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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 Oser Avenue, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
(516) 231-1200
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(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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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
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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
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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:
o Local CDCO exchange serves subscribers in cities and towns.
o Cyber Tandem exchange ("CTSX") serves as a regional exchange
connecting to various local exchanges.
o Toll and transit CDCO exchanges are used for long distance national
service and international gateway.
o Integrated local and tandem exchanges.
o Integrated local, tandem and toll exchanges.
o Integrated local, tandem, toll and transit exchanges.
o 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:
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o Cyber Multi-tenant exchange ("CMT") serves subscribers in large office
complexes and buildings where many business tenants can be served by a
resident exchange.
o Cyber Urban Line Concentrator ("CULC") serves subscribers in congested
areas where traffic is moderate, such as in apartment dwellings and
suburban communities.
o 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.
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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. The Company permits field
trials by potential customers who commit to purchase of the system(s) upon
successful completion of the field trial. Such commitment of purchase must be
guaranteed by irrevocable letter of credit.
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
has 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.
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(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
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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.
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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
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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,
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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.
Price Per Share
---------------
High Low
---- ---
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
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
12
<PAGE>
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 primarily due to volume increases. 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.
13
<PAGE>
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 $(.10) per
share as compared with $(706,102) or $(.04) 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 $(.10) per share as compared to a net loss of $(414,346) or $.02
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
14
<PAGE>
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.
No credit is available to the Company and there were no commitments for
capital expenditures as at March 31, 1998.
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:
Name Age Office
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
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
15
<PAGE>
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
16
<PAGE>
'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 $100,000 other than J.C. Chatpar.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------------------------ -------
Other Restricted Securities
Annual Stock Underlying LTIP All
Name and Principal Salary Bonus Compensation Awards Options/ Payouts Other
Position Year ($) ($) ($)(1) ($) SARs(#) ($) Compensation
- ------------------ ---- --- --- ------ --- ------- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.C. Chatpar,
Chairman of the
Board, President 1998 $150,000 None None None 140,000(3) None None
and Chief Executive 1997 $130,000(2) $100,000(2) None None None None None
Officer 1996 $80,000 None None None 440,000 None None
</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
$2.43 in fiscal 1998.
17
<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth information concerning stock option
grants made during fiscal 1998 to the Named Officers. The Company has not
granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------
Number % of Total
of Options
Securities Granted To
Underlying Employees in Exercise
Options Fiscal Year Price Expiration
Granted 1997 ($/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 0.00 $401,200 0.00
</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
18
<PAGE>
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.
19
<PAGE>
Names and Address
of Beneficial Owners Number of Shares Percentage Owned (1)(2)
- -------------------- ---------------- -----------------
J.C. Chatpar(3) 5,345,712 28.4%
c/o Cyber Digital, Inc.
400 Oser Avenue
Hauppauge, NY 11788
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%
(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.
20
<PAGE>
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.
21
<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.
22
<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: March 16, 1999
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 March 16, 1999
- -------------------- and Chief Executive Officer
J.C. Chatpar (Principal Executive , Accounting
and Financial Officer)
/s/ Jack P. Dorfman Secretary and Director March 16, 1999
- -------------------
Jack P. Dorfman
/s/ Jatinder Wadhwa Treasurer and Director March 16, 1999
- -------------------
Jatinder Wadhwa
/s/ Terry Jones Director March 16, 1999
- -------------------
Terry Jones
/s/ Khushi Nichani Director March 16, 1999
- -------------------
Khushi Nichani
23
<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.
10.6 Contractor Agreement between the Company and GTE Data Services GmbH,
dated as of December 9, 1997.
27 Financial Data Schedule
24
<PAGE>
CYBER DIGITAL, INC.
FINANCIAL STATEMENTS
<PAGE>
TABLE OF CONTENTS
-----------------
Page No.
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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>
ALBRECHT, VIGGIANO, ZURECK
& COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
25 SUFFOLK COURT
HAUPPAUGE, NY 11788
(516) 434-9500
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.
/s/ Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
June 14, 1998
F-1
<PAGE>
CYBER DIGITAL, INC.
BALANCE SHEETS
March 31, 1998 and 1997
<TABLE>
<CAPTION>
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 13,892,867 13,919,241
Retained deficit (10,674,101) (8,303,214)
----------------- -----------------
3,392,737 5,787,083
----------------- -----------------
$ 3,533,686 $ 5,829,356
================= =================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
CYBER DIGITAL, INC.
STATEMENTS OF OPERATIONS
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
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)
Preferred Stock Dividend (232,610) -0-
------------------ -----------------
Income Available to Common Stockholders (2,097,486) (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>
CYBER DIGITAL, INC.
STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------
Series A Series B-1 Series B-2 Common Stock
--------------------- --------------------- ---------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 15,110,311 $ 151,103
Exercise of stock options 109,286 1,093
Preferred stock issued - Series A 805 $ 40
Preferred stock issued - Series B-1 2,000 $ 100
Conversion of preferred stock -
Series A (496) (25) 1,875,579 18,756
Remption of Series A
preferred stock (223) (11)
Net Loss
--------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Balance - March 31, 1997 86 $ 4 2,000 $ 100 -0- $ -0- 17,095,176 $ 170,952
Exercise of stock options 90,000 900
10% Preferred stock dividend - Series B-1 200 $ 10
Conversion of preferred stock -
Series A (38) (2) 200,877 2,009
Redemption of Series A
preferred stock (48) (2)
Net Loss
--------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Balance - March 31, 1998 -0- $ -0- 2,200 $ 110 -0- $ -0- 17,386,053 $ 173,861
========= ========== ========== ========== ========== ========== =========== ===========
</TABLE>
Additional Paid- Retained
in Capital Deficit Total
------------ ------------- -----------
Balance at March 31, 1996 $ 6,253,146 $ (6,378,515) $ 25,734
Exercise of stock options 141,203 142,296
Preferred stock issued - Series A 7,049,460 7,049,500
Preferred stock issued - Series B-1 1,684,900 1,685,000
Conversion of preferred stock -
Series A 743,364 (762,095) -0-
Remption of Series A
preferred stock (1,952,832) (748,258) (2,701,101)
Net Loss (414,346) (414,346)
------------ ------------- -----------
Balance - March 31, 1997 $ 13,919,241 $ (8,303,214) $ 5,787,083
Exercise of stock options 82,900 83,800
10% Preferred stock dividend -
Series B-1 232,600 (232,610) -0-
Conversion of preferred stock -
Series A 78,466 (80,473) -0-
Redemption of Series A
preferred stock (420,340) (192,928) (613,270)
Net Loss (1,864,876) (1,864,876)
------------ ------------- -----------
Balance - March 31, 1998 $ 13,892,867 $ (10,674,101)$ 3,392,737
============ ============= ===========
See notes to financial statements
F-4
<PAGE>
CYBER DIGITAL, INC.
