As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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CYBER DIGITAL, INC.
(Name of Small Business Issuer in its Charter)
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New York 3661 11-2644640
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization) Industrial Classification Code Number) Identification Number)
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400 Oser Avenue
Suite 1650
Hauppauge, New York 11788
(516) 231-1200
(Address and Telephone Number of Principal Executive Offices)
J.C. Chatpar, President
Cyber Digital, Inc.
400 Oser Avenue
Suite 1650
Hauppauge, New York 11788
(516) 231-1200
(Name, Address and Telephone Number of Agent For Service)
Copies to:
Scott S. Rosenblum, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
(212) 715-9100
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _____________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| __________________
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Offering Maximum Amount of
Title of Each Class of Securities to be Amount To Be Price Per Aggregate Registration
Registered (1) Registered (2) Share (2) Offering Price (2) Fee
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Common Stock, par value $.01 per share........... 3,000,000 $3.5625 $10,687,500 $3,238.64
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(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), this Registration Statement also covers
such indeterminable additional shares of Common Stock as may be
issuable as a result of any future anti-dilution adjustments made in
accordance with the terms of the Company's Series A Preferred Stock and
the warrants accompanying such stock.
(2) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act, based on
the average high and low prices for the shares reported on the OTC
Bulletin Board on October 8, 1996.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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CYBER DIGITAL, INC.
Cross-Reference Sheet
(Showing Location in Prospectus of Information
Required by Items of Form SB-2)
Registration Statement Item
Location in Prospectus
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1. Front of Registration Statement and
Outside Front Cover of Prospectus..................Facing Page; Prospectus Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................................Prospectus Cover Page; Prospectus Back Cover Page
3. Summary Information and Risk Factors...................Prospectus Summary; Risk Factors
4. Use of Proceeds........................................Not Applicable
5. Determination of Offering Price........................Prospectus Cover Page; Underwriting
6. Dilution...............................................Not Applicable
7. Selling Security-Holders...............................Selling Securityholders
8. Plan of Distribution...................................Prospectus Cover Page; Selling Securityholders;
Plan of Distribution
9. Legal Proceedings......................................Business
10. Directors, Executive Officers, Promoters
and Control Persons................................Management
11. Security Ownership of Certain Beneficial
Owners and Management..............................Principal Shareholders
12. Description of Securities..............................Description of Capital Stock
13. Interest of Named Experts and Counsel..................Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities....................................Not Applicable
15. Organization Within Five Years.........................Not Applicable
16. Description of Business................................Business
17. Management's Discussion and Analysis or
Plan of Operation..................................Management's Discussion and Analysis of Financial
Condition and Results of Operation
18. Description of Property................................Business
19. Certain Relations and Related
Transactions.......................................Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters................................Prospectus Cover Page; Description of Capital Stock;
Dividend Policy; Price Range of Common Stock
21. Executive Compensation.................................Management
22. Financial Statements...................................Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure...............................Not Applicable
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED OCTOBER 11, 1996
PROSPECTUS
3,000,000 Shares of Common Stock
CYBER DIGITAL, INC.
This prospectus ("Prospectus") covers the resale of certain shares (the
"Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of
Cyber Digital, Inc. (the "Company") held or acquirable by certain persons
("Selling Securityholders") named in this Prospectus. The Company will not
receive any of the proceeds from the sale of the Shares. The Shares covered
hereby include (i) shares of Common Stock that are issuable upon conversion of
previously-issued shares of Series A Preferred Stock (the "Series A Preferred")
held by certain Selling Securityholders (the "Series A Holders") and up to an
additional 633,857 shares of Common Stock that are issuable upon exercise of
warrants to purchase Common Stock held by such Selling Securityholders (the
"Series A Warrants"), and (ii) up to 190,156 shares of Common Stock that are
issuable upon exercise of warrants to purchase Common Stock (the "Other
Warrants," and together with the Series A Warrants, the "Warrants") held by
certain other Selling Securityholders (the "Other Selling Securityholders"). See
"Selling Securityholders."
The number of Shares issuable upon conversion of the Series A Preferred
depends on several factors, including a fixed conversion ratio and a variable
conversion ratio and the date on which shares are converted. The variable
conversion ratio could result in a greater number of Shares being issued than
under the fixed conversion ratio. In order to have a sufficient number of Shares
registered upon conversion of the Series A Preferred, this Prospectus covers a
larger number of shares of Common Stock than the Company believes will actually
be issued upon conversion of all of the Series A Preferred. Except for the total
number of shares to which this Prospectus relates as set forth above, references
in this Prospectus to the "number of Shares covered by this Prospectus," or
similar statements, and information in this Prospectus regarding the number of
Shares issuable to or held by the Selling Securityholders and percentage
information relating to the Shares of the outstanding capital stock of the
Company, are based upon the fixed conversion ratio set forth in the instruments
establishing the rights of the Series A Preferred and assume that 1,293,764
Shares are issued upon conversion of all shares of Series A Preferred. See
"Selling Securityholders," "Plan of Distribution" and "Description of Capital
Stock." The Shares offered hereby represent approximately 12.3% of the Company's
currently outstanding Common Stock (assuming conversion of all shares of Series
A Preferred and that all of the warrants held by the Selling Securityholders are
exercised). The Shares are being offered on a continuous basis pursuant to Rule
415 under the Securities Act of 1933, as amended (the "Securities Act"). No
underwriting discounts, commissions or expenses are payable or applicable in
connection with the sale of such Shares by the Selling Securityholders. The
Common Stock of the Company is quoted on the National Association of Securities
Dealers, Inc. (the "NASD") OTC Bulletin Board under the symbol "CYBD." The
Shares offered hereby will be sold from time to time at then prevailing market
prices, at prices relating to prevailing market prices or at negotiated prices.
On October 9, 1996, the last reported sale price of the Common Stock on the OTC
Bulletin Board was $3.625 per share. This Prospectus may be used by the Selling
Securityholders or by any broker-dealer who may participate in sales of the
Common Stock covered hereby.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to Selling
Public Commissions Securityholders (1)
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Per Share.............................................. see text above none see text above
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Total.................................................. see text above none see text above
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(1) The shares of Common Stock offered hereby will be sold from time to
time at the then prevailing market prices, at prices relating to
prevailing market prices or at negotiated prices. The Company will pay
the expenses of registration estimated at $30,000.
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The date of this Prospectus is ________, 1996
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act, with respect to the securities offered hereby. This prospectus
constitutes a part of the Registration Statement and does not contain all the
information set forth therein. Any statements contained herein concerning the
provisions of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. For further information
regarding the Company and the securities offered hereby, reference is made to
the Registration Statement and to the exhibits thereto.
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. These reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024 of the Commission's office at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission, such as the
Company. The address of such site is http://www.sec.gov.
THE COMPANY
The Company designs, develops, manufactures, markets and services a
family of high performance distributed digital switching and networking systems
that enable both public telephone exchanges and private network operators to
provide cost effective simultaneous communication of voice and data services to
a large number of users. The Company's systems are based on its proprietary
software technology which permits "modemless" transmission of data between a
variety of incompatible and dissimilar end-user equipment, such as computers,
printers, work stations and data terminals, over standard telephone lines. To
date, the Company has applied its technology primarily to voice-only office
systems and, to a lesser extent, office automation -- voice-and-data integrated
systems. The Company's systems allow for the connection of telephones and/or
data devices up to a distance of one mile from a system's node, which can
network geographically dispersed users, such as in large office complexes,
hospitals and campus settings. Additionally, by interfacing the Company's
systems with existing public carrier networks, users can be connected
world-wide. The Company's systems have been designed in response to perceived
market opportunities arising out of the proliferation of increasingly
sophisticated and relatively low-cost data devices and advances in
telecommunications technologies.
The Company has pioneered the concept of utilizing a flexible
distributed switching platform designed to support a vast array of voice, data
and simultaneous voice and data services for both the domestic and international
telecommunications networks. The Company's multi-service and multi-functional
switching systems permit telephone operating companies and private
telecommunication providers to implement switching services that best fit the
subscriber's requirements and applications with price/performance
characteristics that the Company believes are competitive with currently
available single function monolithic centralized switches. The Company's
products are based on its proprietary operating system software which provides
high performance, reliability and multi- functionality. Unlike centralized
switching systems, the Company's systems are neither labor nor capital intensive
but are software intensive. The Company believes that the applications
capability and flexibility of its systems are comparatively advantaged over its
competitors' products.
The Company's system architecture is software-based and includes
compact, universal hardware consisting of modular cabinets, or nodes, each with
512 ports (lines) for voice, data or trunk connections. Systems can be
configured to add nodes, upon initial installation or as needed, to increase the
number of users in the network. A
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system's node contains interchangeable printed circuit boards which operate the
system and perform the system's various networking capabilities -- networking
internal telephones and data equipment and providing trunk connections to
external analog and digital telephone lines, digital wireless, digital
microwave, satellite and fiber optic voice and data networks. Data capabilities
can be added by incorporating the Company's integrated service terminal ("iST"),
a digital telephone containing a microprocessor, which can be programmed to
connect a corresponding data device to the system. The Company believes that the
broad range of capabilities combined in its systems, including system
flexibility in permitting upgrading to continuously increase the number of users
and add data capabilities and the ability to achieve end-to-end connectivity
between incompatible and dissimilar data devices, provides cost-effective
solutions for voice-and-data integrated systems applications.
The Company has sold approximately 75 systems, substantially all of
which have been the Cyber Switch Exchange ("CSX"), an integrated voice and data
switch which functions as a private network for up to 100,000 users. The Company
has developed, but not yet commercialized, the Cyber Local Area Network ("CLAN")
and Cyber Hub Controller ("CHUB") office switching products. CLAN is a data-only
switch designed to function as a local area network for up to 2,400 data
devices. CHUB is designed as an integrated voice and data switch which combines
the capabilities of CSX and CLAN systems. The Company has also developed Cyber
Rural Exchange ("CRX"), a voice-only switch which functions as a rural telephone
exchange to connect widely dispersed subscribers and Cyber Distributed Central
Office ("CDCO"), a voice-only switch designed to connect rural exchanges or
subscribers in densely populated metropolitan areas. The Company has sold only
one CRX system to date and has not yet commercialized its CDCO system.
The Company has sold CSX systems in the People's Republic of China
("China") to Tianchi Telecommunications Corporation ("TTC"), a corporation owned
in part by China, and in the United States to federal and state government
agencies, primarily for use in voice-only office applications. Federal Telephone
System 2000 (the "FTS 2000") program is facilitating the development of an
"information highway" connecting federal government offices over a long-distance
fiber optic network. The FTS 2000 is intended to permit end-to-end digital
voice, data and video connectivity. The Company has installed five CSX systems,
connecting three U.S. naval sites, a U.S. Coast Guard facility and a U.S. Postal
Service facility to the FTS 2000 network. The Company believes that
implementation of FTS 2000, the growth in emerging markets and the adoption of
telecommunications standards for integrated services digital networks ("ISDN")
have created significant opportunities to expand its business.
Unlike in advanced countries, where the existing public voice telephone
network consists of monolithic centralized digital switches, the developing
countries are seeking an alternative, cost effective approach, such as the
Company's distributed digital switching systems. The Company believes that the
trend in the telecommunications industry towards distributed switching from
monolithic centralized switching is similar to the trend in the computer
industry towards distributed networking personal computers from monolithic
centralized mainframe computers. Similar to the computer industry where personal
computing has been brought closer to the users, the Company's distributed
switching systems are also being installed closer to groups of subscribers,
thereby dramatically reducing the cost of cabling. The Company believes that
with its distributed switching system, the public telephone operating companies
in the developing countries can rapidly provide telephone services to their
customers. It is substantially easier to install small distributed switches than
large monolithic centralized switches with its corresponding long cabling
infra-structure. The Company believes that its systems are ideally suited for
developing countries.
The Company recently commenced marketing of CDCO and CRX systems in
developing nations. The Company just recently signed a manufacturing licensing
contract with the National Telecommunications Company ("NTC") of Egypt, pursuant
to which the NTC will assemble the systems in Egypt with parts provided by the
Company. In addition, the NTC will market, install, maintain and service the
Company's systems in Egypt, Kenya, Tanzania, Uganda, Sudan, Yemen, United Arab
Emirates and Qatar. The Company plans to expand its marketing efforts in other
foreign countries which have regulatory environments that the Company believes
are favorable and which are seeking to upgrade their telecommunication network
infrastructure, such as the former Soviet republics, India and China and other
countries in Asia, Eastern Europe and Latin America. Consistent with this
strategy, the
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Company may seek to enter into strategic alliance, licensing, joint venture and
other similar arrangements with government authorities which typically operate
public telephone network.
On July 16, 1996, the Company concluded a private placement of the
Series A Preferred and the Warrants to accredited institutional investors and
received net proceeds of approximately $7.1 million. Such proceeds will be used
primarily to fund the working capital requirements, expansion of international
sales and marketing activities, continued research and development of wireless
digital switching systems, reduction of long-term debt, and modernization of the
Company's manufacturing facilities.
The Company was incorporated under the laws of the State of New York in
1983. The Company's principal executive offices are located at 400 Oser Avenue,
Hauppauge, New York 11788, and its telephone number is (516) 231-1200.
RISK FACTORS
The securities being offered hereby are highly speculative in nature
and involve a high degree of risk. In addition to the other information included
in this Prospectus, the following factors should be considered carefully in
evaluating the Company and its business before purchasing the securities offered
hereby.
1. Limited Revenues; Recent Losses; Future Operating Results. Since
inception, the Company has generated limited revenues. The Company incurred
losses of $208,478 and $743,098, respectively, for the fiscal year ended March
31, 1994 ("fiscal 1994") and the fiscal year ended March 31, 1995 ("fiscal
1995"), and a net earnings of $974,568 for the fiscal year ended March 31, 1996
("fiscal 1996") (includes one-time extraordinary gain on debt restructuring of
$912,974). At June 30, 1996, the Company had an accumulated deficit of
$5,815,058 and a shareholders' equity of $593,191. Inasmuch as the Company
intends to increase its level of activities and will be required to make
significant up-front expenditures in connection with its planned operations
(including salaries of executive, technical, marketing and other personnel), the
Company anticipates that it may incur additional losses. Unfavorable general
economic conditions, including the recent or any possible future downturns in
domestic or international economies, or current or anticipated reductions in
government spending, resulting in deferral of capital expenditures by
prospective customers, contract cancellations or decreased demand for digital
switching and networking systems, would materially adversely affect the
Company's future operating results. The Company has not achieved revenue growth
in recent years and there can be no assurance that the Company will be able to
achieve increased levels of revenues in the future or that the Company's future
operations will be profitable.
2. Significant Capital Requirements; Possible Need for Additional
Financing. The Company's capital requirements in connection with the design,
development and commercialization of its systems have been and will continue to
be significant. The Company has historically satisfied its working capital
requirements through the issuance of equity securities and borrowings from
government agencies. In July 1996, the Company completed a private placement of
805 shares of the Series A Preferred resulting in net proceeds of approximately
$7.1 million. The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the current assets of the Company,
together with cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for approximately 24 months. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate or
if the cash flow proves to be insufficient to fund operations (due to
unanticipated expenses, technical difficulties, problems or otherwise), the
Company would be required to seek additional financing sooner than anticipated.
The Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that additional financing
will be available to the Company on acceptable terms, or at all. Any inability
to obtain additional financing could possibly require the Company to
significantly curtail its operations.
3. Foreign Sales. A substantial portion of the Company's revenues will
be derived from sales of its products to foreign markets. Accordingly, the
Company is and will continue to be subject to all of the risks associated with
foreign trade, including shipping delays, increased credit risks, trade
restrictions, export duties and
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tariffs, fluctuations in foreign currency exchange rates and international,
political, regulatory and economic developments, any of which could have a
material adverse effect on the Company's operating margins and results of
operations and exacerbate the risks inherent in the Company's business. The
Company may expand its sales and marketing activities in foreign markets,
including by seeking to establish relationships with foreign governmental
agencies which typically operate telecommunications networks. The Company's
prospects will be dependent upon the Company's ability to establish satisfactory
relationships with foreign governmental agencies and upon the efforts of such
agencies in connection with commercialization of its products. To the extent
that the Company is able to successfully expand sales of its products in foreign
markets, the Company will become increasingly subject to foreign political and
economic factors beyond its control, including governmentally imposed
moratoriums on new network development and construction, as a result of
budgetary constraints or otherwise, which could have a material adverse effect
on the Company. The Company anticipates that foreign operations will require the
Company to devote significant financial, personnel and other resources to system
installation, training and service. The Company currently has limited experience
in system installation, training and service and in conducting foreign
operations.
4. Technological Factors; Uncertainty of Product Development and
Commercialization. Although the Company has developed digital switching and
networking systems, which the Company believes perform the principal functions
for which they have been designed, the Company has only commercialized the CSX
system which has been used in limited commercial applications, primarily
voice-only office applications for a limited number of users. Accordingly, there
can be no assurance that, upon widespread commercial use, CSX systems will
satisfactorily perform all of the functions for which they have been designed or
that they will network significant numbers of users. The Company has also
developed, but not yet commercialized, CHUB and CLAN systems which are designed
for widespread office automation and data-only applications, as well as CRX and
CDCO systems which are designed for public networking significant numbers of
users. System commercialization and continued system refinement and enhancement
efforts, including adapting its systems to satisfy newly implemented industry
interface standards, remain subject to all of the risks inherent in development
of new products based on innovative technologies, including unanticipated
delays, expenses, technical problems or difficulties, as well as the possible
insufficiency of funds to implement development efforts, which could result in
abandonment or substantial change in product commercialization. The Company's
success will be largely dependent upon its proposed products meeting targeted
cost and performance objectives and the Company's ability to adapt its products
to satisfy industry standards, and may also be dependent upon their timely
introduction into the marketplace. There can be no assurance that the Company's
proposed products, upon commercial introduction, will satisfy current price or
performance objectives, that unanticipated technical or other problems will not
occur which would result in increased costs or material delays in product
commercialization or that the Company's systems will prove to be sufficiently
reliable or durable under actual operating conditions or otherwise be
commercially viable. Software and other technologies as complex as that
incorporated into the Company's systems may contain errors which become apparent
subsequent to widespread commercial use. Remedying such errors would delay the
Company's plans and cause it to incur additional costs which would have a
material adverse effect on the Company.
5. Uncertainty of Market Acceptance; Limited Marketing Experience and
Capabilities. The telecommunications and related networking industries are
characterized by emerging and evolving markets and an increasing number of
market entrants who have introduced or are developing an array of new switching
and networking products and services. Each of these entrants is seeking to
position its products and services as the preferred method for networking voice
and data communications. As is typical in the case of emerging and evolving
markets, demand and market acceptance for newly introduced products and services
is subject to a high level of uncertainty. Several leading software and computer
companies, including International Business Machines Corp. ("IBM"), Xerox Corp.
("Xerox") and Wang Laboratories, possessing substantially greater resources than
the Company, have failed to meet their initial marketing objectives and, as a
result, are reevaluating their strategies relating to, or their participation
in, the office networking industry. The Company has not yet commenced
significant marketing activities relating to system commercialization and
currently has limited marketing experience and limited financial, personnel and
other resources to undertake extensive marketing activities. The Company has not
conducted and does not intend to conduct formal market or concept feasibility
studies and has not formulated a marketing strategy for certain of its proposed
products. Achieving market acceptance for the Company's systems
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will require substantial marketing efforts and expenditure of significant funds
to create awareness and demand by potential customers as to the perceived
benefits and cost advantages of the Company's systems. Potential customers may
elect to utilize other products which they believe to be more efficient or have
other advantages over the Company's systems, or due to significant capital
investments in other networking systems, may be reluctant to purchase the
Company's systems. To date, the Company has relied principally on the efforts of
J.C. Chatpar, its Chairman, President and Chief Executive Officer, for the
marketing of its products. Although the Company may hire additional marketing
personnel, the Company's ability to build its customer base will be limited by
the number of marketing personnel and will be dependent upon the efforts of such
individuals. In light of the continually evolving nature of the
telecommunications and related networking industries, there can be no assurance
that the Company's marketing efforts will be successful, that the Company will
succeed in positioning its products as a preferred method for networking voice
and data communications or that the ultimate level of demand and market
acceptance for the Company's products will be significant.
6. Competition. The telecommunications and related networking
industries are characterized by intense competition. The Company competes with
numerous well-established foreign and domestic companies, many of which possess
substantially greater financial, marketing, personnel and other resources than
the Company and have established reputations for success in the development,
sale and service of high-speed digital switching and networking and related
products. Products which perform many of the same functions as the Company's
systems are readily available from several competitors, including AT&T Network
Systems International, Northern Telecom Inc., Siemens Corp., L.M. Ericsson
Corp., Alcatel Telecom, Fujitsu Limited, and NEC America, Inc., as well as
computer networking companies engaged in system integration, such as Novell
Inc., Xerox and IBM, certain of which dominate the industry and have already
established a significant installed base of their products or achieved
significant market penetration in selected geographic areas. These competitors
also have the research and development capabilities and financial and technical
resources necessary to enable them to respond to technological advances as well
as evolving industry requirements and standards.
