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, 1999. Commission file number 2-67918
MIKROS SYSTEMS CORPORATION
--------------------------
(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 March 31, 2000, was approximately $9,983,516, 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 March 31, 2000 was 29,363,283.
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 for the military defense industry. 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.
The knowledge base and proprietary technology developed were 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 scientists to invent
new methods for optimizing 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.
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.
Mikros entered negotiations in late 1997 for the sale of its military contracts
to General Atronics Corporation (GAC). The resulting transaction was concluded
in 1998 and included a $600,000 cash payment and a 2% royalty to be paid to the
Company over four years on all data terminal set sales. In addition, the
purchaser was obligated to supply $1,000,000 in engineering services to the
Company which will continue to be expended on the AM data program in cooperation
with MBC. The Company was provided with engineering services by the purchaser
pursuant to the agreement which aggregated $234,722 and $765,278 for the years
ended December 31, 1999 and 1998, respectively.
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 digital system Mikros is developing for AM radio data transmission will
allow simultaneous broadcasting of the present radio signal with a digital
signal. 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 is not expected to require new FCC approval since
adjacent channel interference is avoided.
The Company has 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 are received using a prototype custom data radio that has been developed by
the Company.
The Company developed a business model during 1999. This model combines the AM
data transmission technology with the operations of a nationwide or area wide
network of AM radio stations equipped with the minor modifications to the radio
station's transmitter. Data could be broadcast from point to multipoint and the
signal received by the listener who will have a small portable receiver to be
developed based on the prototype presently being used in the Company's
experimental trials.
In addition to the AM technology developed by the Company, Mikros entered into
an Memorandum of Understanding with Lucent Digital Radio, Inc., a venture owned
jointly by Lucent Technologies and Pequot Capital. Mikros is seeking to license
the use of patented Lucent Digital Radio AM in band on channel technologies. The
Company plans to augment its existing AM Digital Radio technology with the
Lucent Digital Radio technologies. There is no assurance that any of the
applications presently contemplated for datacasting (assuming a network will be
established) will be embraced by potential users.
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. MBC is
jointly owned by Safeguard Scientifics (Delaware), Inc. of Wayne, PA and Mikros
Systems Corporation.
Backlog
- -------
As of December 31, 1999, the Company had no backlog compared to a backlog of $0
in 1998 and $380,000 in 1997 respectively.
Engineering; Research and Development
- -------------------------------------
In 1994, the Company began research on a method of optimizing spectrum
efficiency for wireless communications in radio data broadcasting and
Personal Communications Services (PCS) markets and has continued this effort.
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 1999, the
total amount of engineering services utilized was $234,722.
Patents
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The Company has two patents covering digital signal processing technology and
our base scheme of implementing Link-11.
Competition
- -----------
High technology products such as wireless technology often require large
investments of both money and talent. Many large companies with greater
financial and human resources than the Company are currently investing heavily
in products that could compete directly with Mikros. There is no assurance that
the Company could compete successfully 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
- ---------
As of March 31, 2000, the Company had two executive employees. The Company
believes its relations with its employees are satisfactory.
<PAGE>
Year 2000 Compliance
- --------------------
In prior years, the Company discussed the nature and progress of its plan to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. Through December
31, 1999, the Company capitalized approximately $0 in connection with software
and hardware acquired to address the Year 2000. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the Year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Risk Factors
- ------------
History of Losses, Lack of Liquidity; Working Capital Deficit. The Company
incurred a net loss before extraordinary items of $286,432, $1,223,890, and
$604,550 for the years ended December 31, 1999, 1998 and 1997 respectively. As
of December 31, 1999, the Company had an accumulated deficit of $11,766,889 and
had negative working capital of $412,115. 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. The
Company requires additional financing if it chooses to build a datacasting
network around the AM radio stations from which it would lease bandwidth.
Alliances or other partnership agreements must be developed with entities who
may be 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 identify users for its
datacasting network and thereby 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 network in the commercial sector will be determined in large
part by the Company s ability to develop a customer base which would have a need
to broadcast data and could be convinced of the value and cost effective uses of
the AM radio based network. To date, the Company has limited evidence with
which to evaluate the market reaction to its service in the commercial sector
because there has been no commercial experience. There can be no assurance
that the Company s services 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 offerings over competing options. The Company s marketing
experience with its new commercial products is limited, and the Company has not
identified a customer for a commercially feasible application. 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
technology and to develop or acquire new ideas that address the needs of
potential users. There can be no assurance that the Company will be successful
in developing new products or procedures 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 applications such as those 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 and services that compete directly
with the Company s contemplated services and underlying products. There is no
assurance that the Company s offerings 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 offerings 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 in Princeton, New Jersey.
