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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended MARCH 31, 1998
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OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-16034
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VIKONICS, INC.
(Name of small business issuer in its charter)
NEW YORK 13-2759466
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
370 North Street, Teterboro, New Jersey 07608
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: 201-641-8077
----------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.02 per share
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(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
--- ---
Check 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 this Form 10-KSB or
any amendment to this Form 10-KSB [X]
Issuer's revenues for the year ended March 31, 1998 were $1,561,000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, on June 22, 1998, was $201,590.
As of June 22, 1998 the Registrant had 2,933,431 shares of Common Stock
outstanding.
Documents Incorporated by Reference
None
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PART I
Item 1. Description of Business
General
Vikonics, Inc. (the "Company") designs, manufacturers, markets,
installs and supports a line of sophisticated computer-based security systems.
The Company's modular systems combine hardware components and proprietary
software which can be custom-designed in various configurations and tailored
to satisfy individual customer specifications as well as evolving security
requirements. The Company's advanced systems feature integrated access
control, intrusion detection, alarm monitoring, closed circuit television
surveillance and logging functions, providing customers with a distributed
intelligent security network.
The Company's product line includes the VISIDS(R) and TAC(R) series
of microprocessor-based systems. These systems consist of central processing
units, intelligent card readers that utilize a variety of card technologies
for access control and microprocessor based peripherals for alarm control and
management. The Company has developed and supports software which is
menu-driven and user-friendly.
The Company markets it systems to defense contractors and government
agencies, commercial customers and a dealer network. The Company's systems are
designed to allow defense contractors and government agencies to meet
regulations for facilities handling classified programs. For the fiscal years
ended March 31, 1998, 1997 and 1996, defense contractors and government
agencies (including the United States Armed Forces) accounted for
approximately 80%, 73% and 67% of total revenues, respectively. International
customers accounted for 9.8% of total revenues for the year ended March 31,
1998.
Since the early 1970's, the security industry has undergone
substantial transformation, evolving from the use of security guards and
mechanical hardware devices to the use of advanced computer-based security
systems. This has resulted from the increasing sophistication, reliability and
cost-effectiveness of available systems technology and the acceptance by the
United States government defense establishment of computer-based security
systems. In addition, the United States government has placed emphasis on the
need to adequately secure sensitive facilities, including military and other
defense-related facilities. The Company has significant experience in
designing advanced hardware and systems software which satisfy stringent
government standards and, as a result, has the capability to install systems
in foreign government and commercial markets requiring sophisticated security
technology. The dealer market takes the Company's component pieces, along with
other manufacturers' devices, and provides systems to this customer base. The
Company believes that the cost of designing advanced systems, which must
continually conform to government security requirements, has limited the
number of companies capable or interested in competing in this field.
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The Company was incorporated in New York on September 21, 1973, under
the name Vikonics, Inc. In 1979, a majority interest of the Company was
acquired by Racal Electronics, PLC ("Racal"), a large electronics company
based in the United Kingdom. In 1983, John L. Kaufman, the founder and
president of the Company, until his resignation in March, 1996, re-acquired
control of the Company. The Company's name was changed to Racal-Vikonics, Inc.
on September 24, 1981 and changed back to Vikonics, Inc. on February 7, 1983.
Unless the context otherwise requires, references to the Company shall include
Vikonics Canada Inc., a wholly-owned subsidiary of the Company incorporated in
Canada. This subsidiary has been inactive for the past several years.
The Company's principal office is located at 370 North Street,
Teterboro, New Jersey 07608 and its telephone number is (201) 641-8077.
Product and System Features
The Company designs security systems for its customers by integrating the
hardware and software components of its product lines, including the VISIDS
and TAC systems and peripheral devices. These components have been developed in
modular fashion to facilitate integration and to allow customers to upgrade or
expand their security systems. The Company's security systems incorporate the
following features:
o Fully Integrated - entry and access control, alarm monitoring, closed
circuit television (CCTV) interface and response device control can be
handled through one system, thus eliminating the need to purchase and
learn multiple systems.
o Entry and Access Control - monitors and controls entry and access to
single or multiple facilities, or to a designed area within a facility.
The Company's systems can selectively allow or disallow access based upon
card identification, the time or the day of the week. At each entry point
(e.g. doors, turnstiles, elevators), a card reader or personal identity
verifier (e.g. hand geometry) is installed. The Company's card readers
employ various technologies, including magnetic stripe, Wiegand(TM),
barium ferrite and proximity.
o Alarm Monitoring - monitors for intrusions and emergencies (smoke, fire,
flood and equipment failures). Sensors and other devices at alarm points
automatically send alarms or transmit a change of condition message
through a multiplexed communication network. The change of condition is
displayed at operator terminals and included in detailed reports, and
includes a description and the location of the alarm.
o Response Device Control - turn on and off lights, heating units, air
conditioning and other devices and equipment remotely based on operator
command or a time schedule.
o CCTV Interface - with interfaces to Vikonics' systems, closed circuit
television (CCTV) cameras can be automatically computer controlled upon
an alarm condition,
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thereby giving security personnel the opportunity to immediately assess
the alarm area(s).
o Central or Local Control - activities can be monitored either locally or
from a remote, central site. A local security officer might monitor the
area during business hours and transfer control to a central site during
off-hours. Either site can add or delete individuals or groups of
personnel change time zone and access level parameters, and lock/unlock
doors upon command or based on a time schedule.
o Management Reports - the system automatically records all access, alarm
and operator activities, and provides printed reports. Valid entries show
the card number, cardholder name, entry location, time and date. Denial
entry attempts are highlighted and give the reason for denial in addition
to the information listed above. Alarm records are highlighted and
provide a description of the alarm, its location, and the time and date
of the occurrence.
o Multiplexed Network - multiple peripheral devices in the system can
communicate over a single communications line. This allows for
cost-effective system installation. The communication line can be copper
wire, fiber optic cable, telephone lines, microwave links and other line
types. All communication lines within a system can be provided with
encryption to meet the Data Encryption Standard (DES) as specified in the
Federal Information Processing Publication 140.
o Government Approval - the Company's systems have received certification
from or conform with the requirements of various government agencies.
Many of the Company's products are also UL listed.
O Software Flexibility - the Company's software is menu-driven and written
in a modular manner to allow the user to use combinations of system
features through simple operator commands. The user can query the system
for network status and can generate reports from system logs. Complete
logs are stored on disks or on off-line historical files.
Products
The Company's products include the following:
VISIDS. The VISIDS intrusion detection system is a high performance
distributed processing network incorporating advanced user-friently features
utilizing the UNIX operating system on a Pentium based CPU platform. The
VISIDS menu-driven operator interface, comprehensive alarm management
functions, and extensive color graphics capabilities make the system simple to
operate. A "touch " screen option is available to further simplify the
operator interface. Multi-lingual capabilities permit the system to be used
throughout the world. The system offers advanced features and provides a cost
competitive solution in medium to large system designs. VISIDS links up to
sixteen TAC/NCM processors for large scale system integration (larger systems
are available). With the VISIDS operating as the central monitor and each TAC
controlling its own subsystem, the VISIDS allows for security control in a
distributed processing
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network. The capacity of a VISIDS is 1,024 access/entry points, 64,000
cardholders and 8,192 individually monitored alarm zones. The system's mapping
feature provides the user with a graphical depiction of a facility's floor plan,
showing the exact location of an alarm which greatly improves security response
time.
