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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13992
CYBER DIGITAL, INC.
(Name of small business issuer in its charter)
New York 11-2644640
(State or other jurisdiciton (I.R.S. Employer
of incorporation or organization) Identification No.)
400 Oser Avenue, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(516) 231-1200
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
This issuer's revenues for its most recent fiscal year are
$66,110.
The aggregate market value of the voting and non-voting common
stock held by nonaffiliates of the registrant at April 30, 1998
was $21,655,425 based on a total of 12,374,529 shares held by
nonaffiliates and the closing bid price in the over-the-counter
market on that date which was $1.75.
The number of shares of common stock outstanding at March 31, 1998:
17,386,053 shares of Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one)
Yes ____ No __X__
Documents Incorporated by Reference: None
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<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
The Company
Cyber Digital, Inc. (the "Company") was incorporated under the
Laws of the State of New York in 1983. It designs, develops,
manufactures, markets and services 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 with minimal or no infrastructure cabling. The
Company's systems are based on its proprietary software
technology. Cyber's systems also permit "modemless"
transmission of data between a variety of incompatible and
dissimilar end-user equipment, such as computers, printers, work
stations and data terminals as well as high speed Internet
access over standard telephone lines. The Company believes that
its systems are the only ones available with this capability.
The Company has designed and developed a family of switches
(see "Types of Systems" below) which, by interfacing with
appropriate methods of wireless transmission, can easily and
rapidly provide telecommunications services to consumers who are
underserved or have no service at all, as in the case of many
developing countries. The Company's products are suitable for
both densely packed urban areas as well as sparsely populated
rural areas. In the United States, the enactment of the
Telecommunications Act of 1996 (the "Telecommunications Act")
has resulted in the creation of a large market for the Company's
products since they are capable of serving the requirements of
some carriers now attempting to by-pass the regional Bell
operating companies.
The Company has sold approximately 76 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. It has sold one Cyber Rural
Exchange ("CRX") which functions as a rural telephone exchange
to serve widely dispersed subscribers. The Cyber Distributed
Central Office ("CDCO") is designed to serve subscribers in
densely populated metropolitan areas. CRXs and CDCOs
communicate with each other by wireless means thereby
eliminating the need for infrastructure cabling.
After development of its first technology in 1987, the Company
targeted the Federal Government market for sale of CSX. CSX was
also sold to a Chinese Government owned joint venture. These
sales established the efficacy of the Company's base technology.
Concurrently with the on-going development of CDCO and CRX, the
Company has targeted the huge emerging international market
which is seeking cost-effective technology as well as the newly
created domestic market for CDCO and CRX type systems.
Industry Background
Since the advent of telecommunications, 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 environment. These needs were
met by local area networks ("LANs") which require a different
type of cabling and associated equipment than the Company
provides. 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
would also provide greater manageability with an increasing
number 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 International
Telephone Union ("ITU") 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, such
as computer-to-computer communications, office systems
integration, video-text, video-phone, video-conferencing,
electronic mail, informational data bases, Internet and
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 voice/data needs of private networks
in the United States and the basic voice-only needs of public
networks in developing countries.
Unlike advanced countries, where the existing public voice
telephone network consists of monolithic centralized digital
switches, 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 infrastructure. The Company
believes that its systems are well suited for developing
countries.
Prior to 1996, regional Bell operating companies (and some
independent telephone operating companies) had a monopoly in
providing local services and long distance access in their
respective defined territories. The enactment of the
Telecommunications Act dismantled the barriers between local and
long distance carriers which prevented them from offering
services to one another's customers. Furthermore, the
Telecommunication Act also enabled new entrants to the telecom
business to provide both local and long distance services
without any restrictions as to the geographical territory
served, subject to such companies obtaining any required
license. These entrants in the telecom business as well as
existing carriers are seeking to employ new cost effective
technologies made possible by software based systems and
applications of wireless technology. The Company's believes
that its range of products can satisfy a significant part of
this emerging switching market demand.
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 is constantly developing additional
new technologies and software that has enabled it to create new
systems such as the CDCO and the CRX for various applications,
primarily for developing countries and domestic local carriers
attempting to bypass the Bell operating companies. Although the
Company has only recently started to market these new systems,
the Company believes that these systems are capable of providing
the functions for which they have been designed.
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
1,000,000 lines capacity.
The nodal structure of the system permits changes to the
functionality of the system simply by using different software
while keeping the same common hardware. CDCO's flexibility
offers a vast array of system configurations to telephone
operating companies and administrations to fulfill a wide range
of applications, including the following:
Local CDCO exchange serves subscribers in cities and towns.
Cyber Tandem exchange ("CTSX") serves as a regional exchange
connecting to various local exchanges.
Toll and transit CDCO exchanges are used for long distance
national service and international gateway.
Integrated local and tandem exchanges.
Integrated local, tandem and toll exchanges.
Integrated local, tandem, toll and transit exchanges.
Cyber Digital Access Cross-connect ("CDAC") is a network
management system providing optimal routing and control of
heavy traffic through software.
The flexibility of CDCO systems are further enhanced by
software configurable Peripheral and Switching Nodes performing
the following functions:
Cyber Multi-tenant exchange ("CMT") serves subscribers in
large office complexes and buildings where many business
tenants can be served by a resident exchange.
Cyber Urban Line Concentrator ("CULC") serves subscribers in
congested areas where traffic is moderate, such as in
apartment dwellings and suburban communities.
Cyber Remote Line Switch ("CRLS") serves business subscribers
in high growth areas, such as in industrial parks and
complexes, and university campus settings.
The control functions of the CDCO system are totally
distributed in autonomous processing sub-systems (nodes). Node
processors are loosely coupled and exchange information through
standardized inter-nodal communication digital links. The
distributed approach permits switching systems to be located
closer to groups of subscribers or at subscribers' premises,
which dramatically reduces the cost of wiring and cabling. It
also results in instant installation. Moreover, a failure in
one node does not affect other nodes. In addition, the
distributed approach eliminates bottlenecks as the system offers
multiple routes for call completion.
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
Cyber Switch Exchange
Cyber Switch 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.
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 covering distances of a few
hundred feet at most, can network users up to a distance of
approximately one mile.
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.
Sales and Marketing
Customers
To date, the Company has sold approximately 76
systems, substantially all of which have been the CSX. The
Company has not commercialized the CLAN, the CHUB or the CDCO
and has sold one CRX. The Company has sold its systems to
federal and state government agencies and to Tianchi
Telecommunications Company in China. Due to constrained
financial, personnel and other resources, the Company has been
engaged in limited marketing activities relating to the CSX
system directed principally to the government market.
In December 1995, the Company signed a manufacturing
licensing contract with the National Telecommunications Company
("NTC") of Egypt, pursuant to which NTC will assemble the
systems in Egypt with parts provided by the Company. In
addition, NTC will market, install, maintain and service the
Company's systems in Egypt, Kenya, Tanzania, Uganda, Sudan,
Yemen, United Arab Emirates and Qatar. Sales of the Company's
products to NTC have not yet commenced. As at present, NTC has
trained its personnel to fulfill its obligations under the
contract. NTC has been delayed in its performance for a variety
of reasons, such as a lack of a suitable assembly facility in
Egypt at this time.
In August 1996, the Company entered into a non-exclusive
Manufacturing Licensing Agreement with Gujarat Communications &
Electronics Ltd. ("GCEL" - a company based in India) which will,
pursuant to a license, assemble and sell the Company's products
in Russia and certain CIS countries. GCEL has the benefit of
certain financial facilities made available to it under the
terms of an intergovernmental agreement between the Government
of India and Russia as well as certain CIS countries. The
telecom industry in Russia and the CIS countries have been
undergoing a process of deregulation and privatization. Due to
inactivity of GCEL, there can be no assurances that any revenues
could be realized under this contract.
Public and private telecom companies in several other
developing countries have taken an interest in the Company's
products. It is not possible to estimate the sales revenues
which may eventually be generated from the international market
and the timing thereof since substantially long lead times are
involved even after a contract has been executed.
In fiscal 1998, the Company assembled a sales and marketing
team to explore domestic opportunities. Target markets in the
United States for the Company's switches may be categorized as
follows:
(i) Existing national interexchange carriers such a AT&T, MCI
and Sprint which will be building local networks both to compete
with the incumbent local exchange carriers and also to protect
their long distance market share.
(ii) Newly formed telecommunications companies which are
building local networks and which offer both local and long
distance service. Examples are ICG Communications and GST
Telecom.
(iii) Start up competitive local exchange carries which build
local networks and offer long distance service to their
customers by resale of other companies' long distance network
offerings.
(iv) Large companies such as electric utilities with certain
rights of way and other capabilities in place which are studying
whether and where to enter the telephone business.
(v) Independent telephone companies which must upgrade their
networks rapidly or risk losing their franchise to aggressive
competition.
(vi) Any large telephone user which believes that it can
operate its own telephone company in a more efficient and cost
effective manner than can be provided for it by others. Examples
include government at all levels, universities, utilities and
real estate operators.
Government Contracts
A significant portion of the Company's business since its
inception has consisted of sales under United States government
contracts. Certain of these contracts are competitive bid
contracts, which were 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. As
more fully set out in "Management Discusssion and Analysis"
below, revenues from government contracts has become
insignificant since fiscal 1997. The Company is now
concentrating its marketing efforts on international and
domestic non-governmental markets.
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 Lucent Technologies, Nortel, Ericsson, DSC, Alcatel,
Siemens, Fujitsu and NEC. 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's products have three strengths in the United
States marketplace: (a) the installed cost of Cyber Digital's
switching networks is less than those of the competition; (b)
the switches can be engineered, installed and put into service
much more quickly, and (c) the Company's distributed
architecture fits with the marketing strategy of the competitive
local exchange carriers who will target specific customers
rather than entire geographic areas; the Company's architecture
will allow these carriers to tailor their local networks to
their marketplace successes without stranding capacity and
capital.
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 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.
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
permiting 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 exporting to certain
countries. A denial of an export license to the Company,
however, would probably be based upon a policy which also
affects other American companies exporting similar products.
Industry standards bodies such as ITU 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 OSI Model
and accommodates most existing and pending ISDN standards,
including applicable BELLCORE and ITU 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 the 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,
except for a few semiconductor components purchased from single
source vendors, such as Pentium based processors manufactured by
Intel Corporation and ISDN chips manufactured by Motorola, Inc.
If such semiconductor components are discontinued by their
respective manufacturers, the Company would be required to
redesign some of its products by using other vendors components,
which can cause set back for product delivery. 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 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.
Research and Development
Since its inception, the Company has devoted substantial
resources to the design and development of the Company's
systems. For the fiscal years ended March 31, 1998 and
1997, the Company expended approximately $388,854 and $109,322,
respectively, on research and development. Although some of 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.
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 such as Signaling
System No 7 which the Company is currently developing. 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. In the United
States, the Company typically charges an annual fee for ongoing
support services. The Company has just established a small
technical support and services team in Bluffton, Indiana to
complement the promotion of product sales in the U.S.
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 or
technical services offices in Bluffton, allowing the Company's
service personnel to remotely call up, diagnose and otherwise
support systems, thereby reducing response time and cost.
