U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1996
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-13117
MICROFRAME, INC.
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(Name of Small Business Issuer in Its Charter)
New Jersey 22-2413505
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
21 Meridian Road, Edison, New Jersey 08820
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (908) 494-4440
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
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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 is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The issuer's revenues for its most recent fiscal year totaled $6,258,243.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and asked prices as reported on NASDAQ as
of June 17, 1996 was approximately $6,291,014.
There were 4,819,142 shares of Common Stock outstanding as of June 17, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
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MicroFrame, Inc., a New Jersey corporation (the "Company"), founded
in 1982, designs, develops and markets a broad range of network management and
remote maintenance and security products for mission critical voice and data
communications networks. The Company's products provide for alarm monitoring,
proactive administration and reporting capabilities which are to be used as a
basis for remote network management and maintenance. In addition, by
incorporating a variety of hardware and software options for security and user
authentication, these products can deter as well as prevent unauthorized dial-in
and/or in-band access to network elements and systems (such as computers, local
area networks (LANs) and Private Branch Exchange telephone switches ("PBXs")),
while allowing authorized personnel access to perform needed administration and
maintenance of host devices and networks from remote locations.
In May 1993, the Company completed a private placement to accredited
investors of an aggregate of 800,000 shares (after giving effect to a reverse
stock split as noted below) of common stock, par value $.001 per share, of the
Company ("Common Stock") for $1,000,000.
In September 1993, the Company effected a one-for-five reverse stock
split of the issued and outstanding shares of the Common Stock (the "Reverse
Stock Split").
In September 1995, the Company formed a wholly-owned subsidiary,
MicroFrame Europe N.V., which in turn acquired all of the issued and outstanding
shares of capital stock of European Business Associates BVBA ("EBA") of
Brussels, Belgium.
In April 1996, the Company completed a private placement (the "1996
Private Placement") to accredited investors of an aggregate of 1,101,467 Units
for $1,376,933.75, each Unit consisting of one share of Common Stock and one
Class A Warrant and one Class B Warrant, each of which is exercisable into one
share of Common Stock at an exercise price of $1.50 and $2.00, respectively.
Principal Products and Markets
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The Company has established a strong customer base through the
development of a family of modular standards oriented hardware and software
components designed to interface with a customer's existing dial-up and/or
in-band wide area network communications environment. The Company believes that
each of these components, when combined with the programmability as provided by
the Company's unique software, support and meet the needs of a wide variety of
customer network management and security requirements. The software is designed
to permit easy
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modification, thus allowing customized solutions for monitoring and controlling
telemaintenance and/or network access. In other words, Secure Remote
Tele-Maintenance.
The Company develops and markets a broad range of security, network
management and remote maintenance products for voice and data communications
networks. The Company's products are based upon a family of hardware and
software components which, combined with a uniquely developed software "engine",
provide programmability and easy modification. Customized solutions for network
access, monitoring and telemaintenance of mission-critical applications can
readily be accommodated.
New Products and Markets
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In fiscal 1996, the Company continued its evolutionary development of
products to address the Network Management and Security marketplace and began to
introduce a new family of products referred to collectively as SECURE NETWORK
SYSTEMS/2000 ("SNS/2000"). This family of industry standards based products is
designed to address the growing demand for remote network management of mission
critical integrated voice and data networks. The SNS/2000 product family
consists primarily of Sentinel 2000, Admin 2000, Manager 2000, Alert 2000 and
SeGaSys 2000.
These products uniquely integrate security management, remote access,
fault management and problem identification/resolution into a powerful suite of
network management solutions to monitor, maintain and increase the operational
integrity and access to the voice and data network.
As telecommunications networks continue to expand to support more and
more mission-critical applications, the economic impact of downtime and the
importance of secure remote access increases exponentially. According to a
recent third party study, "network downtime" can cost companies up to $1,000 per
minute in lost revenues and employee productivity. In addition, the technical
support staff necessary to administer, support and maintain combined voice and
data networks containing a large distributed base of legacy devices, remains
distributed and inefficient. Faced with budget constraints and a lack of skilled
staff resources due to downsizing programs, network and system managers today
are searching for new tools to more effectively manage, secure and control their
expanding and increasingly more complex networks. The SNS/2000 family of
products provides cost effective solutions to these problems. The products are
completely modular by design. Each product element provides a unique stand alone
feature/function set enabling one to choose only the products needed to enhance
the performance of the existing network management system. Or, for maximum
advantage, the elements may be integrated into a comprehensive, secured
telemaintenance and remote access control solution customized to specific
organizational requirements.
SECURE REMOTE TELEMAINTENANCE. One aspect of the SNS/2000 family of
products is designed to specifically reduce network "downtime" due to
ineffective detection, reporting, handling and resolution of alarm/fault
conditions. It also directly addresses the requirement to manage both
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"legacy" and standards-based communications resources across widely dispersed
heterogeneous network environments. The SNS/2000 product set is fully Simple
Network Management Protocol ("SNMP") compliant. It offers comprehensive stand
alone network management and remote access solutions which can be fully
integrated into existing SNMP-based management systems. Its SNMP proxy agent
capability enables non-SNMP legacy devices, such as the PBX, to communicate with
the SNMP network manager for more cohesive centralized control of all
communications resources.
SNS/2000 provides redundant, secured access and alarm monitoring to
all network resource maintenance ports via both in-band and out-of-band
connectivity to increase system reliability. All network access may be channeled
through a secure central gateway where users are authenticated and transparently
routed only to authorized destinations. Network resources are continually
monitored by local intelligent agents to detect alarms and threshold violations.
This monitoring includes ensuring that environmental conditions (e.g.
temperature, moisture, battery voltage, etc.) at various points in the network
are also within preset thresholds. Critical fault conditions are promptly
identified and immediately transmitted to the appropriate management center for
analysis, trouble ticket generation and corrective action. This enables
organizations to improve network availability through proactive response to
potential network problems.
SECURE REMOTE ACCESS. A second aspect of the SNS/2000 family of
products is designed to address a rapidly growing group of telecommuters who are
redefining the boundaries of the traditional workplace. They are placing an
increasing demand for convenient remote access to network resources. By opening
the networks to meet these demands, the networks are left vulnerable to
unauthorized entry. Such unauthorized access carries security liabilities and
exposure to critical company resources, data and information. In addition,
unauthorized users are consuming valuable network bandwidth, thus reducing
availability for legitimate users. SNS/2000 offers remote access security
solutions for host computers, LANs and wide area networks ("WANs") by providing
front-end barriers to unauthorized entry. Access control is managed and
monitored via a client/server architecture. Central administration is provided
to facilitate ease of administration, monitoring and maintenance. Alerts are
issued when user defined events occur. Extensive reporting capabilities are
provided which are useful for identifying trends and analyzing network
utilization. A wide choice of authentication technologies are supported and,
based on operational needs, can easily be incorporated into the Company's remote
access security solutions.
SNS/2000 FEATURE/FUNCTION/BENEFIT SET. The primary benefits of
SNS/2000 include:
* SNMP Agent/Proxy
Standards-based SNMP Proxy alarm reporting for
non-compliant legacy devices. Centralized telemaintenance
for both voice and data communications networks.
* Alarm Reporting & Evaluation Distributed Rules Based alarm
filtering to reduce network bandwidth consumption.
Multilevel alarm reporting with programmable escalation to
insure prompt response. PBX toll fraud detection and
reporting to reduce fraud loss potential.
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* Remote Maintenance & Monitoring
Programmed monitoring of device fault tables to enable
proactive maintenance activity. Locally executed
auto-recovery procedures to reduce costly downtime.
* Security
Secured in-band/out-of-band maintenance access to insure
network integrity. Secured remote telecommuting access to
eliminate unauthorized network access.
* Graphical User Interface ("GUI") Based System
Central GUI based system administration for convenient
system management.
* Controlled Access & Ethernet Capabilities
Controlled vendor access for secure out-of-band device
servicing. Ethernet and dial access allowing for redundant
access/reporting paths for increased network reliability.
Distributed intelligent device controllers for reduced
bandwidth utilization.
* Buffering/Database Capabilities
Central relational database with ad hoc report generation
for convenient activity/utilization analysis. Buffering
system for storage/retrieval of data (i.e. CDR Records,
Critical Logs, etc.)
SENTINEL 2000. The flagship member of the Company's new family of
SNS/2000 products. In the first quarter of fiscal 1997, the Company introduced
the Sentinel 2000. The Sentinel 2000 is a stand-alone, secure multi-port
programmable Remote Site Manager. It is complete with integrated application
software designed to provide security, monitor and control remote voice and data
network devices via their out-of-band dial-up maintenance ports as well as via
in-band Ethernet connectivity. The system provides device alarm/fault monitoring
and reporting, SNMP management and SNMP proxy functionality, PCMCIA high speed
modem(s) plus Ethernet connectivity, environmental monitoring and control, and
secured in-band/out-of-band access to device maintenance and control ports.
Sentinel 2000 is a comprehensive site management solution that facilitates
convenient, reliable, centralized telemaintenance of global voice and data
networks.
An extremely powerful, robust and comprehensive offering, based on
the Motorola 68360 Multi controller processor chip, the Sentinel 2000 is easily
administered and maintained with the Company's new GUI Administration software,
Admin 2000. Sentinel 2000 integrates a wide range of applications which provide
for robust Remote Network Management of a wide range of network elements (either
directly or via an SNMP proxy function), Access Security, Alarm Management,
Environmental Monitoring and Control, PBX Toll Fraud Detection and Remote Device
Reboot Facility.
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Other Products and Markets
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The Company's first major product success, the DL-4000(TM), was
introduced in 1986 and is designed to protect mainframe computers from
unauthorized dial-up access. Since that time, more than 1,000 units have been
installed worldwide and the product continues to be a part of the Company's
product offering.
Recognizing that organizations were restructuring data processing
away from centralized mainframes and into various network configurations, the
Company re-engineered its original fixed-function, "black box" product into a
flexible, programmable hardware/software system capable of securing access at a
wide variety of "nodes" in the network. The foundation of this re-design was the
development of a proprietary software "engine," which maximizes the
programmability of the hardware, defining and controlling the functions to be
performed by various hardware components.