TAC/NCM. The TAC/NCM is intended only for use with a VISIDS network
or when included with a printer and CRT can perform as an independently
operating computer. In its independent configuration, it is designed for the
small to medium facility or building complex. Maximum capabilities are 128
access/entry points, 64,000 cardholders, and 1024 individually monitored alarm
zones. The TAC central processing unit utilizes multiple microprocessors in a
shared environment. Each processor is given a dedicated function to increase
throughput of the TAC processor.
TAC-200. Designed for small sized installations, the TAC-200 is an
integrated security system for up to 32 access/entry points, 5,000 cardholders
and 256 individually monitored alarm zones.
Entry and Access Control Devices. The Company manufacturers a variety
of card readers and access/entry control interface panels which can be used
with either card readers or with other personal identity verifiers (PIV's) to
control door contacts, locks and egress devices. Card readers operate by
either allowing or not allowing entry after the insertion or passing of a
card. A keypad used in conjunction with a card reader adds an additional level
of security by requiring an individual to enter a valid personal
identification number (PIN) after card validation. A PIV measures certain
physical characteristics of an individual (i.e., fingerprint) which are then
compared to stored data for identity verification. Several card readers or
PIV's can be attached to a single entry control interface panel, thus
increasing efficiency and providing a local back-up by processing without the
need to communicate with the central processor.
Alarm Sensor Interfaces. The Company manufacturers and markets three
types of alarm interfaces. An alarm control panel (ACP) can individually
monitor up to 16 alarm zones, and allows local control over the alarm zones.
An alarm monitor panel (AMP) can individually monitor up to 32 alarm zones,
but does not allow local control. An alarm control subsystem (ACS) can
individually monitor 16 alarm zones with power supply with backup, data
encryption and an enclosure with an optional secure/access device having local
intelligence and management capability. All interfaces can accommodate
virtually any type of alarm sensor (e.g. motion detectors, heat detectors,
smoke alarms) and come in a variety of configurations.
Other Products. The Company manufactures and markets numerous other
products which round out the integrated security system approach. These
products include, among others, power supplies, multiplexers, modems,
communication devices, and both DES and custom algorithm data encryption
devices for high line security. The Company also markets alarm sensors and
access cards of various technologies.
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Installations of the Company's Systems
The Company has installed security systems for many corporations and
governmental agencies. In a typical installation project, the Company
undertakes to provide and install the necessary hardware and software.
Installation projects normally take from one month for less extensive projects
to in excess of a year for complex installations. Prices for these systems
range from several thousand dollars to millions of dollars. The Company also
offers to service and maintain the system after installation. Payment to the
Company is normally made at specified intervals. Installation contracts with
defense contractors and government agencies generally allow for the
termination of such contracts, without cause and at any time, by such
contractor or agency. In such event, payments under the contracts will be
pro-rated for products and services provided by the Company to date of
termination. The Company's systems have been installed at facilities for the
following customers, among others:
Defense Contractors and
Government Agencies Commercial Customers
Architect of the U.S. Capitol American Express Publishing Co.
City of New York Engineering & Professional Services, Inc.
GTE Corporation Ernst & Young
Harris Corporation NYNEX Information Resources
Lockheed Martin Corporation Tropworld Resort & Casino Hotel
Northrop Corporation Warnaco Corporation
Raytheon Company
The Boeing Company International Customers
U.S. Air Force
U.S. Army Kingdom of Kuwait
U.S. Department of Treasury Quendon Limited London
U.S. General Services Administration Royal Saudi Air Force
U.S. Marines
During the fiscal year ended March 31, 1998, the Maryland Procurement
Office at Fort Meade through Engineering and Professional Services, Inc.
accounted for $509,000 or 32.6% of sales, the U.S. Capitol accounted for
$315,000 or 20.2% of sales, and the U.S. Department of Treasury for $114,000
or 7.3% of total sales. International sales accounted for $153,000 or 9.8% of
total sales.
During the fiscal year ended March 31, 1997, the U.S. Department of
Treasury accounted for $345,000 or 22.9% of sales, the Maryland Procurement
Office at Fort Meade through Engineering & Professional Services, Inc.
accounted for $296,000 or 19.6% of sales, and the U.S. Capitol accounted for
$291,000 or 19.3% of sales.
At March 31, 1998, the Company had a backlog of orders of approximately
$383,000 as compared to a backlog of $675,000 at March 31, 1997. The backlog
of $383,000 at March 31, 1998 is expected to be shipped in its entirety during
the fiscal year ending March 31, 1999.
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Marketing
At March 31, 1998, the Company employed two (2) sales and marketing
personnel. These personnel make presentations, investigate the site projects
for which the Company is asked to bid, write proposals and take orders in
person and by telephone. The Company also participates in trade shows and
delivers catalogs and brochures to prospective purchasers.
The Company focuses its marketing efforts on the defense contractor and
governmental agency market and on the commercial and industrial market. For
the fiscal year ended March 31, 1998, defense contractors and government
agencies accounted for approximately 80% of total revenues. In fiscal years
1997 and 1996, defense contractors and government agencies accounted for
approximately 73% and 67% of Company revenues, respectively. Defense
contractors have the legal requirement to protect data, ideas, hardware or
systems being conceived or manufactured for the government in a classified
program. The Company's products are designed to allow customers to meet
existing governmental security regulations.
Engineering and Product Development
At March 31, 1998, the Company employed three (3) individuals in
engineering. The department is responsible for new product development and the
design and integration of the Company's products into security systems.
Engineering personnel are engaged in a continuous effort to integrate new
features into existing products and systems.
The Company's current development activities are primarily directed
toward improvement and enhancement of its VISIDS(R) product line. Research and
development expenses for the years ended March 31, 1998, 1997 and 1996 were
$76,000, $78,000, and $83,000 respectively. The decreases in year to year
activities were the result of cost control measures instituted by the Company.
To date, the Company does not believe that these reductions have had any
adverse effect on its technical competitiveness or any technical advantage
which it may hold.
Manufacturing
Product assembly, testing and quality assurance is performed at the
Company's facility in Teterboro, New Jersey. Components for the Company's
products are purchased from third parties. The Company is not dependent on any
one supplier for any of the components of its products and believes should it
become necessary, that it could find substitute suppliers for any of its
components. Inventory records, including purchasing, receiving, shipping and
job costing, are maintained on a computerized system. At March 31, 1998, the
Company had three (3) manufacturing employees.
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Customer Support Services
The Company provides a full range of customer support services, including
system design, hook-up and testing, project management, maintenance and
operator training, depot repairs and on-site maintenance and service
contracts. A total of five (5) employees are involved in customer support
services.
Equipment mounting and installation of electrical wiring is normally
performed by sub-contractors under the supervision of the Company's personnel.
The scope of this installation work varies from project to project.
System hook-up and testing are performed by the Company's trained
technicians. This effort involves making final connections of security devices
to system integration devices, front end processors and the central processing
unit. Devices are tested to ensure that they are performing the functions for
which they are intended and properly reporting their status.
