revenue $5,097,432 859,100 $3,379,897 $4,445,468 $2,909,202
Net Income (Loss) (604,550) (1,447,641) (647,673) 151,635 447,140
Income (Loss) per
common share-Basic (.05) (.18) (.10) .01 .08
Fully Diluted (.05) (.18) (.10) .01 .08
Weighted average
number of common
shares outstanding-
Basic 12,688,327 8,382,383 7,285,441 8,415,576 5,407,994
BALANCE SHEET
Current Assets 555,430 1,204,944 283,309 1,405,554 518,289
Current Liabilities 2,074,391 1,330,601 604,527 1,118,537 304,246
Total Assets 676,023 1,497,294 546,995 1,641,001 806,006
Long-Term Liabilitie 81,166 1,080,052 423,319 368,142 500,323
Total Liabilities 2,155,557 2,410,653 1,027,846 1,486,679 804,569
Shareholders' Equity
(Deficiency) (1,479,534) (913,359) (480,851) 154,322 1,437
(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: Historically, the Company derived a large
percentage of its revenues from government contracts. In the last three years,
the Company has been developing commercial applications. While the financial
data presented reflects the Company s financial history, it cannot predict
future results as the Company divested its government contracts early in 1998.
The Company s current focus is solely on the development of its AM data casting
program.
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as believes, expects, may, will, should or anticipates
or the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy that involve risks and uncertainties. These
forward-looking statements, such as statements regarding anticipated future
revenues, Year 2000 compliance, products under development, size of markets for
products under development and other statements regarding matters that are not
historical facts, involve predictions. The Company s actual results, performance
or achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements contained in this Annual Report
on Form 10-K. Factors that could cause actual results, performance or
achievements to vary materially include, but are not limited to: changes in
business conditions, Year 2000 Compliance of the Company s and other vendors
products and related issues, changes in Mikros sales strategy and product
development plans, changes in the radio digital data marketplace, competition
between Mikros and other companies that may be entering the radio digital data
marketplace, competitive pricing pressures, market acceptance of Mikros
products under development, and delays in the development of products.
1997 vs. 1996:
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Total revenues in 1997 were approximately $5,097,000 compared to $859,000 in
1996, an increase of 493.4%.
In 1997, revenues from research and development contracts were
approximately $1,856,000 or 36.4% of total revenues as compared to $702,000 or
81.7% of total revenues in 1996. Revenues from equipment sales in 1997 were
approximately $3,241,000 or 63.6% of total revenues compared to $157,000 or
18.3% of total revenues in 1996. The increase in revenues in the equipment sales
category were primarily from a U.S. Navy contract. The increase in Research &
Development revenues is due primarily to commercial contracts including a
related party.
Total cost of sales in 1997 was approximately $3,601,000 or 70.6%
of total revenues as compared to $826,000 or 96.1% of total
revenues in 1996. Contract R & D cost of sales in 1997 was
approximately $1,336,000 or 72% of Contract R & D revenues
compared to $713,000 or 101.6% in 1996. In both 1997 and 1996
the high cost of sales percentages for Contract R & D sales are
due in part to certain contracts on which revenues exactly matched the costs.
Except for such contracts, the cost of sales percentages for Contract R & D
sales would be 70.4% and 83.1% for 1997 and 1996 respectively.
General and Administrative expenses were approximately $1,088,000 in 1997
compared to $896,000 in 1996. Interest expense in 1997
amounted to approximately $135,000 versus $126,000 in 1996. This increase is due
to the higher level of debt during 1997 and corresponding interest payments
(see 1996 Financing).
In 1997, the Company incurred approximately $719,000 or 14.1% of total revenues
on research and development costs related to the development of a military
communication system application and 159,000 or 3.1% of total revenues, for
research and development costs for commercial applications of its FM technology.
This is compared to $457,000 or 53% of total revenues for the FM commercial
application in 1996.
The Company recorded a net loss for 1997 of approximately $605,000 compared to
a net loss for 1996 of approximately $1,448,000. The loss in 1997 is due to the
significant level of research and development cost born by the company. The 1996
loss was high due to delays in government contracts and commercial research and
development costs.
<PAGE>
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 $856,000 in 1995. Interest expense in 1996
amounted to approximately $126,000 versus $57,000 in 1995. This increase is due
to the higher level of debt during 1996 and corresponding interest payments
(see 1996 Financing).
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 and to higher spending on research and development in
1996.
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%.
In 1995, revenues from research and development contracts were 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 $856,000
in 1995 compared to $850,000 in 1994. Interest expense in 1995
amounted to approximately $57,000 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.
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 1997, the Company had negative cash flow from operations of approximately
$185,000 compared to negative cash flow from operations of approximately
$1,090,000 in 1996 and negative cash flow from operations of $55,000 in 1995.
There was negative working capital $1,519,000 as of December 31, 1997, negative
working capital of $126,000 at December 31, 1996 and negative working capital of
$321,000 in 1995.
As of December 31, 1997, the Company was in arrears on its December interest
payments and could not meet its principal repayment obligation in 1998.
Management is attempting to restructure its note obligations with related
parties and other note holders. During 1998, management has divested its
military contracts to General Atronics Corporation (see Exhibits 10.25, and
10.26). In addition, the Company has negotiated a settlement with over 80% of
its vendor accounts payable (see Note S to the Financial Statements).
A substantial portion of the Company s costs and expenses is represented by
labor and related benefits. In 1997, the Company decreased its number of
employees from 24 to 19. As of October 31, 1998, there were three employees.
Commencing April 10, 1998, for a period of four years, the Company will receive
a royalty of 2% of all data terminal sales by General Atronics Corporation. The
royalty agreement provides for quarterly reports and payments based on the GAC
shipments and receipts during the quarter.
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
was 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 C. Tecce,
Deborah A. Montagna and Patricia A. Bird. Deborah Montagna separated from the
Company in March, 1998.
As of December 31, 1997, the Company was in arrears for the interest payment due
in December 1997.
<PAGE>
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.
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) permit SSI to inspect the operations and business of
the Company; and (ii) 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.
<PAGE>
Also in connection with the transaction, certain of the Company's
AM and FM technology was transferred to Data Design & Development Corporation,
a Delaware corporation ("3D"), pursuant to a contribution agreement. Under the
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 the 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 the 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. Initially, SSI owned 75% of
the issued and outstanding capital stock of MBC and the Company owned 25% of
such capital stock.
Finally, the Company entered into a Consulting Services Agreement
with MBC pursuant to which the Company provided consulting
services to MBC for the development of the AM technology.
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 as of December 31, 1997, the Company was in arrears for the
interest payment due December 31, 1997. As additional consideration for the
modification of such loans, the Company extended the exercise period for the
Series C Warrants until April 25, 1999. In addition, 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".
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
- ---------------------------------------------------------
The current members of the Board of Directors of the Company are as
follows:
Served as a Positions with
Name Age Director Since the Company
Joseph R. Burns 61 1984 Director
F. Joseph Loeper 54 1997 Director
Thomas C. Lynch 55 1997 Director
Thomas J. Meaney 63 1986 President,
Chairman of the Board and
Director
Wayne E. Meyer 73 1988 Director
Frederick C. Tecce 63 1996 Director
John B. Torkelsen 53 1985 Director
The principal occupation and business experience, for at least the past
five years, of each nominee is as follows:
Joseph R. Burns was a Director and President of the Company from May 1984
until July 1986. From July 1986 until December 1986, Dr. Burns was Chairman of
the Company. From January 1987 until April 1988, Dr. Burns was a consultant to
the Company. From April 1988 to March 1998, Dr. Burns served has Senior Vice
President and Chief Scientist of the Company. From March 1998 to present Dr.
Burns serves as Executive Vice President of Ocean Power Technologies, Inc.
Dr. Burns currently serves as a Director.
F. Joseph Loeper has been a Director of the Company since February 1997.
He was first elected to the Pennsylvania Senate in 1979 to represent the 26th
Senatorial District and continues to serve in this capacity. He currently
serves as Majority Leader of the State Senate. Senator Loeper also serves as a
member of the Board of Governors of the State System of Higher Education and is
a Pennsylvania Commissioner on the Delaware River Port Authority.
Thomas C. Lynch has been a Director of the Company since February 1997.
He serves as Senior Vice President for Safeguard Scientifics, Inc. since
retiring at the rank of Rear Admiral, U.S. Navy in November 1995. Mr. Lynch
serves on the Boards of OAO International, Sanchez Computer Associates, Eastern
Technology Council, Safeguard Scientifics International and Enhanced Vision
Systems Inc.
Thomas J. Meaney has been a Director of the Company since July 1986 and
Chairman of the Board since June 1997. He was appointed President in June 1986
and continued to serve until February 1997. On September 30, 1998, he was
reappointed President of the Corporation. From February 1983 to June 1986, Mr.
