SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998. Commission file number 2-67918
MIKROS SYSTEMS CORPORATION
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(Exact name of Registrant as specified in charter)
Delaware 14-1598200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Alexander Road, Suite 208, Princeton, New Jersey 08540
(Address of principal executive offices, Including Zip Code)
Registrant's Telephone Number, including area code: 609-987-1513
------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of
Registrant as of April 9, 1999, was approximately $ 3,149,563 based on the
average of the bid and asked price quoted by National Quotation Bureau, Inc.
The number of shares outstanding of the Registrant's $.01 par value common
stock as of April 9, 1999 was 28,588,963.
PART I
Item 1. Description of Business
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Introduction
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Mikros Systems Corporation was founded in 1978 in Albany, New York to exploit
microprocessor technology developed at the General Electric Research and
Development Center. The Company was incorporated under the laws of the State of
Delaware in 1978 and acquired all rights of General Electric Venture Capital
Corp., a subsidiary of General Electric Company, to certain microcomputer
technology. The Company's headquarters are located at 707 Alexander Road, Suite
208, Princeton, New Jersey; telephone (609)987-1513.
Mikros Systems Corporation became an established US Navy defense contractor in
1987 and continued to supply advanced technology and equipment for ten years to
the US Navy and Air Force. The Company was capitalized with more than $15
million to engage in engineering and manufacturing for these customers supplying
advanced communication equipment using cutting edge technology.
The knowledge base and proprietary technology developed was recognized by the
Company 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. In 1998,
Mikros'share increased to 50% as a result of the Company's investment arising
from the use of its engineering credits.(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.
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. Royalties of $5,540 were paid in 1998. 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. In 1998, the
total amount of engineering services utilized was $765,278.
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.
Digital radio has been under development for a number of years by some
corporations. The 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 business model to utilize this technology in the commercial sector is being
developed.
The digital 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 additional voice channels. This will be accomplished with
minimal 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.
The Company has successfully completed the Alpha Phase of its development
program for AM data broadcasting. Live on the air tests have demonstrated the
Company's ability to simultaneously broadcast a data signal along with regular
audio programming. The data is received using a custom data radio that has been
developed by the Company.
While the new technology can be made available to all modified or newly designed
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,
and books on tape.
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. It is
indicated that Robert M. Lansey, President of Mobile Broadcasting Corporation
(MBC), will be marketing the AM data broadcasting technology currently being
developed by the Company. MBC is jointly owned by Safeguard Scientifics
(Delaware), Inc. of Wayne, PA and Mikros Systems Corporation.
Backlog
- -------
As of December 31, 1998, the Company had no backlog compared to a backlog of
approximately $380,000 and $3,800,000 at December 31, 1997 and December 31,
1996 respectively.
Engineering; Research and Development
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In 1994, the Company began research on a method of optimizing spectrum
efficiency for wireless communications in radio data broadcasting and Personal
Communications Services (PCS) markets and has continued this effort.
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. GAC is obligated to supply $1 million in engineering services to
Mikros which will be expended on the AM data program with MBC. In 1998, the
total amount of engineering services utilized was $765,278.
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
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High technology products such as wireless technology often require large
investments of both money and talent. Many large companies with greater
financial and human resources than the Company are currently investing heavily
in products that compete directly with the Company's products. There is no
assurance that the Company's products can be successfully marketed against such
competition.
Being first in the market with new high technology is a critical factor in a
company's success in the market. There is no assurance that the Company will be
able to introduce new products to the market before any of its competitors.
Employees
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As of March 31, 1999, the Company had three executive employees. The Company
believes its relations with its employees are satisfactory.
Warranty
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The Company warrants that the equipment made by it will be free from defects of
material and workmanship. The Company normally provides a limited warranty of
90 days from the date of shipment. If during the warranty period any component
part of the equipment becomes defective by reason of material or workmanship and
the purchaser immediately notifies the Company of such defect, the Company is
obliged, at its option, either to supply a replacement part, to request that
such part be returned to the plant for repair or to perform necessary repair at
the purchaser's location. The Company's warranty expense has been minimal over
the past three years. In addition, there are no warranties outstanding as of
December 31, 1998.
Inventories
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The Company's inventory at December 31, 1997 had an aggregate value of
approximately $5,000 and consisted of work-in-process. The Company maintained no
inventories as of December 31, 1998.
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
- --------------------
Assessment. The Company believes that its exposure to Year 2000 problems lies
primarily in three areas: (i) its internal operating systems; (ii) Year 2000
compliance of any products sold to customers; and (iii) non-compliance of third
parties with whom the Company has material relationships. The Company has
completed its assessment with respect to its internal operating systems. The
Company continues to evaluate its exposure with respect to its products sold to
customers and its relationships with third parties.
Internal Operating Systems. The Company believes its internal accounting system
are not currently Year 2000 compliant, The Company does not believe that there
will be future significant costs related to upgrading or replacing such
accounting system.
Products Sold to Customers. The Company is continuing to analyze the extent to
which any products sold to customers are not Year 2000 compliant. The Company
does not believe any required remediation will be significant or will materially
adversely affect the Company's financial condition and results of operations.
Third Party Relationships. The Company is dependent on third party service
providers and partners such as telephone companies, banks, insurance carriers,
auditors and marketing partners. The failure of such third parties to deliver
Year 2000 compliant products or to remediate their internal systems could
jeopardize the Company's ability to meet its obligations to its customers. As
a result, the Company is presently conducting inquiries of its outside vendors,
suppliers, service providers and marketing partners to identify and resolve Year
2000 exposure from third parties. Upon completion of the foregoing, the Company
will be able to assess such exposure and financial impact, if any, should such
parties fail to be Year 2000 compliant.
Risks of Year 2000 Issues. The Company expects to identify and resolve all Year
2000 problems that could materially adversely affect its business, financial
condition or results of operations. However, the Company believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company have been identified or corrected. Further, the Company
cannot accurately predict how many failures related to the Year 2000 Problem
will occur or the severity, duration or financial consequences of such failures.
Additionally, the Company cannot guarantee that its products will not be
integrated by customers or interact with non-compliant software or other
products which may expose the Company to claims from its customers.
Costs. Other than time spent by the Company's personnel, the costs associated
with remediating non-compliant products and assessing Year 2000 compliance
issues have not been significant to date. The Company believes that the
continued analysis of compliance of products and evaluation of potential Year
2000 problems will not result in material expenditures.
Contingency Plans. The Company believes its plans for addressing the Year 2000
Problem are adequate. The Company does not believe it will incur a material
financial impact from system failures, or from the costs associated with
assessing the risks of failure, arising from the Year 2000 Problem.
Consequently, the Company does not intend to create a detailed contingency
plan. In the event that the Company does not adequately identify and resolve
its Year 2000 issues, the absence of a detailed contingency plan may materially
adversely affect the Company's business, financial condition and results of
operations.
Risk Factors
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History of Losses, Lack of Liquidity; Working Capital Deficit. The Company
incurred a net loss before extraordinary items of $1,223,890, $604,500, and
$1,447,641 for the years ended December 31, 1998, 1997 and 1996 respectively.
As of December 31, 1998, the Company had an accumulated deficit of $11,489,354
and had negative working capital of $231,734. In addition, the Company expects
to incur substantial expenditures to expand its commercial wireless
communications business. The Company s working capital, plus revenue from its
royalty agreement with GAC will not be sufficient to meet such objectives as
presently structured. There can be no assurance that the Company will achieve
a profitable level of operations in the future.
Additional Financing Requirement; Merger and Partnering Opportunities. In May
1996, the Company completed a series of debt financings that raised an aggregate
of $641,500. Approximately 83.6% of this debt was subsequently converted to
common stock in 1998. In November 1996, the Company consummated an equity
financing that raised an aggregate of $1,000,000. In addition, the Company will
consider the issuance of additional debt and equity securities under appropriate
market conditions, alliances or other partnership agreements with entities
interested in supporting the Company s commercial programs, or other business
transactions which would generate resources sufficient to assure continuation of
the Company s operations and research programs. There can be no assurance,
assuming the Company successfully raises additional funds or enters into
business alliances, that the Company will achieve profitability or positive cash
flow. If the Company is unable to obtain additional adequate financing or enter
into such business alliances, management will be required to further curtail its
operations. Failure to obtain such additional financing on terms acceptable to
the Company, if coupled with a material shortfall from the Company s current
operating plan could negatively impact the Company's ability to continue
operations.
Uncertainty of Market Acceptance. In 1995, the Company expanded its initiatives
in commercial wireless communications in the current and emerging radio data
broadcasting and the personal communications service markets. Market acceptance
of the Company s products in the commercial sector will be determined in large
part by the Company s ability to develop commercial products based on advanced
wireless communications technology originally developed for the military and its
ability to demonstrate the cost-effectiveness and performance features of such
products. To date, the Company has limited evidence with which to evaluate the
market reaction to its products in the commercial sector because there has been
limited commercial experience with these products. There can be no assurance
that the Company s products will achieve market acceptance.
Limited Marketing Experience. The Company will be required to develop a
marketing and sales network that will effectively demonstrate the advantages of
its commercial sector products over competing products. The Company s marketing
experience with its new commercial products is limited, and the Company has not
yet sold any of these products. The Company currently performs all its
marketing through its own employees and through MBC. There can be no assurance
that the Company will be successful in its marketing efforts, that it will be
able to establish adequate sales and distribution capabilities, or that it will
be able to enter into marketing agreements or relationships with third
parties on financially acceptable terms.
Government Regulation. Under current Federal Communications Commission ( FCC )
regulations, designated portions of the FM radio broadcast spectrum, known as
subcarriers, may be used to transmit information in addition to normal station
programming. Listeners with specially equipped FM radios can decode the
subcarrier information, while standard FM radios continue to receive normal
radio station programs. FM subcarrier broadcasting currently represents a $100
million industry operating within well-established and stable FCC regulatory
guidelines. Any significant change in these regulatory requirements or the
enforcement thereof could adversely affect the Company s prospects.
Rapid Technological Change; Potential Infringement.The market for the Company's
products and planned products is characterized by rapid changes in technology
including the potential introduction of new types of wireless communications and
digital signal processor technologies which could have a material adverse impact
on the Company s business. The Company s future success will depend in part on
its ability to continually enhance its current products and to develop or
acquire new products that address the needs of its customers. There can be no
assurance that the Company will be successful in developing such new products
that respond to technological changes. There can be no assurance that research
and development by competitors will not render the Company s technology
obsolete or uncompetitive. In addition, in a technology-based industry, there
can be no
assurance that a claim of patent or other infringement will not be made against
the Company. While the Company is not aware of any such claims, no infringement
studies have been conducted on behalf of the Company.
Competition. High technology products such as the products made and being
developed by the Company often require large investments of both money and
talent. Many large entities with greater financial, technical and human
resources than the Company are currently investing heavily in products that
compete directly with the Company s products. There is no assurance that the
Company s products can be successfully marketed against such competition. In
addition being first in the market with new high technology is a critical factor
in a company s success in the market. There is no assurance that the Company
will be able to introduce new products to the market before any of its
competitors. As the markets in which the Company competes mature and new and
existing companies compete for customers, price competition is likely to
intensify, and such price competition could adversely affect the Company's
results of operations.
