SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant | |
Check the appropriate box:
|X| Preliminary Proxy Statement
| | Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
| | Definitive Proxy Statement
| | Definitive Additional Materials
| | Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Mikros Systems Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
| | Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
| | Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
MIKROS SYSTEMS CORPORATION
707 Alexander Road, Building Two, Suite 208
Princeton, NJ 08540
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held December 21, 1998
The Annual Meeting of Stockholders of MIKROS SYSTEMS CORPORATION, a
Delaware corporation (the "Company"), will be held at the offices of the
Company, 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey on
Monday, December 21, 1998 at 11:00 A.M., local time, for the following purposes:
(1) To elect seven directors to serve until the next Annual Meeting of
Stockholders and until their respective successors shall have been duly
elected and qualified;
(2) To amend the Certificate of Incorporation of the Company, as amended, to
increase the number of authorized shares of Common Stock from 35,000,000
shares to 60,000,000; and
(3) To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
Holders of Common Stock, Convertible Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, and Warrants to
purchase Series C Preferred Stock of record at the close of business on November
9, 1998 are entitled to notice of and to vote at the meeting, or any adjournment
or adjournments thereof. A complete list of such stockholders and warrantholders
will be open to the examination of any stockholder or warrantholder at the
Company's principal executive offices at 707 Alexander Road, Building Two, Suite
208, Princeton, New Jersey for a period of 10 days prior to the meeting. The
meeting may be adjourned from time to time without notice other than by
announcement at the meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF
SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE. EACH PROXY GRANTED MAY BE REVOKED BY THE
STOCKHOLDER OR WARRANTHOLDER APPOINTING SUCH PROXY AT ANY TIME BEFORE IT IS
VOTED. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES OR BECAUSE YOU OWN MORE THAN ONE
CLASS OF STOCK, EACH SUCH PROXY CARD SHOULD BE SIGNED AND RETURNED TO ASSURE
THAT ALL OF YOUR SHARES WILL BE VOTED.
By Order of the Board of Directors
Patricia A. Bird
Secretary
Princeton, New Jersey
November 30, 1998
The Company's 1997 Annual Report accompanies the Proxy Statement.
<PAGE>
MIKROS SYSTEMS CORPORATION
707 Alexander Road, Building Two, Suite 208
Princeton, NJ 08540
--------------------------------------------------------
PROXY STATEMENT
--------------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Mikros Systems Corporation (the "Company") of proxies
to be voted at the Annual Meeting of Stockholders of the Company to be held on
Monday, December 21, 1998 (the "Meeting"), at the Company's principal executive
offices at 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey,
at 11:00 A.M., local time, and at any adjournment or adjournments thereof.
Holders of record of Common Stock, $0.01 par value ("Common Stock"), Convertible
Preferred Stock, $0.01 par value ("Convertible Preferred Stock"), Series B
Preferred Stock, $0.01 par value ("Series B Stock"), Series C Preferred Stock,
$0.01 par value ("Series C Stock"), Series D Preferred Stock, $0.01 par value
("Series D Stock"), and warrants to purchase Series C Stock (the "Warrants"), as
of the close of business on November 9, 1998, will be entitled to notice of and
to vote at the Meeting and any adjournment or adjournments thereof. As of that
date, there were (i) 14,251,452 shares of Common Stock; (ii) 255,000 shares of
Convertible Preferred Stock; (iii) 1,131,663 shares of Series B Stock; (iv)
5,000 shares of Series C Stock; (v) 690,000 shares of Series D Stock; and (vi)
Warrants to purchase 104,500 shares of Series C Stock, issued and outstanding
and entitled to vote. Each share of Common Stock, Convertible Preferred Stock,
Series C Stock, Series D Stock and each Warrant is entitled to one vote on any
matter presented at the Meeting. Each share of Series B Stock is entitled to
three votes on any matter presented at the Meeting. The aggregate number of
votes entitled to be cast at the Meeting is 18,700,941. The holders of all
classes of stock will vote as a single class.