Meaney was Senior Vice President and Director of Robotic Vision Systems
Incorporated ("RVSI"), a manufacturer of robotic vision systems. Mr. Meaney
served as a Director of RVSI until 1991 when he resigned from the post. Prior
to 1983 and for more than five years, he was Vice President - Business
Development, International of Norden Systems and President - Norden Systems
Canada, both divisions of United Technologies Corporation and developers of
computer and electronic products and systems.
Wayne E. Meyer has been a Director of the Company since April 1988 and
Chairman of the Board 1990 to 1997. From 1986 to present he has been the
Founder and President of the W.E. Meyer Corporation which engages in consulting
and advice to industry, government and academic institutions in matters of
system engineering, project management, strategic planning and military and
electronic designs. He enlisted in the U.S. Navy as an Apprentice Seaman in
1943 and retired in 1985 in the rank of Rear Admiral. As a national authority
on Ballistic Missile Defense, he serves on numerous boards, groups and panels.
Frederick C. Tecce has been a Director of the Company since July 1996. Mr.
Tecce is of Counsel to Klett Lieber Rooney & Schorling. Previously, Mr. Tecce
was Counsel to Pepper, Hamilton and Scheetz. Since 1995, he has served as
Co-Chairman of the Executive Committee of the Eastern Technology Council. In
1996, Mr. Tecce was named Chairman of the Finance Committee of the Pennsylvania
Schools Employees Retirement Systems.
John B. Torkelsen has been a Director of the Company since June 1985 and
has served as Secretary of the Corporation from June 1985 until April 25, 1996.
Mr. Torkelsen has been President of Princeton Venture Research, Inc., a
financial research and consulting firm located in Princeton, New Jersey from
November 1984 to the present. He is also a Director of Voice Control Systems,
Inc., a voice recognition technology company; Objective Communications, Inc., a
video communications company; and Princeton Video Image, Inc. a developer of
video insertion systems for the television broadcast industry.
None of the Company's Directors or executive officers is related to any
other Director or executive officer of the Company. In connection with the
acquisition of certain debt and equity instruments of the Company from third
parties, Messrs. Burns, Meaney, Meyer, Torkelsen and Tecce (collectively, the
Investors") have the right to designate 2/7ths of the Board of Directors of the
Company. See Certain Relationships and Related Transactions. There are
currently seven members of the Board.
<PAGE>
The following table identifies the current executive officers of the
Company:
Capacities in In Current
Name Age Which Served Position Since
Thomas J. Meaney 63 President, September 1998
Chairman of the
Board and Director
Patricia A. Bird 32 Secretary and September 1998
Treasurer
Item 11. Executive Compensation
- --------------------------------
Summary of Compensation in Fiscal 1997, 1996 and 1995
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to the
Company's Chief Executive Officer and the four most highly compensated executive
officers of the Company whose aggregate cash compensation exceeded $100,000
(collectively, the "Named Executives") during the years ended December 31, 1995,
1996 and 1997.
SUMMARY COMPENSATION TABLE
Annual
Compensation(1)
Name and Principal Position
Year Salary ($)
Thomas J. Meaney, President
1997 145,466
1996 140,263
1995 149,550
Joseph R. Burns, Senior Vice President
1997 113,200
1996 108,012
1995 116,313
(1) The costs of certain benefits are not included because they did not
exceed, in the case of each Named Executive, the lesser of $50,000 or 10%
of the total of annual compensation reported in the above table.
(2) Mr. Burns served as Senior Vice President until his resignation in March
1998.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Common Stock
The following table sets forth certain information, as of November 9,
1998 with respect to holdings of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Common Stock outstanding as of such date, (ii) each of the
nominees (which includes all current directors and Named Executives), and (iii)
all current directors and officers as a group.
<TABLE>
<CAPTION> Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) Of Class
(i) Certain Beneficial Owners:
Safeguard Scientifics 7,371,000(2) 37.4
(Delaware) Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Transitions Two, 2,137,775(3) 13.4
Limited Partnership
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 1,113,081(4) 7.7
F. Joseph Loeper 177,000(5) 1.2
Thomas C. Lynch -- --
Thomas J. Meaney 1,908,500(6) 12.9
Wayne E. Meyer 1,170,550(7) 8.0
Frederick C. Tecce 1,425,000(8) 9.9
John B. Torkelsen 1,878,383(9) 12.4
(iii) All Current Directors and Officers as a Group
(eight persons) 7,766,714(4)(5)(6)(7)(8)(9) 46.9
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Includes 5,459,000 shares issuable upon exercise of warrants, and included
504,916 shares of common stock granted by Safeguard to certain of its
employees pursuant to a long-term incentive plan. Safeguard will continue
to exercise voting rights with respect to these shares until the
occurrence of certain vesting requirements.
(3) Includes 250,000 shares issuable upon conversion of Convertible Preferred
Stock plus 1,750,275 shares issuable upon conversion of Series B Stock.
(4) Includes 14,748 shares issuable upon conversion of Series B Stock and
100,000 shares issuable upon the exercise of warrants.
(5) Includes 75,000 shares issuable upon the exercise of warrants and
100,000 issuable upon the exercise of options.
(6) Includes 50,000 shares issuable upon conversion of Convertible Preferred
Stock plus 199,500 shares issuable upon conversion of Series B Stock and
275,000 shares issuable upon the exercise of warrants.
(7) Includes 30,000 shares issuable upon conversion of Series B Stock and
100,000 shares issuable upon the exercise of options and 318,750 shares
issuable upon the exercise of warrants.
(8) Includes 100,000 shares issuable upon the exercise of warrants.
(9) Includes 130,000 shares held of record by Princeton Venture Research,
Inc., a corporation wholly owned by Mr. Torkelsen. Also includes 202,500
shares issuable upon conversion of Convertible Preferred Stock and 695,883
shares issuable upon conversion of Series B Stock. The Series B Stock is
held of record by Princeton Venture Research, Inc.
<PAGE>
Convertible Preferred Stock
The following table sets forth certain information, as of November 9,
1998, with respect to holdings of the Company's Convertible Preferred Stock by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the total number of shares of Convertible Preferred Stock outstanding as of
such date, (ii) each of the nominees (which includes all current directors and
Named Executives), and (iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(i) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns -- --
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 50,000 19.6
Wayne E. Meyer -- --
Frederick C. Tecce -- --
John B. Torkelsen 202,500 79.4
(iii) All Current Directors and Officers as a Group
(eight persons) 252,500 99.0
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
<PAGE>
Series B Stock
The following table sets forth certain information, as of November 9,
1998, with respect to holdings of the Company's Series B Stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
total number of shares of Series B Stock outstanding as of such date, (ii) each
of the nominees (which includes all current directors and Named Executives), and
(iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(i) Certain Beneficial Owners:
The Mercantile & General 91,342 8.1
Reinsurance Company, PLC
Moorfields House
Moorfields
London EC2Y 9AL
Transitions Two, Limited Partnership 583,425 51.6
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 4,916 *
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 66,500 5.9
Wayne E. Meyer 10,000 *
Frederick C. Tecce -- --
John B. Torkelsen 231,961(2) 20.5
(iii) All Current Directors and Officers as a Group
(eight persons) 313,377 27.7
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Held of record by Princeton Venture Research, Inc., a corporation wholly
owned by Mr. Torkelsen.
Series C Stock
The following table sets forth certain information, as of November 9,
1998, with respect to holdings of the Company's Series C Stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
total number of shares of Series C Stock outstanding as of such date, (ii) each
of the nominees (which includes all current directors and Named Executives), and
(iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(i) Certain Beneficial Owners:
Transitions Two, Limited Partnership 5,000 100.0
920 Hopmeadow Street
Simsbury, CT 06070
(ii) Nominees:
Joseph R. Burns 19,500(2) 79.6
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 19,500(2) 79.6
Wayne E. Meyer 19,500(2) 79.6
Frederick C. Tecce 19,500(2) 79.6
John B. Torkelsen 19,500(2) 79.6
(iii) All Current Directors and Officers as a Group
(eight persons) 97,500(2) 95.1
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) This number reflects warrants to purchase Series C Stock.
<PAGE>
Series D Stock
The following table sets forth certain information, as of November 9,
1998, with respect to holdings of the Company's Series D Stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
total number of shares of Series D Stock outstanding as of such date, (ii) each
of the nominees (which includes all current directors and Named Executives), and
(iii)all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(i) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns 138,000 20.0
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 138,000 20.0
Wayne E. Meyer 138,000 20.0
Frederick C. Tecce 138,000 20.0
John B. Torkelsen 138,000 20.0
(iii) All Current Directors and Officers as a Group
(eight persons) 690,000 100.0
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
In a series of transactions consummated on October 27, 1992 and April 27,
1993, Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer and John B. Torkelsen,
each a Director of the Company, and Frederick C. Tecce (collectively, the
Investors") acquired all of the loan and equity interests in the Company from
certain third parties. Pursuant to such transactions, each of the Investors
acquired, in consideration of $50,000 each, 20% of (I) 50,000 shares of Common
Stock, (ii) promissory notes of the Company in the aggregate principal amount of
$916,875 (collectively, the "Investor Notes"), (iii) warrants to purchase 97,500
shares of Series C Stock (the "Series C Warrants"), and (iv) certain other loan
and equity rights in the Company, including the right to designate 2/7ths of the
Board of Directors of the Company. See "Election of Directors."