In addition, the Company intends to enter into agreements with
third party service providers to provide customer support on a
local basis in foreign markets, as needed.
Employees
As of the date hereof, the Company had thirty three
full time employees, of which eight were engaged in marketing
and sales activities, five were engaged in technical services
and support, eight were engaged in research and development,
eight were engaged in production testing and operations, and
four in administration. None of the Company's employees is
represented by a labor union. The Company considers its
employee relations satisfactory.
ITEM 2 - Description of 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, 1999, with 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.
ITEM 3 - Legal Proceedings
On or about August 5, 1996, Brockington Securities, Inc.
("Brockington") commenced an action, in the Supreme Court of the
State of New York, County of Suffolk, against the Company for
wrongful termination of a purported agreement for investment
banking services. Brockington is seeking damages in the amount
of (i) $775,000 based upon the alleged net aggregate value of
the shares of the Company's Common Stock upon which Brockington
alleges it had a purchase option and (ii) $1 million for the
alleged wrongful termination.
The Company has asserted counterclaims based upon Brockington's
wrongful conduct and is seeking damages in the amount of
$428,000 or, in the alternative, recission of the alleged
contract and the return of the 100,000 shares previously issued
Brockington.
The Company believes that Brockington's claims are without
merit and intends to vigorously defend its position.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5 - Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter
market and quoted on the National Association of Securities
Dealers' Electronic Bulletin Board (the "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 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>
Price Per Share
High Low
<S> <C> <C>
Fiscal Year Ended March 31, 1998
First Quarter $3.56 $1.69
Second Quarter 2.87 2.03
Third Quarter 2.87 1.38
Fourth Quarter 2.50 1.25
Fiscal Year Ended March 31, 1997
First Quarter $6.93 $2.43
Second Quarter 7.50 3.62
Third Quarter 4.18 1.93
Fourth Quarter 3.06 1.75
</TABLE>
On March 31, 1998, the closing trade price of the Common Stock
as reported on the Bulletin Board was $1.81 per share. As of
such date, there were approximately 520 holders of record of
the Company's Common Stock.
To date, the Company has not paid any dividends on its Common
Stock and does not expect to declare or pay any dividends in the
foreseeable future. Instead, the Company intends to retain all
earnings for use in the Company's business operations.
ITEM 6 - Management's Discussion and Analysis or Plan of
Operation
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 targeted to federal
government agencies with respect to CSX systems only and,
therefore, generated limited revenues. The Company did not
attempt to commercialize CLAN and CHUB office switching systems
as it was devoting most of its efforts to the marketing of CSX.
The Company targeted the federal government market since its
early products received certification from the General Services
Administration. This drastically reduced the Company's
marketing expenses. Furthermore, sales to Federal Government
agencies (which included the U.S. Air Force and Navy) proved the
efficacy of the Company's products in a challenging operating
environment. Nevertheless, the Company's available working
capital was limited in view of the long selling and receivables
cycles typical of the Government market. Furthermore, although
the Company was the lowest qualified bidder in some larger
Government contracts, it was not awarded the job in view of its
limited financial resources. Vendor financing, as is typically
available for export contracts, is not available for Government
contracts. Export financing available for the international
market led management to concentrate its efforts in that market
segment since fiscal 1996.
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 has continued
enhancements of these systems. In December 1995, the Company
signed a manufacturing license contract with NTC, pursuant to
which NTC will assemble the systems in Egypt with parts provided
by the Company. In addition, 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 is seeking to enter into long-term
contracts, licensing, joint venture or other similar
arrangements with government authorities which typically operate
public telephone networks. As at present, NTC has trained its
personnel to fulfill its obligations under the agreement,
however, no revenues have been generated from the contract with
NTC. NTC has been delayed in its performance for a variety of
reasons, such as a lack of a suitable assembly facility in Egypt
at this time.
In August 1996, the Company signed a non-exclusive
Manufacturing Licensing Contract with GCEL which will assemble
and sell the Company's systems in Russia and certain CIS
countries. GCEL received the benefit of certain financing
facilities pursuant to intergovernmental agreements between the
Government of India and these countries. The telecommunications
industry in Russia and some CIS countries have been going
through a process of deregulation and privatization. Due to
inactivity of GCEL, there could be no assurances that any
revenues could be realized under this contract.
In view of long lead times involved, it is impossible to
project the volume of revenues which may be generated from the
contracts with NTC and GCEL.
During fiscal 1997 and 1998 the Company invested significant
management time and financial resources to focus on research and
development for the completion of CRX and CDCO systems and the
initial introduction of these systems to targeted foreign
countries such as Egypt, India and Russia. However, there can
be no assurance that the Company will be successful in
establishing a reasonable business in such countries.
Results of Operations
Year Ended March 31, 1998, Compared to Year Ended March 31, 1997
Net sales
The Company's net sales for the year ended March 31, 1998, were
$66,110 representing an increase of $20,725 or approximately 45%
from $45,385 for the year ended March 31, 1997. Net sales were
insignificant, primarily attributable to management's focus on
completing the development of new products and introduction of
these products to the domestic and international market.
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
decreased from 42% to 32% of net sales from fiscal 1997 to 1998.
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 increased from
$849,491 in fiscal 1997 to $1,674,977 in fiscal 1998,
representing an increase of $825,486 or approximately 97%. The
absolute dollar increases in selling, general and administrative
expenses from fiscal 1997 to fiscal 1998 were principally the
result of increased selling expenses incurred with respect to
introductory and exploratory marketing efforts in the U.S. Such
efforts have not resulted in any sales to date.
Provision for bad debt
Bad debt expense amounted to zero in fiscal 1998 as well as
fiscal 1997.
Research and development
Research and development expenses increased from $109,322 in
fiscal 1997 to $388,854 in fiscal 1998, representing an increase
of $279,532 or approximately 355%. These dollar increases in
research and development expenses were primarily due to
development of CDCO for the U.S. market. 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, as commercialization of ISDN
applications for CDCO and 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
Loss from operations in fiscal 1998 was $(1,864,876) or $(.12)
per share as compared with $(706,102) or $(.05) per share in
fiscal 1997.
Extraordinary item
Extraordinary gain on debt restructure in fiscal 1998 was $0 or
$.00 per share as compared to $291,756 or $.02 per share in
fiscal 1997.
Net income (loss)
As a result of the foregoing, the net loss in fiscal 1998 was
$(1,864,876) or $(.12) per share as compared to a net loss of
$(414,346) or $(.03) per share in fiscal 1997.
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its
needs results primarily from sale of preferred and common stock
and cash flow from operations; it is anticipated that export
financing will also play a role in the foreseeable future. Total
working capital decreased by $2,582,171 to $3,150,422 at March
31, 1998 from $5,732,593 at March 31, 1997. The current ratio
decreased to 23.4 to 1 as at March 31, 1998 from 136.6 to 1 as
at March 31, 1997. Current levels of inventory are adequate to
meet short term sales. 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 $219,625 and $26,071 during fiscal 1998 and
1997 respectively, for investing activities. The cash used for
investing activities relates primarily to purchases of equipment
in fiscal 1998 and 1997.
Net cash (used) provided by financing activities was $(529,470)
and $5,570,417 for fiscal 1998 and 1997, respectively. The
decrease in net cash provided by financing activities in 1998
was principally due to redemption of preferred stock. The
Company made principal payments on long-term debt of $489,482
(inclusive of cash settlements, given below) in fiscal 1997. The
payments of long-term debt principally relate to amounts owed to
Job Development Authority of New York and Regional Development
Corporation in fiscal 1997.
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
approximately $7.1 million. On December 30, 1996, the Company
concluded a private placement of 2,000 shares of its Series B-1
Preferred Stock to Syndicated Communications Venture Partners
III, L.P. and received net proceeds of $1.7 million. Some of
the proceeds from these offerings have been used for retirement
of long-term debt, redemption of Series A Preferred Shares prior
to conversion, and to fund research and development, marketing
and production expenses. All of the Series A Preferred Stock
has been converted or redeemed and there are no such shares
outstanding. However, there are 824,013 warrants outstanding in
connection with the offering of Series A preferred stock at an
exercise price of $6.35 per share for an aggregate amount of
$5,232,482. On December 30, 1997, the Series B-1 preferred
stockholders received a 10% dividend through issuance of 200
shares of Series B-1 Preferred Stock, in accordance with the
terms of the private placement.
Due to the completion of the Series A and Series B Preferred
Stock transactions and together with expected cash flow from
operations and export financing, the Company believes its
liquidity will be sufficient to meets its needs for the next 18
months.
Impact of Inflation
Inflation has historically not had a material effect on the
Company's operations.
ITEM 7 - Financial Statements
The Financial Statements of the Company are listed in
the "Cyber Digital, Inc. Financial Statements" filed as part of
this Form 10-KSB.
ITEM 8 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
ITEM 9 - Directors, Executive Officers , Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
Jawahar C. Chatpar 50 Chairman of the Board, President, and
Chief Executive Officer
Jack P. Dorfman 60 Director and Secretary
Jatinder V. Wadhwa 63 Director and Treasurer
Terry L. Jones 50 Director
Khushi A. Nichani 60 Director
Robert G. Keller 53 Vice President - United States
Larry S. Shluger 59 Vice President of Operations
</TABLE>
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, Canada.
Jack P. Dorfman joined the Company as a Director in November
1993, and has served as Secretary since October 1995. Mr.
Dorfman has otherwise been retired since June 1996. Prior
thereto, since 1992, Mr. Dorfman served as consultant and
manager for a number of pharmacies. 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.
Jatinder Wadhwa has served as a Director of the Company since
1986 and as Treasurer of the Company since August 1997. He had
been the Secretary of the Company from 1993 to 1995. Since
1994, Mr. Wadhwa has served as the Chief Executive Officer of
Security First Financial Corp., a financial institution dealing
with first and second mortgages on residential and commercial
properties. From 1989 to 1994, Mr. Wadhwa had served as a
management consultant to Gibbons Goodwin van Amerongen, an
investment banking firm, Wells Aluminum Corporation, a
manufacturer of aluminum extrusion products and Sealy Mattress
Company. From 1970 to 1990, Mr. Wadhwa had served as Chief
Operating Officer and Vice President of Operations of EZ Por
Corporation, a manufacturer of aluminum products.
Terry L. Jones has served as a Director of the Company since
November 1997. He has been the President of Syndicated
Communications, Inc. ("Syncom"), a communications venture
capital investment company, since 1990. He joined Syncom in
1978 as a Vice President. Mr. Jones serves in various
capacities, including director, president, general partner and
vice president for various other entities affiliated with
Syncom. He also serves on the Board of Directors of Radio One,
Inc. Mr. Jones earned his B.S. degree from Trinity College, his
M.S. from George Washington University and his M.B.A. from
Harvard Business School.
Khushi A. Nichani has served as a Director of the Company since
November 1997. He has been a commercial manager at Black &
Veatch Incorporated, an engineering and architectural firm for
power industrial projects, since May 1997, where his
responsibilities included negotiating orders for turnkey power
plants. From 1973 to May 1997, he held various positions (most
recently as Manager of Proposals & Estimating) at GE Co. Power
Generation, the power project division of General Electric.