Potential Dilutive Effect of Preferred Stock, Warrants and Options; Possible
Adverse Effect on the Company s Ability to Obtain Additional Financing. The
outstanding securities of the Company include shares of convertible preferred
stock, options and warrants. During the respective terms of the options and
warrants, and when the preferred stock is outstanding, the holders thereof are
given an opportunity to profit from a rise in the market price of the Common
Stock, causing a dilution of the interests of existing stockholders. Thus, the
terms on which the Company may obtain additional financing during that period
may be adversely affected. The holders of preferred stock, options, and
warrants might be expected to exercise their respective rights to acquire Common
Stock at a time when the Company would, in all likelihood, obtain needed
capital through a new offering of securities on terms more favorable than those
provided by these outstanding securities. In the event that such holders
exercise their rights to acquire shares of Common Stock at such time, the net
tangible book value per share of the Common Stock might be subject to dilution.
Potential Future Sales. Future sales of shares by existing stockholders under
Rule 144 of the Securities Act or through the exercise of outstanding options or
otherwise could have a negative impact on the market price of the Common Stock.
The Company is unable to estimate the number of shares that may be sold under
Rule 144 because such sales depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and a variety of other
factors. Any sale of substantial amounts of Common Stock or other securities of
the Company in the open market may adversely affect the market price of the
securities offered hereby and may adversely affect the Company s ability to
obtain future financing in the capital markets as well as create a potential
market overhang.
No Dividends. The Company has never paid cash dividends on its Common Stock.
Any payment of cash dividends in the future will depend upon the Company s
earnings (if any), financial condition and capital requirements. In addition,
the Company has executed certain loan agreements, which prohibit the payment of
a dividend on the Common Stock as long as such agreements are in place.
Accordingly, any potential investor who anticipates the need for current
dividends from its investment should not purchase any of the securities offered
hereby.
Public Market; Possible Volatility of Stock Price. The Company s Common Stock
currently is traded over-the-counter on the NASD Bulletin Board. There can be
no assurance that an active market in any of the Company s securities will be
sustained. Absent a public trading market, an investor may be unable to
liquidate its investment. The Company believes that factors such as the
Company s and its competitors announcements of the availability of new services
and new contracts, quarterly fluctuations in the Company s financial results and
general conditions in the communications industry could cause the price of the
Common Stock to fluctuate substantially. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had
a substantial effect on the market prices of securities issued by many companies
for reasons unrelated to the operating performance of the specific companies.
Concentration of Share Ownership. The Company s directors, officers and
principal stockholders, and certain of their affiliates, beneficially own
approximately 70.8% (without giving effect to any outstanding options, warrants
or other convertible securities) of the outstanding Common Stock and will have
significant influence over the outcome of all matters submitted to the
stockholders for approval, including the election of directors of the Company.
In addition, such influence by management could have the effect of discouraging
others from attempting to take-over the Company, thereby increasing the
likelihood that the market price of the Common Stock will not reflect a premium
for control.
Anti-Takeover Provisions. The Company has authorized 4,040,000 shares of
preferred stock, which may be issued by the Board of Directors on such terms,
and with such rights, preferences and designations as the Board may determine.
Issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, may have the effect of delaying, deterring or preventing
a change in control of the company. The 2,081,663 shares of issued and
outstanding preferred stock have certain rights and preferences, including
dividend and liquidation preferences, which also may have the effect of
delaying, deterring or preventing a change in control of the Company. In
addition, certain anti-takeover provisions of the Delaware General
Corporation Law (the DGCL ), among other things, restrict the ability of
stockholders to effect a merger or business combination or obtain control of
the Company, and may be considered disadvantageous by a stockholder.
Item 2. Properties
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The Company owns no real property. The Company is currently leasing office
space from Daily Plan It.
Item 3. Legal Proceedings
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The Company was notified during 1998 of one currently pending lawsuit. The total
amount of the claim equals $26,023. The amount is included in obligations under
capital leases on the balance sheet and relates to leased equipment.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Stockholders was held on December 21, 1998. The purpose
was to elect seven directors until the next Annual Meeting of Stockholders or
until their respective successors are elected. The proxy vote elected each of
the nominees and there was no solicitation in opposition to the management
nominees. In addition, there was a vote to amend the Certificate of
Incorporation to increase the number of authorized shares from 35,000,000 to
60,000,000 shares.
The following represents the directors nominated and duly elected with the
corresponding number of votes cast for, against or withheld:
Director For Against Withheld
----------------- ---------- --------- -----------
Joseph R. Burns 11,724,348 7,108 4,233
F. Joseph Loeper 11,723,948 7,508 4,233
Thomas C. Lynch 11,724,348 7,108 4,233
Thomas J. Meaney 11,724,348 7,108 4,233
Wayne E. Meyer 11,724,348 7,108 4,233
Frederick C. Tecce 11,703,448 28,808 4,233
John B. Torkelsen 11,724,348 7,108 4,233
The results of the voting to amend the Certificate of Incorporation was as
follows:
For Against Withheld
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11,434,428 87,180 209,848
PART II
Item 5. Market for the Registrants' Common Equity and Related Shareholder
Matters
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The following table sets forth the range of high and low closing bid prices of
the Common Stock for the periods indicated as determined by the National
Quotation Bureau, Inc. The quoted prices represent only prices between dealers
on each trading day as submitted from time to time by certain of the securities
dealers wishing to trade in the Company's Common Stock, do not reflect retail
mark-ups, mark-downs or commissions, and may differ substantially from prices in
actual transactions.
Bid
High Low
1998
First Quarter $ .375 $ .09
Second Quarter .13 .06
Third Quarter .13 .08
Fourth Quarter .13 .05
1997
First Quarte r $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
The Company has never paid cash dividends on its Common Stock. Any payment of
cash dividends in the future will depend upon the Company's earnings (if any),
financial condition, and capital requirements.
In addition, the Company has executed certain loan agreements which prohibit
the payment of a dividend on the Common Stock as long as such agreements are in
place. (see "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations - 1992-1993 Financing" and "1996 Financing"
below).
As of April 9, 1999, the Company had 371 holders of record of its Common
Stock.
The following information relates to all securities of the Company sold by the
Company within the year ended December 31, 1998 which were not registered under
the securities laws at the time of grant, issuance and/or sale:
1. The Company has, during the year ended December 31, 1998,
issued 13,970,844 shares of Common Stock which at the time of
issuance, had not yet been registered under the securities
laws. These shares were issued as follows: (i) 800,000 shares
issued to related parties and (ii)13,170,844 shares issued in
conversion of notes payable to common stock.
The Company did not employ an underwriter in connection with the issuance of the
securities described above. The Company believes that the issuance of the
foregoing securities was exempt from registration under Section 4 (2) of the
Securities Act of 1933, as amended (the Act ), as transactions not involving
any public offering and such securities having been acquired for investment and
not with a view to distribution.
Item 6. Selected Financial Data (1)
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YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
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INCOME STATEMENT
Total Revenue $ 408,029 $5,097,432 $ 859,100 $3,379,897 $4,446,468
Net Income (Loss) 393,839 (604,550) (1,447,641) (647,673) 151,635
Income (Loss) per
common share-Basic .03 (.05) (.17) (.10) .01
Fully Diluted .03 (.05) (.17) (.10) .01
Weighted average
number of common
shares outstanding-
Basic 14,013,941 12,688,327 8,382,383 7,285,441 8,415,576
BALANCE SHEET
Current Assets 364,786 555,430 1,209,944 283,309 1,405,554
Current Liabilities 596,610 2,074,391 1,339,601 604,527 1,118,537
Total Assets 429,614 676,023 1,497,294 546,995 1,641,001
Long-Term Liabilities - 716 1,080,052 423,319 368,142
Total Liabilities 677,060 2,155,557 2,410,652 1,027,846 1,486,679
Shareholders' Equity
(Deficiency) (247,446) (1,479,534) (913,359) (480,851) 154,322
(1) The above data should be read in conjunction with the financial
statements of the Company included elsewhere herein.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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Results of Operations, General: Historically, the Company derived a large
percentage of its revenues from government contracts. In the last three years,
the Company has been developing commercial applications. While the financial
data presented reflects the Company s financial history, it cannot predict
future results as the Company divested its government contracts early in 1998.
The Company s current focus is solely on the development of its AM data casting
program.
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as believes, expects, may, will, should or anticipates
or the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy that involve risks and uncertainties. These
forward-looking statements, such as statements regarding anticipated future
revenues, Year 2000 compliance, products under development, size of markets for
products under development and other statements regarding matters that are not
historical facts, involve predictions. The Company s actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements contained in this Annual
Report on Form 10-K. Factors that could cause actual results, performance or
achievements to vary materially include, but are not limited to: changes in
business conditions, Year 2000 Compliance of the Company s and other vendors
products and related issues, changes in Mikros sales strategy and product
development plans, changes in the radio digital data marketplace, competition
between Mikros and other companies that may be entering the radio digital data
marketplace, competitive pricing pressures, market acceptance of Mikros
products under development, and delays in the development of products.
1998 vs. 1997:
- --------------
Total revenues in 1998 were approximately $408,000 compared to $5,097,000 in
1997, a decrease of 92%.
In 1998, revenues from research and development contracts were approximately
$47,000 or 11.5% of total revenues as compared to $1,856,000 or 36.4% of total
revenues in 1997. Revenues from equipment sales in 1998 were approximately
$334,000 or 81.9% of total revenues compared to $3,241,000 or 63.6% of total
revenues in 1997. The decrease in revenues in the equipment sales category were
primarily the result of final revenues from a U.S. Navy contract. The decrease
in Research & Development revenues is due primarily to the Company's final
revenues on commercial contracts including revenues of approximately $29,755
from MBC. In 1998, revenues from a royalty agreement pursuant to the Company's
divestiture of its military contracts were approximately $27,000 or 6.6% of
revenues. There were no royalties in 1997.
Total cost of sales in 1998 was approximately $376,000 or 92.2% of total
revenues as compared to $3,601,000 or 70.6% of total revenues in 1997.
Contract R & D cost of sales in 1998 was approximately $55,000 or 117.5% of
Contract R & D revenues compared to $1,336,000 or 72% in 1997.
General and Administrative expenses were approximately $341,000 in 1998 compared
to $1,088,000 in 1997. Interest expense in 1998 amounted to approximately
$51,000 versus $135,000 in 1997. This decrease is due to the reduction in notes
payable resulting from the conversion of debt to common stock and the
corresponding interest payments (see 1996 Financing ).
In 1998, the Company incurred approximately $864,000 or 211.7% of total revenues
on research and development costs related to the development of AM wireless
technology. This is compared to $719,000 or 14.1% of total revenues for the
development of a military communication system application in 1997.
The Company attained net income for 1998 of approximately $394,000 compared to
a net loss for 1997 of approximately $605,000. The net income in 1998 is
attributable to extraordinary gains arising from the Company's divestiture of
its military contracts and the settlement of its accounts payable obligations.
The loss in 1997 is due to the significant level of research and development
cost born by the Company.
1997 vs. 1996:
- --------------
Total revenues in 1997 were approximately $5,097,000 compared to $859,000 in
1996, an increase of 493.4%.
In 1997, revenues from research and development contracts were approximately
$1,856,000 or 36.4% of total revenues as compared to $702,000 or 81.7% of total
revenues in 1996. Revenues from equipment sales in 1997 were approximately
$3,241,000 or 63.6% of total revenues compared to $157,000 or 18.3% of total
revenues in 1996. The increase in revenues in the equipment sales category were
primarily from a U.S. Navy contract. The increase in Research & Development
revenues is due primarily to commercial contracts including a related party.
Total cost of sales in 1997 was approximately $3,601,000 or 70.6% of total
revenues as compared to $826,000 or 96.1% of total revenues in 1996. Contract
R & D cost of sales in 1997 was approximately $1,336,000 or 72% of Contract R &
D revenues compared to $713,000 or 101.6% in 1996. In both 1997 and 1996 the
high cost of sales percentages for Contract R & D sales are due in part to
certain contracts on which revenues exactly matched the costs. Except for such
contracts, the cost of sales percentages for Contract R & D sales would be
70.4% and 83.1% for 1997 and 1996, respectively.