7. Technological Obsolescence. The Company expects that companies which
have developed or are developing new technologies or products, as well as other
companies which have the expertise which would encourage them to attempt to
develop and market competitive products, may attempt to develop new products
directly competitive with the Company's products. In particular, the Company is
aware that Microsoft Corporation ("Microsoft"), a leading software company, is
currently developing office system software designed to connect incompatible and
dissimilar end-user equipment which requires third-party hardware manufacturers
to adapt their products to be compatible with Microsoft's software systems. In
addition, the markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Accordingly, the Company's ability to
compete will depend in large part on its ability to introduce its products to
the marketplace in a timely manner, to continually enhance and improve such
products and maintain development capabilities to adapt to technological changes
and advances in the communications industry, including insuring continuing
compatibility with evolving industry standards. There can be no assurance that
the Company will be able to compete successfully, that competitors will not
develop technologies or products that render the Company's systems obsolete or
less marketable, or that the Company will be able to keep pace with the
technological demands of the marketplace or successfully enhance and adapt its
products to satisfy industry standards.
8. Dependence on Government Contracts. For fiscal 1994, fiscal 1995 and
fiscal 1996, approximately 100%, 93% and 100%, respectively, of the Company's
revenues were derived from contracts with Federal and local government agencies
and it is anticipated that a much smaller portion of the Company's future
revenues will continue to be derived from governmental customers. Government
contracts are subject to special risks, including delays in funding, lengthy
review processes for awarding contracts, non-renewal, delay, termination,
reduction or modification of contracts in the event of changes in the
government's policies or as a result of budgeting constraints and increased or
unexpected costs resulting in losses, any or all of which could have a material
adverse effect on the Company. The Company believes that it is one of a limited
number of companies to have received General Services Administration ("GSA")
certification to sell digital switching equipment to Federal government
agencies.
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Failure by the Company to maintain GSA certification for its products or the
grant of GSA certification to additional competitors could have a material
adverse effect on the Company.
9. Competitive Bidding. The Company has obtained and expects to
continue to obtain a portion of its government contracts through the competitive
bidding process. There can be no assurance that the Company will be successful
in having its bids accepted or, if accepted, that awarded contracts will
generate sufficient revenues to result in profitable operations. The competitive
bidding process is typically lengthy and often results in the expenditure of
financial and other resources in connection with bids that are not accepted.
Additionally, inherent in the competitive bidding process is the risk that
actual performance costs may exceed projected costs upon which a submitted bid
or contract price is based. To the extent that actual costs exceed projected
costs, the Company would incur losses, which would adversely affect the
Company's operating margins and results of operations.
10. Lack of Patent Protection. The Company does not hold any patents
nor has it filed any patent applications relating to its products or software
technology. The Company regards its software technology as proprietary and
relies for protection upon trade secret laws and confidentiality agreements with
its employees. Despite these measures, it is possible that competitors,
employees, licensees or others may copy one or more of the Company's products or
its technology or obtain information that the Company regards as proprietary. In
addition, there can be no assurance that others will not independently develop
products or technologies similar to those of the Company, that confidentiality
agreements will not be breached or that the Company will have adequate resources
to protect its proprietary technology. Although the Company believes that its
products and technology do not and will not infringe patents or violate the
proprietary rights of others, it is possible that such infringement or violation
has occurred or may occur. In the event that the Company's products or
technology infringe patents or proprietary rights of others, the Company could
be required to modify its products or obtain licenses. There can be no assurance
that the Company would be able to do so in a timely manner, upon acceptable
terms and conditions, or at all, or that the Company will have the financial or
other resources necessary to defend or enforce a patent infringement or
proprietary rights violation action. Furthermore, if the Company's products or
technologies are deemed to infringe patents or proprietary rights of others, the
Company could under certain circumstances, become liable for damages, which
would have a material adverse effect on the Company.
11. Dependence on Third-Party Suppliers. The Company is dependent on
third-party arrangements for the manufacture of all of its component parts
incorporated into the Company's systems. The Company purchases its component
parts from numerous third-party manufacturers and believes that numerous
alternative sources of supply are readily available. The Company is
substantially dependent on the ability of its suppliers, among other things, to
satisfy performance and quality specifications and dedicate sufficient
production capacity for components within scheduled delivery times. There can be
no assurance that the Company's suppliers will have sufficient production
capacity to satisfy the Company's component requirements during any period of
sustained demand. The Company does not maintain contracts with any of its
suppliers and purchases system components pursuant to purchase orders placed
from time to time in the ordinary course of business. Failure or delay by the
Company's suppliers in supplying necessary components to the Company would
adversely affect the Company's ability to obtain and deliver products on a
timely and competitive basis.
12. Fluctuations in Operating Results; Credit Risks. The Company's
operating results could vary from period to period as a result of the length of
the Company's sales cycle, as well as from purchasing patterns of potential
customers, the timing of introduction of new products by the Company and its
competitors, variations in sales by distribution channels and products,
competitive factors and generally non-recurring system sales. The Company's
sales cycle for government contracts generally commences at the time a
prospective customer issues a request for a proposal and ends upon execution of
a sales contract with that customer and typically ranges from three to twelve
months. The period from the acceptance of the Company's bid and execution of the
sales contract until delivery, installation and acceptance of a system, at which
time the Company recognizes revenues, typically ranges from two to eighteen
months. The principal factors affecting delivery and installation time are the
configuration and complexity of the system and the availability of third-party
hardware components. Although the Company intends to purchase an inventory of
system components, which the Company believes may reduce the length of its sales
cycle, there can be no assurance that such factors will not result in
significant fluctuations in operating results
- 7 -
<PAGE>
in the future. In addition, the Company generally does not receive cash payment
until approximately three to four months after acceptance of a system by a
government agency. Delays in collection or uncollectibility of accounts
receivable would have a material adverse effect on the Company's liquidity and
working capital position. In connection with the Company's proposed expansion,
the Company intends to increase its marketing efforts in foreign markets, which
will subject the Company to increased credit risks. The Company may finance its
accounts receivable.
13. Government Regulation. The telecommunications and related
networking industries in which the Company competes are highly regulated in both
the United States and internationally. Imposition of public carrier tariffs and
taxation of telecommunications services could materially adversely affect demand
for the Company's products. Furthermore, regulation or deregulation of public
carrier services by the United States and other governments, including recent
proposals to permit local carriers to manufacture switching equipment, may
determine the extent to which the Company will be able to enter and penetrate
markets in the United States and internationally and may result in significantly
increased competition, which would significantly impact the Company's future
operating results. In addition, the Company's products must comply with
equipment, interface and installation standards promulgated by communications
regulatory authorities and industry standards imposed by domestic and foreign
carriers. Changes in government policies, regulations and interface and
installation standards or industry standards imposed by domestic and foreign
carriers in the future could require the Company to alter methods of operation,
resulting in additional costs, which could have a material adverse effect on the
Company.
14. Dependence on J.C. Chatpar; Lack of Management Personnel. The
success of the Company will be largely dependent upon the efforts of J.C.
Chatpar, its founder, Chairman, President and Chief Executive Officer and the
individual primarily responsible for the development of its proprietary
technology. Although the Company entered into a three-year employment agreement
with Mr. Chatpar and an agreement to conditions of employment that prevents him
from engaging in activities which are competitive with the Company during the
term of his employment, the loss of his services would adversely affect the
Company's ability to utilize its proprietary technology, which would have a
material adverse effect on the Company's business and prospects. The Company has
obtained "key-man" insurance on the life of Mr. Chatpar in the amount of
$1,000,000. The success of the Company is also dependent upon its ability to
hire and retain additional qualified operating, marketing, technical, financial
and management personnel. The Company recently hired a Vice President of
International Sales and a Vice President of Operations, and anticipates that
additional personnel to be hired over the next 12 months will include a Chief
Financial Officer and Vice President of Engineering. Competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain such
necessary personnel.
15. Influence by Management and Certain Shareholders. The Company's
current officers, directors and shareholders owning 5% or more of the Common
Stock of the Company, own, of record or beneficially, an aggregate of
approximately 41% of the issued and outstanding shares of Common Stock prior to
this Offering, and approximately 36% after this Offering (assuming the
conversion of all shares of the Series A Preferred and the exercise of all
Warrants). Accordingly, such persons acting together, will likely be in a
position to effectively control the Company, elect all or a majority of the
Company's directors, increase authorized capital, merge or sell the assets of
the Company and generally direct the affairs of the Company.
16. No Assurance of Public Market; Possible Volatility of Common Stock
Price. Prior to the Offering, there has been a limited trading market for the
Company's Common Stock in the over-the-counter market. In addition, there can be
no assurance that a regular trading market will develop after the Offering or
that, if developed, it will be sustained. The market price for the Company's
Common Stock has been subject to volatility and following the Offering, may be
highly volatile as has been the case with the securities of other small
capitalization companies. Additionally, in recent years, the securities markets
have experienced a high level of price and volume volatility and the market
prices of securities for many companies, particularly small capitalization
companies, have experienced wide fluctuations which have not necessarily been
related to the operating performances or underlying asset values of such
companies.
- 8 -
<PAGE>
17. Shares Eligible for Future Sale. Upon the consummation of the
Offering, assuming the issuance of 2,117,777 shares of Common Stock upon
conversion of all of the Series A Preferred and the exercise of all of the
Warrants, the Company will have 17,237,088 shares of Common Stock outstanding,
and of such shares, 6,687,712 are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act. No prediction can
be made as to the effect, if any, that sales of shares of Common Stock or the
availability of such shares for sale will have on the market prices prevailing
from time to time. Nevertheless, the possibility that substantial amounts of
Common Stock may be sold in a public market, or sales of substantial amounts of
Common Stock in the public market, would likely have a material adverse effect
on prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
18. No Dividends. To date, the Company has not paid any cash dividends
on its Common Stock and does not intend to declare any dividends in the
foreseeable future.
19. Authorization of Preferred Stock. The Company's Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), authorizes the
issuance of 10,000,000 shares of "blank check" preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors. Of such shares, 805 shares have been designated as
Series A Preferred. Accordingly, the Board of Directors is empowered, without
shareholder approval, to make issuances of preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuances, the preferred stock could be utilized, under certain
conditions, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any additional shares of its preferred stock, there can be no assurance that the
Company will not do so in the future.
20. Significant Outstanding Options and Warrants. As of September 25,
1996, there are outstanding stock options and warrants (not including the
Warrants) to purchase an aggregate of approximately 1,865,000 shares of Common
Stock at exercise prices ranging from $.25 to $6.00 per share. To the extent
that outstanding options or warrants are exercised, dilution to the Company's
shareholders will occur. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of outstanding options and warrants can be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
on terms more favorable to the Company than the exercise terms provided by such
outstanding securities.
21. Disclosure Relating to Low-Priced Stocks. The Common Stock is
currently traded in the over-the-counter market. If the trading price of the
Common Stock is less than $5.00 per share, trading in the Common Stock would be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers may discourage broker-dealers from effecting
transactions in penny stocks, which could reduce the liquidity of the Common
Stock and have a material adverse effect on the trading market for the Common
Stock.
- 9 -
<PAGE>
SELLING SECURITYHOLDERS
The Selling Securityholders consist of the Series A Holders and the
Other Selling Securityholders. The registration statement of which this
Prospectus is a part is being filed, and the Shares offered hereby are included
herein, pursuant to various registration rights agreements entered into between
the Company and the Selling Securityholders (collectively, the "Registration
Rights Agreements"). Due to (i) the ability of the Selling Securityholders to
determine individually when and whether they will sell any Shares under this
Prospectus and (ii) the uncertainty as to how many of the Warrants will be
exercised and how many shares of Common Stock will be issued upon conversion of
shares of Series A Preferred, the Company is unable to determine the exact
number of Shares that will actually be sold pursuant to this Prospectus.
The Series A Holders
The Selling Securityholders identified in the table below as "Series A
Holders" acquired an aggregate of 805 shares of Series A Preferred in a private
placement transaction (the "Series A Transaction") pursuant to Subscription
Agreements dated as of July 16, 1996 (collectively, the "Subscription
Agreements"). The Series A Preferred is convertible into Common Stock at the
option of the Series A Holder as follows: (x) up to 1/3 of the shares of Series
A Preferred initially issued to such holder at any time beginning 45 days
following the Last Closing Date and at any time thereafter, (y) up to an
additional 1/3 of the shares of Series A Preferred initially issued to such
holder at any time beginning 75 days following the Last Closing Date and at any
time thereafter, and (z) all remaining Series A Preferred held by such holder at
any time beginning 105 days following the Last Closing Date. The number of
shares of Common Stock into which shares of Series A Preferred are convertible
depends on several factors, including the date on which the shares are converted
and the market price of the Common Stock at the time of conversion. See
"Description of Capital Stock--Preferred Stock." The figures in the table below
representing the number of shares of Common Stock beneficially owned and offered
by the Series A Holders make a number of assumptions concerning the applicable
conversion ratio and the dates on which shares of Series A Preferred are
converted. As described in greater detail under "Description of Capital
Stock--Preferred Stock," the number of shares of Common Stock issuable upon
conversion of Series A Preferred is calculated in part on the basis of the lower
of a fixed conversion price or a variable conversion price. The variable
conversion price depends primarily on the market price of the Common Stock on
the date of conversion. The fixed conversion price is $6.35 per share. Since the
Series A Holders paid $10,000 per share of Series A Preferred, each share of
Series A Preferred is, in general, convertible into a number of shares
determined by dividing $10,000 by the applicable conversion price (plus the
premium, as described below). If the variable conversion price on the date of
conversion is lower that the fixed conversion price, then a greater number of
shares will be issued. In addition, a conversion premium of 10% per annum
accrues from July 16, 1996 until the date of conversion and will result in
issuance of a certain number of additional shares of Common Stock upon
conversion of shares of Series A Preferred.
For the above reasons, it is not possible to set forth in the table the
maximum number of shares that could be acquired by the Series A Holders upon
conversion of shares of Series A Preferred. The number of shares set forth in
the table is based on conversion of the Series A Preferred at the fixed
conversion price, with the 10% premium calculated, assuming conversion of 1/3 of
the shares of Series A Preferred on each of August 30, 1996, September 28, 1996
and October 29, 1996. Several factors, including whether the market price of the
Common Stock is lower than the fixed conversion price of $6.35 per share, could
result in a greater number of Shares being issued to the Series A Holders than
are reflected in the table below.
Other Selling Securityholders
The Other Selling Securityholders consist of designees of Swartz
Investments, LLC ("Swartz"). In connection with it services as placement agent
for the 805 shares of Series A Preferred in the Series A Transaction, Swartz
received warrants to purchase up to 190,156 shares of Common Stock at an
exercise price of $6.35 per share, and received a placement agent's fee of
$885,500.
- 10 -
<PAGE>
The following table and accompanying footnotes identify each Selling
Securityholder based upon information provided to the Company, set forth as of
August 30, 1996, with respect to the Shares beneficially held by or acquirable
by, as the case may be, each Selling Securityholder and the shares of Common
Stock beneficially owned by the Selling Securityholder which are not covered by
this Prospectus. No Selling Securityholder has had any position, office or other
material relationship with the Company within the past three years. The
percentage figures reflected in the table assume conversion of all shares of
Series A Preferred into 1,293,764 shares of Common Stock, and exercise of all
Warrants into 824,013 shares of Common Stock.
<TABLE>
<CAPTION>
Common Stock
Number of Number of Owned Number of
Shares of Common Stock Shares of Common Stock Prior to Shares Common Stock Owned
Underlying Underlying Offering (1) to be After Offering (1)(2)
Name of Investor Series A Preferred Warrants Number Percent Offered Number Percent
- ---------------- ------------------ -------- ------ ------- ------- ------ -------
Series A Holders
<S> <C> <C> <C> <C> <C> <C>
AG Super Fund International
Partners, L.P. 16,072 7,874 23,946 * 23,946 0 0
Banque Scandinave en Suisse 48,215 23,622 71,837 * 71,837 0 0
C.A. Acco Manufacturing 16,072 7,874 23,946 * 23,946 0 0
Cameron Capital Ltd. 80,358 39,370 119,728 * 119,728 0 0
Capital Ventures International 80,358 39,370 119,728 * 119,728 0 0
Carousel Investments Inc. 24,107 11,811 35,918 * 35,918 0 0
Darissco Diversified Investments
Inc. 19,286 9,449 28,735 * 28,735 0 0
Faisal Finance (Switzerland) 96,430 47,244 143,674 * 143,674 0 0
S.A.
Gam Arbitrage Investments, Inc. 32,143 15,748 47,891 * 47,891 0 0
Global Bermuda, L.P. 80,358 39,370 119,728 * 119,728 0 0
Gracechurch & Co 64,286 31,496 95,782 * 95,782 0 0
G.P.S. Fund Limited 8,036 3,937 11,973 * 11,973 0 0
Gundyco in Trust for RRSP 550-
98866-19 48,215 23,622 71,837 * 71,837 0 0
JC Bradford & Co 16,072 7,874 23,946 * 23,946 0 0
Lake Management LDC 72,322 35,433 107,755 * 107,755 0 0
Legong Investments N.V. 64,286 31,496 95,782 * 95,782 0 0
Leonardo, L.P. 128,573 62,992 191,565 1.3 191,565 0 0
Otato Limited Partnership 33,750 16,535 50,285 * 50,285 0 0
Queensway Financial Holdings
Limited 24,107 11,811 35,918 * 35,918 0 0
Rana Investment Company 48,215 23,622 71,837 * 71,837 0 0
Raphael, L.P. 24,107 11,811 35,918 * 35,918 0 0
RIC Investment Fund Ltd. 56,251 27,559 83,810 * 83,810 0 0
The Matthew Fund 35,358 17,323 52,681 * 52,681 0 0
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Number of Number of Owned Number of
Shares of Common Stock Shares of Common Stock Prior to Shares Common Stock Owned
Underlying Underlying Offering (1) to be After Offering (1)(2)
Name of Investor Series A Preferred Warrants Number Percent Offered Number Percent
- ---------------- ------------------ -------- ------ ------- ------- ------ -------
Series A Holders
<S> <C> <C> <C> <C> <C> <C>
West Merchant Bank
Nominees Ltd. 24,107 11,811 35,918 * 35,918 0 0
Windward Island Limited 32,143 15,748 47,891 * 47,891 0 0
Wood Gundy London Ltd. 120,537 59,055 179,592 1.2 179,592 0 0
Other Selling Securityholders
Eric Swartz 0 62,220 62,220 * 62,220 0 0
Michael Kendrick 0 62,220 62,220 * 62,220 0 0
Brad Hathorn 0 10,000 10,000 * 10,000 0 0
John Harris 0 15,000 15,000 * 15,000 0 0
Mills Rogers III 0 7,500 7,500 * 7,500 0 0
Glenn Archer 0 7,500 7,500 * 7,500 0 0
Davis Holden 0 7,500 7,500 * 7,500 0 0
Enigma Investments, Ltd. 0 5,846 5,846 * 5,846 0 0
Charles Krusen 0 7,370 7,370 * 7,370 0 0
Dunwoody Brokerage
Services, Inc. 0 5,000 5,000 * 5,000 0 0
--------- ------- --------- --------- - -
Total 1,293,764 824,013 2,117,777 2,117,777 0 0
========= ======= ========= ========= = =
</TABLE>
* less than 1%
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of Common Stock which such
person has the right to acquire after the date of this Prospectus. For
purposes of computing the percentage of outstanding shares of Common
Stock held by each person or group of persons named above, any security
which such person or persons has or have the right to acquire after the
date of this Prospectus is deemed to be outstanding but is not deemed
to be outstanding for the purpose of computing the percentage ownership
of any other person. Except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the Company
believes based on information supplied by such persons, that the
persons named in this table have sole voting power with respect to all
shares of Common Stock which they beneficially own.
(2) Assumes the sale of all shares of Common Stock offered hereby.
- 12 -
<PAGE>
PLAN OF DISTRIBUTION
The registration statement of which this Prospectus forms a part has
been filed pursuant to the Registration Rights Agreements. To the Company's
knowledge, as of the date hereof, no Selling Securityholder has entered into any
agreement, arrangement or understanding with any particular broker or market
maker with respect to the Shares offered hereby, nor does the Company know the
identity of the brokers of market makers which will participate in the offering.
The Shares covered hereby may be offered and sold from time to time by
the Selling Securityholders. The Selling Securityholders will act independently
of the Company in making decisions with respect to the timing, manner and size
of each sale. Such sale may be made on the OTC Bulletin Board or otherwise, at
prices and on terms then prevailing or at prices related to the then market
price, or in negotiated transactions. The Shares may be sold by one or more of
the following methods: (a) a block trade in which the broker-dealer engaged by
the Selling Securityholder will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
To the Company's knowledge, the Selling Securityholders have not, as of the date
hereof, entered into any arrangement with a broker-dealer for the sale of shares
through a block trade, special offering, or secondary distribution of a purchase
by a broker-dealer. In effecting sales, broker-dealers engaged by the Selling
Securityholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or discounts from the Selling
Securityholders in amounts to be negotiated.
In offering the Shares, the Selling Securityholders and any
broker-dealers who execute sales for the Selling Securityholders may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales, and any profits realized by the Selling Securityholders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
Rule 10b-6 under the Exchange Act prohibits participants in a
distribution from bidding for or purchasing for an account in which the
participant has a beneficial interest, any of the securities that are the
subject of the distribution. Rule 10b-7 under the Exchange Act governs bids and
purchases made to stabilize the price of a security in connection with a
distribution of the security.
This offering will terminate as to each Selling Securityholder on the
earlier of (a) the date on which such Selling Securityholder's shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all Shares offered hereby have been sold by the Selling Securityholders. There
can be no assurance that any of the Selling Securityholders will sell any or all
of the shares of Common Stock offered hereby.
