<PAGE>
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, 1999
--------------
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
-------------------------------------
VIKONICS, INC.
(Name of small business issuer in its charter)
NEW YORK 13-2759466
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
370 North Street, Teterboro, New Jersey 07608
--------------------------------------- ----------
(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
---------------------------------------
(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 NO x
--- ---
<PAGE>
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, 1999 were $1,570,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on October 26, 1999 was $144,531.
As of October 26, 1999 the Registrant had 2,933,431 shares of Common Stock
outstanding.
Documents Incorporated by Reference
None
2
<PAGE>
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(Registered) and
TAC(Registered) 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, 1999, 1998 and 1997, defense contractors and government agencies
(including the United States Armed Forces) accounted for approximately 63%, 80%
and 73% of total revenues, respectively.
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.
3
<PAGE>
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,
4
<PAGE>
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.
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
network. The capacity of a VISIDS is 1,024 access/entry points, 64,000
cardholders and
5
<PAGE>
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.
6
<PAGE>
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:
<TABLE>
<S> <C>
Defense Contractors and
Government Agencies Commercial Customers
- ----------------------- --------------------
Architect of the U.S. Capitol American Express Publishing Co.
City of New York Engineering and 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
</TABLE>
During the fiscal year ended March 31, 1999, the U.S. Capitol accounted for
$396,000 or 25.2% of sales, Engineering and Professional Services, Inc.
accounted for $381,000 or 24.3% of sales, the U.S. Department of Treasury
accounted for $175,000 or 11.1% of sales, and the City of New York accounted for
$167,000 or 10.6%.
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.
At March 31, 1999, the Company had a backlog of orders of approximately
$577,000 as compared to a backlog of $383,000 at March 31, 1998. The backlog of
$577,000 at March 31, 1999 is expected to be shipped in its entirety during the
fiscal year ending March 31, 2000.
7
<PAGE>
Marketing
At March 31, 1999, 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 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, 1999, defense contractors and government agencies
accounted for approximately 60% of total revenues. In fiscal years 1998 and
1997, defense contractors and government agencies accounted for approximately
80% and 73% 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, 1999, the Company employed two (2) 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(Registered) product line. Research and
development expenses for the years ended March 31, 1999, 1998 and 1997 were
$68,000, $76,000, and $78,000, 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, 1999, the Company
had three (3) manufacturing employees.
8
<PAGE>
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.
9
<PAGE>
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(Registered), VIKONICS(Registered) and TAC(Registered).
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.
10
<PAGE>
Employees
As of March 31, 1999, the Company had 13 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
The Company's administrative, marketing and manufacturing operations occupy
approximately 8,000 square feet of a 27,000 square foot facility located in
Teterboro, New Jersey. The Company currently occupies the premises on a month to
month use and occupancy basis at a monthly rental payment of $7,885.
Item 3. Legal Proceedings
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. On September 17,1998 the private investors filed a lawsuit for the
total principal amount of $200,000 together with accrued interest of $103,000.
On June 15,1999 a Judgment by Default against the Company was entered in the
Superior Court of New Jersey, Bergen County. If the Company does not negotiate a
satisfactory resolution of this Judgment and the creditors foreclose on the
collateral, the Company will cease as a going concern. (See Note 3 to notes to
financial statements.) There are no other material pending legal proceedings, or
to management's knowledge, any such threatened proceedings against the Company
or its properties.
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.
11
<PAGE>
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." The following table sets
forth the high and 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, 1999 High Low
-------------------------------- ---- ---
1st Quarter $ 1/10 $ 1/10
2nd Quarter 1/10 1/16
3rd Quarter 1/16 1/16
4th Quarter 1/10 1/16
Fiscal Year Ended March 31, 1998 High Low
-------------------------------- ---- ---
1st Quarter $ 11/32 $ 7/32
2nd Quarter 7/16 1/8
3rd Quarter 3/16 1/16
4th Quarter 1/10 1/16
On March 31, 1999, there were aproximately 500 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.
12
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
1999 Fiscal Year Compared to 1998 Fiscal Year
The Company's net sales for the fiscal year ended March 31, 1999 were
$1,570,000, compared to the $1,561,000 net sales in the previous year. There
were increases in U.S. Federal agency revenues of $169,000 and the City of New
York of $157,000 during fiscal 1999. However, these were offset by reductions in
international revenues of $153,000 and Engineering and Professional Services,
Inc. revenues of $128,000.These reductions were the result of both contracts
being completed in fiscal 1998, without new contracts being awarded in fiscal
1999.
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 has contributed to the deterioration and stagnation of the Company's
sales levels.