Beginning in 1991, the Company determined that an additional related
market opportunity was developing with the proliferation of PBXs, voice mail
systems and other privately-owned voice communications systems and security
devices. The Company believes that theft of long distance telephone services
("toll fraud") through unauthorized access to these devices has resulted in
substantial losses and thus the support of PBXs through the development and
marketing of data communications security products is a good business to be
engaged in due to customer demands for greater system reliability, protection
against toll fraud and security against network intrusion.
A vulnerability of these systems results from the fact that PBXs and
other devices used in the voice communications system have what are referred to
as remote maintenance and administrative "ports." These ports permit a system
administrator or maintenance personnel to "dial in" or gain access to a device
electronically, by telephone, and to monitor and, if necessary, change or
manipulate the software and hardware embedded in the equipment. This can all be
accomplished without having to be physically present at the site where the
equipment is located. Without proper security, an unauthorized user can gain
access to a system through one of these ports, a potential exposure of PBX
customers to toll fraud. With a remote maintenance facility, PBX and other
telecommunications product vendors can respond to and provide their customers
with cost-effective solutions that address the customers demand for highly
responsive service for their products.
After initiating discussions with major PBX suppliers, the Company
developed a group of products, referred to as "Intelligent Port Controllers"
("IPC"), designed to provide security for these dial access remote ports. Among
these products are a Remote Port Security Device (RPSD(TM)), which was designed
and manufactured exclusively for AT&T, beginning in 1991 and the Secure
Sentinel(TM) family of devices, which were introduced by the Company in 1992.
The RPSD is provided on an original equipment manufacturer ("OEM")
basis under AT&T's own label, as a security device for AT&T's Definity PBX. Over
13,100 RPSD units have been shipped to AT&T since 1991 and the Company has begun
shipping the product to other customers as well.
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The Secure Sentinel is a family of programmable hardware platforms
which combine security management of remote maintenance ports, protection
against toll fraud, a comprehensive range of fault and alarm reporting functions
and real-time call detail record analysis. Since its introduction, the Company
has expanded both the number of models offered and the functionality of each,
shipping more than 9,000 units which has accounted for more than $10,500,000 in
revenue. During fiscal 1996, sales from the Secure Sentinel product line were
responsible for approximately 50% of the Company's overall revenue.
Beginning in fiscal 1993, the Company began offering a new product,
the Secured Database Server (SDS(TM)). Like the DL-4000, this is a programmable
system designed to prevent unauthorized dial-in access to a computer or data
communications network. The SDS, however, incorporates the technology of the
DL-4000 in a personal computer, allowing storage of greater amounts of user
data, which permits a customer to both monitor a greater number of users and to
store more detailed identification data about each user. The SDS also
incorporates redundant processor elements, reducing the possibility of system
down-time. This product is thus suitable for protecting significantly larger
systems and is currently implemented by MCI to provide secured access for
network administration of over 500 of its long distance service switching
facilities, as well as for Chemical Bank, Key Corp., Lockheed/Marietta and other
major companies worldwide.
Building on the SDS, in fiscal 1994, the Company introduced the
Secured Gateway System (SeGaSys(TM)), designed to provide centrally controlled
access to and administration of a large number of remotely located maintenance
ports on both voice and data communications devices. It consists of a
"communication firewall" or secured gateway which controls and routes all access
to remote port destinations, a central database management server which uses the
SDS software to administer and control user access and resource authorizations,
remote security modems and/or alarm reporting devices which provide fault/alarm
management capabilities. SeGaSys effectively manages a number of Secure Sentinel
devices located at remote locations which provide the security, alarm monitoring
and reporting for those locations.
The Company believes its products are well positioned to take
advantage of what it perceives as current trends in data communications and
voice communications networks. In the Company's view, organizations are seeking
to increase productivity by providing sophisticated communications networks
which connect all of their separate units, whether locally, nationally or
internationally. As the price of equipment decreases and power increases, such
networks become possible for more and more groups, regardless of size, and it
becomes feasible to introduce sophisticated networks into technologically less
advanced regions. At the same time more of the organizations' data and other
resources are being made available to more users by means of these systems.
Since many of these networks utilize dial-in lines, the Company believes that
the security and network management issues resulting from this growth will
generate demand for the Company's products.
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Security
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The DL-4000 can be used to secure dial-up access to any host
computer, LAN or WAN by monitoring and centrally administering up to 4,096
dial-up "ports" or telephone access points located in up to 256 locations. The
SDS, as noted above, expands the number of users and other features of the
DL-4000 by incorporating the same technology into a personal computer. Using
"open system" software, the products allow the system administrator to configure
each channel separately with one or more access control technologies as required
by the application assigned to the channel or as preferred by the user.
The IPC family of products - the Secure Sentinel and the RPSD, are
designed to secure the maintenance and administration ports on PBX, voice mail
and other voice communications equipment. In addition to preventing unauthorized
access through these ports, the Secure Sentinel can be customized to provide the
following features:
SECURITY MANAGEMENT: The Secure Sentinel can monitor a host device's
internal diagnostic routines and fault tables, determine if a particular alarm
condition exists and execute appropriate reporting procedures or take corrective
actions.
PBX TOLL FRAUD/ABUSE CONTROL: PBXs and voice mail systems frequently
permit dial-in users access to outbound trunk lines to enable users to take
advantage of a Company's WATS lines or similar services. However, abuse of these
services can result in substantial charges. The Secure Sentinel can be
programmed to monitor and analyze all dial-in call activity to determine if
current activity exceeds specified parameters or selected criteria indicative of
potential toll fraud or abuse. If the activity exceeds the parameters, the
system issues an alarm to the appropriate personnel or initiates protective
procedures.
Both the DL-4000 and the SDS incorporate a comprehensive, high level
programming language and program editor developed specifically for these
products, which is referred to as the Communication Control Language ("CCL").
This language allows the standard program incorporated in each Channel Control
Card monitoring an individual dial-in line to be modified or enhanced easily to
meet specific customer requirements. The incorporation of CCL into these
products also facilitates the introduction of additional product enhancements.
Network Management
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As noted above, widely distributed data communications networks may
incorporate numerous devices with dial-in ports. The Company offers a software
module, SeGaSys, with the DL-4000 and the SDS which permits a central device to
control access to all ports on the network. All maintenance providers and others
authorized to service or administer devices in the system dial a single
telephone number for access. Upon successful validation of access for the
requested device, the user is automatically routed to the target device by
SeGaSys. This eliminates the security risk
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inherent in providing lists of telephone numbers and access codes for numerous
devices and reduces the burden of administering many remotely located security
devices. Once authenticated and routed, the transaction (including session
activity, if desired), is logged to a central database, available for audit
review and analysis.
Remote Maintenance
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The requirement for increased service levels, especially as they
relate to mission-critical systems like PBXs has created a market for alarm
monitoring systems to emerge. Alarm monitoring systems monitor host device's
internal diagnostic routines and fault tables, determine alarm status, and
automatically execute appropriate reporting and/or corrective action procedures.
ALARM MONITORING: With the Secure Sentinel, alarms are transmitted to
a single or multiple PCs, personal pagers, etc. and alarm reporting can be
escalated to ensure timely response. The Secure Sentinel also allows programmed
administration of the host device via the maintenance port connection.
ENVIRONMENTAL MONITORING AND CONTROL: Since communications equipment
is sensitive to changes in the physical environment, the Secure Sentinel can be
enhanced to monitor changes in temperature, humidity, moisture, battery voltage,
LED indicators and other similar environmental indicators to determine if
current trends exceed pre-set limits. If such limits are exceeded, the device
can be programmed to issue an appropriate alarm or take corrective action using
multiple internal relays to activate necessary environmental controls.
ALARM REPORTING: This provides for automatic transmission of
information regarding network status, alarms, etc. It allows for automatic
escalation of alarms when there is no response. Information may be automatically
transmitted to computers via modem, or to humans via pager and recorded voice.
"HELP DESK" ENHANCEMENTS: Most data networks include a "help desk"
operator, a resource available to assist other personnel and to resolve network
problems encountered by dial-in users. The Company's proprietary HelpNET(TM)
software permits the user to page the help desk terminal and automatically
effect an interactive link with the help desk operator when the page is
acknowledged. Without leaving the control station, the help desk operator can
then directly observe and participate in the user's session with the relevant
network device and, if necessary, take temporary command of the session to
correct the problem, thus providing more cost-effective corrections than would
occur if the help desk operator physically had to visit the device in question
or had to "talk the user through" the necessary procedures.
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Support Services
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In addition to the normal training, installation and repair services
provided for all of its products, the Company also provides its customers with
consulting, specialized programing and turnkey installations.
Marketing and Distribution
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The Company believes that the markets for data communications network
management security and voice communications network management security may
merge in the near future. Therefore, the Company is approaching each of these
markets with an integrated marketing strategy. The SNS/2000 family of products,
the DL-4000 and the SDS, data communications security products, have been sold
and will continue to be sold to data network security customers through in-house
telemarketing efforts and selected distributors. In fiscal 1995, the Company
commenced expansion of its direct sales force and its network of distributors
into major geographic markets in the United States. As this sales and
distribution network is established, the telemarketing effort will be redirected
to generate sales leads by the Company and to provide support for the field
organization. In addition, the Company will look to continue to expand its
channels of distribution via major systems and network outsourcers.
With respect to the voice communications security market, the Company
recognized that product sales could be effected more economically if major
telecommunications companies could be convinced to promote the products to their
own customers. The Company has been successful in establishing contractual
relations in the United States with AT&T, MCI, Southwestern Bell Communications,
Inc. and NORTEL West (formerly Pactel Meridian Systems, Inc.), a Northern
Telecom subsidiary. During fiscal 1995, the Company expanded its distribution
into Canada through a non-exclusive distribution agreement with TTS Meridian
Systems, Inc. of Willowdale, Ontario, another Northern Telecom subsidiary. The
Company expects to continue seeking additional arrangements with the other PBX
systems vendors and distributors in North America.
In connection with the foreign distribution of its products, the
Company appointed EBA of Brussels, Belgium in November 1993, as its exclusive
sales representative for Europe to provide sales and technical support to the
Company's authorized distributors and to directly sell the Company's products to
accounts in that region. In September 1995, the Company acquired through
MicroFrame Europe NV, its newly formed wholly-owned subsidiary, all of the
issued and outstanding shares of capital stock of EBA. In fiscal 1995, the
Company signed a five-year agreement with LM Ericsson ("Ericsson") of Stockholm,
Sweden, a global telecommunications equipment manufacturer and distributor.