- 13 -
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and
quoted on the OTC Bulletin Board under the symbol "CYBD" since its initial
public offering in 1984. The following table sets forth, for each of the fiscal
periods indicated, the high and low trade prices for the Common Stock, as
reported on the OTC Bulletin Board. These per share quotations represent
inter-dealer prices in the over-the-counter market, do not include retail
markups, markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal Year Ended March 31, 1997
First Quarter................................................. $ 6.93 $ 2.43
Second Quarter (up to October 9, 1996)........................ 7.50 3.50
Fiscal Year Ended March 31, 1996
First Quarter................................................. $ 1.43 $ 0.87
Second Quarter................................................ 1.09 0.68
Third Quarter................................................. 3.50 0.68
Fourth Quarter................................................ 3.93 2.25
Fiscal Year Ended March 31, 1995
First Quarter................................................. $ 1.25 $ 0.75
Second Quarter................................................ 1.43 0.62
Third Quarter................................................. 1.18 0.62
Fourth Quarter................................................ 1.50 0.81
</TABLE>
On October 9, 1996, the closing trade price of the Common Stock as
reported on the OTC Bulletin Board was $3.625 per share. As of such date, there
were approximately 600 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Any future determination as to dividend policy will be made
at the discretion of the Board of Directors of the Company and will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and business prospects of the Company and such other factors
as the Board of Directors may deem relevant.
- 14 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of June 30, 1996, and (ii) as adjusted to reflect the issuance and conversion of
the Series A Preferred, the exercise of the Warrants and the sale of the Shares
offered hereby.
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------
Actual As Adjusted(1)
------ --------------
<S> <C> <C>
Short-term debt, including current portion
of long-term debt: ............................................ 537,476 537,476
Long-term debt.................................................... 100,000 100,000
Stockholders' equity:
Preferred Stock, par value $.05 per share:
10,000,000 shares authorized, no shares
issued and outstanding................................... 0 0
Common Stock, par value $.01 per share:
30,000,000 shares authorized, 15,114,311
shares issued and outstanding; 17,232,088
shares issued and outstanding as adjusted................ 151,143 172,320
Additional paid-in capital...................................... 6,257,106 18,366,768
Accumulated deficit............................................. (5,815,058) (5,815,058)
Total stockholders' equity............................... 593,191 12,724,030
Total capitalization................................. 1,230,667 13,361,506
</TABLE>
- ------------
(1) Adjusted to give effect to the issuance and conversion of the Series A
Preferred, the exercise of the Warrants and the sale of the Shares
offered hereby.
- 15 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was incorporated in April 1983 to develop, manufacture and
market high performance software controlled digital switching and networking
systems providing simultaneous voice and data communications over standard
telephone lines. Since completion of development of its first technology in
1987, which resulted in the development of CSX, CLAN and CHUB systems for
private communications networks, the Company has been engaged in limited
marketing activities with respect to CSX systems only and, therefore, generated
limited revenues. The Company has not yet commercialized CLAN and CHUB office
switching systems as it is devoting most of its efforts to the marketing of CSX.
As part of the Company's plans to expand its marketing efforts in
foreign countries with favorable regulatory environments and which are seeking
to upgrade their telecommunications network infrastructure, the Company
completed the initial development of CDCO and CRX systems in late fiscal 1994
and continued enhancements of these systems in fiscal 1996. The Company recently
signed a manufacturing licensing contract with the NTC of Egypt, pursuant to
which the NTC will assemble the systems in Egypt with parts provided by the
Company. In addition, the NTC will market, install, maintain and service the
Company's systems in Egypt, Tanzania, Uganda, Sudan, Yemen, United Arab Emirates
and Qatar. Consistent with this strategy, the Company may seek to enter into
long-term contracts, licensing, joint venture or other similar arrangements with
government authorities which typically operate public telephone networks. To
date the Company has sold one CRX system and has not yet commercialized its CDCO
system.
During the past two years, the Company's revenues have been derived
principally from contract awards, which include installation, maintenance and
service, solely from system sales to the Federal Government agencies. In order
to gain rapid penetration of its systems, the Company's strategy is to use a
combination of long-term contracts, licensing, joint venture and other similar
arrangements besides contract awards. To date the Company has been successful in
receiving small contract awards based on specific projects from Federal
Government agencies. During fiscal 1996 and fiscal 1995, the Company was awarded
long-term multi-million dollar contracts but could not qualify due to limited
cash and working capital resources. The Company is currently pursuing long-term
contracts and joint venture arrangements with certain foreign countries.
However, to date the Company has not gained rapid market penetration of its
systems and there can be no assurance that it will be able to do so. To the
extent the Company enters into long-term contracts and joint venture
arrangements, the revenues derived from such arrangements are expected to
represent a significant portion of the Company's revenues.
A relatively limited number of customers have historically accounted
for a substantial portion of the Company's net sales. Approximately 100% and 93%
of the Company's revenues in fiscal 1996 and fiscal 1995, respectively, were
derived from contracts with federal government agencies. Government contracts
are subject to certain risks, including delays in funding, lengthy review
processes for awarding contracts, non-renewal, delay, termination, reduction or
modification of contracts in the event of changes in the government's policies
or as a result of budgeting constraints and increased or unexpected costs
resulting in losses, any or all of which could have an adverse effect on the
Company. The Company believes that it is one of a limited number of companies to
have received GSA certification to sell digital switching equipment to federal
government agencies. Failure by the Company to maintain GSA certification for
its products or the grant of GSA certification to additional competitors could
have an adverse effect on the Company. In addition, as the Company expands its
marketing efforts in foreign countries, it may be subject to all risks
associated with foreign trade, including shipping delays, increased credit
risks, trade restrictions, export duties and tariffs, fluctuations in foreign
currency rates and international, political, regulatory and economic
developments, any of which could have an adverse effect on the Company.
During fiscal 1996, the Company invested significant research and
development, and marketing resources to focus on the completion of CRX and CDCO
systems and the initial introduction of these systems to targeted foreign
countries such as Egypt, India, Russia and Tajikistan. However, there can be no
assurance that the Company will be successful in establishing a reasonable
business in such countries.
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Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Net sales decreased 93% in quarter ended June 30, 1996 over the prior
year's same quarter. Net sales for quarter ended June 30, 1996 were $18,734 as
compared to $273,624 for quarter ended June 30, 1995. Gross profit for quarter
ended June 30, 1996 was 54% of net sales as compared to 66% for quarter ended
June 30, 1995. Fluctuations in gross profit margins are primarily attributable
to price changes, changes in sales mix by product or distribution channel.
Selling, general and administrative expenses as a percentage of sales increased
from 37% in quarter ended June 30, 1995 to 469% in quarter ended June 30, 1996.
Profit (loss) from operations for quarter ended June 30, 1996 was $(77,715) as
compared with $78,511 for quarter ended June 30, 1995. Extraordinary gain on
debt restructure for the period ended June 30, 1996 was $291,756 or $.02 per
share. Net income for quarter ended June 30, 1996 was $214,747 or $.01 per share
as compared to $78,813 or $.01 per share for quarter ended June 30, 1995.
Fiscal 1996 Compared to Fiscal 1995
Net sales. The Company's net sales for fiscal 1996, were $701,410,
representing an increase of $467,293 or approximately 199% from $234,117 for
fiscal 1995. The increase in net sales was primarily attributable to increase in
sales to Federal Government Agencies. In fiscal 1996 the Company experienced
diminished bidding activity on small contracts as most bids entailed large
contracts or multiyear long-term contracts where the Company was at a
disadvantage against large competitors due to its limited working capital.
Gross margin. The Company includes in its cost of sales the materials
and labor used, subcontractor costs and overhead incurred in the manufacture of
its systems. The Company's gross margin increased from 53% to 89% of net sales
from fiscal 1995 to fiscal 1996. Fluctuations in gross margins are primarily
attributable to inventory changes, material price changes and changes in sales
mix by system.
Selling, general and administrative. Selling, general and
administrative expenses decreased from $553,591 in fiscal 1995 to $474,924 in
fiscal 1996, representing a decrease of $78,667 or approximately 14%. The
absolute dollar decrease in selling, general and administrative expenses from
fiscal 1995 to fiscal 1996 was principally the result of reduced selling
expenses incurred with respect to introductory and exploratory marketing efforts
in Egypt, India and Russia. Such efforts have not resulted in any sales to these
countries.
Provision for bad debt. Bad debt expense amounted to zero in fiscal
1996 as compared to $156,719 in fiscal 1995.
Research and development. Research and development expenses decreased
from $86,383, or 37% of net sales, in fiscal 1995 to $41,679, or 6% of net
sales, in fiscal 1996. These dollar decreases in research and development
expenses were primarily due to lesser allocation of personnel. All development
costs are expensed in the period incurred. The Company expects to continue to
commit reasonable resources to research and development in the future,
particularly for certification of CDCO and CRX in foreign countries, and as
commercialization of ISDN applications for the CSX continue to be developed in
the U.S. and digital voice applications in the developing countries.
Income (loss) from operations or income (loss) before extraordinary
item. Income from operations in fiscal 1996 was $61,594 or $.01 per share as
compared with a loss in fiscal 1995 of $743,098 or $.05 per share.
Extraordinary item. Extraordinary gain on debt restructure in fiscal
1996 was $912,974 or $.06 per share as compared to zero in fiscal 1995.
Net income (loss). As a result of the foregoing, the net income in
fiscal 1996 was $974,568 or $.07 per share as compared to a net loss of $743,098
or $.05 per share in fiscal 1995.
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Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
results primarily from cash flow from operations. Total working capital
increased by $171,933 to $654,002 for quarter ended June 30, 1996 from $482,069
for period ended March 31, 1996. The current ratio increased to 2.2 to 1 as at
June 30, 1996 from 1.6 to 1 as at March 31, 1996. Current levels of inventory
are adequate to meet at least four times the current level of quarterly sales.
There were no significant capital expenditures in the quarter ended June 30,
1996. The Company believes that its current sources of liquidity will be
sufficient to meet its needs for the foreseeable future. The Company believes
that, if needed, it will be able to obtain additional funds required for future
needs.
The Company used $2,399 and $25,649 during fiscal 1996 and fiscal 1995,
respectively, for investing activities. The cash used for investing activities
relates primarily to purchases of equipment in fiscal 1996 and fiscal 1995.
Net cash provided by (used in) financing activities was $559,841 and
$(35,034) for fiscal 1996 and fiscal 1995, respectively. The increase in net
cash provided by financing activities from fiscal 1995 to fiscal 1996 was
principally due to issuance of common stock, and proceeds from debt. The Company
made principal payments of long-term debt of $5,219 and $73,034 in fiscal 1996
and fiscal 1995, respectively. The payments of long-term debt principally relate
to the JDA and RDC in each of the fiscal years during which years both JDA and
RDC have agreed to revise the payment terms. For 1996, the Company is obligated
to pay to JDA only 5% of the outstanding principal amount of such indebtedness,
without interest. As of February 14, 1996, all of the Company's indebtedness to
RDC was settled for $100,000 cash and the issuance of warrants to purchase
100,000 shares of Common Stock at $1.00 per share. As of May 31, 1996, JDA has
agreed to settle all of the Company's indebtedness to JDA for a cash settlement
of $300,000 made prior to November 20, 1996.
Pursuant to the completion of the Series A Transaction on July 16,
1996, resulting in the Company receiving net proceeds of approximately $7.1
million, the Company's current sources of liquidity has significantly improved,
and together with expected cash flow from operations, the Company believes its
liquidity will be sufficient to meet its needs for the next 24 months. The
Company has allocated a portion of the net proceeds of such offering to repay
outstanding indebtedness.
Impact of Inflation
Inflation has historically not had a material effect on the Company's
operations.
New Accounting Pronouncements
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires a change from the deferred method of accounting for income
taxes pursuant to Accounting Principles Board Opinion No. 11 to the asset and
liability method of accounting for income taxes. This change in accounting did
not have any impact on the Company's financial statements.
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BUSINESS
The Company designs, develops, manufactures, markets and services a
family of high performance distributed digital switching and networking systems
that enable both public telephone exchanges and private network operators to
provide cost effective simultaneous communication of voice and data services to
a large number of users. The Company's systems are based on its proprietary
software technology which permits "modemless" transmission of data between a
variety of incompatible and dissimilar end-user equipment, such as computers,
printers, work stations and data terminals, over standard telephone lines. The
Company's systems have been designed in response to perceived market
opportunities arising out of the proliferation of increasingly sophisticated and
relatively low-cost data devices and advances in telecommunications
technologies.
Industry Background
In the past, voice communication technologies were developed and
managed by large telephone operating companies which were largely insulated from
competition. The data communications industry grew independently, and provided
the specialized communications link between computers and office systems. In
recent years, there has also been a proliferation of office systems consisting
of personal computers, work stations, printers and storage devices, which has
resulted in the growth of a separate office automation industry. These three
industries developed in parallel and took independent approaches to the
application of technology.
In the area of voice communications, digital technology enabled
telephone companies to improve the quality of voice communication and also
provide additional features and services such as call forwarding and
conferencing and least-cost-routing for long distance calls by
microprocessor-based software control. Such digital technology has been applied
to both public exchanges which serve cities, towns and villages and private
branch exchanges (or PBXs) which serve offices and other large organizations.
The need for data communications arose largely within the office environments.
These needs were met by local area networks ("LANs") which require a different
type of cabling and associated equipment. Such LANs are limited to small offices
typically having less than a hundred data users.
The numerous productivity enhancing devices and systems which have been
introduced into the market by the office automation industry also created a
greater need for the accessing, sharing and exchange of information.
Traditionally, these products and systems could communicate with one another
only if they were made by the same manufacturer. Furthermore, as the number of
data users increase, where each user is connected to all other users, a network
becomes increasingly complex and less manageable.
As separate data networks became more prevalent, it became apparent
that a data network which utilizes the existing telephone cabling would be the
most cost effective solution, and also provide greater manageability with an
increasing numbers of users. In an effort to facilitate such deployment of
integrated voice and data networks (commonly referred to as Integrated Service
Digital Networks ("ISDN")), the Consultive Committee on International Telephone
and Telegraph ("CCITT") adopted international standards for ISDN in 1987; Bell
Communications and Research ("BELLCORE") adopted ISDN standards for the U.S.
market in November 1992. It is anticipated that the combined power of ISDN based
switches and fiber optic cables will provide the basis for the growth in an
array of applications and electronic information services computer-to-computer
communications, office systems integration, video-text, video-phone,
video-conferencing, electronic mail, informational data bases, multi-media usage
and access, all simultaneously with voice transmission capability over the same
network.
In technologically advanced countries, extensive public voice telephone
networks are already in place. Innovation and change in the form of simultaneous
voice and data communications are now taking place in the domain serviced by
private networks. Private networks providing new types of services are,
therefore, growing at a much faster rate than public voice networks. On the
other hand, in the developing world (Eastern Europe, Russia, China, India, and
Latin America), there is demand for voice-only public networks to serve
individuals and business subscribers in cities, towns and villages. The
Company's systems are designed to meet the sophisticated
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voice/data needs of private networks in the United States, and the basic
voice-only needs of public networks in developing countries.
Unlike in advanced countries, where the existing public voice telephone
network consists of monolithic centralized digital switches, the developing
countries are seeking an alternative, cost effective approach, such as the
Company's distributed digital switching systems. The Company believes that the
trend in the telecommunications industry towards distributed switching from
monolithic centralized switching is similar to the trend in the computer
industry towards distributed networking personal computers from monolithic
centralized mainframe computers. Similar to the computer industry where personal
computing has been brought closer to the users, the Company's distributed
switching systems are also being installed closer to groups of subscribers,
thereby dramatically reducing the cost of cabling. The Company believes that
with its distributed switching system, the public telephone operating companies
in the developing countries can rapidly provide telephone services to their
customers. It is substantially easier to install small distributed switches than
large monolithic centralized switches with its corresponding long cabling
infra-structure. The Company believes that its systems are ideally suited for
developing countries.
The Company's Systems
System Architecture
The Company's systems consist of software and hardware that combine to
permit voice and data transmission over standard telephone lines. The system
hardware, which is common to each of the Company's systems, consists primarily
of modular cabinets, or nodes, which contain the system's control and interface
circuitry and the system operating software. Each node provides for 512 ports,
or lines, connections to telephones and data devices within the network and
connections to public telephone exchanges. A standard 512 line node measures
approximately 2' by 2' by 3'. Nodes can be connected to increase capacity to up
to 100,000 lines.
Each node contains slots for the insertion of printed circuit boards,
which contain microprocessors which are programmed by the Company to provide the
functions required by a particular customer. Two boards, the Main Processor Unit
and the Time Switch Unit, comprise the equipment common to all of the system's
applications. The node also provides for an additional 30 slots for the
insertion of any configuration of four additional types of circuit boards which
provide interfacing capabilities through use of standard telephone wire to
internal telephones and data equipment and trunk connections to external analog
and digital trunk lines, digital microwave systems, satellite systems and fiber
optic voice and data networks.
The node also contains a disk drive module which is the center for the
system's operating software. The Company has developed software that enables the
Company to program its systems to employ a combination of circuit and packet
switching technologies to provide for the transmission of voice and data, either
separately or simultaneously. The system's various switching and interfacing
functions are programmed in the microprocessors contained on the various circuit
boards.
The Company's systems can be used with existing analog telephones for
voice-only applications. For enhanced voice capabilities and for data
capabilities, the Company provides its proprietary digital telephone, the iST.
The iST is a telephone that contains a microprocessor and microchip that are
programmed to transform voice from analog form to digital form and transmits the
digitized voice over standard telephone wire. In addition, the iST in
conjunction with the system provides a full range of voice features, including
call forwarding, call waiting, least cost routing and conferencing.
The iST, through the programming of the microprocessor and microchip
contained in the unit, can also be equipped to provide for data transmission. A
data device can be plugged into the iST, which connects the device to the system
and permits a user to use the iST to talk while simultaneously transmitting data
over the same telephone line. Through format and protocol conversions and packet
switching parameters programmed into the iST, the iST permits communication
between dissimilar and incompatible devices without the use of modems.
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Analog telephones and iSTs can be connected to the system's node by
ordinary telephone wire. This permits the system to connect users located within
an area of up to one mile from the system's node. The system can interface with
existing public lines to connect to the outside world, including other systems
located beyond one mile from the system node.
The Company believes that the architecture of its systems possesses the
following characteristics:
* Easily Upgradable - The modularity of the Company's system and the
software-based nature of the system permits for system capacity and capabilities
to be upgraded or modified on a prompt and cost-effective basis. Nodes can be
added to increase the number of available lines. The system operating software
and circuit board microprocessors can be reprogrammed to provide system
functions required by a particular customer.
* End-to-End Connectivity and Compatibility with Existing Technologies
- - The Company's system can be programmed to be compatible with the operating
parameters of most existing data communication technologies. The Company's
systems allow data devices with incompatible communications parameters to
communicate with each other through functions programmed into the iSTs and
microprocessors contained in the node circuit boards. The Company believes that
its system is the only one available with this capability. In voice
applications, the Company's systems can interface with virtually all existing
forms of telecommunication exchanges and transmission speeds, and conform to
telecommunication standards in effect in the United States and Europe.
* Distributed Processing - The Company system functions are performed
by numerous microprocessors. By distributing the functions in this way, the risk
of total system failure as a result of failure in one microprocessor is greatly
minimized This feature also prevents blocking of transmissions by providing
multiple routes for transmission completion, thereby allowing more members of a
network to use lines simultaneously.
Types of Systems
The Company completed the development of its first technology in 1987,
at which time it began marketing its CSX system on a limited basis. The Company
has just recently developed additional new technologies and software that has
enabled it to create new systems for various applications, primarily for the
developing countries such as the CDCO and CRX. Although the Company has just
started to market these new systems, the Company believes that these systems are
capable of providing the functions for which they have been designed.
CyberSwitch Exchange
CyberSwitch Exchange ("CSX") is a digital switching system designed for
use as a private network for offices, universities, hospitals and other large
organizations. The CSX system employs nodes, each offering 512 ports, which can
be used to network up to 100,000 users within one mile from each node. Users are
equipped with iSTs which permit communication between data devices. The CSX
system enables data device users to communicate with other users without single
purpose data links and modems. The system also accommodates traditional analog
telephones. The CSX can be designed to provide voice-only applications. The
Company has sold approximately 75 CSX systems to date, each of which is
operational and the largest of which serves approximately 4,000 users.
Cyber Local Area Network
The Company has developed but not yet commercialized the Cyber Local
Area Network ("CLAN"). CLAN is a data only local area network which, unlike most
LANs which cover distances of a few hundred feet at most, can network users up
to a distance of approximately one mile. The CLAN can serve even much larger
distances, effectively making it a wide area network. The CLAN provides
data-only capabilities and consists of a system node and iSTs, without a
handset, which serves as a data server unit, transmitting and receiving data.
The iST allows a user to exchange data in a manner similar to making a telephone
call, pressing a button and keying in the destination for the data to be
communicated. A single node CLAN can accommodate up to 240 users, with the
ability to upgrade to 2,400 data users.
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Cyber Hub
The Company has developed but not yet commercialized the Cyber Hub
Controller ("CHUB"). CHUB is an integrated voice and data switch which combines
the capabilities of the CLAN and CSX systems to offer total integrated data and
voice communications capability in a single, multi-purpose system. CHUB offers
digital transmission, switching and networking capabilities, thus enabling voice
and data communications both within a local area and with the outside world. A
single node CHUB is capable of supporting 512 lines for data, voice or trunk
connections. Through its digital networking and transmission capabilities,
several nodes can be networked to provide up to 100,000 lines.