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 capital stock issued by the Company. In return for a reduction in
principal 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 Stock. The
Investor Notes were modified to provide for 16 quarterly payments of principal
beginning January 1, 1994 and ending October 1, 1997. The Investors have
authorized deferral of all principal payments until 1998. Interest on the unpaid
principal balance is payable quarterly commencing 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.
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 first interest
payment was paid on June 15, 1996 and interest is due quarterly thereafter. The
principal payments were to be paid on the fifteenth of March, June and September
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. As of
December 31, 1997, the Company was in arrears for the December interest payment.
During 1998, the Company was unable to meet its note obligations and is
currently working to restructure its debt to related and other parties.
The following officers and directors participated in the 1996 financing:
Wayne E. Meyer, Thomas J. Meaney and Patricia A. Bird.
On May 31, 1989, the Company retained the services of W.E. Meyer
Corporation to provide engineering and management consulting services to the
Company. Under the agreement, the Company paid $1,000 to W.E. Meyer Corporation
in 1997 for services rendered.
On April 15, 1991, the Company retained the services of WVG Corporation,
of which William V. Goodwin, a Director of the Company, was President, to
provide operations management and technical consulting services until his death
in 1997. Under the agreement, the Company paid $5,000 in cash to WVG
Corporation in 1997
for services rendered.
<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.
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 iv)]
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]<PAGE>
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]
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 Incentive Stock Option [Exhibit 10(c)(iii) to Form 10-K
for the year ended December 13, 1981]
10.11 Amended and Restated Stock Option Plan (1988)[Exhibit
10.27 to Form 10-K for 1989 filed April 3, 1990]
10.12 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]
10.13 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]
10.14 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]
10.15 Note Modification and Stock Purchase Agreement dated
December 31, 1993. [Exhibit 10.47 to Form 10-K for
1993 filed March 30, 1994]
10.16 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]
10.17 Authorizations for deferral of principal payments by
each of the Investors [Exhibit 10.18 to Form 10-K for
1995 filed May 16, 1996]
10.18 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]
10.19 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]
10.20 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]
10.21 Authorization for Deferral of principal payment by each
of the investors together with Schedule of Deferrals.
[Exhibit 10.22 to Form 10-K filed February 28, 1997]
10.22 Form of Promissory Note together with Schedule of
Investors.[Exhibit 10.23 to Form 10-K filed February 28, 1997]
10.23 Form of 1996 Warrant with Schedule of Warrants.
[Exhibit 10.24 to Form 10-K filed February 28,1997]
10.24 Registration Statement of shares included in the
Incentive Stock Option Plan (1981)and the 1992
Incentive Stock Option Plan [Form S-8/S-3 filed
April 25,1997]
10.25 Contract to sell defense contracts to General Atronics
Corporation dated April 10,1998
10.26 Non-Compete agreement with General Atronics
Corporation dated April 10,1998
10.27 Lease agreement with the Daily Plan It for office space
dated July 29, 1998
(b) Not applicable
(c) See (a) 3 above
(d) Financial Statement Schedules
The following financial statements are incorporated herein:
Independent Auditors' Report
Balance Sheets at December 31, 1996 and 1997
Statements of Operations for the years ended December 31, 1995, 1996 and 1997
Statements of Shareholders' Equity (Deficiency) for the years ended December 31,
1995, 1996 and 1997
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997
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: November , 1998
By: /s/
--------------------------------
Thomas J. Meaney, President,
Chairman of the Board, Director
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/
- ------------------------------ November , 1998
Joseph R. Burns, Director
/s/ November , 1998
- ------------------------------
F. Joseph Loeper, Director
/s/ November , 1998
- ------------------------------
Thomas C. Lynch, Director
/s/ November , 1998
- ------------------------------
Wayne E. Meyer, Director
/s/ November , 1998
- ------------------------------
Frederick C. Tecce, Director
/s/ November , 1998
- ------------------------------
John B. Torkelsen, Director
<PAGE>
Exhibit 10.25
AGREEMENT FOR SALE OF ASSETS
This Agreement is made effective on the 10th day of April 1998, by and
between Mikros Systems Corporation, a Delaware corporation, with its principal
place of business in Princeton, New Jersey, (hereinafter Mikros ) and General
Atronics Corporation, a Pennsylvania corporation, with its principal place of
business in Wyndmoor, Pennsylvania (hereinafter GAC ).
RECITALS
A. GAC and Mikros are engineering firms who engage in research and
development projects and who provide goods and services defense products
technology (i.e., for military use exclusively) both directly and indirectly
to the United States defense market, as well as the international defense
market. Such business is traditionally referred to as Defense Business and
such firms are traditionally referred to as Defense Contractors .
Mikros over the past few years has expanded into the commercial
market and is no longer a Defense Contractor exclusively.
B. Mikros has entered into certain defense contracts and has suffered
major losses as a result of having bid prices that were grossly inadequate.
Mikros has suffered severe financial difficulties as a result of this
circumstance.
C. GAC has designed and developed several products for similar use in
the defense industry, and GAC has an interest in acquiring the assets of
Mikros that are related to the development and manufacture of defense
products.
D. Mikros and GAC believe that it will be in the best interests of
both parties for Mikros to sell its assets related to defense products to GAC.
E. This Agreement is intended to set forth the terms and conditions
under which Mikros shall deliver its assets to GAC.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the mutual benefits to be derived by each of the parties
hereto, and such other consideration as shall inure to the benefit of the
parties hereto, the sufficiency and receipt of which consideration the parties
hereby acknowledge, it is hereby agreed as follows:
I. GAC will:
(a) pay to Mikros a sum of Six Hundred Thousand ($600,000)
Dollars.
(b) commence to pay Mikros a royalty of Two (2%) percent of the
total sale price of all Link-11 Data Terminal Sets from April 13, 1998 until
April 12, 2002. (The expression Link-11 Data Terminal Set shall be as that
term is used in MIL-STD-188-203-1A.)
(c) provide to Mikros or its designee a credit for engineering
support services having a value of One Million ($1,000,000) Dollars. These
support services shall be provided over a period of two (2) years. The actual
labor rate incurred, depending on the level of engineering support provided,
marked-up through profit (sellable rate) will be used to debit the One Million
$1,000,000) Dollars. The overhead, G&A and profit rates will be then current
bid rates.
II. Upon payment of the initial Six Hundred ($600,000) Dollars by GAC
to Mikros, Mikros shall:
(a) make available to GAC all non-patented technology relating to
defense products existing or being developed by Mikros (drawings, lists,
reports, algorithms, software). This is not intended to include patent rights
or other intellectual property owned by Mikros.
(b) assist GAC in novating all Defense related contracts and
provide marketing support material (customer lists, contracts, market
projections).
(c) deliver to GAC any unique tools, test equipment and software
used exclusively in the development, manufacture and test of Defense products.
III. It is understood and agreed that no technology or know-how has
been or will be exchanged that is applicable to the commercial sector.
IV. Nothing contained in this Agreement shall be construed as the
grant, license, transfer or assignment of any Mikros patent or other
intellectual property right (or any claims thereunder) to GAC or any customer
of GAC except that Mikros covenants that it will not assert any claim under
any such patent or other intellectual property right against GAC with respect
to or arising from the manufacture by GAC of Defense products or the sale by
GAC of Defense products in or to the United States Defense market and/or the
international defense market.
<PAGE>
V. This Agreement shall be governed and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
VI. This Agreement constitutes the entire agreement between the
parties hereto with respect to the rights, duties and obligations established
herein.
VII. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their successors and assigns.
VIII. In the event that any part or provision of this Agreement shall be
deemed invalid or unenforceable, the remaining parts or portions of this
Agreement which can be separated from the invalid or unenforceable provision
shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals on
the day and year first written above.
MIKROS SYSTEMS CORPORATION
By: /s/ Thomas Meaney
GENERAL ATRONICS CORPORATION
By: /s/ George E. Huffman
Exhibit 10.26
NON-COMPETITION AND CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is made as of April 10, 1998, between MIKROS SYSTEMS
CORPORATION, a Delaware corporation with its principal place of business in
Princeton, New Jersey ("Mikros) and GENERAL ATRONICS CORPORATION, a
Pennsylvania corporation with its principal place of business in Wyndmoor,
Pennsylvania (the "Company").