If proxies in the accompanying form are properly executed and returned, the
stock or Warrants represented thereby will be voted in the manner specified
therein. If not otherwise specified, the stock or Warrants represented by the
proxies will be voted (i) FOR the election of the seven nominees below as
Directors, (ii) FOR the proposal to amend the Certificate of Incorporation of
the Company, as amended, to increase the number of authorized shares of Common
Stock from 35,000,000 shares to 60,000,000 shares, and (iii) in the discretion
of the persons named in the enclosed form of proxy, on any other proposals which
may properly come before the Meeting or any adjournment or adjournments thereof.
Any Stockholder who has submitted a proxy may revoke it any time before it is
voted by written notice addressed to and received by the Secretary of the
Company, by submitting a duly executed proxy bearing a later date or by electing
to vote in person at the Meeting. The mere presence at the Meeting of the person
appointing a proxy does not, however, revoke the appointment.
The presence, in person or by proxy, of holders of Common Stock,
Convertible Preferred Stock, Series B Stock, Series C Stock, Series D Stock, and
Warrants having a majority of the votes entitled to be cast at the Meeting shall
constitute a quorum. All actions proposed herein may be taken upon the
affirmative vote of Stockholders and Warrantholders possessing a majority of the
voting power represented at the Meeting, provided a quorum is present in person
or by proxy.
This Proxy Statement, together with the related proxy card, is being mailed
to the Stockholders and Warrantholders of the Company on or about November 9,
1998. The Annual Report to Stockholders of the Company for the year ended
December 31, 1997, including financial statements (the "Annual Report"), is
being mailed concurrently with this Proxy Statement to all Stockholders and
Warrantholders of record as of November 9, 1998. In addition, the Company has
provided brokers, dealers, banks, voting trustees and their nominees, at the
Company's expense, with additional copies of the Annual Report so that such
record holders could supply such material to beneficial owners as of November 9,
1998.
<PAGE>
ELECTION OF DIRECTORS
At the Meeting seven Directors are to be elected to hold office until the
next Annual Meeting of Stockholders and until their successors shall have been
elected and qualified.
The number which constitutes the entire Board of Directors of the Company
is seven. As described below, certain debt and equity holders of the Company
have the right to designate 2/7ths of the Board of Directors of the Company.
Such right has not been exercised. Proxies cannot be voted for a greater number
of persons than the number of nominees named in this Proxy Statement.
It is the intention of the persons named in the enclosed form of proxy to
vote the stock or Warrants represented thereby, unless otherwise specified in
the proxy, for the election as Directors of the persons whose names and
biographies appear below. All of the persons whose names and biographies appear
below are at present Directors of the Company.
In the event any of the nominees named below should become unavailable or
unable to serve as a director, it is intended that votes will be cast for a
substitute nominee designated by the Board of Directors. The Board of Directors
has no reason to believe that the nominees named will be unable to serve if
elected. Each of the nominees has consented to being named in this Proxy
Statement and to serve if elected.
The nominees for election to the Board of Directors of the Company are as
follows:
Served as a Positions with
Name Age Director Since the Company
- ---- --- -------------- -----------
Joseph R. Burns 61 1984 Director
F. Joseph Loeper 54 1997 Director
Thomas C. Lynch 55 1997 Director
Thomas J. Meaney 63 1986 President, Chairman of the
Board and Director
Wayne E. Meyer 73 1988 Director
Frederick C. Tecce 63 1996 Director
John B. Torkelsen 53 1985 Director
The principal occupation and business experience, for at least the past
five years, of each Director is as follows:
Joseph R. Burns was a Director and President of the Company from May 1984
until July 1986. From July 1986 until December 1986, Dr. Burns was Chairman of
the Company. From January 1987 until April 1988, Dr. Burns was a consultant to
the Company. From April 1988 to March 1998, Dr. Burns served as Senior Vice
President and Chief Scientist of the Company. Since March 1998, Dr. Burns has
served as Executive Vice President of Ocean Power Technologies, Inc. Dr. Burns
currently serves as Director.
-2-
<PAGE>
F. Joseph Loeper has been a Director of the Company since February 1997. He
was first elected to the Pennsylvania Senate in 1979 to represent the 26th
Senatorial District and continues to serve in this capacity. He currently serves
as Majority Leader of the State Senate. Senator Loeper also serves as a member
of the Board of Governors of the State System of Higher Education and is a
Pennsylvania Commissioner on the Delaware River Port Authority.