Project management services include supervision, scheduling, coordination
and administrative activities associated with project implementation. Drawing
upon its experience, the Company is able to provide its customers with
virtually a turnkey system with little need for significant day-to-day
involvement by the customer during installation and final check-out.
Maintenance and operator training service is provided either at the
customer site or the Company's facilities. Customers electing to perform their
own maintenance are taught how to diagnose and repair system components to the
circuit board level.
Depot repair service is provided at the Company's facilities in
Teterboro, New Jersey by factory trained technicians. The Company generally
warrants its equipment against defects for a one year period. Equipment under
warranty is either repaired on site or repaired at the Company's facilities
and returned at no charge.
Equipment out of warranty is either repaired on a time and materials
basis or pursuant to a maintenance and service contract. On-site maintenance
and service contracts provide for the Company to dispatch a field service
technician in response to a customer request for a fixed annual contractual
fee. A variety of different service coverage options are offered based upon
coverage and response time desired.
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Proprietary Technology and Trademarks
The Company has not applied, and does not presently intend to apply, for
any patents or copyrights with respect to its products, or the software
incorporated therein. The Company intends to rely to a large extent upon
whatever protection the law affords to trade secrets and copyrights, including
unpatented know-how and not copyrighted textual material. The Company believes
that patent and copyright protection is of lessor significance than
technological and engineering capabilities, marketing skills and the
development of proprietary information.
The Company has obtained the registration of certain trademarks,
including VISIDS(R), VIKONICS(R) and TAC(R).
There can be no assurance that others will not independently develop
technology or know-how similar to that of the Company or obtain access to the
Company's technology or know-how. In addition, although the Company believes
that its technology has been independently developed and does not infringe the
patents of others, certain components of the Company's products could infringe
patents, either existing or which may be issued in the future, in which event
the Company may be requested to modify its design or obtain a patent license.
No assurance can be given that the Company will be able to do so in a timely
manner or upon acceptable terms and conditions; and the failure to do either
of the foregoing could have a material adverse effect on the Company. In
addition, although the Company has independently developed the software
incorporated in its products, there can be no assurance that claims will not
be asserted against the Company that its software codes, concepts, ideas, and
documentation infringe on the proprietary rights of others in software
developed by them. No claims of infringement have been asserted or threatened
against the Company.
The Company has entered into confidentiality agreements with each of its
employees to protect its trade secrets. However, there can be no assurance
that other companies will not acquire information which the Company considers
to be proprietary.
Competition
The Company faces significant competition from other providers of
integrated security systems. Competitive factors in the industry include
system features, design, performance, reliability and price. The Company's
size and low overhead base enables fast reaction capability to custom design
requirements and allows for a competitive price structure. In addition, the
Company's installed system base provides a continuous non-competitive source
of new business. However, despite the aforementioned advantages, many of the
Company's competitors are well established and have substantially greater
management, technical, financial, marketing and product development resources
than the Company.
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Employees
As of March 31, 1998, the Company had 14 full-time employees, three of
whom were in executive capacities. None of the Company's employees is
represented by a labor organization. The Company considers its relationship
with its employees to be satisfactory.
Item 2. Description of Property
In May, 1992, the Company moved its administrative, marketing and
manufacturing operations to a 27,000 square foot facility located in
Teterboro, New Jersey. The facility was leased for a term expiring in April
2002 at a monthly rental of $7,472 for the period May, 1992 through October,
1992; $15,366 per month for the period November, 1992 through April, 1993; and
$19,708 per month, plus escalations for certain cost increases, for the period
May, 1993 through April 2002. On May 1, 1994, this lease was amended to a term
of seven (7) months, expiring on November 30, 1994 with leased premises
reduced to 8,000 square feet at a monthly rental of $8,000. After another
extension to April 30, 1995, the lease on the 8,000 square feet was again
amended to a two (2) year term expiring April 30, 1997, at a monthly rental of
$7,185. On April 14, 1997, the lease was again amended to a one (1) year term
expiring April 30, 1998, at a monthly rental of $7,585. The Company is
currently occupying the premises on a month to month use and occupancy basis
at a monthly rental payment of $ 7,885.
Item 3. Legal Proceedings
There are no material pending legal proceedings, nor to management's
knowledge, any such threatened proceedings against the Company or its
properties. As hereafter disclosed, $200,000 of loans due private investors
and an ex-director became due and payable on June 30, 1996. The Company does
not have the ability to pay such loans, which are secured by the Company's
accounts receivable. If the Company is not able to re-negotiate the terms of
payment on these loans and the creditors foreclose on the collateral, there is
substantial doubt about the Company's ability to continue as a going concern.
(See Note 3 to notes to financial statements.)
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by the report.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock, par value $.02 per share ("Common Stock"), is
traded on the over-the-counter market. The Common Stock is quoted on the NASD
Electronic Bulletin Board under the symbol "VKSI"; such quotes are reported in
the interdealer pink sheets. The following table sets forth the high and the low
closing bid prices as quoted on the Electronic Bulletin Board. The quotations
represent prices between dealers without adjustments for retail mark-ups,
mark-downs, or commissions and may not represent actual transactions.
Fiscal Year Ended March 31, 1998 High Low
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1st Quarter $ 11/32 $ 7/32
2nd Quarter 7/16 1/8
3rd Quarter 3/16 1/16
4th Quarter 1/10 1/16
Fiscal Year Ended March 31, 1997 High Low
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1st Quarter $ 3/8 $ 3/8
2nd Quarter 3/8 3/8
3rd Quarter 3/8 1/4
4th Quarter 7/16 1/4
On March 31, 1998, there were approximately 550 holders of the Common
Stock.
The Company has never paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, it will continue to follow a
policy of retaining earnings, if any, to finance the expansion and development
of its business.
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Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
1998 Fiscal Year Compared to 1997 Fiscal Year
The Company's net sales for the fiscal year ended March 31, 1998 were
$1,561,000, a 3.5% increase from the $1,509,000 net sales in the previous
year. The increase was due primarily to a contract at Fort Meade, Maryland
through Engineering and Professional Services, Inc. which accounted for
$509,000 during fiscal 1998 versus sales of $296,000 earned on that contract
in 1997. There was also an increase in international sales of $141,000, which
was the result of a contract in the Kingdom of Kuwait. These increases were
offset by a $300,000 reduction in U.S. Federal agency revenues, due to two
contracts being completed in fiscal 1997, without new contracts being awarded
by these agencies in fiscal 1998.
Over the past four (4) years there have been major staff reductions and
cost containment measures initiated within the Company. These reductions have
reduced, among others, sales and marketing resources. The reduction in these
resources have contributed to the deterioration of the Company's sales levels,
primarily in the commercial market.
In recent years, Government spending within the Department of Defense and
other agencies, from which the Company has historically received a majority of
its business, have been subject to cutbacks. These cutbacks have adversely
affected the Company's sales levels in both fiscal 1998 and fiscal 1997.
