FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period to
Commission file number 0-6933
CAMBEX CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04 244 2959
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
360 Second Avenue 02451
Waltham, Massachusetts (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: 781-890-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
An Exhibit Index setting forth the exhibits filed herewith or
incorporated by reference herein is included herein at Page A-1.
The aggregate market value of the voting stock held by non-
affiliates of Cambex Corporation as of March 29, 1999 was
$1,196,187 based on the closing price of the common stock on that
date.
The number of shares of Cambex Corporation's common stock
outstanding as of March 29, 1999: 9,538,226.
- 2 -
PART I
Item 1. Business.
General
The Company develops, manufactures and markets data storage
solutions that enhance the performance and reliability of
enterprise data centers. The Company's products and services
include memories for mission-critical enterprise servers including
IBM's CMOS mainframes,disk storage arrays, and Storage Area
Network (SAN) solutions for UNIX and Windows NT operating system
users.
Products
The Company's memory products include IBM compatible mainframe
memory for IBM 9672 and Multiprise 2000 mainframe enterprise
servers and add-on memory for high-end open systems servers from
IBM, Sun, and Hewlett-Packard. The Company also sells or leases
trade-in memory which it acquires from its customers when this
memory is replaced by new memory. In most transactions, when the
Company upgrades a computer system with its memory, the customer
pays the Company in whole or in part with memory already resident
on the machine. On certain occasions, the memory already resident
on the customer's machine is more valuable than the Company's memory,
and in those cases, the Company pays the difference to the customer,
net of a customary gross profit for the Company.
The Company is assembling a product portfolio that will allow the
Company to offer full service Storage Area Network (SAN) solutions
for IBM RS/6000 and Windows NT users. The Company offers both
internally developed SAN products as well as products developed by
other companies that the Company resells such as Fibre Channel
host bus adapters, hubs, routers and management software. The
Company's SAN products also include Fibre Channel disk arrays to
provide the disk storage as well as the Fibre Channel
infrastructure when implementing a SAN. For non-SAN disk storage
applications, the Company offers disk arrays with SCSI and SSA
storage connectivity options.
Customer Service
The Company arranges for maintenance and service of its products
at the time of lease or sale on a monthly or lifetime fee per
system basis. It normally provides this maintenance through its
own maintenance personnel or through third party maintenance
organizations supported by the Company's personnel.
Research and Development and New Products
The Company maintains a research and development program directed
to the development of new products and systems, to the improvement
and refinement of its present products and systems and to the
expansion of their uses and applications. The new products
include add-on memory and Fibre Channel connectivity products. The
dollar amount spent by the Company during each of its last three
fiscal years on such activities was approximately $1,379,000 in
1998, $2,322,000 in 1997, and $3,433,000 in 1996.
- 3 -
Manufacturing
The production of the Company's products involves primarily
electronics assembly and testing. These operations are performed
primarily at the Company's plant in Waltham, Massachusetts. The
Company also subcontracts some of its assembly operations to
several circuit board assembly companies. Most of the electronic
components used in the Company's products are purchased from
outside suppliers and are either standard items or custom
manufactured to the Company's design and specifications and are
generally available from several sources.
Sales & Marketing
The Company markets its products through both direct and indirect
sales and marketing channels. The direct sales force is chartered
with selling the Company's products to the past and present
customer base as well as developing new large accounts that prefer
dealing directly with the manufacturer. Cambex's indirect channel
consists of distributors, systems integrators and value-added
resellers.
The Company established European sales and marketing subsidiaries
in the Netherlands, the United Kingdom and Germany during fiscal
1991 and in France during fiscal 1993.
Competition
The market for the Company's add-on memory products is dominated
by International Business Machines Corporation (IBM). In the
Storage Area Network market, the Company's current competitors
include several large companies in addition to IBM. IBM
announcements concerning new systems, improved performance
characteristics of existing systems and price reductions have had
adverse effects on the markets for the Company's products in the
past.
The Company believes that its success in competing is dependent
upon its ability to offer products with substantially better
cost/performance characteristics than the competition. In
addition, the Company believes that other competitive factors are
non-price factors such as product quality, reliability and product
features, as well as service and support capability.
Competition in the add-on memory and Storage Area Network markets
is intense. The markets are characterized by rapid
technological advances resulting in the frequent introduction of
new products and services and by price reductions in established
product categories. A number of other companies, some of which
are substantially larger and have substantially greater resources
than the Company, are engaged in the manufacture and marketing of
products similar to those manufactured and marketed by the
Company.
- 4 -
Backlog
As of December 31, 1998, the dollar amount of the Company's firm
backlog was approximately $151,000. On the same date of the
preceding year, the comparable amount was approximately $144,000.
All such backlog was deliverable within a year. Such backlog has
no material seasonal characteristics. All equipment ordered by
customers is subject to acceptance and satisfactory performance as
well as the Company's ability to meet delivery schedules. The
Company believes that backlog is not a meaningful indication of
future business.
Patents
Although the Company owns 26 patents, it does not consider its
patent position to be significant from a competitive standpoint.
Significant Customers
No single customer accounted for 10% or more of sales during
fiscal 1997. During fiscal 1998 and 1996, sales to one customer
accounted for 11% and 14% of the Company's sales.
Employees
On March 29, 1999, the Company employed 30 persons.
Item 2. Properties
The Company leases approximately 68,000 square feet of floor space
in Waltham, Massachusetts, under a lease for a term ending May 31,
2003. This facility consists of office, manufacturing and R & D
space. The Company subleases approximately 20,000 square feet of
this space (which is approximately 30% of the Company's total
leased space) for a term ending May 31, 2003. On March 1, 1999,
the Company entered into a sublease agreement pursuant to which
the Company sublet approximately 14,000 square feet in its
Waltham, Massachusetts facility (which is approximately 21% of the
Company's total leased space). The term of the sublease is
coterminous with the primary lease and expires on May 31, 2003.
The Company also leases additional sales and support offices
in the United States and Europe.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in
the ordinary course of business, including those relating to pre-
petition creditor claims. The Company believes that the outcome
of these proceedings will not have a material adverse effect on
the Company's financial condition.
- 5 -
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
- 6 -
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.
The Company's common stock is traded over the counter. The
approximate number of shareholders of record at March 29, 1999 was
582. The high and low sales prices for the Company's stock for
each quarter during the years ended December 31, 1998 and December
31, 1997 are as follows:
1998 1997
High Low High Low
First Quarter 0.34 0.28 1.94 1.31
Second Quarter 0.71 0.28 1.56 0.97
Third Quarter 0.52 0.28 1.56 0.41
Fourth Quarter 0.35 0.15 0.41 0.13
The Company has not paid dividends on its common stock in the past
and does not expect to do so in the foreseeable future.
Item 6. Selected Financial Data.
The following selected financial data should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this Form 10-K.
- 7 -
Year Year Year Four Year Year
Ended Ended Ended Months Ended Ended
December December December December August August
1998 1997 1996 1995 1995 1994
(In thousands, except per share amounts)
Revenues $ 3,749 $ 10,066 $ 22,917 $8,509 $35,152 $40,549
Net income(loss) (2,773) ( 6,597) ( 8,632) ( 2,855) ( 9,899) 590
Per share data:
Net income(loss) ( 0.30) ( 0.72) ( 0.96) ( 0.32) ( 1.14) 0.07
Weighted Average
Common and Common
Equivalent Shares
Outstanding 9,300 9,100 9,000 8,920 8,700 8,550
Total assets $ 1,474 $ 3,928 $ 13,033 $26,212 $32,027 $38,048
Long-term debt 1,064 ----- ------ ------ ------ 3,900
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Fiscal 1998 as compared with Fiscal 1997
The Company's revenues were $3,749,000 and $10,066,000 in 1998 and
1997, respectively. The Company's revenues for mainframe storage
and client/server products declined significantly in 1998.