Thomas C. Lynch has been a Director of the Company since February 1997. He
serves as Senior Vice President for Safeguard Scientifics, Inc. since retiring
at the rank of Rear Admiral, U.S. Navy in November 1995. Mr. Lynch serves on the
Boards of OAO International, Sanchez Computer Associates, Eastern Technology
Council, Safeguard Scientifics International and Enhanced Vision Systems Inc.
Thomas J. Meaney has been a Director of the Company since July 1986 and
Chairman of the Board since June 1997. He was appointed President in June 1986
and continued to serve until February 1997. On September 30, 1998, he was
reappointed President of the Corporation. From February 1983 to his appointment
as President of the Company in June 1986, Mr. Meaney was Senior Vice President
and Director of Robotic Vision Systems Incorporated ("RVSI"), a manufacturer of
robotic vision systems. Mr. Meaney served as a Director of RVSI until 1991 when
he resigned from the post. Prior to 1983 and for more than five years, he was
Vice President - Business Development, International of Norden Systems and
President - Norden Systems Canada, both divisions of United Technologies
Corporation and developers of computer and electronic products and systems.
Wayne E. Meyer has been a Director of the Company since April 1988 and
Chairman of the Board from 1990 to 1997. From 1986 to present he has been the
Founder and President of the W.E. Meyer Corporation which provides consulting
and advice to industry, government and academic institutions in matters of
system engineering, project management, strategic planning and military and
electronic designs. He enlisted in the U.S. Navy as an Apprentice Seaman in 1943
and retired in 1985 in the rank of Rear Admiral. As a national authority on
Ballistic Missile Defense, he serves on numerous boards, groups and panels.
Frederick C. Tecce has been a Director of the Company since July 1996. Mr.
Tecce is of Counsel to Klett Lieber Rooney & Schorling. Previously, Mr. Tecce
was Counsel to Pepper, Hamilton and Scheetz. Since 1995, he has served as
Co-Chairman of the Executive Committee of the Eastern Technology Council. In
1996, Mr. Tecce was named Chairman of the Finance Committee of the Pennsylvania
Schools Employees Retirement Systems.
John B. Torkelsen has been a Director of the Company since June 1985 and
served as Secretary of the Company from June 1985 to April 1996. Mr. Torkelsen
has been President of Princeton Venture Research, Inc., a financial research and
consulting firm located in Princeton, New Jersey from November 1984 to the
present. He is also a Director of Voice Control Systems, Inc., a voice
recognition technology company; Objective Communications, Inc., a video
communications company; and Princeton Video Image, Inc. a developer of video
insertion systems for the television broadcast industry.
None of the Company's Directors or executive officers is related to any
other Director or executive officer of the Company. In connection with the
acquisition of certain debt and equity instruments of the Company from third
parties, Messrs. Burns, Meaney, Meyer, Tecce and Torkelsen have the right to
designate 2/7ths of the Board of Directors of the Company. See "Certain
Relationships and Related Transactions."
The Board of Directors recommends that Stockholders and Warrantholders vote
FOR each of the nominees for the Board of Directors.
-3-
<PAGE>
COMMITTEES AND MEETINGS OF THE BOARD
The Board of Directors has a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company. The current members of the Compensation
Committee are Messrs. Loeper, Meaney and Meyer. The Compensation Committee was
established in December 1992 and held one meeting in 1997. There were four
meetings of the Board of Directors in 1997, not including written consents of
the Directors. During 1997, each incumbent Director attended at least 75% of the
aggregate of all meetings of the Board of Directors and meetings of committees
on which he served.
COMPENSATION OF DIRECTORS
In December 1994, the Board of Directors authorized the payment to each
outside Director of $500 for each Board meeting attended in person and $150 for
each Board meeting attended telephonically. See "Certain Relationships and
Related Transactions".