In fiscal 1998, The Company's largest customers were: Fort Meade,
Maryland through Engineering and Professional Services, Inc. accounting for
$509,000 or 32.6% of sales, the U.S. Capitol, $ 315,000 or 20.2% of sales, the
U.S. Department of Treasury, $114,000 or 7.3% of sales. International sales
accounted for $153,000 or 9.8% of sales.
In fiscal 1997, the Company's largest customers were: U.S. Department of
Treasury accounting for $345,000 or 22.9% of sales, Fort Meade, Maryland
through Engineering and Professional Services, Inc., $296,000 or 19.6% of
sales and the U.S. Capitol, $291,000 or 19.3% of sales.
Gross profit as a percentage of net sales for the year ended March 31,
1998 was 41.3% compared to 45.8% in fiscal 1997. The decrease in the gross
profit was due to a combination of approximately $30,000 inventory write down
and an unfavorable mix of lower margin Vikonics equipment sales in 1998 versus
service labor sales in 1997.
Marketing and sales expenses for the year ended March 31, 1998 were
$171,000, which is comparable to the $168,000 incurred in the previous year.
Engineering, research and development expenses for the year ended March
31, 1998 were $321,000, a 8.5% increase from the $213,000 expended a year ago,
due primarily to incurred outside contractor costs of $23,000 for product
development in 1998.
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General and administrative expenses were $424,000 in fiscal 1998 compared
to $394,000 in fiscal 1997, an increase of 7.6%. The increase was primarily
due to a combination of increased insurance and general expenses of $15,000
plus an additional $10,000 for doubtful account allowance.
The net (loss) for the year ended March 31, 1998 was $(242,000) compared
to a net (loss) of $(137,000) for the previous year due to the factors
regarding sales and expenses described above.
The future viability of the Company will depend upon the Company's
success in raising revenue levels, maintaining low cost levels and, if
necessary, raising additional financing. There can be no assurance that the
Company's actions will result in sustained profitability or sufficient cash
flow to maintain operations.
1997 Fiscal Year Compared to 1996 Fiscal Year
The Company's net sales for the fiscal year ended March 31, 1997 were
$1,509,000, a 19.9% decrease from the $1,885,000 net sales in the previous
year. The decrease was due primarily to a decrease in commercial sales of
approximately $300,000 in the New York Metro region during fiscal 1997 and the
completion in fiscal 1996 of the U.S. Army contract at Fort Drum which
accounted for $232,000 of sales during fiscal 1996. These decreases were
offset somewhat by the contract at Fort Meade, Maryland which accounted for
$296,000 of sales in fiscal 1997.
In fiscal 1997, the Company's largest customers were: the U.S. Department
of Treasury accounting for $345,000 or 22.9% of sales, Fort Meade, Maryland
through Engineering & Professional Services, Inc., $296,000 or 19.6% of sales
and the U.S. Capitol, $291,000 or 19.3% of sales. In fiscal 1996, the
Company's largest customers were: the U.S. Capitol accounting for $334,000 or
17.7% of sales, the Warnaco Corporation $267,000 or 14.2% of sales, the U.S.
Army, $259,000 or 13.7% of sales and the U.S. Department of Treasury, $223,000
or 11.8% of sales.
Gross profit as a percentage of net sales for the year ended March 31,
1997 was 45.8% compared to 35.1% in fiscal 1996. The improvement in the gross
profit was due to the reduction in manufacturing and service overhead costs
during fiscal 1997 and a favorable mix of higher margin Vikonics proprietary
equipment sales versus outside purchased equipment sales in 1997.
Marketing and sales expenses for the year ended March 31, 1997 were
$168,000, a 39.1% decrease from the $276,000 incurred in the previous year.
The decrease was due to a reduction in sales staff and travel and advertising
cost containment.
Engineering, research and development expenses for the year ended March
31, 1997 were $213,000, a .9% increase from the $211,000 expended a year ago.
General and administrative expenses were $394,000 in fiscal 1997 compared
to a net (loss) of $(631,000) for the previous year due to the factors
regarding sales and expenses described above.
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Liquidity and Capital Resources
The Company's continued existence is dependent upon its ability to obtain
contract awards which, in the aggregate, will provide significant revenues in
the immediate future. While there can be no assurance of favorable results,
the Company remains optimistic about obtaining these potential contract
awards.
To date, there has been no adverse effect on the Company's ability to
perform on any of its contracts due to its limited working capital. The
Company has also been able to maintain a satisfactory relationship with the
majority of its suppliers and has been able to substitute for dissatisfied
vendors, when necessary. For any large contract, that the Company might be
awarded in the future where working capital might hamper its ability to
perform, the Company would attempt to negotiate adequate terms and delivery
with the customer and/or if necessary, obtain required financing. There can be
no assurance, however, that the Company would be successful in these efforts.
There was a working capital deficit on March 31, 1998 of $(1,694,000)
compared to working capital deficit of $(1,453,000) on March 31, 1997. At
March 31, 1998 the Company had $10,000 in cash, a decrease of $42,000 from a
year ago. $6,000 of cash was used for operating activities during the 1998
fiscal year.
On June 30, 1993 the Company entered into an amended agreement with
private investors which provided the Company with a loan in the amount of
$200,000 repayable in one year together with interest at a rate of 9% per
annum. In addition, the amended agreement granted the investors two-year
options to purchase an aggregate of 400,000 shares of common stock at an
exercise price of $4.75 per share. In July 1993, one of the private investors
assigned $20,000 of the loan along with options to purchase 40,000 shares of
common stock to one of the Company's directors.
Additionally, two other directors provided the Company with loans
aggregating $120,000 during the months of August and September, 1993 payable
on demand with interest at a rate of 9% per annum.
On June 24, 1994, the Company entered into an agreement with the above
private investors, the directors and the Company's retained legal counsel.
Pursuant to the agreement, the due date for the investors ($180,000) and
directors ($140,000) loans and fees payable ($250,000) to legal counsel were
extended until the first to occur of (i) June 30, 1996, (ii) a public
financing by the Company, or (iii) a private financing by the Company of not
less than $2,500,000. In addition, the exercise period of the investors
options to purchase 400,000 shares of common stock were extended three years
and the exercise price was reduced to $1.50.
At this time, the Company does not have the ability to pay these loans
but is attempting to re-negotisate the terms of payment. There can be no
assurance, however that the Company will be successful in these efforts.
15
<PAGE>
Included in this agreement were the grant of five year warrants to one of
the directors and the legal firm to purchase such number of shares of Common
Stock of the Company as is equal to the aggregate dollar amount of loans made
($150,000) by that director and unpaid legal fees ($250,000) at an exercise
price of $1.00 per share.
There was no value attached to these warrants.
Additionally, on May 1, 1994, the Company's facility lease was amended
whereby the Company now occupies approximately 8,000 square feet of the 27,000
square foot facility at a reduced monthly payment of $8,000 expiring on
November 30, 1994 and subsequently extended to April 30, 1995. On May 1, 1995
the lease was again amended extending the lease term to April 30, 1997 at a
monthly payment of $7,185. On April 14, 1997, the lease was again amended
extending the lease term to April 30, 1998 at a monthly payment of $7,585. The
Company is currently occupying the premises on a month to month use and
occupancy basis at a monthly rental payment of $7,885.
