ANNOUNCEMENT TO THE AUSTRALIAN STOCK EXCHANGE MIKOH CORPORATION LIMITED UPDATE TO SHAREHOLDERS APRIL 2004 A1. Overall Business Review Continuing on from the positive results announced for the half-year ended 31 December 2003, sales booked during the 3 rd quarter have been encouraging and a profitable result is expected again in the US during the 2 nd half, with the Company presently on track to deliver an improved trading result overall for this financial year. Over the past 4 months sales success has been achieved in China, Europe and the US, including equipment contracts for the installation of MIS SLX200 digital inkjet products valued at over $A400,000 into China and Italy. There was also a small increase in revenues in the US during the past quarter to $A210,000, including the supply of additional RFID tags to TransCore for their transportation applications. Since the last Shareholder Update the Company has continued to focus its attention on growing existing relationships, developing new sales opportunities and fostering new relationships that will position the Company favourably for sales growth during 2004/5. A summary of activities over the past 9 months follows: MIKOH US The ongoing development of the TRS tag for TransCore has been at the forefront of activity in the US, with the first TRS tag due for release in June 2004; Sales orders have continued to flow from TransCore for the interim tag design to satisfy US border control applications; and. The US operation, while focused on its key market opportunities (transportation and inventory/asset management), is also responding to specific enquiries from key market sectors including authentication and track&trace applications for the pharmaceutical industry, airline safety and container security. The adoption of RFID tagging on a large scale appears more likely in a number of key industry sectors as highlighted recently by a recommendation from the US Food and Drug Administration to use RFID in the authentication and tracking of pharmaceutical products. There have been a number of enquiries over the last 6 months highlighting the need to provide a reliable mechanism to detect tampering with the tags. Smart&Secure was developed specifically to address this requirement, and the company is encouraged by this heightened awareness. 1
MIS The MIS team has been focused on sales opportunities in both Asia and Europe; MIS has recently announced the finalisation of an alliance in Europe with Castagnoli Forms Consulta srl (CFC), with whom MIS will expand its representation in Western and Eastern Europe, Northern Africa and the Middle East; and will market the CFC range of printing press equipment into other existing MIS markets. There has been early and encouraging sales success in Italy from the CFC relationship; and The Chinese distributor has continued to vigorously promote the MIS equipment in an ever growing and dynamic market. Future Initiatives A summary of future initiatives follows: For the remainder of this financial year the MIS business focus will be in Europe and China to maximise the sales results from those established markets, whilst MIKOH US will concentrate on the current TransCore development and related applications; MIS plans to introduce to its product range a new high speed machine (5 times present speed) to meet a growing demand to add variable digital data to high-speed printing presses. This new product will compliment our relationship with CFC and enable MIS to take advantage of an emerging market sector. This new range of high speed inkjet equipment is planned for deployment at the end of this calendar year. This strategy will not affect existing sales but will provide business growth into higher end users whilst maintaining strong profit margins; and It is planned over the coming months to expand the Company s presence in Asia through the formation of a subsidiary in Hong Kong, to be known as MIKOH Asia. This subsidiary will be used to interface with business relationships in China and other countries in the region and possibly attract capital for specific business development initiatives in Asia as and when required. MIKOH is proud of all its technologies and believes, despite having limited resources, that it has created internationally competitive products that are equal to or better than that from multi-national suppliers. From this base MIKOH plans to steadily build its sales through selected distributors, integrators and partners who have an extensive and worldwide presence. A more detailed report on each of the Company s business units follows: A2. Operations Review A2.1 MIKOH US (MUS) MIKOH US is focused on implementing its Smart&Secure security technology for radio frequency identification (RFID) labels and tags. Smart&Secure (which has been described in detail in previous shareholder announcements) is a high-security tamper detection process that can be applied to any of the RFID technologies used in low-cost self-adhesive RFID labels and tags. 2