General and Administrative expenses were approximately $1,088,000 in 1997
compared to $896,000 in 1996. Interest expense in 1997 amounted to approximately
$135,000 versus $126,000 in 1996. This increase is due to the higher level of
debt during 1997 and corresponding interest payments (see 1996 Financing ).
In 1997, the Company incurred approximately $719,000 or 14.1% of total revenues
on research and development costs related to the development of a military
communication system application and 159,000 or 3.1% of total revenues, for
research and development costs for commercial applications of its FM technology.
This is compared to $457,000 or 53% of total revenues for the FM commercial
application in 1996.
The Company recorded a net loss for 1997 of approximately $605,000 compared to
a net loss for 1996 of approximately $1,448,000. The loss in 1997 is due to the
significant level of research and development cost born by the company. The 1996
loss was high due to delays in government contracts and commercial research and
development costs.
1996 vs. 1995:
- --------------
Total revenues in 1996 were approximately $859,000 compared to $3,380,000 in
1995, a decrease of 74.5%. In 1996, revenues from research and development
contracts was approximately $702,000 or 81.7% of total revenues as compared to
$1,990,000 or 58.9% of total revenues in 1995. Revenues from equipment sales in
1996 were approximately $157,000 or 18.3% of total revenues compared to
$1,390,000 or 41.1% of total revenues in 1995. The decrease in revenues in both
categories in 1996 was due to delays in U.S. Navy funding for development and
equipment contracts.
Total cost of sales in 1996 was approximately $826,000 or 96.1% of total
revenues as compared to $2,876,000 or 85.1% of total revenues in 1995.
Contract R & D cost of sales in 1996 was approximately $713,000 or 101.6% of
Contract R & D revenues compared to $1,796,000 or 90.2% in 1995. In both 1996
and 1995 the high cost of sales percentages for Contract R & D sales are due to
a contract on which revenues exactly matched the costs. Except for such
contract, the cost of sales percentages for Contract R & D sales would be 83.1%
and 88.8% for 1996 and 1995, respectively.
General and Administrative expenses were approximately $896,000 in 1996 compared
to $856,000 in 1995. Interest expense in 1996 amounted to approximately
$126,000 versus $57,000 in 1995. This increase is due to the higher level of
debt during 1996 and corresponding interest payments (see 1996 Financing ).
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.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has financed its operations through debt,
private and public offerings of equity securities and cash generated by
operations.
In 1998, the Company had negative cash flow from operations of approximately
$547,000 compared to negative cash flow from operations of approximately
$185,000 in 1997 and negative cash flow from operations of $1,090,000 in 1996.
There was negative working capital of $232,000 as of December 31, 1998 as
compared to negative working capital of $1,519,000 and $126,000 and December
31, 1997 and 1996, respectively.
As of December 31, 1998, the Company could not meet its remaining principal
repayment obligations under the 1996 Financing and the 1992-93 Financing. The
Company has ceased accruing interest on its notes payable as of May 15, 1998.
Management is attempting to finalize the restructuring of its remaining note
obligations with one related party and other note holders.
A substantial portion of the Company s costs and expenses is represented by
labor, related benefits and subcontractors. In 1998, the Company decreased its
number of employees from 19 to 3.
Commencing April 10, 1998, for a period of four years, the Company is receiving
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.
The Company intends to continue the development and marketing of its commercial
applications of its wireless communications technology both directly and through
its relationship with MBC. In order to continue such development and marketing,
the Company will be required to raise additional funds. The Company intends to
consider the sale of additional debt and equity securities under appropriate
market conditions, alliances or other partnership agreements with entities
interested in supporting the Company s commercial programs, or other business
transactions which would generate resources sufficient to assure continuation of
the Company s operations and research programs. There can be no assurance,
assuming the Company successfully raises additional funds or enters into
business alliances, that the Company will achieve profitability or positive
cash flow.
If the Company is unable to obtain additional adequate financing or enter into
such business alliances, management will be required to sharply curtail its
operations. Failure to obtain such additional financing on terms acceptable to
the Company may materially adversely affect the Company s ability to continue as
a going concern.
<PAGE>
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 had 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 and Patricia A. Bird.
In 1998, the terms of the agreement were modified such that the conversion price
was reduced to $0.06 from $1.00. Of the total notes of $641,500, all but
$105,000 (three note holders) were converted to common stock in 1998. No
interest was accrued after May 15, 1998.
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 Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick
C. Tecce and John B. Torkelsen, each a director of the Company (collectively,
the "Management Shareholders"), agreed to vote an aggregate of approximately
6,659,214 votes for the election of two designees of SSI to the Board of
Directors of the Company.
Also in connection with the transaction, certain of the Company's AM and FM
technology was transferred to Data Design & Development Corporation, a Delaware
corporation ("3D"), pursuant to a contribution agreement. Under the contribution
agreement, each of the Company, SSI and certain debtholders of the Company
(including each of the Management Shareholders) owns one-third of the issued and
outstanding capital stock of 3D. Pursuant to the License Agreement, 3D granted
to the Company an exclusive, royalty-free perpetual right and license in and to
the development and marketing of FM technology in the United States, Canada and
Mexico. Pursuant to the Technology License Agreement, 3D granted to Mobile
Broadcasting Corporation ("MBC"), a Delaware corporation, a royalty-free,
exclusive, perpetual right and license in and to the marketing of the AM
technology in the United States, Canada and Mexico. Initially, SSI owned 75% of
the issued and outstanding capital stock of MBC and the Company owned 25% of
such capital stock.
Finally, the Company entered into a Consulting Services Agreement with MBC
pursuant to which the Company provided consulting services to MBC for the
development of the AM technology.
1992-93 Financing
- -----------------
In a series of transactions consummated on October 27, 1992 and April 27, 1993,
Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick C. Tecce, and John
B. Torkelsen, individually and not as a group, (collectively referred to herein
as the "Investors") acquired certain loan and equity interests in the
Company from other debt and equity holders.
Pursuant to such transactions, each of the Investors acquired, in consideration
of an aggregate of $250,000 (each of the Investors individually paying $50,000
in cash), twenty percent of (i) 50,000 shares of Common Stock, $.01 par value
("Common Stock"), of the Company (ii) promissory notes of the Company in the
aggregate principal amount of $916,875 (collectively, the "Investor Notes"),
(iii) warrants ("Series C Warrants") to purchase 97,500 shares of Series C
Preferred Stock, $.01 par value, of the Company and (iv) certain loan and equity
rights in the Company, including without limitation, rights under loan
agreements, an investment agreement, a note purchase agreement, and all
documents related to such agreements.
Pursuant to such loan documents, among other things, the Company is prohibited
from paying dividends on its Common Stock. The Company has granted to the
Investors a security interest in all of the assets of the Company and the
Investors have the right to designate 2/7ths of the Board of Directors of the
Company, which right has not been exercised. Each of the investors is a
director of the Company.
In December 1993, the Investors agreed to reduce the amounts owed by the Company
under the Investor Notes, including unpaid interest in exchange for shares of
Common Stock and Preferred Stock issued by the Company. In return for a
reduction in debt of $416,875 and accrued interest of $273,125, the Company
issued 2,750,000 shares of Common Stock and 690,000 shares of Series D
Preferred Stock which provides for an annual cumulative dividend of $.10 per
share. The Investor Notes were modified to provide for principal payment in
sixteen quarterly payments beginning January 1, 1994 and ending on October 1,
1997. As additional consideration for the modification of such loans, the
Company extended the exercise period for the Series C Warrants until April 25,
1999.
Interest on the unpaid principal balance was due in quarterly payments beginning
March 31, 1994. In 1998, the Company paid all of the Investors interest through
May 15, 1998. At that time, the Company offered to convert the notes at face
value at $0.06 per share in order to restructure its debt. As a result,
4,166,668 shares were issued. One of the Investors chose not to convert. No
interest has been accrued since May 15, 1998.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
Not Applicable.
Item 8. Financial Statements and Supplementary Data
- -------------------------------------------------------
The financial statements required to be filed pursuant to this Item 8 are
appended to this report on Form 10-K. A list of the financial statement
schedules filed herewith is found at "Item 14 Exhibits, Financial Statement
Schedules and Reports on Form 8-K".
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------------
Not Applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
- ---------------------------------------------------------
The current members of the Board of Directors of the Company are as follows:
Served as a Positions with
Name Age Director Since the Company
Joseph R. Burns 61 1984 Director
F. Joseph Loeper 54 1997 Director
Thomas C. Lynch 55 1997 Director
Thomas J. Meaney 63 1986 President
and Director
Wayne E. Meyer 73 1988 Chairman of the
Board and
Director
Frederick C. Tecce 63 1996 Director
John B. Torkelsen 53 1985 Director
The principal occupation and business experience, for at least the past
five years, of each nominee is as follows:
Joseph R. Burns was a Director and President of the Company from May 1984
until July 1986. From July 1986 until December 1986, Dr. Burns was Chairman of
the Company. From January 1987 until April 1988, Dr. Burns was a consultant to
the Company. From April 1988 to March 1998, Dr. Burns served has Senior Vice
President and Chief Scientist of the Company. From March 1998 to present Dr.
Burns serves as Executive Vice President of Ocean Power Technologies, Inc.
Dr. Burns currently serves as a Director.
F. Joseph Loeper has been a Director of the Company since February 1997.
He was first elected to the Pennsylvania Senate in 1979 to represent the 26th
Senatorial District and continues to serve in this capacity. He currently
serves as Majority Leader of the State Senate. Senator Loeper also serves as a
member of the Board of Governors of the State System of Higher Education and
is a Pennsylvania Commissioner on the Delaware River Port Authority.
Thomas C. Lynch has been a Director of the Company since February 1997.
He serves as Senior Vice President for Safeguard Scientifics, Inc. since
retiring at the rank of Rear Admiral, U.S. Navy in November 1995. Mr. Lynch
serves on the Boards of OAO International, Sanchez Computer Associates, Eastern
Technology Council, Safeguard Scientifics International and Enhanced Vision
Systems Inc.
Thomas J. Meaney has been a Director of the Company since July 1986 and was
Chairman of the Board from June 1997 to February 1999. He was appointed
President in June 1986 and continued to serve until February 1997. On
September 30, 1998, he was reappointed President of the Corporation. From
February 1983 to June 1986, Mr. Meaney was Senior Vice President and Director
of Robotic Vision Systems Incorporated ("RVSI"), a manufacturer of robotic
vision systems. Mr. Meaney served as a Director of RVSI until 1991 when he
resigned from the post. Prior to 1983 and for more than five years, he was
Vice President - Business Development, International of Norden Systems and
President - Norden Systems Canada, both divisions of United Technologies
Corporation and developers of computer and electronic products and systems.
Wayne E. Meyer has been a Director of the Company since April 1988 and
Chairman of the Board 1990 to 1997 and re-elected as Chairman in February 1999.
From 1986 to present he has been the Founder and President of the W.E. Meyer
Corporation which engages in consulting and advice to industry, government and
academic institutions in matters of system engineering, project management,
strategic planning and military and electronic designs. He enlisted in the U.S.
Navy as an Apprentice Seaman in 1943 and retired in 1985 in the rank of Rear
Admiral. As a national authority on Ballistic Missile Defense, he serves on
numerous boards, groups and panels.
Frederick C. Tecce has been a Director of the Company since July 1996. Mr.