W I T N E S S E T H:
WHEREAS, contemporaneously with the execution and delivery hereof and in
accordance with an Agreement effective April 10, 1998 between Mikros and the
Company (the "Purchase Agreement") and a General Assignment and Bill of Sale
of even date herewith between Mikros and the Company (the "Bill of Sale"), the
Company is acquiring the Defense Business (as hereinafter defined) of Mikros
and certain assets associated therewith including the goodwill associated with
such Defense Business (the "Assets"); and
WHEREAS, execution by Mikros of this Agreement is a condition precedent
to the Company's obligation to perform under the Purchase Agreement; and
WHEREAS, by virtue of the purchase of the Assets and the Defense
Business, the Company will be engaged throughout the Area in the Defense
Business of the Company which was formerly conducted by Seller throughout the
Area; and
WHEREAS, it is expected that Mikros or MBC will engage the Company to
perform certain engineering and/or development services for use by MBC or
Mikros in pursuit of their AM Business which is based upon AM data
transmission technology in the AM radio broadcast band specifically the
frequency range AM=550Khz to 1750Khz (the AM Business);
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. The following terms shall have the definitions set forth below:
(a) "Area" shall mean anywhere in the World.
(b) "Closing Date" shall mean the date of this
Agreement.
(c) Confidential Information" shall mean and include, but shall not
be limited to, all of the following materials and information (whether or not
reduced to writing and whether or not patentable) to the extent they pertain to
Seller's Defense Business:
(1) All items of information that could be classified as a
trade secret pursuant to law;
(2) The discoveries, concepts and ideas, whether patentable
or not, including without limitation, the nature and results of research and
development activities, processes, techniques, "know-how", designs, drawings and
specifications of Seller relating to Seller's Defense Business;
(3) Application, operating system, communication and other
computer software and derivatives thereof, including without limitation, source
and object codes, flowcharts, algorithms, coding sheets, routines, subroutines,
compilers, assemblers, design concept and related documentation and manuals of
Seller relating to Seller's Defense Business;
(4) Production processes, marketing techniques, purchasing
information, price lists, pricing policies, quoting procedures, financial
information, customer names and requirements, customer data and other materials
or information relating to Seller's manner of conducting its Defense Business;
and
(5) Any other materials or information related to Seller's
Defense Business which are not generally known to others engaged in similar
business activities; Company's or Seller's failure to make and keep any of the
foregoing confidential shall not affect its status as part of the Confidential
Information under the terms of this Agreement.
"Defense Business" shall mean the business of designing, manufacturing,
selling, and/or servicing military tactical data links.
2. Ownership and Non-Disclosure and Non-Use of Confidential Information.
Mikros acknowledges and agrees that all Confidential Information, and all
physical embodiments thereof, are confidential to and shall be and remain the
sole and exclusive property of the Company. Mikros agrees that it will not: (I)
disclose or make available any Confidential Information to any person or entity,
or (ii) make or cause to be made, or permit, either on its own behalf or in the
service or on behalf of others, any use of such Confidential Information except
in the commercial, non defense industry market.
3. Acknowledgment. Mikros acknowledges that it has been for a number
of years engaged in the Defense Business throughout the Area; that the within
and foregoing covenants are made by it in consequence of and as an inducement to
the Company to acquire the Defense Business and Assets and to protect and
preserve to the Company the benefit of its bargain in the acquisition of the
Defense Business and Assets, including, particularly, the goodwill associated
therewith; that each of the above and foregoing covenants is reasonable and
necessary to protect and preserve the benefits of such purchase; and that
irreparable loss and injury would result should Mikros breach any of the
foregoing covenants.
4. In the event that Mikros or Mobile Broadcasting Company (MBC) engages
the Company to perform engineering and/or development services with respect to
the AM Business, during the period of performance of the services and for a
period of five (5) years thereafter, the Company will not engage in the AM
Business nor provide engineering or development services to any other person or
entity, directly or indirectly, which would permit the Company or any such third
party to conduct or propose to conduct business or initiate activities which
would be competitive with Mikros or MBC in the AM Business.
Mikros agrees that the Company, its employees and agents shall be
free to use and employ their general skills, know-how, and expertise, to use,
disclose, and employ any generalized ideas, concepts, know-how, methods and
techniques, or skills gained or learned during the course of any services
performed on behalf of Mikros, so long as it or they do not disclose any
confidential information of Mikros nor assist some third party to compete with
Mikros or MBC in the AM Business.
The Company and Mikros agree that all patents, trademarks,
copyrights, discoveries, know-how, inventions, methods and ideas, including
other intellectual property related thereto (collectively, the INVENTIONS),
made or discovered by the Company s employees pursuant to the engineering and/or
development activities contemplated by this Section 4, (a) shall be owned solely
and exclusively by Mikros if such Inventions have applications solely in the AM
Business, or (b) shall be owned jointly by Mikros and the Company if such
Inventions have applications outside of the AM Business. Joint ownership shall
mean that each party shall be free to develop, sell, market, license or
otherwise exploit such Invention as it deems appropriate subject to the
limitations on competition set forth in this Agreement. If an Invention has
application both with respect to the AM Business as well as beyond the scope of
the AM Business then in such case Mikros shall have exclusive rights with
respect to any use in the AM Business but ownership shall be joint with respect
to use beyond the AM Business.
3. General.
(a) Each of the covenants hereinabove contained shall be deemed
separate, severable, and independent covenants, and in the event any covenant
shall be declared invalid by any court of competent jurisdiction, such
invalidity shall not in any manner affect or impair the validity or
enforceability of any other part or provision of such covenant or of any other
covenant contained herein.
(b) If any of the covenants contained in Sections 2 and 3, or 4,
or any part thereof, is held to be unenforceable because of the duration of such
provision or the scope of the subject matter thereof or the area covered
thereby,the parties agree that the court making such determination shall have
the power to reduce the duration, scope and/or area of such provision and, in
its reduced form, said provision shall then be enforceable.
(c) In addition to all other remedies provided at law or in equity,
the Company shall be entitled to both preliminary and permanent injunctions
against Mikros to prevent a breach or contemplated or threatened breach by
Mikros of any of the foregoing covenants, without the necessity of proving
actual damages; and the existence of any claim, demand, cause of action, or
action of Mikros against the Company, whether predicated upon this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
any such covenants. In the event of an actual breach of any of the foregoing
covenants, the Company shall have the right to recover damages for all losses,
actual and contingent, and the right to require Mikros to account for and pay
over to the Company all profits or other benefits (collectively "Benefits")
derived or received by Mikros as a result of any transactions constituting
such breach, and Mikros hereby agrees to account for and pay over such Benefits
to the Company. Each of the rights and remedies enumerated above shall be
independent of the other, and shall be severally enforceable, and all of such
rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company at law or equity.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania without reference to
principles of conflicts of law.
(e) This Agreement may be executed and delivered in any number of
counterparts, each of which, when executed and delivered, shall be an original,
but all of which shall together constitute one and the same agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed and effective as of the date first above written.
MIKROS SYSTEMS CORPORATION
By: /s/ Thomas J. Meaney
GENERAL ATRONICS CORPORATION
By: /s/ George S. Huffman
<PAGE>
Exhibit 10.27
DAILY PLAN IT
LEASE AND SERVICE AGREEMENT
Daily Plan It, having an office at 707 Alexander Road, Princeton, New Jersey
08540 is herein referred to as DPI , and MIKROS SYSTEMS herein referred to as
client hereby make an agreement for certain services on the following terms and
conditions:
1. The term shall be 6 months, commencing on August 19, 1998 and ending on
February 28, 1999.
2. The client is engaged in the business of Research and Development .
Client expressly warrants that its business activities will in no way infringe
or impede the business activities of DPI or other clients served by DPI.
Accordingly, the utilization of the premises shall be for no purpose other than
listed above. Should the client desire to expand, change, or alter the nature
of its business, written consent from DPI is required. Conduct of any type of
business not expressly listed above will constitute default on behalf of client,
unless specifically agreed to in writing, by DPI.
3. Temporary Office Space will be provided at the monthly rate of $ 743.00 for
office number 21. The client agrees to pay $500.00 per room to be held as
security. This security shall be returned to the client with interest within 30
days after the termination of this agreement, provided the client has preformed
all of its obligations. DPI may suspend service at any time without notice if
client doesn t pay all charges billed within 30 days of the statement date.
4. DPI agrees to provide telephone answering services on one incoming line for
the client during regular business hours, 8:30am to 5:30pm daily, Monday
through Friday, excluding all banking and government holidays so long as this
agreement remains in effect and provided the client is not in default. The
incoming line will be a trunk line capable of handling 4 incoming calls
simultaneously.
5. DPI hereby authorizes the client to use the above described address as it s
business and mailing address. It is specifically understood that client shall
not use this address for bulk advertising of any type without DPI s prior
approval.
6. It is understood that in the event that the client terminates the use of
this address, it will be the client s responsibility to notify all parties of
its termination and is also responsible for arranging either pick-up or
forwarding of incoming mail.
7. Client understands that DPI is in the business of providing competent
secretarial and clerical services to it and other clients. In order to provide
those services, DPI incurs expenses in hiring, training and maintaining
qualified personnel. Client agrees that during the term of this agreement and
for 1 year thereafter, it will not hire, employ, or solicit any person employed
by DPI, former employee of DPI for 1 year, either for its own benefit or for
the benefit of any other party. This clause shall survive the termination of
this agreement and is severable therefrom. If this clause is violated, a fee of
$5,000.00 will become immediately due and payable.