Cost of sales as a percentage of revenues was 79% and 94% in 1998
and 1997, respectively. Inventory write-downs in 1997 were
approximately $2,700,000. Their effect on the cost of sales
percentage was 28% in 1997.
Research and development expenses represented 37% ($1,379,000) and
23% ($2,322,000) in 1998 and 1997, respectively. Sales and general
and administrative expenses were $2,002,000 and $4,489,000 in 1998
and 1997, respectively. The reduction in expenses is due to the
cost savings achieved from putting in place additional expense
controls.
8
Fiscal 1997 as compared with Fiscal 1996
The Company's revenues were $10,066,000 and $22,917,000 in 1997
and 1996, respectively. The Company's revenues for the mainframe
memory products for the IBM ES/9021 declined significantly in
1997. Historically, the Company's mainframe revenues have been
cyclical, dependent on the technological changes initiated by IBM.
During 1997, IBM introduced a new CMOS mainframe processor, and as
a result, customers reduced their purchases of incremental memory
for the ES/9021 machines. The demand for additional memory usually
lags the introduction of new generations of mainframes by twelve
to eighteen months, but the Company is unable to predict whether
or when the market will return to its former position. The Company
had planned to balance the decline in mainframe memory revenues by
selling mainframe and client/server disk storage products. Initial
shipments of the Company's mainframe disk storage product
(Cascade) experienced operating problems, which required
additional time to resolve. These problems were corrected by the
end of 1997.
The Company has reduced its general level of expenses since 1994
as a result of decreasing annual revenues. The total number of
employees has decreased each year. These staff reductions have
impacted all functional areas and should be considered when
analyzing comparative financial statements.
Cost of sales as a percentage of revenues was 94% and 75% in 1997
and 1996, respectively. The major reason for the increased cost of
sales is the decrease in total revenues and the resulting effect
of fixed overhead costs. Inventory write-downs in 1997 and 1996
were approximately $2,700,000 and $3,000,000, respectively. Their
effect on the cost of sales percentage was 28% and 13% in 1997 and
1996, respectively.
Research and development expenses represented 23% ($2,322,000) and
15% ($3,433,000) in 1997 and 1996, respectively. The reduction in
total expenses is due mainly to reduced staffing. Sales and
general and administrative expenses were $4,489,000 and $8,986,000
in 1997 and 1996, respectively. The reduction in expenses is due
primarily to lower staffing levels.
The Company recognized a net expense of $1,823,000 in 1996, which
was entirely due to amortization of a technology license and
marketing agreement that was acquired in 1992. The amortization
was over a five year period, ending in 1996. The Company
recognized a net expense of $295,000 in 1997, of which
approximately $200,000 relates to accrued professional services in
conjunction with the Chapter 11 services. The Company recorded
$244,000 in interest expense in 1996, which was related to a
revolving credit agreement with a bank. The entire balance of the
outstanding loan was repaid in February 1997.
The Company recorded no income tax provision or credit in 1997 and
a net credit of $200,000 in 1996.
9
Inflation
The Company did not experience any material adverse effects in
1998, 1997 and 1996 due to general inflation.
Liquidity and Capital Resources
On June 1, 1998, the Company raised approximately $1,060,000,
including approximately $460,000 from Joseph F. Kruy, Chairman,
President and Chief Executive Officer of the Company, in cash from
the issuance of 10% Secured Subordinated Convertible Promissory
Notes (the "Notes"). Under the terms of the Notes, which are due
on April 30, 2003, the holders may convert the notes into shares
of common stock at a conversion price of $0.22 per share. In
addition to the Note, each holder was issued a Stock Purchase
Warrant ( the "Warrant"), the exercise of which will allow the
warrant holder to purchase one share of common stock, at $0.50 per
share, for each dollar invested through the issuance of the Notes.
On November 9, 1998, the Company entered into a loan and security
agreement with a lender company, hereafter referred to as "Lender"
which is owned by a relative of Joseph F. Kruy, Chairman and Chief
Executive Officer of the Company, under which the Company may
borrow up to a maximum of $500,000 being outstanding at any one
time. Such loan is fully secured by all assets of the Company.
The Company pays all collections from accounts receivable to the
Lender not less frequently than each week until the outstanding
loan amount plus related interest, which accrues at a 12% annual
rate, is fully paid. Under the terms of the loan agreement, the
Lender receives a warrant for the purchase of two shares of common
stock, at $0.21 per share, for each dollar loaned to the Company.
As discussed more fully in Note 1 to the financial statements, the
Company has suffered recurring losses from operations.
Consequently, the Company's ability to continue as a going
concern, is dependent upon several factors, including the
Company's ability to raise additional capital. The additional
financing will be used to fund continuing operations of the
Company, particularly in development, sales and marketing.
The Company's management believes it has taken the appropriate
corrective actions to reduce expenses through consolidation of the
workforce and to increase revenue through new strategic alliances
and selling products with improved gross margins. There are no
assurances that such actions will increase revenues.
The Company's cash and marketable securities were $211,000 and
$476,000 at December 31, 1998 and December 31, 1997, respectively.
Working capital was a negative $1,575,000 at December 31, 1998
compared with $2,512,000 at December 31, 1997. During 1998, the
Company expended $8,000 for capital equipment to support its
growth. During fiscal 1999, the Company expects to acquire less
than $100,000 of capital equipment.
- 10 -
Year 2000
The Company has evaluated the impact of changes necessary to
achieve a year 2000 date conversion. Software failures due to
processing errors arising from calculations using the year 2000
date are a known risk. Major areas of potential impact have been
identified and it is management's opinion that the software
currently in use, or that which will be in use at the time is year
2000 compliant. Therefore, the Company does not expect a material
impact on future results due to conversion or noncompliance.
Forward-Looking Statements
The statements contained in "Management Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere
throughout this Annual Report on Form 10-K that are not historical
facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements
are subject to certain risks and uncertainties which could cause
actual results to differ materially from those reflected in the
forward-looking statements. These forward-looking statements
reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof or to
publicly release the results of any revisions to such forward-
looking statements that may be made to reflect events or
circumstances after the date hereof. In addition to the
disclosure contained herein, readers should carefully review any
disclosure of risks and uncertainties contained in other documents
the Company files or has filed from time to time with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934.
Item 8. Financial Statements and Supplementary Data.
See financial statements, beginning at page F-2, incorporated
herein by reference.
Unaudited quarterly financial data pertaining to the results of
operations for 1998 and 1997 are as follows:
Q1 Q2 Q3 Q4
(In thousands, except per share amounts)
December 31, 1998
Revenues $ 909 $ 930 $ 740 $1,170
Gross Profit (Loss) 46 172 13 551
Net Income (Loss) ( 990) ( 637) ( 941) (205)
Earnings (Loss)
Per Share ( 0.11) (0.07) ( 0.10) (0.02)
December 31, 1997
Revenues $ 3,027 $ 4,376 $ 1,225 $1,438
Gross Profit (Loss) 1,179 1,525 130 (2,269)
Net Income (Loss) (1,212) ( 583) (1,684) (3,118)
Earnings (Loss)
Per Share ( 0.13) ( 0.06) ( 0.18) (0.35)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
- 11 -
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers of the Company are as follows:
Positions and Offices with the Company:
Name Business Experience During Last Five Years
Joseph F. Kruy President and a Director from incorporation in
Age: 67 1968 to December, 1975 and from June, 1976 to
date; Chairman of the Board of Directors from
December, 1975 to date. Treasurer from June,1985
to April, 1987 and January, 1988 to April, 1988
and August, 1997 to date.
Philip C. Hankins Director since 1979. President, Charter
Age: 67 Information Corporation (Information
Processing).