Cyber Distributed Central Office
The Company has developed but not yet commercialized the Cyber
Distributed Central Office ("CDCO") which is designed to provide digital voice
communications to subscribers in densely populated urban areas. The CDCO is
essentially a digital switch with trunk and tandem exchange capabilities
enabling it to connect subscribers served by other exchanges. The CDCO system
interfaces with digital telecommunications networks and older analog telephone
networks. The CDCO system consists of nodes connected by standard digital links
which permit optimization of the network with respect to specific size, required
traffic capacity, and desired applications. The modularity derived from the
nodal structure of the CDCO provides an economical digital switching exchange
from as little as a few hundred lines up to 100,000 lines capacity.
Cyber Rural Exchange
The Company has developed the Cyber Rural Exchange ("CRX"), which is a
specialized version of the CDCO. The Company has sold only one CRX system to
date, which is currently serving about 400 users. The CRX is designed to handle
the traffic requirements of widely dispersed single-line users, such as users in
a small town or rural area.
Sales and Marketing
Customers
To date, the Company has sold approximately 75 systems, substantially
all of which have been the CSX. The Company has not commercialized the CLAN, the
CHUB or the CDCO and has sold only one CRX. The Company has sold its systems to
federal and state government agencies and to TTC in China. The Company has been
engaged in limited marketing activities relating to the CSX system due to its
limited marketing experience and limited financial, personnel and other
resources to undertake extensive marketing activities.
Sales of the Company's systems to federal and local government agencies
accounted for approximately 100% and 93% of the Company's revenues in fiscal
1996 and fiscal 1995, respectively. A portion of the Company's government
contracts are obtained through a competitive bidding process. The Company has
been limited in its ability to bid on larger contracts and to obtain bid and
performance bonds due to the Company's limited capital resources.
The Company just recently signed a manufacturing licensing contract
with the NTC of Egypt, pursuant to which the NTC will assemble the systems in
Egypt with parts provided by the Company. In addition, the NTC with market,
install, maintain and service the Company's systems in Egypt, Kenya, Tanzania,
Uganda, Sudan, Yemen, United Arab Emirates and Qatar.
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Government Contracts
A portion of the Company's business consists and will continue to
consist of sales under United States government contracts. Certain of these
contracts are competitive bid contracts, which are awarded after a formal bid
and proposal competition among suppliers.
Virtually all of the Company's United States government contracts are
fixed price contracts, pursuant to which the Company agrees to provide a system
for a fixed price and assumes the risk of cost overruns. The Company has not
experienced cost overruns on fixed price contracts.
The Company's United States government contracts generally may be
terminated as a result of factors which may not depend on the Company, including
termination for the convenience of the customer. In the event of a termination
for convenience, the Company would be entitled to reimbursement for its incurred
contract costs and to payment of a proportionate share of its fee or profit for
the work actually performed.
Competition
The telecommunications and related networking industries are
characterized by intense competition. The Company competes with numerous
well-established foreign and domestic companies, many of which possess
substantially greater financial, marketing, personnel and other resources than
the Company and have established reputations for success in the development,
sale and service of high-speed digital switching and networking and related
products.
Products which perform many of the functions of the Company's systems
are readily available from several competitors, including AT&T, Rolm, Intecom,
Northern Telecom, Siemens, Fujitsu and NEC, as well as computer networking
companies engaged in system integration, such as Novell, Xerox, IBM and Corvus,
certain of which dominate the industry and have already established a
significant base of their products or achieved significant market penetration in
selected geographic areas. These competitors also have the research and
development capabilities and financial and technical resources necessary to
enable them to respond to technical advances as well as evolving industry
requirements and standards.
The Company believes that it competes primarily on the basis of the
capabilities of its systems, price, reliability and quality, and ease of
installation and use. The Company believes, based on its own research and
information available to it from industry sources and from customers, that it
offers the only digital switching and networking system that provides end-to-end
connectivity between incompatible and dissimilar data devices. In addition, the
Company believes that certain features of its system architecture, including the
software based nature of the system, the distributed processing system and the
compact and modular nature of the system hardware, provide advantages over
competitive products which are mostly hardware intensive and employ centralized
processing methods which increase the potential for blocking transmissions.
The Company expects that companies which have developed or are
developing new technologies or products, as well as other companies which have
the expertise which would encourage them to attempt to develop and market
competitive products may attempt to develop new products directly competitive
with the Company's products. In particular, the Company is aware that Microsoft,
a leading software company, is currently developing office system software
designed to connect incompatible and dissimilar end-user equipment. According to
published reports, however, Microsoft's proposal would require third-party
hardware manufacturers to adapt their products to be compatible with Microsoft's
software systems. The Company's system can be used with currently available
hardware. In addition, Microsoft has announced that its proposed product will
not be commercialized for three to four years.
Proprietary Technology
The Company does not hold any patents or copyrights, nor has it filed
any patent or copyright applications, relating to its products or software
technology. The Company regards its software technology and certain
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components of its system hardware, including the iSTs, as proprietary and relies
for protection upon copyright and trade secret laws and confidentiality
agreements with its employees. In addition, the Company requires customers to
enter into a license and confidentiality agreement permitting the customer the
exclusive use of the system operating software, which is furnished to the
customer in object form .
The Company believes that these protections are sufficient to protect
the Company's rights as to its systems and software. Despite these protections,
however, it is possible that competitors, employees, licensees or others may
copy one or more of the Company's products or its technology or obtain
information that the Company regards as proprietary. In addition, there can be
no assurance that others will not independently develop products or technologies
similar to those of the Company, that confidentiality agreements will not be
breached or that the Company will have adequate resources to protect its
proprietary technology. The Company believes, however, that because of the rapid
pace of technological change in the digital switching and networking industries,
protection for its systems is less significant than the knowledge, ability and
experience of the Company's employees, the frequency of product enhancements and
the level of service and support provided by the Company.
In 1987, the Company entered into a Technology License Agreement with
TTC (the "License Agreement") pursuant to which the Company granted to TTC an
exclusive, royalty-free, perpetual license to use the Company's technology for
the purpose of manufacturing, distributing and selling products in China. In
addition, the Company granted TTC a non-exclusive thirty-year license in the
licensed technology to manufacture, sell and distribute products in certain
foreign countries and states in the United States, and appointed a U.S.-based
joint venture partner as a non-exclusive distributor of the Company's products
in certain states in the U.S. Under the License Agreement, the Company trained
employees of TTC in the use of the licensed technology and delivered certain
products to TTC for which the Company was entitled to receive $1,000,000 and 5%
ownership of the U.S.-based joint venture partner. To date, the Company has not
received such ownership interest and has received only $650,000 from TTC for
such training and product. Currently, the Company sells system components to TTC
on a purchase order basis from time to time in the ordinary course of business.
The Company sells components to TTC only upon the issuance of a letter of credit
satisfactory to the Company.
Government Regulation and Industry Standards
The telecommunications and related networking industries in which the
Company competes are highly regulated in both the United States and
internationally. Imposition of public carrier tariffs and taxation of
telecommunications services could materially adversely affect demand for the
Company's products. Furthermore, regulation or deregulation of public carrier
services by the United States and other governments, including recent proposals
to permit local carriers to manufacture switching equipment, may determine the
extent to which the Company will be able to enter and penetrate markets in the
United States and internationally and may result in significantly increased
competition, which would significantly impact the Company's future operating
results. In addition, the Company's products must comply with equipment,
interface and installation standards promulgated by communications regulatory
authorities, including the Federal Communications Commission.
In addition, the Company is required to obtain a license from the
Department of Commerce prior to export sales to certain countries. A denial of
an export license to the Company would be based upon a policy which likewise
affects all other American companies exporting similar products.
Industry standards bodies such as CCITT and BELLCORE have created
committees to address the matter of standards within the telecommunications
industry. The purpose of such standards is to facilitate the interoperability of
products from various vendors and, through standardization, create a competitive
environment which is anticipated to result in lower product costs. During the
past few years, many new standards have been adopted and more are pending. The
International Standards Organization ("ISO"), one of the primary standard
setting bodies in the communications industry, has developed a framework for
network standard called the Open System Interconnection Reference Model (the
"OSI Model"). The OSI Model represents a standard approach by which information
can be communicated throughout a network, so that a variety of independently
developed computer and communications devices can interoperate. The design of
the Company's products incorporates the
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OSI Model and accommodates most existing and pending ISDN standards, including
applicable BELLCORE and CCITT specifications. In most foreign countries,
government departments or ministries set industry standards.
Changes in government policies, regulations and interface and
installation standards or industry standards imposed by domestic and foreign
carriers in the future could require the Company to alter methods of operation,
resulting in additional costs, which could have a material adverse effect on the
Company.
Production and Supply
The Company engages in manufacturing, software programming, assembly,
system testing and quality assurance operations at its facility in Hauppauge,
New York. The Company's operations involve the creation of the required system
software, the inspection of system components manufactured by third parties,
programming of microchips and microprocessors, assembly of the components of the
system hardware and quality and testing to certify final performance
specification. The Company believes that it has sufficient excess production
capacity to satisfy any increased demand for the Company's systems in the
foreseeable future.
The Company is dependent on third-party arrangements for the
manufacture of all of its component parts incorporated into the Company's
systems. The Company purchases its component parts from numerous third-party
manufacturers and believes that numerous alternative sources of supply are
readily available. The Company currently purchases all of its requirements of
specially designed plastic parts for the iST from a single source supplier. The
Company believes that alternative sources of supply for such components are
available. The Company is substantially dependent on the ability of its
suppliers, among other things, to satisfy performance and quality specifications
and dedicate sufficient production capacity for plastic parts within scheduled
delivery times. The Company does not maintain contracts with any of its
suppliers and purchases system components pursuant to purchase orders placed
from time to time in the ordinary course of business. Failure or delay by the
Company's suppliers in supplying necessary components to the Company would
adversely affect the Company's ability to obtain and deliver products on a
timely and competitive basis.
The Company's sales cycle for government contracts generally commences
at the time a prospective customer issues a request for a proposal and ends upon
execution of a sales contract with that customer and typically ranges from 3 to
12 months. The period from the acceptance of the Company's bid and execution of
the sales contract until delivery, installation and acceptance of a system, at
which time the Company recognizes revenues, typically ranges from 2 to 18
months. The principal factors affecting delivery and installation time are the
configuration and complexity of the system and the availability of third-party
hardware components. In addition, the Company generally does not receive cash
payment until approximately three to four months after acceptance of a system by
a government agency. At June 30, 1996, the Company maintained an inventory of
system components of $431,735. Because the Company generally expects to fill
orders shortly after receipt, backlog is not expected to be material to the
Company's business.
The Company offers a one-year warranty, for sales in the United States,
covering operating defects during which period the Company will replace parts
and make repairs to the system components at its expense. For sales in China,
the Company offers a 100-day warranty. To date, the Company has not incurred any
significant warranty expense.
Research and Development
Since its inception, the Company has devoted substantial resources to
the design and development of the Company's systems. For fiscal 1996 and fiscal
1995, and for the three months ended June 30, 1996, the Company expended
approximately $41,679, $86,383 and $0, respectively, on research and
development. Although the Company's basic systems have been developed, the
Company is continually seeking to refine and enhance its systems, including
enhancements to comply with emerging regulatory or industry standards or the
requirements of a particular customer or country.
- 25 -
<PAGE>
The markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Accordingly, the Company's ability to
compete will depend in large part on its ability to introduce its products to
the marketplace in a timely manner, to continually enhance and improve such
products and maintain development capabilities to adapt to technological changes
and advances in the communications industry, including insuring continuing
compatibility with evolving industry standards. There can be no assurance that
the Company will be able to compete successfully, that competitors will not
develop technologies or products that render the Company's systems obsolete or
less marketable, or that the Company will be able to keep pace with the
technological demands of the marketplace or successfully enhance and adapt its
products to satisfy industry standards.
Service and Support
The Company believes that service, support and training are important
factors in promoting sales and customer satisfaction. Service and support
include system planning, site preparation, installation, customer training, and
maintenance. The Company typically charges an annual fee for ongoing support
services.
Because the Company's system hardware consists of a cabinet with
shelves having printed circuit boards inserted into physical slots, a
substantial part of repair and maintenance can be accomplished by simply
substituting the component in need of repair. In addition, the Company's systems
are designed to be accessible by computer from the Company's headquarters,
allowing the Company's service personnel to remotely call up, diagnose and
otherwise support systems and reducing response time and cost.
In addition, the Company intends to enter agreements with third party
service providers to provide customer support on a local basis in foreign
markets.
Employees
As of September 25, 1996, the Company had eleven full time employees,
of which three were engaged in marketing and sales activities, two were engaged
in research and development and support engineering, four were engaged in
production and operations, and two were in administration. None of the Company's
employees is represented by a labor union. The Company considers its employee
relations satisfactory.
Property
The Company's executive offices and assembly operations are located in
approximately 8,200 square feet of leased space in Hauppauge, New York. The
lease expires on March 31, 1998, with renewal option and an annual rental
payment of $51,250. The Company believes that its facility is adequate for its
current and reasonably foreseeable future needs. The Company believes that
additional physical capacity at its current facility will accommodate expansion,
if required.
Legal Proceedings
The Company is presently not a party to any material legal proceedings.
- 26 -
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are:
Name Age Office
- ---- --- ------
Jawahar C. Chatpar 48 Chairman of the Board, President, and
Chief Executive Officer
Jack P. Dorfman 58 Director and Secretary
Dr. Anil K. Agarwal 54 Director
Jatinder Wadhwa 58 Director
Neal P. Bennett 55 Vice President of International Sales
Larry S. Shluger 57 Vice President of Operations
Jawahar C. Chatpar is a founder of the Company and has served as
Chairman of the Board, Chief Executive Officer and President since March 1991,
as Chairman of the Board, Chief Executive Officer and Secretary from November
1986 until March 1991, and as President and Chief Executive Officer since
inception until November 1986. Mr. Chatpar has also served as a director since
inception. Mr. Chatpar founded the Company in 1983 as a successor to a Canadian
corporation of the same name which he founded in 1982. From 1980 to 1982, Mr.
Chatpar was employed by Bayly Engineering Limited, a manufacturer of digital
telecommunication systems and a member of A.E.G. Telefunken Group, as a Manager
of Digital Transmission and Fiber Optics Engineering (research and development).
From 1974 to 1980, Mr. Chatpar served in various engineering, management and
marketing positions with Northern Telecom. He holds an M.S. degree in Electrical
Engineering from the University of Waterloo.
Jack P. Dorfman joined the Company as a Director in November 1993, and
served as Secretary since October 1995. Since 1992, Mr. Dorfman has served as
consultant and manager for an independent community pharmacy. From 1990 to 1992,
he served as a management consultant for Clark Container, a division of Mark IV
Industries, a conglomerate. From 1988 to 1990, he served as Vice President and
Treasurer of US Distribution, a transportation company. Prior to 1988, he owned,
managed and operated an independent community pharmacy for over fifteen years.
Anil K. Agarwal, M.D., joined the Company as a Director in November
1993. Since 1976, Dr. Agarwal has been practicing at the Omaha Orthopedics
Clinic and Sports Medicine, Omaha, Nebraska and at Orthopedic Clinic, Iowa, as
an American Board Certified Orthopedic Surgeon. In addition, he has active
appointments with Bergen Mercy Hospital and Jenny Edmundson Hospital. From 1977
to 1991, he also taught at the Creighton University School of Medicine.
Jatinder Wadhwa has served as a Director of the Company since 1986, and
was Secretary of the Company from 1993 to 1995. Since 1992, Mr. Wadhwa has
served as a management consultant to Sealy Mattress. From 1990 to 1992, Mr.
Wadhwa had served as a management consultant to Gibbons Goodwin van Amerongen,
an investment banking firm, and Wells Aluminum Corporation, a manufacturer of
aluminum extrusion products. From 1970 to 1990, Mr. Wadhwa had served as Chief
Operating Officer and Vice President of Operations of EZ Por Corporation, a
manufacturer of aluminium products.
- 27 -
<PAGE>
Neal P. Bennett has been Vice President of International Sales of the
Company since August 1996. From 1990 to 1996, Mr. Bennett was Vice President of
Sales for North America at PTT Telecom Netherlands US, Inc., the sole
telecommunication provider in the Netherlands. From 1985 to 1990, he was
Director of Sales at Overseas Telecommunications, Inc., an international carrier
of telephone services, which was acquired by MCI Telecommunications Corporation.
Prior to 1985, he had served as Assistant Vice President of Sales at Sears
Communication Corp. and American Satellite Co., both of which are international
telephone carriers. He holds a B.A. degree in Marketing from St. Francis
College.
Larry S. Shluger has been Vice President of Operations of the Company
since August 1996. From 1991 to 1996, Mr. Shluger was Director of Purchasing and
Operations at Cashtek Corporation, a company which designs, develops and
manufacturers computerized gaming systems. From 1975 to 1991, he was Director of
Purchasing and Operations at Kenilworth Systems Corporation until its
acquisition by Cashtek Corporation. Prior to 1975 he was employed in various
management positions at Ecologic Instruments Corporation, a company which
designs, develops and manufactures test equipment for the environment and
pollution control fields, and Dynamic Instruments Corporation, a manufacturer of
battery chargers. He holds a degree in Business Administration from the
University of Maryland.
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the compensation
for services, in all capacities for fiscal 1996 and fiscal 1995, of those
persons who were, at March 31, 1996, the Chief Executive Officer and the most
highly compensated executive officers of the Company (collectively, the "Named
Officers"). No executive officer of the Company received compensation in excess
of $100,000 in fiscal 1996 or 1995.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------- ---------------------
Other
Name and Annual Restricted Securities All
Principal Fiscal Compensation Stock Underlying Other
Position(1) Year Salary($) Bonus($) ($)(2) Awards($) Options(#) Compensation($)
----------- ---- --------- -------- ------ --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
J.C. Chatpar 1996 $80,000 None(1) None None 440,000 None
Chairman of the Board,
President and CEO
1995 $80,000 None None None None None
</TABLE>
- -----------------
(1) An employment agreement with Mr. Chatpar provides for an annual bonus
as described in "-- Employment Agreements and Insurance. Mr. Chatpar
waived his right to receive the bonus for fiscal 1996.
(2) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and
bonus for fiscal 1996 and (ii) $50,000. Thus, such amounts are not
reflected in the table.
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock option
grants made during fiscal 1996 to the Named Officers. These grants are also
reflected in the Summary Compensation Table. The Company has not granted any
stock appreciation rights.
- 28 -
<PAGE>
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------
Number % of Total
of Options
Securities Granted to
Underlying Employees in Exercise
Options Fiscal Year Price Expiration
Granted 1996 ($/Share) Date
Name (#) (1) (2) (3)
---- --- --- --- ---
<S> <C> <C> <C> <C>
J.C. Chatpar 40,000 8.5% $1.00 8/17/2005
400,000 85.1% $1.00 10/30/2005
</TABLE>
- ------------------
(1) During fiscal 1996, options to purchase an aggregate of 440,000 shares
were granted to Mr. Chatpar and options to purchase an aggregate of
30,000 shares were granted to Jack Dorfman.
(2) The exercise price of the options granted were equal to the fair market
value of the underlying stock on the date of grant.
(3) Grants are exercisable at any time following the date of grant.
Aggregated Fiscal Year-End Option Values
The following table sets forth information concerning the number of
unexercised options and the fiscal 1996 year-end value of unexercised options on
an aggregated basis held by the Named Officers. The Company has not granted any
stock appreciation rights and no options were exercised in fiscal 1996.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-The-Money
Options at Fiscal Year-End (#) Options at Fiscal Year-End ($)(1)
----------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J.C. Chatpar 480,000 0 $852,400 0
</TABLE>
- ------------------
(1) Options are "in-the-money" if, on March 31, 1996, the market price of
the Common Stock ($2.75) exceeded the exercise price of such options.
The value of such options is calculated by determining the difference
between the aggregate market price of the Common Stock underlying the
options on March 31, 1996 and the aggregate exercise price of such
options.
Compensation of Directors
The directors of the Company are paid $250 per Board meeting. In
addition, the Company currently reimburses each director for expenses incurred
in connection with his or her attendance at each meeting of the Board of
Directors or a committee on which he or she serves.
On August 18, 1995, the Company granted non-qualified stock options to
purchase 40,000, 40,000, 20,000 and 20,000 shares of Common Stock to J.C.
Chatpar, Jatinder Wadhwa, Anil Agarwal and Jack Dorfman, respectively. On
October 31, 1995, the Company granted non-qualified stock options to purchase an
additional 10,000 and 400,000 shares of Common Stock to Jack Dorfman and J.C.
Chatpar, respectively. Each of these options have an exercise price of $1.00 per
share, expire 10 years from the date of issuance, and are exercisable at any
time following the dates of grant.
- 29 -
<PAGE>
Employment Agreements and Insurance
The Company has entered into an employment agreement with Mr. J.C.
Chatpar for a three-year term commencing on March 1, 1992. Such three-year term
shall be automatically extended for another three-year term commencing on the
third anniversary date of the current term. The Board, however, has the
authority to terminate such extension either based upon cause or without cause.
"Cause" is defined as proven material dishonesty, fraud or physical disability
preventing performance of Mr. Chatpar's duties for a continuous period of 180
days. Mr. Chatpar is entitled to receive a salary of $80,000 per annum. In
recognition of the complex scientific and technical leadership which Mr. Chatpar
brings to the Company, the Company has also agreed that its Board of Directors
may raise his salary during the three-year term as soon as the financial
resources of the Company and other business conditions permit. In such event Mr.
Chatpar's salary shall be at a level comparable to that of chief executive
officers of other comparable technology-driven publicly held companies.