8. Client or any employee of the client agrees and covenants that it will not
compete in any way with DPI during the term of this agreement and any extension
thereof.
9. Client agrees to abide by the rules and regulations of DPI and the building
as established and modified from time to time.
10. Client shall also have access to additional services as set forth in the
current schedule of fees. These services shall be billed to the client in
accordance with reasonable rates to be established by DPI from time to time.
11. Payments for services herein described shall be due on the first day of each
month. Bills for additional services shall be due upon receipt. Any payments
received 10 days after the due date shall be subject to late charges of $5.00
per day.
12. Termination of, within agreement, shall be given 30 days in advance of
expiration date. Client must advise DPI regarding renewal. If client doesnt
advise DPI otherwise by that time limit, then the agreement may be continued at
DPI s option on a month to month contract. The fixed charges will be due for
the entire month, and there will be no pro-ration for a partial month of use.
13. At the expiration of this agreement, the client will promptly vacate the
premises in the same condition as when first occupied by the client, normal
wear and tear expected, turn in its keys, and provide DPI with a forwarding
address and telephone number.
14. Additional charges required:
A. Phone installation $ NA
B. Phone Rental Per Month $ NA
15. Client shall have round the clock access to their offices and shall abide by
the rules and regulations attached as they may apply.
16. DPI shall have no obligation to carry insurance on client s personal or
business property or with respect to the leased premises. DPI shall not be
liable to client or to any other person, for any damages on account of loss,
damage, or theft to any personal or business property of the client.
17. Client may not make any alterations to its office unless it obtains prior
written approval from DPI.
18. Client may not sublease, assign, or encumber the space used by it.
19. DPI is not liable for personal injury suffered by client, its guests,
customers, clients, invites, or visitors, unless the injury is caused by DPIs
own negligence, or that of its employees.
20. The agreement is premised on the services being used by two persons per
office only. If more than two people habitually uses each space or services,
the contract charges will be increased by a factor of 25% for each additional
person.
21. The following are events of default:
A. Contract charges becoming past due
B. Variable charges becoming past due
C. Default in any other terms of this agreement, but only if DPI gives client
written notice of default, and client fails to cure the default within 30 days
of the notice. In the event of a recurring default, DPI will give client 30
days notice to cure for the first event of default.
22. On default, DPI may choose any of all of the following remedies:
A. Terminate the office services agreement
B. Accelerate the contract charges, and demand all sums due immediately
C. Take possession of all property in client s office, or stored by client on
the premises and store it at client s expense, until taken in full or partial
satisfaction of any lien or judgement
D. Deny access to the office by client and deny use of any of the services; and
any other remedies allowed by the law.
23. In the event of default, Client will be liable for the following additional
charges, attorney s fees, and expenses incurred by attorneys: time spent by any
DPI officers, at the rate of $150.00 per hour; interest on unpaid sums at
18% per annum; any other costs incurred by DPI as a result of the default.
24. In the event of default, DPI may immediately cease providing client with
any or all services, including telecommunications services. If DPI is able to
move an existing client to less expensive office space into the office(s) of the
defaulting client, then the defaulting client will remain liable for the less
expensive space until the expiration of this contract, but will be liable for
the rate here contracted.
All parties have read the above pages and agree to all terms and provisions.
Daily Plan It
/s/ Rochelle Stemmer Date July 29, 1998
Rochelle Stemmer - Managing Director
/s/ Thomas J. Meaney Date July 29, 1998
By: tenant, individually
Special Provision:
Based on the credit report of Mikros Systems the parties have agreed that Mr.
Thomas Meaney will personally guarantee the lease for the premises located at
The Daily Plan It, 707 Alexander Road, Bldg..2, Suite 208 in Princeton New
Jersey, Office #21. In addition the parties mutually agree that $4,770.00
(includes August 19th prorated move in date amount) is fair compensation for the
leased office along with the Security deposit of $500.00. The fair
compensation of $4,770.00 represents 6 months and 13 days of rent commencing on
August 19, 1998 thru February 19, 1999.
<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
We have audited the balance sheets of Mikros Systems Corporation (the "Company")
as of December 31, 1997 and 1996, and the related statements of operations,
shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations, shareholders'
deficiency and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern.
As shown in the financial statements, the Company incurred a net loss of
$604,550 for 1997 and has incurred substantial net losses for each of the past
two years. As of December 31, 1997, current liabilities exceed current assets by
$1,518,961 and total liabilities exceed total assets by $1,479,534. These
factors, and others discussed in Note 2.1. raise substantial doubt about the
Company s ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
Druker Rahl & Fein
Princeton, New Jersey
May 12, 1998
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1997 1996
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 85,592 $ 395,120
Accounts Receivable
Government 342,726 441,826
Trade 112,258 198,298
Inventories 5,293 153,192
Other Current Assets 9,561 16,508
------------ ------------
TOTAL CURRENT ASSETS 555,430 1,204,944
------------ ------------
PROPERTY & EQUIPMENT
Equipment 135,530 679,060
Furniture and Fixtures 50,241 59,207
Leasehold Improvements - 3,408
------------ ------------
185,771 741,675
Less: Accumulated Depreciation (100,672) (535,547)
------------ ------------
PROPERTY & EQUIPMENT, NET 85,099 206,128
------------ ------------
UNBILLED RECEIVABLES 3,837 52,612
PATENT COSTS, NET 14,609 15,785
OTHER ASSETS 17,048 17,825
------------ ------------
TOTAL OTHER ASSETS 35,494 86,222
------------ ------------
TOTAL ASSETS $ 676,023 $1,497,294
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS (continued)
LIABILITIES AND DECEMBER 31,
SHAREHOLDERS' DEFICIENCY 1997 1996
- ---------------------------------- ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 685,139 $ 507,249
Notes Payable
Bank 9,271 9,271
Related Parties 547,500 20,000
Other 446,500 18,302
Obligations under Capital Leases 23,967 29,492
Accrued Payroll and Payroll Taxes 35,391 50,922
Accrued Interest 34,712 3,866
Accrued Vacations 84,821 55,285
Accrued Expenses 84,241 128,743
Unliquidated Progress Payments and
Other Customer Advances 122,849 507,471
------------ ------------
TOTAL CURRENT LIABILITIES 2,074,391 1,330,601
------------ ------------
NOTES PAYABLE
Bank 716 10,017
Related Parties - 527,500
Other - 446,500
OBLIGATIONS UNDER CAPITAL LEASES-NONCURRENT - 15,585
------------ ------------
TOTAL LIABILITIES 2,075,107 2,330,203
------------------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
par value $.01 per share, authorized 150,000
shares, issued and outstanding 5,000 shares
in 1997 and 1996 80,450 80,450
------------ ------------
SHAREHOLDERS' DEFICIENCY
Common Stock, par value $.01 per share,
authorized 35,000,000 shares, issued and
outstanding 13,451,452 shares in 1997 and
11,846,952 in 1996 134,515 118,470
Preferred Stock, convertible, par value $.01
per share, authorized 2,000,000 shares, issued
and outstanding 255,000 shares in 1997 and
1,005,000 shares in 1996 2,550 10,050
Preferred Stock, Series B convertible, par value
$.01 per share, authorized 1,200,000 shares, issued
and outstanding 1,131,663 shares in 1997 and 1996 11,316 11,316
Preferred Stock, Series D, par value $.01 per share
690,000 shares authorized, issued and outstanding
in 1997 and 1996 6,900 6,900
Capital in excess of par 10,248,378 10,218,548
Accumulated deficit (11,883,193) (11,278,643)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY (1,479,534) (913,359)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 676,023 $ 1,497,294
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
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
-----------------------------------------------------------
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
Year Ended December 31, 1997:
Issuance of Common Stock 854,500 8,545
Conversion of Preferred Stock 750,000 7,500 (750,000)(7,500)
Net Loss
---------- ------- --------- ------- --------- -----
Balance-December 31, 1997 13,451,452 $134,515 255,000 $ 2,550 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, 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)
Year Ended December 31, 1997:
Issuance of Common Stock 29,830
Net Loss (604,550)
--------- ------- ----------- ------------
Balance-December 31, 1997 690,000 $6,900 $10,248,378 ($11,883,193)
========= ====== =========== =============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1997 1996 1995
------------ ---------- ----------
Revenues:
Equipment Sales $ 3,240,980 $ 157,364 $1,390,085
Contract Research and Development
(including $1,223,305 to a
Related Party in 1997 and
$30,409 in 1996) 1,856,452 701,736 1,989,812
------------ ----------- -----------
Total Revenues 5,097,432 859,100 3,379,897
------------ ----------- -----------
Cost of Sales:
Equipment Sales 2,264,782 113,992 1,079,873
Contract Research and Development 1,336,223 712,836 1,796,168
------------ ----------- -----------
Total Cost of Sales 3,601,005 826,828 2,876,041
------------ ----------- -----------
Gross Margin 1,496,427 32,272 503,856
------------ ----------- -----------
Expenses:
Research and Development 878,095 456,991 238,120
Marketing, General
and Administrative 1,088,072 895,900 855,925
Interest 134,710 126,572 57,334
------------ ----------- -----------