STATEMENTS OF CASH FLOWS
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
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.
F-6
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
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.
F-7
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
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.
F-8
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
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:
1998 1997
--------------- ---------------
Raw materials $ 312,792 $ 277,532
Work-in-process 37,076 46,718
Finished goods 97,882 110,223
--------------- ---------------
$ 447,750 $ 434,473
=============== ===============
F-9
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
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>
<CAPTION>
1998 1997
------------------ ---------------
<S> <C> <C>
Net Loss $ (1,864,876) $ (414,346)
Dividends paid on Preferred Stock Series B-1 (232,610) -0-
----------------- ---------------
Income Available to Common Shareholders $ (2,097,486) $ (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.
F-10
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
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.
F-11
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 7 - Stock Option Plans (continued)
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:
Price Shares
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 a Black-Scholes option pricing
model.
The following assumptions were employed to estimate the fair value of stock
options granted:
Fiscal Year Ended March 31,
---------------------------
1998 1997
---- ----
Expected dividend yield 0.00% 0.00%
Expected price volatilities 95.20% 95.20%
Risk-free interest rate 5.00% 5.20%
Expected life (years) 6.75 9.25
For pro forma puposes, the estimated fair value of the Company's stock options
is amortized over the options' vesting period. The Company pro forma information
follows:
1998 1997
---- ----
Weighted average fair value of
Options granted $ 0.19 $ 0.62
Net Loss
As reported $ (1,864,876) $ (414,346)
Pro forma (1,882,448) (414,346)
Net Loss Per Share
As reported
Basic $ (0.12) $ (0.05)
Diluted $ (0.12) $ (0.05)
Pro Forma
Basic $ (0.12) $ (0.05)
Diluted $ (0.12) $ (0.05)
F-12
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
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, plus
$32,610 represents the beneficial conversion feature on the preferred stock
dividend.
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.
F-13
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
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.
F-14
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 10 - Commitments and Contingencies (continued)
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:
For years ending March 31, 1999 $ 71,086
March 31, 2000 16,200
---------------
$ 87,286
===============
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.
F-15
<PAGE>
CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
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, namely National Telecommunications Company and
GTE Data Services GmbH, representing 43% and 48% of revenue respectively. 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:
Debt payable to the JDA $ 591,756
Cash paid in settlement of debt 300,000
----------------
Extraordinary Gain on Extinguishment of Debt $ 291,756
================
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.
F-16
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 1
3.13 Effective Date and Term of Plan 11
3.14 Governing Law 11
<PAGE>
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.
<PAGE>
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 quota-
2
<PAGE>
tions, 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.
3
<PAGE>
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
4
<PAGE>
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
5
<PAGE>
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
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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.
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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
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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;
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(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.
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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.
CONTRACTOR AGREEMENT
This agreement (Agreement) is made between GTE Data Services GmbH, a limited
liability company organized and existing under the laws of the Federal Republic
of Germany, with a place of business at One East Telecom Parkway, FLTDSA1H,
Temple Terrace, FL 33687, (CUSTOMER), and Cyber Digital Inc., located at 400
Oser Avenue, Suite 1650, Hauppauge, NY 11788 (CONTRACTOR).
In consideration of the mutual terms and conditions of this Agreement, the
parties agree as follows:
1. GENERAL
CUSTOMER retains CONTRACTOR to perform the services described in
Schedule A (Services) concerning SS7 DSC consulting services in support
of CUSTOMER's contract with o.tel.o communications GmbH & Co.
("o.tel.o"). This Agreement shall be contingent upon execution of an
agreement for SS7 DSC consulting services between CUSTOMER and o.tel.o.
Services shall be performed in Germany in accordance with Schedule A
and the compensation arrangement set out in Paragraph 2 of this
Agreement, below.
2. FEES, EXPENSES, AND BILLING
(a) CUSTOMER agrees to pay CONTRACTOR the following fees (Fees)
for Services to be accomplished under this Agreement. Fees
will be paid monthly using the following rate schedules:
Amount Job Title
$800/per work day SS7/AIN Technician
$720/per work day SS7/AIN Data Base Administrator
A work day shall consist of 8 or more hours of billable work
time. No additional compensation is due for hours worked in
excess of 8 hours per day. For work consisting of less than 8
hours per day, CUSTOMER shall pay CONTRACTOR $100 per hour for
the Technician and $90 per hour for the Data Base
Administrator.
Note: One week in Dallas for GTE training will be free of
charge from CONTRACTOR and the last week in Germany will be
free of charge.
(b) In addition to the Fees set forth in 2.(a), CUSTOMER will pay
CONTRACTOR a per diem rate of $175 per employee while based in
Germany. The per-diem will be in lieu of all expenses
including, but not limited to, airline travel, lodging, meals,
telephone toll charges, ground
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transportation, and miscellaneous expenses incurred away from
CONTRACTOR's offices.
(c) CONTRACTOR shall submit invoices to CUSTOMER for Fees and for
per-diem, together with the documentation required under this
Agreement, following completion of CONTRACTOR'S services on a
monthly basis. Each invoice must contain the following
information, at a minimum:
CONTRACTOR'S Firm Name and Remit to Address
Description of Performance for Which Payment is Due
Number of hours worked including non-compensable
hours
GTE Purchase Order Number_________
GTE Agreement Number______________
If CUSTOMER determines that an invoice and the related
documentation are complete and correct, CUSTOMER will pay to
CONTRACTOR the amount of the invoice within thirty (30) days
after CUSTOMER's receipt of the invoice. If CUSTOMER
determines that the invoice and/or the related documentation
is incomplete and/or incorrect, CUSTOMER will notify
CONTRACTOR within ten (10) business days after CUSTOMER's
receipt of the invoice to resolve any disputes regarding the
invoice and/or the related documentation.
(d) CONTRACTOR shall maintain complete and accurate records in a
form in accordance with generally accepted accounting
practices, to substantiate CONTRACTOR charges. Such records
shall include, but not be limited to, time cards, job cards
and job summaries. CONTRACTOR shall retain, and make available
upon request, such records for a period of three (3) years
from the date of payment(s) for Consulting Services covered by
this Agreement. CUSTOMER and its authorized agents shall have
access to such records during normal business hours during the
term of this Agreement and during the respective periods in
which CONTRACTOR is required to maintain such records pursuant
to this subsection.