Item 3. Legal Proceedings
- ---------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
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Not Applicable
<PAGE>
PART II
Item 5. Market for the Registrants' Common Equity and Related Shareholder
Matters
- --------------------------------------------------------------
The following table sets forth the range of high and low closing bid prices of
the Common Stock for the periods indicated as determined by the National
Quotation Bureau, Inc. The quoted prices represent only prices between dealers
on each trading day as submitted from time to time by certain of the securities
dealers wishing to trade in the Company's Common Stock, do not reflect retail
mark-ups, mark-downs or commissions, and may differ substantially from prices in
actual transactions.
Bid
High Low
1999
First Quarter $ .2188 $ .05
Second Quarter .19 .13
Third Quarter .15 .07
Fourth Quarter .21 .05
1998
First Quarter $ .375 $ .09
Second Quarter .13 .06
Third Quarter .13 .08
Fourth Quarter .13 .05
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 March 31, 2000, the Company had 477 holders of record of its Common
Stock.
Item 6. Selected Financial Data (1)
- ------------------------------------
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
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INCOME STATEMENT
Total Revenue $ 69,563 $ 408,029 $5,097,432 $ 859,100 $3,379,897
Net Income (Loss) (277,535) 393,839 (604,550) (1,447,641) (647,673)
Income (Loss) per
common share-Basic (.01) (.09) (.05) (.17) (.10)
Fully Diluted (.01) .03 (.05) (.17) (.10)
Weighted average
number of common
shares outstanding-
Basic 28,388,986 14,013,941 12,688,327 8,382,383 7,285,441
BALANCE SHEET
Current Assets 64,266 364,876 555,430 1,209,944 283,309
Current Liabilities 476,381 596,610 2,074,391 1,339,601 604,527
Total Assets 101,850 429,614 676,023 1,497,294 546,995
Long-Term Liabilities - - 716 1,080,052 423,319
Total Liabilities 556,831 677,060 2,155,557 2,410,652 1,027,846
Shareholders'
(Deficiency) (454,981) (247,446) (1,479,534) (913,359) (480,851)
(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.
1999 vs. 1998:
- -------------
Total revenues in 1999 were approximately $70,000 compared to $408,000 in 1998,
a decrease of 82.8%.
In 1999, revenues from research and development were $0 of total revenues
compared to $47,000 of total revenues in 1998. Revenues from equipment sales in
1999 were $0 compared to $334,000 in 1998.
Total cost of sales in 1999 was $0 compared to $376,000 in 1998. Contract R&D
cost of sales in 1999 was $0 compared to $55,000 in 1998.
General and Administrative expenses were $125,000 in 1999 compared to $341,000
in 1998. Interest expense in 1999 was $0 versus $51,000 in 1998. 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").
The Company incurred a net loss of $278,000 compared to net income of $394,000
in 1998. The loss in 1999 is due to the significant level of research and
development costs by the Company.
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.
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 1999, the Company had negative cash flow from operations of approximately
$161,000 compared to negative cash flow from operations of approximately
$554,000 in 1998 and negative cash flow from operations of $185,000 in 1997.
There was negative working capital of $412,000 as of December 31, 1999 as
compared to negative working capital of $232,000 and $1,519,000 at December 31,
1998 and 1997, 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
Research and Development costs.
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 (GAC).The royalty agreement provides for quarterly reports and
payments based on the GAC shipments and receipts during the quarter.
The royalties for 1999 were $69,563, respectively.
Mikros is presently seeking $5M in financing in order to implement its business
plan. There is no guarantee that the Company will be able to obtain the
necessary financing or that the application contemplated will be embraced by
potential users.
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>
Debt Financing
- --------------
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 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
inmaterial. 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, the Company 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 the note holders (not related parties) chose not to
convert notes totalling $105,000. These are included in the notes payable as of
December 31, 1998. During 1999, two of the remaining three note holders
converted their debt, totalling $70,000, under the 1998 terms.
1992-93 Financing
- -----------------
During 1998, the Company paid the investors of the 1992-93 financing all of the
interest accrued on their notes payable through May 15, 1998. At that time, it
offered to convert the notes at face value to stock valued at $0.06 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 totaled
$72,500. This amount is included in Notes Payable as of December 31, 1998.
The Company ceased accruing interest on the remaining debt as of May 15, 1998.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
Not Applicable.
<PAGE>
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 62 1984 Director
F. Joseph Loeper 55 1997 Director
Thomas C. Lynch 58 1997 Director
Thomas J. Meaney 65 1986 President
and Director
Wayne E. Meyer 73 1988 Chairman of the
Board and
Director
Frederick C. Tecce 64 1996 Director
John B. Torkelsen 54 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. Senator
Loeper serves on the Board of Directors of Sovereign Bank and Nursecare, Inc.
He is Vice Chairman of Packard Press.
Thomas C. Lynch has been a Director of the Company since February 1997.