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------ --------------
Thomas J. Meaney 63 President, Chairman of the September 1998
Board and Director
Patricia A. Bird 32 Secretary and Treasurer September 1998
-4-
<PAGE>
EXECUTIVE COMPENSATION
Summary of Compensation in Fiscal 1997, 1996 and 1995
- -----------------------------------------------------
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to the
Company's Chief Executive Officer and the four most highly compensated executive
officers of the Company whose aggregate cash compensation exceeded $100,000
(collectively, the "Named Executives") during the years ended December 31, 1995,
1996 and 1997.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Annual
Compensation(1)
----------------
Year Salary ($)
Name and Principal Position
(a) (b) (c)
- --------------------------------------------------------------------------------
Thomas J. Meaney, President and 1997 145,466
Chief Executive Officer 1996 140,263
1995 149,550
Joseph R. Burns, Senior Vice President(2) 1997 113,200
1996 108,012
1995 116,313
- ---------------------
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total of annual compensation reported in the above table.
(2) Mr. Burns served as Senior Vice President until his resignation in March
1998.
-5-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth certain information, as of November 9, 1998,
with respect to holdings of the Company's Common Stock by (i) each person known
by the Company to be the beneficial owner of more than 5% of the total number of
shares of Common Stock outstanding as of such date, (ii) each of the nominees
(which includes all current directors and Named Executives), and (iii) all
current directors and officers as a group.
Amount and Nature
Name of of Beneficial Percent
Beneficial Owner Ownership(1) of Class
---------------- ------------ --------
(i) Certain Beneficial Owners:
Safeguard Scientifics 7,371,000(2) 37.4
(Delaware) Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Transitions Two, Limited Partnership 2,137,775(3) 13.4
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 1,113,081(4) 7.7
F. Joseph Loeper 177,000(5) 1.2
Thomas C. Lynch -- --
Thomas J. Meaney 1,908,000(6) 12.9
Wayne E. Meyer 1,170,550(7) 8.0
Frederick C. Tecce 1,425,000(8) 9.9
John B. Torkelsen 1,878,383(9) 12.4
(iii) All Current Directors and Officers 7,766,714(4)(5)(6)(7)(8)(9) 46.9
as a Group(eight persons)
- --------------------------
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
-6-
<PAGE>
(2) Includes 5,459,000 shares issuable upon exercise of warrants, and 504,916
shares of common stock granted by Safeguard to certain of its employees
pursuant to a long-term incentive plan. Safeguard will continue to exercise
voting rights with respect to these shares until the occurrence of certain
vesting requirements.
(3) Includes 1,750,275 shares issuable upon conversion of Series B Stock.
(4) Includes 14,748 shares issuable upon conversion of Series B Stock and
100,000 shares issuable upon the exercise of warrants.
(5) Includes 75,000 shares issuable upon the exercise of warrants and 100,000
shares issuable upon the exercise of options.
(6) Includes 50,000 shares issuable upon conversion of Convertible Preferred
Stock, 199,500 shares issuable upon conversion of Series B Stock and
275,000 shares issuable upon exercise of warrants.
(7) Includes 30,000 shares issuable upon conversion of Series B Stock, 100,000
shares issuable upon the exercise of options and 318,750 shares issuable
upon the exercise of warrants.
(8) Includes 100,000 shares issuable upon the exercise of warrants.
(9) Includes 130,000 shares held of record by Princeton Venture Research, Inc.,
a corporation wholly owned by Mr. Torkelsen. Also includes 202,500 shares
issuable upon conversion of Convertible Preferred Stock and 695,883 shares
issuable upon conversion of Series B Stock. The Series B Stock is held of
record by Princeton Venture Research, Inc.
-7-
<PAGE>
CONVERTIBLE PREFERRED STOCK
The following table sets forth certain information, as of November 9, 1998,
with respect to holdings of the Company's Convertible Preferred Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the total number of shares of Convertible Preferred Stock outstanding as of such
date, (ii) each of the nominees (which includes all current directors and Named
Executives), and (iii) all current directors and officers as a group.
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership(1) Class
---------------- ------------ -----
(i) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns -- --
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 50,000 19.6
Wayne E. Meyer -- --
Frederick C. Tecce -- --
John B. Torkelsen 202,500 79.4
(iii) All Current Directors and 252,500 99.0
Officers as a Group (eight persons)
- --------------------------
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
-8-
<PAGE>
SERIES B STOCK
The following table sets forth certain information, as of November 9, 1998,
with respect to holdings of the Company's Series B Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series B Stock outstanding as of such date, (ii) each of the
nominees (which includes all current directors and Named Executives), and (iii)
all current directors and officers as a group.