In addition, to his base salary, Mr. Chatpar shall be entitled to
receive a bonus based upon the following formula: (a) 1% of gross revenues for
each fiscal year in excess of $3 million provided, however, that the Company
shall be profitable, (b) plus 5% of net income after deduction of the bonus
provided for in (a) above, and (c) plus 10% of the increase in net income over
that of the prior fiscal year after deduction of the bonus provided for in (a)
above. In the event of a termination of Mr. Chatpar's employment without cause
prior to February 28, 1998, Mr. Chatpar shall receive an amount equal to 5% of
gross revenues earned by the Company each month beginning on the date of
termination and continuing for a period of five years.
The Company does not have employment contracts with any other officer
or director. The Company currently maintains a $1,000,000 term life insurance
policy on the life of J.C. Chatpar with benefits payable to the Company. The
Company offers basic health, major medical and life insurance to its employees.
No retirement, pension or similar program has been adopted by the Company.
CERTAIN TRANSACTIONS
In December 1993, the Company issued an aggregate of 817,200 shares of
its Common Stock in a private placement at a price of $1.00 per share. One of
the investors, Dr. Anil Agarwal, who purchased 400,000 shares of Common Stock,
is a director of the Company. In August 1995, Dr. Anil Agarwal was granted
warrants to purchase 100,000 shares at $1.50 per share pursuant to a loan
agreement.
In August 1995, the Company issued to Jatindar Wadhwa, Dr. Anil
Agarwal, J.C. Chatpar and Jack Dorfman, directors of the Company, non-qualified
stock options to purchase 40,000, 20,000, 40,000, and 20,000 shares of Common
Stock, respectively, at an exercise price of $1.00 per share.
In October 1995, the Company issued to J.C. Chatpar and Jack Dorfman,
non-qualified stock options to purchase 400,000 and 10,000 shares of Common
Stock, respectively, at an exercise price of $1.00 per share.
- 30 -
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of October 9, 1996, and as
adjusted to reflect the sale of Shares offered hereby, for (i) each person or
group that is known by the Company to be a beneficial owner of more than 5% of
the outstanding shares of Common Stock, (ii) each of the Named Officers and
directors, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated, the Company believes that such beneficial
owners, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws,
where applicable.
<TABLE>
<CAPTION>
Percent Owned(1)
Name and Address Number -----------------------------------------
of Beneficial Owner of Shares Before Offering(2) After Offering(3)
- ------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
J.C. Chatpar(4)
400 Oser Avenue
Happauge, NY 11788 5,205,712 34.5% 30.2%
Dr. Anil Agarwal(5)
804 Meadow Drive
Omaha, NE 68152 630,000 4.2% 3.7%
Jack P. Dorfman(6)
21 Rosewood Drive
Williamsville, NY 14221 160,000 1.0% *
Jatinder V. Wadhwa(7)
400 Oser Avenue
Happauge, NY 11788 157,812 1.0% *
All directors and executive officers as a group
(4 persons)......................................... 6,153,524 40.7% 35.7%
</TABLE>
- ------------
*less than 1%
(1) For purposes of computing the percentage of outstanding shares of
Common Stock held by each person or group of persons named above, any
security which such person or persons have or have the right to acquire
within 60 days is deemed to be outstanding but is not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person.
(2) Does not include (i) the 1,293,764 shares of Common Stock issuable upon
the conversion of the Series A Preferred and (ii) the 824,013 shares of
Common Stock issuable upon the exercise of the Warrants.
(3) Assumes the conversion of all shares of Series A Preferred and the
exercise of all Warrants.
(4) Does not include 476,000 shares owned by Sylvie Chatpar, his wife, and
175,000 shares owned by certain other relatives, as to which shares
beneficial ownership is disclaimed. Includes 480,000 shares as to which
Mr. Chatpar holds non-qualified stock options, which are exercisable at
any time.
(5) Includes 230,000 shares as to which Dr. Agarwal holds non-qualified
stock options and warrants which are exercisable at any time.
(6) Includes 40,000 shares as to which Mr. Dorfman holds a non-qualified
stock option which is exercisable at any time. Does not include 360,000
shares owned by his wife, Sandra Dorfman, as to which beneficial
ownership is disclaimed.
(7) Includes 70,000 shares as to which Mr. Wadhwa holds non-qualified stock
options which are exercisable at any time.
- 31 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 30,000,000 shares of Common Stock,
and 10,000,000 shares of Preferred Stock, par value $.05 per share. As of the
date of this Prospectus, there are 15,110,311 shares of Common Stock outstanding
and 805 shares of Series A Preferred outstanding (convertible into 1,293,764
shares of Common Stock). There are no other outstanding shares of Preferred
Stock.
Common Stock
The holders of the Common Stock are entitled to one vote for each share
in the election of directors and in all other matters to be voted on by the
shareholders. There is no cumulative voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available therefor and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock issued or
issuable upon the conversion of the Series A Preferred and the exercise of
Warrants will be, when issued against the consideration therefor, fully paid and
nonassessable.
Preferred Stock
General
The Company's Certificate of Incorporation provides that the Company
may issue shares of Preferred Stock in one or more series. The Board of
Directors is authorized to establish from time to time the number of shares to
be included in, and the designation of, any such series, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock, and to increase or decrease the
number of shares of any such series (but not below the number of shares of such
series then outstanding) without any further vote or action by the shareholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power or other rights of the holders of Common
Stock. The Company has no present plans as of the date of the Prospectus to
issue any additional shares of Preferred Stock.
Series A Preferred
A total of 805 shares of Series A Preferred are authorized by the
Certificate of Amendment to the Certificate of Incorporation (the "Certificate
of Determination") establishing the rights, preferences, privileges and
restrictions granted to or imposed upon the Series A Preferred. The following is
a description of some of the material terms of the Series A Preferred.
Voting. The holders of Series A Preferred have no voting power, except
as required by applicable New York law, and no holder of Series A Preferred is
entitled to notification of any meeting of shareholders, except any meeting
regarding any major corporate events affecting the Company. In addition, the
Company must provide holders of Series A Preferred with prior notice of record
dates relating to certain kinds of corporate actions. To the extent that under
New York law the holders of Series A Preferred are entitled to vote on a matter
with holders of Common Stock, voting together as one class, each share of Series
A Preferred is entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible.
- 32 -
<PAGE>
Dividends. The Series A Preferred is not entitled to any dividends.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, each holder of
Series A Preferred is entitled to receive, immediately after any distributions
to securities identified as "Senior Securities" (if any) required by the
Company's charter documents, and in preference to any distribution to securities
identified as "Junior Securities" (which includes the Common Stock), an amount
per share equal to the sum of (i) the original Series A issue price ($10,000 per
share) for each outstanding share of Series A Preferred held by such holder and
(ii) an amount (such amount referred to as the "Premium") equal to 10% of the
original Series A issue price per annum for the period that has passed since the
date (the "Funds Delivery Date") that, in connection with the consummation of
the purchase of such shares of Series A Preferred from the Company by the
original holder of such shares, the escrow agent appointed in connection with
such purchase first had in its possession funds representing full payment for
such shares of Series A Preferred. If, after payment in full of the preferential
amount with respect to Senior Securities, the assets and funds available to be
distributed among the holders of Series A Preferred and holders of securities
identified as "Parity Securities" are insufficient to permit the payment to such
holders of the full preferential amounts, then the entire assets and funds of
the Company legally available for distribution shall be distributed among the
holders of the Series A Preferred and the Parity Securities, pro rata. All
remaining assets of the Company will then be distributed to holders of Junior
Securities. A sale, conveyance or disposition of all or substantially all of the
assets of the Company, or a transaction or series of related transactions in
which more than 50% of the voting power of the Company is disposed of, may be
treated as a liquidation at the option of each holder of Series A Preferred.
Conversion. Each holder of Series A Preferred is entitled (at the times
and in the amounts set forth below) to convert (in multiples of one share of
Series A Preferred) as follows: (x) up to one-third (1/3) of the shares of
Series A Preferred initially issued to such holder at any time beginning
forty-five (45) days following the date of the last closing of a purchase and
sale of Series A Preferred that occurs pursuant to the offering of the Series A
Preferred by the Company (the "Last Closing Date") and at any time thereafter,
(y) up to an additional one-third (1/3) of the shares of Series A Preferred
initially issued to such holder at any time beginning seventy-five (75) days
following the Last Closing Date and at any time thereafter, and (z) all
remaining Series A Preferred held by such holder at any time beginning one
hundred five (105) days following the Last Closing Date (each of the time
periods referenced in subclauses (x), (y) and (z) is hereinafter referred to
singularly as a "Conversion Gate"), into that number of shares of Common Stock
calculated in accordance with the following formula (the "Conversion Rate"):
(.10) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price
where,
o N = the number of days between (i) the Funds Delivery Date
for the shares of Series A Preferred for which conversion is being
elected, and (ii) the applicable date of conversion, and
o Conversion Price = the lesser of (x) $6.35 (the "Fixed
Conversion Price"), or (y) .85 times the average Closing Bid Price, as
that term is defined below, of the Common Stock for the five trading
days immediately preceding the Date of Conversion, as defined below
(the "Variable Conversion Price").
Any such conversion is subject to the Company's right of redemption
described below. The term "Closing Bid Price" means the closing bid price for
the Common Stock on the OTC Bulletin Board, or if no longer traded thereon, on
the Nasdaq SmallCap Market or the Nasdaq National Market, or if not traded on
the Nasdaq SmallCap Market or the Nasdaq National Market, the closing bid price
on the principal national securities exchange or the automatic quotation system
on which the Common Stock is so traded, and if not available, the price of the
last sale on the principal national securities exchange or the automatic
quotation system on which the Common Stock is so traded. The term "Last Closing
Date" means July 16, 1996.
- 33 -
<PAGE>
All Series A Preferred that has not previously been converted will
convert into Common Stock on July 16, 1999.
Right of First Refusal. The Series A Holders have a right of first
refusal to purchase the holder's pro rata share (based on the proportion that
the number of shares of Series A Preferred held by the holder bears to the
number of shares of Series A Preferred initially issued) with respect to certain
future offerings of Company securities for a period of 240 days after the Last
Closing Date.
Anti-Dilution Provisions. The conversion price of the Series A
Preferred is subject to proportionate adjustments upon the occurrence of stock
splits, reverse stock splits, dividends, or similar transactions.
Adjustment Due to Merger, Consolidation, Etc. If, prior to the
conversion of all Series A Preferred, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event, as
a result of which shares of Common Stock are changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity or there is a sale of all or
substantially all of the Company's assets, then the holders of Series A
Preferred shall thereafter have the right to receive upon conversion of Series A
Preferred, in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities and/or other assets which the
holder would have been entitled to receive in such transaction had the Series A
Preferred been converted immediately prior to such transaction. Appropriate
provisions will be made with respect to the rights and interests of the holders
of the Series A Preferred to the end that the provisions of the Certificate of
Determination (including, without limitation, provisions for the adjustment of
the Conversion Price and the number of shares issuable upon conversion of the
Series A Preferred) shall thereafter be applicable, as nearly as may be
practicable, in relation to any securities thereafter deliverable. The Company
shall not effect any such transaction unless (a) it first gives to the holders
prior notice of the transaction, and (b) the resulting successor or acquiring
entity (if not the Company) assumes by written instrument these obligations.
Redemption by the Company. If the Conversion Price is less than the
Fixed Conversion Price at the time of receipt of a Notice of Conversion, the
Company may, in its sole discretion, redeem in whole or in part any Series A
Preferred submitted for conversion, immediately prior to and in lieu of
conversion ("Redemption Upon Receipt of Notice of Conversion"). If the Company
elects to redeem some, but not all, of the Series A Preferred submitted for
conversion, the Company shall redeem from among the Series A Preferred submitted
by the various shareholders for conversion on the applicable date, a pro rata
amount from each such holder so submitting Series A Preferred for conversion.
The redemption price per share of Series A Preferred is calculated in
accordance with the following formula ("Redemption Rate"):
[[(.10)(N/365)(10,000)] + 10,000] x Closing Bid Price on Date of Conversion,
divided by the Conversion Price; where "N," "Date of Conversion," "Closing Bid
Price" and "Conversion Price" have the meanings described above.
At any time, commencing twelve months and one day after the Last
Closing Date, the Company has the right, in its sole discretion, to redeem
("Redemption at Company's Election"), from time to time, any or all of the
Series A Preferred; provided that (i) the Company shall first provide 30 days'
advance written notice (which can be given beginning 30 business days prior to
the date which is twelve months and one day after the Last Closing Date), and
(ii) that the Company may only redeem Series A Preferred in increments having an
aggregate Stated Value (as defined below) of at least $1.5 million. If the
Company elects to redeem some, but not all, of this Series A Preferred, the
Company shall redeem a pro rata amount from each holder of the Series A
Preferred.
The "Redemption Price at Company's Election" shall be calculated as a
percentage of Stated Value, as that term is defined below, of the Series A
Preferred redeemed, which percentage shall vary depending on the date of
Redemption at Company's Election, and shall be determined as follows:
- 34 -
<PAGE>
Date of Notice of Redemption at Company's Election % of Stated Value
- -------------------------------------------------- -----------------
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
24 months and 1 day to 30 months following Last Closing Date 120%
30 months and 1 day to 36 months following Last Closing Date 115%
"Stated Value" means the original Series A Issue Price of the shares of
Series A Preferred being redeemed, together with the accrued Premium.
Protective Provisions
So long as any shares of Series A Preferred are outstanding, the
Company shall not, without first obtaining the approval of the holders of at
least 75% of the then outstanding shares of Series A Preferred and at least 75%
of the then outstanding holders:
(a) alter or change the rights, preferences or privileges of
the Series A Preferred or any Senior Securities so as to adversely
affect the Series A Preferred;
(b) create any new class or series of stock having a
preference over or on parity with the Series A Preferred with respect
to distributions, or increase the authorized number of shares of Series
A Preferred; or
(c) do any act or thing not authorized or contemplated by the
Certificate of Determination which would result in taxation of the
holders of Series A Preferred under Section 305 of the Internal Revenue
Code of 1986, as amended.
If holders of at least 75% of the then outstanding shares of Series A
Preferred and at least 75% of the then outstanding holders agree to allow the
Company to alter or change the rights, preferences or privileges of the shares
of the Series A Preferred so as to affect the Series A Preferred, then the
Company will deliver notice of such approved change to the holders of Series A
Preferred that did not agree to such alteration or change (the "Dissenting
Holders"). The Dissenting Holders shall have the right, for a period of thirty
(30) business days after receipt of such notice, to convert, pursuant to the
terms of the Certificate of Determination as they exist prior to such alteration
or change, or continue to hold their shares of Series A Preferred.
New York Law and Certain Charter and By-Law Provisions
Generally, Section 912(b) of the NYBCL prohibits a New York corporation
from engaging in a "business combination" with an "interested shareholder" for a
period of five years after the date of the transaction in which the person
became an interested shareholder, unless the combination or the transaction in
which the person became an interested shareholder is approved by the board of
directors of the corporation before the date such person became an interested
shareholder. If the business combination is not previously approved, the
interested shareholder may effect a business combination after the five-year
period only if a majority of the shares not owned by the interested shareholder
votes in favor of the combination or the aggregate amount of the offer meets
certain fair price criteria. A "business combination" includes mergers, asset
sales and other transactions resulting in a financial benefit to the
shareholder. An "interested shareholder" is a person who (i) beneficially owns,
or (ii) is an affiliate or associate of a corporation and within the past five
years did beneficially own, 20% or more of the corporation's voting stock.
The Certificate of Incorporation and By-laws of the Company contain
certain provisions which may have the effect of discouraging future takeover
attempts which the Company's shareholders may deem to be in their best interests
and perpetuating the Company's existing management. Such provisions (a) provide
the Board of Directors with broad discretion to issue serial preferred stock;
(b) require the affirmative vote of at least 75% of the total voting power of
all outstanding shares of the Company's capital stock entitled to vote generally
in the election of
- 35 -
<PAGE>
directors, voting together as a single class, for the adoption or authorization
of any of the following actions with any other entity (as defined below): (i) a
merger or consolidation wherein the Company merges with or into another entity
(other than a merger or consolidation that does not require the vote of
shareholders of the Company) or wherein another entity merges with or into the
Company, (ii) a sale, lease, transfer or exchange (in one transaction or a
series of transactions) of all, or substantially all, of the Company's property
and assets, or (iii) an agreement or contract with any other entity providing
for any of the transactions described in (i) and (ii) above; and (c) require the
approval of 75% of all shares, eligible to vote in the election of directors,
for any proposed amendment to the Certificate of Incorporation or By-laws that
seeks to modify or remove the foregoing provisions. However, the super-majority
requirements will not be applicable if the proposal is approved by two-thirds of
the whole Board of Directors and a majority of the Directors acting upon such
matter shall be Continuing Directors (as defined below).
A Continuing Director is defined in the Certificate of Incorporation as
a member of the initial Board of Directors of the Company or one who was elected
as Director by the public shareholders prior to the time that such other entity
(as defined below) acquired more than 10% of the voting power of all classes of
stock of the Company entitled to vote in the election of directors.
Alternatively, a Continuing Director is also one who was elected or nominated
for election by a majority of the Continuing Directors. The term "other entity"
is defined in the Certificate of Incorporation as any individual, corporation,
partnership, person or entity and any other entity with which it or its
"affiliate" or "associate" (as defined below) has any agreement, arrangement or
understanding, directly or indirectly, for the purpose of acquiring, holding,
voting or disposing of stock of the Company, or which is its "affiliate" or
"associate" as those terms are defined in Rule 12b-2 (or any successor rule) of
the General Rules and Regulations under the Securities Exchange Act of 1934,
together with the successors and assigns of such persons in any transaction or
series of transactions not involving a public offering of the Company's stock
within the meaning of the Securities Act.
The foregoing provisions will discourage takeover attempts and also
have the effect of perpetuating existing management. It could also have an
adverse impact on the market price of the Common Stock.
Stock Transfer Agent and Registrar
The stock transfer agent and registrar for the Common Stock is
Continental Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have 17,237,088 shares of Common Stock outstanding if
all of the Series A Preferred is converted and all of the Warrants are
exercised. Of such shares, 6,687,712 shares are "restricted securities" as that
term is defined under Rule 144 promulgated under the Securities Act ("Rule
144").
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or other persons whose shares are aggregated), who has owned
restricted shares of Common Stock beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the Common Stock is quoted on Nasdaq, the average weekly
trading volume in the over-the-counter market or other exchange during the four
calendar weeks preceding such sale. A person who has not been an affiliate of
the Company for at least three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least three years is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of such shares for sale will have on
the market price prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market, or sales of
substantial amounts of the Common Stock in the public market, is likely to have
a material adverse effect on the price of the Common Stock and could impair the
Company's ability to raise capital through the future sale of its equity
securities.
- 36 -
<PAGE>
EXPERTS
The financial Statements as of and for the period ended March 31, 1996
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Albrecht, Viggiano, Zureck & Company, P.C., C.P.A., independent
auditors, as set forth in their report with respect thereto, and are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock hereby will
be passed upon for the Company by Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York 10022. Members of that firm own 50,000 shares of
Common Stock.
- 37 -
<PAGE>
CYBER DIGITAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountants' Report............................................................ F-2
Balance Sheets at June 30, 1996 (unaudited) and March 31, 1996............................. F-3
Statements of Operations for each of the two fiscal years ended March 31, 1996
and for each of the three month periods ended June 30, 1995 (unaudited) and
June 30, 1996 (unaudited) .............................................................. F-4
Statements of Shareholders' Equity for each of the two fiscal years ended
March 31, 1996 and for the three months ended June 30, 1996 (unaudited)................. F-5
Statements of Cash Flows for each of the two fiscal years ended March 31, 1996
and for each of the three month periods ended June 30, 1995 (unaudited) and
June 30, 1996 (unaudited)............................................................... F-6
Notes to Financial Statements.............................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Cyber Digital, Inc.
Hauppauge, New York
We have audited the accompanying balance sheets of Cyber Digital, Inc. as of
March 31, 1996 and 1995 and the related statements of operations, shareholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Except as discussed in the following paragraphs, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
We were unable to confirm the accounts receivable from sales discussed in Note 2
aggregating $611,928 at March 31, 1996, and were unable to satisfy ourselves
about such accounts receivable through alternative procedures.
Because we were not engaged as auditors until after March 31, 1994, we were not
present to observe the physical inventory taken at that date, and we have not
satisfied ourselves by means of other auditing procedures about inventory
quantities. Also, in accordance with the terms of our engagement, we have not
applied audit procedures necessary to satisfy ourselves about the
classifications and amounts comprising the balance sheet at March 31, 1994. The
amount of the inventory at March 31, 1994, and other significant aspects of the
balance sheet at that date, including classifications and amounts, materially
affect the determination of the results of operations and cash flows for the
year ended March 31, 1995. Accordingly, the scope of our work was not sufficient
to enable us to express, and we do not express, an opinion on the accompanying
statements of operations, shareholders' deficit, and cash flows for the year
ended March 31, 1995, or on the consistency of application of accounting
principles with the preceding year.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to confirm the accounts
receivable referred to in the third paragraph, the accompanying balance sheets
referred to in the first paragraph presents fairly, in all material respects,
the financial position of Cyber Digital, Inc. as of March 31, 1996 and the
results of its operations and its cash flows for the year then ended and the
financial position as of March 31, 1995, in conformity with generally accepted
accounting principles.