Ericsson has qualified for use and will promote the Company's Secure Sentinel
products with Ericsson PBX equipment, worldwide, with initial roll-out in
Europe, the Pacific Rim and the United States. During fiscal 1995, a three-year
distribution agreement was also entered into with Racal Australia PTY, Ltd.
("Racal Australia") of Brookdale, South Wales, Australia, a wholly-owned
subsidiary of Racal Electronics, plc of the United Kingdom. Racal Australia,
which provides data communications, data security and digital cellular equipment
throughout the Pacific Rim, will
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distribute the Company's product line throughout Australia, New Zealand,
Singapore and Hong Kong. Additionally, during fiscal 1995, the Company signed
its first distribution agreement in Eastern Europe with Netlink of Prague, in
the Czech Republic. With the acquisition of EBA in place and the maturation of
the agreements consummated in previous years, the revenues related to the
international segment increased from approximately $950,000 (13% of Total
Revenues) in fiscal 1995 to approximately $1,300,000 (21% of Total Revenues) in
fiscal 1996.
Competition
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The market for voice and data network management and security
products to control access to computer and telecommunications is highly
competitive. There can be no assurance that the proprietary technology which
forms the basis for most of the Company's products will continue to enjoy market
acceptance or that the Company will be able to compete successfully on an
on-going basis.
The Company believes that the principal factors affecting competition
in the network management and security markets are: (1) the products' ability to
meet a multiplicity of network management and security requirements; (2) the
products' ability to conform to the network topologies and/or computer systems;
(3) the products' ability to avoid technological obsolescence; (4) the
willingness and the ability of a vendor to support customization, training, and
installation; and (5) the price.
Although the Company believes that its present products and services
are competitive, the Company competes in its general market with a number of
large computer, electronics and telecommunications manufacturers which have
financial, research and development, marketing, and technical resources
substantially greater than those of the Company. The Company also faces
competition from a variety of niche market players. In security situations, they
include Security Dynamics, Inc., Digital Pathways, Inc. and the Lee Mah Data
Systems Corp. In remote maintenance situations, they include TSB International,
Inc. and Teltronics, Inc. Such companies may succeed in producing and
distributing competitive products more effectively than the Company can produce
and distribute its products, and may also develop new products which compete
effectively with those of the Company.
Sources and Availability of Materials
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The Company designs its products primarily utilizing readily
available parts manufactured by multiple suppliers and the Company currently
relies on and intends to continue to rely on these suppliers. The Company has
been and expects to continue to be able to obtain all of the parts required to
manufacture its products, without any significant interruption or sudden price
increase, although there is no assurance of this.
There are cases where the Company is utilizing a component available
from only one supplier. If a supplier were to cease to supply this component,
the Company would most likely have to
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redesign a feature of the affected device. In these cases, the Company maintains
a greater supply of the component on hand in order to allow the time necessary
to effectuate a redesign or alternative course of action.
Dependence on Particular Customers
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The Company sells a substantial portion of its products to two
customers, AT&T and MCI. Sales to AT&T and MCI represented 23.8% and 24.8%,
respectively, of the Company's revenue in fiscal 1996. The loss of either of
these customers could have a material adverse effect on the Company's business.
Fiscal 1996 was the first time in three years where the total percentage of
revenues generated to these two customers fell below 50%. This is attributable
to three factors: (1) a reduction in absolute revenues of approximately $1.25M
(29%) from year to year from these two customers; (2) an increase in North
American revenues, exclusive of these two customers of approximately $50K (3%);
and (3) an increase in European revenues of approximately $450K (38%).
The Company's installed customer base is estimated to number over 185
companies in more than 2,100 customer sites worldwide. In the United States,
virtually all of the Company's customers are Fortune 1,000 industrial companies
and large U.S. financial institutions. Customers in the U.S. represented
approximately 79% of the Company's revenue in fiscal 1996.
Under an agreement with AT&T, the Company has been manufacturing the
RPSD for AT&T's resale to its PBX customers. As of the fiscal year ended March
31, 1996, AT&T had purchased and installed more than 13,100 RPSD units.
In fiscal 1996, MCI and the Company expanded their relationship
across multiple operating units within MCI, including the unit responsible for
outsourcing and MCI's joint venture with British Telecom, known as Concert.
Intellectual Property, Licenses and Labor Contracts
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The Company holds no patents on any of its technology. Although it
does license some of its technology from third parties, it does not consider any
of these licenses to be critical to the Company's operations.
The Company has made a consistent effort to minimize the ability of
competitors to duplicate the Company's software technology utilized in its
products. However, there remains the possibility of duplication of the Company's
products and competing products have already been introduced.
MicroFrame's name is a registered trademark of the Company filed with
the United States Patent and Trademark Office ("PTO"). The Company also has a
trademark application pending with the PTO for the Intelligent Port Controller
trademark. The Company is awaiting publication from the PTO on the trademarks
Secure Sentinel and SeGaSys, provided there is no opposition, these trademarks
shall be registered.
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None of the Company's employees are represented by labor unions. The
Company considers its relations with its employees to be satisfactory.
Governmental Approvals Required and Effect of Government Regulation
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Due to the sophistication of the technology employed in the Company's
devices, export of the Company's products is subject to governmental regulation.
As required by law or demanded by customer contract, the Company routinely
obtains approval of its products by Underwriters' Laboratories. Additionally,
because many of the Company's products interface with telecommunications
networks, its products are subject to several key Federal Communications
Commission ("FCC") rules and thus FCC approval is necessary as well.
Part 68 of the FCC rules contains the majority of the technical
requirements with which telephone systems must comply to qualify for FCC
registration for interconnection to the public telephone network. Part 68
registration represents a determination by the FCC that telecommunication
equipment interfacing with the public telephone network complies with certain
interference parameters and other technical specifications. FCC Part 68
registration for the Company's products has been granted and the Company intends
to apply for FCC Part 68 registration for all of its new and future products.
Part 15 of the FCC rules requires equipment classified as containing
a Class A computing device to meet certain radio and television interference
requirements, especially as they relate to operation of such equipment in a
residential area. Certain of the Company's products are subject to and comply
with Part 15.
The European Community is developing a similar set of requirements
for its members and the Company has begun the process of compliance for Europe.
Although the Company has not experienced any difficulties obtaining
such approvals, failure to obtain approval for new and future products could
have a material adverse effect on the Company's business. The Company has
obtained licenses to export certain of its products in limited quantities to
Sweden, Norway, Switzerland, South Africa, the United Kingdom, France, Italy,
Germany, Australia and Singapore.
Research and Development Activities
- -----------------------------------
During fiscal 1996, the Company continued development of its "next
generation" of products built on an entirely new architecture to ultimately
replace its IPC products - the Secure Sentinel and RPSD - referred to
collectively as SNS/2000. As discussed previously, this family of products is
designed to address the growing demand for remote network management and
security of mission critical integrated voice and data networks. Research and
development expenses, net of capitalized software development, were $713,441 in
fiscal 1996 and $488,339 in fiscal 1995.
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Costs of Compliance with Environmental Laws
- -------------------------------------------
The Company's business is not subject to regulations involving
discharge of materials into the environment.
Employees
- ---------
As of June 17, 1996, the Company has 37 employees of which 36 are
full-time employees, and of which 11 are technical personnel, 9 are in sales,
marketing and support, 9 are in production and 8 are in executive, financial and
administrative capacities.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases 8,900 square feet of space at 21
Meridian Road, Edison, New Jersey for its administrative, sales and marketing,
and research and development functions. The Lease provides for a monthly rental
of $5,412.50 and shall expire on June 30, 1999. The Company has amended the
Lease to rent an additional 2,000 square feet of office space and an additional
2,600 square feet of warehouse space (currently occupied by a third party)
commencing January 1, 1997, and terminating June 30, 1999. From the commencement
date until June 30, 1997 the total monthly rental shall be $7,916.66 and from
July 1, 1997 until June 30, 1999, the total monthly rental shall be $8,125.00.
In addition, the Company currently leases 5,112 square feet of space
at 300E Corporate Court, South Plainfield, New Jersey for its finance,
manufacturing, and warehousing functions. This lease provides for a monthly
rental of $3,408.00 and shall expire on June 30, 1999.
ITEM 3. LEGAL PROCEEDINGS.
In March 1996 the Company received a Notice of Determination from the
New York State Department of Taxation and Finance in which a sales tax
assessment was made in the sum of approximately $227,391.90, which includes
interest and penalties. The Company believes that New York's position is without
merit and is vigorously defending its position that no tax is owed. A
conciliation conference will take place before the Bureau of Conciliation and
Mediation Services of the New York State Department of Taxation and Finance. In
the opinion of management of the Company amounts accrued for assessments in
connection with sales tax are adequate and the ultimate resolution of these
matters will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
- ------------------
The Company's Common Stock commenced trading on August 17, 1995 on
the NASDAQ SmallCap Market under the symbol "MCFR". Prior to that date, the
Common Stock was not traded on any registered national securities exchange,
although several registered broker-dealers made a market in the Common Stock.
The following table sets forth the high and low bid prices of the Common Stock
in the over-the-counter market as reported by the National Quotation Bureau
through August 16, 1995 and by NASDAQ from August 17,1995 through March 31,
1996. The quotations set forth below do not include retail markups, markdowns or
commissions and may not represent actual transactions.
HIGH LOW
Fiscal 1995
June 30 $3.13 $1.50
September 30 2.50 1.00
December 31 2.00 1.00
March 31 3.00 1.25
Fiscal 1996
June 30 $2.88 $2.00
September 30 3.13 2.56
December 31 2.63 1.41
March 31 1.88 1.56
Holders
- -------
As of June 17, 1996 there were approximately 388 record holders of
the Company's Common Stock (including brokers holding in street name).
Dividends
- ---------
The Company has not paid any cash dividends on its Common Stock
during the two fiscal years ended March 31, 1996 and March 31, 1995. The Company
presently intends to retain all earnings to finance its operations and therefore
does not presently anticipate paying any cash dividends in the foreseeable
future.
Under the terms of the Company's credit agreement with CoreStates
Bank, N.A. (formerly New Jersey National Bank) ("CoreStates Bank"), the Company
may not, without the prior written
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consent of CoreStates Bank, declare or pay any dividends in cash or otherwise on
any shares of stock of the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Plan of Operation
- -----------------
During the next 12 months, the Company will continue its effort to
expand its existing customer relationships and marketplace penetration, while
tightly controlling operating costs. The Company will place substantial emphasis
on introducing and distributing its new family of products, international
business expansion and reducing its reliance on its two major customer
organizations.
