SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: September 30, 1998 COMMISSION FILE #: 2-67918-NY
MIKROS SYSTEMS CORPORATION
--------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 14-1598200
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification#)
Incorporation or Organization)
707 Alexander Road, Suite 208, Princeton, NJ 08540
-------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: 609-987-1513
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ ]Yes [X]No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS September 30, 1998
- ---------------------------- ----------------
COMMON STOCK, PAR VALUE $.01 13,451,452 SHARES
- --------------------------------------------------------------------
<PAGE>
MIKROS SYSTEMS CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page #
ITEM I - FINANCIAL STATEMENTS
Balance Sheets at September 30, 1998 and December 31, 1997
(Unaudited)................................................... 1
Statements of Operations for the Three Months Ended and the
Nine Months Ended September 30, 1998 and 1997 (Unaudited)..... 3
Statements of Shareholders' Equity for the Years ended 1996
and 1997 and Nine Months Ended September 30,1998 (Unaudited)...4
Statements of Cash Flows for the Three Months Ended and the
Nine Months ended September 30, 1998 and 1997 (Unaudited)..... 5
Notes to the Financial Statements............................. 6
ITEM II
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 11
PART II - OTHER INFORMATION..................................... 14
<PAGE>
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 156,656 $ 85,592
Accounts Receivable
Government - 342,726
Trade - 112,258
Royalties 7,760 -
Inventories - 5,293
Prepaid Engineering Services 438,451 -
Other Current Assets 9,715 9,561
------------ ------------
TOTAL CURRENT ASSETS 612,582 555,430
------------ ------------
PROPERTY & EQUIPMENT
Equipment 71,240 135,530
Furniture and Fixtures - 50,241
------------ ------------
TOTAL 71,240 185,771
Less: Accumulated Depreciation ( 21,144) (100,672)
------------ ------------
PROPERTY & EQUIPMENT, NET 50,096 85,099
------------ ------------
OTHER ASSETS:
Unbilled Receivables - 3,837
Patent Costs, Net 30,186 14,609
Other Assets 872 17,048
------------ ------------
TOTAL OTHER ASSETS 31,058 35,494
------------ ------------
TOTAL ASSETS $ 693,736 $ 676,023
============ ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SEPTEMBER 30, DECEMBER 31,
SHAREHOLDERS' DEFICIENCY 1998 1997
- ------------------------------------------ ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 54,118 $ 685,139
Notes Payable
Bank 3,012 9,271
Related Parties 530,000 547,500
Other 446,500 446,500
Obligations under Capital Leases 23,967 23,967
Accrued Payroll and Payroll Taxes 32,486 35,391
Accrued Interest - 34,712
Accrued Vacations 3,736 84,821
Accrued Expenses 109,569 84,241
Deferred Contract 438,451 -
Unliquidated Progress Payments and Other
Customer Advances 0 122,849
----------- ------------
TOTAL CURRENT LIABILITIES 1,641,839 2,074,391
------------ ------------
NOTES PAYABLE -Bank - 716
------------ ------------
TOTAL LIABILITIES 1,641,839 2,075,107
------------ ------------
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 1998 and 1997 80,450 80,450
------------ ------------
SHAREHOLDERS' DEFICIENCY
Common Stock, par value $.01 per share,
authorized 25,000,000 shares, issued and
outstanding 13,451,452 shares in 1998 and 1997 134,515 134,515
Preferred Stock, convertible,
par value $.01 per share, authorized 2,000,000
shares, issued and outstanding 255,000 shares
in 1998 and 1997 2,550 2,550
Preferred Stock, Series B convertible, par value
$.01 per share, authorized 1,200,000 shares, issued
and outstanding 1,131,663 shares in 1998 and 1997 11,316 11,316
Preferred Stock, Series D, par value $.01 per
share, 690,000 shares authorized, issued and
outstanding in 1998 and 1997 6,900 6,900
Capital in excess of par 10,248,378 10,248,378
Accumulated deficit (11,432 212) (11,883,193)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY (1,028,553) (1,479,534)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 693,736 $ 676,023
============ ============
See Notes to Financial Statements
<PAGE>
<PAGE>
MIKROS SYSTEM CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended, Nine Months Ended,
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues:
Equipment Sales $ - $1,270,127 $333,592 $2,268,192
Contract Research - 711,705 46,874 1,496,268
and Development
Royalty 3,583 - 7,760 -
---------- ---------- ---------- ---------
Total Revenues 3,583 1,981,832 388,226 3,764,460
---------- ---------- ---------- ----------
Cost of Sales:
Equipment Sales - 901,241 321,787 1,710,910