We have also audited Schedule VIII of Cyber Digital, Inc. for the year ended
March 31, 1996. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
July 15, 1996
F-2
<PAGE>
CYBER DIGITAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1996 1996
---------------- ----------------
(unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 156,027 $ 67,432
Accounts receivable 684,875 691,309
Inventories 433,582 431,735
Prepaid and other 4,007 1,002
---------------- ----------------
Total Current Assets $ 1,278,491 $ 1,191,478
Property and Equipment, net 30,691 28,509
Other Assets
Other 10,680 10,680
---------------- ----------------
$ 1,319,862 $ 1,230,667
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable, accrued expenses, and taxes $ 48,385 $ 38,605
Current maturities of long-term debt 748,037 498,871
---------------- ----------------
Total Current Liabilities $ 796,422 $ 537,476
Long-Term Debt, less current maturities 148,997 100,000
---------------- ----------------
$ 945,419 $ 637,476
---------------- ----------------
Shareholders' Equity (Deficit)
Preferred Stock - $.05 par value; authorized, 10,000,000 shares;
issued and outstanding, none
Common Stock - $.01 par value; authorized, 30,000,000 shares; issued and
outstanding, 15,110,311 shares and 15,114,311 shares at March 31, 1996
and June 30, 1996,
respectively $ 151,103 $ 151,143
Additional paid-in capital 6,253,146 6,257,106
Accumulated deficit (6,029,806) (5,815,058)
---------------- ----------------
$ 374,443 $ 593,191
---------------- ----------------
$ 1,319,862 $ 1,230,667
================ ================
</TABLE>
The accompanying notes are an integral part of these.
F-3
<PAGE>
CYBER DIGITAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Three months ended
March 31, June 30,
--------------------------------- -----------------------------------
1996 1995 1996 1995
--------------- -------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 701,410 $ 234,117 $ 18,734 $ 273,624
Cost of Sales 76,236 111,013 8,574 93,308
--------------- -------------- ---------------- -------------
Gross Profit $ 625,174 $ 123,104 $ 10,160 $ 180,316
--------------- -------------- ---------------- -------------
Operating Expenses
Selling, general and
administrative expenses $ 474,924 $ 553,591 $ 87,875 $ 101,805
Provision for bad debt 0 156,719 0 0
Research and development 41,679 86,383 0 0
Other expense 43,551 69,080 0 0
--------------- -------------- ---------------- -------------
Total Operating Expenses $ 560,154 $ 865,773 $ 87,875 $ 101,805
--------------- -------------- ---------------- -------------
Income (Loss) from operations $ 65,020 $ (742,669) $ (77,715) $ 78,511
Other Income, net 0 0 706 302
--------------- -------------- ---------------- -------------
Income (Loss) Before Income Taxes
and Extraordinary Item $ 65,020 $ (742,669) $ (77,009) $ 78,813
Provision for taxes 3,426 429 0 0
--------------- -------------- ---------------- -------------
Income (Loss) Before Extraordinary
Item $ 61,594 $ (743,098) $ (77,009) $ 78,813
Extraordinary item (less applicable
income taxes) 912,974 0 291,756 0
--------------- -------------- ---------------- -------------
Net Income (Loss) $ 974,568 $ (743,098) $ 214,747 $ 78,813
=============== ============== ================ =============
Earnings per share calculations
Income (loss) before extraordinary item
per common and common equivalent
share $ 0.01 $ (0.05) $ (0.01) $ 0.01
Extraordinary item 0.06 0.00 0.02 0.00
Net income $ 0.07 $ (0.05) $ 0.01 0.01
=============== ============== ================ =============
Weighted average number of common
shares outstanding 14,570,469 13,652,585 16,975,311 14,830,336
=============== ============== ================ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CYBER DIGITAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Accu-
Common Stock Paid-In mulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1994 13,615,801 $ 136,158 $ 5,765,031 $ (6,239,721) $ (338,532)
Exercise of stock options 117,000 1,170 6,830 8,000
Sale of common stock 20,000 200 29,800 30,000
Net loss (743,098) (743,098)
---------------- --------------- ---------------- ---------------- ----------------
Balance at March 31, 1995 13,752,801 $ 137,528 $ 5,801,661 $ (6,982,819) $ (1,043,630)
Exercise of stock options 1,357,510 13,575 451,485 465,060
Prior Period adjustment (21,555) (21,555)
Net Income 974,568 974,568
---------------- --------------- ---------------- ---------------- ----------------
Balance at March 31, 1996 15,110,311 $ 151,103 $ 6,253,146 $ (6,029,806) $ 374,443
Sale of common stock 4,000 40 3,960 4,000
Net Income 214,747 214,747
---------------- --------------- ---------------- ---------------- ----------------
Balance at June 30, 1996 15,114,311 $ 151,143 $ 6,257,106 $ (5,815,059) $ 593,190
================ =============== ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
CYBER DIGITAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Three months ended
March 31, June 30,
------------------------------ ---------------------------
1996 1995 1996 1995
--------- ---------- ---------- --------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from Operating Activities
Net income (loss) $ 974,568 $ (743,098) $ 214,747 78,813
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation 9,608 6,510 2,182 2,091
Amortization 10,155 15,048 0 3,762
Forgiveness of debt (912,974) 0 (291,756) 0
(Increase) decrease in operating assets:
Accounts receivable (668,443) 219,855 (6,434) (254,298)
Inventories 60,719 69,317 1,847 80,070
Other assets and prepaid expenses 54,133 68,476 3,005 2,677
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses, and taxes (11,069) (10,834) (9,780) (1,611)
--------- ---------- ---------- --------
Net Cash Used in Operating Activities $ (483,303) $ (374,726) $ (86,189) $ (88,496)
--------- ---------- ---------- --------
Cash Flows from Investing Activities
Purchase of equipment $ (2,399) $ (25,649) $ 0 $ 0
--------- ---------- ---------- --------
Net Cash Used in Investing Activities $ (2,399) $ (25,649) $ 0 $ 0
--------- ---------- ---------- --------
Cash Flows from Financing Activities
Issuance of common stock $ 465,060 $ 38,000 $ 4,000 $ 25,000
Payments of long-term debt (5,219) (73,034) (6,406) (943)
Proceeds from long-term debt 100,000 0 0 0
--------- ---------- ---------- --------
Net Cash Providced by (Used in) Financing Activities $ 559,841 $ (35,034) $ (2,406) $ 24,057
--------- ---------- ---------- --------
Net Increase (Decrease) in Cash and Cash Equivalents $ 74,139 $ (435,409) $ (88,595) $ (64,439)
Cash and Cash Equivalents at Beginning of Period 81,888 517,297 156,027 81,888
--------- ---------- ---------- --------
Cash and Cash Equivalents at End of Period $ 156,027 $ 81,888 $ 67,432 $ 17,449
========= ========== ========== ========
Supplemental Disclosures of Cash Flow Information
Cash during the period for:
Income taxes $ 421 $ 429 $ 404 $ 429
Interest 4,606 386 0 0
Supplemental Schedule of Non Cash Investing and
and Financing Activities:
Issuance of common stock in exchange for consulting
services $ 51,700
=========
Issuance of common stock in exchange for legal
services $ 20,000
=========
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary Of Significant Accounting Policies
Description of Business
Cyber Digital, Inc. (the "Company") is a New York corporation that designs,
develops, manufactures and markets digital switching and networking systems that
enable simultaneous communication of voice and data to a large number of users.
The Company's systems are based on its propriety software technology which
permits "modemless" transmission of data between a variety of incompatible and
dissimilar end-user equipment, such as personal computers, printers, work
stations and data terminals, over standard telephone lines.
Operating and Financing Matters
Since inception, the Company has devoted substantial resources to the design and
development of the Company's systems. As such, the Company has not achieved
revenue growth and has incurred operating losses. At March 31, 1996, the Company
had an accumulated deficit of $6,029,806 and a shareholders' equity of $374,443.
The increase in equity from March 31, 1995 to March 31, 1996 is due mainly to
the recognition of an extraordinary gain on the forgiveness of debt as more
fully described in Note 12. The Company had working capital of $482,069 at March
31, 1996 relating largely to inventory. The Company historically has sufficient
cash flow generated mainly from the issuance of debt and equity securities and
funding from state and local agencies as discussed in Note 6 and Note 13.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at March 31, 1996, does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet. The estimated fair value amounts have been determined by the
Company using available market information and the appropriate valuation
methodologies. Considerable judgment is necessarily required in the interpreting
market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
Cash and Cash Equivalents
The Company considers highly liquid temporary cash investments with an original
maturity of three months or less to be cash equivalents
Accounts Receivable
Accounts receivable are considered fully collectible and are presented net of a
zero allowance for doubtful accounts.
F-7
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Inventories
The Company uses a cost system which approximates the first-in, first-out
method. Inventories are valued at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization are computed by the straight-line method over
their estimated useful lives (generally 5 to 7 years).
Deferred Financing Costs
Deferred financing costs consisting of loan origination fees, legal, accounting
and other fees associated with obtaining loans from the Buffalo and Erie County
Regional Development Corporation ("RDC") and the New York State Job Development
Agency ("JDA"), have been capitalized and are being amortized on a straight-line
basis over the original term of the related credit agreements. The amortization
of deferred financing costs was $10,155 and $15,048 for the years ended March
31, 1996 and 1995, respectively.
Revenue Recognition
The Company recognizes product system sales upon shipment and acceptance by the
customer. Component part and software sales are recognized upon shipment to the
customer.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of assets and liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future federal income taxes. The Company accounts for
investment tax credits using the flow-through method, and thus reduces income
tax expense in the year the related assets are placed in service.
Research and Development Costs
Research and development costs are charged to expense when incurred.
Warranty Expenses
The Company records warranty expense as incurred and does not make a provision
as shipments are made. Such expense is not significant.
Earnings (Loss) Per Share
The computation of earnings per common and common equivalent share is based upon
the weighted average number of common shares outstanding during the period plus
(in periods in which they have a dilutive effect) the effect of common shares
contingently issuable from stock options.
F-8
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Prior Period Adjustment
During the current year it was discovered that there was an error in the
calculation of the New York State alternative minimum taxes due for the fiscal
years ended March 31, 1993 and 1992. The following schedule outlines the effect
on each of the years:
March 31, 1993 $ 10,998
March 31, 1992 10,557
---------------
Total Prior Period Adjustment $ 21,555
===============
These errors have no effect on Net Income (Loss) for the fiscal years ended
March 31, 1996 or 1995.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
Note 2 - Accounts Receivable
Pursuant to a federal government agency contract that was terminated at the
convenience of the government, the Company was requested by the government to
bill the government for actual costs incurred plus a reasonable mark-up for
profit. Such contract billings submitted to the government, in accordance with
the Federal Acquisition Regulations and directions provided by the Company by
the government, amount to in excess of $1.1 million. However, the management of
the Company has conservatively recorded on its books the contract amount of
$611,928. Due to recent budget constraints, the government has been slow in
making payments but the Company expects to receive the entire $611,928.
Note 3 - Inventories
Inventories consist of:
March 31
----------------------------------------
1996 1995
------------------ -------------------
Raw materials $ 276,593 $ 285,650
Work-in-process 33,123 33,701
Finished goods 123,866 174,950
------------------ -------------------
$ 433,582 $ 494,301
================== ===================
F-9
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Property and Equipment
Major classes of property and equipment consist of the following:
March 31
-----------------------------------------
1996 1995
------------------ -----------------
Machinery and equipment $ 625,060 $ 617,517
Furniture and fixtures 53,988 53,988
------------------ -----------------
679,048 671,505
Less: Accumulated depreciation 648,357 638,749
------------------ -----------------
$ 30,691 $ 32,756
================== =================
Note 5 - Other Assets
Other assets consist of up-front costs in connection with a private placement,
security deposits, and cash surrender value on officers' life insurance.
Note 6 - Long-Term Debt
The Company's Plan of Reorganization was confirmed by the United States
Bankruptcy Court for the Eastern District of New York in June 1990. Pursuant to
the Plan, the Company is required to repay an aggregate of $1,102,557 and
$788,032 of principal to the Buffalo and Erie County Regional Development
Corporation and the New York State Job Development Agency, respectively, as well
as the unsecured creditors, as follows:
<TABLE>
<CAPTION>
March 31
------------------------------
1996 1995
------------ ---------
<S> <C> <C>
BUFFALO AND ERIE REGIONAL DEVELOPMENT CORPORATION ("RDC") Collateralized by
substantially all of the Company's assets, including its software technology;
payable in accordance with the Company's Plan of Reorganization (as noted
above) at 5% of the outstanding principal during the first year increasing to
10% during the second year, 15% in each of the third, fourth and fifth years,
and 20% thereafter until maturity, without interest. Interest will be applied
to the outstanding principal balance at a rate of 5% per annum in any fiscal
year in which the Company's net income exceeds $2,000,000. The RDC has agreed
to revise the paymetn terms to a lump sum payment of $100,000 due and payable
no later than July 30, 1996 as more fully described in Note 12. $ 100,000 $1,012,974
NEW YORK STATE JOB DEVELOPMENT AGENCY ("JDA")
Collateralized by substantially all of the Company's assets, including its
software technology; payable in accordance with the Company's Plan of
Reorganization (as noted above) at 5% of the outstanding principal during the
first year increasing to 10% during the second year, 15% in each of the
third, fourth and fifth years, and 20% thereafter until
</TABLE>
F-10
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31
------------------------------
1996 1995
------------ ---------
<S> <C> <C>
maturity, without interest. Interest will be applied to the outstanding
principal balance at a rate of 5% per annum in any fiscal year in which the
Company's net income exceeds $2,000,000. The JDA has agreed to revise the
payment terms to 5% per annum for months which fall within the calendar year
1995 and 20% for months which fall within calendar year 1996. 591,756 591,756
DR. ANIL K. AGARWAL
Collateralized by substantially all of the Company's assets, including its
software technology. This loan is due and payable in full four (4) years from
the date of issuance. Interest will be applied to the outstanding balance at
a rate of 15% per annum. 100,000 -0-
LOAN PAYABLE-BANK OF SMITHTOWN
Secured by an transportation equipment payable over sixty months at $158 per
month including interest at 8.4%, final payment due in April 1997. 5,144 -0-
UNSECURED CREDITORS
Pursuant to the reorganization plan, the unsecured creditors have selected
either of the following two options: Option I - unsecured creditors will
receive 100% of their allowed claims commencing July 1990, paid quarterly
without interest over a seven year period as follows: year 1 - 5%, year 2 -
10%, years 3 - 5 - 15% and years 6 and 7 - 20%; Option II- unsecured
creditors will receive 5% of their allowed claim in July 1990 and 20% of said
claim on the anniversary of the first payment, without interest, in full and
complete satisfaction of said claim. 100,134 105,353
---------- ----------
$ 897,034 $1,710,083
Less: Current maturities
748,037 155,994
$ 148,997 $1,554,089
========== ==========
Maturities of long-term debt are as follows:
Years ending March 31, 1997 $ 748,037
1998 48,997
1999 -0-
2000 100,000
----------
$ 897,034
</TABLE>
This schedule assumes that the original restructured repayment terms will be in
effect on any remaining unpaid balances will be repaid in fiscal year ending
March 31, 1998.
In accordance with the confirmed Plan of Reorganization, the secured creditors
agreed to share the respective lien interests in the collateral with future
lenders, if any, on a pari passu basis.
In the event of a default by the Company on its repayment obligations, the RDC
and the JDA could declare the Company's indebtedness to be due and currently
payable and foreclose on the Company's assets used to secure such debts.
F-11
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock Option Plans
The Company adopted a 1983 Stock Option Plan which expired in accordance with
its terms in April 1993. Under the terms of the Plan, 1,462,500 shares were
reserved for issuance to officers, directors and key employees meeting certain
qualifications. Under the Plan, incentive stock options are granted at 100% of
fair market value on the date of grant, and the employee's rights to exercise
the options accrued in respect to one-quarter of the shares subject to grant
each year that the employee is employed by the Company. Options granted under
the plan automatically expire ten years from the date on which they are granted.
Options will not be granted to any stockholder owning more than 10% of the
Company's voting securities unless the option price is at least 110% of the fair
market value of the shares covered by the option and will expire not less than
five years from the date it is granted. With an exercise price of $.25 per
share, 50,000 shares are exercisable at March 31, 1996. Incentive stock options
relative to 125,000 shares were exercised at a price of $.07 per share during
fiscal year ended March 31, 1996.
The Company's Board of Directors adopted, on November 5, 1993, a 1993 Stock
Incentive Plan (the "1993 Plan"). The 1993 Plan is a successor to the Company's
1983 Incentive Stock Option Plan as amended, which has expired. The total number
of shares of common stock of the Company, which may be issued pursuant to the
1993 Plan, shall not exceed 853,375, subject to adjustment in the event of a
stock split or similar action.
Pursuant to the 1993 Plan, incentive stock options, nonqualified stock options,
restricted stock and stock appreciation rights may be granted to such officers,
directors, and employees of the Company, and to such consultants to the Company
and such other persons or entities, as the Stock Option Committee of the Board
of Directors (the "Committee") shall select. All incentive stock options
("ISO"), which may be granted only to employees and which provide certain tax
advantages to the optionee, must have an exercise price of at least 100 percent
of the fair market value of a share of common stock on the date the option is
granted. No ISOs will be exercisable more than 10 years after the date of grant.
ISOs granted to ten percent shareholders must have an exercise price of at least
110 percent of fair market value and may not be exercisable after the expiration
of five years from grant. The exercise price and the term of nonqualified stock
options will be determined by the Committee at the time of grant.
Stock appreciation rights ("SARS") may be granted independently or in connection
with all or any part of any option granted under the 1993 Plan, either at the
time of grant of the option or at any time thereafter. The holder of an SAR has
the right to receive from the Company, in cash or in shares as the Committee
shall determine, an amount equal to the excess of the fair market value of the
shares covered by the SAR at the date of exercise over the exercise price set at
the date of grant of the SAR. At the request of the holder of an option, the
committee may at its discretion substitute for the exercise of the option,
compensation (in cash or in shares) in an amount equal to or less than the
excess of the fair market value of the shares covered by the option at the
request date over the exercise price set at the grant of the option.
A restricted stock award, entitling the recipient to acquire shares of common
stock for a purchase price at least equal to par value may be granted to such
persons and in such amounts and subject to such terms and conditions as the
Committee may determine. Shares of restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as specified
in the 1993 Plan or the written agreement governing the grant. The Committee at
the time of grant, will specify the date or dates on which the
nontransferability of the restricted stock shall lapse. During the 120 days
following the termination of the grantee's employment for any reason, the
Company has the right to require the return of any shares to which restrictions
on transferability apply, in exchange for which the Company shall repay to the
grantee any amount paid by the grantee for such shares.
F-12
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Unless sooner terminated by the Board, the provisions of the 1993 Plan regarding
the grant of ISOs shall terminate on the tenth anniversary of the adoption of
the 1993 Plan by the Board. No ISOs shall thereafter be granted under the Plan,
but all ISOs granted therefore shall remain in effect in accordance with their
terms.
There has been no activity in connection with the 1993 Plan through March 31,
1996.
In addition to these plans, the Company has issued non-qualified stock options
and warrants upon the approval by the Board of Directors. Such options and
warrants are granted at 100% of fair market value on the date of the grant.
Information with respect to non-qualified stock options and warrants are
summarized as follows:
Price Shares
---------------------- -------------------
Outstanding, March 31, 1995 $ .05 to $1.25 910,000
Granted $ 1.00 to $1.75 1,425,000
Exercised $ .05 to $1.38 (676,000)
Canceled $ .05 to $ .05 (90,000)
-------------------
Outstanding, March 31, 1996 1,569,000
===================
Note 8 - Commitments and Contingencies
Employment Contract
The Company is obligated under an employment agreement with the Chairman to pay
him $80,000 during each of the years ended February 28, 1996 through 1998.
In addition to such base salary, the Chairman shall be entitled to receive a
bonus based upon the following formula: (i) 1% of gross revenues for each fiscal
year in excess of $3 million, provided, however, that the Company shall be
profitable, (ii) plus 5% of net income after deduction of the bonus provided for
in (i) above, (iii) plus 10% of the increase in net income over that of the
prior fiscal year after deduction of the bonus provided for in (i) above. In the
event of the termination of the Chairman's employment without cause prior to
February 28, 1998, he shall receive an amount equal to 5% of gross revenues
earned by the Company each month beginning on the date of termination and
continuing for a period of five years. The Chairman has waived his right to
receive the bonus for fiscal year ended March 31, 1996.
Operating Leases
Effective April 1, 1994, the Company commenced a noncancelable operating lease
that expires on March 31, 1998, with a renewal option, with respect to the
Company's executive offices and operations. Rent expense was $46,681 and $49,200
for the years ended March 31, 1996 and 1995, respectively.
The Company also entered into non-cancelable operating leases for a vehicle and
office equipment. The monthly rental on the vehicle and office equipment is $364
and $205, respectively. The amount charged to expense was $2,546 and $2,504,
respectively, for the year ended March 31, 1996 and $4,368 and $2,460
respectively, for the year ended March 31, 1995. The lease on the vehicle
expired in November 1995.
F-13
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Future minimum rentals are as follows:
For years ending March 31, 1997 $ 57,873
1998 51,250
--------
$109,123
Government Regulation
The Company's operations are highly sensitive to regulations promulgated by the
United States and throughout the world in which the Company has targeted it
marketing efforts. These regulations or deregulations could affect both the
competition for the Company's product as well as the costs associated with doing
business abroad.
Cash in Excess of FDIC Limit
The bank balance at the Bank of New York at March 31, 1996 is $167,316. The
current FDIC insured limited is $100,000 per financial institution.
Note 9 - Income Taxes
The Company was subject to alternative minimum tax for Federal and New York
state due to a net operating loss carryforward for the year ended March 31,
1996. The Company was only subject to New York state minimum tax for the year
ended March 31, 1995.