During fiscal 1996, the Company continued development of a new
generation of products based on more advanced technology. The products were
formally introduced at an industry trade show to enthusiastic customer reception
in January, 1996. The new network management product family, known as SNS/2000,
uniquely integrates network management, security management, fault management as
well as problem resolution into a powerful suite of network management
solutions. This technology will allow for increased operational integrity and
access to voice and data networks. The Company began shipment of the prototype
of the flagship member of this next generation product family, the Sentinel
2000, in May, 1996 and volume production shipments began in late June, 1996.
Additional product family offerings are expected to become available throughout
the remainder of fiscal 1997.
The Company believes this next generation of products will create the
foundation and growth to meet the Company's goals and objectives in the coming
years. These new products will allow the Company to capitalize on its strength
of an established worldwide customer base which includes major U.S. and
International telecommunications providers, PBX vendors, financial institutions,
Fortune 500 companies and numerous governmental agencies. The Company has more
than 2,100 installations across North America, South America, Europe and the
Pacific Rim. With the September 1995 acquisition of EBA, an even greater focus
is being placed on expanding the international customer base. Based in Brussels,
Belgium, EBA had acted as the Company's exclusive sales representative in the
European market since November, 1993, providing both sales support and technical
support to the Company's authorized distributors, as well as selling directly to
accounts in the region. During the latter part of fiscal 1996, the Company's
international revenue stream increased as it capitalized on relationships with
new global PBX suppliers including LM Ericsson of Stockholm, Sweden and Alcatel
Bell of Antwerp, Belgium. Additionally, it expanded its distribution agreements
in Canada, Eastern and Western Europe and the Pacific Rim.
A major concern of the Company continues to be the reliance on two
major customers, MCI and AT&T, for a significant portion of its current revenue
stream. This vulnerability was exposed in fiscal 1996 as discussed below. Its
relationship with MCI extends to multiple operating units within the
organization, each with divergent business needs and different market
characteristics. The Company ships multiple products to MCI for security and
alarm management of various internal
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switch installations, including shipments to Concert Global Networks, MCI's
joint venture with British Telecom, as well as to various outsource relations
which MCI manages. In its relationship with AT&T, the Company has been
manufacturing RPSDs for AT&T's resale to its PBX customers. The RPSD is a
secured access product, provided under AT&T's own label, custom designed to
operate with AT&T's PBX, Key Systems and Voice Processing products, primarily
the Definity product line. As of the fiscal year ended March 31, 1996, AT&T had
purchased and installed more than 13,100 RPSDs since 1991. In October, 1995, the
Company signed a two-year renewal of an OEM agreement, through which AT&T
purchases RPSDs. Under the terms of the renewal, the expected value of the
contract to the Company over the full two-year period is $3.5M. The Company
expects to continue the growth and development of its domestic customer base
outside of these two primary customers in fiscal 1997. Increased revenues from
fiscal 1995 to fiscal 1996 were experienced at several key customers, including
Southwestern Bell and Nortel. New sources of revenues in fiscal 1996 included
Ameritech, which has had significant order input with the Company in early
fiscal 1997.
The Company's employee base dropped from 45 full-time employees in
fiscal 1995 to 42 full-time employees during fiscal 1996. It is anticipated that
the Company will operate at this employee level throughout fiscal 1997. In the
longer term, when a return to profitability is established, the Company expects
to add additional employees. These additional resources would be devoted
primarily to the marketing and development of a more extensive system
integration capability which would enable the Company to gain an increasing
share of the market. Due to the significant growth which the Company experienced
in fiscal 1995, an additional facility in South Plainfield, New Jersey was
leased with expiration terms concurrent with its existing lease in Edison, New
Jersey. The operations group relocated to this facility in August, 1995. The
Company believes that it has space adequate to meet its growth requirements for
the foreseeable future.
The Company believes that as data and voice networks continue to
grow, the recognition of network vulnerability and consequential impact will
continue to increase and the Company's products will be in greater demand.
Despite the unsatisfactory performance in fiscal 1996, the Company believes many
significant events, including the increased emphasis on new product development,
increased worldwide customer base and the acquisition of EBA, position the
Company for future growth. Management's primary mission in fiscal 1997 is to
return the Company to profitability.
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared to Fiscal Year 1995
- ---------------------------------------------
The results for fiscal 1996 fell well below the Company's
expectations. An operational loss of approximately $800,000 was supplemented by
fourth quarter adjustments of approximately $1,200,000. The $800,000 loss was
directly related to the quarter ended September 30, 1995 when revenues were
negatively impacted by two simultaneous events at its two major customers: a
"capital spending freeze" at MCI communications and an "overstocked" position
regarding the Company's products due to a change in sales strategy at AT&T. The
Company's performance in the other three
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fiscal quarters was approximately at a break-even level in terms of operating
results. However, in the quarter ended March 31, 1996, the Company recorded the
following adjustments: (1) a $575,000 valuation reserve against the deferred tax
asset on the books at March 31, 1995; (2) a $150,000 provision for inventory
obsolescence as the Company is phasing out existing product lines in preparation
for the introduction of the SNS/2000 family of products; (3) a $100,000
write-off of certain capitalized software costs; (4) a $100,000 provision
related to a sales tax assessment by the State of New York which the Company is
contesting; (5) a $120,000 provision related to the separation of an officer;
and (6) a $100,000 provision relating to the Company's vacation accrual.
In addition, several minor adjustments totalling $50,000 were made.
The major adjustment relates to the Financial Accounting Standards
Board's Statement No. 109, "Accounting for Income Taxes." This Statement, issued
in February 1992, was adopted by the Company effective April 1, 1993. This
Statement provided the Company the opportunity to increase net income by
$950,000 in the year ended March 31, 1994 by accruing the anticipated future
benefits of applying the Company's available net operating loss carry forwards
against anticipated future taxable income on which tax would otherwise be
payable. The Statement also requires that the Company record a valuation
allowance when it is "more likely than not that some portion or all of the
deferred tax assets will not be realized." It further states that "forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years." As the Company's
annual operating income (income or loss before income taxes, extraordinary items
and cumulative effect on prior years) had increased from a loss of $163,825 in
fiscal 1991 to profits of $19,998 in fiscal 1992, $245,715 in fiscal 1993,
$390,902 in fiscal 1994 and $582,897 in fiscal 1995, the Company considered a
valuation allowance to be unnecessary. At March 31, 1995, the deferred tax asset
carried on the books had been reduced from the initial $950,000 to $574,900.
However, due to the operating loss of $1,288,409 for the year ended March 31,
1996, the realization of this deferred tax asset is more uncertain. As a result,
the Company provided a full valuation allowance of $574,900 against the deferred
tax asset remaining at March 31, 1995.
The Company is involved in proceedings with the State of New York
with respect to sales tax matters. As a result, the Company accrued $100,000 in
non-operational expense at March 31, 1996. The Company is contesting the stated
violations and believes the amounts accrued for assessments in connection with
sales tax are adequate and ultimate resolution of these matters will not have a
material effect on the Company's consolidated financial position, results of
operations, or cash flow.
The Company's revenues for fiscal 1996 were $6,258,243 versus
revenues of $7,126,391 for fiscal 1995, a decrease of 12.2%. The decrease in
revenues is attributable to decreased sales of the Company's products to both
MCI and AT&T. The decrease of approximately $1.3M (from $4.3M to $3.0M)
represented a 29% reduction from the previous fiscal year. The majority of the
shortfall occurred in the quarter ending September 30, 1995, with the remainder
of the year stabilized at expected levels. In fact, sales to all other customers
increased to approximately $3.3M in fiscal 1996 from approximately $2.8M in
fiscal 1995, representing an 18% increase from year to year. Of this
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total, international sales increased to approximately $1.3M from approximately
$950K in fiscal 1995, representing a 38% increase from year to year.
The Company's cost of sales decreased from $3,015,520 for fiscal year
1995 to $2,789,855 for fiscal year 1996. Cost of sales as a percentage of sales
increased from 42.3% for fiscal 1995 to 44.6% for 1996 as a result of the
one-time provision for excess and obsolete inventory of approximately $150,000,
or 2.4% of revenue, as well as an increase of approximately $130,000, or 2.1% of
revenue, in capitalized software amortization. Exclusive of these two items, the
Company continued its positive trend begun in fiscal 1995 of reducing direct
material and labor costs over the course of fiscal 1996.
Selling, general and administrative expenses increased from
$3,048,224 for 1995 to $4,043,356 for 1996, an increase from 42.8% to 64.6% as a
percentage of sales. The major factors contributing to this increase were (1)
the expansion of senior management and the domestic sales force late in fiscal
1995 and early in fiscal 1996 in preparation for the anticipated growth which
did not materialize; and (2) costs associated with the separation of employees
from the Company as part of the austerity measures implemented in the second
half of the fiscal year. The Company's acquisition of its European subsidiary
did not have a material effect on the Company's financial position or results of
operations.
Research and development costs, net of capitalized software
development, rose from $488,339 during fiscal year 1995 to $713,441 in fiscal
year 1996. As a percentage of sales, the Company's research and development
costs increased from 6.9% in fiscal year 1995 to 11.4% in fiscal year 1996. This
increase is directly attributable to the non-capitalized portion of the
development of the SNS/2000 family of products.
Fiscal Year 1995 Compared to Fiscal Year 1994
- ---------------------------------------------
Revenues for the fiscal year 1995 were $7,126,391 versus revenues of
$4,744,554 for fiscal year 1994, an increase of 50.2%. A major portion of the
increase in revenues was attributed to increased sales of the Company's products
to both MCI and AT&T, which totaled approximately $4.3M in fiscal year 1995.
This was an increase from the prior year revenues of approximately $2.6M for
these two customers. As of March 31, 1995, AT&T had purchased and installed more
than 9,300 RPSD units. Additionally, international sales increased to
approximately $950K in fiscal 1995 from approximately $400K in fiscal 1994, an
increase of over 100%.
The Company's cost of sales increased from $2,024,120 for fiscal year
1994 to $3,015,520 for fiscal year 1995. Cost of sales as a percentage of sales
decreased from 42.7% for 1994 to 42.3% for 1995 as a result of the initial
impact of new systems for planning, allowing for more effective purchasing and
more "just in time" inventory acquisition. Selling, general and administrative
expenses increased from $2,027,162 for 1994 to $3,048,224 for 1995, a slight
increase from 42.7% to 42.8% as a percentage of sales. The major factor
contributing to this increase was the Company's continued
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<PAGE>
commitment in fiscal 1995 to increase the size and scope of its sales and
marketing organization and its customer support capabilities.