C. V. Ramamoorthy Director since 1968. Professor of Electrical
Age: 72 Engineering and Computer Sciences, University of
California at Berkeley.
Robert Spain Director since 1995. President, CFC, Inc.
Age: 61 (Electronic Components Manufacturing)
Peter J. Kruy Executive Vice President and Chief Financial
Age: 36 Officer from August, 1998 to date; President
and Chief Executive Officer of Jupiter
Technology, Inc. from 1994 to 1998.
- 12 -
Item 11. Executive Compensation.
The following table provides certain summary information
concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the
other executive officers of the Company (determined as of the end
of the last fiscal year) for the fiscal years ended December 31,
1998, December 31, 1997, and December 31, 1996.
Summary Compensation Table
Annual Compensation
Commissions
Salary Salary and Incentive
Name and Position Year Paid Deferred(1) Bonuses
Joseph F. Kruy 1998 $200,000 $ - $ -
Chairman, President and CEO 1997 $136,270 $63,730 $ -
1996 $200,000 $ - $ -
Peter J. Kruy 1998 $ 34,327 $ - $ -
Executive Vice President and 1997 $ - $ - $ -
Chief Financial Officer 1996 $ - $ - $ -
Long Term Compensation Awards
All Other
Name and Position Year Options(#) Compensation(2)
Joseph F. Kruy 1998 - $ -
Chairman, President and CEO 1997 - $ -
1996 - $ 3,854
Peter J. Kruy 1998 - $ -
Executive Vice President and 1997 - $ -
Chief Financial Officer 1996 - $ -
(1) Salary Deferred is a prepetition obligation of the Company. Under the
terms of the Reorganization Plan, Mr. Kruy was entitled to receive the
salary deferral as an executory contract. Rather than receive the deferral
in cash, the entire amount was incorporated into Mr. Kruy's loan to the
Company in exchange for a 10% secured subordinated promissory note.
(2) Company contribution in Company Common Stock on officer's behalf to
the Company's 401(K) Plan.
Directors who are not employed by the Company receive an annual
fee of $10,000 and a fee of $1,000 for each meeting of the Board
attended.
13
Stock Options
No options were granted to or exercised by the executive officers
named in the Summary Compensation Table.
Aggregate Fiscal Year End Option Value
Number of Options Value of Unexercised In-the-money
at December 31, 1998 Options at December 31, 1998(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
Joseph F. Kruy - -
Peter J. Kruy - -
(1) The closing price of the Company's Common Stock on December 31, 1998
was $0.20. The numbers shown reflect the value of options
accumulated over all years of employment.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is presently comprised of the Board of
Directors. Mr. Kruy, the Company Chairman of the Board of
Directors, President and CEO, participates as a member of the
Board in compensation decisions, excluding decisions regarding his
own compensation.
Employment Contracts and Termination Agreements
Mr. Kruy is employed under an agreement which provides for his
full-time employment as Chairman of the Board of Directors,
President and Chief Executive Officer of the Company until
December 31, 1998. Pursuant to an employment agreement dated
November 18, 1994, the Company has agreed to pay Mr. Kruy minimum
base compensation of $200,000 per year and an incentive bonus
pursuant to the Company's Incentive Bonus Plan in an amount equal
to 4% of the Company's pre-tax profit, as defined, beginning in
fiscal 1995 for each fiscal year during the term of the agreement.
If another person is given either the title or the powers of the
Chief Executive Officer, Mr. Kruy will be entitled to resign and
continue to be paid his fixed and incentive compensation, subject
to mitigation, through December 31, 1998.
Report on Executive Compensation
The Company has designed its compensation program to compensate
employees, including its executives, in a consistent manner to
promote a cooperative effort toward common goals of quality
performance. Compensation is set at levels which the Company
believes will attract, motivate, and retain employees who can
achieve these goals.
Compensation for the Company's executive officers consists of base
salary, bonus and stock options. Base salaries and stock options
are approved by the
14
Compensation Committee presently comprised of the Board of
Directors based upon a review of the responsibilities of the
officer as well as a review of the base salaries and stock options
of similar positions in other high technology companies of
comparable revenues.
The Company believes that a substantial portion of an employee's
compensation should be based on the performance of the Company.
Therefore, the Company has an Incentive Bonus Plan which provides
for annual cash bonuses to certain key employees of the Company
based on the Company's operating results for the year up to an
aggregate maximum of 15% of the Company's pre-tax income. As of
December 31, 1998, approximately 10 employees were eligible to
participate in this plan. Of the executive officers, Mr. Kruy was
a participant in this plan in 1998. The amount of each individual
bonus is determined at the discretion of the Board of Directors.
The Company also has the Cambex Corporation Employee Stock
Purchase Plan which is an equity purchase plan designed to attract
and retain employees who can make significant contributions to the
success of the Company.
BOARD OF DIRECTORS
Joseph F. Kruy
Philip C. Hankins
C.V. Ramamoorthy
Robert J. Spain
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(#)Shares of Common
Stock Beneficially Owned
Name as of December 31, 1998 Percent of Class
Joseph F. Kruy 1,334,152(1) 13.99%
Philip C. Hankins 106,358 1.12%
C.V. Ramamoorthy 99,156 1.04%
Robert Spain - -
Peter J. Kruy 962,164(2) 10.09%
All directors and
executive officers
as a group (5 persons) 2,501,830(3) 26.23%
(1) Includes 56,250 shares owned by Mr. Kruy as co-trustee for his wife and
children.
(2) Includes 960,164 shares held by CyberFin Corporation, which is
owned by Peter Kruy.
(3) Directors and officers have shared investment power with
respect to 56,250 shares and sole voting power with respect
to 2,445,580 shares.
15
Solely for the purpose of calculating the aggregate market value
of voting stock held by non-affiliates of the Company as set forth
on the Cover Page, it was assumed that only directors and
executive officers on the calculation date together with spouses
and dependent children of such persons constituted affiliates.
Item 13. Certain Relationships and Related Transactions.
During the third quarter of 1996, the Company entered into a
Manufacturing Agreement with Jupiter Technology, Inc. ("Jupiter"),
the majority of which is owned by Joseph F. Kruy, Chairman and
Chief Executive Officer of Cambex Corporation, and his son, Peter
Kruy. Under the terms of this Agreement, Cambex agreed to
manufacture, sell and deliver products exclusively to Jupiter.
Cambex agreed to purchase approximately $300,000 of Jupiter
inventory from Jupiter and paid Jupiter $100,000 towards that
amount. During 1996, the Company shipped and billed to Jupiter
$298,000 for Jupiter products plus $43,000 for expenses related to
a sublease agreement. During 1997, the Company shipped and billed
to Jupiter $174,000 for Jupiter products plus $118,000 for
expenses related to a sublease agreement. As of December 31,
1997, Cambex owed Jupiter $267,000 for inventory purchases and
Jupiter owed Cambex $504,000 for revenue shipments plus expenses.
In January, 1998, substantially all of the assets of Jupiter
Technology were purchased by an unrelated third party. In March,
1998, Jupiter paid the Company $230,000, which represented the net
amount due the Company.
On June 1, 1998, the Company raised approximately $1,060,000,
including approximately $460,000 from Joseph F. Kruy, Chairman,
President and Chief Executive Officer of the Company, in cash from
the issuance of 10% Subordinated Convertible Promissory Notes (the
"Notes"). Under the terms of the Notes, which are due on April 30,
2003, the holders may convert the notes into shares of common
stock at a conversion price of $0.22 per share. In addition to the
Note, each holder was issued a Stock Purchase Warrant ( the
"Warrant"), the exercise of which will allow the warrant holder to
purchase one share of common stock, at $0.50 per share, for each
dollar invested through the issuance of the Notes.