Contract Research 8,233 596,280 52,662 1,087,803
and Development
---------- ---------- ---------- -----------
Total Cost of Sales 8,233 1,497,521 374,449 2,798,713
---------- ---------- ---------- -----------
Gross Margin (4,650) 484,311 13,777 965,747
---------- ---------- ---------- -----------
Expenses:
Research & Development 332,130 (16,694) 660,096 109,125
Selling, General 48,603 180,434 268,257 723,560
and Administrative
Interest 24 33,469 49,125 101,827
---------- ---------- ---------- ----------
Total Expenses 380,757 197,209 977,478 934,512
---------- ---------- ---------- ----------
Net Operating Income (385,407) 287,102 (963,701) 31,235
(Loss) ---------- ---------- ---------- ---------
Gain on Sale 332,130 - 1,096,085 -
of Government Contracts
Gain on Settlement of Accounts
Payable Debt 31,957 - 318,597 -
---------- ---------- ---------- ---------
Net Income (Loss) ($ 21,320) $287,102 $450,981 $31,235
=========== ========== ========== =========
Net Income (Loss) $ - $ - $0.03 $ -
per share =========== ========== ========== =========
Weighted average number of
shares outstanding 13,451,452 12,265,910 13,451,452 12,265,910
=========== ========== ========== ==========
See Notes to Financial Statements
<PAGE>
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS DEFICIENCY
(UNAUDITED)
<TABLE>
<CAPTION> Common Preferred Preferred
Stock Stock Stock B
$.01 PAR $.01 PAR $.01 PAR
VALUE VALUE VALUE
--------- ------- --------- -------- --------- --------
PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE
--------- ------- --------- -------- --------- --------
<C> <C> <C> <C> <C> <C>
Balance December 31, 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 Income (Loss)
--------- ------- --------- -------- --------- ------
Balance-December 31, 199611,846,952 118,470 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 Income (Loss)
--------- ------- ------- ------ --------- ------
Balance December 31, 1997 13,451,452 134,515 255,000 2,550 1,131,663 11,316
Nine Months Ended
September 30, 1998
Net Income (Loss)
--------- ------- --------- ------- --------- -----
Balance September 30, 13,451,452 $134,515 255,000 $2,550 1,131,663$11,316
1998 =========== ======== ========= ====== ========= ======
Preferred
Stock D Capital
$.01 PAR in excess Accumulated
VALUE of Par Deficit
--------- ------- --------- -----------
PAR
SHARES VALUE
--------- ------- --------- -----------
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 Income (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
Conversion of Preferred Stock
Net Income (Loss) (604,550)
--------- ------- ---------- ------------
Balance December 31, 1997 690,000 6,900 10,248,378 ( 11,883,193)
Six Months Ended
September 30, 1998
Net Income (Loss) 450,981
--------- ------- ---------- ------------
Balance September 30,1998 690,000 $ 6,900 $10,248,378 ($11,432,212)
========= ======= ========== ============
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -----------
Cash Flows Provided (Used)
by Operating Activities:
Net Income (Loss) ($21,320) $287,102 $450,981 $31,235
Adjustments to reconcile Net Income (Loss)
to Net Cash Provided (Used) by Operating
Activities:
Depreciation and Amortization 7,022 20,577 11,711 61,731
Gain from Sale of Defense Contracts, Net of
Equipment and Engineering - - (575,662) -
Credit
Non Cash Settlement of Accounts (31,957) - (318,597) -
Payable
Net Changes in Operating Assets and
Liabilities:
(Increase) Decrease in:
Accounts Receivable (3,583) (2,164) 447,224 (89,180)
Unbilled Receivables - 43,948 3,837 48,772
Inventories - (237,217) 5,293 (393,812)
Other Current Assets (3,444) (68) (154) (4,536)
Other Assets (66) - (447) (6,708)
Increase (Decrease) in:
Accounts Payable (39,124) (15,591) (312,424) (2,089)
Accrued Payroll and Payroll Taxes - (4,192) (2,905) (16,677)
Unliquidated Progress Payments and
Customer Advances (15,000) (352,393) (122,849) (95,398)
Other Liabilities and Interest(14,741) 194,584 (90,469) 191,198
--------- --------- --------- ----------
Net Cash Provided (Used) by (122,213) (65,414) (504,461) (275,464)
Operations --------- --------- --------- ----------
Cash Flows Provided (Used) by Investing
Activities:
Sale of Government Contracts - - 600,000 -
Equipment Purchases - (3,949) - (96,405)
--------- --------- --------- ----------
Net Provided (Used) by - (3,949) 600,000 (96,405)
Investing Activities
Cash Flows Provided (Used) by Financing
Activities:
Proceeds from Issuance of - 5,844 - 36,500
Common Stock
Repayment of Debt and Capital (19,825) (8,643) (24,475) (49,549)
Leases
--------- --------- --------- -------
Net Cash Provided (Used) by Financing
Activities: (19,825) (2,799) (24,475) (13,049)