Total Expenses 2,100,877 1,479,463 1,151,379
------------ ----------- -----------
Loss before Provision
for Income Taxes (604,450) (1,447,191) (647,523)
Provision for Income Taxes 100 450 150
------------ ----------- -----------
Net Loss ($604,550) ($1,447,641) ($647,673)
============ =========== ===========
Basic loss per share ($0.05) ($0.18) ($0.10)
=========== =========== ==========
Weighted Average Number of Shares
Outstanding 12,688,327 8,382,383 7,285,441
========== ========= =========
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1997 1996 1995
---------- ----------- -----------
Cash Flow From Operating Activities:
Net Loss ($ 604,550) ($1,447,641) ($ 647,673)
Adjustments to reconcile Net Loss to
Cash Used by Operations:
Depreciation and Amortization 86,050 72,730 68,961
Provision for Inventory Obsolescence - - 15,000
Asset Impairment 107,489 - -
Loss from Fixed Asset Disposition 36,482 - -
Net Changes in Operating Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 185,140 (521,971) 1,001,818
Unbilled Receivables 48,775 6,069 (26,593)
Inventories 873,305 (977,748) 47,825
Other Current Assets 6,947 (4,949) 16,285
Other Assets 778 (840) (5,692)
Increase (Decrease) in:
Accounts Payable 177,890 302,373 (85,706)
Accrued Payroll and Payroll Taxes (15,531) 36,614 (40,077)
Unliquidated Progress Billings and
Other Customer Advances (1,110,028) 1,408,348 -
Other Liabilities and Interest 22,558 37,282 (398,962)
----------- --------- -----------
Net Cash Used in Operations (184,695) (1,089,733) (54,814)
----------- --------- -----------
Cash Flows Used By Investing Activities:
Equipment Purchases (107,818) (56,052) (47,107)
----------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from Loans - 651,500 30,000
Proceeds from Sale of Common Stock - 960,000 -
Proceeds from Exercise of Options and
Warrants 38,375 27,877 12,500
Net Payments/Borrowings - Line of Credit - (125,000) 180,603
Repayment of Debt and Capital Leases (55,390) (50,748) (162,499)
----------- ---------- ----------
Net Cash Provided by (Used in) Financing
Activities (17,015) 1,463,629 60,604
----------- ---------- ----------
Net Increase (Decrease) in Cash (309,528) 317,844 (41,317)
Cash at Beginning of Year 395,120 77,276 118,593
----------- ---------- ----------
Cash at End of Year $ 85,592 $ 395,120 $ 77,276
=========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for $ 105,770 $ 135,411 $ 41,231
interest =========== ========== ==========
Acquisition of Equipment through
Capital Lease Obligations $ 11,449 $ 50,571 $ 17,808
=========== ========== ==========
Notes Issued in Settlement of Accounts
Payable Obligations $ - $ 36,802 $ -
=========== ========== ==========
Stock Issued in Settlement of Accounts
Payable Obligations $ - $ 27,255 $ -
=========== ========== ==========
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. COMPANY OVERVIEW
- ---------------------
1. THE COMPANY
- ----------------
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 707 Alexander Road,
Suite 208, Princeton, New Jersey telephone;(609)987-1513.
Mikros Systems Corporation became an established US Navy defense contractor in
1987 and continued to supply advanced technology and equipment for ten years to
the US Navy and Air Force. The Company was capitalized with more than $15
million to engage in engineering and manufacturing for these customers supplying
advanced communication equipment using cutting edge technology.
The knowledge base and proprietary technology developed was recognized as
applicable to the rapidly expanding wireless business in the commercial sector.
The rigorous radio transmission environment as well as the challenges of
underwater signal processing required Mikros employees to invent new methods to
optimize the bandwidth for a higher data throughput.
In 1995, the Company s Board of Directors decided the Company should also pursue
commercial contracts which would employ these advanced techniques to enhance the
data transmission rates in the AM and FM radio spectrum. Since the Company had
limited resources, it was decided to pursue the AM technology.
In 1996, Safeguard Scientifics (Delaware), Inc., invested $1 million in Mikros
in exchange for 10% ownership in the Company. At the same time, Mobile
Broadcasting Corporation (MBC) was created to exploit the AM radio technology,
particularly in mobile or portable platforms such as automobiles. Initially,
Safeguard invested $1 million in MBC for 75% ownership whereas Mikros owned the
remaining 25%. Mikros share in MBC was subsequently diluted to 18%, as a
result of additional capital invested by Safeguard. (See Notes B and I).
Data Design and Development Corporation (3D) was also founded in 1996 as part of
the Safeguard Scientific agreement and retains ownership of the AM and FM
technology. 3D has licensed the FM technology rights in North America to Mikros
and the AM technology rights in North America to MBC. Mikros owns 1/3 of 3D,
certain Mikros shareholders own another 1/3, and Safeguard owns the remaining
1/3.
The Common Shipboard Data Terminal System contract consumed most of the
technical resources of the Company in 1997. The contract with the US Navy
provided for the purchase units periodically over the life of the contract. The
delivery of the initial units under the contract resulted in severe negative
cash flow. This limitation of resources and the delays in the initial
delivery of the units hampered the Company s ability to market such systems
internationally.
As a result, the Company s Board of Directors determined that it would be in the
best interest of the shareholders to sell the government contracts and use the
proceeds to focus exclusively on the commercial contracts, particularly the AM
radio data casting.
Mikros entered negotiations in late 1997 for the sale of the military contracts
with prospective purchasers.
The resulting transaction concluded in 1998 and included a $600,000 cash payment
and a 2% royalty to be paid to Mikros over four years on all data terminal set
sales. In addition, the purchaser is obligated to supply $1 million in
engineering services to Mikros which will be expended on the AM data program
with MBC.
2. SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
1. Basis of Presentation
--------------------------
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates the
continuation of the Company as a going concern. The Company has
sustained substantial operating losses in recent years. In addition, the
Company has used substantial amounts of working capital in its
operations. Further, at December 31, 1997, its current liabilities exceed
its current assets by $1,518,961.
As shown in the accompanying financial statements, the Company incurred a
net loss of $604,550 for the year ended December 31, 1997, and as of
December 31, 1997, had an accumulated deficit of $11,883,193. As of
December 31, 1997, the Company was in arrears for its December, 1997
interest payments and could not meet its principal repayment obligations
in 1998. Management is attempting to restructure its notes obligations with
related parties and other note holders. Starting in April 1998, the
Company began negotiating settlement agreements with its vendors
to settle its accounts payable for reduced amounts. In order
to continue as a going concern, the Company will incur substantial
expenditures to develop and market its commercial wireless
communications business.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent on the Company being able to
restructure its obligations and to obtain financing to support continuing
operations. Management believes that actions presently being taken to
revise the Company s operating and financial requirements provide the
opportunity to continue as a going concern.
With the sale of the government contracts, Mikros' business assets will
consist of both commercial FM and AM Radio technology. Continued
development of the FM technology has been postponed in order to direct
all of the Company's resources to the AM radio technology.
The initial customer for this AM technology is MBC. MBC has the North
American rights and will be the first customer to apply the Mikros
technology. 3D Corporation owns the rights for other parts of the world
and will license the rights to MBC, Mikros or others.
Management believes Mikros program to develop high speed digital radio has
positioned the Company at the very cutting edge of digital radio. Digital
radio has been under development for a number of years by some large
corporations. The Mikros proposed approach has the prospect of delivery of
the data in a robust manner that will have the same signal strength as the
basic radio signal.
The digital radio system Mikros is developing for AM radio data
transmission will allow simultaneous broadcasting of the present radio
signal with a digital channel that can be used for the high quality FM
music or additional clear voice channels. This will be accomplished with
no disturbance to the existing radio channel. In effect the radio
broadcaster will be able to provide more channels or equivalent
stations from the same radio transmitters. This system will require a
minor modification to the radio station transmitter which will not require
new FCC approval, if the adjacent channel interference is avoided.
While the new technology can be made available to all AM receivers,
initially, the automotive market, as a post production option, will be
addressed due to the size and its dependence on wireless transmissions.
The Company believes that eventually, the digital receiver can be supplied
in radios from the original equipment manufacturer. The technology is a low
cost solution for the broadcasters using the existing AM radio
infrastructure.
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 $175,500 (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.
3. Property and Equipment
----------------------------
Property and Equipment is 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 $84,872, $71,552, and
$67,783 for 1997, 1996 and 1995, respectively.
In 1997, certain property and equipment were deemed to be impaired and
were written down to their fair value. An impairment loss of $107,489 has
been charged to cost of sales in 1997.
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 1997, Accounts Receivable is presented net of an allowance for
uncollectible accounts in the amount of $140,311 which pertains to two
contracts.