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate on losses:
<TABLE>
<CAPTION>
March 31
------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State income taxes, net of Federal tax benefit (5.0)% (5.0)%
Operating loss generating no current tax benefits 39.0% 39.0%
-------------- ---------------
Effective rate 0% 0%
============== ===============
</TABLE>
The Company has net operating loss carryforwards for tax purposes amounting to
approximately $6.3 million that may be offset against future taxable income
which expires through 2009. In addition, the Company has investment and research
and development tax credits for tax purposes amounting to approximately $196,000
which expire through 2003.
Deferred income taxes are recognized for differences between the bases of assets
and liabilities for financial statement and income tax purposes. The utilization
of these tax attributes is contingent upon the Company's ability to generate
future taxable income and tax before the tax attributes expire as well as
Internal Revenue Code limitations. As a result, a valuation allowance equal to
the full extent of the deferred tax asset has been established. The change in
the deferred tax asset (as well as the valuation account) was approximately
$156,000 for the fiscal year ended March 31, 1996.
F-14
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note 10 - Segment Information and Significant Customers
Significant Customers
The Company considers itself to be in a single industry defined as the design,
manufacturing and marketing of high performance distributed digital switching
and networking systems. In fiscal year ended March 31, 1996 the Company derived
100% of its revenue from Federal government agencies as opposed to 93% in fiscal
year ended March 31, 1995. The accounts receivable for this customer accounted
for 100% of the total accounts receivable at March 31, 1996 and 1995.
Export Sales
The Company derived 0% of its revenue from China in fiscal year ended March 31,
1996 as opposed to 7% in fiscal year ended March 31, 1995. As previously noted,
the Company is subject to all risks associated with foreign trade including but
not limited to trade restrictions, export tariffs and foreign currency
fluctuations as well as international and political developments which could
adversely effect the industry in which the Company operates.
Note 11 - Related Party Transactions
On September 25, 1995, the company borrowed $100,000 from Dr. Anil K. Agarwal, a
director of the Company, for working capital purposes as stated in Note 6. The
note is due and payable September 25, 1999.
Note 12 - Extraordinary item
On November 1, 1995 the Company entered into an agreement to restructure the
debt with the Buffalo and Erie County Regional Development Corporation ("RDC").
The agreement calls for the Company to pay $100,000 and issue five year warrants
to purchase 100,000 shares of common stock with a purchase price of $1.00 per
share. The agreement for the payment of the $100,000 expired on April 14, 1996
and has been extended until July 30, 1996. The extraordinary item in the amount
of $912,974 is included in the calculation of net income for the fiscal year
ended March 31, 1996 and has been calculated as follows:
Debt payable to the RDC $ 1,012,974
Cash payable in settlement of debt 100,000
-------------
Extraordinary gain on extinguishment of debt $ 912,974
=============
Note 13 - Subsequent Events
On May 31, 1996, JDA has agreed to settle all of the Company's indebtedness to
JDA in the amount of $591,756 for a cash settlement of $300,000 made prior to
November 20, 1996.
On July 11, 1996, the Company concluded a private placement of its Series A
Preferred Stock and accompanying warrants to accredited institutional investors
and received net proceeds of $7,049,500.
On May 31, 1996, the Company entered into a 26 month operating lease for
transportation equipment. The monthly payment are $303 relating to this lease.
F-15
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to anyone
in any jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that there has been no change in the affairs of the Company
or that the information herein is correct as of any time subsequent to the dates
as of which such information is given.
TABLE OF CONTENTS
Page
----
Available Information....................................... 2
The Company ................................................ 2
Risk Factors ............................................... 4
Selling Securityholders..................................... 10
Plan of Distribution........................................ 13
Price Range of Common Stock................................. 14
Dividend Policy ............................................ 14
Capitalization ............................................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................. 16
Business ................................................... 19
Management ................................................. 27
Certain Transactions........................................ 30
Principal Shareholders...................................... 31
Description of Capital Stock................................ 32
Shares Eligible for Future Sale............................. 36
Experts .................................................... 37
Legal Matters .............................................. 37
Index to Financial Statements............................... F-1
- --------------------------------------------------------------------------------
3,000,000 Shares
CYBER DIGITAL, INC.
COMMON STOCK
PROSPECTUS
_________, 1996
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
To the fullest extent that limitations on the liability of directors and
officers are permitted by the New York Business Corporation Law, no director or
officer of the Registrant shall have any liability to the Registrant or its
stockholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the Registrant
whether or not such person is a director or officer at the time of any
proceeding in which liability is asserted.
The Registrant shall indemnify and advance expenses to its currently acting
and its former directors to the fullest extent that indemnification of directors
is permitted by the New York Business Corporation Law. The Registrant shall
indemnify and advance expenses to its officers to the same extent as its
directors and to such further extent as is consistent with law. The Board of
Directors may, through a by-law, resolution or agreement, make further
provisions for indemnification of directors, officers, employees and agents to
the fullest extent permitted by the New York Business Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement will be as
follows:
Total*
SEC registration fee ............................ $ 3,238.64
Legal fees and expenses.......................... $ 25,000.00
Miscellaneous.................................... $ 1,761.36
--------------
Total........................................ $ 30,000.00
==============
* All expenses are estimated, except for registration and filing fees.
Item 26. Recent Sales of Unregistered Securities.
On July 16, 1996, the Company completed a private placement of its
Series A Preferred Stock and accompanying warrants to accredited investors and
received net proceeds of $7,049,500. The placement consisted of 805 shares of
Series A Preferred Stock (with accompanying warrants) for a price of $10,000 per
share. These securities were offered pursuant to Regulation S promulgated under
the Securities Act.
In December 1993, the Company completed a private placement of 817,200
shares of its Common Stock to accredited investors and received proceeds of
$817,200. A director of the Company purchased 400,000 shares of Common Stock in
such private placement. These securities were offered pursuant to Section 4(2)
of the Securities Act.
II-1
<PAGE>
Item 27. Exhibits.
Exhibit
Number Description of Document
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-KSB/A for the fiscal year ended March 31, 1996 (the "1996 Form
10-KSB/A")).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3(c)
to the Company's Registration Statement No. 2-87696-NY on Form S-18).
4.1 Form of Warrant Certificate.
4.2 Form of Registration Rights Agreement, dated July 1996, relating to the
Series A Preferred Stock.
5.1 Opinion of Kramer, Levin, Naftalis & Frankel.
10.1 1993 Stock Incentive Plan (incorporated herein by reference to Exhibit
10(a) to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994 (the "1994 Form 10-K")).
10.2 Employment Agreement between the Company and J.C. Chatpar (incorporated
herein by reference to Exhibit 10(b) to the 1994 Form 10-K).
10.3 Manufacturing License Contract between the Company and National
Telecommunications Co., dated as of December 4, 1995 (incorporated
herein by reference to Exhibit 10(c) to the 1996 Form 10- KSB/A).
11.1 Statement Regarding Computation of Loss Per Share.
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., C.P.A.
23.2 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on signature page).
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
(b) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the Registration
Statement; and
(iii) To include any additional or changed
material information with respect to the
plan of distribution not previously
disclosed in the Registration Statement or
any material change to such information in
the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on October 11, 1996.
Cyber Digital, Inc.
By: /s/ J.C. Chatpar
----------------------
J.C. Chatpar
(President)
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
constitutes and appoints J.C. Chatpar his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign this registration
statement and all amendments thereto (including post-effective amendments), and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ J.C. Chatpar Chairman, President October 11, 1996
- ----------------------- and Director
J.C. Chatpar (Principal Executive, Accounting
and Financial Officer)
/s/ Jack P. Dorfman Secretary and Director October 11, 1996
- -----------------------
Jack P. Dorfman
/s/ Dr. Anil K. Agarwal Director October 11, 1996
- -----------------------
Dr. Anil K. Agarwal
/s/ Jatinder Wadhwa Director October 11, 1996
- -----------------------
Jatinder Wadhwa
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Description of Document Number
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-KSB/A for the fiscal year ended March 31, 1996 (the "1996 Form
10-KSB/A")).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3(c)
to the Company's Registration Statement No. 2-87696-NY on Form S-18).
4.1 Form of Warrant Certificate.
4.2 Form of Registration Rights Agreement, dated July 1996, relating to the
Series A Preferred Stock.
5.1 Opinion of Kramer, Levin, Naftalis & Frankel.
10.1 1993 Stock Incentive Plan (incorporated herein by reference to Exhibit
10(a) to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994 (the "1994 Form 10-K")).
10.2 Employment Agreement between the Company and J.C. Chatpar (incorporated
herein by reference to Exhibit 10(b) to the 1994 Form 10-K).
10.3 Manufacturing License Contract between the Company and National
Telecommunications Co., dated as of December 4, 1995 (incorporated
herein by reference to Exhibit 10(c) to the 1996 Form 10-KSB/A).
11.1 Statement Regarding Computation of Loss Per Share.
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., C.P.A.
23.2 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on signature page).
</TABLE>
THE WARRANTS AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
("COMMISSION") UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE
BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S
("REGULATION S") PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH
TERM IS DEFINED IN REGULATION S) UNLESS THE SECURITIES ARE REGISTERED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS
ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THOSE LAWS.
Warrant to Purchase
______ shares
Warrant to Purchase Common Stock
of
CYBER DIGITAL, INC.
THIS CERTIFIES that ______________________ or any subsequent ("Holder")
hereof, has the right to purchase from CYBER DIGITAL, INC., a New York
corporation (the "Company"), up to ______ fully paid and nonassessable shares of
the Company's Common Stock, par value $.01 ("Common Stock"), subject to
adjustment as provided herein, at a price equal to the Exercise Price as defined
in Section 3 below, at any time beginning on October 25, 1996 (one hundred five
(105) days from the Date of Issuance as defined below) and ending at 5:00 p.m.,
Atlanta, Georgia time, on July 10, 2001.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on ____________ ("Date of
Issuance").
2. Exercise.
(a) Manner of Exercise. This Warrant may not be exercised, in whole or
in part, for a period of one hundred five (105) days from the Date of Issuance.
Thereafter, this Warrant may be exercised as to all or any lesser number of full
shares of Common Stock covered hereby upon surrender of this Warrant, with the
Exercise Form attached hereto duly executed, together with the full Exercise
Price (as defined in Section 3) for each share of Common Stock as to which this
Warrant is exercised, at the office of the Company, 400 Oser Avenue, Suite 1650,
Hauppauge, New York 11788; Attention:
<PAGE>
President, Telephone No. (516) 231-1200, Telecopy No. (516) 231-1446, or at such
other office or agency as the Company may designate in writing, by overnight
mail, with an advance copy of the Exercise Form attached as Exhibit A ("Exercise
Form") by facsimile (such surrender and payment of the Exercise Price
hereinafter called the "Exercise of this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the Exercise Form is sent by
facsimile to the Company, provided that the original Warrant and Exercise Form
are received by the Company within five (5) business days thereafter. The
original Warrant and Exercise Form must be received within five (5) business
days of the Date of Exercise, or the exercise may, at theCompany's option, be
considered void. Alternatively, the Date of Exercise shall be defined as the
date the original Exercise Form is received by the Company, if Holder has not
sent advance notice by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon its
Exercise, and, as soon as practical after the Date of Exercise, the Holder
hereof shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise, and if this Warrant is not exercised in full, the
Holder shall be entitled to receive a new Warrant or Warrants (containing terms
identical to this Warrant) representing any unexercised portion of this Warrant
in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to have become the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of such shares of Common Stock. Nothing in
this Warrant shall be construed as conferring upon the Holder hereof any rights
as a shareholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price shall equal $6.35 ("Exercise Price").
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) Cash Exercise: cash, certified check or cashiers check or wire
transfer; or
(ii) Cashless Exercise: surrender of this Warrant at the principal
office of the Company together with notice of cashless election, in which event
the Company shall issue Holder a number of shares of Common Stock computed using
the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
<PAGE>
Y = the number of shares of Common Stock for which this Warrant
is being exercised.
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(ii), the "Market Price" shall be
defined as the average closing price of the Common Stock for
the five (5) trading days prior to the Date of Exercise of
this Warrant (the "Average Closing Price"), as reported by the
OTC Bulletin Board or Nasdaq Stock Market ("Nasdaq"), or if
the Common Stock is not traded on the OTC Bulletin Board or
Nasdaq, the price in the over-the-counter market; provided,
however, that if the Common Stock is listed on a stock
exchange, the Market Price shall be the average Closing on
such exchange. If the Common Stock is/was not traded during
the five (5) trading days prior to the Date of Exercise, then
the closing price for the last publicly traded day shall be
deemed to be the closing price for any and all (if applicable)
days during such five (5) trading day period.
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of this
Warrant in a cashless exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon exercise
of this Warrant in a cashless exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.
Notwithstanding anything to the contrary contained herein, this Warrant may not
be exercised in a cashless exercise transaction if, on the Date of Exercise, the
shares of Common Stock to be issued upon exercise of this Warrant would upon
such issuance (x) be immediately transferable in the United States free of any
restrictive legend, including without limitation under Rule 144; (y) be then
registered pursuant to Section 2 of that certain Registration Rights Agreement
(the "Registration Rights Agreement") dated on or about the date hereof by and
among the Company and certain investors; or (z) otherwise be registered under
the Securities Act of 1933, as amended.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
endorsed. This Warrant shall be canceled upon such surrender and, as soon as
practicable thereafter, the person to whom such transfer is made shall be
entitled to receive a new Warrant or Warrants as to the portion of this Warrant
transferred, and the Holder of this Warrant shall be entitled to receive a new
Warrant or Warrants as to the portion hereof retained.
<PAGE>
(b) Registrable Securities. The Common Stock issuable upon the exercise
of this Warrant constitute "Registrable Securities" under that certain
Registration Rights Agreement and, accordingly, has the benefit of the
registration rights, if applicable, pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then the Holder hereof, upon Exercise of this
Warrant after the record date for the determination of Holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is Exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been Exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which the Holder hereof shall
be entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give the Warrant Holder the same notice it provides to holders of
Common Stock of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive, upon exercise of this
Warrant, with respect to each share of Common Stock issuable upon such Exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which such Holder would have been entitled to receive with respect to each such
share of Common Stock as a result of the happening of such event had this
Warrant been Exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
thereof, if the Board of Directors of the Company should so determine at the
time of such distribution, a reduced Exercise Price determined by multiplying
the Exercise Price on the Determination Date by a fraction, the numerator of
which is the result of such Exercise Price reduced by the value of such
distribution applicable to one share of Common Stock (such value to be
determined by the Board in its discretion) and the denominator of which is such
Exercise Price.
<PAGE>
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, or sale of assets, as a result of which shares of Common Stock of
the Company shall be changed into the same or a different number of shares of
the same or another class or classes of stock or securities of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be assumed by the
acquiring entity or any affiliate thereof and thereafter this Warrant shall be
exerciseable into such class and type of securities or other assets as the
Holder would have received had the Holder exercised this Warrant immediately
prior to such Corporate Change; provided, however, that Company shall first give
thirty (30) business days notice to the Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, until the occurrence of an event stated in subsection (a), (b)
or (c) of this Section 5, and thereafter shall mean said price as adjusted from
time to time in accordance with the provisions of said subsection. No such
adjustment under this Section 5 shall be made unless such adjustment would
change the Exercise Price at the time by $.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.01 or more. No
adjustment made pursuant to any provision of this Section 5 shall have the
effect of increasing the total consideration payable upon Exercise of this
Warrant in respect of all the Common Stock as to which this Warrant may be
exercised.
(f) Adjustments: Additional Shares, Securities or Assets. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
the Holder of this Warrant shall, upon Exercise of this Warrant, become entitled
to receive shares and/or other securities or assets (other than Common Stock)
then, wherever appropriate, all references herein to shares of Common Stock
shall be deemed to refer to and include such shares and/or other securities or
assets; and thereafter the number of such shares and/or other securities or
assets shall be subject to adjustment from time to time in a manner and upon
terms as nearly equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, the Holder hereof may purchase only a whole number of shares of Common
Stock. If, on Exercise of this Warrant, the Holder hereof would be entitled to a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the nearest whole
number of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such
number of authorized and unissued shares of Common Stock (or other securities
substituted therefor
<PAGE>
as herein above provided) as shall be sufficient for Exercise and payment of the
Exercise Price of this Warrant. The Company covenants and agrees that upon
Exercise of this Warrant, all shares of Common Stock issuable upon such Exercise
shall be duly and validly issued, fully paid, nonassessable and not subject to
preemptive rights, rights of first refusal or similar rights of any person or
entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been
issued in a transaction exempt from the registration requirements of the Act by
virtue of Regulation S. The Warrant may not be resold into the United States, or
to a U.S. person (as defined in Regulation S) for a period of forty (40) days
from the Date of Issuance, and thereafter, the Warrant and the Common Stock
issuable upon exercise of the Warrant may not be sold into the United States or
to a U.S. person (as defined in Regulation S) except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as Exhibit B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
(10) days, and shall deliver to the assignee(s) designated by Holder a Warrant
or Warrants of like tenor and terms for the appropriate number of shares.
(c) Investment Intent. The Warrant and Common Stock issuable
upon conversion are intended to be held for investment purposes and not with an
intent to distribution, as defined in the Act.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and the Holder of this Warrant any legal or
equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Company and the Holder of this
Warrant.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of New York,
without giving effect to conflict of law provisions thereof.
<PAGE>
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by the Holder of
this Warrant to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company, 400
Oser Avenue, Suite 1650, Hauppauge, New York, 11788, Attention: President,
Telephone No. (516) 231-1200, Telecopy No. (516) 231-1446. Notices or demands
pursuant to this Warrant to be given or made by the Company to or on the Holder
of this Warrant shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, to
the address of the Holder set forth in the Company's records, until another
address is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
______ day of _________________, 1996.
CYBER DIGITAL, INC.
By: ________________________________
Print Name: ________________________________
Title: ________________________________
<PAGE>
EXHIBIT A
EXERCISE FORM
TO: CYBER DIGITAL, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock of CYBER DIGITAL, INC., a New York
corporation (the "Company"), evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
[ ] Cash Exercise [ ] Cashless Exercise
1. The undersigned hereby represents and warrants to the Company as follows:
(a) At least forty (40) days have passed since the date of the issuance
of the Warrant to the undersigned and the termination of the offering in which
the Warrant was distributed;
(b) The undersigned is not a U.S. person, as defined in Regulation S,
and is not exercising the Warrant on behalf of a U.S. person;
(c) The undersigned received the Warrant, and has kept the Warrant
since the date of receipt, outside of the U.S.;
(d) The person who made the financial decision on behalf of the
undersigned to exercise the Warrant was outside of the U.S. at the time of
making such decision;
(e) The common stock obtained on exercise of the Warrant will be
delivered to the undersigned at a location outside of the U.S.;
(f) The undersigned acknowledges that the Company's transfer agent has
been instructed not to issue common stock on exercise of this Warrant unless the
undersigned has certified that the statements contained in this Exercise Form
are true and correct as of the date of this Exercise Form.
2. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of Common Stock obtained on exercise of the Warrant, except in accordance
with the provisions of Section 8 of the Warrant.
3. The undersigned requests that stock certificates for such shares be issued,
and a warrant representing any unexercised portion hereof be issued, pursuant to
the Warrant in the name of the Registered Holder and delivered to the
undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature of Registered Holder
- --------------------------------------------------------------------------------
Name of Registered Holder (Print)
- --------------------------------------------------------------------------------
Non-U.S. Address
<PAGE>
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons below named the right to
purchase _______ shares of the Common Stock of CYBER DIGITAL, INC. evidenced by
the attached Warrant and does hereby irrevocably constitute and appoint
_______________________ attorney to transfer the said Warrant on the books of
the Company, with full power of substitution in the premises.
Dated: ______________________________
Signature
Fill in for new Registration of Warrant:
- -----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
- --------------------------------------------------------------------------------
CYBER DIGITAL, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
_____________, 1996, by and among CYBER DIGITAL, INC., a New York corporation
("Company"), and the subscribers ("Subscribers") to the Company's offering
("Offering") of up to Eight Million Fifty Thousand ($8,050,000) of Series A
Preferred Stock ("Preferred Stock") pursuant to the Regulation S Subscription
Agreement between the Company and the Subscribers of even date herewith
("Subscription Agreement").
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933 (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) For purposes of the Required Registration under Section 2
hereof, the term "Registrable Securities" means the Company's Common Stock
(together with any capital stock issued as a dividend on, in replacement of, in
exchange for, or otherwise in respect of such Common Stock or issued pursuant to
Section 17 hereof, the "Common Stock") issuable or issued upon conversion of the
Preferred Stock and exercise of the Warrants. For purposes of a Demand
Registration under Section 3 hereof or a Piggyback Registration under Section 4
hereof, the term "Registrable Securities" means the Company's Common Stock
issuable or issued upon conversion of the Preferred Stock in the Offering and
exercise of the Warrants; provided, however, that after the expiration of the
Restricted Period (as defined in the Subscription Agreement), for purposes of
Section 3 and Section 4, shares of Common Stock obtainable on conversion of the
Preferred Stock and exercise of the Warrants (in whole or in part) shall not
constitute Registrable Securities, if those shares of Common Stock may be sold
or transferred in the U.S. free of any restrictive legend, including without
limitation under Rule 144;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock which
have been issued or are issuable upon conversion of the Preferred Stock or
exercise of the Warrants at the time of such determination;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any permitted assignee thereof;
(e) The terms "Warrant" and "Warrants" refer to the warrant or
warrants issued to Subscribers as securities in connection with the Offering;
and
(f) The term "Due Date" means the date which is one hundred
five (105) days after the Last Closing (as defined in the Subscription
Agreement) of the Offering.