He served as Senior Vice President for Safeguard Scientifics, Inc. since
retiring at the rank of Rear Admiral, U.S. Navy in November 1995 and currently
is the President and Chief Operating Officer of CompuCom Systems, Inc. Mr.
Lynch serves on the Boards of Sanchez Computer Associates, Eastern Technology
Council and e-Merge Interactive.
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.
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. He is also a Director
of NutriSystems.com. In addition, he also serves as 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.
Since October 1997, Mr. Torkelsen has been a General Partner of the Acorn
Technology Fund, L.P., a venture capital fund specializing in early stage, high
technology investing. From 1984 to 1999, he was President of Princeton Venture
Research, Inc., an investment banking, consulting and venture capital firm that
he founded. Mr. Torkelsen is currently a director of Princeton Video Image,
Inc. (NASDAQ, PVII), 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>
There were two meetings of the Board of Directors in 1999, not including
written consents of the Directors. During 1999, each Director attended at
least 75% of the aggregate of all meetings of the Board of Directors and
meeting of committees on which he served except for Messrs. Burns, Lynch, and
Torkelsen.
The following table identifies the current executive officers of the
Company:
Capacities in In Current
Name Age Which Served Position Since
- ---------------- --- ------------- --------------
Thomas J. Meaney 65 President September 1998
and Director
Patricia A. Kapp 33 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 $100,000
(collectively, the "Named Executives") during the years ended December 31, 1997,
1998 and 1999.
SUMMARY COMPENSATION TABLE
Name and Principal Position(a) Year (b) Annual Compensation (1)
Salary ($)
(c)
Thomas J. Meaney, President 1999 0
1998 35,830
1997 145,466
(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.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Common Stock
The following table sets forth certain information, as of March 31, 2000
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) 21.2
(Delaware) Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Transitions Two, 2,137,775(3) 6.9
Limited Partnership
920 Hopmeadow Street
Simsbury, Connecticut 06070
Princeton Valuation Consultants, 2,920,050(4) 9.6
L.L.C.
5 Vaughn Drive
Princeton, New Jersey 08540
(ii) Nominees:
Joseph R. Burns 1,113,081(5) 3.8
F. Joseph Loeper 202,000(6) *
Thomas C. Lynch - -
Thomas J. Meaney 3,700,167(7) 12.4
Wayne E. Meyer 3,108,000(8) 10.4
Frederick C. Tecce 2,066,668(9) 7.0
John B. Torkelsen 2,920,050(10) 9.6
(iii) All Current Directors and Officers as a Group
(eight persons) 13,109,966(5)(6)(7)(8)(9)(10) 41.5
* 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 202,500 shares issuable upon conversion of Convertible Preferred
Stock and 695,883 shares issuable upon conversion of Series B Stock.
(5) Includes 14,748 shares issuable upon conversion of Series B Stock and
100,000 shares issuable upon the exercise of warrants.
(6) Includes 175,000 shares issuable upon the exercise of warrants.
(7) 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.
(8) 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.
(9) Includes 100,000 shares issuable upon the exercise of warrants.
(10) Represents shares held of record by Princeton Valuation Consultants,
L.L.C.
Convertible Preferred Stock
The following table sets forth certain information, as of March 31, 2000,
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:
Princeton Valuation Consultants
L.L.C. 202,500 79.4
5 Vaughn Drive
Princeton, New Jersey 08540
(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(2) 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.
(2) Represents shares held or record by Princeton Valuation Consultants,
L.L.C.
<PAGE>
Series B Stock
The following table sets forth certain information, as March 31, 2000,
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
Princeton Valuation Consultants, 231,961 20.5
L.L.C
5 Vaughn Drive
Princeton, New Jersey 08540
(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) Represents shares held of record by Princeton Valuation Consultants,
L.L.C.
Series C Stock
The following table sets forth certain information, as of March 31, 2000,
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
Princeton Valuation Consultants, 19,500(2) 79.6
L.L.C.
5 Vaughn Drive
Princeton, New Jersey 08540
(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(3) 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.
(3) Represents shares held of record by Princeton Valuation Consultants,
L.L.C.
Series D Stock
The following table sets forth certain information, as of March 31, 2000,
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:
Princeton Valuation Consultants,
L.L.C. 138,000 20.0
5 Vaughn Drive
Princeton, New Jersey 08540
(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(2) 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.
(2) Represents shares held of record by Princeton Valuation Consultants,
L.L.C.
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The Company currently is indebted to Joseph R. Burns, a director of the Company,
in the aggregate amount of $72,500. Such debt is evidenced by promissory
notes. Interest on the note is paid through May 15, 1998. The Company is no
longer accruing interest on the remaining notes.
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.