--------- ---------- --------- ---------
Net Increase (Decrease) (142,038) (72,162) 71,064 (384,918)
in Cash
Cash at Beginning of Period 298,694 82,364 85,592 395,120
--------- --------- --------- ---------
Cash at End of Period $156,656 $ 10,202 $156,656 $ 10,202
========= ========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 20,332 $31,919 $83,497 $ 95,508
========= ======== ========= =========
Supplemental disclosure of non-cash transactions:
Credit for Engineering Services from
Sale of Government Contracts $ - $ - $1,000,000 $ -
========== ========= ========== ========
Engineering Services Credit $332,130 $ - $ 561,549 $ -
Utilized =========== ========= ========= ========
See Notes to Financial Statements
<PAGE>
<PAGE>
MIKROS SYSTEMS CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - 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
September 30, 1998, the Company s current liabilities exceeded its current
assets by $1,029,257, and at December 31, 1997, the Company s current
liabilities exceeded its current assets by $1,518,961.
As shown in the accompanying financial statements, the Company incurred a net
operating loss of $385,407 for the quarter ended September 30, 1998, and as of
September 30, 1998 incurred a year to date operating loss of $977,478. The
Company recorded extraordinary gains as described below during the second
and third quarter of 1998. The net loss after extraordinary gains was $21,320
for the quarter and the year to date net income after extraordinary gains was
$450,981 at September 30, 1998. The accumulated deficit was $11,432,212 as of
September 30, 1998.
The Company recorded a significant portion of its extraordinary gain from the
sale of its government contracts during the second quarter. As the engineering
services credit is being utilized the deferred gain is being recognized. In
the third quarter the amount of the gain equaled $332,130. The year to date
gain totals $1,096,085 as of September 30, 1998. The balance of the gain will
continue to be recorded within the next twelve months as the balance of the
$1,000,000 engineering services credit (part of the terms of the sale) is
utilized. (For further explanation see Liquidity and Cash Resources included
in this report.)
Commencing in April 1998, the Company began negotiating settlement agreements
with its vendors to settle its accounts payable for reduced amounts. As such,
the Company recorded an extraordinary gain of $31,957 and $318,597 for the
quarter and year to date as of September 30, 1998, respectively. The Company
continues to work towards settlement with its remaining accounts payable
vendors.
As of September 30, 1998, the Company could not meet its principal repayment
obligations in 1998. Management is attempting to restructure its notes
obligations with related parties and other note holders. Based on the proposed
restructuring of debt, management has ceased to record interest expense as of
May 15, 1998.
In order to continue as a going concern, the Company will continue to utilize
its engineering credit with a strategic partner to develop 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
<PAGE>
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.
As permitted by rules of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, these notes are condensed and do not contain
all disclosures required by generally accepted accounting principles.
Reference should be made to the financial statements and related notes
included in the Company's 1997 Annual Report on Form 10-K.
In the opinion of the management of Mikros Systems Corporation, the
accompanying financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Company's financial
position at September 30, 1998, the changes in deficiency in assets, and the
results of operations, and cash flows for the three month and nine month
periods ended September 30, 1998 and 1997.
The results disclosed in the Statements of Operations for the three and nine
months ended September 30, 1998 are not necessarily indicative of the results
to be expected for the full year.
NOTE B - NOTES AND LOANS PAYABLE
- --------------------------------
1) Outstanding Debt is summarized as follows:
09/30/98 12/31/97
-------- --------
Notes Payable to Banks $ 3,012 9,987
Related Parties 530,000 547,500
Other Notes Payable 446,500 446,500
-------- --------
$979,512 $1,003,987
========= ==========
2) Financing Transactions
- --------------------------
1996 Financing
- --------------
In a series of transactions from February through May 1996, the Company issued
secured promissory notes and warrants to raise an aggregate of $641,500
(including $140,000 from officers and directors).