Tecce is of Counsel to Klett Lieber Rooney & Schorling. Previously, Mr. Tecce
was Counsel to Pepper, Hamilton and Scheetz. Since 1995, he has served as
Co-Chairman of the Executive Committee of the Eastern Technology Council. In
1996, Mr. Tecce was named Chairman of the Finance Committee of the Pennsylvania
Schools Employees Retirement Systems.
John B. Torkelsen has been a Director of the Company since June 1985 and
has served as Secretary of the Corporation from June 1985 until April 25, 1996.
Mr. Torkelsen has been President of Princeton Venture Research, Inc., a
financial research and consulting firm located in Princeton, New Jersey from
November 1984 to the present. He is also a Director of Voice Control Systems,
Inc., a voice recognition technology company; Objective Communications, Inc.,
a video communications company; and Princeton Video Image, Inc. a developer of
video insertion systems for the television broadcast industry.
None of the Company's Directors or executive officers is related to any
other Director or executive officer of the Company. In connection with the
acquisition of certain debt and equity instruments of the Company from third
parties, Messrs. Burns, Meaney, Meyer, Torkelsen and Tecce (collectively, the
Investors") have the right to designate 2/7ths of the Board of Directors of the
Company. See Certain Relationships and Related Transactions. There are
currently seven members of the Board.
<PAGE>
The following table identifies the current executive officers of the
Company:
Capacities in In Current
Name Age Which Served Position Since
Thomas J. Meaney 63 President September 1998
and Director
Patricia A. Bird 32 Secretary and September 1998
Treasurer
Item 11. Executive Compensation
- --------------------------------
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 $100,000
(collectively, the "Named Executives") during the years ended December 31, 1996,
1997 and 1998.
SUMMARY COMPENSATION TABLE
Name and Principal Position
(a)
Thomas J. Meaney, President
Year (b) Annual Compensation (1)
Salary ($)
(c)
1998 35,830
1997 145,466
1996 140,263
Joseph R. Burns, Senior Vice President (2)
1998 24,709
1997 113,200
1996 108,012
(1) The costs of certain benefits are not included because they did not
exceed, in the case of each Named Executive, the lesser of $50,000 or 10%
of the total of annual compensation reported in the above table.
(2) Mr. Burns served as Senior Vice President until his resignation in March
1998.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Common Stock
The following table sets forth certain information, as of March 31, 1999
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
of Beneficial Percent
Name of Beneficial Owner Ownership(1) Of Class
(i) Certain Beneficial Owners:
Safeguard Scientifics 7,371,000(2) 18.8
(Delaware) Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Transitions Two, 2,137,775(3) 5.5
Limited Partnership
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 1,113,081(4) 2.8
F. Joseph Loeper 177,000(5) .5
Thomas C. Lynch - -
Thomas J. Meaney 3,700,167(6) 9.4
Wayne E. Meyer 3,108,000(7) 7.9
Frederick C. Tecce 3,216,668(8) 8.2
John B. Torkelsen 2,920,050(9) 7.5
(iii) All Current Directors and Officers as a Group
(eight persons) 14,329,216(4)(5)(6)(7)(8)(9) 36.6
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Includes 5,459,000 shares issuable upon exercise of warrants, and 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 175,000 shares issuable upon the exercise of warrants.
(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 the 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.
Convertible Preferred Stock
The following table sets forth certain information, as of March 31, 1999,
with respect to holdings of the Company's Convertible Preferred Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the total number of shares of Convertible Preferred Stock outstanding as of such
date, (ii) each of the nominees (which includes all current directors and Named
Executives), and (iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(I) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns -- --
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 50,000 19.6
Wayne E. Meyer -- --
Frederick C. Tecce -- --
John B. Torkelsen 202,500 79.4
(iii) All Current Directors and Officers as a Group
(eight persons) 252,500 99.0
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
<PAGE>
Series B Stock
The following table sets forth certain information, as March 31, 1999,
with respect to holdings of the Company's Series B Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series B Stock outstanding as of such date, (ii) each of
the nominees (which includes all current directors and Named Executives), and
(iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(I) Certain Beneficial Owners:
The Mercantile & General 91,342 8.1
Reinsurance Company, PLC
Moorfields House
Moorfields
London EC2Y 9AL
Transitions Two, Limited Partnership 583,425 51.6
920 Hopmeadow Street
Simsbury, Connecticut 06070
(ii) Nominees:
Joseph R. Burns 4,916 *
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 66,500 5.9
Wayne E. Meyer 10,000 *
Frederick C. Tecce -- --
John B. Torkelsen 231,961(2) 20.5
(iii) All Current Directors and Officers as a Group
(eight persons) 313,377 27.7
* Less than 1%
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Held of record by Princeton Venture Research, Inc., a corporation wholly
owned by Mr. Torkelsen.
Series C Stock
The following table sets forth certain information, as of March 31, 1999,
with respect to holdings of the Company's Series C Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series C Stock outstanding as of such date, (ii) each of
the nominees (which includes all current directors and Named Executives), and
(iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(I) Certain Beneficial Owners:
Transitions Two, Limited Partnership 5,000 100.0
920 Hopmeadow Street
Simsbury, 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 Officers as a Group
(eight persons) 97,500(2) 95.1
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
(2) Reflects warrants to purchase Series C Stock.
<PAGE>
Series D Stock
The following table sets forth certain information, as of March 31, 1999,
with respect to holdings of the Company's Series D Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the total
number of shares of Series D Stock outstanding as of such date, (ii) each of
the nominees (which includes all current directors and Named Executives), and
(iii) all current directors and officers as a group.
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership(1) of Class
(I) Certain Beneficial Owners:
(ii) Nominees:
Joseph R. Burns 138,000 20.0
F. Joseph Loeper -- --
Thomas C. Lynch -- --
Thomas J. Meaney 138,000 20.0
Wayne E. Meyer 138,000 20.0
Frederick C. Tecce 138,000 20.0
John B. Torkelsen 138,000 20.0
(iii) All Current Directors and Officers as a Group
(eight persons) 690,000 100.0
(1) Except as otherwise indicated, all shares are beneficially owned and the
sole investment and voting power is held by the persons named.
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
In a series of transactions consummated on October 27, 1992 and April 27, 1993,
Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer and John B. Torkelsen, each a
Director of the Company, and Frederick C. Tecce (collectively, the Investors")
acquired all of the loan and equity interests in the Company from certain third
parties. Pursuant to such transactions, each of the Investors acquired, in
consideration of $50,000 each, 20% of (I) 50,000 shares of Common Stock, (ii)
promissory notes of the Company in the aggregate principal amount of $916,875
(collectively, the "Investor Notes"), (iii) warrants to purchase 97,500 shares
of Series C Stock (the "Series C Warrants"), and (iv) certain other loan and
equity rights in the Company, including the right to designate 2/7ths of the
Board of Directors of the Company.
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 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.
Interest on the unpaid principal balance was due in quarterly payments beginning
March 31, 1994. In 1998, the Company paid all of the Investors interest through
May 15, 1998. At that time, the Company offered to convert the notes at face
value at $0.06 per share in order to restructure its debt. As a result,
4,166,668 shares were issued. One of the Investors chose not to convert. No
interest has been accrued since May 15, 1998.
In a series of events from February through May 1996, the Company raised an
aggregate of $641,500 in debt financing pursuant to the issuance of secured
promissory notes.
The promissory notes are for a term of approximately eighteen months and include
an interest rate of 12% on the unpaid balance. The first interest payment was
paid on June 15, 1996 and interest is due quarterly thereafter. The principal
payments were to be paid on the fifteenth of March, June and September 1998.
The notes are secured by the assets of the Corporation. As additional
consideration, warrants for the purchase of common stock were granted (the
number of shares were based on the amount of the promissory note and equal to
five shares to each dollar). The warrant price is $.01 per share. As of
December 31, 1997, the Company was in arrears for the December interest
payment. During 1998, the Company was unable to meet its note obligations and
is currently working to restructure its debt to related and other parties.
The following officers and directors participated in the 1996 financing: Wayne
E. Meyer, Thomas J. Meaney and Patricia A. Bird. In 1998, the terms of the
agreement were modified such that the conversion price was reduced to $0.06 from
$1.00. Of the total notes of $641,500, all but $105,000 were converted to
common stock in 1998. No interest was accrued after May 15, 1998.
The Company retained the services of a member of its board of directors to
provide engineering and management consulting services to the Company. No
payments were remitted in 1998. 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 of services rendered. 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 until his death
in 1997. No payments were made in 1998. 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.
As of December 31, 1998 and 1997, accounts payable owed to these two related
parties amounted to $19,573 and $18,874, respectively.
In 1998, another director provided consulting services and was paid $10,000
during the year. There were no accounts payable to this director as of December
31, 1998 and no payments in 1997.
In 1998, another director provided services and was compensated with 600,000
shares of common stock valued at $36,000(see Note O). There were no accounts
payable to this director as of December 31, 1998, and no cash payments in 1998
or 1997.
In addition, the Company retained the services of a management consultant in
1998. The consultant, who is a lawyer, was compensated as follows:(i) a grant of
200,000 shares of common stock valued at $12,000 and(ii) cash payments of
$1,500 per quarter to his affiliated law firm. As of December 31, 1998, there
was no balance due. Total cash payments to the law firm were $4,531 in 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
- -----------------------------------------------------------------
(a) 1. Reference is made to financial statements included under Item 8.
2. Reference is made to financial statements included under Item 14(c).
3. Description of Exhibits (Pursuant to Item 601 of Regulation S-K).
Note: All exhibits that were filed as exhibits (I) to the Company's
Registration Statement on Form S-18, File No. 2-67918-NY, as amended, (ii) or,
if so specified, to previously filed Annual Reports on Form 10-K or to
previously filed Current Reports on Form 8-K, are indicated by a parenthesis
setting forth the exhibit number by which the exhibits were identified in
said Registration Statement and are hereby incorporated by reference.
3.1 Certificate of Incorporation [Exhibit 2(I)]
3.2 By-laws [Exhibit 2(ii)]
3.3 Form of Certificate of Amendment to Certificate of
Incorporation [Exhibit 2(iii)]
3.4 Form of Certificate of Amendment of Incorporation with
respect to increase of authorized shares [Exhibit iv)]
4.1 Certificate of Designations of Series B Preferred Stock and
Series C Preferred Stock [Exhibit 4.1 to Form 8-K filed
September 12, 1988]
4.2 Revised form of Series C Preferred Stock Purchase
Warrant issued to Bishop Capital, L.P. as assigned to
the Investors.
4.3 Form of Series C Preferred Stock Purchase Warrant
issued to Unicorn Ventures, Ltd., Renaissance Holdings
PLC and Gartmore Information and Financial Trust PLC.
[Exhibit 4.5 to Form 10-K for 1988 filed May 15, 1989]
4.4 Form of Series C Preferred Stock Purchase Warrant
assigned to the Investors. [Exhibit 4.10 to Form 10-K
for 1990 filed April 12, 1991]
4.5 Form of Series C Preferred Stock Purchase Warrant
assigned to the Investors [Exhibit 4.11 to Form 10-K
for 1990 filed April 12, 1991]
4.6 Assignment and Sale Agreement dated October 27, 1992 by
and among Renaissance Holdings PLC, acting by its
Receivers, the Company, and each of the Investors and,
as to Section 1.1 thereof only, the Chartfield Group,
acting by its Receivers [Exhibit 4.1 to Form 8-K filed
October 27, 1992]
4.7 Loan Modification and Intercreditor Agreement dated
October 27, 1992 by and among the Company and the
Investors [Exhibit 4.2 to Form 8-K filed October 27,
1992]
4.8 Certificate of Designations of Serial Preferred Stock
[Exhibit 4.16 to Form 10-K for 1993 filed March 30, 1994]
10.1 Loan Agreement dated April 26, 1988 between the Company
and Bishop Capital, L.P. as assigned to the Investors
[Exhibit 10.1 to Form 8-K filed September 12, 1988].