5. Earnings per Common Share
------------------------------
The Company adopted FAS #128, earnings per share, and in accordance with
this provision has restated all prior periods. Basic earnings per common
share is computed using the weighted average number of shares outstanding.
The number of common shares that would be issued from the exercise of stock
options and warrants, and the conversion of convertible preferred stock
would be anti-dilutive. Diluted earnings per share is not presented
because it would be anti-dilutive in all periods presented.
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 are measured by the
costs incurred as compared to total contract costs based on time and
materials. If milestones are included in the contract requirements, the
revenue recognition is deferred until the milestone is completed.
Adjustments to cost estimates are made periodically, and losses expected
to be incurred on contracts in progress are charged to operations in the
period such losses are determined.
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 1997, 1996, and 1995.
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. 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 costs being
incurred on certain contracts.
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).
<PAGE>
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 note holders 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.
As of December 31, 1997, the Company was in arrears for the December interest
payments.
Safeguard Scientifics (Delaware) Inc. (SSI)
- -------------------------------------------
On November 15, 1996, the Company, all of its secured creditors from its 1996
and 1992-93 financings and SSI entered into an agreement. Under the
agreement SSI paid $1,000,000 to the Company.
- - SSI received: 1) 1,912,000 shares of Common Stock of the Company; 2) a
warrant to purchase 2,388,000 shares of Common Stock at $0.65 per share;
3) a warrant to purchase 3,071,000 shares at $0.78 per share; 4) a 75%
interest in an exclusive, royalty-free, perpetual license of the AM
technology in the United States, Canada and Mexico (through SSI's
ownership in MBC); and 5) a 33 1/3% interest in the FM and AM technology
(through SSI's ownership in 3D). This transaction is more fully described
below.
- - Two (2) new companies were formed, Data Design and Development Corporation
(3D) and Mobile Broadcasting Corporation (MBC). The Company received one-
third of 3D in exchange for certain of its AM and FM technology. SSI
received one-third of 3D in exchange for a commitment to invest up to
$1,000,000 in MBC. The secured creditors received one-third of 3D and
released their security interest in the technology transferred. The
Company received 25% of MBC for $50. SSI received 75% of MBC for
$200,000.
- - 3D granted MBC an exclusive, royalty-free, perpetual license to the AM
technology in the United States, Canada and Mexico. 3D granted the
Company an exclusive, royalty-free, perpetual license to the FM technology
in the United States, Canada and Mexico. 3D retained rights to the AM and
FM technology in the rest of the world. The Company and MBC entered into
a consulting arrangement under which the Company was paid for the
development of the AM technology. 3D owns 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) permit SSI to inspect the operations and
business of the Company; and (ii) fix and maintain the number of Directors on
the Board of Directors at eight members. In addition, the Purchase Agreement
also provides that as long as SSI owns such 1%, the Company is subject to
certain negative covenants, including, among other things, restrictions on: (I)
transactions with affiliates of the Company; (ii) certain indebtedness; and
(iii) amendments to the Company's Certificate of Incorporation and Bylaws.
In connection with the transaction, the Company entered into a voting agreement
pursuant to which each of Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer,
Frederick C. Tecce and John B. Torkelsen, each a director of the Company
(collectively, the "Management Shareholders"), agreed to vote an aggregate of
approximately 6,659,214 votes for the election of two designees of SSI to the
Board of Directors of the Company.
1992-93 Financing
- -----------------
In a series of transactions consummated on October 27, 1992 and April 27, 1993,
Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick C. Tecce, and John
B. Torkelsen, individually and not as a group, (collectively referred to herein
as the "Investors") acquired certain loan and equity interests in the Company
from other debt and equity holders.
Pursuant to such transactions, each of the Investors acquired, in consideration
of an aggregate of $250,000 (each of the Investors individually paying $50,000
in cash), twenty percent of (I) 50,000 shares of Common Stock, $.01 par value
("Common Stock"), of the Company (ii) promissory notes of the Company in the
aggregate principal amount of $916,875 (collectively, the "Investor Notes"),
(iii) warrants ("Series C Warrants") to purchase 97,500 shares of Series C
Preferred Stock, $.01 par value, of the Company and (iv) certain loan and equity
rights in the Company, including without limitation, rights under loan
agreements, an investment agreement, a note purchase agreement, and all
documents related to such agreements.
Pursuant to such loan documents, among other things, the Company is prohibited
from paying dividends on its Common Stock, the Company has granted to the
Investors a security interest in all of the assets of the Company and the
Investors have the right to designate 2/7ths of the Board of Directors of the
Company, which right has not been exercised. Each of Messrs. Burns, Meaney,
Meyer and Torkelsen is a Director of the Company.
In December 1993, the Investors agreed to reduce the amounts owed by the Company
under the Investor Notes, including unpaid interest, in exchange for shares of
Common Stock and Preferred Stock issued by the Company. In return for a
reduction in debt of $416,875 and accrued interest of $273,125, the Company
issued 2,750,000 shares of Common Stock and 690,000 shares of Series D Preferred
Stock which provides for an annual cumulative dividend of $.10 per share. The
Investor Notes were modified to provide for principal payments in sixteen
quarterly installments beginning January 1, 1994 and ending on October 1, 1997.
Interest on the unpaid principal balance is due in quarterly installments
beginning on March 31, 1994. As of December 31, 1997 the Company was in arrears
for the December interest 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. In October 1996, the
Investors authorized deferral of the remaining $312,500 of principal payments
until 1998 (See Note D).
C. DIVIDENDS
- --------------
As of December 31, 1997 and December 31, 1996 there were dividends in arrears on
shares of Series D Preferred Stock of $276,000 ($.10 per share) and $207,000,
respectively.
D. NOTES PAYABLE
- ------------------- As of December 31,
1997 1996
--------- ---------
Bank Equipment Loan 36 monthly
payments; starting February 1996 $ 9,987 $ 19,288
Related Parties 547,500 547,500
Others 446,500 464,802
--------- ---------
1,003,987 1,031,590
--------- ---------
Less Current Maturities
Banks 9,271 9,271
Related Parties 547,500 20,000
Others 446,500 18,302
--------- ---------
1,003,271 47,573
--------- ---------
Notes Payable-Noncurrent $ 716 $ 984,017
========= =========
<PAGE>
Maturities of the Notes Payable are as follows:
1998 $1,003,271
1999 716
---------
$1,003,987
=========
Interest rates on the notes range from 1% over prime to 14% per annum. The
prime rate at December 31, 1997 and 1996 was 8.5% and 8.25% respectively. In
October 1996 note holders 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.
E. INVENTORIES
- ----------------
December 31,
1997 1996
----------- ---------
Raw materials $ - $ 15,985
Finished goods - 12,567
Work-in-process 180,764 1,025,517
----------- ---------
Sub-Total 180,764 1,054,069
Unliquidated Progress Payments (175,471) (900,877)
----------- ----------
TOTAL $ 5,293 $ 153,192
=========== ==========
F. REVENUES
- -------------
Revenues from two federal government agencies amounted to 63% of total revenues
in 1997, as compared to 39.1% in 1996 and 70.4% in 1995. Revenues from two
commercial customers including a related party were 34.1% of total revenues in
1997. This compares to 46.6% in 1996 and 8.4% in 1995 of revenues from two
commercial customers. Revenues from a related party amounted to 24% of total
revenues in 1997 and 3.5% of total revenues in 1996.
G. INCOME TAXES
- -----------------
Income taxes are recorded in accordance with FASB Statement 109 on accounting
for income taxes.
<PAGE>
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 is as follows:
1997 1996 1995
--------- --------- ---------
Income Taxes:
Current tax expense-State $ 100 $ 450 $ 150
Deferred tax expense - - -
--------- --------- ---------
Total Provision for
Income Taxes $ 100 $ 450 $ 150
========= ========= =========
The deferred tax asset and deferred tax liability consist of the following:
1997 1996 1995
--------- --------- ---------
Deferred tax asset:
Income Taxes:
Net Operating Loss Carry
Forward $2,344,840 $2,966,608 $2,869,450
Valuation Allowance (2,344,840) ( 2,966,608) ( 2,869,450)
---------- ---------- ----------
Net deferred tax asset $ - $ - $ -
========== ========== ==========
Deferred tax liability $ - $ - $ -
========== ========== ==========
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.
<PAGE>
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
1998 $ 587,000 $ -
1999 704,000 -
2000 1,143,000 -
2001 1,141,000 -
2002 923,000 577,000
2003 606,000 1,421,000
2004 147,000 340,000
2005 81,000 -
2010 602,000 -
2011 1,422,000 -
2012 340,000 -
---------- ----------
$ 7,696,000 $ 2,338,000
========== ==========
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, 1997 and December 31, 1996 was
$11,449 and $17,479, respectively. Accumulated amortization as of December 31,
1997 and 1996 was $4,641 and $1,748, respectively. Amortization of assets held
under capital leases is included in depreciation expense.