The promissory notes are for a term of approximately eighteen months, bear
interest at 12% on the unpaid balance, and are secured by certain assets of
the Company. In addition, the Company issued warrants to purchase five (5)
shares of Common Stock at $0.01 per share for each dollar of debt. The value
of the warrants was immaterial and no accounting recognition was given to
their issuance.
In October 1996 all of the 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 September 30, 1998, the Company could not meet its principal repayment
obligations in 1998. Management is attempting to restructure its notes
obligations with related parties and other note holders. Based on the proposed
<PAGE>
restructuring of debt, management has ceased to record interest expense as of
May 15, 1998.
Safeguard Scientifics (Delaware) Inc. (SSI)
- ------------------------------------------------------------
On November 15, 1996, the Company, all of its secured creditors from its 1996
and 1992-93 financings and SSI entered into an agreement. Under the agreement
SSI paid $1,000,000 to the Company.
- - SSI received: 1) 1,912,000 shares of Common Stock of the Company; 2) a
warrant to purchase 2,388,000 shares of Common Stock at $0.65 per share;
3) a warrant to purchase 3,071,000 shares at $0.78 per share; 4) a 75%
interest in an exclusive, royalty-free, perpetual license of the AM
technology in the United States, Canada and Mexico (through SSI's
ownership in MBC); and 5) a 33 1/3% interest in the FM and AM technology
(through SSI's ownership in 3D). This transaction is more fully
described below.
- - Two (2) new companies were formed, Data Design and Development
Corporation (3D) and Mobile Broadcasting Corporation (MBC). The Company
received one-third of 3D in exchange for certain of its AM and FM
technology. SSI received one-third of 3D in exchange for a commitment
to invest up to $1,000,000 in MBC. The secured creditors received
one-third of 3D and released their security interest in the technology
transferred. The Company received 25% of MBC for $50. SSI received
75% of MBC for $200,000.
- - 3D granted MBC an exclusive, royalty-free, perpetual license to the AM
technology in the United States, Canada and Mexico. 3D granted the
Company an exclusive, royalty-free, perpetual license to the FM
technology in the United States, Canada and Mexico. 3D retained rights
to the AM and FM technology in the rest of the world. The Company and
MBC entered into a consulting arrangement under which the Company will
be paid for the development of the AM technology. 3D will own the
rights to such technology.
The Company is unable to assign fair values to these transactions. No amount
of cash consideration was considered attributable to a sale of the AM or FM
technology or to the license thereto. No gain was recognized on the transfer
of the technology. The entire amount of the cash consideration received from
SSI was recorded as a sale of Common Stock.
In connection with the sale of the Common Stock and the Warrants, the Company
granted to SSI certain piggyback and demand registration rights with respect
to the Common Stock and the Common Stock underlying the Warrants. In
addition, the Company granted to SSI a right of first refusal pursuant to
which, subject to certain conditions, in the event the Company issues,
sells or exchanges any securities, it must first offer such securities to SSI
and such offer must remain open and irrevocable for 30 days. Such right of
first refusal may only be waived in writing and terminates at such time as SSI
owns less than 10% of the Common Stock.
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.
<PAGE>
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 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.
As of September 30, 1998, the Company could not meet its principal repayment
obligations in 1998. Management is attempting to restructure its notes
obligations with related parties and other note holders. Based on the proposed
restructuring of debt, management has ceased to record interest expense as of
May 15, 1998.
<PAGE>
NOTE C - INVENTORIES
- --------------------
Inventories as of December 31, 1997 are stated at lower of cost or market,
using the first-in, first-out method. No inventories exist at
September 30, 1998.
<PAGE>
Part I. Item II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUE
- -------
Total revenues were $3,583 for the quarter ended September 30, 1998 and
$388,226 for the nine months ended September 30, 1998 compared to $1,981,832
for the three months ended September 30, 1997 and $3,764,460 for the nine
months ended September 30, 1997. The third quarter revenues represent royalty
revenue attributable to GAC's sales of Data Terminal Sets worldwide.
In 1998, revenues from equipment sales were $333,592 or 85.9% of total revenue
compared to $2,268,192 or 60.3% of total revenue for the nine months ended
September 30, 1997. The 1998 equipment revenues represent final revenues on
the Company s government contracts.
Research and development revenues in 1998 total $46,874 or 12.1% quarter and
$1,496,268 or 40.0% of total revenue for the nine months ended September 30,
1997. The 1998 research and development revenues represent the revenues on two
contracts which were completed in the first quarter.