Robert G. Keller joined the Company as Vice President - United
States in June 1997. Since 1991, Mr. Keller was engaged in
various consultancy assignments. From 1986 to 1991, he was Vice
President and Chief Operating Officer of NYNEX Mobile
Communications Company. Between 1970 and 1986, Mr. Keller held
several management positions initially with New York Telephone
and later with NYNEX.
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 manufactures 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.
There is no family relationship among the Directors and
Officers of the Company.
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), requires the Company's directors and
executive officers, and persons who own more than ten (10%)
percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission
(the 'Commission") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities
of the Company. Reporting persons are required by Commission
regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, the following
persons failed to file, on a timely basis, the following reports
required by Section 16(a) of the 1934 Act: J.C. Chatpar failed
to timely file two Forms 4, in connection with the receipt of
certain stock options, during the fiscal year ended March 31,
1998. Jatinder Wadhwa failed to timely file three Forms 4, in
connection with the receipt and exercise of certain stock
options, during the fiscal year ended March 31, 1998. Jack
Dorfman failed to timely file two Forms 4, in connection with
the receipt of certain stock options, during the fiscal year
ended March 31, 1998. Terry Jones failed to timely file a Form
3, and in connection with the receipt of certain stock options,
a Form 4 during the fiscal year ended March 31, 1998. Khushi
Nichani failed to timely file a Form 3, and in connection with
the receipt of certain stock options, a Form 4 during the fiscal
year ended March 31, 1998. Robert Keller failed to timely file
a Form 3, and in connection with the receipt of certain stock
options, a Form 4, during the fiscal year ended March 31, 1998.
Larry Shluger failed to timely file a Form 3, and in connection
with the receipt of certain stock options, a Form 4, during the
fiscal year ended March 31, 1998. These forms are currently
being prepared for filing.
ITEM 10 - Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the
compensation for services in all capacities for the fiscal years
ended March 31, 1998, 1997 and 1996 of those persons who were,
at March 31, 1998, the chief executive officer and the most
highly compensated executive officers of the Company (the "Named
Officers"). During such periods, no executive officer of the
Company received compensation in excess of $100,000 other than
J.C. Chatpar.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
Name and Year Salary Bonus Other Restricted Securities LTIP All
Prinicpal ($) ($) Annual Stock Underlying Payouts Other
Position Compe- Awards Options/ ($) Comp-
nsation ($) SARs(#) ensat-
($)(1) on
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.C. Chatpar 1998 $150,000 None None None 140,000(3) None None
Chairman 1997 $130,000(2) $100,000(2)None None None None None
of the 1996 $80,000 None None None 440,000 None None
Board, President
and Chie f
Executive Officer
</TABLE>
(1) The Company has concluded that the aggregate amount of
perquisites and other personal benefits paid to each of the
Named Officers named in the table did not exceed the lesser of
10% of such officer's total annual salary and bonus for the
1998, 1997 and 1996 fiscal years or $50,000, thus, such amounts
are not included in the table.
(2) Mr. Chatpar's salary was raised from $80,000 per annum to
$150,000 per annum effective August 12, 1996.
(3) Mr. Chatpar was granted 110,000 options at $2.56 and 30,000
options at $2.43 in fiscal 1998.
Option Grants In Last Fiscal Year
The following table sets forth information concerning stock
option grants made during fiscal 1998 to the Named Officers. The
Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
Number % of Total
of Options
Securities Granted To
Underlying Employees in Exercise
Options Fiscal Year Price Expiration
Granted 1997 ($/Share) Date
Name (#) (1) (2) (3)
<S> <C> <C> <C> <C>
J.C. Chatpar 110,000 23.3% $2.56 8/03/2007
J.C. Chatpar 30,000 6.3% $2.43 8/03/2007
_________________
</TABLE>
(1) During fiscal 1998, options to purchase an aggregate of
140,000 shares were granted to Mr. Chatpar and options to
purchase an aggregate of 332,000 shares were granted to thirteen
other employees.
(2) The exercise price of the options granted were equal to the
fair market value of the underlying stock on the date of grant.
(3) Options are immediately exercisable.
Aggregated Fiscal Year-End Option Values
The following table sets forth information concerning the
number of unexercised options and the fiscal 1998 year-end value
of unexercised options on an aggregated basis held by the Named
Officers. The Company has not granted any stock appreciation
rights and no options were exercised in fiscal 1998.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-The-Money
Options at Fiscal Year-End (#) Options at Fiscal Year-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
J.C. Chatpar 620,000 0 $401,200 0
</TABLE>
(1) Options are "in-the-money" if, on March 31, 1998, the market
price of the Common Stock ($1.81) 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, 1998
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.
Employment Agreements and Insurance
The Company has entered into an Amended and Restated Employment
Agreement with Mr. J.C. Chatpar dated as of August 4, 1997 (the
"Employment Agreement") for a three year term. Such three-year
term shall be automatically extended for successive three-year
terms unless either party gives the other party 120 days prior
written notice of termination before the end of any such
three-year period. The Board, however, has the authority to
terminate such extension upon cause. "Cause" is defined as
conviction of a felony or willful misconduct. Mr. Chatpar is
entitled to receive a salary of $150,000 per annum, with an
annual increase of 10%. 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 term of his employment
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, plus
(b) 5% of net income after deduction of the bonus provided for
in (a) above, and plus (c) 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 due
to disability, he shall receive royalty payments of 5% of the
gross revenues earned by the Company ("Royalties") for a period
of 15 years following termination. In the event of Mr.
Chatpar's death, his wife, if any, or his estate, shall receive
a payment equal to six months of his base salary and Royalties
for 15 years. In the event of a termination of Mr. Chatpar's
employment for any reason other than pursuant to disability,
death or for cause, or if there is a change of control (as
defined in the Employment Agreement) of the Company which
results in an actual or constructive termination of employment
(as defined therein), he shall receive a payment equal to three
years of his base salary plus three times his prior year's
bonus, Royalties for 15 years, and all of his outstanding
options will be deemed immediately vested and exercisable for a
period of one year from the effective termination date.
The Company does not have employment contracts with any other
officer or director. 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.
ITEM 11 - Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information known to the
Company regarding beneficial ownership of the Company's Common
Stock as of March 31, 1998, 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>
Names and Address
of Beneficial Owners Number of Shares Percentage Owned (1)(2)
____________________ ________________ _______________________
<S> <C> <C>
J.C. Chatpar(3)
c/o Cyber Digital, Inc.
400 Oser Avenue
Hauppauge, NY 11788 5,345,712 28.4%
Jack P. Dorfman(4) 200,000 1.1%
Jatinder V. Wadhwa(5) 197,812 1.1%
Terry L. Jones (6) 10,000 *
Khushi A. Nichani (7) 18,000 *
All directors and executive
officers as a group:
(7) persons 5,981,024 32.5%
*less than 1%
</TABLE>
(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 of ownership of any other person.
(2) Assumes the exercise of the warrants to purchase 824,013
shares of Common Stock issued in connection with the offering of
the Company's Series A Preferred stock.
(3) 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
620,000 shares as to which Mr. Chatpar holds non-qualified stock
options, which are exercisable at any time.
(4) Includes 80,000 shares as to which Mr. Dorfman holds a
non-qualified stock option, which are exercisable at any time.
Does not include 360,000 shares owned by his wife, Sandra
Dorfman, as to which beneficial ownership is disclaimed.
(5) Includes 40,000 shares as to which Mr. Wadhwa holds
non-qualified stock options which are exercisable at any time.
(6) Terry Jones is a general partner of a limited partnership
that is the general partner of Syndicated Communications Venture
Partners III, L.P. ("Syncom III"), a fund which owns all the
2,200 shares of the Company's Series B convertible preferred
stock (the "Series B Stock") currently outstanding. Includes
10,000 shares as to which Mr. Jones holds non-qualified stock
options which are exercisable at any time.
(7) Includes 10,000 shares as to which Mr. Nichani holds
non-qualified stock options which are exercisable at any time.
ITEM 12 - Certain Relationships and Related Transactions
In August 1997, the Company issued to J.C. Chatpar, Jack
Dorfman and Jatinder Wadhwa, directors of the Company,
non-qualified stock options to purchase 110,000, 10,000, and
10,000 shares of Common Stock, respectively, at an exercise
price of $2.56 per share.
In November 1997, the Company issued to J.C. Chatpar, Jack
Dorfman, Jatinder Wadhwa, Terry Jones and Khushi Nichani,
directors of the Company, non-qualified stock options to
purchase 30,000, 30,000, 30,000, 10,000, and 10,000 shares of
Common Stock, respectively, at an exercise price of $2.43 per
share.
On December 30, 1996, the Company consummated a private
placement of its Series B Stock, to Syncom III. The Company
issued 2,000 shares of its Series B Stock to Syncom III in
return for $2,000,000. Such shares are convertible into shares
of the Company's Common Stock commencing one year from closing
date. The conversion price is lesser of either eighty-five
(85%) per cent of the average closing price during the five
trading days preceding the conversion date or $7.50 per share.
All shares of Series B Stock shall automatically be converted
into shares of the Company's Common Stock on December 21, 2001.
On December 30, 1997, Syncom III received 10% dividend through
issuance of 200 shares of Series B Stock.
Terry Jones, a director, is the general partner of WJM Partners
III, L.P. ("WJM"), the general partner of Syncom III. Pursuant
to the terms of the Stock Purchase Agreement entered into in
connection with such placement, so long as Syncom III holds at
least 750 shares of Series B Stock and/or shares of the
Company's Common Stock issued upon conversion of such shares of
Series B Stock, or any combination thereof, the Company's Board
of Directors shall consist of not less than five members and the
Company shall use its best efforts to cause Terry Jones (or
another partner of WJM) to be elected as a director.
<PAGE>
ITEM 13 - Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Composite Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the period
ended December 31, 1996).
3.2 Composite Amended and Restated By-Laws
(incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1997 (the "September 1997 Form 10-QSB")).
10.1 Cyber Digital, Inc. 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).
10.2 Amended and Restated Employment Agreement, dated as
of August 4, 1997, between the Company and J.C. Chatpar
(incorporated herein by reference to Exhibit 10.1 to the
September 1997 Form 10-QSB).
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
Company's Annual Report on Form 10-KSB/A for the fiscal year
ended March 31, 1996)).
10.4 Manufacturing License Contract between the Company and
Gujarat Communications and Electronics, Ltd. dated as of May 30,
1996 (incorporated herein by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997).
10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan.
27 Financial Data Schedule.
(b) Reports of Form 8-K. No reports on Form 8-K were filed for
the three months ended March 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: June 26,1998
CYBER DIGITAL, INC.
By: /s/ J.C. Chatpar
________________
J.C. Chatpar
Chairman of the Board, President
and Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following person on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ J.C. Chatpar Chairman of the Board, President June 26, 1998
____________ and Chief Executive Office
J.C. Chatpar (Principal Executive, Accounting
and Financial Officer)
/s/ Jack P. Dorfman Secretary and Director June 26, 1998
_______________
Jack P. Dorfman
/s/ Jatinder Wadhwa Treasurer and Director June 26, 1998
_______________
Jatinder Wadhwa
/s/ Terry Jones Director June 26, 1998
___________
Terry Jones
/s/ Khushi Nichani Director June 26, 1998
______________
Khushi Nichani
<PAGE>
Index to Exhibits
Exhibit Number Description
3.1 Composite Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the period
ended December 31, 1996).