3. TERM
This Agreement shall become effective when signed by both parties and,
except as otherwise provided in this Agreement, shall continue in full
force and effect thereafter for 18 months unless sooner terminated as
provided herein.
4. PERFORMANCE STANDARD
CONTRACTOR shall perform Services to the satisfaction of CUSTOMER.
CONTRACTOR shall provide written notification of completion of Services
to the CUSTOMER. CONTRACTOR shall correct at its expense all
deficiencies caused by CONTRACTOR and complete the correction as
quickly as possible.
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5. WARRANTY
CONTRACTOR represents, warrants, and covenants to CUSTOMER that:
(a) In performing Services, CONTRACTOR will strictly comply with
the descriptions and representations as to the Services
(including performance capabilities, accuracy, completeness,
characteristics, specifications, configurations, standards,
functions, and requirements) which appear herein and to any
subsequently issued attachments hereto and (if applicable) its
employees will perform Services on time and further that
Services will be in strict accordance with all applicable
laws, codes, ordinances, orders, rules and regulations of
local, state, federal and foreign governments and agencies and
instrumentalities, including, but not limited to, applicable
wage and hour, safety and environmental laws, and all
standards and regulations of appropriate regulatory
commissions and similar agencies.
(b) All Services furnished by CONTRACTOR shall be performed (i) in
a diligent, efficient and skillful manner, (ii) to the best of
CONTRACTOR's ability and (iii) at generally accepted levels of
performance available in the telecommunications industry. Any
substantial interruption or degradation of service, as
determined by CUSTOMER, will be considered below the generally
accepted levels of performance in the industry. Any dispute or
controversy relating to whether any Services meet the
generally accepted levels of performance in the industry shall
be decided by CUSTOMER in its reasonable discretion. The
CONTRACTOR recognizes that its performance is for the benefit
of o.tel.o and that if o.tel.o determines that the performance
is not acceptable, the CONTRACTOR will not be paid for those
services.
(c) If Services rendered by an employee of the CONTRACTOR are in
breach of the warranty or otherwise unsatisfactory in the sole
judgment of the CUSTOMER, CUSTOMER shall notify CONTRACTOR.
Upon receipt of notice from CUSTOMER that Services rendered by
an employee of CONTRACTOR are unsatisfactory, CONTRACTOR shall
immediately remove said employee and, within ten (10) calendar
days replace said employee with another employee who is
qualified to provide the Services.
(d) All goods provided and Services performed under this Agreement
do not and will not give rise to or result in any infringement
or misappropriation of any patent, copyright, trade secret, or
any violation of any other intellectual property right of any
third party.
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6. PERFORMANCE SCHEDULE
CONTRACTOR shall be free at all times to arrange the time and manner of
performance of Services and will not be expected to maintain a schedule
of duties or assignments except as needed to meet deadlines or
schedules established by CUSTOMER. CONTRACTOR will work as CONTRACTOR
may so independently decide. CUSTOMER shall specify milestones, meeting
and conference schedules, and due dates for deliverables.
7. DIRECTION AND CONTROL
CUSTOMER shall not direct, control or supervise CONTRACTOR as to the
details or means by which Services are accomplished.
8. NON-COMPETE
CONTRACTOR shall not directly or indirectly engage in a business or
other activity in competition with CUSTOMER in the provision of
consulting services to o.tel.o or its affiliates and subsidiaries. This
non-compete covenant shall remain in full force and effect during the
term of this Agreement and for a period of one (1) year following the
date of its termination. In the event of any breach, CUSTOMER shall be
entitled to full injunctive relief without need to post bond, which
rights shall be cumulative with and not necessarily successive or
exclusive of any other legal rights.
9. OWNERSHIP OF WORK PRODUCT
(a) CONTRACTOR shall make prompt written disclosure to CUSTOMER of
all inventions, improvements, discoveries, computer software
(including firmware), and other forms of technology or
intellectual property made or conceived or actually or
constructively reduced to practice during the term of this
Agreement, whether solely or jointly with others, and which
are associated with, refer to, are suggested by, or result
from any Services which CONTRACTOR may do pursuant to this
Agreement, or from any information obtained by CONTRACTOR from
CUSTOMER or in discussions and meetings with employees of
CUSTOMER or any of its affiliated companies. Furthermore,
CONTRACTOR hereby assigns and agrees to assign its entire
right, title and interest in and to said inventions,
improvements, discoveries, computer software and other forms
of technology and intellectual property to CUSTOMER and, at
the expense of CUSTOMER, agrees to assist CUSTOMER in every
proper way to protect said inventions, improvements,
discoveries, computer software and other forms of technology
and intellectual property, including, but not limited to,
signing patent and copyright applications, oaths or
declarations, and assignments in favor of CUSTOMER relating to
the said inventions, improvements, discoveries, computer
software, and other forms of
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technology and intellectual property, as well as such
ancillary and confirmatory documents as may be required or
appropriate to insure that such title is clearly and
exclusively vested in CUSTOMER, within the United States and
in any and all foreign countries. CONTRACTOR further agrees to
assist and cooperate with all efforts to enforce the rights of
CUSTOMER in such property against any third parties at the
expense of CUSTOMER.
(b) All notes, designs, models, prototypes, drawings, data storage
media, listings, deliverables, technical data, and other work
product developed in connection with or pursuant to the terms
and conditions of this Agreement, including any reports to be
prepared by CONTRACTOR for CUSTOMER under this Agreement,
shall become and remain the exclusive property of CUSTOMER,
and CUSTOMER shall have the rights to use such for any purpose
without any additional compensation to CONTRACTOR.
(c) CONTRACTOR grants to CUSTOMER its entire right, title and
interest in and to (including the right to reproduce, modify,
display, produce derivative works of, translate, publish,
sell, use, dispose of, and to authorize others so to do, and
the right to copyright and to register such copyright in
CUSTOMER's or its nominee's name) all copyrightable materials
conceived or first produced under this Agreement by
CONTRACTOR; and CONTRACTOR agrees that such copyrightable
materials are works made for hire exclusively for CUSTOMER
under the copyright laws of the United States. Further,
CONTRACTOR grants to CUSTOMER a royalty-free, nonexclusive,
transferrable, sublicensable, and irrevocable license to any
and all copyrighted or copyrightable works not conceived or
first produced by CONTRACTOR in the performance of this
Agreement, but which are incorporated in any materials
furnished under this Agreement to CUSTOMER by CONTRACTOR,
provided that such license shall only be to the extent that
CONTRACTOR has, or prior to completion of final settlement of
this Agreement, may acquire, the right to grant such license
without becoming liable to pay compensation to others solely
because of such grant.