10.2 Security Agreement dated April 26, 1988 between the
Company and Bishop Capital, L.P. as assigned to the
Investors [Exhibit 10.2 to Form 8-K filed September 12,
1988]
10.3 Amendment to Loan Agreement and Promissory Note dated
as of January 27, 1989 between Bishop Capital, L.P. as
assigned to the Investors and the Company. [Exhibit
10.4 to Form 10-K for 1988 filed May 15, 1989]
10.4 Investment Agreement dated as of June 30, 1988 between
Unicorn Ventures, Ltd., Unicorn Ventures II, L.P., as
assigned to the Investors and the Company [Exhibit 10.6
to Form 8-K filed September 12, 1988]
10.5 Security Agreement dated June 30, 1988 from the Company
to Unicorn Ventures, Ltd. and Unicorn Ventures II, L.P.
as assigned to the Investors [Exhibit 10.9 to Form 8-K
filed September 12, 1988]
10.6 Registration Agreement dated as of June 30, 1988
between Unicorn Ventures, Ltd., Unicorn Ventures II,
L.P., as assigned to the Investors and the Company
[Exhibit 10.10 to Form 8-K filed September 12, 1988]
10.7 Consent and Amendment Agreement dated March 31,1989 as
assigned to the Investors. [Exhibit 10.10 to Form 10-K
for 1988 filed May 15, 1989]
10.8 1988 Restricted Stock Award Plan. [Exhibit 10.20 to
Form 10-K for 1988 filed May 15, 1989]
10.9 Form of Restricted Stock Agreement. [Exhibit 10.21 to
Form 10-K for 1988 filed May 15, 1989]
10.10 Incentive Stock Option [Exhibit 10(c)(iii) to Form 10-K
for the year ended December 13, 1981]
10.11 Amended and Restated Stock Option Plan (1988)[Exhibit
10.27 to Form 10-K for 1989 filed April 3, 1990]
10.12 Security Agreement dated April 19, 1990 from Mikros
to Bishop Capital, L.P. as assigned to the Investors
[Exhibit 10.35 to Form 10-K for 1990 filed April 12,
1991]
10.13 Security Agreement dated April 19, 1990 from Mikros to
Renaissance Holdings PLC as assigned to the Investors.
[Exhibit 10.36 to Form 10-K for 1990 filed April 12,
1991]
10.14 Consent and Amendment Agreement dated as of April 19,
1990 as assigned to the Investors. [Exhibit 10.37 to
Form 10-K for 1990 filed April 12, 1991]
10.15 Note Modification and Stock Purchase Agreement dated
December 31, 1993. [Exhibit 10.47 to Form 10-K for
1993 filed March 30, 1994]
10.16 Promissory Notes dated December 31, 1993 in the amount
of $100,000 to each of the Investors. [Exhibit 10.17 to
Form 10-K for 1994 filed March 29, 1995]
10.17 Authorizations for deferral of principal payments by
each of the Investors [Exhibit 10.18 to Form 10-K for
1995 filed May 16, 1996]
10.18 Common Stock and Warrant Purchase Agreement dated
November 15, 1996 by and between Mikros Systems
Corporation and Safeguard Scientifics (Delaware), Inc.
[Exhibit 10.1 to Form 8-K filed November 18, 1996]
10.19 License Agreement dated November 15, 1996 by and
between Mikros Systems Corporation and Data Design and
Development Corporation. [Exhibit 10.2 to Form 8-K
filed November 18, 1996]
10.20 Technology License Agreement dated November 15, 1996 by
and among Data Design and Development Corporation,
Mikros Systems Corporation and Mobile Broadcasting
Corporation. [Exhibit 10.3 to Form 8-K filed November
18, 1996]
10.21 Authorization for Deferral of principal payment by each
of the investors together with Schedule of Deferrals.
[Exhibit 10.22 to Form 10-K filed February 28, 1997]
10.22 Form of Promissory Note together with Schedule of
Investors.[Exhibit 10.23 to Form 10-K filed February 28, 1997]
10.23 Form of 1996 Warrant with Schedule of Warrants.
[Exhibit 10.24 to Form 10-K filed February 28,1997]
10.24 Registration Statement of shares included in the
Incentive Stock Option Plan (1981)and the 1992
Incentive Stock Option Plan [Form S-8/S-3 filed April 25,1997]
10.25 Contract to sell defense contracts to General Atronics
Corporation dated April 10, 1998 [Exhibit 10.25 to Form 10-K
filed November 13, 1998]
10.26 Non-Compete agreement with General Atronics Corporation dated
April 10, 1998 [Exhibit 10.26 to Form 10-K filed November 13,
1998]
10.27 Lease agreement with the Daily Plan It for office space dated
July 29, 1998 [Exhibit 10.23 to Form 10-K filed February 28,
1997]
(b) Not applicable
(c) See (a) 3 above
(d) Financial Statement Schedules
The following financial statements are incorporated herein:
Independent Auditors' Report
Balance Sheets at December 31, 1997 and 1998
Statements of Operations for the years ended December 31, 1996, 1997 and 1998
Statements of Shareholders' Deficiency for the years ended December 31, 1996,
1997 and 1998
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998
Notes to Financial Statements
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIKROS SYSTEMS CORPORATION
--------------------------
(Registrant)
Dated: April 14, 1999
By: /s/
--------------------------------
Thomas J. Meaney, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
Signatures Date
/s/
- ------------------------------ April 14, 1999
Wayne E. Meyer, Chairman
/s/ April 14, 1999
- ------------------------------
Joseph R. Burns, Director
/s/ April 14, 1999
- ------------------------------
F. Joseph Loeper, Director
/s/ April 14, 1999
- ------------------------------
Thomas C. Lynch, Director
/s/
- ------------------------------ April 14, 1999
Thomas J. Meaney, Director
/s/ April 14, 1999
- ------------------------------
Frederick C. Tecce, Director
/s/ April 14, 1999
- ------------------------------
John B. Torkelsen, Director
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 accompanying balance sheets of Mikros Systems Corporation
(the "Company") as of December 31, 1998 and 1997, and the related statements of
operations, shareholders' deficiency and cash flows for each of the three years
in the period ended December 31, 1998. 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 audit.
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, 1998 and 1997, and the results of its operations,
shareholders' deficiency and its cash flows for each of the three years in the
period ended December 31, 1998, 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 an operating loss before extraordinary items of $1,223,890 and
$604,550 for the year ended December 31, 1998 and 1997, respectively. As of
December 31, 1998, current liabilities exceed current assets by $231,734 and
total liabilities exceed total assets by $247,446. 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
March 5, 1999
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1998 1997
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 100,983 $ 85,592
Accounts Receivable
Government - 342,726
Trade 22,023 112,258
Inventories - 5,293
Prepaid Engineering Services 234,722 -
Other Current Assets 7,148 9,561
------------ ------------
TOTAL CURRENT ASSETS 364,876 555,430
------------ ------------
PROPERTY AND EQUIPMENT
Equipment 71,170 135,530
Furniture and Fixtures - 50,241
------------ ------------
71,170 185,771
Less: Accumulated Depreciation 36,080 100,672
------------ ------------
PROPERTY AND EQUIPMENT, NET 35,090 85,099
------------ -----------
OTHER ASSETS:
Unbilled Receivables - 3,837
Patent Costs, Net 29,648 14,609
Other Assets - 17,048
------------ ------------
TOTAL OTHER ASSETS 29,648 35,494
------------ ------------
TOTAL ASSETS $ 429,614 $ 676,023
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS (continued)
LIABILITIES AND DECEMBER 31,
SHAREHOLDERS' DEFICIENCY 1998 1997
- ---------------------------------- ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 69,173 $ 685,139
Notes Payable
Bank - 9,271
Related Parties 72,500 547,500
Other 105,000 446,500
Obligations under Capital Leases 26,063 23,967
Accrued Payroll and Payroll Taxes 25,932 35,391
Accrued Expenses 48,220 203,774
Deferred Contract Credits 234,722 -
Unliquidated Progress Payments and
Other Customer Advances 15,000 122,849
------------ ------------
TOTAL CURRENT LIABILITIES 596,610 2,074,391
NOTES PAYABLE - BANK - 716
------------ ------------
TOTAL LIABILITIES 596,610 2,075,107
----------- ------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
par value $.01 per share, authorized 150,000
shares, issued and outstanding 5,000 shares
in 1998 and 1997 80,450 80,450
------------ ------------
SHAREHOLDERS' DEFICIENCY
Common Stock, par value $.01 per share,
authorized 60,000,000 shares, issued and
outstanding 27,422,296 shares in 1998 and
13,451,452 in 1997 274,223 134,515
Preferred Stock, convertible, par value $.01
per share, authorized 2,000,000 shares, issued
and outstanding 255,000 shares in 1998 and
1997 2,550 2,550
Preferred Stock, Series B convertible, par value
$.01 per share, authorized 1,200,000 shares, issued
and outstanding 1,131,663 shares in 1998 and 1997 11,316 11,316
Preferred Stock, Series D, par value $.01 per share
690,000 shares authorized, issued and outstanding
in 1998 and 1997 6,900 6,900
Capital in Excess of Par 10,946,919 10,248,378
Accumulated Deficit (11,489,354) (11,883,193)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY ( 247,446) (1,479,534)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 429,614 $ 676,023
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
Common Stock Preferred Stock Preferred Stock B
0.01 Par Value $0.01 Par Value $0.01 Par Value
----------------------------------------------------------
Number Par Number Par Number Par
of shares Value of shares Value of shares Value
-----------------------------------------------------------
Balance-December 31, 7,352,108 $73,521 1,005,000 $10,050 1,131,663 $11,316
1995
Year Ended December 31, 1996:
Issuance of Common Stock2,582,844 25,829
Sale of Common Stock 1,912,000 19,120
Net Loss
---------- ------- --------- ------- --------- ------
Balance-December 31, 11,846,952 118,470 1,005,000 10,050 1,131,663 11,316
1996
Year Ended December 31, 1997:
Issuance of Common Stock 854,500 8,545
Conversion of 750,000 7,500 (750,000) (7,500)
Preferred Stock
Net Loss
---------- ------- --------- ------- --------- ------
Balance-December 31, 13,451,452 134,515 255,000 2,550 1,131,663 11,316
1997
Year Ended December 31, 1998:
Issuance of Common Stock 800,000 8,000
Conversion of Secured 13,170,844 131,708
Secured Debt
Net Income
---------- ------- --------- ------- --------- ------
Balance-December 31, 27,422,296 $274,223 255,000 $ 2,550 1,131,663 $11,316
1998 ========== ======= ========= ======= ========= =======
Capital in
Preferred Stock D excess of Accumulated
$0.01 Par Value Par Value Deficit
------------------------------------------------
Number Par
of shares Value
----------------------
Balance-December 31, 1995 690,000 $6,900 $9,248,364 $( 9,831,002)
Year ended December 31, 1996:
Issuance of Common Stock 29,304
Sale of Common Stock 940,880
Net Loss ( 1,447,641)
--------- ------- ---------- ------------
Balance-December 31, 1996 690,000 6,900 10,218,548 (11,278,643)
Year Ended December 31, 1997:
Issuance of Common Stock 29,830
Conversion of Preferred Stock
Net Loss ( 604,550)
--------- ------- ----------- ------------
Balance-December 31, 1997 690,000 6,900 10,248,378 (11,883,193)
Year Ended December 31, 1998:
Issuance of Common Stock 40,000
Conversion of Secured Debt 658,541
Net Income 393,839
--------- ------- ----------- ------------
Balance-December 31, 1998 690,000 $6,900 $10,946,919 $(11,489,354)
========= ====== =========== =============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1998 1997 1996
------------ ---------- ----------
Revenues:
Equipment Sales $ 333,592 $3,240,980 $ 157,364
Contract Research and Development 46,874 1,856,452 701,736
Royalties 27,563 - -
------------ ----------- -----------
Total Revenues 408,029 5,097,432 859,100
------------ ----------- -----------
Cost of Sales:
Equipment Sales 321,787 2,264,782 113,992
Contract Research and Development 54,615 1,336,223 712,836
------------ ----------- -----------
Total Cost of Sales 376,402 3,601,005 826,828
------------ ----------- -----------
Gross Margin 31,627 1,496,427 32,272
------------ ----------- -----------
Expenses:
Research and Development 863,825 878,095 456,991
General and Administrative 340,959 1,088,172 896,350
Interest 50,733 134,710 126,572
------------ ----------- -----------
Total Operating Expenses 1,255,517 2,100,977 1,479,913
------------ ----------- -----------
Net Loss before Extraordinary Items (1,223,890) (604,550) (1,447,641)
------------ ----------- -----------
Extraordinary Items:
Gain on Sale of Government Contracts 1,299,814 - -
Gain on Settlement of Accounts
Payable Obligations 317,915 - -