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 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]
10.18 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]
10.19 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]
10.20 Form of Promissory Note together with Schedule of
Investors.[Exhibit 10.23 to Form 10-K filed February 28, 1997]
10.21 Form of 1996 Warrant with Schedule of Warrants.
[Exhibit 10.24 to Form 10-K filed February 28,1997]
10.22 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]
10.23 Contract to sell defense contracts to General Atronics
Corporation dated April 10, 1998 [Exhibit 10.25 to Form 10-K
filed November 13, 1998]
10.24 Non-Compete agreement with General Atronics Corporation dated
April 10,1998 [Exhibit 10.26 to Form 10-K filed November 13,
1998]
10.25 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) Reports on Form 8-K
The Company filed a current Report on Form 8-K with the Securities and
Exchange Commission on March 15, 2000.
(c) See (a) 3 above
(d) Financial Statement Schedules
The following financial statements are incorporated herein:
Independent Auditors' Reports
Balance Sheets at December 31, 1998 and 1999
Statements of Operations for the years ended December 31, 1997, 1998 and 1999
Statements of Shareholders' Deficiency for the years ended December 31, 1997,
1998 and 1999
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999
Notes to Financial Statements
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, 2000
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, 2000
Wayne E. Meyer, Chairman
/s/ April 14, 2000
- ------------------------------
Joseph R. Burns, Director
/s/ April 14, 2000
- ------------------------------
F. Joseph Loeper, Director
/s/ April 14, 2000
- ------------------------------
Thomas C. Lynch, Director
/s/
- ------------------------------ April 14, 2000
Thomas J. Meaney, Director
/s/ April 14, 2000
- ------------------------------
Frederick C. Tecce, Director
/s/ April 14, 2000
- ------------------------------
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 sheet of Mikros Systems Corporation
(the "Company") as of December 31, 1998, and the related statements of
operations, shareholders' deficiency and cash flows for each of the two 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mikros Systems Corporation,
as of December 31, 1998 and the results of its operations, shareholders'
deficiency and its cash flows for each of the two 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 years 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 B 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
Lipman Selzick & Witkowski
Raritan Plaza III
101 Fieldcrest Avenue
Post Office Box 6204
Edison, New Jersey 08818-6204
(732) 225-8888
FAX (732) 225-5326
Independent Auditors' Report
To the Board of Directors and Shareholders of
MIKROS SYSTEMS CORPORATION
We have audited the accompanying balance sheet of Mikros Systems Corporation as
of December 31, 1999, and the related statements of operations, changes in
shareholders' deficiency and cash flows for the year ended December 31, 1999.
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 audit 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 audit provides 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, 1999, and the consolidated results of its operations and its cash
flows for the year ended December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
A Professional Corporation
Lipman Selznick & Witkowski
Edison, New Jersey
April 7, 2000
<PAGE>
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1999 1998
- ------------------------------ ------------ ------------
CURRENT ASSETS
Cash $ 33,766 $ 100,983
Accounts Receivable, net
of allowances 30,000 22,023
Prepaid Expenses - 234,722
Other Current Assets 500 7,148
------------ ------------
TOTAL CURRENT ASSETS 64,266 364,876
------------ ------------
Equipment 71,170 71,170
Less: Accumulated Depreciation 61,080 36,080
------------ ------------
10,090 35,090
OTHER ASSETS:
Patent Costs, Net 27,494 29,648
------------ ------------
TOTAL ASSETS $ 101,850 $ 429,614
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
BALANCE SHEETS (continued)
LIABILITIES AND DECEMBER 31,
SHAREHOLDERS' DEFICIENCY 1999 1998
- ---------------------------------- ----------- ------------
CURRENT LIABILITIES
Accounts Payable $ 52,558 $ 69,173
Notes Payable
Related Parties 72,500 72,500
Other 35,000 105,000
Obligations under Capital Leases - 26,063
Accrued Payroll and Payroll Taxes 25,240 25,932
Accrued Expenses 164,990 48,220
Advances from related party 111,093 -
Deferred Contract credits - 234,722
Unliquidated Progress Payments and
Other Customer Advances 15,000 15,000
------------ ------------
TOTAL CURRENT LIABILITIES 476,381 596,610
------------ ------------
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 1999 and 1998 80,450 80,450
------------ ------------
SHAREHOLDERS' DEFICIENCY
Preferred Stock, convertible, par value $.01
per share, authorized 2,000,000 shares, issued
and outstanding 255,000 shares in 1999 and
1998 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 1999 and 1998 11,316 11,316
Preferred Stock, Series D, par value $.01 per share
690,000 shares authorized, issued and outstanding
in 1999 and 1998 6,900 6,900
Common Stock, par value $.01 per share,
authorized 60,000,000 shares, issued and
outstanding 28,588,963 shares in 1999 and
27,422,296 in 1998 285,890 274,223