In fiscal 1999, the Company's largest customers were: the U.S. Capitol
accounting for $396,000 or 25.2% of sales, Engineering and Professional
Services, Inc., $381,000 or 24.3% of sales, the U.S. Department of Treasury,
$175,000 or 11.1% of sales, and the City of New York , $167,000 or 10.6% of
sales.
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, and the U.S.
Department of Treasury, $114,000 or 7.3% of sales. International sales accounted
for $153,000 or 9.8% of sales.
Gross profit as a percentage of net sales for the year ended March 31, 1999
was 36.3% compared to 41.3% in fiscal 1998. The decrease in the gross profit was
due to an unfavorable mix of lower margin Vikonics equipment sales in fiscal
1999 versus higher margin custom software sales in fiscal 1998.
Marketing and sales expenses for the year ended March 31, 1999 were
$136,000, a 20.5% decrease from the $171,000 incurred in the previous year. This
is primarily due to a reduction in consulting fees.
Engineering, research and development expenses for the year ended March 31,
1999 were $229,000, which are comparable to the $231,000 expended a year ago.
General and administrative expenses were $431,000 in fiscal 1999, which is
also comparable to $424,000 in fiscal 1998.
The net (loss) for the year ended March 31, 1999 was $(282,000) compared to
a net (loss) of $(242,000) for the previous year due to the factors regarding
sales and expenses described above.
13
<PAGE>
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.
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 has 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, has 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 $231,000, 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.
14
<PAGE>
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.
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, 1999 of $(1,979,000)
compared to working capital deficit of $(1,694,000) on March 31, 1998. At March
31, 1999 the Company had $30,000 in cash, an increase of $20,000 from a year
ago. Operating activities during the 1999 fiscal year provided $95,000 of cash.
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
15
<PAGE>
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. On
September 17,1998 the private investors filed a lawsuit for the total principal
amount of $200,000 together with accrued interest of $103,000. On June 15,1999 a
Judgment by Default against the Company was entered in the Superior Court of New
Jersey, Bergen County. If the Company does not negotiate a satisfactory
resolution of this Judgment and the creditors foreclose on the collateral, the
Company will cease as a going concern. (See Note 3 to notes to financial
statements.)
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.
The Company currently occupies approximately 8,000 square feet of a 27,000
square foot facility on a month to month use and occupancy basis at a monthly
rental payment of $7,885.
Accounts receivable decreased by $72,000 in fiscal 1999 from the previous
year due to an accelerated cash collection effort during the forth quarter of
fiscal 1999.
Inventory levels increased $21,000 from the previous year to $114,000 at
March 31, 1999. This is due to increased purchases during the final month of
fiscal 1999 in anticipation of shipping the relatively high fiscal year end
backlog ($577,000) in fiscal 2000.
Accounts payable of $254,000 at March 31, 1999 are $48,000 higher than the
$206,000 balance at March 31, 1998. This is due to the of the higher inventory
levels, previously noted, and a slight extension of the Company's payment cycle.
Accrued expenses and other current liabilities at March 31, 1999 of
$1,329,000 are $242,000 more than the $1,087,000 at the end of the previous
fiscal year. This is primarily due to an increase in accrued salaries and
payroll taxes of $72,000 and an increase in accrued interest of $194,000.
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.
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:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
John J. Strong 51 Chairman of the Board, President and Director
Michael J. Pisano 53 Vice President - General Manager
William R. Hoskinson 50 Vice President - Engineering
Howard S. Breslow 60 Secretary and Director
</TABLE>
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.
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.
Section 16 (a) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, the Company's directors, its officers, and any
persons holding more than ten percent of the Common Stock are required to report
their initial ownership of the Common Stock and any subsequent changes in that
ownership to the Securities and Exchange Commission. Specific filing deadlines
of these reports have been established and the Company is required to disclose
any failure to meet such deadlines during the fiscal year ended March 31, 1999.
Based solely on a review of such reports furnished to the Company, the Company
believes that all of these filing requirements have been satisfied.
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 1999.
<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 1999 $125,000 -- -- -- -- --
--
Chairman of the Board & 1998 $125,000 -- -- -- -- --
President (Principal 1997 $110,000 -- -- -- -- --
Executive Officer)
</TABLE>
Option Grants in Last Fiscal Year
There were no options granted to the named executive officer during the
fiscal year ended March 31, 1999.
Option Exercise during Fiscal Year 1999 and Fiscal Year-End Option Values
The following table provides information related to options exercised by
the named executive officer during the 1999 fiscal year and the number and value
of options held at fiscal year end.
<TABLE>
<CAPTION>
Number of Value of
unexercised unexercised in
options at the money options
year-end at year-end ($) (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, 1999 was $.0625. Value is
calculated on the basis of the difference between the option exercise price
and $.0625 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.