------------ ----------- -----------
Total Extraordinary Items 1,617,729 - -
------------ ----------- -----------
Net Income (Loss) $ 393,839 $ (604,550) $(1,447,641)
============ =========== ============
Basic Loss per share $ (0.09) $ (0.05) $ (0.17)
Basic Income per share-Extraordinary
Items 0.12 - -
------------ ------------- ------------
Basic Income (Loss) per share $ 0.03 $ (0.05) $ (0.17)
============ ============= ============
Weighted Average Number of Shares
Outstanding 14,013,941 12,688,327 8,382,383
============ ============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1998 1997 1996
---------- ----------- --------
Cash Flow From Operating Activities:
Net Income (Loss) $ 393,839 $( 604,550) $(1,447,641)
Adjustments to reconcile Net Income (Loss)
to Net Cash Provided (Used) by
Operating Activities:
Gain from Sale of Defense Contracts,
net of Engineering Credit
and Equipment sold (578,413) - -
Settlement of Accounts Payable (317,915) - -
Depreciation and Amortization 26,421 86,050 72,730
Asset Impairment - 107,489 -
Common Stock Grant to Related Parties 48,000 - -
Loss from Fixed Asset Disposition - 36,482 -
Net Changes in Operating Assets and Liabilities
Accounts Receivable 432,961 185,140 (521,971)
Unbilled Receivables 3,837 48,775 6,069
Inventories 5,293 873,305 (977,748)
Other Current Assets 2,411 6,947 (4,949)
Other Assets 425 778 (840)
Accounts Payable (298,050) 177,890 302,373
Accrued Payroll and Payroll Taxes (9,459) (15,531) 36,614
Unliquidated Progress Billings and
Other Customer Advances (107,849) (1,110,028) 1,408,348
Other Liabilities and Interest (155,554) 22,558 37,282
----------- --------- -----------
Net Cash Used in Operations (554,053) (184,695) (1,089,733)
----------- --------- -----------
Cash Flows Provided (Used) By Investing Activities:
Sale of Government Contracts 600,000 - -
Proceeds from Sale of Equipment 3,585 - -
Equipment Purchases - (107,818) (56,052)
----------- ---------- ----------
Net Cash Provided (Used) by Investing
Activities 603,585 (107,818) (56,052)
----------- ---------- ----------
Cash Flows Provided (Used) from Financing Activities:
Proceeds from Loans - - 651,500
Proceeds from Sale of Common Stock - - 960,000
Proceeds from Exercise of Options and
Warrants - 38,375 27,877
Repayment of Debt and Capital Leases (34,141) (55,390) (175,748)
----------- ---------- ----------
Net Cash Provided (Used) by Financing
Activities (34,141) (17,015) 1,463,629
----------- ---------- ----------
Net Increase (Decrease) in Cash 15,391 (309,528) 317,844
Cash at the Beginning of the Period 85,592 395,120 77,276
----------- ---------- ----------
Cash at the End of the Period $ 100,983 $ 85,592 $ 395,120
=========== =========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 82,915 $ 105,770 $135,411
Supplemental disclosure of non-cash activities:
Acquisition of Equipment through
Capital Lease Obligations $ - $ 11,449 $ 50,571
Credit for Engineering Services from
Sale of Government Contracts $ 1,000,000 $ - $ -
Engineering Services Utilized $ (765,278)$ - $ -
Stock Issued from Conversion of Notes
Payable $ 790,250 $ - $ -
Notes Issued in Settlement of Accounts
Payable Obligations $ - $ - $ -
Stock Issued in Settlement of Accounts
Payable Obligations $ - $ 27,255 $ -
See Notes to Financial Statements<PAGE>
MIKROS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. COMPANY OVERVIEW
- ---------------------
1. THE COMPANY
- ----------------
Mikros Systems Corporation was founded in 1978 in Albany, New York to exploit
microprocessor technology developed at the General Electric Research and
Development Center. The Company was incorporated under the laws of the State of
Delaware in 1978 and acquired all rights of General Electric Venture Capital
Corp., a subsidiary of General Electric Company, to certain microcomputer
technology. The Company's headquarters are located at 707 Alexander Road,
Suite 208, Princeton, New Jersey telephone;(609)987-1513.
Mikros Systems Corporation became an established US Navy defense contractor in
1987 and continued to supply advanced technology and equipment for ten years to
the US Navy and Air Force. The Company was capitalized with more than $15
million to engage in engineering and manufacturing for these customers supplying
advanced communication equipment using cutting edge technology.
The knowledge base and proprietary technology developed was recognized as
applicable to the rapidly expanding wireless business in the commercial sector.
The rigorous radio transmission environment as well as the challenges of
underwater signal processing required Mikros employees to invent new methods to
optimize the bandwidth for a higher data throughput.
In 1995, the Company s Board of Directors decided the Company should also pursue
commercial contracts which would employ these advanced techniques to enhance the
data transmission rates in the AM and FM radio spectrum. Since the Company had
limited resources, it was decided to pursue the AM technology.
In 1996, Safeguard Scientifics (Delaware), Inc., invested $1 million in Mikros
in exchange for 10% ownership in the Company. At the same time, Mobile
Broadcasting Corporation (MBC) was created to exploit the AM radio technology,
particularly in mobile or portable platforms such as automobiles. Initially,
Safeguard invested $1 million in MBC for 75% ownership whereas Mikros owned the
remaining 25%. Mikros share in MBC was subsequently increased to 50%, as a
result of the Company's investment in the development of this technology. (See
Notes B and I).
Data Design and Development Corporation (3D) was also founded in 1996 as part of
the Safeguard Scientific agreement and retains ownership of the AM and FM
technology. 3D has licensed the FM technology rights in North America to Mikros
and the AM technology rights in North America to MBC. Mikros owns 1/3 of 3D,
certain Mikros shareholders own another 1/3, and Safeguard owns the remaining
1/3.
The Common Shipboard Data Terminal System contract consumed most of the
technical resources of the Company in 1997. The contract with the US Navy
provided for the purchase 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.
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 was 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 continue to be expended on the AM
data program in cooperation with MBC. During 1998, the Company was provided with
$765,278 of engineering services by the purchaser pursuant to the agreement.
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, 1998, its current liabilities exceed its current assets by
$231,734.
As shown in the accompanying financial statements, although the Company
attained net income of $393,839 after extraordinary items, it incurred
an operating loss before extraordinary items of $1,223,890 for the year
ended December 31, 1998. As of December 31, 1998, the Company had an
accumulated deficit of $11,489,354.
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
obtain financing to support further development for its commercial
wireless business and continuing operations. Management believes that
actions presently being taken to revise the Company s operating and
financial requirements provide the opportunity to continue as a going
concern.
With the sale of the government contracts, Mikros business assets
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.
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 business model being considered to
utilize this technology in the commercial sector is being developed.
The digital 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 additional voice channels. This will
be accomplished with minimal disturbance to the existing radio channel.
This system will require a minor modification to the radio station
transmitter which probably will not require new FCC approval, if the
adjacent channel interference is avoided.
While the new technology can be made available to all modified and newly
designed 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 technology is a low cost solution for the
broadcasters using the existing AM radio infrastructure.
The Company completed the Alpha phase (first) of its development and live
testing late in 1998 and early in 1999.
The Company intends to continue the development and marketing of its
commercial applications of its wireless communications technology both
directly and through its relationship with MBC. In order to continue such
development and marketing, the Company will be required to raise additional
funds. The Company intends to consider the sale of additional debt and
equity securities under appropriate market conditions, alliances or other
partnership agreements with entities interested in supporting the Company s
commercial programs, or other business transactions which would generate
resources sufficient to assure continuation of the Company s operations and
research programs.
2. Inventories
----------------
In 1997, Inventories, other than inventoried costs relating to long-term
contracts and programs, were stated at the lower of cost (principally
first in, first-out) or market. As of December 31, 1998 there were no
inventories.
<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
2 to 5 years. Depreciation expense amounted to $24,837, $84,872, and
$71,552 for 1998, 1997 and 1996, 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 was
charged to cost of sales in 1997. No further impairment loss recognition
was required in 1998.
4. Accounts and Unbilled Receivables
--------------------------------------
In 1998 and 1997, Accounts Receivable is presented net of an allowance for
uncollectible accounts in the amount of $140,311 which pertains to two
contracts. Unbilled Receivables in 1997 represented residual amounts on
specific contracts. As of December 31, 1998, there were no unbilled
receivables.
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.
6. Revenue Recognition
------------------------
Revenues pertaining to long-term fixed-price contracts, which principally
provide for the manufacture and delivery of finished units, were
recognized as shipments were made. The estimated profits applicable to
such shipments were recorded pro rata based upon estimated total profit
at completion of the contracts.
Revenues on contracts with significant engineering were 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 was deferred until the milestone was 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 were recognized as shipments were made.
Royalty revenues are recorded when shipments are completed and reported to
Mikros.
7. Prepaid Engineering Services and Deferred Contract Credit
---------------------------------------------------------------
The prepaid engineering services balance of $234,722 at December 31, 1998
represents the unused portion of the engineering services credit received
in connection with the sale of government contracts during 1998. The
corresponding deferred contract credit represents the unrealized gain on
the sale of such government contracts which is being recognized as other
income when the engineering services are utilized by the Company (see note
N).
8. Patents
-------------
Patent costs are amortized over a 17-year life. Amortization expense
amounted to $1,584 for 1998, and $1,178 for each of 1997 and 1996. In
August 1998, a patent was issued which is reflected in the net increase in
the asset as well as the increase in the 1998 amortization.
9. Warranty Costs
-------------------
The Company expects warranty costs to be minimal.
10. 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.
11. Cash
---------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
12. Unliquidated Progress Payments and Other Customer Advances
-----------------------------------------------------------------
Unliquidated progress payments at December 31, 1997 represented 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.
<PAGE>
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 $122,500 from officers and directors). The promissory notes were for
a term of approximately eighteen months, bearing interest at 12% on the unpaid
balance, and were secured by certain assets of the Company. In addition, the
Company issued warrants to purchase five (5) shares of Common Stock at $0.01 per
share for each dollar of debt. The value of the warrants was immaterial, and no
accounting recognition was given to their issuance.