On November 9, 1998, the Company entered into a loan and security
agreement with a lender company, hereafter referred to as "Lender"
which is owned by a relative of Joseph F. Kruy, Chairman and Chief
Executive Officer of the Company, under which the Company may
borrow up to a maximum of $500,000 being outstanding at any one
time. Such loan is fully secured by all assets of the Company.
The Company pays all collections from accounts receivable to the
Lender not less frequently than each week until the outstanding
loan amount plus related interest, which accrues at a 12% annual
rate, is fully paid. Under the terms of the loan agreement, the
Lender receives a warrant for the purchase of two shares of common
stock, at $0.21 per share, for each dollar loaned to the Company.
- 16 -
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) The financial statements listed in the index to
financial statements appearing at page F-1 of this
report, which index is incorporated in this item by
reference.
(2) The financial statement schedules as set forth in the
above-mentioned index to financial statements.
(3) See the exhibit index following on page A-1.
(b) No reports on Form 8-K were filed during the last quarter
of the period covered by this report.
- 17 -
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated by
reference herein.
Exhibit
3.1 Articles of Organization of Cambex Corporation, as amended
(incorporated herein by reference to Exhibit 1.1 to Form 10-K
for the fiscal year ended August 31, 1981).
3.1.1 Articles of Amendment to Articles of Organization filed with
the Massachusetts Secretary of State on December 11, 1987
(incorporated herein by reference to Exhibit 3.1.1 to
Form 10-K for the fiscal year ended August 31, 1987).
3.1.2 Articles of Amendment to Articles of Organization filed with
the Massachusetts Secretary of State on June 8, 1988
(incorporated herein by reference to Exhibit 3.1.2 to
Form 10-K for the fiscal year ended August 31, 1988).
3.1.3 Articles of Amendment to Articles of Organization filed with
the Massachusetts Secretary of State on January 23, 1992
(incorporated herein by reference to Exhibit 3.1.3 to
Form 10-K for the fiscal year ended August 31, 1993).
3.2 By-Laws of Cambex Corporation, as amended (incorporated herein
by reference to Exhibit 1.2 to Form 10-K for the fiscal year
ended August 31, 1981).
10.1 Employment Agreement between Joseph F. Kruy and Cambex
Corporation, dated as of April 22, 1987 (incorporated herein
by reference to Exhibit 10.1.1 to Form 10-K for the fiscal
year ended August 31, 1987).
10.2 Incentive Bonus Plan (incorporated herein by reference to
Exhibit 10.3 to Form 10-K for the fiscal year ended
August 31, 1983).
10.4 1985 Non-Qualified Stock Option Plan (incorporated herein by
reference to Exhibit 10.6 to Form 10-K for the fiscal year
ended August 31, 1985).
10.6 1987 Combination Stock Option Plan (incorporated herein by
reference to Exhibit 10.8 to Form 10-K for the fiscal year
ended August 31, 1987).
10.8 9021 Memory Products Business Acquisition Agreement dated
January 10, 1992 between the Company and EMC Corporation
(incorporated herein by reference to Exhibit 1 to Form 8-K
dated January 14, 1992).
- 18 -
Exhibit Index - Continued
Exhibit - Continued
10.9 Cambex Corporation Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.9 to Form 10-K for the
fiscal year ended August 31, 1994).
10.10 Revolving Credit Agreement dated April 15, 1993 between the
Company and the First National Bank of Boston (incorporated
herein by reference to Exhibit 10.10 to Form 10-K for the
fiscal year ended August 31, 1994).
10.11 Cambex Corporation Reorganization Plan (incorporated herein by
reference to Exhibit 10.11 to Form 8-K for April 23, 1998).
23. Consent of Independent Public Accountants.
- 19 -
CAMBEX CORPORATION AND SUBSIDIARIES
(Information required by Part II, Item 8 and
Part IV, Item 14 of Form 10-K)
FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F- 2
Consolidated Balance Sheets - December 31, 1998 and 1997 F- 3
Consolidated Statements of Operations for the Years
Ended December 31, 1998, December 31, 1997 and
December 31, 1996 F- 4
Consolidated Statements of Stockholders' Investment
for the Years Ended December 31, 1998,
December 31, 1997 and December 31, 1996 F- 5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, December 31, 1997
and December 31, 1996 F- 6
Notes to Consolidated Financial Statements F- 7
SUPPLEMENTARY SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1998,
DECEMBER 31, 1997 AND DECEMBER 31, 1996
Schedule Number
II Valuation and Qualifying Accounts F-23
Schedules other than those referred to above have been omitted, as
they are not required or the information is included elsewhere in
the financial statements or the notes thereto.
- 20 -
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Stockholders of Cambex Corporation:
We have audited the accompanying consolidated balance sheets of
Cambex Corporation (a Massachusetts corporation) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' investment and cash flows
for the years then ended. These financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements
of Cambex Corporation and subsidiaries as of December 31, 1996
were audited by other auditors whose report dated March 4, 1997,
on those statements included an explanatory paragraph describing
conditions that raised substantial doubt about the Company's
ability to continue as a going concern discussed in Note 1 to the
financial statements.
We have 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 1998 and 1997 financial statements referred to
above present fairly, in all material respects, the financial
position of Cambex Corporation and subsidiaries as of December 31,
1998 and 1997 and the results of their operations and their cash
flows for the years then ended 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 1 to the financial statements, the Company has suffered
recurring losses from operations that raises substantial doubt
about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result
should the Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed
in the index of the financial statements is presented for the
purpose of complying with the
Report of Independent Public Accounts
Page - 2 -
Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a
whole.
BELANGER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Chelmsford, Massachusetts
March 31, 1999
F-2
- 22 -
<TABLE>
<S> <C>
CAMBEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
CURRENT ASSETS: --------- ---------
Cash and cash equivalents $ 211,452 $ 476,246
Accounts receivable,less reserves
of $100,000 in 1998 and $131,000
in 1997 514,335 1,200,343
Current portion of investment in sales-type
leases, net of unearned interest income of
$400 in 1998 and $4,000 in 1997 25,820 59,299
Inventories 303,720 1,412,925
Prepaid expenses 72,852 121,183
Total current assets $ 1,128,179 $ 3,269,996
LONG-TERM INVESTMENT IN SALES-TYPE
LEASES, net of unearned interest
income of $1,000 in 1997 $ - $ 25,820
LEASED EQUIPMENT, at cost, net of
accumulated depreciation of $208,000
in 1998 and $138,000 in 1997 $ - $ 37,886
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment $ 3,044,199 $ 3,036,699
Furniture and fixtures 247,173 247,173
Leasehold improvements 602,092 620,949
$ 3,893,464 $ 3,904,821
Less- Accumulated depreciation
and amortization 3,585,441 3,347,941
$ 308,023 $ 556,880
OTHER ASSETS
Technology License/Marketing Agreement,
net of accumulated amortization
of $8,500,000 in 1998 and 1997 $ - $ -
Other 37,830 37,830
Total Assets $ 1,474,032 $ 3,928,412
LIABILITIES AND STOCKHOLDERS' INVESTMENT
1998 1997
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Loan Agreement $ 393,424 $ -
