Mikros Systems Corporation
1997 Annual Report<PAGE>
TO OUR SHAREHOLDERS:
1997 marked a challenging year for Mikros. We initialized new commercial
applications and continued to strengthen our relationship with Safeguard
Scientifics, Inc. Mikros reported a loss of $605,000 on revenues of
$5,097,000 for the year ended December 31, 1997, compared to a loss of
$1,447,000 on revenues of $859,000 for 1996. Although we entered 1997 with a
record backlog the continued heavy investment in both the defense and
commercial programs took its toll on the Company's cash position. Thus the
Mikros Board of Directors elected to sell the defense business after
considering the results of operations, and the need to prioritize the
Company's resources.
Mikros entered negotiations in late 1997 for the sale of its defense business
to General Atronics Corporation (GAC) of Wyndmoor, PA. Completed in April,
1998, Mikros received $600,000 in cash and $1,000,000 in engineering
services for development of commercial products for the Company. Mikros
also receives a 2% royalty on all military Data Terminal Sets GAC sells in the
U.S. or international over the next four years. GAC subsequently hired
several Mikros engineers.
After the sale, your Board of Directors decided to more aggressively pursue
the effective use of our patented AM Radio Digital Data Transmission system.
As a result, this development is presently being executed at GAC, with the
team of former Mikros engineers.
Mikros continues to have a strong strategic relationship with Safeguard
Scientifics, Inc. of Wayne, PA. The AM Radio Data Transmission technology
will be marketed through Mobile Broadcasting Corporation (MBC), a company
jointly owned by Safeguard Scientifics and Mikros. The expenditure of
$500,000 of our engineering credits at GAC has resulted in Mikros' ownership
of MBC being increased to 50% with Safeguard owning the other 50%.
Successful progress in the development of the AM technology has taken us
through the planned laboratory phase and is expected to proceed to live
testing at two radio stations during the fourth quarter of 1998. We believe
these empirical tests will demonstrate simultaneous transmission of the normal
radio signal and the new digital signal.
We believe this high speed digital radio development has positioned the
Company at the very cutting edge of digital radio. The goal of this program
is to offer a product that will provide an inexpensive wireless data delivery
system for mobile and portable applications such as car radios and pagers.
We look forward to the continued challenges that we face in the year ahead.
We would like to thank you for your continued support.
Sincerely,
Thomas J. Meaney
President and Chairman of the Board
Description of Business
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 approval if the 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.
<PAGE>
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
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
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
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
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
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
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.
<PAGE>
Employees
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
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
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
The Company purchases all components and supplies for the manufacture of its
products from a variety of sources, domestic and foreign.
Year 2000 Compliance
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.
Properties
The Company owns no real property. The company is currently leasing office
space from Daily Plan It.
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Market for the Registrants' Common Equity and Related Shareholder Matters
The following table sets forth the range of high and low closing bid prices of
the Common Stock for the periods indicated as determined by the National
Quotation Bureau, Inc. The quoted prices represent only prices between
dealers on each trading day as submitted from time to time by certain of the
securities dealers wishing to trade in the Company's Common Stock, do not
reflect retail mark-ups, mark-downs or commissions, and may Differ
substantially from prices in actual transactions.
Bid
High Low
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 "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.
<PAGE>
Selected Financial Data
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) 151,635447,140
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 Liabilities 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>
Management's Discussion and Analysis of Financial Condition and Results of
Operation
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:
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.
1996 vs. 1995:
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 ).
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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:
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. 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.
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.
<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
<PAGE>
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
<PAGE>
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 $10,0501,131,663 $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 Ta 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 Obsolce - - 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 interest $ 105,770 $ 135,411 $ 41,231
=========== ========== ==========
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
<PAGE>
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.
<PAGE>
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).
The promissory notes are for a term of approximately eighteen months, bear
interest at 12% on the unpaid balance, and are secured by certain assets of
the Company. In addition, the Company issued warrants to purchase five (5)
shares of Common Stock at $0.01 per share for each dollar of debt. The value
of the warrants was immaterial and no accounting recognition was given to
their issuance.
<PAGE>
In October 1996, all of the 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.
<PAGE>
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
========= =========
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.
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
========= ========= =========
<PAGE>
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.
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.
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.
<PAGE>
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.
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.
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.
<PAGE>
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.
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
-------- ----------- ---------------- ------------ ---------- ---------
$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
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
<PAGE>
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.
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.
Officers and Directors
Officers
Thomas J. Meaney
President and Chairman of the Board
Patricia A. Bird
Secretary of the Corporation and Treasurer
Directors
Joseph R. Burns
Executive Vice President
Ocean Power Technologies, Inc.
West Trenton, New Jersey 08628
F. Joseph Loeper
Majority Leader Senate of Pennsylvania (R-26)
Drexel Hill, PA 19026
Thomas C. Lynch
Senior Vice President
Safeguard Scientifics, Inc.
Wayne, PA 19087
Thomas J. Meaney
President and Chairman of the Board
Wayne E. Meyer
President
W.E. Meyer Corporation
Arlington, VA 22202
Frederick C. Tecce
Of Counsel to Klett Lieber Rooney & Schorling
Philadelphia, PA 19103-6901
John B. Torkelsen
President
Princeton Venture Research, Inc.
Princeton, New Jersey 08540<PAGE>
STOCK LISTING
The Common Stock of the Corporation is traded over-the-counter on the NASD
Bulletin Board - Symbol - MKRS
FORM 10-K
A copy of the Corporation s Annual Report on Form 10-K filed with the
Securities and Exchange Commission, may be obtained by contacting the
Secretary of the Corporation, Mikros Systems Corporation, 707 Alexander Road,
Building Two, Suite 208, Princeton, New Jersey 08540
TRANSFER AGENT
Continental Stock Transfer & Trust Co., 2 Broadway, New York, New York 10004
LEGAL COUNSEL
Buchanan Ingersoll, 500 College Road East, Princeton, New Jersey 08540
AUDITORS
Druker, Rahl and Fein, 200 Canal Pointe Boulevard, Princeton, New Jersey 08540
<PAGE>