Capital in Excess of Par 11,005,252 10,946,919
Accumulated Deficit (11,766,889) (11,489,354)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY ( 454,981) ( 247,446)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 101,850 $ 429,614
============ ============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1999 1998 1997
------------ ---------- ----------
Revenues:
Equipment Sales $ - $ 333,592 $ 3,240,980
Contract Research and Development - 46,874 1,856,452
Royalties 69,563 27,563 -
------------ ----------- -----------
Total Revenues 69,563 408,029 5,097,432
------------ ----------- -----------
Cost of Sales:
Equipment Sales - 321,787 2,264,782
Contract Research and Development - 54,615 1,336,223
------------ ----------- -----------
Total Cost of Sales - 376,402 3,601,005
------------ ----------- -----------
Gross Margin 69,563 31,627 1,496,427
------------ ----------- -----------
Expenses:
Research and Development 230,946 863,825 878,095
General and Administrative 125,045 340,959 1,088,172
Interest - 50,733 134,710
------------ ----------- -----------
Total Operating Expenses 355,991 1,255,517 2,100,977
------------ ----------- -----------
Net Loss before Extraordinary Items (286,428) (1,223,890) (604,550)
------------ ----------- -----------
Extraordinary Items:
Gain on Sale of Government Contracts - 1,299,814 -
Gain on Settlement of Accounts
Payable Obligations 8,893 317,915 -
------------ ----------- -----------
Total Extraordinary Items 8,893 1,617,729 -
------------ ----------- -----------
Net Income (Loss) $ (277,535) $ 393,839 $ (604,550)
============ =========== ============
Basic Loss per share $ (0.01) $ (0.09) $ (0.05)
Basic Income per share-Extraordinary
Items - 0.12 -
------------ ------------- ------------
Basic Income (Loss) per share $ (0.01) $ 0.03 $ (0.05)
============ ============= ============
Weighted Average Number of Shares
Outstanding 28,388,986 14,013,941 12,688,327
============ ============= ============
See Notes to Financial Statements
<PAGE>
MIKROS SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
Preferred Stock Preferred Stock B Preferred Stock D
$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, 19961,005,000 $ 10,050 1,131,663 $11,316 690,000 $ 6,900
Year Ended December 31, 1997:
Issuance of Common Stock
Conversion of Preferred Stock(750,000)(7,500)
Net Loss
----------- --------- ---------- ------- -------- -----
Balance-December 31, 1997 255,000 2,550 1,131,663 11,316 690,000 6,900
Year Ended December 31, 1998:
Issuance of Common Stock
Conversion of Secured Debt
Net Loss
---------- -------- --------- ------- --------- ----
Balance-December 31, 1998 255,000 $2,550 1,131,663 11,316 690,000 6,900
Year Ended December 31, 1999:
Conversion of Secured Debt
Net Loss
---------- -------- --------- ------- --------- -----
Balance-December 31, 1999 255,000 $ 2,550 1,131,663 $11,316 690,000 $6,900
========== ======== ========= ======= ========= ======
Capital in
Common Stock excess of Accumulated
$0.01 Par Value Par Value Deficit
------------------------------------------------
Number Par
of shares Value
-----------------------
Balance-December 31, 1996 11,846,952 $118,470 $10,218,548 $(11,278,643)
Year ended December 31, 1997:
Issuance of Common Stock 854,500 8,545 29,830
Conversion of Preferred Stock 750,000 7,500
Net Loss (604,550)
---------- ------- ---------- ------------
Balance-December 31, 1997 13,451,452 134,515 10,248,378 (11,883,193)
Year Ended December 31, 1998:
Issuance of Common Stock 800,000 8,000 40,000
Conversion of Secured Debt 13,170,844 131,708 658,541
Net Income 393,839
---------- -------- ----------- ------------
Balance-December 31, 1998 27,422,296 274,223 10,946,919 (11,489,354)
Year Ended December 31, 1999:
Conversion of Secured Debt 1,166,667 11,667 58,333
Net Loss (277,535)
---------- -------- ----------- ------------
Balance-December 31, 1999 28,588,963 $285,890 $ 11,005,252 $(11,766,889)
========== ======== =========== =============
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1999 1998 1997
---------- ----------- -----
Cash Flow From Operating Activities:
Net Income (Loss) $ (277,535) $ 393,839 $ (604,550)
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 (8,893) (317,915) -
Depreciation and Amortization 8,154 26,421 86,050
Asset Impairment 19,000 - 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 (7,977) 432,961 185,140
Unbilled Receivables - 3,837 48,775
Inventories - 5,293 873,305
Other Current Assets 6,648 2,411 6,947
Other Assets - 425 778
Accounts Payable (16,615) (298,050) 177,890
Accrued Payroll and Payroll Taxes (692) (9,459) (15,531)
Unliquidated Progress Billings and
Other Customer Advances - (107,849)(1,110,028)
Other Liabilities and Accrued Expenses 116,770 (155,554) 22,558
----------- --------- -----------
Net Cash Used in Operating Activities (161,140) (554,053) (184,695)
----------- --------- -----------
Cash Flows Provided (Used) By Investing Activities:
Sale of Government Contracts - 600,000 -
Proceeds from Sale of Equipment - 3,585 -
Equipment Purchases - - (107,818)
----------- ---------- ----------
Net Cash Provided by (used in) investing
Activities - 603,585 (107,818)
----------- ---------- ----------
Cash Flows Provided from Financing Activities:
Advances from Related Parties 111,093 - -
Proceeds from Exercise of Options and Warrants - - 38,375
Repayment of Debt and Capital Leases (17,170) (34,141) (55,390)
----------- ---------- ----------
Net Cash Provided by (used in)