21
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at October 26, 1999 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, (iii) each named executive officer and (iv)
all officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of Outstanding
Beneficial Owner Beneficial Ownership(1) Shares Owned
- ------------------- ----------------------- --------------------------
<S> <C> <C>
John L. Kaufman (2) 445,600 15.2%
370 North Street
Teterboro, NJ 07608
Howard S. Breslow 158,400 5.4
767 Third Avenue
New York, NY 10017
John J. Strong -- --
370 North Street
Teterboro, NJ 07608
All officers and directors as a 175,331 6.0
group (4 persons)
</TABLE>
(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.
22
<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. An affiliate of Breslow &
Walker, LLP has ownership of 158,400 shares of Common Stock. During the year
ended March 31, 1999, Breslow & Walker billed the Company $3,309 for legal
services provided. At March 31, 1999, the Company owed Breslow & Walker
approximately $286,000 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.
23
<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, 1999.
Statements of Operations for the years ended March 31, 1999 and 1998.
Statements of Cash Flows for the years ended March 31, 1999 and 1998.
Statements of Changes in Shareholders' (Deficit) for the years ended
March 31, 1999 and 1998.
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.
24
<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,
1999.
25
<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: December 1, 1999 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: December 1, 1999 /s/ John J. Strong
------------------------
John J. Strong, Director
Date: December 1, 1999 /s/ Howard S. Breslow
---------------------------
Howard S. Breslow, Director
26
<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, 1999 and the related statements of operations, cash flows and changes
in shareholders' (deficit) for the years ended March 31, 1999 and 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 aforementioned financial statements present fairly, in
all material respects, the financial position of Vikonics, Inc. as at March 31,
1999 and the results of its operations and its cash flows for the years ended
March 31, 1999 and 1998 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
October 11, 1999
New York, New York
F1
<PAGE>
VIKONICS, INC.
BALANCE SHEET
ASSETS
MARCH 31, 1999
--------------
CURRENT ASSETS:
Cash (Note 1(b)) $ 30,219
Accounts receivable (less allowance for doubtful
accounts of $10,000) 211,931
Inventories (Notes 1(c) and 2) 114,417
Prepaid expenses and other current assets 16,468
--------
TOTAL CURRENT ASSETS 373,035
--------
EQUIPMENT AND FIXTURES (NOTE 1(D)):
Machinery and equipment 376,996
Furniture and fixtures 67,437
--------
444,433
--------
Less, accumulated depreciation (441,991)
--------
EQUIPMENT AND FIXTURES - NET 2,442
--------
OTHER ASSETS 1,200
--------
$376,677
========
See notes to financial statements.
F2
<PAGE>
VIKONICS, INC.
BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
MARCH 31, 1999
--------------
CURRENT LIABILITIES:
Notes and loans payable (Note 3) $ 717,728
Accounts payable 253,859
Accrued expenses and other current liabilities (Note 4) 1,328,517
Deferred service income (Note 1(h)) 52,226
----------
TOTAL CURRENT LIABILITIES 2,352,330
----------
COMMITMENTS AND CONTINGENCIES
(NOTES 5 AND 12)
SHAREHOLDERS' (DEFICIT) (NOTES 3, 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
Accumulated deficit (7,675,416)
----------
TOTAL SHAREHOLDERS' (DEFICIT) (1,975,653)
$ 376,677
==========
See notes to financial statements.
F3
<PAGE>
VIKONICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
1999 1998
---- ----
SALES - NET (NOTES 1(H) AND 10) $ 1,570,238 $ 1,561,157
COST OF GOODS SOLD 1,000,181 917,124
----------- -----------
GROSS PROFIT 570,057 644,033
----------- -----------
COST AND EXPENSES:
Engineering, research and
development (Notes 1(f) and 8) 228,915 231,077
Marketing and sales 136,490 170,727
General and administrative 431,207 423,530
Depreciation and amortization 611 853
Interest expense - net 55,273 60,268
----------- -----------
TOTAL COSTS AND EXPENSES 852,496 886,455
----------- -----------
NET (LOSS) $ (282,439) $ (242,422)
=========== ===========
NET (LOSS) PER SHARE (NOTE 9) -
BASIC AND DILUTED $ (.10) $ (.08)
=========== ===========
See notes to financial statements.
F4
<PAGE>
VIKONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(282,439) $(242,422)
Adjustments to reconcile net (loss) to net
cash (used for) provided by operating activities:
Depreciation and amortization 611
Provision for allowance for doubtful accounts (20,000) 853
10,000
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 71,548 27,128
Inventories (20,677) 35,870
Prepaid expenses and other current assets 60,083 19,470
Other assets -- 20
Increase (decrease) in:
Accounts payable 48,012 (47,969)
Accrued expenses and other current liabilities 241,577 184,664
Deferred service income (3,485) 6,507
--------- ---------
Net cash provided by (used for) operating activities 95,230 (5,879)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of equipment and fixtures-net (3,053) --
--------- ---------
SUBTOTALS (CARRIED FORWARD) $92,177 $ (5,879)
--------- ----------
</TABLE>
See notes to financial statements.