The $7,760 in royalty revenues represent the year to date royalties due to the
Company pursuant to its agreement with General Atronics Corporation relative
to the Company s sale of its defense contracts. The royalty revenue represents
2% of the Company s 1998 revenues.
COST OF SALES
- -------------
Total Cost of Sales for the quarter ended September 30, 1998 was $8,233 which
represents depreciation of equipment relative to the Company s commercial
development equipment and final costs relating to the elimination of the
Company s engineering department. It represents 230% of revenues for the
quarter ended September 30, 1998. Total costs of sales equaled $1,497,521 or
75.6% of total revenue for the same period in 1997.
Equipment Cost of Sales was $321,787 or 96.4% of equipment revenue for the
nine months ended September 30, 1998 compared to $1,710,910 or 75.4% of
equipment revenue for the same period in 1997. Cost of Sales of Contract R & D
was $52,662 or 112.3% of Contract R & D revenue and $1,087,803 or 72.7% of
Contract R & D revenue in the first three quarters of 1998 and 1997,
respectively. In 1998, the higher Cost of Sales percentages were mainly
because of unabsorption of fixed overhead costs due to low volume of revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, General and Administrative expenses $48,603 for the quarter, and
$268,257 year to date at September 30, 1998.This compares with $286,859 for
the quarter and $543,126 year to date as of September 30, 1997, a decrease of
73.1% and 62.9% a respectively. This decrease is due mainly to downsizing
which began in the second quarter of 1997 and continued through the second
quarter of 1998.
INTEREST EXPENSE
- ----------------
Interest expense was $24 in the quarter ended September 30, 1998 compared to
$33,469 for the same quarter in 1997. For the nine months ended September 30,
1998 and 1997, respectively, interest expense was $49,125 and $101,827. Based
on the proposed restructuring of debt, management has ceased to record
interest expense as of May 15, 1998.
<PAGE>
NET INCOME (LOSS)
- -----------------
Net Loss for the quarter ended September 30, 1998 was $21,320 versus net
income of $287,102 for the same period in 1997.
The net operating loss for the current quarter was $380,757 and the year to
date was net operating loss was $963,701 in 1998. This compares with a net
operating income of $287,102 for the quarter and $31,235 year to date in
1997. The increase in net operating losses is directly attributable to the
constriction of business in both Equipment and Contract Research & Development
in 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's financial statements for the quarter ended September 30,1998
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal
course of business.
The Company incurred a net income of $450,981 and year to date as of
September 30, 1998 had an accumulated deficit of $11,432,212. At September
30, 1998 the Company had negative working capital of $1,029,257 compared to
negative working capital of $1,518,961 at December 31, 1997. For the quarter
ended September 30, 1998 the Company used $122,213 by operating activities.
For the same period in 1997, the Company used $65,485. Year to date, the
Company used $504,461 and $276,464 by operating activities in 1998 and 1997,
respectively. The Company expects to continue to incur expenditures to expand
its commercial wireless communications business. The Company is currently
utilizing the engineering services credit attained from the sale of its
defense contracts.
Since its inception, the Company has financed its operations through debt,
private and public offerings of equity securities and cash generated by
operations.
As of September 30, 1998, the Company could not meet its principal repayment
obligation in 1998. Management is attempting to restructure its note
obligations with related parties and other note holders. Pursuant to the plans
to restructure debt, the Company ceased to record interest expense on its
related party and other notes payable as of May 15, 1998.
In addition, the Company has negotiated a settlement with over 90% of its
vendor accounts payable.
During 1998, management has divested its military contracts to General
Atronics Corporation (GAC). The agreement, which was finalized in April, 1998,
included terms that included cash in the amount of $600,000, a $1,000,000
credit for engineering services and future royalties. The Company is utilizing
the engineering services credit to continue development of its AM radio
technology. Because GAC hired key Mikros engineers which were involved in the
development, Mikros was able to continue the development and maintain
continuity for the project. As of September 30, 1998, the engineering services
provided by GAC totaled $561,549.
Commencing April 10, 1998, for a period of four years, the Company will
receive a royalty of 2% of all data terminal sales by GAC. The royalty
agreement provides for quarterly reports and payments based on the GAC
shipments and receipts during the quarter.
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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.
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Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits. None.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MIKROS SYSTEMS CORPORATION
(Registrant)
Dated: December 2, 1998
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Thomas J. Meaney
President