financing activities 93,923 (34,141) (17,015)
----------- ---------- ---------
Net Increase (Decrease) in Cash (67,217) 15,391 (309,528)
Cash, Beginning of Year 100,983 85,592 395,120
----------- ---------- ----------
Cash, end of year $ 33,766 $100,983 $ 85,592
============ ========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ - $ 82,915 $105,770
Supplemental disclosure of non-cash activities:
Acquisition of Equipment through
Capital Lease Obligations $ - $ - $ 11,449
Credit for Engineering Services from
Sale of Government Contracts $ - $ 1,000,000 $ -
Engineering Services Utilized $ (234,722) $ (765,278) $ -
Stock Issued from Conversion of Notes
Payable $ 70,000 $ 790,250 $ -
Stock issued in Settlement of Accounts
Payable Obligations $ - $ - $27,255
=========== ============= ======
See Notes to Financial Statements
MIKROS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. 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 for the military defense industry. 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.
Initially, the Company supplied technology for military applications. 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 the Company's 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., (Safeguard) invested $1,000,000
in the Company 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 $1,000,000 in MBC for 75% ownership and the
Company owned the remaining 25%. The Company's share in MBC was subsequently
increased to 50%, as a result of the Company's investment in the development of
this technology.
Data Design and Development Corporation (3D) was founded in 1996 as a part of
the Company's agreement with Safeguard Scientific agreement and retains
ownership of the AM and FM technology. 3D has licensed the FM technology
rights in North America to the Company and the AM technology rights in North
America to MBC. The Company owns 1/3 of 3D, certain shareholders of the
Company own another 1/3, and Safeguard owns the remaining 1/3.
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
The Company 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 the
Company over four years on all data terminal set sales. In addition, the
purchaser was obligated to supply $1,000,000 in engineering services to the
Company which will continue to be expended on the AM data program in cooperation
with MBC. The Company was provided with engineering services by the purchaser
pursuant to the agreement which aggregated $234,722 and $765,278 for the years
ended December 31, 1999 and 1998, respectively.
B. SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
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, 1999, its current liabilities exceed its current assets by
$412,115. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans and intentions
on the going concern issue are discussed below. These financial
statements do not include any adjustments that would be required if the
Company were unable to continue as a going concern.
In order to continue as a going concern, the Company will need to 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 and/or equity 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.
Equipment
---------
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 $6,000, $84,872, and $71,552 for
years ended 1999, 1998 and 1997, respectively.
Certain property and equipment were deemed to be impaired and were
written down to their fair value. An impairment loss which was charged to
general and administrative amounted to $19,000 in 1999 and cost of
sales was charged $107,489 in 1997.
<PAGE>
Accounts Receivables
--------------------
In 1999 and 1998, accounts receivable is presented net of an allowance for
uncollectible accounts in the amount of $50,000 and $140,311, respectively.
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.
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
the Company.
Patents
-------
Patent costs are amortized over a 17-year life. Amortization expense
amounted to $2,154 for 1999, $1,584 for 1998 and $1,178 for 1997.
Warranty Costs
--------------
The Company expects warranty costs to be minimal.
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.
Cash
----
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Unliquidated Progress Payments and Other Customer Advances
----------------------------------------------------------
Unliquidated progress payments at December 31, 1999 and 1998 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>
C. 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 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
inmaterial. 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 the note holders (not related parties) chose not to convert
notes totaling $105,000. These are included in the notes payable as of December
31, 1998. During 1999, two of the remaining three note holders converted their
debt, totalling $70,000, under the 1998 terms.
Safeguard Scientifics (Delaware) Inc. (SSI)
- -------------------------------------------
On November 15, 1996, the Company, all of its secured creditors and Safeguard
entered into an agreement. Under the agreement Safeguard paid $1,000,000 to the
Company. Safeguard 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 Safeguard's ownership in MBC);
and 5) a 1/3 interest in the FM and AM technology (through Safeguard'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. Safeguard 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.