Smart&Secure addresses the increasingly recognised need for tamper detection in RFID systems by causing an RFID label or tag to respond differently if it is tampered with or moved. This is important in ensuring that an RFID system accurately monitors items to which the labels or tags are applied, rather than just monitoring the labels or tags. Following are highlights of activities during the past several months. Ground Transportation As reported previously, MIKOH US transportation-related activities are centred on its relationship with US-based TransCore Inc. Under this relationship MIKOH and TransCore are developing a Smart&Securebased vehicle tag, known as the TRS tag, that is intended for use in a number of international markets. The first TRS tag is due to be released in June, 2004. MIKOH and TransCore have also developed an interim tag design that has already been deployed by the US government in its FAST (Free And Secure Trade) program to monitor vehicular border crossings (see November 2003 shareholder update). Interim Vehicle Tag Design for FAST (Free And Secure Trade) Program The following url - http://www.cbp.gov/xp/customstoday/2002/october/fast.xml - links to a US Customs press release regarding a demonstration of the FAST system to US President George W. Bush and Canadian Prime Minister Jean Chretien on September 9, 2003. The primary markets for the interim tag design at present are in Homeland Security (and related areas) in the US. To date MIKOH has supplied approximately 150,000 tags of various designs to TransCore, and continues to receive orders. It is expected that most end-users will migrate to the TRS tag once it is available. As reported previously, electronic vehicle registration (EVR) is an important and potentially large-scale application area for the TRS tag, but one that is expected to take time to develop. TransCore is actively pursuing this market, and believes that the first sizeable implementations may be outside the US. MIKOH expects the transportation sector to generate sales of between 250,000 and 400,000 tags during calendar 2004. 3
Secure Inventory Management MIKOH previously reported two US government inventory management projects, one using a frequency of 13.56MHz and the other operating at 915MHz. The 13.56MHz system has been delivered, as have a prototype read/write device and sample tags for the longer read-range 915MHz system, thereby completing MIKOH s obligations under the purchase orders received from the agency. No further progress has been made by the agency on deploying a 915MHz system. MIKOH believes secure inventory management to be an important emerging application area, and has formed a relationship with a Washington DC-based integrator to attack this market. As indicated previously, MIKOH US strategy is to work through integrators to reach targeted market sectors. The two companies are now finalizing a business relationship. Joint promotional material has been developed for use in a coordinated marketing program aimed initially at US government end users. Authentication and Track&Trace Pharmaceuticals MIKOH has been approached by a major US-based pharmaceutical packaging supplier that has worked extensively on the introduction of RFID technology into the pharmaceutical supply chain. This company recognized the need for its RFID labels and tags to include tamper detection in order to provide reliable and accurate product authentication and track&trace capabilities, and is interested in incorporating Smart&Secure for this purpose. This application has the potential to offer very high label volumes, and appears more likely to be successful in light of a recent report by the US Food and Drug Administration (FDA) recommending the use of RFID in the pharmaceutical industry. (The FDA report can be downloaded at http://www.fda.gov/oc/initiatives/counterfeit/report02_04.html) The two companies are currently formulating a relationship and working to develop Smart&Secure tag designs to address requirements in both the pharmaceutical industry and other markets in which the company has a presence. Securing Airline Safety Equipment MIKOH has been approached by an airline that is interested in using Smart&Secure seals to secure safety equipment. MIKOH has involved a US-based integrator in this application (to address the systems issues and software requirements), and the two companies are working with the airline to develop a solution. Indications are that an effective solution for this airline would be readily extendable to other airlines, based on security requirements recently mandated by the US government to combat the threat of terrorist activities. Container Security MIKOH is working with two government agencies (outside the US) to develop and implement a low cost, single-use container security solution based on RFID, incorporating its Smart&Secure technology. The solution is aimed mainly at securing containers used for ground and sea transportation, exported from the home country, but could be extended to other container security applications. A container security solution incorporating Smart&Secure has been submitted to the end-user agencies, and if adopted would be used by both the agency and exporters. Discussions are continuing regarding design and implementation issues. If MIKOH is successful in this application, the solution could readily be extended internationally. Other governments are also interested in a similar solution. 4