Accounts receivable decreased by $37,000 in fiscal 1998 from the previous
year due to the lower revenue level in the fourth fiscal quarter 1998
($215,000) compared to the revenue level in the 1997 fourth fiscal quarter
($422,000).
Inventory levels decreased $36,000 from the previous year to $94,000 at
March 31, 1998, due to an inventory obsolescence review and write off.
Accounts payable of $206,000 at March 31, 1998 are $48,000 lower than the
$254,000 balance at March 31, 1997. This is the direct result of a reduction
in operating costs associated with the reduced sales level in the fourth
fiscal 1998 quarter to the sales level in the 1997 fourth fiscal quarter.
Accrued expenses and other current liabilities at March 31, 1998 of
$1,087,000 are $185,000 more than the $902,000 at the end of the previous
year. This is primarily due to increased accrued payroll taxes and accrued
interest expense on loans outstanding.
The Company's potential sources of liquidity include its current assets
and potentially external financing.
The Company has no significant capital plans at this time.
16
<PAGE>
Inflation
The Company has, in the past, been able to increase the price of its
products and services sufficiently to offset the effects of inflation on wages
and other expenses, and anticipates that it will be able to do so in the
future.
<PAGE>
Item 7. Financial Statements
The financial statements and schedules are included in this report
beginning on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
17
<PAGE>
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the Exchange Act
The current directors and executive officers of the Company are as
follows:
Name Age Title
John J. Strong 50 Chairman of the Board, President and Director
Michael J. Pisano 52 Vice President - General Manager
William R. Hoskinson 49 Vice President - Engineering
Howard S. Breslow 58 Secretary and Director
Mr. Strong has been Chairman of the Board and President of the Company
since March, 1996. Mr. Strong was Vice President-Finance and Administration of
the Company from 1985 to March 1996 and a director of the Company since 1989.
Mr. Pisano has been Vice President- General Manager of the Company since
1988. From 1984 to 1988, Mr. Pisano was Vice-President-Manufactuirng of the
Company.
Mr. Hoskinson has been Vice President-Engineering of the Company since
1989. From 1988 to 1989, Mr. Hoskinson was Vice President of Engineering,
Breakaway Technologies, Inc., a consumer electronics company. From 1984 to
1987, Mr. Hoskinson was Director of Engineering Support Services for
TIE/Communications, Inc., a distributor and manufacturer of telephone systems.
Mr. Breslow has been a director of the Company since 1983 and Secretary
of the Company since 1984. He has been a practicing attorney in New York for
more than 25 years and is a member of the law firm of Breslow & Walker, LLP,
New York, New York. Mr. Breslow currently serves a director of Cryomedical
Sciences, Inc., a company engaged in the development and Marketing of Products
for use in low-temperature medicine, FIND/SVP, Inc., a company engaged in the
development and marketing of information services and products, Excel
Technology, Inc., a company engaged in the development and sales of laser
products, and Lucille Farms, Inc., a company engaged in the manufacture and
sale of cheese.
All of the Company's directors will continue to serve as directors until
their successors are elected and qualified. The By-Laws of the Company provide
that the annual meeting of shareholders be held each year during the month of
September at a time and place to be designated by the Board of Directors.
Officers of the Company serve at the discretion of the Board of Directors or
until the next annual meeting of directors and executive officers.
18
<PAGE>
Limitation on Liability of Directors
As permitted by New York law, the Company's Certificate of Incorporation
contains an article providing for the elimination of the personal liability of
the directors of the Company to the fullest extent permitted by the provisions
of paragraph (b) of Section 402 of the New York Business Corporation Law.
Accordingly, a director's personal liability would be eliminated for any
breach of a director's duty, unless, among other things, the director's
actions or omissions were in bad faith, involved intentional misconduct or a
knowing violation of the law, or personal gain in fact of a financial profit
to which the director was not lawfully entitled. This article is intended to
afford directors additional protection, and limit their potential liability,
from suits alleging a breach of the duty of care by a director. The Company
believes this article will enhance the Company's ability to attract and retain
qualified persons to serve as directors. As a result of the inclusion of such
a provision, shareholders may be unable to recover monetary damages against
directors for actions taken by them which constitute negligence or gross
negligence or which are in violation of their fiduciary duties, although it
may be possible to obtain injunctive or other equitable relief with respect to
such actions. If equitable remedies are found not to be available to
shareholders for any particular case, shareholders may not have any effective
remedy against the challenged conduct.
19
<PAGE>
Item 10. Executive Compensation
The following table sets forth certain information regarding compensation
paid by the Company during each of the last three fiscal years to the
Company's Chief Executive Officer and to each of the Company's executive
officers who received salary and bonus payments in excess of $100,000 during
fiscal 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Name and Principal Fiscal Salary Bonus Other Restricted Options/ LTIP
Position Year $ $ $ Stock $ SAR(#) Payouts $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John J. Strong 1998 $125,000 - - - - -
- ---------------
Chairman of the Board & 1997 $110,000 - - - - -
President (Principal
Executive Officer)
</TABLE>
Option Grants in Last Fiscal Year
There were no options granted to the named executive officer during
fiscal year 1998.
Option Exercise during Fiscal Year 1998 and Fiscal Year-End Option Values
The following table provides information related to options exercised by
the named executive officer during the 1998 fiscal year and the number and
value of options held at fiscal year end.
<TABLE>
<CAPTION>
Number of Value of
unexercised unexercised in
options at the money options
year-end at year-end ($) (1)
-------- -------------------
Shares
Acquired on Value Exer- Not Exer- Not
Name Exercise (#) Realized ($) cisable Exercisable Cisable Exercisable
---- ----------- ------------ ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
John J.
Strong ------ ------ 25,000 ----- ----- -----
</TABLE>
(1) The last trading price for the Company's common stock as reported on the
NASD Electronic Bulletin Board on March 31, 1998 was $.10. Value is calculated
on the basis of the difference between the option exercise price and $.10
multiplied by the number of shares of common stock underlying the option.
Compensation of Directors
The Company currently accrues a fee of $750 per meeting for outside
directors for serving in that capacity. The Company's 1992 Stock Option Plan
contains a formula provision for the annual grant of five-year options to
purchase 7,500 shares of common stock at fair market value, immediately
exercisable, to each director of the Company.
20
<PAGE>
Item 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at June 22, 1998 with respect
to the beneficial ownership of shares of Common Stock (i) all persons known by
the Company to be owners of more than five percent of the outstanding shares
of Common Stock, (ii) each director, and (iii) all officers and directors as a
group.
Name and Address of Amount and Nature of Percentage of Outstanding
Beneficial Owner Beneficial Ownership(1) Shares Owned
- ---------------- ----------------------- ------------
John L. Kaufman (2) 741,600 25.3%
370 North Street
Teterboro, NJ 07608
408,400 12.8
Howard S. Breslow (3)
875 Third Avenue
New York, NY 10022
25,000 less than 1.0
John J. Strong (4)
370 North Street
Teterboro, NJ 07608
500,931 15.4
All Officers and Directors
as a Group (4 persons) (5)
(1) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(2) Includes as beneficially owned an aggregate of 110,578 shares of
Common Stock owned by Mr. Kaufman's children.