Research and development costs, net of capitalized software
development, rose from $296,696 during fiscal year 1994 to $488,339 in fiscal
year 1995. As a percentage of sales, the Company's research and development
costs increased from 6.3% in fiscal year 1994 to 6.9% in fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company's financial position was impacted
substantially as assets were reduced from $4,337,929 to $3,558,171, and the
Company's working capital decreased from $2,341,895 to $837,064, net of any
deferred taxes. The primary contributor to this reduction in the Company's
working capital position was the Company's loss of $1,993,700.
The Company enhanced its working capital position subsequent to the
fiscal year ended March 31, 1996 in April and May 1996 with the completion of a
private placement of 860,000 shares of the Company's Common Stock for net
proceeds of approximately $1,050,000. In addition, 241,467 shares of the
Company's Common Stock were issued in June 1996 to existing shareholders who had
the contractual right to maintain their percentage ownership in the Company. Net
proceeds of $301,834 were received.
In addition, the Company's net revenues for the second half of fiscal
1996 were $3,651,000, representing a $7.3M annualized run rate. The Company
expects to improve on this run rate in fiscal 1997 as a result of the expanded
customer base and SNS/2000 family of products described earlier.
At the same time, the Company expects to continue the austerity measures put in
place in fiscal 1996, including no significant capital expansion and no increase
in headcount from the March 31, 1996 level until a trend of profitability is
restored.
The Company has a credit agreement with CoreStates Bank for a credit
line of $1,000,000 to finance future working capital requirements, secured by
accounts receivable, inventory, equipment and all other assets of the Company.
As of March 31, 1996, there was $500,000 outstanding under this working capital
credit line, In addition, the Company has a $150,000 revolving credit facility
with CoreStates Bank to finance purchases of machinery and equipment,
convertible into a three-year secured term loan. The Company borrowed $124,000
against this facility in November, 1995, at which time this debt was converted
into a three-year term loan. As of March 31, 1996, $111,587 remained outstanding
on this loan.
Subsequent to March 31, 1996, the Company was informed by CoreStates
Bank that the working capital credit line would not be renewed at the expiration
date of July 31, 1996. An agreement with the bank was reached to repay the
outstanding balance ($300,000 at June 21, 1996) no later than October 31, 1996
in order to facilitate an orderly transition to a new credit facility.
There will be no impact on the outstanding term loan.
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Based on its current cash and working capital position as a result of
the cash infusion from the private placement in the first quarter of fiscal
1997, its anticipation of increased revenue streams, and the continued austerity
measures as to operational and capital expenditures, the Company believes that
it has sufficient resources to meet its operational needs, including those
described above, over the next twelve months.
In fiscal 1997, the Company will be required to adopt the provisions
of two recently issued accounting standards. Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" requires companies to review their
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying value of a
long-lived asset may not be recoverable. The Company believes that, based upon
current operations and prospects, the adoption of this Standard will not have a
material impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" requires companies to estimate the fair value of common stock,
stock options, or other equity instruments ("Equity Instruments") issued to
employees using pricing models which take into account various factors such as
current price of the common stock, volatility and expected life of the Equity
Instrument. The Standard permits companies to either provide pro forma footnote
disclosure, or to adjust operating results, for the amortization of the
estimated value of the Equity Instrument over the vesting period of the Equity
Instrument. The Company has elected to account for stock options under
Accounting Principles Board Opinion No. 15 and will disclose certain pro forma
information beginning in fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required hereby are located on pages F-1
through F-18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Previously reported on Forms 8-K dated January 10, 1996 and January
30, 1996.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position Held with the Company
---- --- ------------------------------
Stephen M. Deixler 60 Chairman of the Board of Directors,
Chief Executive Officer, Treasurer
Stephen B. Gray 38 President and Chief Operating Officer
Michael Radomsky 43 Executive Vice President, Secretary, Director
William H. Whitney 41 Chief Technology Officer, Assistant Secretary,
Director
Mark A. Simmons 35 Vice President - Operations, Chief Financial
Officer
Robert M. Groll 62 Vice President - Marketing
David I. Gould 65 Director
Michehl R. Gent 55 Director
Stephen P. Roma 48 Director
All directors of the Company hold office until the next annual
meeting of shareholders and until their successors have been elected and
qualified. No family relationship exists between any director or executive
officer and any other director or executive officer of the Company.
The officers of the Company are elected by the Board of Directors at
its first meeting after each annual meeting of the Company's shareholders and
hold office until their successors are chosen and qualified, until their death,
or until they resign or have been removed from office.
STEPHEN M. DEIXLER has been Chairman of the Board of Directors since
1985 and has served as Chief Executive Officer of the Company since April 1996,
as well as from June 1985 through October 1994. He was President of the Company
from May 1982 to June 1985 and served as Treasurer of the Company from its
formation in 1982 until September 1993 and currently has
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served as Treasurer of the Company since October 1994. Mr. Deixler is also
currently a director of Farrington Bank. During April 1995, Mr. Deixler sold his
interest in Princeton Credit Corporation, a company engaged in the business of
buying, selling, and leasing high technology products, to Greyvest Capital Inc.,
a Toronto Stock Exchange company. Prior to the sale, Mr. Deixler was Chairman of
Princeton Credit Corporation. He previously served as President of Atlantic
International Brokerage, a leasing company, which is a wholly owned subsidiary
of Atlantic Computer Systems, Inc., which was liquidated as a result of the
bankruptcy proceedings of its parent company, Atlantic Computer Systems PLC.
Prior to holding this position, he was President and sole shareholder of
Princeton Computer Associates, Inc. ("PCA"). PCA was a company engaged in the
business of buying, selling and leasing of large-scale computer systems as well
as functioning in consulting and facilities management and was sold to Atlantic
Computer Systems, Inc. in 1988.
STEPHEN B. GRAY has been President and Chief Operating Officer since
April 1996. He also is a director of MicroFrame Europe N.V. He served as Senior
Vice President-Sales, Marketing and Support of the Company from December 1994
through March 1996. From July 1993 through December 1994, Mr. Gray was an
independent consultant, engaged in assisting both private and publicly-held
companies with strategy development, internal operational reviews and
shareholder value enhancement programs. From September 1988 through June 1993,
he held a series of management positions within Siemens Nixdorf USA, the last as
Vice President, (reporting to the Chief Executive Officer and Board of
Directors), and a member of the executive committee overseeing Siemens
Information Systems businesses in the United States. Prior to joining Siemens,
Mr. Gray previously held a series of rapidly progressive positions within IBM
including various technical, sales and marketing management assignments.
MICHAEL RADOMSKY is an original founder of the Company and has been
the Executive Vice President and a director since the Company's formation in
1982 and has served as Secretary of the Company since November 1994. He is
currently responsible for all International Operations. Previously, he has been
charged with multiple tasks, the most important being the identification of
industry directions, and the technical appropriateness of Company designs as
well as products acquired, licensed or jointly developed with others. In
addition, Mr. Radomsky has been responsible for the design of network topologies
for large corporate customers, ensuring compatibility for future products. Mr.
Radomsky has also previously been responsible for the Company's technical
support, purchasing and manufacturing operations. Prior to 1989, Mr. Radomsky
was responsible for the mechanical and electronic engineering of the Company's
products.
WILLIAM H. WHITNEY is an original founder of the Company and has been
the Vice President - Software Development (which title has currently been
changed to Chief Technology Officer ) and a director since the Company's
formation in 1982 and has served as Assistant Secretary of the Company since
November 1994. Along with Mr. Radomsky, he developed all of the Company's
initial products, including the DL-4000 and the IPC product line. As Chief
Technology Officer, Mr. Whitney has been responsible for development of hardware
and software for all of the Company's standard offerings, including all products
being sold through OEM and distributor channels.
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MARK A. SIMMONS has been the Company's Vice President - Operations
and Chief Financial Officer since January 1995. His responsibilities include
finance, administration, purchasing/materials management and production. Mr.
Simmons is a finance professional and Certified Public Accountant. From 1987
through 1994, he was with the Communications Division of General Instrument
Corporation where he served as Controller from 1992 through 1994 and Manager of
Financial Reporting and Accounting Services from 1987 to 1992. From 1985 to
1987, Mr. Simmons was Accounting Manager for UGI Development Company, an oil and
gas equipment supplier. Prior to this, he was with KPMG Peat Marwick.
ROBERT M. GROLL has been Vice President - Marketing of the Company
since March 1986. From 1970 until joining the Company in June 1985, as Director
of Marketing, Mr. Groll was the President of PTM Associates, Inc. ("PTM"), a
firm engaged in management consulting in the areas of technical marketing and
computer system design. While with PTM, during 1983 and 1984, Mr. Groll became
Vice President of Cable Applications, Inc. a New York corporation, where he was
responsible for initiating and managing new product development efforts.
DAVID I. GOULD, retired as Vice Chairman of the Board of Directors at
the end of April 1995, a position which he had served since December 1993. He
presently is a director of the Company and has been since April 1985 and he is
President of Gould Consulting since May 1, 1995. He served as President and
Chief Operating Officer of the Company from June 1985 until December 1993. He
was Vice President-Marketing of the Company from April 1985 until June 1985.
From 1982 until joining the Company in 1985, he was an officer of The Ultimate
Corporation ("Ultimate"), a computer manufacturer listed on the New York Stock
Exchange, eventually serving as Senior Vice President of Marketing. During his
three years at Ultimate, Mr. Gould managed the growth of that company's revenues
from $40 million to more than $100 million.
MICHEHL R. GENT has been a director of the Company since October 1984
and is the President of the North American Electric Reliability Council
("NERC"), an association of the North American electric utilities responsible
for establishing various operating standards and criteria for that industry. Mr.
Gent joined NERC in 1980 as Executive Vice President and became President in
1982. From 1973 to 1980 he was the General Manager of the Florida Coordinating
Group, a power pool of electric utilities in Florida. He holds a Master of
Science in Electrical Engineering from the University of Southern California and
is a Registered Professional Engineer. He also belongs to several industry
professional groups and is the author of several technical papers.