(d) In the event any work conceived or first produced under this
Agreement shall not be deemed to be a work made for hire
exclusively for CUSTOMER under the copyright laws of the
United States, CONTRACTOR hereby assigns and agrees to assign
to CUSTOMER its entire right, title and interest in and to
such work, including all copyrights therein, and CONTRACTOR
further agrees at CUSTOMER's expense to execute whatever
assignments of copyright and ancillary and confirmatory
documents in said work may be required or appropriate so that
title to the work and to the copyrights therein will be
clearly and exclusively held by CUSTOMER.
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(e) CONTRACTOR warrants and represents that it has or will have
the right, through written agreements with all employees
performing Services under or in connection with this
Agreement, to secure for CUSTOMER the rights called for in
this Section. Further, in the event CONTRACTOR uses any
subcontractor, consultant or other third party to perform any
of the Services contracted for by this Agreement, CONTRACTOR
agrees to enter into such written agreements with such third
party, and to take such other steps as are or may be required
to secure for CUSTOMER the rights called for in this Section.
10. CONFIDENTIAL INFORMATION
(a) In the course of performing Services pursuant to this
Agreement, CONTRACTOR may come into contact with, or acquire
knowledge about, CUSTOMER's technical or business information
including information or data pertaining to specifications,
drawings, sketches, models, samples, computer programs,
information about CUSTOMER's network or facilities, and
CUSTOMER's customers, which information may be in written or
oral form (Information). Such Information is, and shall
remain, the exclusive property of the CUSTOMER. CONTRACTOR
shall treat and maintain all such Information as confidential,
whether or not it has been physically marked as Confidential.
The Information may be used by CONTRACTOR only if required to
perform Services under this Agreement and may only be
distributed to those employees of CONTRACTOR who have a need
to know in order to perform Services pursuant to this
Agreement; the Information may not be released to any other
person, entity, or the public without the written consent of
CUSTOMER.
(b) The foregoing obligations shall not apply to any Information
lawfully in CONTRACTOR's possession prior to its acquisition
from the CUSTOMER; received in good faith from a third party
not subject to any confidential obligation to the CUSTOMER;
now is or later becomes publicly known through no breach of
confidential obligation by CONTRACTOR.
(c) If CONTRACTOR receives a request to disclose any information
(whether pursuant to a valid and effective subpoena, an order
issued by a court or other governmental authority of competent
jurisdiction or otherwise) on advice of legal counsel that
disclosure is required under applicable law, CONTRACTOR agrees
that, prior to disclosing any information, it shall (i) notify
CUSTOMER of the existence and terms of such request or advice,
(ii) cooperate with CUSTOMER in taking legally available steps
to resist or narrow any such request or to otherwise eliminate
the need for such disclosure, if requested to do so by
CUSTOMER, and (iii) at CUSTOMER's expense, if disclosure is
required, use its best efforts to obtain a protective order or
other reliable assurance that confidential
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treatment will be afforded to such portion of the Information
as is required to be disclosed;
(d) If CONTRACTOR is given access, whether on-site or through
remote facilities, to any CUSTOMER computer or electronic data
storage system in order for CONTRACTOR to accomplish the
Services called for in this Agreement, CONTRACTOR shall limit
such access and use solely to perform work within the scope of
this Agreement and shall not access or attempt to access any
computer system, electronic file, software or other electronic
services other than those specifically required to accomplish
the work required under this Agreement. CONTRACTOR shall limit
such access to those of its employees whom CUSTOMER has
authorized in writing to have such access in connection with
this Agreement, and shall strictly follow all CUSTOMER's
security rules and procedures for use of CUSTOMER's electronic
resources. All user identification numbers and passwords
disclosed to CONTRACTOR and any information obtained by
CONTRACTOR as a result of CONTRACTOR's access to and use of
CUSTOMER's computer and electronic data storage systems shall
be deemed to be, and shall be treated as, CUSTOMER Information
under applicable provisions of this Agreement. CONTRACTOR
agrees to cooperate with CUSTOMER in the investigation of any
apparent unauthorized access by CONTRACTOR to CUSTOMER's
computer or electronic data storage systems or unauthorized
release of Information by CONTRACTOR.
(e) The obligation of confidentiality and use with respect to
Information shall survive termination of this Agreement.
11. DISPUTE RESOLUTION
(a) The parties desire to resolve certain disputes, controversies
and claims arising out of this Agreement without litigation.
Accordingly, except in the case of (i) a dispute, controversy
or claim relating to a breach or alleged breach of the
provisions of Section 10, CONFIDENTIAL INFORMATION, (ii) a
suit, action or proceeding to compel CONTRACTOR to comply with
its obligations to indemnify CUSTOMER pursuant to this General
Agreement or (iii) a suit, action or proceeding to compel
either party to comply with the dispute resolution procedures
set forth in this Section 11, the parties agree to use the
following alternative procedure as their sole remedy with
respect to any dispute, controversy or claim arising out of or
relating to this Agreement or its breach. The term "Arbitrable
Dispute" means any dispute, controversy or claim to be
resolved in accordance with the dispute resolution procedure
specified in this Section 11.
(b) At the written request of a party, each party shall appoint a
knowledgeable, responsible representative to meet and
negotiate in good
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faith to resolve any Arbitrable Dispute arising under this
Agreement. The parties intend that these negotiations be
conducted by nonlawyer, business representatives. The
discussions shall be left to the discretion of the
representatives. Upon agreement the representatives may
utilize other alternative dispute resolution procedures such
as mediation to assist in the negotiations. Discussions and
correspondence among the representatives for purposes of these
negotiations shall be treated as confidential information
developed for purposes of settlement shall be exempt from
discovery and production, and which shall not be admissible in
the arbitration described below or in any lawsuit without the
concurrence of all parties. Documents identified in or
provided with such communications, which are not prepared for
purposes of the negotiations, are not so exempted and may, if
otherwise admissible, be admitted in evidence in the
arbitration or lawsuit.
(c) If the negotiations do not resolve the Arbitrable Dispute
within sixty (60) days of the initial written request, the
Arbitrable Dispute shall be submitted to binding arbitration
by a single arbitrator pursuant to the Commercial Arbitration
Rules of the American Arbitration Association. A party may
demand such arbitration in accordance with the procedures set
out in those rules. Discovery shall be controlled by the
arbitrator and shall be permitted to the extent set out in
this Section. Each party may submit in writing to a party, and
that party shall so respond, to a maximum of any combination
of thirty-five (35) (none of which may have subparts) of the
following: interrogatories, demands to produce documents and
requests for admission. Each party is also entitled to take
the oral deposition of one (1) individual of another party.