Accounts payable 408,841 296,419
Obligations for trade-in memory 360,250 -
Prepetition liabilities-short term portion 1,146,168 -
Accrued expenses-
Payroll and related 136,349 96,713
Income and other taxes 83,869 12,143
Other 173,821 352,869
Total current liabilities $ 0 $ 758,144
LONG TERM DEBT $ 1,063,730 $ -
PREPETITION LIABILITIES-LONG TERM PORTION $ 3,173,007 $ -
DEFERRED REVENUE $ 255,366 $ 15,478
LIABILITIES SUBJECT TO COMPROMISE -
Accounts payable and accrued expenses $ - $ 6,325,273
Total liabilities $ 4,492,103 $ 7,098,895
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Preferred Stock, $1.00 par value per share -
Authorized--3,000,000 shares
Issued--None $ $
Common Stock, $.10 par value per share -
Authorized--25,000,000 shares
Issued- 11,072,582 shares in 1998
and 10,636,108 shares in 1997 1,107,258 1,063,611
Capital in excess of par value 15,966,625 15,814,783
Accumulated other comprehensive income 88,134 60,756
Retained earnings(deficit) (22,028,044) (19,254,867)
Less - Cost of shares held in treasury--
1,534,356 shares in 1998 and 1997 (854,766) (854,766)
Total Stockholders' Investment $ (5,720,793) $ (3,170,483)
Total Liabilities and Stockholders'
Investment $ (1,228,690) $ 3,928,412
============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
-23- F-3
</TABLE>
<TABLE>
<S> <C>
CAMBEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
REVENUES
Product sales $ 1,600,644 $ 6,667,693 $ 17,741,399
Services 2,148,289 3,398,699 5,083,624
License fees - - 91,667
Total revenues $ 3,748,933 $10,066,392 $ 22,916,690
COST OF SALES 2,967,406 9,501,543 17,355,948
Gross profit $ 781,527 $ 564,849 $ 5,560,742
OPERATING EXPENSES:
Research and development $ 1,379,094 $ 2,321,925 $ 3,432,772
Selling 1,241,385 3,193,271 6,839,807
General and administrative 760,578 1,295,465 2,146,060
$ 3,381,057 $ 6,810,661 $ 12,418,639
OPERATING INCOME (LOSS) $(2,599,530) $ (6,245,812) $ (6,857,897)
OTHER INCOME (EXPENSE):
Interest expense (70,000) (74,477) (243,694)
Interest income 3,641 17,674 92,361
Other income (expense) (107,288) (84,861) (1,822,873)
INCOME (LOSS) BEFORE REORGANIZATION
ITEMS AND INCOME TAXES $(2,773,177) $ (6,387,476) $ (8,832,103)
Professional fees - (210,000) -
INCOME (LOSS) BEFORE
INCOME TAXES $(2,773,177) $ (6,597,476) $ (8,832,103)
Credit (Provision) for income taxes - - 200,000
NET INCOME (LOSS) $(2,773,177) $ (6,597,476) $ (8,632,103)
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Foreign Currency Translation
Adjustments 27,378 (122,599) (104,408)
OTHER COMPREHENSIVE INCOME 27,378 (122,599) (104,408)
TOTAL COMPREHENSIVE INCOME $(2,745,799) $ (6,720,075) $ (8,736,511)
TOTAL COMPREHENSIVE INCOME (LOSS)
PER COMMON SHARE $(0.30) $(0.74) $(0.97)
Weighted Average Common and
Common Equivalent Shares Outstanding 9,300,000 9,100,000 9,000,000
The accompanying notes are an integral part of these consolidated financial statements.
-24- F-4
</TABLE>
<TABLE>
<S> <C>
CAMBEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Common Stock Capital in Accumulated Retained Cost of
$.10 Excess of Other Comprehensive Earnings Shares Held
Par Value Par Value Income (Deficit) in Treasury
BALANCE AT DECEMBER 31, 1995 $ 1,045,299 $ 15,446,004 $ 287,763 $ (4,025,288) $(854,766)
ADD:
Net loss $ - $ - $ - $ (8,632,103) $ -
Exercise of employee stock options 7,627 53,864 - - -
401(k) Employer match 3,482 100,990 - - -
Stock Purchase Plan shares 5,006 191,247 - - -
Purchase Plan
Translation adjustment - - (104,408) - -
BALANCE AT DECEMBER 31, 1996 $ 1,061,414 $ 15,792,105 $ 183,355 $(12,657,391) $(854,766)
ADD:
Net loss $ - $ - $ - $ (6,597,476) $ -
Exercise of employee stock options 90 135 - - -
Stock Purchase Plan Shares 2,107 22,543 - - -
Translation Adjustment - - (122,599) - -
BALANCE AT DECEMBER 31, 1997 $ 1,063,611 $ 15,814,783 $ 60,756 $(19,254,867) $(854,766)
ADD:
Net loss $ - $ - $ - $ (2,773,177) $ -
Exercise of employee stock options 600 120 - - -
Stock Purchase Plan Shares 5,386 1,077 - - -
Issuance of shares pursuant
to reorganization plan 37,661 150,645 - - -
Translation adjustment - - 27,378 - -
BALANCE AT DECEMBER 31, 1998 $ 1,107,258 $ 15,966,625 $ 88,134 $(22,028,044) $(854,766)
-25- F-5
</TABLE>
<TABLE>
<S> <C>
CAMBEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
Net income (loss) $ (2,773,177) $ (6,597,476) $ (8,632,103)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation $ 283,243 $ 569,207 $ 658,191
Amortization - - 1,841,671
Provision for losses on accounts receivable - - -
Provision for losses on inventory - 2,300,000 2,800,000
Amortization of prepaid expenses 24,892 28,990 14,074
Common stock/warrants issued in lieu of cash 194,769 - 104,472
Change in assets and liabilities:
Decrease (increase) in accounts receivable 686,008 734,365 694,070
Decrease (increase) in inventory 1,109,205 2,487,108 3,030,291
Decrease (increase) in investment in sales-type leases 59,299 501,072 170,085
Decrease (increase) in prepaid taxes - 2,335,295 4,053,364
Decrease (increase) in prepaid expenses 23,439 (14,452) 29,196
Decrease in other assets - - 45
Increase (decrease) in accounts payable 112,422 (4,033,219) (209,214)
Increase (decrease) in obligations for trade-in memory360,250 (1,036,235) (903,422)
Increase (decrease) in accrued liabilities (67,686) (857,512) (2,398,454)
Increase (decrease) in deferred revenue 239,888 (1,007,273) 105,664
Increase in prepetition liabilities 4,319,175 - -
Increase in liabilities subject to compromise (6,325,273) 6,325,273 -
Total adjustments $ 1,019,631 $ 8,332,619 $ 9,990,033
Net cash provided by (used in) operating activities $ (1,753,546) $ 1,735,143 $ 1,357,930
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net $ 3,500 $ 22,878 $ (83,639)
Net cash used in investing activities $ 3,500 $ 22,878 $ (83,639)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable $ 1,063,730 $ - $ -
Proceeds from sale of common stock 720 24,875 257,744
Net borrowings (repayments) under loan agreement 393,424 - -
Net borrowings (repayments) under revolving credit agreement - (1,800,000) (1,400,000)
Net cash provided by (used in) financing activities $ 1,457,874 $ (1,775,125) $ (1,142,256)
Effect of exchange rate changes on cash 27,378 (122,599) (104,408)
Net increase (decrease) in cash and cash equivalents$ (264,794) $ (139,703) $ 27,627
Cash and cash equivalents at beginning of year 476,246 615,949 588,322
Cash and cash equivalents at end of year $ 211,452 $ 476,246 $ 615,949
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for: Interest $ - $ 43,477 $ 269,364
Income Taxes - - 13,613
Refunds received from the Internal Revenue Service - 2,335,295 2,189,984
Reorganization professional fees 195,766 210,000 -
The accompanying notes are an integral part of these consolidated financial statements.
-26-
F-6
</TABLE>
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) Liquidity
As further described in Note 12, the Company raised
$1,060,000 in cash from the issuance of 10% Subordinated
Convertible Promissory Notes, of which $700,000 was used to
pay pre-petition debt and legal and professional fees
resulting from the Company filing a voluntary petition for
relief under Chapter 11 of the bankruptcy code on October 10,
1997 with the United States Bankruptcy Court in Boston,
Massachusetts. The Company's reorganization plan was
confirmed by the Court in April, 1998. Subsequently, the
Company emerged from Chapter 11 on April 23, 1998. As
described in the Company's Plan, the success of the Plan is
dependent upon several factors, including the Company's
ability to raise additional capital. The additional
financing will be used to fund continuing operations of the
Company, particularly in development, sales and marketing..