(3) Included are all shares owned of record by B & W Investment Associates,
an entity of which Mr. Breslow is a partner. Also includes warrants owned
by the law firm of Breslow & Walker, LLP to acquire 250,000 shares of
Common Stock.
(4) Includes incentive and non-qualified stock options to acquire 25,000
shares of Common Stock.
(5) Includes stock options and warrants to purchase an aggregate of 325,000
shares of Common Stock.
21
<PAGE>
Item 12, Certain Relationships and Related Transactions
Howard S. Breslow, the Secretary and a director of the Company, is a
member of Breslow & Walker, LLP counsel to the Company. Breslow & Walker, LLP
owns warrants to purchase 250,000 shares of Common Stock and an affiliate of
Breslow & Walker, LLP has ownership of 158,400 shares of Common Stock. During
the year ended March 31, 1998, Breslow & Walker billed the Company $8,364 for
legal services provided. At March 31, 1998, the Company owed Breslow & Walker
approximately $283,000 for legal services.
John L. Kaufman and Leonard J. Fassler, directors of the Company, until
their resignation in March, 1996, provided the Company with loans of $70,000
and $50,000, respectively, during the months of August and September 1993,
payable on demand with interest at a rate of 9% per annum.
On June 24, 1994, the Company entered into an agreement with two private
investors, who had loaned the Company $ 200,000 ($20,000 of which was later
assigned to Gen. Sweeney, a former director) and Mssrs. Sweeney, Kaufman,
Fassler and the legal firm of Breslow & Walker, LLP. Pursuant to the
agreement, the due date for the investors' ($180,000) and directors' loans
($140,000) and fees payable to Breslow and Walker ($250,000) were extended
until the first to occur of (i) June 30, 1996; (ii) a public financing by the
Company, or (iii) a private financing of the Company of not less than
$2,500,000. In addition, the exercise period of Gen. Sweeney's options to
purchase 40,000 shares of Common Stock, as well as the private investors
options to purchase 360,000 shares of Common Stock, were extended three years
and the exercise price was reduced to $1.50. Included in this agreement was
the grant of five year warrants to Mr. Fassler and Breslow & Walker, LLP to
purchase such number of shares of Common Stock of the Company as is equal to
the aggregate dollar amount of loans made ($150,000, which includes the loan
described in the next sentence) by Mr. Fassler and unpaid legal feel
($250,000) at an exercise price of $1.00 per share. The agreement also
included a provision whereby Mssrs. Kaufman and Fassler also agreed to lend
the Company $100,000 each, payable on demand with interest at a rate of 9% per
annum. Such funds were received during the Company's second fiscal 1995
quarter.
22
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) (1) Financial Statements
The following financial statements are filed as part of this Form 10-KSB:
Independent Auditors' Report.
Balance Sheet as of March 31, 1998.
Statements of Operations for the years ended March 31, 1998 and 1997.
Statements of Cash Flows for the years ended March 31, 1998 and 1997.
Statements of Changes in Shareholders' (Deficit) for the years ended
March 31, 1998 and 1997.
Notes to Financial Statements.
All other schedules are not furnished as the information is presented
elsewhere in this document or is not applicable.
(2) Exhibits
Exhibit Number Document
3.1 Restated Certificate of Incorporation of
the Company (1), September, 1988 amendment
(2) and March, 1992 amendment (4) thereto.
3.2 Bylaws of the Company and amendments
thereto. (1)
10.1 Lease, dated April 2, 1992, between North
Teterboro Associates and the Company,
relating to the Company's premises in
Teterboro, New Jersey (4), amendment
thereto dated May 1, 1994 (6), amendment
thereto dated April 25, 1995 (7) and
amendment thereto dated April 14, 1997(8).
10.3 1984 Stock Option Plan. (1)
10.7 Reynolds/Weiss Agreement dated May 6, 1992
relating to 60,000 shares Vikonics common
stock purchase by Randolph N. Reynolds,
Manny Weiss and Lillian Weiss (3) and
amendments thereto dated April 28, 1993 and
June 30, 1993. (5)
10.8 Form of Company Confidentiality
Agreement. (4)
10.9 1992 Stock Option Plan. (5)
10.10 Reynolds/Weiss/Sweeney/Kaufman/Fassler
and Breslow & Walker Agreement
dated June 30, 1994 extending due date
of Vikonics indebtedness and
amounts due. (6)
24 Consent of Accountants.
23
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-18 (Reg. No. 33-14725-NY) which became effective with the
Securities and Exchange Commission on July 14, 1987.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1990.
(3) Incorporated by reference to the Company's Current Report on Form
8-K the date of the report for which is March 30, 1992.
(4) Incorporated by reference to the Company's Annual Report on form
10-K for the fiscal year ended March 31, 1992.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1994.
(7) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995.
(8) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the final Quarter of the fiscal year ended March
31, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
VIKONICS, INC.
Date: July 13, 1998 By: /s/ John J. Strong
-----------------------------
John J. Strong, Chairman and
President (Principal Executive
Officer, Principal Financial
and Accounting Officer)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: July 13, 1998 /s/ John J. Strong
--------------------------------
John J. Strong, Director
Date: July 13, 1998 /s/ Howard S. Breslow
--------------------------------
Howard S. Breslow, Director
25
<PAGE>
To the Board of Directors
Vikonics, Inc.
Independent Auditors' Report
We have audited the accompanying balance sheet of Vikonics, Inc. as
at March 31, 1998 and the related statements of operations, cash flows and
changes in shareholders' (deficit) for the years ended March 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present
fairly, in all material respects, the financial position of Vikonics, Inc. as
at March 31, 1998 and the results of its operations and its cash flows for the
years ended March 31, 1998 and 1997 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 12 to
the financial statements, the Company has suffered significant losses from
operations, has working capital limitations that have severely impacted the
Company's day-to-day operations and does not have the ability to pay amounts
due private investors, ex-directors and legal counsel. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 12.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
CITRIN COOPERMAN & COMPANY, LLP
June 2, 1998
New York, New York
F1
<PAGE>
VIKONICS, INC.
BALANCE SHEET
ASSETS
MARCH 31, 1998
--------------
CURRENT ASSETS:
Cash (Note 1(b)) $ 10,328
Accounts receivable (less allowance for doubtful
accounts of $30,000) 263,479
Inventories (Notes 1(c) and 2)
Prepaid expenses and other current assets 93,740
76,551
----------
TOTAL CURRENT ASSETS 444,098
----------
EQUIPMENT & FIXTURES (Notes 1(d) and 3):
Machinery and equipment 373,943
Furniture and fixtures 67,437
Autos 19,838
----------
461,218
Less, accumulated depreciation (461,218)
EQUIPMENT AND FIXTURES - NET ----------
-------
OTHER ASSETS 1,200
----------
$ 445,298
=========
See notes to financial statements.
F2
<PAGE>
VIKONICS, INC.
BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
MARCH 31, 1998
--------------
CURRENT LIABILITIES:
Notes and loans payable (Note 3) $ 790,014
Accounts payable 205,847
Accrued expenses (Note 4) 1,086,940
Deferred service income (Note 1(h)) 55,711
----------------
TOTAL CURRENT LIABILITIES 2,138,512
----------------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6 and 12)
SHAREHOLDERS' (DEFICIT) (Notes 3(a), 5, 7, and 11):
Preferred stock - $1 par value:
Authorized - 2,000,000 shares
Issued and outstanding - none
Common stock - $.02 par value:
Authorized - 10,000,000 shares
Issued and outstanding - 2,933,431 58,669
Paid-in capital 5,641,094
Retained (deficit) (7,392,977)
---------------
TOTAL SHAREHOLDERS' (DEFICIT) (1,693,214)
---------------
$ 445,298
==============
See notes to financial statements.
F3
<PAGE>
VIKONICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SALES - NET (Notes 1(h) and 10) $ 1,561,157 $ 1,508,853
COST OF GOODS SOLD 917,124 818,492
------------------ ------------------
GROSS PROFIT 644,033 690,361
------------------ ------------------
COST AND EXPENSES:
Engineering, research and
development (Notes 1(f) and 8) 231,077 212,965
Marketing and sales 170,727 168,434
General and administrative 423,530 394,343
Depreciation and amortization 853 872
Interest expense - net 60,268 50,848
------------------- -------------------
TOTAL COSTS AND EXPENSES 886,455 827,462
------------------ ------------------
NET (LOSS) $ (242,422) $ (137,101)
================= =================
NET (LOSS) PER SHARE (Note 9) -
Basic and Diluted $ (.08) $ (.05)
=================== =================
</TABLE>
See notes to financial statements.
F4
<PAGE>
VIKONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (242,422) $ (137,101)
Adjustments to reconcile net (loss) to net
cash (used for) provided
by operating activities:
Depreciation and amortization 853 872
Provision for allowance for doubtful accounts 10,000 10,000
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 27,128 (68,393)
Inventories 35,870 ( 4,388)
Prepaid expenses and other current assets 19,470 (11,780)
Other assets 20 552
Increase (decrease) in:
Accounts payable (47,969) (91,108)
Accrued expenses and other current liabilities 184,664 334,327
Deferred service income 6,507 18,179
------------------ ---------------
Net cash (used for) provided by operating activities (5,879) 51,160
------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of equipment and fixtures-net -------- --------
------------------ ---------------
SUBTOTALS (carried forward) $ (5,879) $ 51,160
------------------ ---------------
</TABLE>
See notes to financial statements.
F5
<PAGE>
VIKONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SUBTOTALS (brought forward) $ (5,879) $ 51,160
------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes and loans payable 70,599 96,537
Repayment of notes and loans payable (106,541) (120,107)
----------------- ----------------
CASH (USED FOR) FINANCING ACTIVITIES (35,942) (23,570)
----------------- -----------------
(DECREASE) INCREASE IN CASH (41,821) 27,590
CASH BEGINNING OF YEAR 52,149 24,559
----------------- ----------------
CASH END OF YEAR $ 10,328 $ 52,149
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,205 $ 9,918
================= ===============
</TABLE>
See notes to financial statements.
F6
<PAGE>
VIKONICS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)
FOR THE YEARS ENDING MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------
Paid-in Retained
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1996 2,933,431 $ 58,669 $ 5,641,094 $ (7,013,454) $ (1,313,691)
Net (loss) -------- ------- ------- ( 137,101) ( 137,101)
---------------- ----------------- -------------- --------------- ---------------
Balance at
March 31, 1997 2,933,431 58,669 5,641,094 (7,150,555) (1,450,792)
Net (loss) ------- ------- ------- ( 242,422) ( 242,422)
---------------- ----------------- -------------- --------------- ---------------
Balance at
March 31, 1998 2,933,431 $ 58,669 $ 5,641,094 $ (7,392,977) $ (1,693,214)
================ ================= ============= ============== ===============
</TABLE>
See notes to financial statements.
F7
<PAGE>
NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Presentation
The financial statements include the accounts of the Company and
Vikonics Canada Inc., its wholly-owned subsidiary, an entity without
any activity during the periods presented.
(b) Statements of Cash Flows
Short-term investments which have an original maturity date of ninety
days or less are considered cash equivalents.
(c) Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
(d) Equipment and Fixtures
Equipment and fixtures are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
applicable assets. Expenditures for maintenance and repairs are
charged to expense as incurred whereas expenditures for renewals and
betterments are capitalized.
The estimated useful lives used to compute depreciation and
amortization are as follows:
Description Years
----------- -----
Machinery and equipment 5
Furniture and fixtures 5-8
Autos 3-4
Leasehold improvements Term of lease or estimated useful life,
whichever is less
(e) Income Taxes
Income tax benefits from operating loss carry forwards are recognized
to the extent available less a valuation allowance if it is more
likely than not that some portion of the deferred tax asset will not
be realized.
(f) Research and Development Costs
All research and development costs are charged to operations as
incurred.
(g) Industry
The Company designs, manufactures, markets, installs and services
integrated computer-based security systems primarily to government
agencies, branches of the U.S. Armed Forces, defense contractors, and
international and industrial customers.
(h) Recognition of Income
Sales and earnings on long-term installation and systems projects are
stated on the percentage-of-completion method, based upon costs
incurred in relation to total estimated costs. Revenue received for
service and maintenance contracts is deferred and recognized over the
terms of the agreements and amounted to $245,000 and $244,000 for the
fiscal years ended March 31, 1998 and 1997, respectively.
F8
<PAGE>
(i) 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 the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. .
(j) Financial Instruments
The Company considers the fair market value of all financial
instruments to be not materially different from their carrying value
at year end.
(k) Prior Year Reclassifications
Certain reclassifications have been made to the March 31, 1997
financial statements to conform to those classifications utilized in
the March 31, 1998 financial statements.
NOTE 2 - INVENTORIES
Inventories at March 31, 1998 consisted of the following:
Raw materials $ 29,200
Work-in-process 8,826
Finished goods 55,714
------------------
$ 93,740
==================
NOTE 3 - NOTES AND LOANS PAYABLE
Notes and loans payable at March 31, 1998, consisted of:
Note payable bearing interest at
9.72% per annum, with the last
installment due in 1998. This note is
secured by equipment with a net
book value of approximately $ 0. $ 10,000
Amounts due private investors, directors and
legal counsel. (a) 717,728
Unsecured installment notes payable (b) 62,286
------------------
$ 790,014
==================
F9
<PAGE>
On June 30, 1993, the Company entered into an amended agreement with
private investors which provided the Company with a loan in the
amount of $200,000 repayable in one year together with an interest
rate of 9% per annum. In addition the amended agreement granted the
investors two year options to purchase an aggregate of 400,000 shares
of common stock at an exercise price of $4.75 per share. In July
1993, one of the private investors assigned $20,000 of the loan along
with options to purchase 40,000 shares of common stock to one of the
Company's directors, who has since resigned from the board.
Additionally, two other directors provided the Company with loans
aggregating $120,000 during the months of August and September, 1993
payable on demand with interest at a rate of 9% per annum.