Additional discovery may be permitted upon mutual agreement of
the parties. The arbitration hearing shall be commenced within
sixty (60) days of the demand for arbitration and the
arbitration shall be held in Tampa, ------ Florida. The
arbitrator shall control the scheduling so as to process the
matter ------- expeditiously. The parties may submit written
briefs. The arbitrator shall rule on the Arbitrable Dispute by
issuing a written opinion within thirty (30) days after the
close of hearings. The times specified in this Section may be
extended upon mutual agreement of the parties or by the
arbitrator upon a showing of good cause. Judgment upon the
award rendered by the arbitrator may be entered in any court
having jurisdiction.
(d) Each party shall bear its own cost of these procedures. A
party seeking discovery shall reimburse the responding party
the cost of production of documents (to include search time
and reproduction time costs). The parties shall equally share
the fees of the arbitration and the arbitrator.
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12. RELATIONSHIP OF PARTIES
In providing any Services pursuant to this Agreement, CONTRACTOR is
acting solely as an independent contractor and not as an agent of any
other party. Persons furnished by the respective parties shall be
solely the employees or agents of such parties, respectively, and shall
be under the sole and exclusive direction and control of such parties.
They shall not be considered employees of the other party for any
purpose. Each party shall be responsible for compliance with all laws,
rules and regulations involving their respective employees or agents,
including (but not limited to) employment of labor, hours of labor,
health and safety, working conditions and payment of wages. Each party
shall also be responsible, respectively, for payment of taxes,
including federal, state, and municipal taxes, chargeable or assessed
with respect to its employees or agents, such as social security,
unemployment, worker's compensation, disability insurance and federal
and state income tax withholding. Neither party undertakes by this
Agreement or otherwise to perform or discharge any liability or
obligation of the other party whether regulatory or contractual, or to
assume any responsibility whatsoever for the conduct of the business or
operations of the other party. Nothing contained in this Agreement is
intended to give rise to a partnership or joint venture between the
parties or to impose upon the parties any of the duties or
responsibilities of partners or joint venturers.
13. FORCE MAJEURE
If performance of this Agreement is prevented, restricted or interfered
with by reason of acts of God, wars, revolution, civil commotion, acts
of public enemy, embargo, acts of government in its sovereign capacity,
labor difficulties, including, without limitation, strikes, slowdowns,
picketing or boycotts, or any other circumstances beyond the reasonable
control and not involving any fault or negligence of the party
affected, the party affected, upon giving prompt notice to the other
party shall be excused from such performance on a day-to-day basis
during the continuance of such prevention, restriction, or interference
(and the other party shall likewise be excused from performance of its
obligations on a day-to-day basis during the same period), provided,
however, that the party so affected shall use its best reasonable
efforts to avoid or remove such causes of nonperformance and both
parties shall proceed immediately with the performance of its
obligations under this Agreement whenever such causes are removed or
cease.
14. TAXES
CONTRACTOR shall be responsible for the withholding and/or payment, as
required by law, of all foreign, federal, state, and local taxes,
including any VAT or value-added taxes, imposed an CONTRACTOR or its
employees because of the performance of Services hereunder. Further,
CONTRACTOR shall comply with all foreign, federal and state benefits
laws applicable to CONTRACTOR or
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its employees, if any, including making deductions and contributions
for social security and unemployment tax. CUSTOMER reserves the right,
on reasonable notice, to inspect or audit CONTRACTOR's records to
ensure compliance with this Section. CONTRACTOR agrees to indemnify
CUSTOMER for any and all sums that are due and owing for withholding
FICA and unemployment or other state, federal and foreign taxes.
CONTRACTOR further agrees to make payments to foreign, federal and
appropriate state authorities for withholding, FICA and unemployment
taxes.
15. ASSIGNMENT
CUSTOMER hereby specifically contracts for services of CONTRACTOR, and
CONTRACTOR may not assign, subcontract or delegate the performance of
Services or other duties under this Agreement without the prior written
consent of CUSTOMER, which consent may be withheld in CUSTOMER's sole
and absolute discretion. CONTRACTOR's hiring of new full-time or
temporary employees shall not be deemed an assignment under this
Section 15.
16. COMPLIANCE WITH LAWS
(a) CONTRACTOR shall comply with the provisions of all applicable
foreign, federal, state, and local laws, ordinances,
regulations and codes (including procurement of required
permits or certificates) in CONTRACTOR's performance under
this Agreement including, but not limited to, German law, the
Fair Labor Standards Act, the Americans with Disabilities Act
(Public Law 101-336, 42 U.S.C. 12101 et seq.), safety and
environmental laws, rules and ------- regulations, any laws,
rules and regulations regarding wages, hours, fringe benefits
and taxes, and federal and state Occupational Safety and
Health Act Laws.
(b) CONTRACTOR shall be solely responsible to provide such
reasonable accommodations, to include auxiliary aids and
services, as may be required under the Americans with
Disabilities Act so as to enable any disabled person furnished
by CONTRACTOR to perform the essential functions of the
person's job as pertains to the Services. CONTRACTOR shall
defend, indemnify and hold harmless CUSTOMER from any claim,
demand, lawsuit, action or liability arising out of failure to
comply with the provisions of the referenced Act with respect
to providing reasonable accommodations for the person
furnished by CONTRACTOR.
17. WORK RULES
CONTRACTOR, when performing Services under this Agreement, shall obey
all rules and regulations established by CUSTOMER or o.tel.o regarding
the conduct of their own employees, including no smoking policies and
security rules and regulations.
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18. CONFLICTS OF INTEREST
CONTRACTOR agrees to refrain from accepting or conducting assignments
from any person, firm or company during the term of this Agreement
which would conflict with or impair an unbiased performance of the
Services or other duties under this Agreement. During the term of this
Agreement, CONTRACTOR agrees promptly to disclose to CUSTOMER any
business relationship or other matter that may raise a question
concerning a conflict of interest.
19. LIMITATION OF LIABILITY
A. IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER WHATSOEVER FOR
ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT
LIMITED TO LOSS OF ANTICIPATED PROFITS OR REVENUE OR OTHER ECONOMIC LOSS IN
CONNECTION WITH OR ENSUING FROM THIS AGREEMENT, EVEN IF THE OTHER PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
B. In no event shall CONTRACTOR be entitled to any direct monetary damages
against CUSTOMER in excess of the amount paid by CUSTOMER to CONTRACTOR, under
this Agreement, except that this limitation shall not apply to any remedy or
damages with respect to claims for personal injury or property damage.