Safeguard 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
Safeguard was recorded as a sale of Common Stock.
In connection with the sale of the Common Stock and the Warrants, the Company
granted to Safeguard 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 Safeguard 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 Safeguard 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 Safeguard
owns less than 10% of the Common Stock.
Pursuant to the Purchase Agreement, as long as Safeguard 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 Safeguard 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 Safeguard 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.
1992-93 Financing
- -----------------
During 1998, the Company paid the investors of the 1992-93 financing all of the
interest accrued on their notes payable through May 15, 1998. At that time, it
offered to convert the notes at face value to stock valued at $0.06 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 totaled
$72,500. This amount is included in Notes Payable. The Company ceased
accruing interest on the remaining debt as of May 15, 1998.
D. DIVIDENDS
- --------------
As of December 31, 1999 and 1998, there were dividends in arrears on shares of
Series D Preferred Stock of $414,000 ($.10 per share) and $345,000,
respectively.
E. NOTES PAYABLE
- ---------------- As of December 31,
1999 1998
--------- ---------
Related Parties $ 72,500 $ 72,500
Others 35,000 105,000
--------- ----------
Total Notes Payable $ 107,500 $ 177,500
--------- ----------
Concurrent with the conversion proposal cited in Note C, on May 15, 1998, the
Company ceased accrual and payment of interest on remaining notes payable.
F. REVENUES
- -------------
Revenues from two federal government agencies amounted to 74.7% of total
revenues in 1998, as compared to 63% in 1997. Revenues from commercial
customers including a related party were 18.6% of total revenues in 1998.
This compares to 34.1% in 1997 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 from one customer amounted to 100% of total revenues in 1999,
as compared to 6.7% in 1998.
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 1999,
1998 and 1997. Because of the extent of the net operating loss carryforward, no
provisions for federal income taxes were required in the years ending December
31, 1999, 1998 and 1997.
The Income tax provision (benefit) is computed as follows:
1999 1998 1997
--------- --------- ---------
Income taxes:
Net Loss before
Extraordinary Items $ (111,016) $(489,556) $(241,820)
Extraordinary Items - 647,097
Valuation Allowance 111,016 (157,541) 241,820
--------- --------- ---------
Net Provision $ - $ - $ -
========= ========= =========
The differences between the statutory federal income tax rate and the
effective rate for the company's income tax rate is as follows:
1999 1998 1997
-------- ---------- ----------
Federal statutory rate 34.0% 34.0% 34.0%
State Income taxes, net of
federal income tax benefit - 4.6% -
Increase in Valuation
Allowance (34.0) (38.6) (34.0)
--------- ---------- ----------
Effective tax rate 0.0% 0.0% 0.0%
========= ========== ==========
The deferred tax asset and deferred tax liability consist of the following:
1999 1998 1997
--------- --------- ---------
Deferred tax asset:
Income Taxes:
Carry Forward $ 2,635,476 $ 2,524,460 $ 2,757,989
Valuation Allowance ( 2,635,476) ( 2,524,460) ( 2,757,989)
---------- ----------- ----------
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
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 81,000 227,000
2010 602,000 -
2011 1,422,000 -
2012 339,000 -
2013 277,000 -
----------- ----------
$6,981,000 $2,265,000
----------- ----------
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 was in arrears with one leaseholder on a
capital lease which includes four pieces of equipment. The total amount in
arrears was approximately $26,000 and was included in leases payable on the
balance sheet. The leaseholder commenced litigation and in 1999 the Company
settled its lawsuit with the leasing company. The Company agreed to a
settlement of approximately $17,100 and the lessor forgave the remaining
balance.
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 1999 or 1998. In 1997, the Company paid $1,000 for
these services. In addition, the Company paid $1,400 to the director for office
and 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. In 1997, he received $5,000 for services.
As of December 31, 1999 and 1998, accounts payable owed to these two related
parties amounted to $19,573.
In 1998, another director provided consulting services and was paid $10,000
during the year.
In 1998, another director provided services and was compensated with 600,000
shares of common stock valued at $36,000.
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, 1999 and 1998,
respectively, there was no balance due. Total cash payments to the law firm
were $5,465 and $4,531 for 1999 and 1998, respectively.
In 1998 and 1997, the Company had revenues of $29,755, $1,223,305, respectively
from Mobile Broadcasting Corporation (MBC), 25% of whose outstanding capital
stock was owned by the Company as of December 31, 1996. In 1997, the Company's
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, 1999, 1998 and 1997, no asset has been recorded. As of December
31, 1998, there were no accounts receivable from MBC. In addition, during 1999
MBC advanced the Company $111,093 for working capital purposes.