On June 24, 1994, the Company entered into an agreement with the
above private investors, the directors and the Company's retained
legal counsel. Pursuant to the agreement, the due date for the
investors and directors loans and fees payable $(250,000) to legal
counsel were extended until the first to occur of (i) June 30, 1996,
(ii) a public financing by the Company, or (iii) a private financing
of the Company of not less than $2,500,000. As the June 30, 1996 date
has been reached, such amounts are now due. While the Company does
not have the ability to pay the amounts due to private investors,
directors and legal counsel, it is attempting to renegotiate the
terms of payment of these obligations. There can be no assurance,
however, that the Company will be successful in these efforts. In
addition, the exercise period of the investors' options to purchase
400,000 shares of common stock was extended three years and the
exercise price was reduced to $1.50.
Included in this agreement were the grant of five year warrants to
one of the directors and the legal firm to purchase such number of
shares of common stock of the Company as is equal to the aggregate
dollar amount of loans made $(150,000) by that director and unpaid
legal fees $(250,000) at an exercise price of $1.00 per share. There
was no value attached to these warrants.
Additionally, at March 31, 1998, the Company had a remaining balance
of $147,728 which was lent to the Company by two directors during the
Company's second fiscal quarter of 1995. Both loans are payable on
demand with interest at 9% per annum.
(b) The Company had unsecured installment notes payable with remaining
balances of $62,286 at March 31, 1998. The notes are used to finance
the Company's insurance premiums and are payable in nine monthly
installments, including interest (8.45%) of $5,790 in 1998.
Interest expenses of $60,301 and $50,940 were charged to operations
for the years ended March 31, 1998 and 1997, respectively.
F10
<PAGE>
NOTE 4 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at March 31, 1998
consisted of the following:
Accrued warranty expense $ 33,000
Accrued salaries, wages and taxes 445,059
Accrued professional fees 32,500
Accrued officers' salaries 171,228
Accrued interest 353,319
Other 51,834
-----------------
$ 1,086,940
==================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company was committed under a non-cancelable operating lease
which commenced on May 17, 1992, relating to its plant and corporate
office facilities located in Teterboro, New Jersey. The lease which
was to expire on April 30, 2002 required minimum annual payments of
approximately $137,000 during the first year and $236,000 annually in
subsequent years.
On May 1, 1994, the lease was amended whereby the Company now
occupies approximately 8,000 square feet of the 27,000 square foot
facility at a reduced monthly payment of $8,000 expiring on November
30, 1994 and subsequently extended to April 30, 1995. On April 25,
1995, the lease was again amended extending the lease term to April
30, 1997 at a monthly payment of $7,185. On April 14, 1997, the lease
was renewed for a one year term at a monthly payment of $7,585. The
Company is currently occupying the premises on a month to month use
and occupancy basis at a monthly rental payment of $7,885.
Rental expense for the years ended March 31, 1998 and 1997 was
approximately $92,448 and $85,610, respectively.
NOTE 6 - INCOME TAXES
(a) At March 31, 1998, the Company had net operating loss carryforwards
available amounting to approximately $6.9 million which will expire
between 2001 and 2012. There is a remote possibility that net
operating loss carryforwards of approximately $500,000 may not be
available. There are no significant differences in the recognition of
income and expenses for tax and financial reporting purposes.
(b) At March 31, 1998, approximately $2,300,000 of available tax benefits
of the loss carryforwards are offset by a corresponding amount of
valuation allowance.
F11
<PAGE>
NOTE 7 - STOCK OPTION PLAN
At March 31, 1998, the Company had options outstanding or available
for grant under the 1992 Stock Option Plan. The 1992 Plan, approved
by shareholders on October 2, 1992, authorized that up to 500,000
shares of common stock could be issued to key employees, officers and
directors at a purchase price of not less than the fair market value
of the shares on the date of grant. The 1984 Plan, for which Options
may no longer be granted, authorized options on up to 660,000 shares
of common stock. The Company has elected to treat those options that
meet specific requirements within the meaning of Section 422 of the
Internal Revenue Code as incentive stock options.
A summary of changes in the stock option plans is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Shares under option - beginning of year 90,000 223,500
Options granted ----- -----
Options expired (15,000) (133,500)
-------- ---------
Shares under option - end of year 75,000 90,000
====== ======
Shares exercisable - end of year
(at prices of $1.00 in 1998 and $1.00 to $4.50 in 1997) 75,000 65,000
====== ======
</TABLE>
Options generally expire after a five-year period. At March 31, 1998,
an aggregate of 425,000 shares remained available for grant under the
1992 Stock Option plan.
NOTE 8 - RESEARCH AND DEVELOPMENT EXPENSES
During the fiscal years ended March 31, 1998 and 1997 the Company
spent approximately $76,000 and $78,000 respectively, on research and
development.
NOTE 9 - (LOSS) PER SHARE
Basic and diluted per share data is based on the weighted average
number of common shares outstanding. Common stock equivalents would
be anti-dilutive and, therefore, were not included in the diluted per
share computations.
The number of shares used in the computation of basic and diluted
(loss) per share was as follows:
1998 1997
---- ----
2,933,431 2,933,431
F12
<PAGE>
NOTE 10 - MAJOR CUSTOMERS
Sales to major individual customers were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
U.S. Government Agencies $468,000 (30.0%) $636,000 (42.2%)
Kingdom of Kuwait 153,000 (9.8%) ----- -----
Warnaco Corp. 35,000 (2.2%) 26,000 (1.7%)
Engineering & Professional Services, Inc. 509,000 (32.6%) 296,000 (19.6%)
</TABLE>
NOTE 11 - RELATED TRANSACTIONS
The Secretary, who is also a director of the Company, is a member of
the firm retained by the Company as legal counsel. An affiliate of
the firm owns 158,400 shares of common stock. Legal fees to this firm
were $8,364 and $3,640, in 1998 and 1997, respectively. The Company
owed this firm approximately $283,000 at March 31, 1998 and such
amounts are included in the accompanying balance sheet at March 31,
1998. In June, 1994, the firm agreed to extend the due date for
payment of these fees (see Note 3) in consideration of the grant of
250,000 five year warrants to purchase the Company's common stock at
an exercise price of $1.00 per share.
NOTE 12 - GOING CONCERN
As shown in the accompanying financial statements, the Company has
incurred significant losses over the past two (2) fiscal years. As of
March 31, 1998, working capital limitations were severely impacting
the Company's day-to-day operations, impairing the Company's ability
to obtain trade credit for purchases and meet the cash requirements
for basic operating expenses. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Additionally, the Company does not have the ability to pay amounts
due private investors, ex-directors and legal counsel. The Company is
attempting to re-negotiate the terms of payment of these obligations
but there can be no assurance that the Company will be successful in
these efforts.
Management's plans include continuing to actively pursue new contract
awards, which would generate revenue as well as cash flow. The
Company's ability to continue as a going concern is dependent upon
its ability to obtain a large volume of contract awards in the
immediate future. The financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
F13
<PAGE>
Exhibit 24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statement and
related prospectus of Vikonics, Inc. on Form S-8 of our report dated June 2,
1998, related to the financial statements, included in Part IV, Item 14(a) (1)
of the Annual Report on Form 10-K of Vikonics, Inc. for the year ended March
31, 1998.
CITRIN COOPERMAN & COMPANY, LLP
New York, New York
July , 1998