STEPHEN P. ROMA has been a director of the Company since August 1991
and since August 1994 is the President and Chief Executive Officer of Family
Health and Fitness Center. During April 1995, he sold his interest in Princeton
Credit Corporation, a company engaged in the business of buying, selling and
leasing high technology products, to Greyvest Capital, Inc., a Toronto Stock
Exchange company. Prior to the sale, Mr. Roma was President and Chief Operating
Officer of Princeton Credit Corporation. He previously served as Vice President
of Sales/Northeast Region of Atlantic Computer Systems, Inc., which was
liquidated as a result of the bankruptcy proceedings of its parent company,
Atlantic Computer Systems, PLC. Prior to holding this position, he was a
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principal and President and Chief Operating Officer of Princeton Computer Group,
Inc., which was sold to Atlantic Computer Systems, Inc. in 1988.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following persons have failed to file on a timely basis certain
reports required by Section 16(a) of the Securities Exchange Act of 1934 as
follows: Each of Messrs. Stephen M. Deixler, Stephen P. Roma and Michehl R. Gent
filed one late report, a Form 5 disclosing the grant of a non-employee stock
option pursuant to the Company's 1994 Stock Option Plan, as amended (the "1994
Plan"). Mr. David I. Gould has filed two late reports, a Form 4, disclosing the
sale of stock and a Form 5 disclosing the grant of a non-employee stock option
pursuant to the Company's 1994 Plan. During the fiscal year ended March 31,
1996, the Company is not aware of other late filings, or failure to file, any
other reports required by Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued by
the Company during the three fiscal years ended March 31, 1996, to those
individuals who as of March 31, 1996 served as the Company's Chief Executive
Officer during fiscal 1996 and to the Company's four most highly compensated
officers other than those who served as the Chief Executive Officer during
fiscal 1996 (these five executive officers being hereinafter referred to as the
"Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
- -------------------------------------- -----------------------------------------------
Awards Payouts
------ -------
Other
Annual Restricted Securities All Other
Principal Compen- Stock Underlying LTIP Compen-
Position Year Salary($) Bonus($) sation($) Award(s)($) Options (#) Payouts($) sation($)
- -------- ---- --------- -------- --------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Lonnie L. Sciambi 1996 186,700 -- -- -- 3,378 -- 1,620(3)
President, Chief 1995 129,135(5) 39,375(4) -- -- 26,595 -- --
Executive Officer(1)
Stephen B. Gray 1996 134,675 -- -- -- 2,309 -- --
President, Chief 1995 42,000(5) 2,213(2) -- -- 40,000 -- --
Operating Officer
Michael Radomsky 1996 122,800 -- -- -- 8,208 -- 1,047(3)
Executive Vice- 1995 111,588 2,910(2) -- -- 1,192 -- 1,997(3)
President 1994 100,000 -- -- -- -- -- 2,770(3)
William H. Whitney 1996 122,800 -- -- -- 8,136 -- 2,152(3)
Chief Technology 1995 111,588 2,841(2) -- -- 1,209 -- 1,997(3)
Officer 1994 100,000 -- -- -- -- -- 2,770(3)
Robert M. Groll 1996 107,800 -- -- -- 7,837 -- 1,892(3)
Vice-President 1995 100,000 2,410(2) -- -- 5,908 -- 1,800(3)
Marketing 1994 100,000 -- -- -- -- -- 2,770(3)
</TABLE>
-25-
<PAGE>
- -------------------------------
(1) On April 1, 1996, the Company did not renew its employment agreement
with Mr. Sciambi in which he served as President and Chief Executive
Officer of the Company and entered into a compensation agreement with
him as of such date. See "Certain Relationships and Related
Transactions."
(2) Represents compensation earned under the Company's Incentive Bonus
Plan for the fiscal year ended March 31, 1995 (the "Incentive Plan").
The Incentive Plan covers all Company employees and was effective as
of October 1, 1994. The Incentive Plan is based on achievement in
three specific areas - Company revenue, Company operating income, and
individual/ departmental objectives.
(3) Represents contribution of the Company under the Company's 401(k)
Plan.
(4) Represents $4,375 in compensation earned under the Incentive Plan as
described in (2) above as well as a stock bonus award of 25,000
shares of the Company's Common Stock granted on October 11, 1994,
pursuant to Mr. Sciambi's employment agreement with the Company,
which shares had a fair market value of $1.40 per share on the date
of grant or $35,000 in the aggregate.
(5) Compensation for Messrs. Sciambi and Gray includes payments they
earned as consultants of the Company in the amounts of $45,000 and
$42,000, respectively. Messrs. Sciambi and Gray served as consultants
to the Company prior to the time they became full-time employees
pursuant to their employment agreements with the Company dated
October 11, 1994 and March 27, 1995, respectively.
-26-
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth certain information concerning stock
option grants during the year ended March 31, 1996 to the Named Executive
Officers (after giving effect to the Reverse Stock Split):
Individual Grants
------------------------------------------------
Percent
Number of of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ------------------ ---------- ----------- ------ ----------
Lonnie L. Sciambi 3,378 4.4% $2.87 (1)
Stephen B. Gray 2,309 3.0% $2.87 (1)
Michael Radomsky 2,208 2.9% $2.87 (1)
6,000 7.8% $2.56 4/16/00
William H. Whitney 2,136 2.8% $2.87 (1)
6,000 7.8% $2.56 4/16/00
Robert M. Groll 1,837 2.4% $2.87 (1)
6,000 7.8% $2.56 4/16/00
(1) One-third of options are exercisable on or after April 3, 1995 with
an expiration date of March 31, 2000, an additional one-third are
exercisable on or after April 1, 1996 with an expiration date of
March 31, 2001 and an additional one-third are exercisable on or
after April 3, 1997 with an expiration date of March 31, 2002.
-27-
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning each
exercise of stock options during the fiscal year ended March 31, 1996 by each of
the Named Executive Officers and the number and value of unexercised options
held by each of the Named Executive Officers on March 31, 1996 (after giving
effect to the Reverse Stock Split).
<TABLE>
<CAPTION>
Value of
Unexercised
Number of Securities In-the-Money
Shares Underlying Unexercised Options at
Acquired on Value Options at FY-End(#) FY-End($)(1)
Name Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Lonnie L.
Sciambi -- -- 26,657/3,316 $2,700/$0
Stephen B. Gray -- -- 30,770/11,539 $0/$0
Michael
Radomsky -- -- 7,133/2,267 $0/$0
William H.
Whitney -- -- 7,115/2,230 $0/$0
Robert M.
Groll -- -- 21,915/1,830 $7,420/$0
</TABLE>
- -----------------------
(1) The average price for the Common Stock as reported by NASDAQ on March
31, 1996 was $1.938 per share. Value is calculated on the basis of
the difference between the option exercise price and $1.938
multiplied by the number of shares of Common Stock underlying the
options.
COMPENSATION OF DIRECTORS
On October 1, 1995, each of Stephen M. Deixler, Stephen P. Roma,
David I. Gould and Michehl R. Gent, the Company's non-employee directors were
granted a non-employee director option pursuant to the Company's 1994 Plan to
purchase 10,000 shares of Common Stock exercisable
-28-
<PAGE>
as to 2,500 shares upon each three-month anniversary of the date of grant,
provided that such individual continues to serve as a non-employee director of
the Company on such dates.
In addition, the Company adopted a policy commencing October 1, 1995,
that all non-employee directors traveling more than fifty miles to a meeting of
the Board of Directors shall be reimbursed for all reasonable travel expenses.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company entered into employment agreements with each of Messrs.
Robert M. Groll, Michael Radomsky and William H. Whitney, which commenced as of
January 1, 1994 and expire on December 31, 1996. Each agreement provides for a
salary of not less than $100,000 per year to continue through the term of the
agreement unless terminated for cause. Each agreement also provides each
executive during the term with reimbursement for reasonable expenses and fringe
benefits that generally are available to the Company's executives. Each of the
executives have agreed not to disclose any confidential information of the
Company during the term of his employment or thereafter and will not compete
with the Company for a period of two years following termination of his
employment.
On April 1, 1996, the Board of Directors did not renew the Company's
employment agreement with Mr. Lonnie L. Sciambi, the Company's then President
and Chief Executive Officer and simultaneously approved a compensation agreement
between the Company and Mr. Sciambi to be effective as of such date. See
"Certain Relationships and Related Transactions".
On March 27, 1995, the Company entered into an employment agreement
with Mr. Stephen B. Gray, in which he was appointed Senior Vice President -
Sales, Marketing and Support for a period of one (1) year with an option to
renew for two (2) additional years. The agreement provides for an initial annual
salary of $125,000 from the commencement of the agreement until March 31, 1995
("Initial Salary") with additional annual increases or decreases in the Initial
Salary based upon the Company's performance in the prior fiscal year measured
against the achievement by the Company of certain performance goals as
established by the Board of Directors with respect to certain weighted
performance criteria. Pursuant to the employment agreement, Mr. Gray also
received 40,000 options to acquire 40,000 shares of Common Stock under the
Company's 1994 Plan. In addition, Mr. Gray shall receive in accordance with the
agreement, reimbursement for reasonable expenses and fringe benefits that
generally are available to the Company's executives. Mr. Gray has agreed not to
disclose to anyone confidential information of the Company during the term of
his employment or thereafter and will not compete with the Company for a period
of two years following termination of his employment. On April 29, 1996, the
Board of Directors of the Company elected Mr. Gray as the President and Chief
Operating Officer of the Company and an employment agreement reflecting the
terms of Mr. Gray's employment in this capacity is currently being negotiated
between the Company and Mr. Gray.
-29-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of the Company's
Common Stock, owned by each person or institution who, as of June 17, 1996, owns
of record or is known by the Company to own beneficially, more than 5% of such
securities, and by each of the Company's Named Executive Officers and by its
Directors, and all of the directors and executive officers as a group, and the
percentage of such securities owned by each such person and the group. Unless
otherwise indicated, such persons have sole voting and investment power with
respect to shares listed as owned by them.