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership(1) Class
---------------- ------------ -----
(i) Certain Beneficial Owners:
The Mercantile & General Reinsurance Company, 91,342 8.1
PLC
Moorfields House
Moorfields
London EC2Y 9AL
Transitions Two, Limited Partnership 583,425 51.6
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 4,916 *
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 66,500 5.9
Wayne E. Meyer 10,000 *
Frederick C. Tecce -- --
John B. Torkelsen 231,961(2) 20.5
(iii) All Current Directors and 313,377 27.7
Officers as a Group (eight persons)
- -------------------------
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Held of record by Princeton Venture Research, Inc., a corporation wholly
owned by Mr. Torkelsen.
-9-
<PAGE>
SERIES C STOCK
The following table sets forth certain information, as of November 9, 1998,
with respect to holdings of the Company's Series C Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series C Stock outstanding as of such date, (ii) each of the
nominees (which includes all current directors and Named Executives), and (iii)
all current directors and officers as a group.
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership(1) Class
---------------- ------------ -----
(i) Certain Beneficial Owners:
Transitions Two, Limited Partnership 5,000 100.0
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 19,500(2) 79.6
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 19,500(2) 79.6
Wayne E. Meyer 19,500(2) 79.6
Frederick C. Tecce 19,500(2) 79.6
John B. Torkelsen 19,500(2) 79.6
(iii) All Current Directors and 97,500(2) 95.1
Officers as a Group (eight persons)
- -----------------------
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Reflects warrants to purchase Series C Stock.
-10-
<PAGE>
SERIES D STOCK
The following table sets forth certain information, as of November 9, 1998,
with respect to holdings of the Company's Series D Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series D Stock outstanding as of such date, (ii) each of the
nominees (which includes all current directors and Named Executives), and (iii)
all current directors and officers as a group.
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership(1) Class
---------------- ------------ -----
(i) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns 138,000 20.0
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 138,000 20.0
Wayne E. Meyer 138,000 20.0
Frederick C. Tecee 138,000 20.0
John B. Torkelsen 138,000 20.0
(iii) All Current Directors and 690,000 100.0
Officers as a Group (eight persons)
- ---------------------------
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
-11-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In a series of transactions consummated on October 27, 1992 and April 27,
1993, Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick C. Tecce and
John B. Torkelsen, each a Director of the Company (collectively, the
Investors"), acquired all of the loan and equity interests in the Company from
certain third parties. Pursuant to such transactions, each of the Investors
acquired, in consideration of $50,000 each, 20% of (i) 50,000 shares of Common
Stock, (ii) promissory notes of the Company in the aggregate principal amount of
$916,875 (collectively, the "Investor Notes"), (iii) warrants to purchase 97,500
shares of Series C Stock (the "Series C Warrants"), and (iv) certain other loan
and equity rights in the Company, including the right to designate 2/7ths of the
Board of Directors of the Company. See "Election of Directors."
In December 1993, the Investors agreed to reduce the amounts owed by the
Company under the Investor Notes, including unpaid interest, in exchange for
shares of capital stock issued by the Company. In return for a reduction in
principal of $416,875 and accrued interest of $273,125, the Company issued
2,750,000 shares of Common Stock and 690,000 shares of Series D Stock. The
Investor Notes were modified to provide for 16 quarterly payments of principal
beginning January 1, 1994 and ending October 1, 1997. The Investors have
authorized deferral of all principal payments until 1998. Interest on the unpaid
principal balance is payable quarterly commencing March 31, 1994. As additional
consideration for the modification of such loans, the Company extended the
exercise period for the Series C Warrants until April 25, 1999.
In a series of events from February through May 1996, the Company raised an
aggregate of $641,500 in debt financing pursuant to the issuance of secured
promissory notes.
The promissory notes are for a term of approximately eighteen months and
include an interest rate of 12% on the unpaid balance. The first interest
payment was paid on June 15, 1996 and interest is due quarterly thereafter. The
principal payments were to be paid on the fifteenth of March, June and September
1998. The notes are secured by the assets of the Corporation. As additional
consideration, warrants for the purchase of Common Stock were granted (the
number of shares were based on the amount of the promissory note and equal to
five shares to each dollar). The warrant price is $.01 per share. As of December
31, 1997, the Company was in arrears the December interest payment. During 1998,
the Company was unable to meet its note obligations and is currently working to
restructure its debt to related and other parties.