In October 1996, all of the note holders of the 1996 and the 1992-93 financings
agreed to a deferral of principal payments in exchange for the right to convert
outstanding debt to Common Stock of the Company at a rate of one (1) share of
stock for $1.00 of debt. The Company determined that the fair value of the
conversion feature was immaterial. Accordingly, no accounting recognition has
been given to this modification of terms.
During 1998, the Company paid the investors all of the interest accrued on
promissory notes payable through May 15, 1998. No additional interest accrued
after that date. At that time, it offered to convert the notes at face value to
stock valued at $.06 per share in order to restructure its debt. Most of the
investors elected to convert. As a result, 8,504,177 shares of common stock were
issued. Three of its investors (not related parties) chose not to convert notes
totalling $105,000. These are included in the Notes Payable as of December 31,
1998(see Note D). In February 1999, two of the remaining three investors
converted their debt, totalling $70,000, under the same terms as debt exchanged
in 1998.
Safeguard Scientifics (Delaware) Inc. (SSI)
- -------------------------------------------
On November 15, 1996, the Company, all of its secured creditors from its 1996
and 1992-93 financings and SSI entered into an agreement. Under the agreement
SSI paid $1,000,000 to the Company.
- - SSI received: 1) 1,912,000 shares of Common Stock of the Company; 2) a
warrant to purchase 2,388,000 shares of Common Stock at $0.65 per share;
3) a warrant to purchase 3,071,000 shares at $0.78 per share; 4) a 75%
interest in an exclusive, royalty-free, perpetual license of the AM
technology in the United States, Canada and Mexico (through SSI's
ownership in MBC); and 5) a 33 1/3% interest in the FM and AM technology
(through SSI's ownership in 3D). This transaction is more fully described
below.
- - Two (2) new companies were formed, Data Design and Development Corporation
(3D) and Mobile Broadcasting Corporation (MBC). The Company received one-
third of 3D in exchange for certain of its AM and FM technology. SSI
received one-third of 3D in exchange for a commitment to invest up to
$1,000,000 in MBC. The secured creditors received one-third of 3D and
released their security interest in the technology transferred. The
Company received 25% of MBC for $50. SSI received 75% of MBC for
$200,000.
- - 3D granted MBC an exclusive, royalty-free, perpetual license to the AM
technology in the United States, Canada and Mexico. 3D granted the
Company an exclusive, royalty-free, perpetual license to the FM technology
in the United States, Canada and Mexico. 3D retained rights to the AM and
FM technology in the rest of the world. The Company and MBC entered into
a consulting arrangement under which the Company was paid for the
development of the AM technology. 3D owns the rights to such technology.
The Company is unable to assign fair values to these transactions. No amount of
cash consideration was considered attributable to a sale of the AM or FM
technology or to the license thereto. No gain was recognized on the transfer of
the technology. The entire amount of the cash consideration received from SSI
was recorded as a sale of Common Stock.
In connection with the sale of the Common Stock and the Warrants, the Company
granted to SSI certain piggyback and demand registration rights with respect to
the Common Stock and the Common Stock underlying the Warrants. In addition, the
Company granted to SSI a right of first refusal pursuant to which, subject to
certain conditions, in the event the Company issues, sells or exchanges any
securities, it must first offer such securities to SSI and such offer must
remain open and irrevocable for 30 days. Such right of first refusal may only
be waived in writing and terminates at such time as SSI owns less than 10% of
the Common Stock.
Pursuant to the Purchase Agreement, as long as SSI owns 1% or more of the
Company's outstanding equity securities, on a fully-diluted basis, the Company
is obligated to, among other things:(i) permit SSI to inspect the operations and
business of the Company; and (ii) fix and maintain the number of Directors on
the Board of Directors at eight members. In addition, the Purchase Agreement
also provides that as long as SSI owns such 1%, the Company is subject to
certain negative covenants, including, among other things, restrictions on: (i)
transactions with affiliates of the Company; (ii) certain indebtedness; and
(iii) amendments to the Company's Certificate of Incorporation and Bylaws.
In connection with the transaction, the Company entered into a voting agreement
pursuant to which Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick
C. Tecce and John B. Torkelsen, each a director of the Company (collectively,
the "Management Shareholders"), agreed to vote an aggregate of approximately
6,659,214 votes for the election of two designees of SSI to the Board of
Directors of the Company.
1992-93 Financing
- -----------------
In a series of transactions consummated on October 27, 1992 and April 27, 1993,
Joseph R. Burns, Thomas J. Meaney, Wayne E. Meyer, Frederick C. Tecce, and John
B. Torkelsen, individually and not as a group, (collectively referred to herein
as the "Investors") acquired certain loan and equity interests in the Company
from other debt and equity holders.
Pursuant to such transactions, each of the Investors acquired, in consideration
of an aggregate of $250,000 (each of the Investors individually paying $50,000
in cash), twenty percent of (i) 50,000 shares of Common Stock, $.01 par value
("Common Stock"), of the Company, (ii) promissory notes of the Company in the
aggregate principal amount of $916,875 (collectively, the "Investor Notes"),
(iii) warrants ("Series C Warrants") to purchase 97,500 shares of Series C
Preferred Stock, $.01 par value, of the Company and (iv) certain loan and equity
rights in the Company, including without limitation, rights under loan
agreements, an investment agreement, a note purchase agreement, and all
documents related to such agreements.
Pursuant to such loan documents, among other things, the Company is prohibited
from paying dividends on its Common Stock, the Company has granted to the
Investors a security interest in all of the assets of the Company and the
Investors have the right to designate 2/7ths of the Board of Directors of the
Company, which right has not been exercised. Each of Messrs. Burns, Meaney,
Meyer and Torkelsen is a Director of the Company.
In December 1993, the Investors agreed to reduce the amounts owed by the Company
under the Investor Notes, including unpaid interest, in exchange for shares of
Common Stock and Preferred Stock issued by the Company. In return for a
reduction in debt of $416,875 and accrued interest of $273,125, the Company
issued 2,750,000 shares of Common Stock and 690,000 shares of Series D
Preferred Stock which provides for an annual cumulative dividend of $.10 per
share. The Investor Notes were modified to provide for principal payments in
sixteen quarterly installments beginning January 1, 1994 and ending on
October 1, 1997.
Interest at 14% per annum on the unpaid principal balance was due in quarterly
installments beginning on March 31, 1994. As additional consideration for the
modification of such loans, the Company extended the exercise period for the
Series C Warrants until April 25, 1999. As of December 31, 1996, the Company
was in arrears on six quarterly principal payments. In October 1996, the
Investors authorized deferral of the remaining $312,500 of principal payments
until 1998.
During 1998, the Company paid the investors all of the interest accrued on these
payable notes through May 15, 1998. At that time, it offered to convert the
notes at face value to stock valued at $.06 per share in order to restructure
its debt.
There were 4,166,668 shares issued as a result. One of the investors chose not
to convert his notes which totalled $62,500. This amount is included in Notes
Payable as of December 31, 1998(See Note D). The Company ceased accruing
interest on the remaining debt as of May 15, 1998.
C. DIVIDENDS
- --------------
As of December 31, 1998 and 1997, there were dividends in arrears on shares of
Series D Preferred Stock of $345,000 ($.10 per share) and $276,000,
respectively.
<PAGE>
D. NOTES PAYABLE
- ------------------- As of December 31,
1998 1997
--------- ---------
Bank Equipment Loan, repaid in 1998 $ - $ 9,987
Related Parties 72,500 547,500
Others 105,000 446,500
--------- ----------
Total Notes Payable 177,500 1,003,987
--------- ----------
Less Current Maturities:
Banks - 9,271
Related Parties 72,500(a) 547,500 (a)
Others 105,000(b) 446,500 (b)
--------- ----------
177,500 1,003,271
--------- ----------
Notes Payable-Noncurrent $ - $ 716
========= ==========
(a) See Notes B & I
(b) See Note B
Concurrent with the conversion proposal cited in Note B, on May 15, 1998, the
Company ceased accrual and payment of interest on remaining notes payable. It
is anticipated that all notes payable will either be converted to common stock
or paid by December 31, 1999. Prior to May 15, 1998, interest rates ranged from
12% to 14% per annum.
E. INVENTORIES
- ----------------
December 31,
1998 1997
----------- ---------
Work-in-process $ - $ 180,764
----------- ---------
Sub-Total - 180,764
Unliquidated Progress
Payments - (175,471)
----------- ----------
Total $ - $ 5,293
=========== ==========
F. REVENUES
- -------------
Revenues from two federal government agencies amounted to 74.7% of total
revenues in 1998, as compared to 63% in 1997 and 39.1% in 1996. Revenues
from commercial customers including a related party were 18.6% of total
revenues in 1998. This compares to 34.1% in 1997 and 46.6% in 1996 of revenues
from two commercial customers. Revenues from a related party amounted to 7.1%
of total revenues in 1998 and 24% of total revenues in 1997.
Royalty revenues in 1998 were 6.7% of total revenues.
G. INCOME TAXES
- ----------------
Income taxes are recorded in accordance with FASB Statement 109 "Accounting for
Income Taxes."
The Company paid minimal corporate taxes to the State of New Jersey in 1997 and
1998 and the States of New Jersey and Connecticut in 1996. Because of the
extent of the net operating loss carryforward, no provisions for federal
income taxes were required in the years ending December 31, 1998, 1997 and 1996.
The 1998 Income tax provision is computed as follows:
Increase
Tax (Decrease)In
Provision Valuation Net
(Benefit) Allowance Provision
Provision/Benefit For --------- ------------ ---------
- ---------------------
Net Loss before
Extraordinary Items (489,556) 489,556 - 0 -
Extraordinary Items 619,092 (619,092) - 0 -
--------- --------- --------
Net Provision (Allowance) 129,536 (129,536) - 0 -
========= ========= ========
The deferred tax asset and deferred tax liability consist of the following:
1998 1997 1996
--------- --------- ---------
Deferred tax asset:
Income Taxes:
Net Operating Loss
Carry Forward 2,524,460 $2,757,989 $2,966,608
Valuation Allowance ( 2,524,460) ( 2,757,989) ( 2,966,608)
---------- ---------- ----------
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
1999 $ 354,000 $ -
2000 1,143,000 -
2001 1,441,000 -
2002 923,000 227,000
2003 606,000 1,421,000
2004 147,000 340,000
2005 81,000 -
2010 602,000 -
2011 1,422,000 -
2012 339,000 -
----------- ----------
$7,058,000 $1,988,000
----------- ----------
H. OBLIGATIONS UNDER CAPITAL LEASES
- -------------------------------------
The Company is the lessee of equipment under capital leases which were to expire
in 1998. This equipment was recorded on the books at the present value of the
minimum lease payments. The Company is presently in arrears with one
leaseholder on a capital lease which includes four pieces of equipment. The
total amount in arrears is approximately $26,000 and is included in leases
payable on the balance sheet.
With respect to the arrearage, the Company is a defendant in a lawsuit. The
amount of the liability is included as a liability in "Obligations Under Capital
Lease," and the Company has provided for anticipated legal expenses in 1998
related to this suit.
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. No
payments were remitted in 1998. 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 of services rendered. 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 until his death
in 1997. No payments were made in 1998. 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.
As of December 31, 1998 and 1997, accounts payable owed to these two related
parties amounted to $19,573 and $18,874, respectively.
In 1998, another director provided consulting services and was paid $10,000
during the year. There were no accounts payable to this director as of December
31, 1998 and no payments in 1997.
In 1998, another director provided services and was compensated with 600,000
shares of common stock valued at $36,000(see Note O). There were no accounts
payable to this director as of December 31, 1998, and no cash payments in 1998
or 1997.