The following is a schedule of minimum lease payments due under capital leases
as of December 31, 1997:
Total Net Minimum Lease Payments $25,475
Less Amounts Representing Interest 1,508
--------
Present Value of Net Minimum Lease Payments $23,967
=======
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 1997,
the Company paid $1,000 for these services. 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, the Company paid $15,000 for such services.
<PAGE>
In addition, in 1997, the Company paid $1,400 to the director 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 1997, he
received $5,000 for services. In 1996, this director was issued 23,760 shares of
Common Stock in payment of $11,880 for services rendered. In 1995 this
director received $8,400 for such services.
As of December 31, 1997 and 1996, accounts payable owed to these two related
parties amounted to $18,874 and $19,160 respectively.
In 1997 and 1996, the Company had revenues of $1,223,305 and $30,409,
respectively from Mobile Broadcasting Corporation (MBC), 25% of whose
outstanding capital stock was owned by the Company as of December 31, 1996. In
1997, Mikros share was diluted to 18%. Since there is no market for MBC s
common stock and MBC has incurred a net loss in each of the years ended
December 31, 1997 and 1996, no asset has been recorded. Included in Accounts
Receivable as of December 31, 1997 and 1996, were $90,221 and $122,049 due from
MBC which was subsequently fully paid.
Certain directors and officers participated in the "1996 Financing"
(see Note 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 was to be repaid in four quarterly
installments beginning September 30, 1997. In 1995, other directors loaned a
total of $30,000 to the Company on identical terms. As of December 31, 1997, no
principal repayments have been made and the interest is in arrears for the
December interest payments.
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.
<PAGE>
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.
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.
<PAGE>
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, 1997.
Had compensation cost been recognized consistent with the method prescribed by
FASB 123, the Company's net loss and loss per share would have been changed to
the pro forma amounts as follows:
1997 1996 1995
----------- ----------- -----------
Net Loss
As Reported ($604,550) ($1,447,641) ($647,673)
========== ========== ===========
Proforma ($667,000) ($1,485,794) ($656,470)
========== =========== ===========
Basic loss per share
As Reported ($0.05) ($0.18) ($.10)
===== ===== =======
Proforma ($0.05) ($0.19) ($.10)
======= ======= =======
The fair value of the Company's stock options used to compute proforma net loss
and loss 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 1997 1996 1995
----------- ---------- ---------
Dividend yield 0% 0% 0%
Risk free interest rate 6.48% 6.48% 5.98%
Expected life 5 years 5 years 5 years
Expected volatility 235% 235% 289%
The per share weighted-average value of stock options issued by the Company
during 1997, 1996 and 1995 was $0.2879 and $0.1873 on the date of grant.
Accordingly, the stock option values presented herein are not necessarily
indicative of amounts that could be realized in a current market exchange.
Proforma net loss reflects only options granted in 1996 and 1995. Options which
were granted in 1997 were subsequently forfeited. Therefore, the full impact of
calculating compensation cost for stock options issued in 1997 under SFAS
No. 123 is not reflected in the proforma net loss amounts presented above
because compensation cost is not material. Compensation cost for options
granted prior to January 1, 1995 is not considered.
<PAGE>
Option activity under the Company's Plan is summarized below:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Common Stock Options: 1997 Price 1996 Price 1995 Price
------- -------- ------- -------- ------- --------
Options outstanding 1,112,500 $0.273 1,087,500 $ 0.0605 997,500 $ 0.0605
beginning of year
Granted 250,000 0.26 485,500 0.1875 417,500 0.1875
Exercised (135,000) 0.1065 (162,500) 0.0625 (200,000 0.0625
Cancelled (107,500) 0.2892 (297,500) 0.0529 (127,500) 0.0529
----------- ----------- ----------
Options outstanding, 1,120,000 0.2879 1,112,500 0.273 1,087,500 0.1101
end of year ========== =========== =========
Options exercisable, 410,000 0.1504 333,750 0.1056 544,375 0.0469
end of year ========== ========== =========
The following summarizes information about the Company's stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/97 Contractual Life Price as 12/31/97 Price
-------- ----------- ---------------- ------------ ------------ -------
<C> <C> <C>
$0.025 - 0.0625 117,500 4.9 years $0.059 117,500 $0.059
$0.125 - 0.1875 387,500 7.3 years $0.175 201,250 $0.1657
$0.26 250,000 9.7 years $0.26 - -
$0.50 365,000 8.5 years $0.50 91,250 $0.50
<PAGE>
As of December 31,
Common Stock Warrants: 1997 1996 1995
------- ------- -------
Warrants Outstanding at
beginning of year 7,138,166 437,500 187,500
Granted 175,000 9,066,500 250,000
Exercised (712,500) (2,365,834) -
Expired or Terminated - - -
---------- --------- ---------
Warrants outstanding and
exercisable, end of year 6,600,666 7,138,166 437,500
========== ========= =========
Exercise price per warrant $0.001, $0.001 & $0.10
$0.01 & $0.01
$0.26
As of December 31,
Series C Preferred
Stock Warrants 1997 1996 1995
------- ------- -------
Warrants Outstanding,
at beginning of year 97,500 97,500 97,500
Granted - - -
Exercised - - -
Expired or Terminated - - -
------- -------- --------
Warrants outstanding and
exercisable, end of year 97,500 97,500 97,500
======= ======== ========
Exercise price per warrant $1.00 $1.00 $1.00
======= ======== ========
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 had a lease for its principal offices and research facilities in
Princeton, New Jersey. The lease for the facilities expired in March, 1998.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $149,919,
$187,166, and $164,610 respectively. The rent expense for 1995 and 1996 included
offices in Connecticut and Washington, D.C. Subsequently the Company rented
office space in Princeton.
The Company entered into an agreement in 1998 to sell its defense contracts to
General Atronics Corporation. As yet, the US Government has not novated contract
# N00600-C-96-3063 to GAC. The Company anticipates the novation will be
completed shortly and will not negatively impact its agreement with GAC. At
this time, however, no determination can be made as to the impact on the
transaction, and its resulting gain, should the novation continue to be delayed
indefinitely (see Note S).
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 matched employee contributions to the
plan up to a limit of one and one-half percent (1.5%) of annual compensation.
The payment of the Company matching contribution has been suspended since
August,1995, and the unpaid amounts are included in accrued expenses as of
December 31, 1997 and 1996, respectively.
The Company recorded expense for matching contributions of $8,906 in 1997,
$14,944 in 1996, and $20,246 in 1995.
The Company also provides for a 401(K) profit sharing contribution which is at
the discretion of the Board of Directors.
Q. CONCENTRATION OF RISK
- ---------------------------
The Company maintains bank accounts which may exceed federally insured limits at
one financial institution. Historically no credit related losses have been
experienced.
<PAGE>
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.
December 31, 1997 December 31, 1996
---------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
Assets
Cash $ 85,592 $ 85,592 $ 395,120 $ 395,120
Unbilled receivables 3,837 See Note (A) Below 52,612 See Note (A) Below
Liabilities
Notes payable - 1,003,271 1,003,271 47,573 47,573
Current
Long-term debt 716 See Note (A) Below 984,017 See Note (A) Below
Mandatorily redeemable
preferred stock 80,450 See Note (A) Below 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.
S. Subsequent Events
- --------------------
Effective, April 10, 1998, the Company sold substantially all of the tangible
and intangible assets related to its defense contracts. The sales agreement
provided for a sales price of $1,000,000 in engineering services to be performed
by the purchaser for the Company in the future, and $600,000 in cash. The
Company will also receive a royalty of 2% of the total sales of all Link 11 Data
Terminal sets for a period of four years. In connection with the sale of the
defense contracts, the Company entered into a non-compete agreement with the
purchaser for a period of 5 years. The purchaser is not assuming the
liabilities of the Company, except the Company warranty obligation under
contract N00600-96-C-3063.
A net gain on the sale estimated at $1,500,000 will be recognized upon the
completion of the sale. Results of operations for 1997 included net sales of
$2,945,000 from defense contracts.
<PAGE>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1997
PERIOD-END DEC-31-1997
CASH $85,592
SECURITIES 0
RECEIVABLES 595,295
ALLOWANCES 140,311
INVENTORY 5,293
CURRENT-ASSETS 555,430
PP&E 185,771
DEPRECIATION 100,672
TOTAL-ASSETS 676,023
CURRENT-LIABILITIES 2,074,391
BONDS 0
PREFERRED-MANDATORY 80,450
PREFERRED 20,766
COMMON 134,515
OTHER-SE (1,634,815)
TOTAL-LIABILITY-AND-EQUITY 676,023
SALES 5,097,432
TOTAL-REVENUES 5,097,432
CGS 3,601,005
TOTAL-COSTS 3,601,005
OTHER-EXPENSES 1,966,167
LOSS-PROVISION 0
INTEREST-EXPENSE 134,710
LOSS-PRETAX (604,450)
LOSS-TAX 100
LOSS-CONTINUING (604,550)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-LOSS (604,550)
EPS-BASIC (.05)
EPS-DILUTED (.05)
</TABLE>