F5
<PAGE>
VIKONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
1999 1998
---- ----
SUBTOTALS (BROUGHT FORWARD) $ 92,177 $ (5,879)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes and loans payable 70,599
Repayment of notes and loans payable (72,286) (106,541)
--------- ---------
CASH (USED FOR) FINANCING ACTIVITIES (72,286) (35,942)
--------- ---------
INCREASE (DECREASE) IN CASH 19,891 (41,821)
CASH BEGINNING OF YEAR 10,328 52,149
--------- ---------
CASH END OF YEAR $ 30,219 $ 10,328
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 13,177 $ 4,205
========= =========
See notes to financial statements.
F6
<PAGE>
VIKONICS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
Net (loss) -- -- -- (282,439) (282,439)
----------- ----------- ----------- ----------- -----------
Balance at
March 31, 1999 2,933,431 $ 58,669 $ 5,641,094 $(7,675,416) $(1,975,653)
=========== =========== =========== =========== ===========
</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 $291,000 and $245,000 for the
fiscal years ended March 31, 1999 and 1998, 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.
NOTE 2 - INVENTORIES
Inventories at March 31, 1999 consisted of the following:
Raw materials $ 42,360
Work-in-process 5,633
Finished goods 66,424
--------
$114,417
========
NOTE 3 - NOTES AND LOANS PAYABLE
Notes and loans payable at March 31, 1999, consisted of:
Amounts due private investors, ex-directors and
legal counsel. $717,728
========
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 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 has attempted to renegotiate the terms of payment of
these obligations.
On September 17, 1998 the private investors filed a lawsuit in the
Superior Court of New Jersey for the total principal amount of
$200,000 together with accrued interest of $103,000. On June 15, 1999
a Judgment by Default against the Company was entered in the Superior
Court of New Jersey, Bergen County.
The Company will seek a satisfactory resolution of this judgment.
There can be no assurance, however, that the Company will be able to
resolve the judgment. The failure to do so will cause the Company to
cease as a going concern.
Additionally, at March 31, 1999, the Company had a remaining balance
of $147,728 which was lent to the Company by two directors during the
Company's 1995 fiscal year. Both loans are payable on demand with
interest at 9% per annum.
Interest expenses of $55,273 and $60,268 were charged to operations
for the years ended March 31, 1999 and 1998, respectively.
F10
<PAGE>
NOTE 4 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at March 31, 1999
consisted of the following:
Accrued warranty expense $ 38,000
Accrued salaries, wages and taxes 517,005
Accrued professional fees 30,000
Accrued officers' salaries 171,228
Accrued interest 546,678
Other 25,606
----------
$1,328,517
==========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company occupies approximately 8,000 square feet of a 27,000 square
foot facility 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, 1999 and 1998 was
approximately $94,620 and $92,448, respectively.
NOTE 6 - INCOME TAXES
(a) At March 31, 1999, the Company had net operating loss carryforwards
available amounting to approximately $7.2 million which will expire
between 2001 and 2013. 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, 1999, 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, 1999, 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:
1999 1998
---- ----
Shares under option - beginning of year 75,000 90,000
Options granted -- --
Options expired -- (15,000)
------ -------
Shares under option - end of year 75,000 75,000
====== =======
Shares exercisable - end of year
(at prices of $1.00 in 1998 and 1999) 75,000 75,000
====== =======
Options generally expire after a five-year period. At March 31, 1999,
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, 1999 and 1998 the Company
spent approximately $68,000 and $76,000, 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:
1999 1998
---- ----
2,933,431 2,933,431
F12
<PAGE>
NOTE 10 - MAJOR CUSTOMERS
Sales to major individual customers were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
U.S. Government Agencies $637,000 (40.6%) $468,000 (30.0%)
Kingdom of Kuwait -- -- 153,000 (9.8%)
City of New York 167,000 (10.6%) 10,000 (< 1%)
Engineering & Professional
Services, Inc. 381,000 (24.3%) 509,000 (32.6%)
</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
$3,309 and $8,364, in 1999 and 1998, respectively. The Company owed
this firm approximately $286,000 at March 31, 1999 and such amounts are
included in the accompanying balance sheet at March 31, 1999. 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, 1999, 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 October
11, 1999, related to the financial statements included in Part IV, Item 14(a)
(1) of the Annual Report on Form 10-KSB of Vikonics, Inc. for the year ended
March 31, 1999.
CITRIN COOPERMAN & COMPANY, LLP
New York, New York
December, 1999