3.2 Composite Amended and Restated By-Laws
(incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1997 (the "September 1997 Form 10-QSB")).
10.1 Cyber Digital, Inc. 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).
10.2 Amended and Restated Employment Agreement, dated as
of August 4, 1997, between the Company and J.C. Chatpar
(incorporated herein by reference to Exhibit 10.1 to the
September 1997 Form 10-QSB).
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
Company's Annual Report on Form 10-KSB/A for the fiscal year
ended March 31, 1996)).
10.4 Manufacturing License Contract between the Company and
Gujarat Communications and Electronics, Ltd. dated as of May 30,
1996 (incorporated herein by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997).
10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan.
27 Financial Data Schedule.
<PAGE>
CYBER DIGITAL, INC.
FINANCIAL STATEMENTS
<PAGE>
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-3
Statements of Changes in Shareholders' Equity (Deficit) F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-16
All schedules omitted are not required, not applicable, or the
information is provided in the financial statements or notes
therein.
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997 and the related
statements of operations, shareholders' equity, 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred
to in the first paragraph presents fairly, in all material
respects, the financial position of Cyber Digital, Inc. as of
March 31, 1998 and 1997 and the results of its operations and
its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Hauppauge, New York
June 14, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
BALANCE SHEETS
March 31, 1998 and 1997
1998 1997
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,436,473 $ 5,002,773
Accounts receivable, net 383,603 327,377
Inventories 447,750 434,473
Prepaid and other 23,545 10,243
___________ ___________
Total Current Assets 3,291,371 5,774,866
Property and Equipment, net 227,965 44,098
Other Assets 14,350 10,392
----------- ----------
$ 3,533,686 $ 5,829,356
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Accounts payable, accrued expenses,
and taxes $ 140,949 $ 42,273
__________ ----------
Total Current Liabilities 140,949 42,273
__________ _________
Commitments and Contingencies
Shareholders' Equity
Convertible preferred stock - Series A $.05 par value;
authorized 9,991,940 shares; issued and outstanding,
-0- and 86 shares at March 31, 1998 and 1997,
respectively -0- 4
Convertible, cumulative and participating
preferred stock - Series B-1 $.05 par value;
authorized 3,225 shares; issued and
outstanding 2,200 and 2,000 shares at
March 31, 1998 and 1997, respectively 110 100
Preferred stock - Series B-2 cumulative,
convertible and participating $.05
par value; authorized 4,835 shares;
issued and outstanding; none -0- -0-
Common stock $.01 par value; authorized
30,000,000 shares; issued and
outstanding 17,386,053 shares and
17,095,176 shares at March 31, 1998 and 1997,
respectively 173,861 170,952
Additional paid-in capital 13,860,257 13,919,241
Retained deficit (10,641,491) (8,303,214)
___________ __________
3,392,737 5,787,083
___________ __________
$ 3,533,686 $ 5,829,356
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
STATEMENTS OF OPERATIONS
Years ended March 31, 1998 and 1997
1998 1997
<S> <C> <C>
Net Sales $ 66,110 $ 45,385
Cost of Sales 44,946 26,120
________ ________
Gross Profit 21,164 19,265
________ ________
Operating Expenses
Selling, general and administrative
expenses 1,674,977 849,491
Research and development 388,854 109,322
_________ ________
Total Operating Expenses 2,063,831 958,813
_________ ________
Loss from Operations (2,042,667) (939,548)
Other Income (Expense)
Interest income 188,146 176,702
Interest expense (4,606) (11,231)
Other income (expense) (972) 51,911
Loss on disposal of fixed assets -0- (387)
_________ ________
Total Other Income 182,568 216,995
Loss Before Income Taxes and Extraordinary
Item (1,860,099) (722,553)
Provision (Benefit) for Income Taxes 4,777 (16,451)
__________ _________
Loss Before Extraordinary Item (1,864,876) (706,102)
__________ ________
Extraordinary Item (less
applicable income taxes) -0- 291,756
__________ _________
Net Loss (1,864,876) $ (414,346)
=========== ===========
Net Earnings (Loss) Per Share of
Common Stock (See Note 6)
Before extraordinary item - Basic $ (.12) $ (.05)
======= =======
Diluted $ (.12) $ (.05)
======= =======
Extraordinary item - Basic $ .00 $ .02
====== =======
Diluted $ .00 $ .02
===== ======
Net Income - Basic $ (.12) $ (.03)
====== =======
Diluted $ (.12) $ (.03)
====== ======
Weighted average number of common shares
outstanding 17,312,550 15,896,524
========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1998 and 1997
Preferred Stock
__________________________________________
Series A Series B-1
______________________ __________________
Shares Amount Shares Amount Total
_________ __________ _______ _______ _____
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1996
Exercise of
stock options
Preferred stock
issued - Series A 805 $ 40 $ 40
Preferred stock
issued - Series B-1 2,000 $ 100 100
Conversion of
preferred stock -
Series A (496) (25) (25)
Redemption of Series
A preferred stock (223) (11) (11)
Net Loss
________ __________ ________ _________ ________
Balance -
March 31, 1997 8 $ 4 2,000 $ 100 $ 104
Exercise of stock
options
10% Preferred stock
dividend - Series B-1 200 $ 10 10
Conversion of preferred
stock - Series A (38) (2) (2)
Redemption of Series
A preferred stock (48) (2) (2)
Net Loss
________ ________ ________ _________ ________
Balance -
March 31, 1998 -0- $ -0- 2,200 $ 110 $ 110
====== ======= ======= ======== ========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1998 and 1997
Preferred Stock
_____________________
Series B-2 Common Stock
_____________________ ___________________
Shares Amount Shares Amount Total
______ _________ _________ _______ _______
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1996 15,110,311 $151,103 $ 151,103
Exercise of
stock option 109,28 1,093 1,093
Preferred stock
issued - Series A
Preferred stock
issued - Series B-1
Conversion of
preferred stock -
Series A 1,875,579 18,756 18,756
Redemption of Series
A preferred stock
Net Loss
________ ________ ___________ _______ _______
Balance -
March 31, 1997 -0- $ -0- 17,095,176 $170,952 $170,952
Exercise of
stock options 90,000 900 900
10% Preferred
stock dividend -
Series B-1
Conversion of
preferred stock -
Series A 200,877 2,009 2,009
Redemption of
Series A preferred
stock
Net Loss
_______ _______ ________ ______ _______
Balance -
March 31, 1998 -0- $ -0- 17,386,053 $ 173,861 $ 173,861
======== ========= =========== ========== =========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1998 and 1997
Additional Paid Retained
in Capital Deficit Total
___________________ _____________ ______________
<S> <C> <C> <C>
Balance at
March 31, 1996 $ 6,253,146 $ (6,378,515) $ (125,369)
Exercise of
stock options 141,203 141,203
Preferred stock
issued - Series A 7,049,460 7,049,460
Preferred stock
issued - Series B-1 1,684,900 1,684,900
Conversion of
preferred stock -
Series A 743,364 (762,095) (18,731)
Redemption of Series
A preferred stock (1,952,832) (748,258) (2,701,090)
Net Loss (414,346) (414,346)
_____________ ______________ ______________
Balance - March
31, 1997 $13,919,241 $(8,303,214) $ 5,616,027
Exercise of
stock options 82,900 82,900
10% Preferred
stock dividend -
Series B-1 199,990 (200,000) (10)
Conversion of
preferred stock -
Series A 78,466 (80,473) (2,007)
Redemption of Series
A preferred stock (420,340) (192,928) (613,268)
Net Loss (1,864,876) (1,864,876)
_____________ _____________ _____________
Balance -
March 31, 1998 $13,860,257 $(10,641,491) $ 3,218,766
============= ============= ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CYBER DIGITAL, INC.
STATEMENTS OF CASH FLOWS
Years ended March 31, 1998 and 1997
1998 1997
<S> <C> <C>
Cash Flows from Operating
Activities
Net loss $ (1,864,876) $ (414,346)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 35,758 12,277
Loss on sale of fixed assets -0- 387
Forgiveness of debt -0- (291,756)
(Increase) decrease in operating assets:
Accounts receivable (56,226) 8,789
Inventories (13,277) (891)
Prepaid and other assets (17,260) (5,948)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued expenses, and taxes 98,676 (6,112)
___________ ___________
Net Cash Used in Operating Activities (1,817,205) (697,600)
Cash Flows from Investing Activities
Purchase of equipment (219,625) (30,183)
Proceeds from sale of fixed assets -0- 4,112
_________ __________
Net Cash Used in Investing Activities (219,625) (26,071)
__________ _________
Cash Flows from Financing Activities
Issuance of common stock 83,800 26,500
Payments of long-term debt -0- (489,482)
Issuance of preferred stock -0- 8,734,500
Redemption of preferred stock (613,270) (2,701,101)
__________ __________
Net Cash (Used) Provided by Financing
Activities (529,470) 5,570,417
__________ __________
Net (Decrease) Increase in Cash and Cash
Equivalents (2,566,300) 4,846,746
Cash and Cash Equivalents at Beginning of
Period 5,002,773 156,027
___________ __________
Cash and Cash Equivalents at End of
Period $ 2,436,473 $ 5,002,773
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Income taxes $ 6,949 $ 3,328
Interest 4,606 42
Supplemental Schedule of Non Cash Investing and Financing
Activities:
Issuance of common stock in exchange for legal
services $ -0- $ 10,000
======== ========
Issuance of common stock in exchange for debt $ -0- $ 115,796
======== =========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies
Description of Business
Cyber Digital, Inc. (the "Company") was incorporated in the
state of New York in April 1983. The Company 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 proprietary 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, 1998, the Company had
an accumulated deficit of $10,641,491 and a shareholders' equity
of $3,392,737. The decrease in equity from March 31, 1997 to
March 31, 1998 is due mainly to the redemption of $613,270 of
preferred stock and a net loss of $1,864,876 for the fiscal year
ended March 31, 1998. The Company had working capital of
$3,150,422 at March 31, 1998 relating largely to cash and cash
equivalents from prior year's stock issuances as discussed in
Note 8. 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 8.
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, 1998 does
not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance
sheets. 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 of 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
For purposes of the statement of cash flows, 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 presented net of a zero allowance for
doubtful accounts at March 31, 1998 and 1997. The allowance is
based on prior experience and management's evaluation of the
collectibility of accounts receivable. Management believes that
the allowance is adequate. However, additions to the allowance
may be necessary based on changes in economic conditions.
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. Repairs
and maintenance are charged against operations as incurred.
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 Expense
The Company records warranty expense as incurred and does not
make a provision as shipments are made. Such expense is not
significant.
Impairment of Long-Lived Assets
The Financial Accounting Standards Board has issued Statement
No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (FASB 121), which the
Company has adopted effective April 1, 1996. FASB No. 121
requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for
possible impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be
recoverable. FASB No. 121 also requires that long-lived assets
and certain identifiable intangibles held for sale be reported
at the lower of carrying amount of fair value less cost to sell.