Name and Address Shares Owned* Percent of Class
- ---------------- ------------- ----------------
Stephen M. Deixler(1) 738,032 15.1%
371 Eagle Drive
Jupiter, Florida 33477
David I. Gould(2) 325,137 6.7%
10844 White Aspen Way
Boca Raton, Florida 33428
Michael Radomsky(3) 222,670 4.6%
8 Zaydee Drive
Edison, New Jersey 08837
William H. Whitney (4) 116,044 2.4%
15 Jackson Avenue
Chatham, New Jersey 07928
Robert M. Groll(5) 67,198 1.4%
52 Village Lane
Freehold, New Jersey 07728
Michehl R. Gent 49,159 1.1%
916 Aspen Drive
Plainboro, New Jersey 08536
Stephen P. Roma(6) 461,899 9.5%
91 Durand Drive
Marlboro, New Jersey 07748
-30-
<PAGE>
Name and Address Shares Owned* Percent of Class
- ---------------- ------------- ----------------
Lonnie L. Sciambi(7) 76,510 1.6%
262 N. Maple Avenue
Basking Ridge, New Jersey 07920
Stephen B. Gray(8) 31,540 **
37 Shy Creek Road
Alexandria, New Jersey 08867
Special Situations Fund, III, L.P.(9) 855,863 14.2%
MGP Advisers Limited Partnership (9) 855,863 14.2%
AWM Investment Company, Inc. (9) 1,164,133 22.4%
Austin W. Marxe (9) 1,164,133 22.4%
Jay Associates LLC (10) 480,000 9.3%
1118 Avenue J
Brooklyn, New York 11230
Alpha Investments LLC (11) 336,000 6.7%
5611 North 16th Street #300
Phoenix, Arizona 85016
Ora Gichtin (12) 300,000 6.0%
6316 Greenspring Avenue #304
Baltimore, Maryland 21209
Jules Nordlicht (12) 300,000 6.0%
225 West Beach Avenue
Long Beach, New York 11561
Directors and executive
officers as a group (9 Persons) 2,042,731 40.1%
- ---------------
* All shares and per share amounts have been adjusted to take into
account the Company's Reverse Stock Split.
** Less than 1% of the outstanding shares of Common Stock.
-31-
<PAGE>
(1) Does not include 214,436 shares of Common Stock owned by
Mr. Deixler's wife, mother, children and grandchildren as
to which shares Mr. Deixler disclaims beneficial
ownership. Includes 90,000 shares of Common Stock of which
Mr. Deixler is the beneficial owner, and which have been
issued to and are registered in the name of Olen and
Company custodian f/b/o Stephen M. Deixler. Also includes
5,000 shares of Common Stock which may be acquired
pursuant to currently exercisable non-employee director
options under the 1994 Plan. Also includes 53,330 shares
issuable upon exercise of currently exercisable Class A
and Class B Warrants of the 1996 Private Placement.
(2) Includes 50,000 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
outside the Company's 1984 Stock Option Plan and the 1994
Plan. Also includes 5,000 shares of Common Stock which may
be acquired pursuant to currently exercisable non-employee
director options under the 1994 Plan.
(3) Includes 8,266 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
under the Company's 1994 Plan.
(4) Includes 8,230 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
under the Company's 1994 Plan.
(5) Includes 10,000 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
under the Company's 1984 Plan. Also includes 13,030 shares
of Common Stock which may be acquired pursuant to
currently exercisable options granted under the 1994 Plan.
(6) Includes 47,877 shares of Common Stock held by Donaldson,
Lufkin & Jenrette Securities Corporation custodian f/b/o
Stephen P. Roma, IRA. Includes 8,400 shares of Common
Stock held by Mr. Roma and his wife as joint tenants. Also
includes 5,000 shares of Common Stock which may be
acquired pursuant to currently exercisable non-employee
director options under the 1994 Plan. Also includes 53,330
shares issuable upon exercise of currently exercisable
Class A and Class B Warrants of the 1996 Private
Placement. Does not include 1,200 shares of Common Stock
held by Mr. Roma as custodian for his son or 29,108 shares
owned by Mr. Roma's wife, some of which are held in Mrs.
Roma's individual retirement account, as to which shares
Mr. Roma disclaims beneficial ownership.
(7) Includes 51,510 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
under the 1994 Plan.
(8) Includes 31,540 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted
under the 1994 Plan.
-32-
<PAGE>
(9) Special Situations Fund III, L.P., a Delaware limited
partnership (the "Fund"), MGP Advisers Limited
Partnership, a Delaware limited partnership ("MGP"), AWM
Investment Company, Inc., a Delaware corporation ("AWM"),
and Austin W. Marxe have filed a Schedule 13G, the latest
amendment of which is dated January 5, 1996. All presented
information is based on the information contained in the
Schedule 13G and subsequent information known to the
Company. The address of each of the reporting persons is
153 East 53rd Street, New York, New York 10022. The Fund
has sole voting and dispositive power with respect to
855,863 shares; MGP has sole dispositive power with
respect to 855,863 shares; AWM has sole voting power with
respect to 308,270 shares and sole dispositive power with
respect to 1,164,133 shares; and Mr. Marxe has sole voting
power with respect to 308,270 shares, shared voting power
with respect to 855,863 shares and sole dispositive power
with respect to 1,164,133 shares. MGP is a general partner
of and investment advisor to the Fund. AWM, which is
primarily owned by Mr. Marxe, is the sole general partner
of MGP. Mr. Marxe, the principal limited partner of MGP
and the President of AWM, is principally responsible for
the selection, acquisition and disposition of the
portfolio securities by AWM on behalf of MGP, the Fund and
another fund that beneficially owns shares included in the
shares beneficially owned by AWM and Mr. Marxe. Also
includes 267,242 shares issuable upon exercise of
currently exercisable Class A and Class B Warrants of the
1996 Private Placement held by the Fund and MGP and
364,422 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996
Private Placement held by AWM and Mr. Marxe.
(10) Includes 320,000 shares issuable upon exercise of
currently exercisable Class A and Class B Warrants of the
1996 Private Placement.
(11) Includes 224,000 shares issuable upon exercise of
currently exercisable Class A and Class B Warrants of the
1996 Private Placement.
(12) Includes 200,000 shares issuable upon exercise of
currently exercisable Class A and Class B Warrants of the
1996 Private Placement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. David I. Gould, formerly an executive officer and a current
director of the Company entered into a consulting agreement with the Company
which become effective on May 1, 1995 upon the expiration date of his employment
agreement on April 30, 1995. The consulting agreement provides for a four-year
term, with an automatic one year renewal, and compensation at the rate of $1,000
per day for services provided. The consulting agreement further provides that
Mr. Gould will not receive less than $40,000 nor more than $220,000 per year,
and that the rendering of any services above $40,000 must be with the prior
approval of the Company.
-33-
<PAGE>
On April 1, 1996, the Company entered into a six-month compensation
agreement with Mr. Lonnie L. Sciambi, a former executive officer and director of
the Company after not renewing its existing employment agreement with Mr.
Sciambi. The compensation agreement provides for compensation in the aggregate
sum of $100,000, as well as certain benefits during the term. In addition, Mr.
Sciambi was granted a stock option under the Company's 1994 Plan to purchase
23,196 shares of Common Stock.
In April 1996, the Company completed the 1996 Private Placement to
accredited investors of an aggregate of 1,101,467 Units for gross proceeds of
$1,376,933.75, each Unit consisting of one share of Common Stock and one Class A
Warrant and one Class B Warrant, each of which are exercisable into one share of
Common Stock. Stephen M. Deixler, an executive officer and a director of the
Company and Stephen P. Roma, a director of the Company, who each held preemptive
rights to purchase Units in this offering, each purchased 26,665 Units at a
price of $1.25 per Unit for aggregate consideration of $33, 331.25.
Additionally, in connection with the 1996 Private Placement, Special Situations
Fund III, L.P., also the holder of preemptive rights purchased 133,621 Units at
$1.25 for aggregate consideration of $167,026.25.
In September 1995, the Company formed a wholly-owned subsidiary,
MicroFrame Europe N.V., which, in turn, acquired all of the issued and
outstanding shares of capital stock of European Business Associates BVBA ("EBA")
of Brussels, Belgium from Marc Kegelaers, its sole shareholder. In connection
with such acquisition, MicroFrame Europe N.V. entered into a consulting
agreement with Mr. Kegelaers for a term of five years. The consulting agreement
provides for a consulting fee in the aggregate sum of U.S.$75,000, as well as
the reimbursement of certain expenses during the term.
-34-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits and Index of Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Reference
--- ----------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of
Company the Form 10-K for the fiscal year ended
March 31, 1992 (the "1992 10-K")
3.2 By-Laws of the Company Incorporated by reference to Exhibit 3.2 of
Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (No.
33-66688) dated October 26, 1993
("Amendment No. 1 to the Registration
Statement")
3.3 Amendment No. 2 of the Company's Filed herewith
By-Laws
3.4 Amendment to Certificate of Incorporated by reference to Exhibit 3.3 of
Incorporation filed September 14, 1992 the Form 10-KSB for the fiscal year ended
March 31, 1993 (the "1993 10-KSB")
3.5 Amendment to Certificate of Incorporated by reference to Exhibit 3.4 of
Incorporation filed September 20, 1993 Amendment No. 1 to the Registration
Statement
3.6 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of
Certificate Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (No.