Certain directors and officers participated in the "1996 Financing" (see
Note C). 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. MANDATORILY REDEEMABLE SERIES C PREFERRED STOCK
- ----------------------------------------------------
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. 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.
K. SERIES B CONVERTIBLE PREFERRED STOCK
- ---------------------------------------
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. 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.
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. 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, 1999.
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:
1999 1998 1997
----------- ----------- -----------
Net Income (Loss):
As Reported $ (277,535) $ 393,839 $ (604,550)
========== =========== =============
Proforma $ (277,535) $ 393,839 $ (667,000)
========== =========== =============
Basic earnings (loss) per share:
As Reported $ (0.01) $ 0.03 $ (0.05)
========== =========== =============
Proforma $ (0.01) $ 0.03 $ (0.05)
========== =========== =============
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 1999 1998 1997
----------- ---------- ---------
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,
42.3% of all outstanding options as of December 31, 1998 were forfeited in 1999.
Therefore, the full impact of calculating compensation cost for stock options
issued in 1997 under SFAS No. 123 is not reflected in the proforma net loss
amounts presented above because compensation cost is not material. Compensation
cost for options granted prior to January 1, 1995 is not considered.
Option activity under the Company's Plan is summarized below:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Common Stock Options: 1999 Price 1998 Price 1997 Price
---------------------------------------------------------
Options outstanding 360,000 $0.1276 1,120,000 $ 0.1504 1,112,500 $ 0.0605
beginning of year
Granted - 0.0000 200,000 0.0600 250,000 0.1875
Exercised - 0.0000 - 0.0000 (135,000) 0.0625
Cancelled (110,000)(0.0858) (960,000) 0.3046 (107,500) 0.0529
-----------------------------------------------------------
Options outstanding,250,000$(0.1240) 360,000 $ 0.1385 1,120,000 $ 0.2879
end of year ===========================================================
Options exercised, - $ - 157,500 $ 0.1276 410,000 $ 0.1504
end of year ===========================================================
The following summarizes information about the Company's stock
options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/99 Contractual Life Price as 12/31/99 Price
- -------- ----------- ---------------- ------------- ------------ ------------
$0.0625 100,000 2.9 years $0.0625 $0.0625
$0.1875 20,000 5.3 years $0.1875 $0.1875
$0.50 30,000 6.5 years $0.50 $0.50
$0.06 100,000 8.4 years $0.06 $0.06
As of December 31,
Common Stock Warrants: 1999 1998 1997
------- ------- -------
Warrants Outstanding at
beginning of year 6,800,666 6,600,666 7,138,166
Granted - 200,000 175,000
Exercised - - (712,500)
Expired or Terminated (41,666) - -
---------- --------- ---------
Warrants outstanding and
exercisable, end of year 6,759,000 6,800,666 6,600,666
========== ========= =========
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 1999 1998 1997
------- ------- -------
Warrants Outstanding and
exercisable 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 was deferred. The entire $234,722 was utilized by
December 31, 1999.
In 1998, 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 1998, 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.
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.
P. 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 1999, the Company notified its present employees as well as former employees
who remained in the Plan of its intent to terminate the plan.
Q. 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, 1999 December 31, 1998
------------------------ ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------ ---------------------
Assets
Cash $ 33,766 $ 33,766 $ 100,983 $ 100,983
Unbilled receivables (A) - -
Liabilities
Notes payable - Current 107,500 107,500 177,500 177,500
Mandatorily redeemable
preferred stock (A) 80,450 80,450
(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.
R. CONTINGENCY
- -----------------
The Company entered into an agreement in 1998 to sell one of its defense
contracts to General Atronics Corporation (GAC). The contract was extended to
November 1999 and was never novated by the United States Government. The
Company does not anticipate any negative impact on its agreement with GAC.
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1999
PERIOD-END DEC-31-1999
CASH $ 33,766
SECURITIES 0
RECEIVABLES 80,000
ALLOWANCES 50,000
INVENTORY 0
CURRENT-ASSETS 64,266
PP&E 71,170
DEPRECIATION 61,080
TOTAL-ASSETS 101,850
CURRENT-LIABILITIES 476,381
BONDS 0
PREFERRED-MANDATORY 80,450
PREFERRED 20,766
COMMON 285,890
OTHER-SE (761,637)
TOTAL-LIABILITY-AND-EQUITY 101,850
SALES 69,563
TOTAL-REVENUES 69,563
CGS 0
TOTAL-COSTS 0
OTHER-EXPENSES 355,995
LOSS-PROVISION 0
INTEREST-EXPENSE 0
LOSS-PRETAX (286,432)
LOSS-TAX 0
LOSS-CONTINUING (286,432)
DISCONTINUED 0
EXTRAORDINARY 8,893
CHANGES 0
NET-INCOME (277,535)
EPS-BASIC (.01)
EPS-DILUTED (.01)