The following officers and directors participated in the 1996 financing:
Wayne E. Meyer, Thomas J. Meaney and Patricia A. Bird.
On May 31, 1989, the Company retained the services of the W.E. Meyer
Corporation to provide engineering and management consulting services to the
Company. Under the agreement, the Company paid 1,000 to the W.E. Meyer
Corporation in 1997 for services rendered. Wayne E. Meyer, a Director of the
Company, is president of the W.E. Meyer Corporation.
On April 15, 1991, the Company retained the services of WVG Corporation, of
which William V. Goodwin, a former Director of the Company until his death in
1997, was President, to provide operations management and technical consulting
services. During 1997, the Company paid $5,000 to WVG Corporation under this
agreement.
-12-
<PAGE>
AMENDMENT TO CERTIFICATE OF INCORPORATION
Stockholders are being asked to consider and vote upon a proposal to amend
the Certificate of Incorporation of the Company, as amended, to increase the
number of authorized shares of Common Stock from 35,000,000 to 60,000,000 to
provide the Company with flexibility to undertake future financings or negotiate
potential acquisitions, partnering transactions or settlement of Company debts.
The Company has no definitive agreements relating to such transactions. The
Board of Directors believes, however, that the adoption of the proposed
amendment will afford the Company needed flexibility when negotiating such
potential transactions by allowing the Board to issue additional shares of
Common Stock without further stockholder approval. Under the Company's current
capitalization structure, approximately 12,902,155 shares of Common Stock are
reserved for issuance under outstanding option plans, warrants and convertible
securities. Consequently, the Company is significantly restricted in its ability
to undertake future financings or other potential transactions.
The increase in the number of authorized shares of Common Stock is required
to permit the issuance of additional shares in the future for corporate
purposes. There are currently no other plans to issue Common Stock. The rights
of the Company's stockholders will not be affected by the increase in the number
of shares of authorized Common Stock, except to the extent of their ownership
dilution of the Company. Stockholders of the Company are not entitled to
appraisal rights nor any preemptive rights as may be provided under the Delaware
General Corporation Law.
The Board of Directors has approved such amendment and recommends its
approval by the stockholders of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 35,000,000 TO 60,000,000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The information appearing under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Balance Sheets as of December 31, 1997 and December 31, 1996 and Statements of
Operations and Shareholders' Equity and Cash Flows for the years ended December
31, 1997, 1996 and 1995 and the independent accountant's report on such
financial statements contained in the Annual Report accompanying this Proxy
Statement are incorporated herein by reference to such portions of such Annual
Report.
STOCKHOLDERS' PROPOSALS
Stockholders deciding to submit proposals for inclusion in the Company's
proxy statement and form of proxy relating to the 1999 Annual Meeting of
Stockholders must advise the Secretary of the Company of such proposals in
writing by December 30, 1998.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Meeting other than the matters referred to above and does not
intend to bring any other matters before the Meeting. However, if other matters
should come before the Meeting, it is intended that holders of the proxies will
vote thereon in their discretion.
One or more representatives of Druker, Rahl & Fein, the independent
auditors of the Company, is expected to attend the Meeting and have an
opportunity to make a statement or respond to appropriate questions from
stockholders.
-13-
<PAGE>
GENERAL
The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company, whose notice of meeting is attached to this Proxy
Statement, and the entire cost of such solicitation will be borne by the
Company.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by directors, officers and other employees of
the Company who will not be specially compensated for these services. The
Company will also request that brokers, nominees, custodians and other
fiduciaries forward soliciting materials to the beneficial owners of shares or
Warrants held of record by such brokers, nominees, custodians and other
fiduciaries. The Company will reimburse such persons for their reasonable
expenses in connection therewith.
Certain information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.