The Company also has a loan and security agreement under
which the Company may borrow up to $500,000 outstanding at
any one time.
The Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue
as a going concern. The Company's management believes it has
taken the appropriate corrective actions to reduce expenses
through consolidation of the workforce and to increase
revenue through the sale of new products, new strategic
alliances and selling products with improved gross margins.
These consolidated financial statements do not include any
adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of
liabilities that might result should the company be unable to
continue as a going concern.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Cambex Corporation and its wholly-owned
subsidiaries (the Company). All material intercompany
transactions and balances have been eliminated in
consolidation.
Revenue Recognition
The Company manufactures equipment for sale or lease.
Revenue from product sales is recognized at the time the
hardware and software are shipped. The Company accepts
memory in trade as consideration in certain revenue
transactions. Revenue is recorded at the net cash received.
When the memory is subsequently sold, the amount received is
recorded as revenue. Service and other revenues are
recognized ratably over the contractual period or as the
services are provided. Under certain equipment leases which
qualify as sales type leases, the present value of
- 27 -
F-7
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(2) Summary of Significant Accounting Policies - Continued
noncancelable payments is currently included in revenues as
sales, and all related costs, exclusive of the residual value
of the equipment, are currently included in cost of sales.
The unearned interest is recognized over the noncancelable
term of the lease. The Company has deferred revenue
associated with the sale of certain products that have future
performance obligations. For equipment leased under
operating lease agreements, revenue is recognized over the
lease term and the equipment is depreciated over its
estimated useful life.
License fees are amortized over the useful life of the
technologies being licensed.
Inventories
Inventories, which include materials, labor and manufacturing
overhead, are stated at the lower of cost (first-in, first-
out) or market and consist of the following:
December 31, December 31,
1998 1997
Raw materials $ 228,524 $ 987,920
Work-in-process 51,215 255,377
Finished goods 23,981 169,628
$ 303,720 $1,412,925
Property and Equipment
The Company provides for depreciation and amortization on a
straight- line basis to amortize the cost of property and
equipment over their estimated useful lives as follows:
Leasehold improvements 2-10 Years
Machinery and equipment 3- 8 Years
Furniture and fixtures 3- 8 Years
Leased equipment 3- 5 Years
Maintenance and repair items are charged to expense when
incurred; renewals or betterments are capitalized.
- 28 -
F-8
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(2) Summary of Significant Accounting Policies - Continued
If property is sold or otherwise disposed of, the Company's
policy is to remove the related cost and accumulated
depreciation from the accounts and to include any resulting
gain or loss in income.
Depreciation expense of $283,243, $569,207, and $658,191, was
recorded for the periods ended December 31, 1998, December
31, 1997, and December 31, 1996, respectively.
Net Income (Loss) Per Common Share
On January 1, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 replaces the presentation of primary
income (loss) per share with a dual presentation of basic
income (loss) per share and diluted income (loss) per share
for each year for which a statement of operations is
presented.
Basic income (loss) per share amounts are based on the
weighted average number of common shares outstanding during
each year. Diluted income (loss) per share amounts are based
on the weighted average number of common shares and common
share equivalents outstanding during each year to the extent
such equivalents have a dilutive effect on the income (loss)
per share.
For the years ended December 31, 1998, 1997 and 1996, common
share equivalents were not included in diluted income (loss)
per share because the Company incurred a loss for each year.
The inclusion of the common stock equivalents would have had
an antidilutive effect on the computation of diluted income
(loss) per share
Cash and Cash Equivalents
Cash and cash equivalents are recorded at cost which
approximates market value. Cash equivalents include
certificates of deposit, government securities and money
market instruments purchased with maturities of less than
three months.
- 29 -
F-9
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(2) Summary of Significant Accounting Policies - Continued
Stock Options and Employee Stock Purchase Plan
Proceeds from the sale of newly issued stock to employees
under the Company's stock option plans and Employee Stock
Purchase Plan are credited to common stock to the extent of
par value and the excess to capital in excess of par value.
Income tax benefits attributable to stock options are
credited to capital in excess of par value.
Disclosures about the Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash,
cash equivalents, accounts receivable, investment in sales-
type leases, property held for sale, accounts payable, notes
payable, and a revolving credit agreement. The carrying
amounts of these financial instruments approximate their fair
value due to the short-term nature of these instruments,
except for the following. Under the reorganization plan
described in Note 1 to the financial statements, accounts
payable subject to compromise of approximately $4,300,000 are
expected to be paid over a 30 month period which commenced in
October 1998, without interest. Accordingly, the net present
value of these payments approximate $3,800,000 at December 31,
1998 assuming an interest rate of 7.44% and $4,000,000 at
December 31, 1997 assuming an interest rate of 9%.
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 disclosures of
contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of income and
expenses during the reporting periods. Actual results could
differ from those estimates.
Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets To Be Disposed Of
On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of". SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset
- 30 -
F-10
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(2) Summary of Significant Accounting Policies - Continued
may not be recoverable. The statement also requires that
certain long-lived assets and identifiable intangibles to be
disposed of be reported at the lower of the carrying amount
or fair value less cost to sell. Based on its review, the
Company does not believe that any material impairment of its
long-lived assets has occurred. The Company's review was
based on the assumption that the Company continues as a going
concern. The financial statements do not include any
adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of
liabilities that might result should the company be unable to
continue as a going concern.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that changes in
stockholders' equity from transactions and events other than
those resulting from investments by and distributions to stockholders
be reflected in comprehensive income or loss. All prior year
financial statements have been reclassified to comply with this
statement.
Segment Reporting
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," became effective for periods beginning
after December 15, 1997. This statement requires the presentment
of information about the identifiable components comprising an
enterprise's business activities.
The Company has determined that there are no separately reportable
operating segments and, therefore, does not present separate
reporting segments in its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation",
encourages but does not require companies to record
compensation cost for stock-based employee compensation plans
at fair value. The Company has chosen to continue to account
for such plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25. Accordingly,
compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's
stock at the date of grant over the exercise price of the
stock (See Note 9).
- 31 -
F-11
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(3) Business, Operations and Segment Information
The Company is in the business of developing and
manufacturing hardware and software for use with a variety of
IBM computer systems. The Company's principal products
include memory storage systems for large-scale IBM mainframe
computers and storage subsystems for open systems computer
platforms.
The Company sells its equipment to both end users and to
distributors. The Company's principal customers operate in a
wide variety of industries and in a broad geographical area.
No single customer or distributor accounted for 10% or more
of total sales in fiscal year 1997. During years 1998 and
1996, one customer accounted for 11% and 14% of total
revenues. Foreign sales were 23% in 1997, 20% in 1996 and
less than 10% of total revenues in fiscal 1998.
(4) Income Taxes
In accordance with SFAS No. 109, "Accounting For Income
Taxes", deferred tax assets and liabilities are determined
based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected
to reverse.
The following table presents the components of income (loss)
before income taxes:
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
Domestic $(2,549,000) $(5,689,000) $(6,506,000)
Foreign ( 224,000) ( 908,000) (2,326,000)
$(2,773,000) $(6,597,000) $(8,832,000)
- 32 -
F-12
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(4) Income Taxes - Continued
The following table presents a reconciliation between taxes
provided at the statutory federal income tax rate and the actual
tax provision recorded for the following periods:
Year ended Year ended Year ended
December December December
1998 1997 1996
Provision (credit) at
federal statutory rate $( 943,000) $(2,243,000) $(3,003,000)
State tax provision
(credit), net of federal
tax benefit ( 160,000) (358,000) (380,000)
Foreign and other losses
for which no benefits have
been recorded 76,000 309,000 853,000
Change in valuation
allowances 1,047,000 2,007,000 2,711,000
Other ( 20,000) 285,000 (381,000)
$ -0- $ -0- $(200,000)
The 1996 tax benefit recognized is primarily for current federal
and foreign tax refunds receivable.