In addition, the Company retained the services of a management consultant in
1998. The consultant, who is a lawyer, was compensated as follows:(i) a grant of
200,000 shares of common stock valued at $12,000 and(ii) cash payments of
$1,500 per quarter to his affiliated law firm. As of December 31, 1998, there
was no balance due. Total cash payments to the law firm were $4,531 in 1998.
In 1998, 1997 and 1996, the Company had revenues of $29,755, $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%. In 1998, the Company s share grew to 50%
as a result of the Company s investment arising from the use of its engineering
credit with the purchaser of its defense contracts. 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, 1998, 1997 and 1996, no asset has been recorded. As of December 31,
1998, there were no Accounts Receivable from MBC. As of December 31, 1997, the
accounts receivable from MBC were $90,221, which was subsequently fully paid.
Certain directors and officers participated in the "1996 Financing" (see
Note B). As a result, the Company issued a total of $131,250 in promissory notes
payable to those directors and officers.
In addition, in 1996 a director loaned $10,000 to the Company. The note bears
interest at 14% per annum. Principal was to be repaid in four quarterly
installments beginning September 30, 1997. In 1995, other directors loaned a
total of $30,000 to the Company on identical terms. During 1998, three directors
converted their notes to common stock at $.06 per share. As a result, 500,001
shares were issued. One director did not convert his shares, and his note of
$10,000 is reflected in Notes Payable as of December 31, 1998.
Interest on the $10,000 note is paid through May 15, 1998. The Company is no
longer accruing interest on the remaining note.
J. SERIES B CONVERTIBLE PREFERRED STOCK
- -----------------------------------------
The Series B Preferred Stock, together with the Series C Preferred Stock, was
issued in 1988 in order to satisfy notes payable and other trade accounts
payable pursuant to a debt restructuring. Each share of Series B Preferred
Stock is convertible into three shares of the Company's common stock at a price
of $.33 per share of common stock to be received upon conversion and entitles
the holder thereof to cast three votes on all matters to be voted on by the
Company's Shareholders. Upon any liquidation, dissolution, or winding up of
the Company, each holder of Series B Preferred Stock will be entitled to be
paid, after all distributions of payments are made upon the Series C Preferred
Stock and before any payment is made upon the Company's Convertible Preferred
Stock, an amount in cash equal to $1.00 for each share of Series B Preferred
Stock held, and such holders will not be entitled to any further payment.
K. MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
- ----------------------------------------------------
The Series C Preferred Stock, together with the Series B Preferred Stock, was
issued in 1988 in order to satisfy notes payable and other trade accounts
payable pursuant to a debt restructuring. The Series C Preferred Stock is not
convertible into any other class of the Company's stock and is subject to
redemption at the Company's option at any time and redemption is mandatory if
certain events occur, such as capital reorganizations, consolidations, mergers,
or sale of all or substantially all of the Company's assets. Upon any
liquidation, dissolution or winding up of the Company, each holder of Series C
Preferred Stock will be entitled to be paid, before any distribution or payment
is made upon any other class of stock of the Company, an amount in cash equal to
the redemption price for each share of Series C Preferred Stock held by such
holder, and the holders of Series C Preferred Stock will not be entitled to any
further payment. The redemption price per share is $16.09.
L. SERIES D PREFERRED STOCK
- -----------------------------
The Series D Preferred Stock was issued in 1993 in order to partially satisfy
notes payable and accrued interest thereon pursuant to a debt restructuring. The
Series D Preferred Stock provides for an annual cumulative dividend of $.10 per
share. The shares are not convertible into any other class of stock and are
subject to redemption at the Company's option at any time at a redemption price
of $1.00 per share plus all unpaid cumulative dividends. Upon liquidation,
dissolution or winding up of the Corporation, each holder of Series D Preferred
Stock will be entitled to be paid, after all distributions or payments are made
upon the Corporation's Convertible Preferred Stock, Series B Preferred Stock,and
Series C Preferred Stock, an amount in cash equal to the Redemption Price for
each share of Series D Preferred Stock held by such holder. The holders of
Series D Preferred Stock will not be entitled to any further payment.
M. STOCK OPTIONS AND WARRANTS
- -------------------------------
In 1992, the Company adopted the Incentive Stock Option Plan, replacing the
previous plan. The stock option plan, as amended provides for ten-year options
to purchase up to 2,000,000 shares of Common Stock at a price equal to the
market price of the shares on date of grant, exercisable at the cumulative
rate of 25% per annum.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies APB Opinion 25 and
related interpretations in accounting for its various stock option plans.
There was no compensation cost for the three years ended December 31, 1998. 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:
1998 1997 1996
----------- ----------- -----------
Net Income (Loss):
As Reported $ 393,839 ($604,550) ($1,447,641)
========== =========== =============
Proforma $ 393,839 $(667,000) ($1,485,794)
========== =========== =============
Basic earnings (loss) per share:
As Reported $ .03 ($0.05) ($.17)
========== =========== =============
Proforma $ .03 ($0.05) ($.18)
========== =========== =============
The fair value of the Company's stock options used to compute proforma net
income (loss) and net income (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 1998 1997 1996
----------- ---------- ---------
Dividend yield 0% 0% 0%
Risk free interest rate 6.48% 6.48% 6.48%
Expected life 5 years 5 years 5 years
Expected volatility 235% 235% 235%
The per share weighted-average value of stock options issued by the Company
during 1998, 1996 and 1995 were $.06, $0.0625 and $0.1875 on the date of grant.
Accordingly, the stock option values presented herein are not necessarily
indicative of amounts that could be realized in a current market exchange.
Proforma net income (loss) reflects only options granted in 1996 and 1995.
Options which were granted in 1997 were subsequently forfeited. In addition,
85.7% of all outstanding options as of December 31, 1997 were forfeited in 1998.
Therefore, the full impact of calculating compensation cost for stock options
issued in 1997 under SFAS No. 123 is not reflected in the proforma net loss
amounts presented above because compensation cost is not material. Compensation
cost for options granted prior to January 1, 1995 is not considered.
<PAGE>
Option activity under the Company's Plan is summarized below:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Common Stock Options: 1998 Price 1997 Price 1996 Price
---------- ------- --------- -------- --------- -----
Options outstanding 1,120,000 $0.1504 1,112,500 $ 0.0605 1,087,500 $ 0.0605
beginning of year
Granted 100,000 0.06 250,000 0.1875 485,500 0.1875
Exercised - 0.00 (135,000) 0.0625 (200,000) 0.0625
Cancelled (960,000) 0.3046 (297,500) 0.0529 (127,500) 0.0529
----------- ------------ -----------
Options outstanding, 260,000 0.1385 1,120,000 0.2879 1,112,500 0.273
end of year =========== ============ ===========
Options exercisable, 157,500 0.1276 410,000 0.1504 333,750 0.1056
end of year =========== ============ ===========
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/98 Contractual Life Price as 12/31/98 Price
-------- ----------- ---------------- ------------ ------------ ----
$0.0625 100,000 3.9 years $0.0625 100,000 $0.0625
$0.1875 20,000 6.3 years $0.1875 12,500 $0.1875
$0.50 40,000 7.5 years $0.50 20,000 $0.50
$0.06 100,000 9.4 years $0.06 25,000 $0.06
As of December 31,
Common Stock Warrants: 1998 1997 1996
------- ------- -------
Warrants Outstanding at
beginning of year 6,600,666 7,138,166 437,500
Granted 200,000 175,000 9,066,000
Exercised - (712,500) (2,365,834)
Expired or Terminated - - -
---------- --------- ---------
Warrants outstanding and
exercisable, end of year 6,800,666 6,600,666 7,138,166
========== ========= =========
Exercise price per warrant $0.001, $0.001, $0.001,
$0.01, $0.01, $0.01,
$0.06, $0.06, $0.06,
$0.10, & $0.10, & $0.10, &
$0.26 $0.26 $0.26
<PAGE>
As of December 31,
Series C Preferred
Stock Warrants 1998 1997 1996
------- ------- -------
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. EXTRAORDINARY GAIN
- ---------------------
In April 1998, the Company sold substantially all of the tangible and intangible
assets related to its defense contracts. The Company received cash of $600,000
and an engineering services credit from the purchaser. 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's warranty obligation under one of the contracts.
The total net gain on the sale is approximately $1,535,000. Of the total,
approximately $1,300,000 was realized in 1998. As of December 31, 1998, the
unused credit of $234,722 has been deferred (see Note A.7.).
The Company also recognized a gain related to the settlement of accounts payable
of approximately $318,000 whereby the Company offered settlement of amounts due
at a percentage of face value. The total amount of accounts payable settled was
approximately $605,000.
O. COMMON STOCK ISSUANCE
- ------------------------
During the year, the Company reached agreement with note holders to convert
notes payable with a face value of $816,500 to approximately 13.2 million
shares of Common Stock at a value of $0.06 per share. This conversion is
recognized as having occurred in December, 1998 when all conditions necessary
for the issuance of the stock had been met. Stock certificate were issued
and dated in January, 1999.
<PAGE>
Also in 1998, the Company granted 800,000 shares of common stock to one
director and a management consultant as compensation for their services in
1998. The shares were valued at $0.06 per share. The recognition of the
issuance is as of the grant date, however, the actual certificates were issued
and dated in January, 1999 (see Note I).
P. CONTINGENCY
- -----------------
The Company entered into an agreement in 1998 to sell one of its defense
contracts to General Atronics Corporation (GAC). As yet, the United States
Government has not novated this contract with the Company. 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 recorded gain, should the
novation continue to be delayed indefinitely.
Q. PROFIT SHARING PLAN
- ------------------------
The Company maintained a 401(K) Profit Sharing Plan. The Plan allowed for a
Company match of 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 had been suspended since August, 1995, and the unpaid
amounts were included in accrued expenses as of December 31, 1997.
In 1998, the Company reversed the prior accruals and credited its General and
Administrative Expenses in the amount of $44,096.
In early 1999, the Company notified its present employees as well as former
employees who remained in the Plan of its intent to terminate the plan.
R. CONCENTRATION OF RISK
- ---------------------------
The Company maintains bank accounts which may exceed federally insured limits at
one financial institution. Historically no losses related to these excess cash
balances have been experienced.
<PAGE>
S. 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, 1998 December 31, 1997
------------------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
Assets
Cash $ 100,983 $100,983 $ 85,592 $ 85,592
Unbilled receivables - See Note (A) Below 3,837 See Note (A) Below
Liabilities
Notes payable - Current 177,500 177,500 1,003,271 1,003,271
Long-term debt - - 716 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.
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1998
PERIOD-END DEC-31-1998
CASH $100,983
SECURITIES 0
RECEIVABLES 162,334
ALLOWANCES 140,311
INVENTORY 0
CURRENT-ASSETS 364,876
PP&E 71,170
DEPRECIATION 36,080
TOTAL-ASSETS 429,614
CURRENT-LIABILITIES 596,610
BONDS 0
PREFERRED-MANDATORY 80,450
PREFERRED 20,766
COMMON 274,223
OTHER-SE (542,435)
TOTAL-LIABILITY-AND-EQUITY 429,614
SALES 408,029
TOTAL-REVENUES 408,029
CGS 376,402
TOTAL-COSTS 376,402
OTHER-EXPENSES 1,204,784
LOSS-PROVISION 0
INTEREST-EXPENSE 50,733
LOSS-PRETAX (1,223,890)
LOSS-TAX 0
LOSS-CONTINUING (1,223,890)
DISCONTINUED 0
EXTRAORDINARY 1,617,729
CHANGES 0
NET-INCOME 393,839
EPS-BASIC .03
EPS-DILUTED .03