MIKROS SYSTEMS CORPORATION WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, INCLUDING FINANCIAL
STATEMENTS AND SCHEDULES THERETO BUT NOT INCLUDING EXHIBITS, TO EACH OF ITS
STOCKHOLDERS OR WARRANTHOLDERS OF RECORD ON NOVEMBER 9, 1998 AND TO EACH
BENEFICIAL STOCKHOLDER OR WARRANTHOLDER ON THAT DATE UPON WRITTEN REQUEST MADE
TO THE SECRETARY OF THE COMPANY. A REASONABLE FEE WILL BE CHARGED FOR COPIES OF
REQUESTED EXHIBITS.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. A PROMPT RETURN OF YOUR PROXY CARD WILL BE
APPRECIATED AS IT WILL SAVE THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors
Patricia A. Bird, Secretary
Princeton, New Jersey
November 30, 1998
-14-
<PAGE>
MIKROS SYSTEMS CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby constitutes and appoints Thomas J. Meaney and
Patricia A. Bird and each of them, his or her true and lawful agents and proxies
with full power of substitution in each, to represent and to vote on behalf of
the undersigned all of the shares and warrants of Mikros Systems Corporation
(the "Corporation") which the undersigned is entitled to vote at the Annual
Meeting of Stockholders of the Corporation to be held at the Corporate Office,
707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey at 11:00
A.M., local time, on Monday, December 21, 1998, and at any adjournment or
adjournments thereof, upon the following proposals more fully described in the
Notice of Annual Meeting of Stockholders and Proxy Statement for the Meeting
(receipt of which is hereby acknowledged).
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR proposals 1, 2, and 3.
1. ELECTION OF DIRECTORS.
Nominees: Joseph R. Burns, F. Joseph Loeper, Thomas C. Lynch, Thomas J.
Meaney, Wayne E. Meyer, Frederick C. Tecce and John B. Torkelsen.
(Mark one only)
[ ] VOTE FOR all the nominees listed above; except vote withheld from the
following nominees (if any).
-------------------------------------
[ ] VOTE WITHHELD from all nominees. (continued and to be signed on reverse
side)
<PAGE>
2. APPROVAL OF PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK OF THE COMPANY FROM 35,000,000 to 60,000,000 SHARES.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote upon other matters as
may properly come before the Meeting.
This proxy must be signed exactly as name appears hereon.
Dated:
---------------------
When shares are held by joint tenants, both should sign.
- ---------------------------
Signture of Securityholder
If the signer is a corporation, please sign full
corporatename by duly authorized officer, giving full title
as such. If a partnership, please sign in partnership name
by If a partnership, please sign in partnership name by If a
partnership, please sign in partnership name by authorized
person.
- -------------------------
Signture of Securityholder
if held jointly
I [ ] WILL [ ] WILL not attend the Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
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
<PAGE>
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.
3
<PAGE>
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.
4
<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.
5
<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.
6
<PAGE>
Market for the Registrant's 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.
7
<PAGE>
Selected Financial Data
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------------------------------------------------------
INCOME STATEMENT
Total Revenue $5,097,432 859,100 $3,379,897 $4,445,468 $2,909,202
Net Income (Loss) (604,550) (1,447,641) (647,673) 151,635 447,140
Income (Loss) per
common share-Basic (.05) (.18) (.10) .01 .08
Fully Diluted (.05) (.18) (.10) .01 .08
Weighted average
number of common
shares outstanding-
Basic 12,688,327 8,382,383 7,285,441 8,415,576 5,407,994
BALANCE SHEET
Current Assets 555,430 1,204,944 283,309 1,405,554 518,289
Current Liabilities 2,074,391 1,330,601 604,527 1,118,537 304,246
Total Assets 676,023 1,497,294 546,995 1,641,001 806,006
Long-Term 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.
8
<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
9
<PAGE>
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").
10
<PAGE>
In 1996, the Company incurred $457,000, or 53% of total revenues, for research
and development expenditures on commercial application of its FM technology
compared to $238,000 or 7% of total revenues in 1995.
The Company recorded a net loss for 1996 of approximately $1,448,000 compared to
a net loss for 1995 of approximately $648,000. The greater loss in 1996 is due
to the significantly lower level of revenues 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.
11
<PAGE>
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.
12
<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
13
<PAGE>
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.