- 33 -
F-13
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(4) Income Taxes - Continued
Refundable income taxes as of December 31, 1996 consisted of
approximately $2,335,000, of federal and foreign incomes
taxes refundable as a result of taxable losses incurred
during fiscal 1995, 1994 and 1993.
The Company has federal net operating loss carryovers
totalling $15,780,000 which expire through the year ended
December 31, 2013.
The tax effects of the significant items which comprise the
deferred tax liability and tax asset, as of fiscal 1998, 1997
and 1996 are as follows:
December December December
1998 1997 1996
Assets
Reserves not currently deductible
for tax purposes $ 1,920,000 $ 1,874,000 $1,186,000
State tax net operating loss
carryforward 1,565,000 1,335,000 1,223,000
Federal net operating loss
carryforward 4,859,000 4,114,000 2,965,000
Employee benefits 47,000 96,000 112,000
Other 154,000 76,000 75,000
Total deferred tax assets $ 8,545,000 $ 7,495,000 $5,561,000
Liabilities
Fixed asset basis difference $ 0 $ 0 $( 67,000)
Other (45,000) (42,000) ( 48,000)
Total deferred tax liabilities $ (45,000) $ (42,000) $( 115,000)
Net deferred tax asset $ 8,500,000 $ 7,453,000 $5,446,000
Valuation allowance (8,500,000) (7,453,000) (5,446,000)
Tax asset 0 0 0
Tax refunds receivable 0 0 2,335,000
Total tax asset 0 0 $2,335,000
- 34 -
F-14
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(4) Income Taxes - Continued
Due to the uncertainty of the realizability of the deferred
tax assets, the Company has established a valuation allowance
for the net deferred tax assets.
(5) Technology/Marketing Agreement
During the second quarter of fiscal 1992, the Company
acquired from EMC Corporation technology rights, inventory,
and other assets associated with EMC's IBM 3090 and ES/9000,
Model 9021 compatible mainframe memory products. The purchase
price of $11,500,000 was paid in fiscal 1992 and 1993. The
use of the technology was exclusive to Cambex for five years.
The financial statement impact included the recording of
inventory in the amount of $3,000,000, a marketing agreement
in the amount of $7,500,000 and a technology license
amounting to $1,000,000. The marketing agreement and
technology license were amortized over a five-year period,
ending December 31, 1996. Amortization of $1,842,000 related
to the technology license and marketing agreement was
recognized as other expense for the year ended December 31,
1996.
(6) Revolving Credit Agreement
During 1993, the Company obtained a $10 million unsecured,
revolving line of bank credit, bearing interest at the prime
rate plus one-half percent with a commitment fee of 3/8 of 1%
per year on the unused portion. The Company was required to
repay any borrowings under this revolving credit line on
March 29, 1996.
- 35 -
F-15
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(6) Revolving Credit Agreement - Continued
During the second quarter of 1996, the Company agreed with
its bank to extend and modify its Revolving Credit Agreement.
Under the terms of the Modification Agreement, the
outstanding balance at that time, $3,020,000 would be repaid,
after an initial payment of $320,000, over a period of twenty
four (24) months at $120,000 per month, with interest at the
prime rate plus one percent. The Company granted to its bank
a security interest in the Company's accounts receivable,
inventory and general intangibles. In addition, the Company
agreed to apply its anticipated refund from the Internal
Revenue Service of not less than $1,900,000 to the
outstanding balance upon receipt.
As of December 31, 1996, $1,800,000 remained outstanding
under this Agreement. Subsequent to the end of the year, the
Company received its refund from the Internal Revenue Service
and repaid its bank in full and the agreement was terminated.
Consequently, the bank released its security interest in the
Company's accounts receivable, inventory and general
intangibles.
- 36 -
F-16
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(7) Earnings Per Share
Options to purchase 143,851, 259,305 and 415,715 weighted
average shares of common stock during the years ended
December 31, 1998, 1997 and 1996, respectively, were not
included in the computation of diluted loss per share because
to do so would have had an antidilutive effect on the
computation of loss per share.
As more fully described in Note 9, options to purchase
94,970, 187,420 and 368,820 shares of common stock
outstanding at December 31, 1998 ,1997 and 1996,
respectively, could potentially dilute basic income (loss)
per share in the future.
(8) Commitments and Contingencies
At December 31, 1998, the Company had minimum rental
commitments under long-term, noncancelable operating leases
for facilities and other equipment as follows:
Due during Fiscal Year
1999 $ 381,924
2000 $ 381,924
2001 $ 381,924
2002 $ 381,924
2003 $ 159,134
$1,686,831
Total rental expense, including the cost of short-term
equipment leases, real estate taxes and insurance paid to the
landlord and charged to operations approximated $260,000 for
the year ended December 31, 1998, $1,160,000 for the year
ended December 31, 1997, and $1,691,000 for the year ended
August 31, 1996. During 1997, 1998 and 1999, the Company
entered into agreements to sublet portions of its facilities
to unrelated parties.
In the ordinary course of business, the Company is involved
in legal proceedings. The Company believes that the outcome
of these proceedings will not have a material adverse effect
on the Company's financial condition or results of
operations.
- 37 -
F-17
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(9) Stock Options and Warrants
On March 7, 1997, the Company established the 1997 Stock
Option Plan (subject to stockholder approval). The 1997
Stock Option Plan provides for the issuance of up to
1,000,000 shares in the aggregate and up to 300,000 shares to
any one employee. At December 31, 1998, the Company had two
stock option plans for officers and certain employees under
which 1,094,970 shares were reserved and options for
1,000,000 shares were available for future grants. Options
are granted at not less than 85%, or in certain cases, not
less than 100%, of the fair market value of the common stock
on the date of grant. Options outstanding have a term of ten
years and become exercisable in installments as determined by
the Board of Directors. The plan's options vest between one
through six years and all expire between July 28, 1999 and
November 11, 2006.
Stock option activity for the three years ended December 31,
1998 was as follows:
Option Shares Number Option
Price
Outstanding at December 31, 1995 471,458 .25 -16.15
Granted 217,000 2.23 -5.95
Exercised, cancelled or
expired (319,638) 3.19 -11.69
Outstanding at December 31, 1996 368,820 .25 -16.15
Granted - -
Exercised, cancelled or
expired (181,400) .25 -10.41
Outstanding at December 31, 1997 187,420 .35 -16.15
Granted - -
Exercised, cancelled or
expired ( 92,450) .12 -16.15
Outstanding at December 31, 1998 94,970 .12
As of December 31, 1998 and 1997, options for 27,970 and
35,100 shares were exercisable at aggregate option prices of
$3,356 and $250,655, respectively.
- 38 -
F-18
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(9) Stock Options and Warrants - Continued
Had compensation cost for these plans been determined
consistent with SFAS No. 123, the Company's net loss and loss
per share would have been increased to the following pro
forma amounts:
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
Net Income (Loss): As Reported (000's) (2,773) (6,597) (8,632)
Pro Forma (2,773) (6,597) (9,456)
Basic and Diluted EPS:As Reported ( 0.30) ( .72) ( .96)
Pro Forma ( 0.30) ( .72) ( 1.05)
The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions and values
for grants in the periods presented.
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
Assumptions:
Risk free interest rate N/A N/A 6.35%
Expected dividend yield N/A N/A 0%
Expected life in years N/A N/A 10
Expected volatility N/A N/A 65.56%
Values:
Weighted average fair
value of options granted 0 0 4.35
Weighted average exercise price 0.12 1.94 4.58
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to September 1, 1994, the
resulting pro forma compensation cost may not be
representative of that to be expected in future years.