C. No action, regardless of form, arising out of the transactions contemplated
by this Agreement may be brought by either party more than two (2) years after
the cause of action has accrued, except that an action for non-payment may be
brought within two (2) years after the date of last payment.
20. INDEMNIFICATION
(a) CONTRACTOR shall defend, indemnify and hold harmless CUSTOMER
and its affiliates, officers, agents and employees from all
claims, suits, actions, demands, damages, liabilities,
expenses (including fees and disbursements of counsel),
judgments, settlements and penalties of every kind related to
CONTRACTOR's (either directly or through its officers, agents,
sub- contractors or representatives) performance of the
Services under this Agreement or violation of any term of this
Agreement or the matters referred to in this Section. The
foregoing indemnity, to the extent permitted by law, shall
apply in the case of all claims which arise from the
negligence, misconduct or other fault of CUSTOMER, provided,
however, that if a claim is the result of the joint
negligence, joint misconduct, or joint fault of CONTRACTOR and
CUSTOMER, the amount of the claim for which CUSTOMER is
entitled to indemnification shall be limited to that portion
of such claim that is attributable to the negligence,
misconduct or other fault of CONTRACTOR. The parties agree
that the price for
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Services provided under this Agreement includes consideration
for the obligation to indemnify as set out in this Section.
The obligations in this Section are in addition to
CONTRACTOR's duty to provide insurance and shall not be
limited by any limitation on the amount or type of damages,
compensation, or benefits payable by CONTRACTOR under the
Worker's Compensation Acts, Longshoremen and Harborworker's
Act, Disability Benefits Acts, or any other employee benefit
act.
(b) Without limitation of Subsection (a) above, CONTRACTOR shall,
to the fullest extent permitted by law, defend, indemnify and
hold harmless CUSTOMER, its officers, agents and employees,
from all claims, suits, actions, demands, damages,
liabilities, expenses (including fees and disbursements of
counsel), judgments, settlements and penalties of every kind
arising from or related to the following matters:
(1) CONTRACTOR's failure to comply with all foreign,
federal, state or local laws, rules or regulations
applicable to CONTRACTOR's employees;
(2) CONTRACTOR's failure to comply with terms of the
Section entitled, CONFIDENTIAL INFORMATION, regarding
proprietary information of CUSTOMER;
(3) CONTRACTOR's failure to pay all fees and royalties
for the use of patented articles or methods in
connection with the Services;
(4) CONTRACTOR's failure to obtain or maintain the
Permits referred to in Section 20, PERMITS, except
for those Permits that CUSTOMER has expressly agreed
to obtain and maintain at CUSTOMER's expense;
(5) Contributions to multiemployer pension plans
affecting CON-TRACTOR's employees;
(6) Any mechanic's or materialmen's liens or any other
liens or encumbrances filed in respect of or placed
upon any real property or improvements owned or
leased by CUSTOMER as a result of any Services
performed by or any other act or omission on the part
of CONTRACTOR or any subcontractor or other person
claiming by, through or under CONTRACTOR; or
(7) Any injury, sickness, disease or death of any person,
damage to any properties or assets or remediation of
any soil, surface water or groundwater resulting from
the processing, use, distribution, treatment,
storage, placement, removal, transportation or
disposal
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of any Hazardous Materials by CONTRACTOR or its
officers, agents subcontractors or representatives.
(8) Any claim, action or proceeding affecting CUSTOMER
arising out of the Contractor Agreement signed
October 6, 1997, between CUSTOMER and First-Tel
Communications, Inc., a copy of which is attached
hereto and incorporated herein ("First-Tel
Agreement"), including, but not limited to, any
pleading, petition or order affecting CONTRACTOR
arising out of the bankruptcy case, In The Matter of
First Tel Communications, Inc., Case No. 97-11015
(Bankr. N.D. In. 1997). GTEDS will write a letter to
the bankruptcy trustee in the above-cited case
requesting that the trustee petition the court to
issue an order abandoning the First-Tel Agreement,
and upon the issuance of said order, the Indemnity in
this Subsection 20(b)(8) shall be deleted.
(c) CUSTOMER shall promptly notify CONTRACTOR in writing of any
suits, claims or demands covered by this indemnity. Promptly
after receipt of such notice, CONTRACTOR shall assume the
defense of such claim with counsel reasonably satisfactory to
CUSTOMER. If CONTRACTOR fails, within a reasonable time after
receipt of such notice, to assume the defense with counsel
reasonably satisfactory to CUSTOMER. Notwithstanding the
above, if CUSTOMER in its sole discretion so elects, CUSTOMER
may also participate in the defense of such actions by
employing counsel at its expense, without waiving CONTRACTOR's
obligations to indemnify or defend. CONTRAC- TOR shall not
settle or compromise any claim or consent to the entry of any
judgment without the prior written consent of CUSTOMER and
without an unconditional release of all liability by each
claimant or plaintiff to CUSTOMER.
21. INSURANCE
CONTRACTOR shall procure and maintain, at its sole cost and expense,
policies of insurance naming CUSTOMER as an additional insured. The
types of coverage, exclusions, limits of liability and deductible
amounts applicable to such policies shall be as set forth in Exhibit 4.
All such policies shall be issued by reputable and financially sound
insurance companies reasonably acceptable to CUSTOMER and shall provide
that no amendment or cancellation shall be effective unless CUSTOMER
receives thirty (30) days' prior written notice. In addition, such
policies shall serve to indemnify CUSTOMER and hold it harmless from
all third party claims arising from or in any way connected with the
Services performed by CONTRACTOR under this Agreement CONTRACTOR shall
furnish to CUSTOMER prior to performing Services, and, on request of
CUSTOMER from time to time thereafter, certificates evidencing that
such policies are in full force and effect. Each certificate so
furnished shall acknowledge that CUSTOMER is named as an additional
insured under the
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applicable policies and shall set forth on its face the applicable
limits of liability. The failure of CONTRACTOR to furnish any such
certificate shall not diminish or otherwise affect its obligation to
procure and maintain any policies of insurance contemplated by this
Section. CONTRACTOR further agrees to take such actions as are
necessary to ensure that all of its subcontractors, suppliers and
independent contractors procure and maintain policies of insurance and
furnish proof, in each case as if they were subject to the terms and
provisions of this Agreement.
22. CUSTOMER PLANT, WORK RULES, AND RIGHT OF ACCESS
(a) CONTRACTOR shall furnish an adequate number of properly
trained and fully qualified personnel, including supervisory
and management, to provide Services. CONTRACTOR's manager must
be available during business hours and other such times as an
emergency may demand to insure that all problems, complaints,
coordination, and any other necessary matters are attended to.