14
<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
15
<PAGE>
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
16
<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
17
<PAGE>
<TABLE>
<CAPTION>
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
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-December 31, 1994 7,152,108 $ 71,521 1,005,000 $10,050 1,131,663 $11,316
Year Ended December 31, 1995:
Issuance of Common Stock 200,000 2,000
Net Loss
---------- -------- ---------- ------- --------- -------
Balance-December 31, 1995 7,352,108 73,521 1,005,000 10,050 1,131,663 11,316
Year Ended December 31, 1996:
Issuance of Common Stock 2,582,844 25,829
Sale of Common Stock 1,912,000 19,120
Net Loss
---------- -------- ---------- ------- --------- -------
Balance-December 31, 1996 11,846,952 118,470 1,005,000 10,050 1,131,663 11,316
Year Ended December 31, 1997:
Issuance of Common Stock 854,500 8,545
Conversion of Preferred Stock 750,000 7,500 (750,000) (7,500)
Net Loss
---------- -------- ---------- ------- --------- -------
Balance-December 31, 1997 13,451,452 $134,515 255,000 $ 2,550 1,131,663 $11,316
========== ======== ========== ======= ========= =======
Preferred
Stock D Capital in
$.01 excess of Accumulated
Par Value Par Value Deficit
------------------------------------------------
Number Par
of shares Value
----------------------
<S> <C> <C> <C> <C>
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)
========== ======== =========== ===========
</TABLE>
See Notes to Financial Statements
18
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1997 1996 1995
------------ ---------- -----------
Revenues:
Equipment Sales $ 3,240,980 $ 157,364 $ 1,390,085
Contract Research and Development
(including $1,223,305 to a
Related Party in 1997 and
$30,409 in 1996) 1,856,452 701,736 1,989,812
------------ ----------- -----------
Total Revenues 5,097,432 859,100 3,379,897
------------ ----------- -----------
Cost of Sales:
Equipment Sales 2,264,782 113,992 1,079,873
Contract Research and Development 1,336,223 712,836 1,796,168
------------ ----------- -----------
Total Cost of Sales 3,601,005 826,828 2,876,041
------------ ----------- -----------
Gross Margin 1,496,427 32,272 503,856
------------ ----------- -----------
Expenses:
Research and Development 878,095 456,991 238,120
Marketing, General
and Administrative 1,088,072 895,900 855,925
Interest 134,710 126,572 57,334
------------ ----------- -----------
Total Expenses 2,100,877 1,479,463 1,151,379
------------ ----------- -----------
Loss before Provision
for Income Taxes (604,450) (1,447,191) (647,523)
Provision for Income Taxes 100 450 150
------------ ----------- -----------
Net Loss ($604,550) ($1,447,641) ($647,673)
============ =========== ===========
Basic loss per share ($0.05) ($0.18) ($0.10)
============ =========== ===========
Weighted Average Number of Shares
Outstanding 12,688,327 8,382,383 7,285,441
============ =========== ===========
See Notes to Financial Statements
19
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1997 1996 1995
----------- ----------- ------------
Cash Flow From Operating Activities:
Net Loss ($ 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
20
<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.
21
<PAGE>
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.
22
<PAGE>
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.
23
<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.
24
<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.
25
<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.
26
<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.
27
<PAGE>
In December 1993, the Investors agreed to reduce the amounts owed by the Company
under the Investor Notes, including unpaid interest, in exchange for shares of
Common Stock and Preferred Stock issued by the Company. In return for a
reduction in debt of $416,875 and accrued interest of $273,125, the Company
issued 2,750,000 shares of Common Stock and 690,000 shares of Series D Preferred
Stock which provides for an annual cumulative dividend of $.10 per share. The
Investor Notes were modified to provide for principal payments in sixteen
quarterly installments beginning January 1, 1994 and ending on October 1, 1997.
Interest on the unpaid principal balance is due in quarterly installments
beginning on March 31, 1994. As 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
=========
28
<PAGE>
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
======== ======== ========
29
<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
30
<PAGE>
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.
31
<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
32
<PAGE>
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.
33
<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:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/97 Contractual Life Price as 12/31/97 Price
-------- ----------- ---------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.025 - 0.0625 117,500 4.9 years $0.059 117,500 $0.059
$0.125 - 0.1875 387,500 7.3 years $0.175 201,250 $0.1657
$0.26 250,000 9.7 years $0.26 - -
$0.50 365,000 8.5 years $0.50 91,250 $0.50
</TABLE>
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
34
<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.
35
<PAGE>
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.
36
<PAGE>
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
37
<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 Company'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
38