As of December 31, 1998, warrants to purchase 1,063,730 shares of
common stock at $0.50 per share were outstanding and an equal
number of shares were reserved for issuance.
- 39 -
F-19
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(10) Incentive Bonus Plan and 401(k) Profit Sharing Retirement Plan
The Company has an incentive bonus plan under which certain
key employees as a group are entitled to receive additional
compensation up to a maximum of 15% of the Company's pre-tax
income, as defined. There was no provision in 1998 or 1997.
The provision for incentive bonus amounted to approximately
$35,000 in fiscal year 1996.
On September 1, 1988, the Company established the Cambex
Corporation 401(k) Profit Sharing Retirement Plan (the Plan).
Under the Plan, employees are allowed to make pre-tax
retirement contributions. In addition, the Company may
provide matching contributions based on pre-established rates
as determined by the Board of Directors. The Company
provided approximately $400,000 in fiscal year 1994 for
matching contributions. In fiscal 1995, the Company recorded
a net reversal of prior accruals of approximately $200,000.
The Company's contributions have been in the form of Cambex
common stock since fiscal 1994.
The Company offers no post-retirement benefits other than
those provided under the Plan.
(11) Employee Stock Purchase Plan
On December 20, 1993, the Company established the Cambex
Corporation Employee Stock Purchase Plan (the Plan), which
was approved by the shareholders. Under the Plan, employees
may elect to have a specified percentage of their wages
withheld through payroll deduction and purchase common stock
shares at 85% of the lower of the fair market value of Common
Stock on the first or last trading day of each Purchase
Period. There are two (2) Purchase Periods each year - the
first six months and the last six months of each calendar
year. During fiscal 1998, fiscal 1997 and fiscal 1996, there
were 53,862, 21,069, and 50,060 shares issued under the Plan,
respectively. On August 31, 1998, the Board of Directors
voted, subject to shareholder approval, to increase the
number of shares to cover the number of shares purchased
under the Plan during the period January 1, 1998 to June 30,
1998 and to terminate the Plan. At December 31, 1998, there
were 160,708 shares reserved for issuance under the Plan.
- 40 -
F-20
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(12) Related Party Transactions
During the third quarter of 1996, the Company entered into a
Manufacturing Agreement with Jupiter Technology, Inc.
("Jupiter"), the majority of which is owned by Joseph F.
Kruy, Chairman and Chief Executive Officer of Cambex
Corporation, and members of his family. Jupiter is a supplier
of multiprotocol frame relay access devices (FRADs) and
network integration systems. Under the terms of this
Agreement, Cambex agreed to manufacture, sell and deliver
products exclusively to Jupiter. Cambex agreed to purchase
approximately $300,000 of Jupiter inventory from Jupiter and
paid Jupiter $100,000 towards that amount. During 1997, the
Company shipped and billed to Jupiter $174,000 for Jupiter
products plus $118,000 ,000 for expenses related to a
sublease agreement. During 1996, the Company shipped and
billed to Jupiter $298,000 for Jupiter products plus $43,000
for expenses related to a sublease agreement. As of December
31, 1997, Cambex owed Jupiter $267,000 for inventory
purchases and Jupiter owed Cambex $504,000 for revenue
shipments plus expenses. In January, 1998, substantially all
of the assets of Jupiter Technology were purchased by an
unrelated third party. In March, 1998, Jupiter paid the
Company $230,000, which represented the net amount due the
Company.
On June 1, 1998, the Company raised approximately $1,060,000,
including approximately $460,000 from Joseph F. Kruy,
Chairman, President and Chief Executive Officer of the
Company, in cash from the issuance of 10% Subordinated
Convertible Promissory Notes. Under the terms of the Notes,
which are due on April 30, 2003, the holders may convert the
notes into shares of common stock at a conversion price of
$0.22 per share. In addition to the Note, each holder was
issued a Stock Purchase Warrant, the exercise of which will
allow the warrant holder to purchase one share of common
stock, at $0.50 per share, for each dollar invested through
the issuance of the Notes.
On November 9, 1998, the Company entered into a loan and
security agreement with a lender company, hereafter referred
to as "Lender" which is owned by a relative of Joseph F.
Kruy, Chairman and Chief Executive Officer of the Company,
under which the Company may borrow up to a maximum of
$500,000 being outstanding at any one time. Such loan is
fully secured by all assets of the Company. The Company pays
all collections from accounts receivable to the Lender not
less frequently than each week until the outstanding loan
amount plus related interest, which accrues at a 12% annual
rate, is fully paid. Under the terms of the loan agreement,
the Lender receives a warrant for the purchase of two shares
of common stock, at $0.21 per share, for each dollar loaned
to the Company.
- 41 -
F-21
CAMBEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Continued)
(13) Events (Unaudited) Subsequent to date of Report of
Independent
Public Accountants
On March 1, 1999, the Company entered into a Sublease
Agreement with a third party pursuant to which the Company
sublet approximately 14,000 square feet in its Waltham,
Massachusetts facility (which is approximately 21% of the
Company's total leased space). The term of the sublease is
coterminous with the primary lease and expires on May 31,
2003.
(14) Credit Risk
The Company maintains cash balances at financial institutions
located in Massachusetts. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1998, the Company's uninsured cash
balances total $72,520.
The Company's subsidiaries maintain cash balances at several
financial institutions located throughout Europe. These cash
balances are subject to normal currency exchange
fluctuations. At December 31, 1998, the Company's overseas
cash balances total $78,936.
- 42 -
F-22
CAMBEX CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Charged To
Balance at (Recovered Balance
Beginning From) Writeoffs/ at End
of Year Income Deductions of Year
YEAR ENDED DECEMBER 31, 1996:
Reserve for doubtful accounts $ 136,000 $ - $ (5,000) $131,000
YEAR ENDED DECEMBER 31, 1997:
Reserve for doubtful accounts $ 131,000 $ - $ - $131,000
YEAR ENDED DECEMBER 31, 1998:
Reserve for doubtful accounts $ 131,000 $ - $ (31,000) $100,000
-43-
F-23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
CAMBEX CORPORATION
By: /s/Joseph F. Kruy
Joseph F. Kruy, President March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities indicated as of
March 31, 1999.
By: /s/ Joseph F. Kruy
Joseph F. Kruy, Chairman of the Board, President and Treasurer
(Principal Executive Officer)
By: /s/ Peter J. Kruy
Peter J. Kruy, Executive Vice President
(Principal Financial and Accounting Officer)
By: /s/ Robert J. Spain
Robert J. Spain, Director
By: /s/ Philip C. Hankins
Philip C. Hankins, Director
By: /s/ C. V. Ramamoorthy
C. V. Ramamoorthy, Director
- 44 -
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8
(File Nos. 2-77667 and 33-18072).
Chelmsford, Massachusetts
March 31, 1999
- 45 -
[ARTICLE] 5
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 211
[SECURITIES] 0
[RECEIVABLES] 614
[ALLOWANCES] 100
[INVENTORY] 304
[CURRENT-ASSETS] 1128
[PP&E] 3893
[DEPRECIATION] 3585
[TOTAL-ASSETS] 1474
[CURRENT-LIABILITIES] 2703
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1107
[OTHER-SE] (6828)
[TOTAL-LIABILITY-AND-EQUITY] 1474
[SALES] 3749
[TOTAL-REVENUES] 3749
[CGS] 2967
[TOTAL-COSTS] 2967
[OTHER-EXPENSES] 107
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 70
[INCOME-PRETAX] (2773)
[INCOME-TAX] 0
[INCOME-CONTINUING] (2773)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2773)
[EPS-PRIMARY] (0.30)
[EPS-DILUTED] (0.30)
</TABLE>