(b) CONTRACTOR agrees that all employees, subcontractors, and
agents assigned to fulfill this Agreement shall read and agree
to CUSTOMER's Policy concerning Sexual Harassment, CUSTOMER's
Contractor Code of Ethics and Business Standards and
CUSTOMER's Policy concerning Alcohol and Drugs, copies of
which are attached hereto as Exhibits 1-3. CONTRACTOR will be
responsible for acquainting each CONTRACTOR employee,
subcontractor, or agent with the contents of these statements
and ensuring that each employee, subcontractor, or agent
abides by them. Furthermore, CONTRACTOR warrants and
represents that no employee of CUSTOMER, or any employee,
subcontractor, or agent of any CUSTOMER affiliated company, is
in the employment of CONTRACTOR, or receiving any compensation
or any other thing of more than nominal value now or at any
other time from CONTRAC- TOR, or any agent of CONTRACTOR.
CONTRACTOR shall insure that its employees, agents and
subcontractors comply with any policies, work rules and
standards of o.tel.o.
(c) All employees, subcontractors, and agents of CONTRACTOR shall
abide by all CUSTOMER work rules while on CUSTOMER or o.tel.o
premises. CUSTOMER shall have the right to modify the work
rules or promulgate additional work rules, and CONTRACTOR and
its employees, subcontractors, and agents shall comply with
such modified or additional work rules immediately following
CONTRACTOR's receipt of a written copy.
(d) CUSTOMER reserves the right to determine in its sole
discretion that any person supplied by CONTRACTOR is not
capable or fit to perform the Services assigned. CUSTOMER may
remove from its premises or the
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premises of o.tel.o such person without incurring any
liability or obligation to pay CONTRACTOR for unsatisfactory
Services performed by said person or for any Services
performed by said person after CUSTOMER gives notice of
removal.
(e) CUSTOMER reserves the right to request at any time and for any
reason that specific employees, subcontractors, and agents of
CONTRACTOR be removed from and not assigned by CONTRACTOR to
perform Services for CUSTOMER, and CONTRACTOR acknowledges,
agrees and understands that CONTRACTOR will immediately comply
with such request by CUSTOMER.
(f) CONTRACTOR shall not engage in any business or transaction or
professional activity, or shall incur any obligation of any
nature, that is in conflict with the proper discharge of Its
duties while performing Services for CUSTOMER.
(g) If CONTRACTOR is given access, whether on-site or through
remote facilities, to any CUSTOMER computer or electronic data
storage system in order for CONTRACTOR to accomplish the
Services called for in this Agreement, CONTRACTOR shall limit
such access and use solely to perform Services within the
scope of this Agreement and shall not access or attempt to
access any computer system, electronic file, software or other
electronic services other than those specifically required to
accomplish the Services required under this Agreement.
CONTRACTOR shall limit such access to those of its employees
whom CUSTOMER has authorized in writing to have such access in
connection with this Agreement, and shall strictly follow all
CUSTOMER's security rules and procedures for use of CUSTOMER's
electronic resources. All user identification numbers and
passwords disclosed to CONTRACTOR and any information obtained
by CONTRACTOR as a result of CONTRACTOR's access to and use of
CUSTOMER's computer and electronic data storage systems shall
be deemed to be, and shall be treated as, CUSTOMER information
under applicable provisions of this Agreement. CONTRACTOR
agrees to cooperate with CUSTOMER in the investigation of any
apparent unauthorized access by CONTRACTOR to CUSTOMER's
computer or electronic data storage systems or unauthorized
release of information by CONTRACTOR.
23. PUBLICITY
Each party agrees not to provide copies of this Agreement, or otherwise
disclose the terms of this Agreement, to any third party without the
prior written consent of the other party; provided, however, that
CUSTOMER may, without obtaining CONTRACTOR's consent, provide copies or
make disclosures to CUSTOMER's affiliates, or any regulatory or
judicial body requesting such information. The
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parties further agree to submit to one another, for written approval,
all advertising, sales promotion, press releases and other publicity
matters relating to Services furnished pursuant to this Agreement, when
its respective name or mark is mentioned or language from which the
connection of said name or mark may be inferred or implied. The parties
further agree not to publish or use such advertising, sales promotions,
press releases, or publicity matters without such prior written
approval. Any approval required under this Section shall not be
unreasonably withheld or delayed by either party.
24. TERMINATION
Notwithstanding anything to the contrary contained in this Agreement,
CUSTOMER reserves the right to terminate this Agreement at any time by
delivering at least ten (10) calendar days' prior written notice of
termination to CONTRACTOR. In the case of termination pursuant to this
paragraph, CUSTOMER shall pay CONTRACTOR the Fees for Services
accomplished for CUSTOMER under this Agreement and delivered to
CUSTOMER, and for Per Diem incurred by CONTRACTOR prior to and
including the date of termination. Upon termination, CONTRACTOR shall
deliver to CUSTOMER all completed work and work in progress, to include
notes, draft reports and similar materials.
25. NOTICE
Any notice required to be given hereunder shall be given by facsimile
transmission or by any method which will require a signed
acknowledgment of receipt. Notices shall be deemed given on the first
business day (Monday through Friday, exclusive of the parties'
holidays) following the date shown on the facsimile transmission or the
date shown on the signed evidence of receipt, as the case may be.
Notices intended for CUSTOMER shall be sent to its address appearing on
page 1 hereof to the attention of its Director - CS Product Management
- Network Services (facsimile 972 256 2512), with a copy to the Law
Department (facsimile 813 978 4163). Notices intended for CONTRACTOR
shall be sent to its address appearing on page 1 hereto to the
attention of its Vice President (facsimile 516 231 1446). Either party
may change its address for notice purposes by notifying the other party
in accordance with this Section. Routine correspondence does not fall
within the intent of this Section.
26. WAIVER OF TERMS AND CONDITIONS
Failure to enforce any of the terms or conditions of this Agreement
shall not constitute a waiver of any such terms or conditions, or of
any other terms or conditions.
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27. PRECEDENCE OF DOCUMENTS
In case of conflict between provisions of this Agreement (for purposes
of this paragraph, meaning just the Agreement document without Schedule
A) and provisions contained in Schedule A, this Agreement shall govern.
In case of conflict between provisions of either this Agreement and
Schedule A and a subsequent written amendment or modification, the
subsequent amendment or modification shall govern.
28. SEVERABILITY
If any term or provision of this Agreement shall be declared invalid,
illegal or unenforceable, the invalidity, illegality or
unenforceability thereof shall not affect the remaining terms or
provisions.