A2.2 MIKOH Imaging Systems (MIS) The continued development of both Asia and European sales opportunities has been the main focus of the MIS business unit over the past 6 months. The commitment of sales and technical resources into China last year, has resulted in 3 installations being completed to date through our Chinese distributor at a value of $A595,000, with a number of sound prospects with imminent sales potential pending. Along similar lines to the commitment made into China last year, and as part of our plan to develop the recently announced relationship with the Italian printing press manufacturer, Castagnoli Forms Consulta srl (CFC), MIKOH has recently assigned sales and technical resources to Europe for three months to ensure solid sales and technical training is undertaken in support of the European sales push (see www.castagnoliformconsulta.com). Further to the recently announced relationship with CFC we have made a joint submission with them for the sale of CFC print presses incorporating MIS inkjet equipment to the value of $A2.5 million through our Chinese distributor. In addition, through CFC, we have recently bid MIS inkjet machines to Italian prospects in excess of $A700,000. At this stage it is difficult to determine the level of success from these prospects but a result is likely within the next 4-6 weeks. A very successful open day was held in February at the CFC headquarters in Florence, Italy, to present to invitees the capability of the MIS inkjet equipment and its ability to be integrated and/or added to existing offset printing press machines. MIS Inkjet Equipment OPEN DAY at Castagnoli Forms Consulta srl The attendance by a number of existing CFC customers and others resulted in several key prospects with Data Ufficio srl, based in Rome, subsequently placing an order for two MIS SLX200 inkjet machines to be used in applying variable data to forms printing. This order is valued at $A320,000. A recent comment from the principal of a prospective MIS purchaser at the Open Day summed up his impressions of the MIS technology as follows:- "the MIS software was the most impressive I have ever seen including IBM, OCE, Xerox and Scitex.it was just so simple to use and so powerful and impressive that MIKOH s software engineers should be congratulated". 5
The Directors are very pleased with the early sales success through CFC and are confident that the new relationship will be a successful platform for penetration into the European market. The continued growth of the digital inkjet market place is very encouraging and while there are other equipment suppliers in this market, MIS has a price competitive and technically sound product to compete favourably against our competitors in most situations. There has been a rapid growth in the speed of print press equipment over the past 12 months and the next technical challenge for MIS is to integrate its technology with a higher speed print head capability. MIS has several current prospects who have indicated a readiness to purchase a higher speed MIS inkjet machine as soon as we can deliver. Accordingly, MIS is presently planning to undertake the necessary development during the coming months and plans to have a higher speed MIS product to meet the market demand by the end of the 4 th calendar quarter 2004. On current indications the higher speed MIS configuration will be very price competitive. A2.3 COUNTERFOIL and SubScribe The licensing agreement with Frontline Barcoding and Printing, covering the original MIKOH technologies including COUNTERFOIL and Subscribe, continues to grow with several new applications in asset identification and packaging security. A new supply contract has recently been negotiated by Frontline with a Hong Kong based company to supply SubScribe label products, which is expected to provide increased sales opportunity into the Asian market during the remainder of calendar 2004. The budgeted licence fees from this relationship have been achieved and MIKOH anticipates steady growth in this activity over the next 12 months. A3. The Future Over the past 9 months the Company has continued to develop relationships that will support and fund its corporate growth initiatives both in Australia and offshore in the near term. This activity has been focused primarily on securing additional sales and marketing alliances. It is the Company s intention to: (i) Continue to pursue qualified product applications and seek opportunities to integrate MIKOH s technologies; (ii) Further develop established existing geographic markets; and (iii) Continue to focus on achievable revenue goals, which so far have resulted in an increase in sales prospects during the year. An increase in revenues is anticipated during the second half of fiscal 2004 as our alliances and re-seller relationships mature further. The Company will continue to shape its future as a quality supplier of security printing and labelling products with the ability to add tiered security for brand, packaging, inventory and document management, using a combination of its technologies. Date: 16 th April 2004 ********************************* 6
Contact Details: Australian Activities: US Activities: Ian Cameron MIKOH Corporation Limited Tel: 02 9453 9700 mikoh@mikoh.com Peter Atherton MIKOH Corporation (US) Tel: +1 571 258 0530 enquiries@mikohcorp.com **************************** 7