The Company adopted FASB No. 121 effective April 1, 1996 and
determined that no impairment loss need be recognized for the
applicable assets.
Reclassifications
Certain prior period amounts have been reclassified to conform
with the current financial statement presentation.
Earnings (Loss) Per Share
Effective for the Company's financial statements for the year
ended March 31, 1998, the Company adopted SFAS No. 128,
"Earnings per Share," which replaces the presentation of primary
earnings per share ("EPS") and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS assumes conversion of the convertible
preferred stock, the elimination of the related preferred stock
dividend requirement, and the issuance of common stock for all
other potentially dilutive equivalent shares outstanding. All
prior-period EPS data have been restated. The adoption of this
new accounting standard did not have a material effect on the
Company's reported EPS amounts.
Recently Issued Pronouncement
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive
income and its comprehensive (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements.
Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events
and circumstances from nonowner sources. This statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of the Company's financial statements for
earlier periods provided for comparative purposes will be
required. The Company believes that this standard will not have
a material effect on the Company's financial statements.
In June 1997, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related information" (Statement 131), was issued.
This statement will change the way public companies report
information about segments of their business in their annual
financial statements and requires them to report selected
segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about
the products, services an entity provides, the material
countries in which it holds assets and reports revenues, and its
major customers. Statement 131 is effective for fiscal years
beginning after December 15, 1997. The Company does not expect
that Statement 131 will have material effect upon the Company's
financial statements.
In February 1998, SFAS No. 132, "Employers Disclosure About
Pensions and Other Post Retirement Benefits" (Statement 132),
was issued. This statement will change the way companies report
information about pensions and other post retirement benefits.
Statement 132 is effective for fiscal years beginning after
December 15, 1998. The Company does not expect that Statement
132 will have a material effect upon the Company's financial
statement.
Note 2 - Accounts Receivable
Pursuant to a federal government agency contract that was
terminated at the convenience of the government, the Company was
requested to bill the government for actual costs incurred plus
a reasonable mark-up for profit. In accordance with this
request, the Company has billed the government agency $263,219
and has included this amount in accounts receivable at March 31,
1998 and 1997.
Note 3 - Inventories
Inventories consist of:
<TABLE>
<CAPTION>
1998 1997
_______ _______
<S> <C> <C>
Raw materials $ 312,792 $ 277,532
Work-in-process 37,076 46,718
Finished goods 97,882 110,223
_________ _________
$ 447,750 $ 434,473
========= =========
</TABLE>
Note 4 - Property and Equipment
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997 Useful Lives
<S> <C> <C> <C>
Machinery and equipment $ 275,819 $ 66,345 5 years
Furniture and fixtures 68,271 58,120 7 years
Leasehold improvements 2,920 2,920 lease term
_________ ________
347,010 127,385
Less: Accumulated
depreciation 119,045 83,287
_________ ________
$ 227,965 $ 44,098
========= ========
</TABLE>
Note 5 - Other Assets
Other assets consist of various security deposits.
Note 6 - Earnings (Loss) Per Share
Earnings per share has been computed and presented pursuant to
the provisions of Statement of Financial Accounting Standards
No. 128, Earnings per Share, which was adopted during the fiscal
year ended March 31, 1998.
<TABLE>
1998 1997
__________ _________
<S> <C> <C>
Net Loss $ (1,864,876) $ (414,346)
Dividends paid on Preferred
Stock Series B-1 (200,000) -0-
____________ __________
Income Available to Common
Shareholders $ (2,064,876) $ (414,346)
_____________ ___________
Weighted Average Common
Shares Outstanding 17,312,550 15,896,524
____________ __________
Basic EPS $ (.12) $ (.03)
Diluted EPS $ (.12) $ (.03)
</TABLE>
Diluted earnings per share does not include any stock warrants,
options, or convertible preferred stock as the inclusion of
these items would be antidilutive to earnings per share.
Note 7 - Stock Option Plans
The Company's Board of Directors adopted, on November 7, 1997, a
1997 Stock Incentive Plan (the "1997 Plan"). The 1997 plan is a
successor to the 1993 plan, which has been terminated. Under
the terms of the 1997 Plan, 850,999 shares were reserved for
issuance to officers, directors, other employees and consultants
meeting certain qualifications. Under the 1997 Plan, incentive
stock options are granted at 100% of fair market on the date of
grant. The right to exercise the options accrued at one quarter
of the shares subject to grant in each year for four years after
grant. Options granted under the plan expire on the day before
the tenth anniversary of the plan.
Pursuant to the 1997 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 1997 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 1997 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.
Unless sooner terminated by the Board, the provisions of the
1997 Plan regarding the grant of ISOs shall terminate on the
tenth anniversary of the adoption of the 1997 Plan by the Board.
No ISOs shall thereafter be granted under the Plan, but all
ISOs granted theretofore shall remain in effect in accordance
with their terms.
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:
<TABLE>
<CAPTION>
Price Shares
_________________ ___________
<C> <S> <S>
Outstanding, March 31, 1997 $ .38 to $ 6.35 2,654,013
Granted $ 1.50 to $10.00 532,000
Exercised $ .38 to $ 1.00 (90,000)
Canceled $ 3.38 to $ 4.50 (45,000)
__________
Outstanding March 31, 1998 3,051,013
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 "Accounting for Stock-Based Compensation"
("FASB 123"), which is effective for the Company's year
beginning April 1, 1996. As permitted under FASB 123, the
Company has elected not to adopt the fair value based method of
accounting for its stock-based compensation plans, but will
continue to account for such compensation under the provisions
of Accounting Principles Board Opinion No. 25. Pro forma
information regarding net income and earnings per share is
required by FASB 123, and has been determined as if the Company
had accounted for its stock options under the fair value method
of that Statement. The fair value for these options was
estimated at the date of grant using an option pricing model
with the following weighted average assumptions for the year
ended March 1998 and 1997, respectively: risk-free interest
rates of 5.0% and 5.2%, volatility factor of the expected market
price of the Company's common stock of 95.2, and a
weighted-average expected life of the options of 6.75 and 9.25
years, and a dividend yield of 0.00%.
The options valuation model was developed for use in estimating
the fair value of options, which have no vesting restrictions
and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's stock options have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimate, management has determined that the stock options
have no value. As such, pro forma information would not provide
different net income (loss) or earnings (loss) per share figures
than those presented herein.
Note 8 - Convertible, Cumulative and Participating Preferred
Stock
In the fiscal year ended March 31, 1997, the Company completed
two private placements of preferred stock. The Company sold 805
shares of 10% Series A convertible preferred stock, priced at
$10,000 per share. The Company also sold 2,000 shares of 10%
Series B-1 convertible, cumulative and participating preferred
stock, priced at $1,000 per share.
Throughout the fiscal years ended March 31, 1998 and 1997,
pursuant to an optional conversion or redemption of Series A
preferred stock, 38 shares were converted into 200,877 shares of
common stock and 48 shares were redeemed, 496 shares were
converted into 1,875,579 shares of common stock and 223 shares
were redeemed during the years ended March 31, 1998 and 1997,
respectively. The converted shares were converted based upon
85% of the average closing bid price for the five trading days
prior to the conversion.
The 10% Series B-1 convertible, cumulative and participating
preferred stock is convertible into restricted common shares
after December 31, 1997 at a price which is the lesser of (a)
$7.50 per share or (b) 85% of the average closing price for the
five days prior to the conversion date. As of March 31, 1998,
there are $54,849 of undeclared dividends on the Series B-1
preferred stock.
In December 1997, the Board of Directors declared and
distributed a stock dividend on the preferred Series B-1 stock.
The stock dividend amounted to 200 shares of preferred Series
B-1 stock at $1,000 per share. The stock dividend was
equivalent to the 10% annual dividend on the preferred Series B
stock.
The 10% Series B-2 preferred stock is convertible into
restricted common shares at a price which is the greater of (a)
$7.50 per share or (b) 85% of the average closing price for the
five days prior to the conversion date. As of March 31, 1998,
this preferred stock remains unissued.
Note 9 - Income Taxes
The Company has net operating loss carryforwards for tax
purposes amounting to approximately $9.5 million that may be
offset against future taxable income which expire through 2013.
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 $624,000 for the
fiscal year ended March 31, 1998.
The Company was subject to capital based taxes for New York
State for the years ended March 31, 1998 and 1997.
Note 10 - Commitments and Contingencies
Employment Contract
The Company is obligated under an employment agreement with the
Chairman to pay him $150,000 during the year ended February 28,
1998.
During the year ended March 31, 1998, the Company entered into a
new employment agreement with the Chairman. The new agreement
is for a three year period covering August 4, 1997 through
August 3, 2000. This agreement is renewable for successive
three year periods.
Under this employment agreement, the Company is obligated to pay
the Chairman $150,000 for the period ending August 3, 1998 with
an annual increase of 10% for each subsequent year under the
terms of employment. The Company also agrees that its Board of
Directors may raise the Chairman's salary as soon as the
financial resources of the Company and other business conditions
permit. In such event, the Chairman's salary shall be
comparable to that of chief executive officers of other
technology driven publicly held companies.
This employment agreement can terminate for one of the following
reasons: (1) disability, (2) death, (3) for cause, and (4)
without cause, change in control.
The following payout terms apply if this agreement is terminated:
1. In the case of disability, the Chairman shall be paid until
the end of the month in which such termination occurs. The
Chairman will receive royalties of 5% of the gross revenues
earned by the Company each month for a period of fifteen years
from the effective date of termination.
2. If the agreement terminates due to the death of the Chairman,
the agreement shall terminate immediately, except that the
Chairman's wife, if any, or otherwise his estate, shall receive
the Chairman's salary until the termination date, payments in
the amount of the Chairman's base salary for a period of six
months from the date of termination and the aforementioned
royalty.
3. If the agreement terminates due to cause. Cause is defined
as willful misconduct by the executive or the conviction of a
felony, the Chairman shall receive his regular salary until the
end of the month in which such termination occurs. The Chairman
must be notified at least ten days prior of his termination.
4. If the agreement terminates due to a change in control or
without cause, the Chairman shall receive his salary until the
end of the month in which he is terminated, an amount equal to
three years base salary plus three times the prior year bonus,
the aforementioned royalties and all of the Chairman's
outstanding options will be deemed immediately vested and
exercisable for a period of one year from the effective date of
termination.
Operating Leases
Effective April 1, 1994, the Company commenced a noncancellable
operating lease that expired on March 31, 1998. In April 1998
this lease was renewed at the same terms for a one year period
with respect to the Company's executive offices and operations.
Rent expense was $58,714 and $55,416 for the years ended March
31, 1998 and 1997, respectively.
In January 1998, the Company commenced a noncancellable
operating lease that expires on February 28, 2000, with a
renewal option for two additional, two year periods, with
respect to the companies Indiana office. Rent expense was
$3,092 for the year ended March 31, 1998.
The Company also has non-cancelable operating leases for a
vehicle and office equipment. The monthly rental on the vehicle
and office equipment is $303 and $205, respectively. The amount
charged to expense was $3,636 and $-0-, respectively, for the
year ended March 31, 1998 and $3,636 and $2,315 respectively,
for the year ended March 31, 1997. The lease on the office
equipment expired in February 1997.