29. SURVIVAL OF OBLIGATIONS
The respective obligations of CONTRACTOR and CUSTOMER under this
Agreement which by their nature would continue beyond the termination,
cancellation or expiration of the Agreement, shall survive termination,
cancellation or expiration.
30. APPLICABLE LAW
This Agreement, and the rights and obligations contained in it, shall
be governed by and construed in accordance with the laws of the State
of Florida, without regard to any conflicts of law principles that
would require the application of the laws of any other jurisdiction.
31. ENTIRE AGREEMENT
This Agreement represents the entire understanding between the parties
with the respect to the provisions and cancels and supersedes all prior
agreements or understandings, whether written or oral, with respect to
the subject matter. This Agreement may only be modified or amended by
an instrument in writing signed by duly authorized representatives of
the parties. No verbal changes to the scope of Services shall be
permitted, and CUSTOMER shall make no payment for Services performed
pursuant to verbal order or agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
their authorized representatives.
CUSTOMER: CONTRACTOR:
GTE DATA SERVICES G.M.B.H. CYBER DIGITAL, INC.
/s/ /s/ Robert G. Keller
- ------------------------------ ---------------------------
Robert G. Keller
/s/
- ------------------------------
Vice President
- ------------------------------ ---------------------------
(Title) (Title)
12-9-97 12-5-97
- ------------------------------ ---------------------------
(Date) (Date)
ATTEST:
---------------------------
Corporate Seal (If Applicable)
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SCHEDULE A
SERVICES
On the Commencement Date of this Agreement, or as soon thereafter as determined
by CUSTOMER, CONTRACTOR will make two (2) qualified persons available to perform
the services ("Services") described below:
SS7/AIN Technician ("Technician"). This individual will be responsible
for the implementation, turnup and ongoing maintenance of DSC SS7/AIN equipment.
This individual will manage approximately three DSC SS7/AIN switching
technicians and one or more DSC SS7/AIN database administrators.
SS7/AIN DataBase Administrator ("Administrator"). This person is
responsible for the installation and ongoing management of the DSC SS7/AIN
database and for the activation of SS7/AIN services and features.
Contracted individuals should be available for training in Dallas, Texas, one
week prior to deployment in Essen, Germany. Deployment in Essen, Germany shall
begin on October 1, 1997, or at a later date as determined by the CUSTOMER.
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EXHIBIT 1
POLICY CONCERNING SEXUAL HARASSMENT
It is the policy of CUSTOMER to provide a work environment free from all forms
of sexual harassment.
Any unwelcome sexual advances, requests or demands for sexual favors, and other
visual, verbal, or physical conduct of a sexual nature constitute sexual
harassment when:
o submission to such conduct is made either explicitly or implicitly a
term or condition of any individual's employment;
o submission to or rejection of such conduct by an individual is used as
a basis for employment decisions affecting individuals such as, but not
limited to, promotions;
o such conduct has the purpose or effect of unreasonably interfering with
an individual's work performance or creating an intimidating, hostile,
or offensive working environment.
CONTRACTOR shall instruct its employees that any such conduct while performing
Services for CUSTOMER or while on CUSTOMER's premises will not be tolerated and
CONTRACTOR shall take all necessary steps to insure that this policy is
enforced.
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EXHIBIT 2
POLICY CONCERNING ALCOHOL AND DRUGS
CONTRACTOR shall not permit its employees that are performing Services for
CUSTOMER to consume alcoholic beverages of any kind at any time during the
CONTRACTOR employee's tour of duty, including any extension of the tour, and
including all relief or lunch breaks associated with the CONTRACTOR employee's
tour of duty. CONTRACTOR shall not permit its employees that are performing
Services for CUSTOMER at any time, whether on or off duty, to drive a
CUSTOMER-owned vehicle after having consumed any kind of alcoholic beverage.
CONTRACTOR shall not permit any of its employees to enter CUSTOMER premises
while under the influence of alcohol. There can be no compromise in the
requirement that any individual who violates this policy is subject to removal.
Any CONTRACTOR employee found to be using, possessing, furnishing, selling or
soliciting the sale of any drug contrary to law on CUSTOMER property or during
hours that such employee is performing Services for CUSTOMER will be subject to
immediate removal from the promises and, in addition, will be reported to the
responsible law enforcement agency. There can be no compromise for any
individual who violates this policy.
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EXHIBIT 3
CONTRACTOR CODE OF ETHICS AND BUSINESS STANDARDS
BASIC RESPONSIBILITY
In traditionally placing the highest trust in the Fundamental Honesty and
Integrity of each employee, CUSTOMER in turn expects that each CONTRACTOR
employee's conduct should at all times reflect favorably upon CUSTOMER and all
of its employees.
Serving the public provides each of us with a great responsibility.
Consequently, there can be no compromise in the requirement that any individual
who violates CUSTOMER's Contractor Code of Ethics and Business Standards is
subject to removal.
SECRECY OF COMMUNICATIONS
Every communication of any type which is transmitted through the facilities of
CUSTOMER is the personal property of the person using the facilities. It is the
right of every person using CUSTOMER's services to have the absolute privacy of
its communication protected. The substance, content, or nature of every
telephone conversation or communication which is handled for CUSTOMER's
subscribers - or fact that there has been a conversation or communication - is
not be to divulged.
A CONTRACTOR employee may not use for his benefit, or for that of others, any
information derived from any conversation or communication from a subscriber, or
from records concerning a subscriber.
Unauthorized persons are not to be permitted to listen to or view any
communication handled. CONTRACTOR's employees must not monitor any connection
more then necessary for its proper supervision.
Information regarding the equipment, trunks, circuits, cables, and use of
facilities, nonpublished numbers, or ticket records of calls must not be given
to any unauthorized person.
Secrecy of communication is a fundamental policy of CUSTOMER, and is protected
by Federal and State laws which impose severe penalties upon any persons who
violate this secrecy.
Protection of CUSTOMER's investment in equipment, tools, supplies, and vehicles
against loss, theft, damage, vandalism, or unauthorized disposal is vitally
important. Tools, supplies, materials vehicles, telephones and other equipment
and facilities are purchased with CUSTOMER funds for CUSTOMER use. They belong
to CUSTOMER in every sense, and are not to be used for personal benefit of an
employee of
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CONTRACTOR; all unused or surplus CUSTOMER owned material is to be returned to
the closest storeroom before leaving the area.
Personal long distance calls are not to be charged to CUSTOMER telephones, nor
made on an unauthorized basis from switchboards, testboards, terminals, or other
facilities locations.
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