<PAGE>
2. Required Registration.
(a) Within forty five (45)days after the Last Closing (as
defined in the Subscription Agreement) of the Offering, the Company shall file a
registration statement ("Registration Statement") on Form S-3 (or other suitable
form), covering the resale of all shares of Registrable Securities then
outstanding.
(b) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
the earlier of (i) the date that the distribution described in the Registration
Statement is completed or (ii) the date that Common Stock covered by the
Registration Statement is immediately transferable, without volume limitations,
pursuant to Rule 144 or another available exemption under the Act. The Company
shall use its best efforts to have the Registration Statement declared effective
within one hundred five (105) days of the Last Closing, and shall in any event
have the Registration Statement declared effective within one hundred twenty
(120) days of the Last Closing.
(c) The Holders have the right to convert the Preferred Stock
into Common Stock pursuant to the terms of the Subscription Agreement and the
Certificate of Designation of Series A Preferred Stock of the Company and sell
the Common Stock under Regulation S and applicable exemptions until such time
that the Registration Statement becomes effective.
(d) Notwithstanding anything to the contrary contained herein,
any Holder (together with any assignee of its rights) (collectively referred to
as "Excluded Holders") shall be entitled, by written notice to the Company
delivered at any time prior to the filing of the Registration Statement
contemplated by this Section 2, to elect to have the Registrable Securities
issued or issuable to it excluded from the Registration Statement. In the event
a Holder elects not to have its Registrable Securities included in the
Registration Statement, the Holder shall, nonetheless, and notwithstanding
anything herein to the contrary, have the right (i) upon written notice to the
Company from Holders of at least twenty-five (25%) of the Registrable Securities
not subject to another registration statement then on file with the Securities
and Exchange Commission, at any time following the expiration of the seventy
five (75) day period following the Last Closing, to cause the Company to effect
a Demand Registration (as defined in Section 3) registering the Registrable
Securities held by such Holders on Form S-3 (or other suitable form, subject to
the approval of such Holders), and (ii) at any time following the expiration of
the thirty (30) day period following the Due Date, to have its shares included
in any Piggyback Registration (as defined in Section 4), in each case in
accordance with the provisions of Sections 3 and 4 hereof. In connection with a
Demand Registration initiated by the Excluded Holders under this Subsection
2(d), the Company shall pay all costs and expenses of Demand Registration in
accordance with Section 9. The Excluded Holders' rights to include their
Registrable Securities in a Piggyback Registration or a Demand Registration
shall be limited to those instances in which their Registrable Securities are
not otherwise immediately transferable pursuant to Rule 144 or another available
exemption under the Act.
<PAGE>
3. Demand Registration.
(a) If the Registration Statement described in Section 2 is
not effective by the Due Date, the Holders of Registrable Securities obtained or
obtainable upon conversion of at least twenty-five percent (25%) of the shares
of the Preferred Stock outstanding may notify the Company in writing that they
demand that the Company file a registration statement under the Act covering the
registration of all of the Registrable Securities then outstanding. Upon receipt
of such notice, the Company shall, within ten (10) days, give written notice of
such request to all Holders and shall, subject to the limitations of subsection
3(b), file as soon as practicable, and in any event within thirty (30) days of
the receipt of such request, the registration under the Act of all Registrable
Securities which the Holders request, by notice given to the Company within ten
(10) days of receipt of the Company's notice, to be registered as expeditiously
as reasonably possible after the mailing of such notice by the Company (a
"Demand Registration").
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 3 and the
Company shall include such information in the written notice referred to in
subsection 3(a). In such event, the right of any Holder to include his
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
7(f)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders, and reasonably acceptable to the Company;
provided that no Holder shall be required to make any representations other than
with respect to its ownership of Registered Securities and its intended method
of distribution.
(c) The Company agrees to include all Registrable Securities
held by all Holders in such Registration Statement without cutback or reduction
unless cutbacks are required by the underwriter. In the event the underwriter
requires a cutback or reduction, any Holders of the Registrable Securities which
were not included in such Registration Statement shall be entitled to additional
Demand Registrations for such excluded securities on the same terms as the
Demand Registration described in this Agreement.
(d) The Company is not obligated to effect a demand
registration under this Section 3 if in the written opinion of counsel to the
Company reasonably acceptable to the person or persons from whom written request
for registration has been received (and satisfactory to the Company's transfer
agent to permit the transfer) that registration under the Act is not required
for the immediate transfer of the Registrable Securities pursuant to Rule 144 or
other applicable provision.
(e) The Company represents that it will use its best efforts
to take such actions as are necessary to become eligible to use Form S-3 for the
registration contemplated hereby.
<PAGE>
4. Piggyback Registration. If the Registration Statement
described in Section 2 is not effective by the Due Date, and no demand for a
Demand Registration has been made pursuant to Section 3, and if (but without any
obligation to do so), the Company proposes to register (including for this
purpose a registration effected by the Company for shareholders other than the
Holders) any of its Common Stock under the Act in connection with the public
offering of such securities (other than a registration relating solely to the
sale of securities to participants in a Company stock plan or a registration on
Form S-4 promulgated under the Act or any successor or similar form registering
stock issuable upon a reclassification, upon a business combination involving an
exchange of securities or upon an exchange offer for securities of the issuer or
another entity), the Company shall, at such time, promptly give each Holder
written notice of such registration. Upon the written request of each Holder
given by fax within ten (10) days after mailing of such notice by the Company,
which request shall state the intended method of disposition of such shares by
such Holder, the Company shall use its best efforts to cause to be registered
under the Act all of the Registrable Securities that each such Holder has
requested to be registered (a "Piggyback Registration").
5. Limitation on Obligations to Register.
(a) In the case of a Piggyback Registration on an underwritten
public offering by the Company, if the managing underwriter determines and
advises in writing that the inclusion in the registration statement of all
Registrable Securities proposed to be included would interfere with the
successful marketing of the securities proposed to be registered by the Company,
then the number of such Registrable Securities to be included in the
registration statement shall be allocated among all Holders who had requested
Piggyback Registration, in the proportion that the number of Registrable
Securities which each such Holder seeks to register bears to the total number of
Registrable Securities sought to be included by all Holders.
(b) Notwithstanding anything to the contrary herein, the
Company shall have the right (i) to defer the initial filing or request for
acceleration of effectiveness of any Demand Registration or Piggyback
Registration or (ii) after effectiveness, to suspend effectiveness of any such
registration statement, if, in the good faith judgment of the board of directors
of the Company and upon the advice of counsel of the managing underwriter (if
any) of the offering, such delay in filing or requesting acceleration of
effectiveness or such suspension of effectiveness is necessary in light of the
existence of material non-public information (financial or otherwise) concerning
the Company disclosure of which at the time is not, in the opinion of the board
of directors of the Company upon the advice of counsel, (A) otherwise required
and (B) in the best interests of the Company; provided however that the Company
will use its best efforts to terminate such delay or suspension as soon as
practicable and, in any event will not delay effectiveness of such registration
for more than three (3) months from the date of the demand or suspend
effectiveness for more than twenty (20) days, unless it is then engaged in an
acquisition that would make such registration impracticable, in which case it
will use its best efforts to eliminate such impracticability as soon as
possible.
6. Obligations to Increase Available Shares. In the event that
the number of shares available under a registration statement filed pursuant to
Section 3 is insufficient to
<PAGE>
cover all of the Registrable Securities then outstanding, the Company shall
amend that registration statement, or file a new registration statement, or
both, so as to cover all shares of Registrable Securities then outstanding. The
Company shall effect such amendment or new registration within sixty (60) days
of the date the registration statement filed under Section 3 is insufficient to
cover all the shares of Registrable Securities then outstanding. Any
Registration Statement filed hereunder shall, to the extent permissible by the
Rules of the Securities and Exchange Commission ("SEC"), state that, in
accordance with Rule 416 under the Act, such Registration Statement also covers
such indeterminate numbers of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Stock to prevent dilution resulting
from stock changes or by reason of changes in the conversion price in accordance
with the terms thereof.
7. Obligations of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) With respect to any Demand Registration, use best efforts
to keep such registration statement effective until the earlier of (i) the date
that the distribution described in the registration statement is completed or
(ii) the date that Common Stock covered by the registration statement is
immediately transferable, without volume limitations, pursuant to Rule 144 or
another available exemption under the Act.
(d) Furnish to the Holders such reasonable numbers of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
Swartz Investments, LLC shall be furnished with copies of drafts of all filings
(including supplements and amendments) prior to filing and given sufficient time
to distribute such documents to the Subscribers and to receive their comments
thereon.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders of the Registrable Securities covered by such registration statement,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(f) In the event of any underwritten public offering, enter
into and perform its
<PAGE>
obligations under an underwriting agreement, in usual and customary form, with
the managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.
(g) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act upon the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(h) Furnish, at the request of any Holder whose shares are
being registered pursuant to this Agreement, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with a
registration pursuant to this Agreement, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
(i) Maintain the listing of the Common Stock on the OTC
Bulletin Board or other automated quotation system or a national securities
exchange.
8. Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Agreement
that the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities or to determine that registration is not
required pursuant to Rule 144 or other applicable provision of the Act.
9. Expenses of Required or Demand Registration. All expenses
other than underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 or 3, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and
including the reasonable fees and disbursements incurred of only one counsel for
the selling Holders shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Sections 2 or 3 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all Holders who had
requested such registration shall bear such expenses); provided further,
however, that if at the
<PAGE>
time of such withdrawal, the Holders have learned of a material adverse change
in the condition, business, or prospects of the Company from that known to the
Holders at the time of their request, then the Holders shall not be required to
pay any of such expenses and shall retain their rights pursuant to Sections 2
and 3.
10. Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 4 for each Holder, including (without limitation) all
registration, filing, and qualification fees, printers and accounting fees
relating or apportionable thereto (and including the reasonable fees and
disbursements incurred of only one counsel for the selling Holders selected by
them), but excluding underwriting discounts and commissions relating to
Registrable Securities.
11. Indemnification. In the event any Registrable Securities
are included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each "Holder Indemnified Persons" (defined for purposes of
this Section 11 as each Holder, the officers and directors of each Holder acting
in their capacity as such, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act")), against any losses, claims, damages, expenses, or liabilities
(joint or several) (hereinafter referred to singularly as "Loss" and
collectively as "Losses") to which they may become subject under the Act, the
1934 Act or other federal or state law, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement,
or alleged untrue statement, of a material fact contained in such registration
statement, including any prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission, or alleged omission, to state therein
a material fact required to be stated therein, or necessary to make the
statements therein not misleading; and the Company will reimburse each such
Holder Indemnified Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such Loss or action;
provided, however, that the indemnity agreement contained in this subsection
11(a) shall not apply to amounts paid in settlement of any such Loss or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such Loss or action to the extent that it arises out of or is based
upon a Violation which occurs in either (i) reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by the Holder Indemnified Person seeking indemnification or (ii)
based upon a prospectus which included a Violation after the Company has advised
the Holder seeking indemnification not to sell pursuant to such prospectus, and
has made available an amended or supplemental prospectus that corrects such
Violation.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the "Company Indemnified Persons" (defined for the
purpose of this Section 11 as the Company, each of its directors in their
capacity as such, each of its officers who have signed the
<PAGE>
registration statement in their capacity as such, each person, if any, who
controls the Company within the meaning of the Act in their capacity as such,
any underwriter and any other Holder Indemnified Person selling securities in
such registration statement), against any Loss (joint or several) to which the
Company or any such director, officer, controlling person, or underwriter or
controlling person, or other such Holder Indemnified Person may become subject,
under the Act, the 1934 Act or other federal or state law, insofar as such Loss
(or actions in respect thereto) arises out of or is based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company and any such Company Indemnified Person in connection with investigating
or defending any such Loss or action; provided, however, that the indemnity
agreement contained in this subsection 11(b) shall not apply to amounts paid in
settlement of any such Loss or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provided, that, in no event shall any indemnity under this subsection 11(b)
exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 11 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 11, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding provided, however, that in the event the Company is the indemnifying
party, it shall pay for only one counsel for all of the Subscribers in this
Offering and their related indemnified parties. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 11, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 11 to the extent it is
prejudicial.
(d) The obligations of the Company and Holders under this
Section 11 shall survive the redemption and conversion, if any, of the Preferred
Stock, the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
12. Reports Under Securities Exchange Act of 1934. With a view
to making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other rule or regulation of the SEC that may at any time permit
a Holder to sell securities of the Company to the public without registration,
the Company agrees to:
<PAGE>
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of SEC
Rule 144 (at any time after ninety (90) days after the effective date of the
first registration statement filed by the Company), the Act and the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration.
13. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, and the holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder, each future Holder, and the Company; provided, however, that no
amendment or waiver that materially and adversely affects the rights of any
Holder shall be effective against such Holder unless such Holder agrees thereto.
14. Notices. All notices required or permitted under this
Agreement shall be made in writing signed by the party making the same, shall
specify the section under this Agreement pursuant to which it is given, and
shall be addressed if to (i) the Company at: President, 400 Oser Avenue, Suite
1650, Hauppauge, New York, 11788, Telephone No. (516) 231-1200, Telecopy No.
(516) 231-1446 and (ii) the Holders at their respective last addresses as set
forth on the Company's register for the Preferred Stock, or such address as the
party shall have furnished in writing as a new address to be entered on such
register. Any notice, except as otherwise provided in this Agreement, shall be
made by fax and shall be deemed given at the time of transmission of the fax.
15. Termination. This Agreement shall terminate on the later
to occur of (a) the date that is five (5) years from the date of this Agreement
and (b) the date that is ninety (90) days after the date on which all the
Warrants have been exercised; but without prejudice to (i) the parties' rights
and obligations arising from breaches of this Agreement occurring prior to such
termination or (ii) other indemnification obligations under this Agreement.
16. Assignment. No assignment, transfer or delegation, whether
by operation of law or otherwise, of any rights or obligations under this
Agreement by the Company or any Holder, respectively, shall be made without the
prior written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee
<PAGE>
shall provide to the Company, together with or prior to such transferee's
request to have such Registrable Securities included in a Demand Registration or
Piggyback Registration, a writing executed by such transferee agreeing to be
bound as a Holder by the terms of this Agreement); and provided further that the
Company may transfer its rights and obligations under this Agreement to a
purchaser of all or a substantial portion of its business if the obligations of
the Company under this Agreement are assumed in connection with such transfer,
either by merger or other operation of law (which may include without limitation
a transaction whereby the Registrable Securities are converted into securities
of the successor in interest) or by specific assumption executed by the
transferee.
17. Payments for Failure to Register or Failure to List. If
the Registration Statement required under Section 2 hereof is not filed on or
prior to ninety (90) days after the Last Closing, or if a Registration Statement
filed pursuant to Section 3 is not effective within one hundred twenty (120)
days of a Demand Registration or if the Company fails to respond to any request
for information from the SEC related to such Registration Statement within
fifteen (15) days of such request, then the Company shall pay to all Holders of
outstanding Preferred Stock an aggregate amount equal to two percent (2%) per
month of the aggregate amount of Preferred Stock sold in the Offering,
compounded monthly, and accruing daily, payable in Common Stock, which Common
Stock shall also be deemed "Registrable Securities" hereunder. If, the Company
is not eligible to effect a Registration under Form S-3, or other appropriate
registration statement, at the time of a Demand Registration under the terms of
this agreement solely through the act or failure to act by the Company, and not
due to a change in statute or regulation or other fact circumstance not under
the Company's control, then the Company shall pay to all Holders of outstanding
Preferred Stock an aggregate penalty equal to the amount of the Conversion
Default Payment ("Conversion Default Payment") set forth in Section 7.6 of the
Regulation S Subscription Agreement between the Company and the Subscribers
("Subscription Agreement") for each day beyond sixty (60) days of the receipt of
a request for a Demand Registration until such registration is complete. If, on
the date (the "Conversion Eligibility Date") that Preferred Stock becomes
eligible for conversion into Common Stock or the Warrants are exercisable, the
Common Stock is not listed on the OTC Bulletin Board or other national stock
exchange or automated quotation system, then the Company shall pay to all
Holders of outstanding Preferred Stock that are eligible for immediate
conversion and to all Holders of unexercised Warrants a penalty equal to the
amount of the Conversion Default Payment for each day beyond the Conversion
Eligibility Date until such listing is complete.
18. Governing Law. This Registration Rights Agreement shall be
governed by and construed in accordance with the laws of the state of New York
applicable to agreements made in and wholly to be performed in that
jurisdiction, except for matters arising under the Act or the 1934 Act, which
matters shall be construed and interpreted in accordance with such laws. Any
action brought to enforce, or otherwise arising out of, this Agreement shall be
heard and determined only in either a federal or city court sitting in the State
of New York, New York County and Subscriber hereby waives any rights to raise a
defense of forum non-conveniens.
[INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date first above written.
CYBER DIGITAL, INC..
By: ________________________________
J.C. Chatpar
President
Address: 400 Oser Avenue, Suite 1650
Hauppauge, New York, 11788
Telephone No. (516) 231-1200
Telecopy No. (516) 231-1446
INVESTOR(S)
___________________________________
Investor's Name
By:_________________________________
(Signature)
Address: ____________________________________
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Richard Marlin Sherwin Kamin
Thomas D. Balliett Thomas E. Molner Arthur B. Kramer
Jay G. Baris Thomas H. Moreland Maurice N. Nessen
Saul E. Burian Ellen R. Nadler Founding Partners
Barry Michael Cass Gary P. Naftalis Counsel
Thomas E. Constance Michael J. Nassau --------
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S.oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph De Winter
Marvin E. Frankel Susan J. Penry-williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maxwell M. Rabb
Mark J. Headley Scott S. Rosenblum James Schreiber
Robert M. Heller Michele D. Ross Counsel
Philip S. Kaufman Max J. Schwartz -------
Peter S. Kolevzon Mark B. Segall M. Frances Buchinsky
Kenneth P. Kopelman Judith Singer Debora K. Grobman
Michael Paul Korotkin Howard A. Sobel Christian S. Herzeca
Kevin B. Leblang Steven C. Todrys Pinchas Mendelson
David P. Levin Jeffrey S. Trachtman Lynn R. Saidenberg
Ezra G. Levin D. Grant Vingoe Jonathan M. Wagner
Larry M. Loeb Harold P. Weinberger Special Counsel
Monica C. Lord E. Lisk Wyckoff, Jr. -------
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
October 11, 1996
Cyber Digital, Inc.
400 Oser Avenue
Hauppauge, New York 11788
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to Cyber Digital, Inc., a New York
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement on Form SB-2 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), covering the sale by
certain persons (the "Selling Securityholders") of up to 3,000,000 shares (the
"Shares") of common stock, par value $.01 per share (the "Common Stock"), of the
Company. The Shares covered by the Registration Statement include (i) shares of
Common Stock that are issuable upon conversion of previously-issued shares of
Series A Preferred Stock of the Company held by certain Selling Securityholders
and up to an additional 633,857 shares of Common Stock that are issuable upon
exercise of warrants to purchase Common Stock held by such Selling
Securityholders and (ii) up to 190,156 shares of Common Stock that are issuable
upon exercise of warrants to purchase Common Stock held by certain other Selling
Securityholders.
As such counsel, we have examined such corporate records,
certificates and other documents and such questions of law as we have considered
necessary or appropriate for the purposes of this opinion. In rendering this
opinion, we have (a) assumed (i) the genuineness of all signatures on all
documents examined by us, (ii) the authenticity of all documents submitted to us
as originals, and (iii) the conformity to original documents of all documents
submitted to us as photostatic or conformed copies and the authenticity of the
originals of such copies; and (b) relied on (i) certificates of public officials
and (ii) as to matters of fact, statements and certificates of officers of the
Company.
<PAGE>
KRAMER, LEVIN, NAFTALIS & FRANKEL
Cyber Digital, Inc.
October 11, 1996
Page 2
We are attorneys admitted to the Bar of the State of New York,
and we express no opinion as to the laws of any other jurisdiction other than
the laws of the United States of America.
Based upon the foregoing, we are of the opinion that the
shares of Common Stock being offered by the Selling Securityholders have been
validly authorized and, when issued and sold in accordance with the terms and
conditions described in the prospectus forming a part of the Registration
Statement (the "Prospectus"), will be validly issued, fully-paid and
non-assessable shares of Common Stock of the Company.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name under the heading
"Legal Matters" in the Prospectus. In giving this consent, we do not thereby
concede that we are within the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations promulgated
thereunder.
Very truly yours,
KRAMER, LEVIN, NAFTALIS & FRANKEL
Cyber Digital, Inc.
Statement of Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months
Ended Year Ended March 31,
June 30, 1996 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $215 $975 $(743) $(208) $(224) $109
==== ==== ====== ====== ====== ====
Shares:
Weighted average common shares
outstanding 15,110 14,256 13,653 13,039 12,739 12,521
Dilutive effect of assumed
conversion of incentive stock
options and a non-qualified option 1,865 1,619 -- -- -- 1,072
Weighted average common shares
outstanding as adjusted 16,975 15,875 13,653 13,039 12,739 13,593
====== ====== ====== ====== ====== ======
Net income (loss) per common share:
Primary $0.01 $0.07 $(0.05) $(0.02) $(0.02) $0.01
Fully Diluted $0.01 $0.07 $(0.05) $(0.02) $(0.02) $0.01
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors
Cyber Digital, Inc.
We consent to incorporation by reference in the registration statement on Form
SB-2 of our report dated July 15, 1996 relating to the balance sheets of Cyber
Digital, Inc. as of March 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
two year period ended March 31, 1996, which report appears in the March 1996
annual report on Form 10-KSB of Cyber Digital, Inc.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
October 7, 1996