Future minimum rentals are as follows:
</TABLE>
<TABLE>
<C> <S>
For years ending March 31, 1999 $ 71,086
March 31, 2000 16,200
________
$ 87,286
========
</TABLE>
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 its 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 SIPC Limit
At March 31, 1997, the Company has a money market fund with the
Bank of New York, which is insured by the Security Investors
Protection Corporation (SIPC). The SIPC insures these accounts
up to $500,000, at March 31, 1997, the uninsured balance was
$4,488,897. At March 31, 1998, the balance in this money market
fund was $242,413. The Company held a treasury bill at March
31, 1998 in the amount of $2,194,720 which matured on April 16,
1998.
Pending Litigation
The Company is a defendant in an action arising from an alleged
wrongful termination of a purported agreement with Brockington
Securities, Inc. The Company has asserted counter claims and
intends to vigorously defend its position. Inasmuch as
discovery has not begun in this case, the outcome and range of
damages or settlement (if any) is unknown.
Note 11 - 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. For
fiscal years ended March 31, 1998 and 1997, the Company derived
9% and 100% of its revenue from Federal government agencies.
For the fiscal year ended March 31, 1998, the Company had sales
representing 91% of its revenue from two customers. The
accounts receivable for these customers accounted for 100% of
the total accounts receivable at March 31, 1998 and 1997.
Note 12 - Extraordinary Item
In May 1996, the Company entered into an agreement to
restructure the debt with the New York Job Development Authority
(JDA). The agreement required the Company to pay $300,000.
This amount was paid in full in July 1996. The extraordinary
item in the amount of $291,756 is included in the calculation of
net income (loss) for the fiscal year ended March 31, 1997 and
has been calculated as follows:
<TABLE>
<S> <C>
Debt payable to the JDA $ 591,756
Cash paid in settlement of debt 300,000
_________
Extraordinary Gain on Extinguishment of Debt $ 291,756
=========
</TABLE>
Note 13 - Foreign Operations
During the fiscal year ended March 31, 1998, the Company formed
a wholly owned subsidiary, Cyber Digital (India) Private
Limited, under the rules and regulations of the Country of
India. The subsidiary has not begun operations and has no
assets as of March 31, 1998.
Note 14 - 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. This note was converted into common stock in October
1996.
CYBER DIGITAL, INC.
1997 STOCK INCENTIVE PLAN
Table of Contents
Page
ARTICLE I
GENERAL
1.1 Purpose 1
1.2 Administration 1
1.3 Persons Eligible for Awards 1
1.4 Types of Awards Under Plan 2
1.5 Shares Available for Awards 2
1.6 Definitions of Certain Terms 2
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards 3
2.2 No Rights as a Shareholder 4
2.3 Grant of Stock Options, Stock Appreciation Rights
and Dividend Equivalent Rights 4
2.4 Exercise of Options and Stock Appreciation Rights 5
2.5 Termination of Employment; Death 6
2.6 Grant of Restricted Stock 6
2.7 Grant of Restricted Stock Units 7
2.8 Other Stock-Based Awards 7
2.9 Grant of Dividend Equivalent Rights 7
2.10 Right of Recapture 8
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification
of Awards 8
3.2 Tax Withholding 8
3.3 Restrictions 9
3.4 Nonassignability 9
3.5 Requirement of Notification of Election Under Section
83(b) of the Code 9
3.6 Requirement of Notification Upon Disqualifying
Disposition Under Section 421(b) of the Code 9
3.7 Change in Control 9
3.8 Right of Discharge Reserved 10
3.9 Nature of Payments 10
3.10 Non-Uniform Determinations 10
3.11 Other Payments or Awards 10
3.12 Section Headings 10
3.13 Effective Date and Term of Plan 11
3.14 Governing Law 11
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Cyber Digital, Inc. 1997 Stock Incentive Plan (the
"Plan") is to provide for officers, other employees and directors of, and
consultants to, Cyber Digital, Inc. (the "Company") and its subsidiaries an
incentive (a) to enter into and remain in the service of the Company, (b)
to enhance the long-term performance of the Company, and (c) to acquire a
proprietary interest in the success of the Company.
1.2 Administration
1.2.1 Subject to Section 1.2.6, the Plan shall be administered by the
Stock Option Committee (the "Committee") of the board of directors of the
Company (the "Board"), which shall consist of not less than two directors.
The members of the Committee shall be appointed by, and serve at the
pleasure of, the Board. To the extend required for transactions under the
Plan to qualify for the exemptions available under Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934 (the "1934 Act"), all
actions relating to awards to persons subject to Section 16 of the 1934 Act
shall be taken by the Board unless each person who serves on the Committee is
a "non-employee director" within the meaning of Rule 16b-3 or such actions
are taken by a sub-committee of the Committee (or the Board) comprised
solely of "non-employee directors". To the extent required for compensation
realized from awards under the Plan to be deductible by the Company pursuant
to section 162(m) of the Internal Revenue Code of 1986 (the "Code"), the
members of the Committee shall be "outside directors" within the meaning
of section 162(m).
1.2.2 The Committee shall have the authority (a) to exercise all of the
powers granted to it under the Plan, (b) to construe, interpret and
implement the Plan and any Plan Agreements executed pursuant to Section 2.1,
(c) to prescribe, amend and rescind rules and regulations relating to the
Plan, including rules governing its own operations, (d) to make all
determinations necessary or advisable in administering the Plan, (e) to
correct any defect, supply any omission and reconcile any inconsistency in
the Plan, and (f) to amend the Plan to reflect changes in applicable law.
1.2.3 Actions of the Committee shall be taken by the vote of a majority of
its members. Any action may be taken by a written instrument signed by a
majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.
1.2.4 The determination of the Committee on all matters relating to the
Plan or any Plan Agreement shall be final, binding and conclusive.
1.2.5 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.
1.2.6 Notwithstanding anything to the contrary contained herein: (a) until
the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board; and (b) the Board may, in its sole discretion,
at any time and from time to time, grant awards or resolve to administer the
Plan. In either of the foregoing events, the Board shall have all of the
authority and responsibility granted to the Committee herein.
1.3 Persons Eligible for Awards
Awards under the Plan may be made to such directors, officers and other
employees of the Company and its subsidiaries (including prospective employees
conditioned on their becoming employees), and to such consultants to the
Company and its subsidiaries (collectively, "key persons") as the Committee
shall in its discretion select.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) incentive stock
options (within the meaning of section 422 of the Code), (b) nonqualified
stock options, (c) stock appreciation rights, (d) dividend equivalent rights,
(e) restricted stock, (f) restricted stock units and (g) other stock-
based awards, all as more fully set for in Article II. The term "award"
means any of the foregoing. No incentive stock option may be granted to a
person who is not an employee of the Company on the date of grant.
1.5 Shares Available for Awards
1.5.1 The total number of shares of common stock of the Company, par
value $.01 per share ("Common Stock"), which may be transferred pursuant
to awards granted under the Plan shall not exceed 850,999 shares. Such
shares may be authorized but unissued Common Stock or authorized and issued
Common Stock held in the Company's treasury or acquired by the Company for
the purposes of the Plan. The Committee may direct that any stock certificate
evidencing shares issued pursuant to the Plan shall bear a legend setting
forth such restrictions on transferability as may apply to such shares
pursuant to the Plan.
1.5.2 The total number of shares of Common Stock with respect to which stock
options and stock appreciation rights may be granted to any one employee or a
subsidiary during any one-year period shall not exceed 500,000.
1.5.3 Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each outstanding award, the number
of shares available for awards, the number of shares that may be subject to
awards to any one employee, and th price per share of Common Stock covered
by each such outstanding award shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock divident, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Committee, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common
Stock subject to an award. After any adjustment made pursuant to this
Seciton 1.5.3, the number of shares subject to each outstanding award shall
be rounded to the nearest whole number.
1.5.4 Except as provided in this Section 1.5 and in Section 2.3.8, there
shall be no limit on the number or the value of the shares of Common Stock
that may be subject to awards to any individual under the Plan.
1.6 Definitions of Certain Terms
1.6.1 The "Fair Market Value" of a share of Common Stock on any day shall
be determined as follows:
(a) If the principal market for the Common Stock (the "Market") is a
national securities exchange or the Nasdaq National Market, the last sale
price or, if no reported sales take place on the applicable date, the average
of the high bid and low asked price of Common Stock as reported for such
Market on such date, or if no such quotation is made on such date, on the next
preceding day on which there were quotations, provided that such quotations
shall have been made within the ten (10) business days preceding the applicable
date;
(b) If the Market is the Nasdaq SmallCap Market, the OTC Bulletin Board
or another market, the average of the high bid and low asked price for
Common Stock on the applicable date, or, if no such quotations shall have been
made on such date, on the next preceding day on which there were quotations,
provided that such quotations shall have been made within the ten (10) business
days preceding the applicable date; or,
(c) In the event that neither paragraph (a) nor (b) shall apply, the
Fair Market Value of a share of Common Stock on any day shall be determined in
good faith by the Committee.
1.6.2 the term "incentive stock option" means an option that is intended
to qualify for special federal income tax treatment pursuant to section 421
and 422 of the Code, as now constituted or subsequently amended, or pursuant
to a successor provision of the Code, and which is so designated in the
applicable Plan Agreement. Any option that is not specifically designated
as an incentive stock option shall under no circumstances be considered
an incentive stock option. Any option that is not an incentive stock option
is referred to herein as a "nonqualified stock option."
1.6.3 The term "employment" means, in the case of a grantee of an award
under the Plan who is not an employee of the Company, the grantee's
association with the Company or a subsidiary as a director, consultant
or otherwise.
1.6.4 A grantee shall be deemed to have a "termination of employment" upon
ceasing to be employed by the Company and all of its subsidiaries or by a
corporation assuming awards in a transaction to which section 425(a) of the
Code applies. The Committee may in its discretion determine (a) whether any
leave of absence constitutes a termination of employment for purposes of the
Plan, (b) the impact, if any, of any such leave of absence on awards
theretofore made under the Plan, and (c) when a change in a non-employee's
association with the Company consititues a termination of employment for
purposes of the Plan. The Committe shall have the right to determine whether
the termination of a grantee's employment is a dismissal for cause and the
date of termination in such case, which date the Committee may retroactively
deem to be the date of the action that is cause for dismissal. Such
determinations of the Committee shall be final, binding and conclusive.
1.6.5 The term "cause," when used in connection with termination of a
grantee's employment, shall have the meaning set forth in any then-effective
employment agreement between the grantee and the Company or a subsidiary
thereof. In the absence of such an employment agreement, "cause" means:
(a) conviction of any crime (whether or not involving the Company)
constituting a felony in the jurisdiction involved; (b) engaging in any
substantiated act involving moral turpitude; (c) engaging in any act which,
in each case, subjects, or if generally known would subject, the Company
to public ridicule or embarrassment; (d) material violation of the Company's
policies, including, without limitation, those relating to sexual
harrassment or the disclosure or misuse of confidential information; or
(e) serious neglect or misconduct in the performance of the grantee's duties
for the Company or a subsidiary or willful or repeated failure or refusal
to perform such duties; in each case as determined by the Committee, which
determination shall be final, binding and conclusive.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each award granted under the Plan (except an award of unrestricted stock)
shall be evidenced by a written agreement ("Plan Agreement")
which shall contain such provisions as the Committee in its discretion deems
necessary or desirable. Such provisions may include, without limitation, a
requirement that the grantee become a party to a shareholders' agreement with
respect to any shares of Common Stock acquired pursuant to the award, a
requirement that the grantee acknowledge that such shares are acquired for
investment purposes only, and a right of first refusal exercisable by the
Company in the event that the grantee wishes to transfer any such shares.
By accepting an award pursuant to the Plan, a grantee thereby agrees that
the award shall be subject to all of the terms and provisions of the Plan
and the applicable Plan Agreement.
2.2 No Rights as a Shareholder
No grantee of an option or stock appreciation right (or other person having
the right to exercise such award) shall have any of the rights of a
shareholder of the Company with respect to shares subject to such award until
the issuance of a stock certificate to such person for such shares. Except
as otherwise provided in Section 1.5.3, no adjustment shall be made for
dividends, distributions or other rights (whether ordinary or extraordinary,
and whether in cash, securities or other property) for which the record date
is prior to the date such stock certificate is issued.
2.3 Grant of Stock Options, Stock Appreciation Rights and Dividend Equivalent
Rights
2.3.1 The Committee may grant incentive stock options and nonqualified
stock options (collectively, "options") to purchase shares of Common Stock
from the Company, to such key persons, in such amounts and subject to such
terms and conditions, as the Committee shall determine in its discretion,
subject to the provisions of the Plan.
2.3.2 The Committee may grant stock appreciation rights to such key persons,
in such amounts and subject to such terms and conditions, as the Committee
shall determine in its discretion, subject to the provisions of the Plan.
Stock appreciation rights may be granted in connection with all or any part
of, or independently of, any option granted under the Plan. A stock
appreciation right granted in connection with a nonqualified stock option may
be granted at or after the time of grant of such option. A stock
appreciation right granted in connection with an incentive stock option may
be granted only at the
time of grant of such option.
2.3.3 The grantee of a stock appreciation right shall have the right,
subject to the terms of the Plan and the applicable Plan Agreement, to
receive from the Company an amount equal to (a) the excess of the Fair
Market Value of a share of Common Stock on the date of exercise of the
stock appreciation right over (b) the exercise price of such right as set
forth in the Plan Agreement (or over the option exercise price if the stock
appreciation right is granted in connection with an option), multiplied by
(c) the number of shares with respect to which the stock appreciation right
is exercised. Payment upon
exercise of a stock appreciation right shall be in cash or in shares of
Common Stock (valued at their Fair Market Value on the date of exercise of
the stock appreciation right) or both, all as the Committee shall determine
in its discretion. Upon the exercise of a stock appreciation right granted
in connection with an option, the number of shares subject to the option
shall be correspondingly reduced by the number of shares with respect
to which the stock appreciation right is exercised. Upon the exercise of an
option in connection with which a stock appreciation right has been granted,
the number of shares subject to the stock appreciation right shall be
correspondingly reduced by the number of shares with respect to which the
option is exercised.
2.3.4 Each Plan Agreement with respect to an option shall set forth the
amount (the "option exercise price") payable by the grantee to the Company
upon exercise of the option evidenced thereby. The option exercise price
per share shall be determined by the Committee in its discretion; provided,
however, that the option exercise price of an incentive stock option shall
be at least 100% of the Fair Market Value of a share of Common Stock on the
date the option is granted, and provided further that in no event shall the
option exercise price be less than the par value of a share of Common Stock.
2.3.5 Each Plan Agreement with respect to an option or stock appreciation
right shall set forth the periods during which the award evidenced thereby
shall be exercisable, whether in whole or in part. Such periods shall be
determined by the Committee in its discretion; provided, however, that no
incentive stock option (or a stock appreciation right granted in connection
with an incentive stock option) shall be exercisable more than 10 years after
the date of grant.
2.3.6 The Committee may in its discretion include in any Plan Agreement
with respect to an option (the "original option") a provision that an
additional option (the "additional option") shall be granted to any grantee
who, pursuant to Section 2.4.3(b), delivers shares of Common Stock in
partial or full payment of the exercise price of the original option. The
additional option shall be for a number of shares of Common Stock equal to
the number thus delivered, shall have an exercise price equal to the Fair
Market Value of a share of Common Stock on the date of exercise of the
original option, and shall have an
expiration date no later than the expiration date of the original option. In
the event that a Plan Agreement provides for the grant of an additional
option, such Agreement shall also provide that the exercise price of the
original option be no less than the Fair Market Value of a share of Common
Stock on its date of grant, and that any shares that are delivered pursuant
to Section 2.4.3(b) in payment of such exercise price shall have been held
for at least six months.
2.3.7 To the extent that the aggregate Fair Market Value (determined as of
the time the option is granted) of the stock with respect to which incentive
stock options granted under this Plan and all other plans of the Company and
any subsidiary are first exercisable by any employee during any calendar year
shall exceed the maximum limit (currently, $100,000), if any, imposed from
time to time under section 422 of the Code, such options shall be treated as
nonqualified stock options.
2.3.8 Notwithstanding the provisions of Sections 2.3.4 and 2.3.5, to the
extent required under section 422 of the Code, an incentive stock option may
not be granted under the Plan to an individual who, at the time the option
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of his employer corporation or of its parent
or subsidiary corporations (as such ownership may be determined for purposes
of section 422(b)(6) of the Code) unless (a) at the time such incentive stock
option is granted the option exercise price is at least 110% of the Fair Market
Value of the shares subject thereto and (b) the incentive stock option by
its terms is not exercisable after the expiration of 5 years from the date
it is granted.
2.4 Exercise of Options and Stock Appreciation Rights
Subject to the provisions of this Article II, each option or stock
appreciation right granted under the Plan shall be exercisable as follows:
2.4.1 Unless the applicable Plan Agreement otherwise provides, an option
or stock appreciation right shall become exercisable in four substantially
equal installments, on each of the first, second, third and fourth
anniversaries of the date of grant, and each installment, once it becomes
exercisable, shall remain exercisable until expiration, cancellation or
termination of the award.
2.4.2 Unless the applicable Plan Agreement otherwise provides, an option
or stock appreciation right may be exercised from time to time as to all or
part of the shares as to which such award is then exercisable (but, in any
event, only for whole shares). A stock appreciation right granted in
connection with an option may be exercised at any time when, and to the same
extent that, the related option may be exercised. An option or stock
appreciation right shall be exercised by the filing of a written notice with
the Company, on such form and in such manner as the Committee shall prescribe.
2.4.3 Any written notice of exercise of an option shall be accompanied by
payment for the shares being purchased. Such payment shall be made: (a) by
certified or official bank check (or the equivalent thereof acceptable to
the Company) for the full option exercise price; or (b) unless the applicable
Plan Agreement provides otherwise, by delivery of shares of Common Stock
acquired at least six months prior to the option exercise date and having a
Fair Market Value (determined as of the exercise date) equal to all or part
of the option exercise price and a certified or official bank check (or the
equivalent thereof acceptable to the Company) for any remaining portion of
the full option exercise price; or (c) at the discretion of the Committee
and to the extent permitted by law, by such other provision as the Committee
may from time to time prescribe.
2.4.4 Promptly after receiving payment of the full option exercise price,
or after receiving notice of the exercise of a stock appreciation right for
which payment will be made partly or entirely in shares, the Company shall,
subject to the provisions of Section 3.3 (relating to certain restrictions),
deliver to the grantee or to such other person as may then have the right to
exercise the award, a certificate or certificates for the shares of Common
Stock for which the award has been exercised. If the method of payment
employed upon option exercise so requires, and if applicable law permits,
an optionee may direct the Company to deliver the certificate(s) to the
optionee's stockbroker.
2.5 Termination of Employment; Death
2.5.1 Except to the extent otherwise provided in Section 2.5.2 or 2.5.3 or
in the applicable Plan Agreement, all options and stock appreciation rights
not theretofore exercised shall terminate upon termination of the grantee's
employment for any reason (including death).
2.5.2 If a grantee's employment terminates for any reason other than death
or dismissal for cause, the grantee may exercise any outstanding option or
stock appreciation right on the following terms and conditions: (a) exercise
may be made only to the extent that the grantee was entitled to exercise the
award on the date of employment termination; and (b) exercise must occur
within three months after employment terminates, except that the three-month
period shall be increased to one year if the termination is by reason of
disability, but in no event after the expiration date of the award as set
forth in the Plan Agreement.
In the case of an incentive stock option, the term "disability" for purposes
of the preceding sentence shall have the meaning given to it by section
422(c)(7) of the Code.
2.5.3 If a grantee dies while employed by the Company or any subsidiary,
or after employment termination but during the period in which the grantee's
awards are exercisable pursuant to Section 2.5.2, any outstanding option or
stock appreciation right shall be exercisable on the following terms and
conditions: (a) exercise may be made only to the extent that the grantee
was entitled to exercise the award on the date of death; and (b) exercise
must occur by the earlier of the first anniversary of the grantee's death or
the expiration date of the award. Any such exercise of an award following a
grantee's death shall be made only by the grantee's executor or administrator,
unless the grantee's will specifically disposes of such award, in which case
such exercise shall be made only by the recipient of such specific
disposition. If a grantee's personal representative or the recipient of a
specific disposition under the grantee's will shall be entitled to exercise
any award pursuant to the preceding sentence, such representative or
recipient shall be bound by all the terms and conditions of the
Plan and the applicable Plan Agreement which would have applied to the
grantee including, without limitation, the provisions of Sections 3.3 and
3.7 hereof.
2.6 Grant of Restricted Stock
2.6.1 The Committee may grant restricted shares of Common Stock to such
key persons, in such amounts, and subject to such terms and conditions as
the Committee shall determine in its discretion, subject to the provisions
of the Plan. Restricted stock awards may be made independently of or in
connection with any other award under the Plan. A grantee of a restricted
stock award shall have no rights with respect to such award unless such
grantee accepts the award within such period as the Committee shall specify
by executing a Plan Agreement in such form as the Committee shall determine
and, if the Committee shall so require, makes payment to the Company by
certified or official bank check (or the equivalent thereof acceptable to
the Company) in such amount as the Committee may determine.
2.6.2 Promptly after a grantee accepts a restricted stock award, the
Company shall issue in the grantee's name a certificate or certificates for
the shares of Common Stock covered by the award. Upon the issuance of such
certificate(s), the grantee shall have the rights of a shareholder with
respect to the restricted stock, subject to the nontransferability
restrictions and Company repurchase rights described in Sections 2.6.4 and
2.6.5 and to such other restrictions and conditions as the Committee in its
discretion may include in the applicable Plan Agreement.
2.6.3 Unless the Committee shall otherwise determine, any certificate
issued evidencing shares of restricted stock shall remain in the possession
of the Company until such shares are free of any restrictions specified in
the applicable Plan Agreement.
2.6.4 Shares of restricted stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically
provided in this Plan or the applicable Plan Agreement. The Committee at
the time of grant shall specify the date or dates (which may depend upon or
be related to the attainment of performance goals and other conditions) on
which the nontransferability of the restricted stock shall lapse. Unless
the applicable Plan Agreement provides otherwise, additional shares
ed to the grantee in respect of shares of restricted stock, as dividends or
otherwise, shall be subject to the same restrictions applicable to such
restricted stock.
2.6.5 During the 90 days following termination of the grantee's employment
for any reason, the Company shall have 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 (or the grantee's estate) any
amount paid by the grantee for such shares.
2.7 Grant of Restricted Stock Units
2.7.1 The Committee may grant awards of restricted stock units to such
key persons, in such amounts, and subject to such terms and conditions as
the Committee shall determine in its discretion, subject to the provisions
of the Plan. Restricted stock units may be awarded independently of or in
connection with any other award under the Plan.
2.7.2 At the time of grant, the Committee shall specify the date or dates
on which the restricted stock units shall become fully vested and
nonforfeitable, and may specify such conditions to vesting as it deems
appropriate. In the event of the termination of the grantee's employment by
the Company and its subsidiaries for any reason, restricted stock units that
have not become nonforfeitable shall be forfeited and cancelled. The
Committee at any time may accelerate vesting dates and otherwise waive or
amend any conditions of an award of restricted stock units.
2.7.3 At the time of grant, the Committee shall specify the maturity date
applicable to each grant of restricted stock units, which may be determined
at the election of the grantee. Such date may be later than the vesting
date or dates of the award. On the maturity date, the Company shall
transfer to the grantee one unrestricted, fully transferable share of
Common Stock for each restricted stock unit scheduled to be paid out on
such date and not previously forfeited. The Committee shall specify the
purchase price, if any, to be paid by the grantee to the Company for such
shares of Common Stock.
2.8 Other Stock-Based Awards
The Board may authorize other types of stock-based awards (including the
grant of unrestricted shares), which the Committee may grant to such key
persons, and in such amounts and subject to such terms and conditions, as
the Committee shall in its discretion determine, subject to the provisions
of the Plan. Such awards may entail the transfer of actual shares of Common
Stock to Plan participants, or payment in cash or otherwise of amounts based
on the value of shares of Common Stock.
2.9 Grant of Dividend Equivalent Rights
The Committee may in its discretion include in the Plan Agreement with
respect to any award a dividend equivalent right entitling the grantee to
receive amounts equal to the ordinary dividends that would be paid, during
the time such award is outstanding and unexercised, on the shares of Common
Stock covered by such award if such shares were then outstanding. In the
event such a provision is included in a Plan Agreement, the Committee shall
determine whether such payments shall be made in cash, in shares of
Common Stock or in another form, whether they shall be conditioned upon the
exercise of the award to which they relate, the time or times at which they
shall be made, and such other terms and conditions as the Committee shall
deem appropriate.
2.10 Right of Recapture
If at any time within one year after the date on which a participant
exercises an option or stock appreciation right, or on which restricted
stock vests, or which is the maturity date of restricted stock units, or on
which income is realized by a participant in connection with any other
stock-based award (each of which events is a "Realization Event"), the
participant (a) is terminated for cause or (b) engages in any activity
determined in the discretion of the Committee to be in competition with
any activity of the Company, or otherwise inimical,
contrary or harmful to the interests of the Company (including, but not
limited to, accepting employment with or serving as a consultant, adviser
or in any other capacity to an entity that is in competition with or acting
against the interests of the Company), then any gain ("Gain") realized by
the participant from the Realization Event shall be paid by the participant
to the Company upon notice from the Company. Such Gain shall be determined
as of the date of the Realization Event, without regard to any subsequent
change in the Fair Market Value of a share of Common Stock. The Company shall
have the right to offset such Gain against any amounts otherwise owed to the
participant by the Company (whether as wages, vacation pay, or pursuant to
any benefit plan or other compensatory arrangement).
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time suspend, discontinue, revise or
amend the Plan in any respect whatsoever, except that no such amendment
shall materially impair any rights or materially increase any obligations
under any award theretofore made under the Plan without the consent of the
grantee (or, after the grantee's death, the person having the right to
exercise the award). For purposes of this Section 3.1, any action of the
Board or the Committee that alters or affects the tax treatment of any award
shall not be considered to materially impair any rights of any grantee.
3.1.2 Shareholder approval of any amendment shall be obtained to the
extent necessary to comply with section 422 of the Code (relating to
incentive stock options) or other applicable law or regulation.
3.1.3 The Committee may amend any outstanding Plan Agreement, including,
without limitation, by amendment which would accelerate the time or times
at which the award becomes unrestricted or may be exercised, or waive or
amend any goals, restrictions or conditions set forth in the Agreement.
However, any such amendment (other than an amendment pursuant to Section
3.7.2, relating to change in control) that materially impairs the rights or
materially increases the obligations of a grantee under an outstanding award
shall be made only with the consent of the grantee (or, upon the grantee's
death, the person having the right to exercise the award).
3.2 Tax Withholding
3.2.1 As a condition to the receipt of any shares of Common Stock
pursuant to any award or the lifting of restrictions on any award, or in
connection with any other event that gives rise to a federal or other
governmental tax withholding obligation on the part of the Company relating
to an award (including, without limitation, FICA tax), the Company shall be
entitled to require that the grantee remit to the Company an amount
sufficient in the opinion of the Company to satisfy such withholding
obligation.
3.2.2 If the event giving rise to the withholding obligation is a
transfer of shares of Common Stock, then, unless otherwise specified in the
applicable Plan Agreement, the grantee may satisfy the withholding
obligation imposed under Section 3.2.1 by electing to have the Company
withhold shares of Common Stock having a Fair Market Value equal to the
amount of tax to be withheld. For this purpose, Fair Market Value shall be
determined as of the date on which the amount of tax to be withheld is
determined (and any fractional share amount shall be settled in cash).
3.3 Restrictions
3.3.1 If the Committee shall at any time determine that any consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other
action thereunder (each such action being hereinafter referred to as a
"plan action"), then such plan action shall not be taken, in whole or in
part, unless and until such consent shall have been effected or obtained
to the full satisfaction of the Committee.
3.3.2 The term "consent" as used herein with respect to any plan action
means (a) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local
law, rule or regulation, (b) any and all written agreements and
representations by the grantee with respect to the disposition of shares,
or with respect to any other matter, which the Committee shall deem necessary
or desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (c) any and all consents,
clearances and approvals in respect of a plan action by any governmental or
other regulatory bodies.
3.4 Nonassignability
Except to the extent otherwise provided in the applicable Plan Agreement,
no award or right granted to any person under the Plan shall be assignable
or transferable other than by will or by the laws of descent and distribution,
and all such awards and rights shall be exercisable during the life of the
grantee only by the grantee or the grantee's legal representative.
3.5 Requirement of Notification of Election Under Section 83(b) of the Code
If any grantee shall, in connection with the acquisition of shares of
Common Stock under the Plan, make the election permitted under section 83(b)
of the Code (that is, an election to include in gross income in the year of
transfer the amounts specified in section 83(b)), such grantee shall notify
the Company of such election within 10 days of filing notice of the election
with the Internal Revenue Service, in addition to any filing and notification
required pursuant to regulations issued under the authority of Code section
83(b).
3.6 Requirement of Notification Upon Disqualifying Disposition Under Section
421(b) of the Code
If any grantee shall make any disposition of shares of Common Stock issued
pursuant to the exercise of an incentive stock option under the circumstances
described in section 421(b) of the Code (relating to certain disqualifying
dispositions), such grantee shall notify the Company of such disposition
within 10 days thereof.
3.7 Change in Control
3.7.1 For purposes of this Section 3.7, a "Change In Control" shall be
deemed to have occurred upon the happening of any of the following events:
(a) any "person," including a "group," as such terms are defined in
Sections 13(d) and 14(d) of the 1934 Act and the rules promulgated thereunder,
becomes the beneficial owner, directly or indirectly, whether by purchase
or acquisition or agreement to act in concert or otherwise, of 10% or more of
the outstanding shares of Common Stock of the Company;
(b) a cash tender or exchange offer for 10% or more of the outstanding
shares of Common Stock of the Company is commenced;
(c) the shareholders of the Company approve an agreement to merge,
consolidate, liquidate, or sell all or substantially all of the assets of
the Company; or
(d) two or more directors are elected to the Board without having
previously been nominated and approved by the members of the Board incumbent
on the day immediately preceding such election.
3.7.2 Upon the happening of a change in control:
(a) notwithstanding any other provision of this Plan, any option or
stock appreciation right then outstanding whose date of grant was at least
one year prior to the date of the Change in Control shall become fully
vested and immediately exercisable upon the subsequent termination of
employment of the grantee by the Company or its successors without cause
unless the applicable Plan Agreement expressly provides otherwise;
(b) to the fullest extent permitted by law, the Committee may, in its
sole discretion, amend any Plan Agreement in such manner as it deems
appropriate, including, without limitation, by amendments that advance the
dates upon which any or all outstanding awards of any type shall terminate.
3.7.3 Whenever deemed appropriate by the Committee, any action referred
to in Section 3.7.2(b) may be made conditional upon the consummation of the
applicable Change in Control transaction.
3.8 Right of Discharge Reserved
Nothing in the Plan or in any Plan Agreement shall confer upon any
grantee the right to continue in the employ of the Company or affect any
right which the Company may have to terminate such employment.
3.9 Nature of Payments
3.9.1 Any and all grants of awards and issuances of shares of Common
Stock under the Plan shall be in consideration of services performed for the
Company by the grantee.
3.9.2 All such grants and issuances shall constitute a special incentive
payment to the grantee and shall not be taken into account in computing
the amount of salary or compensation of the grantee for the purpose of
determining any benefits under any pension, retirement, profit-sharing,
bonus, life insurance or other benefit plan of the Company or under any
agreement between the Company and the grantee, unless such plan or agreement
specifically provides otherwise.
3.10 Non-Uniform Determinations
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee
shall be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Plan agreements,
as to (a) the persons to receive awards under the Plan, (b) the
an, and (c) the treatment of leaves of absence pursuant to Section 1.6.4.
3.11 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under
any other plan, arrangement or understanding, whether now existing or
hereafter in effect.
3.12 Section Headings
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of the sections.
3.13 Effective Date and Term of Plan
3.13.1 The Plan was adopted by the Board on August 4, 1997, subject
to approval by the Company's shareholders. All awards under the Plan prior
to such shareholder approval are subject in their entirety to such approval.
If such approval is not obtained prior to the first anniversary of the date
of adoption of the Plan, the Plan and all awards thereunder shall terminate
on that date.
3.13.2 Unless sooner terminated by the Board, the provisions of the Plan
respecting the grant of incentive stock options shall terminate on the day
before the tenth anniversary of the adoption of the Plan by the Board, and
no incentive stock option awards shall thereafter be made under the Plan.
All awards made under the Plan prior to its termination shall remain in
effect until such awards have been satisfied or terminated in accordance
with the terms and provisions of the Plan and the applicable Plan Agreements.
3.14 Governing Law
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of New York, without
giving effect to principles of conflict of laws.
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