33-66688) dated December 1, 1993
("Amendment No. 2 to the Registration
Statement")
10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4
of the of the Form 10-K for the fiscal year
ended March 31, 1985
10.2 Amendment No. 2 to 1984 Stock Incorporated by reference to Exhibit 10.5
Option Plan of the Form 10-K for the fiscal year ended
March 31, 1986 (the "1986 10-K")
-35-
<PAGE>
Exhibit
No. Description Exhibit Reference
--- ----------- -----------------
10.3 Lease Agreement Incorporated by reference to Exhibit 10.6
of the Form 10-K for the fiscal year ended
March 31, 1991 (the "1991 10-K")
10.4 Stock Purchase Agreement dated May Incorporated by reference to Exhibit 10.4
10, 1993 pursuant to Private Placement of the 1993 10-KSB
10.5 Employment Agreement dated as of Incorporated by reference to Exhibit 10.5
May 2, 1992 between David I. Gould of Amendment No. 2 to the Registration
and the Company Statement
10.6 Loan Agreement between the Company Incorporated by reference to Exhibit 10.6
and New Jersey National Bank of the 199310-KSB
10.7 Letter Agreement dated April 28, 1993 Incorporated by reference to Exhibit 10.7
between the Company and New Jersey of Amendment No. 1 to the Registration
National Bank Statement
10.8 Form of Consulting Agreement Incorporated by reference to Exhibit 10.8
between David I. Gould and the of Amendment No. 1 to the Registration
Company Statement
10.9 Agreement between American Incorporated by reference to Exhibit 10.9
Telephone and Telegraph Company and of Amendment No. 2 to the Registration
the Company dated September 17, Statement
1993
10.10 Joint Marketing Agreement between Incorporated by reference to Exhibit 10.10
MCI Telecommunications Corporation of Amendment No. 2 to the Registration
and the Company dated September 1, Statement
1992, together with Amendment No. 1
dated July 7, 1993
10.11 Employment Agreement dated as of Incorporated by reference to Exhibit 10.11
January 1, 1994 between Michael of Form 10-KSB for the fiscal year ended
Radomsky and the Company March 31, 1994 (the "1994 10-KSB")
-36-
<PAGE>
Exhibit
No. Description Exhibit Reference
--- ----------- -----------------
10.12 Employment Agreement dated as of Incorporated by reference to Exhibit 10.12
January 1, 1994 between William H. of the 1994 10-KSB
Whitney and the Company
10.13 Employment Agreement dated as of Incorporated by reference to Exhibit 10.13
January 1, 1994 between Robert M. of the 1994 10-KSB
Groll and the Company
10.14 Employment Agreement dated as of Incorporated by reference to Exhibit 10.15
January 1, 1994 between P. David of Amendment No. 2 to the Registration
Bocksch and the Company Statement
10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15
of the 1994 10-KSB
10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16
Agreement between the Company and of Form 10-QSB for the quarter ended
CoreStates Bank, N.A. dated September 30, 1994
September 8, 1994.
10.17 Consulting Agreement between the Incorporated by reference to Exhibit 10.17
Company and P. David Bocksch dated to Form 8-K dated November 30, 1994
November 14, 1994
10.18 Employment Agreement dated as of Incorporated by reference to Exhibit 10.18
October 11, 1994 between the to Form 10-QSB for the quarter ended
Company and Lonnie L. Sciambi December 31, 1994
10.19 Incentive Bonus Plan of the Company Incorporated by reference to Exhibit 10.19
for the fiscal year ended March 31, to Form 10-QSB for the quarter ended
1995 December 31, 1994
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20
Company to the Securities and to Form 8-K dated March 13, 1995
Exchange Commission relating to Item
4 of Form 8-K
10.21 1994 Stock Option Plan Incorporated by reference to Exhibit 10.29
(as amended on July 17, 1995) of Form 10-QSB for the quarter ended
September 30, 1995.
-37-
<PAGE>
Exhibit
No. Description Exhibit Reference
--- ----------- -----------------
10.22 Non-Qualified Stock Option Agreement Incorporated by reference to Exhibit 10.22
dated December 19, 1994 between the of the Form 10-KSB for the fiscal year
Company and Cameron Towey Neilson, ended March 31, 1995 (the "1995 10-
Inc. KSB").
10.23 Purchase Agreement dated December Incorporated by reference to Exhibit 10.23
21, 1994 between the Company and of the 1995 10-KSB
Ericsson Business Networks AB
10.24 Employment Agreement dated as of Incorporated by reference to Exhibit 10.24
March 27, 1995 between the Company of the 1995 10-KSB.
and Stephen B. Gray
10.25 Letter dated April 5, 1995 from the Incorporated by reference to Exhibit 10.25
Company to P. David Bocksch of the 1995 10-KSB
terminating his Consulting Agreement
10.26 Incentive Bonus Plan of the Company Incorporated by reference to Exhibit 10.26
for the fiscal year ending March 31, of the 1995 10-KSB
1996
10.27 Employment Agreement dated as of Incorporated by reference to Exhibit 10.27
July 1, 1995 between the Company and of Form 10-QSB for the quarter ended
Mark A. Simmons September 30, 1995
10.28 Lease Agreement dated as of July 20, Incorporated by reference to Exhibit 10.28
1995 between 46.25 Associates, L.P. of Form 10-QSB for the quarter ended
and the Company for premises at the September 30, 1995
Middlesex (New Jersey) Business
Center
10.29 Share Purchase Agreement (EBA) Incorporated by reference to Exhibit 10.30
dated September 15, 1995 between of Form 10-QSB for the quarter ended
Marc Kegelaers and MicroFrame September 30, 1995
Europe N.V.
-38-
<PAGE>
Exhibit
No. Description Exhibit Reference
--- ----------- -----------------
10.30 Consulting Agreement dated as of Incorporated by reference to Exhibit 10.31
September 15, 1995 between Marc of Form 10-QSB for the quarter ended
Kegelaers and MicroFrame Europe September 30, 1995
N.V.
10.31 Termination Letter dated September Incorporated by reference to Exhibit 10.32
15, 1995 from European Business of Form 10-QSB for the quarter ended
Associates BVBA to the Company September 30, 1995
10.32 Letter from Price Waterhouse LLP to Incorporated by reference to Exhibit 10.33
the Securities and Exchange of Form 8-K dated January 30, 1996
Commission relating to Item 4 of Form
8-K
10.33 Form of Purchase Agreement dated Filed herewith
April 1996 pursuant to the 1996 Private
Placement
10.34 Consulting Agreement between the Filed herewith
Company and Lonnie L. Sciambi dated
April 1, 1996
10.35 Fiscal 1997 Incentive Plan Filed herewith
23 (a) Consent of Price Waterhouse LLP Filed herewith
23 (b) Consent of Coopers and Lybrand LLP Filed herewith
(b) Reports on Form 8-K
</TABLE>
During the quarter ended March 31, 1996, the Company filed two
reports on Form 8-K dated January 10, 1996 and January 30, 1996 under Item 4.
-39-
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Report of Independent Accountants F-1.1
Consolidated Balance Sheets as of March 31, 1996 and
March 31, 1995 F-2
Consolidated Statements of Operations for the years ended
March 31, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1996 and March 31, 1995 F-5
Notes to Consolidated Financial Statements for the years
ended March 31, 1996 and 1995 F-6-18
<PAGE>
COOPERS & LYBRAND L.L.P.
(LETTERHEAD)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MicroFrame, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of MicroFrame, Inc.
and Subsidiary (the "Company") as of March 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of March 31, 1996 and the consolidated results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
June 21, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
May 19, 1995
To the Board of Directors and Stockholders
of MicroFrame, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of cash flows and of changes in stockholders' equity present fairly, in
all material respects, the financial position of MicroFrame, Inc. (the
"Company") at March 31, 1995, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
/S/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
F-1.1
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Balance Sheets
as of March 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 48,302 $ 490,261
Accounts receivable, less allowance for doubtful
accounts of $100,000 and $75,000, respectively 1,540,561 1,912,304
Inventory 1,084,870 775,540
Deferred tax asset -- 400,000
Prepaid expenses and other current assets 77,426 24,325
----------- -----------
Total current assets 2,751,159 3,602,430
Property and equipment at cost, net 409,866 317,585
Capitalized software, less accumulated amortization
of $649,332 and $370,879, respectively 266,319 211,602
Goodwill, less accumulated amortization of $5,766 and $0, respectively 95,844 --
Security deposits 34,983 31,412
Deferred tax asset -- 174,900
----------- -----------
Total assets $ 3,558,171 $ 4,337,929
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 538,754 $ --
Accounts payable 395,619 354,427
Accrued payroll and related liabilities 285,651 240,900
Deferred income 258,856 202,478
Other current liabilities 435,215 62,730
----------- -----------
Total current liabilities 1,914,095 860,535
----------- -----------
Commitments and contingencies (Notes 8 and 9)
Long-term debt 72,833 --
Stockholders' equity
Common stock - par value $.001 per share; authorized 50,000,000
shares, issued 3,718,075 shares and outstanding 3,717,675
shares at March 31, 1996; issued 3,687,198 shares and
outstanding 3,686,798 shares at March 31, 1995 3,718 3,687
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued -- --
Additional paid-in capital 4,856,924 4,769,406
Accumulated deficit (3,285,399) (1,291,699)
----------- -----------
1,575,243 3,481,394
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------- -----------
Total stockholders' equity 1,571,243 3,477,394
----------- -----------
Total liabilities and stockholders' equity $ 3,558,171 $ 4,337,929
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 6,258,243 $ 7,126,391
Cost of sales 2,789,855 3,015,520
----------- -----------
Gross margin 3,468,388 4,110,871
Research and development expenses 713,441 488,339
Selling, general and administrative expenses 4,043,356 3,048,224
----------- -----------
(Loss) income from operations (1,288,409) 574,308
Interest income 3,649 10,392
Interest expense (34,917) (1,803)
Other expense, net (99,123) --
----------- -----------
(Loss) income before income tax provision (1,418,800) 582,897
Income tax provision 574,900 218,100
----------- -----------
Net (loss) income $(1,993,700) $ 364,797
=========== ===========
Per share data
Net (loss) income per share $ (0.54) $ 0.10
----------- -----------
Weighted average number of common shares outstanding 3,703,476 3,761,894
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $(1,993,700) $ 364,797
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 431,739 212,132
Provision for bad debts 89,121 35,000
Provision for inventory obsolescence 176,660
Deferred tax provision 574,900 218,100
Stock compensation expense -- 35,000
(Increase) decrease in
Accounts receivable 289,525 (812,063)
Inventory (465,863) 258,796
Prepaid expenses and other current assets (24,773) (17,841)
Security deposits (1,921) (13,782)
Increase (decrease) in
Accounts payable 10,887 (96,961)
Accrued payroll and related liabilities 40,311 180,091
Deferred income 56,378 52,484
Other current liabilities 347,447 (72,559)
----------- -----------
Net cash (used) provided by operating activities (469,289) 343,194
----------- -----------
Cash flows from investing activities
Capital expenditures (210,304) (205,897)
Capitalized software (333,170) (141,842)
Acquisition of European Business Associates, net of cash acquired (50,208) --
----------- -----------
Net cash used in investing activities (593,682) (347,739)
----------- -----------
Cash flows from financing activities
Proceeds of short-term borrowings 500,000 --
Proceeds of long-term debt 124,000 --
Repayments of debt (12,413) (13,511)
Issuance of common stock 9,425 3,000
----------- -----------
Net cash provided (used) by financing activities 621,012 (10,511)
----------- -----------
Net (decrease) in cash and cash equivalents (441,959) (15,056)
Cash and cash equivalents - beginning of period 490,261 505,317
----------- -----------
Cash and cash equivalents - end of period $ 48,302 $ 490,261
=========== ===========
Supplemental information
Cash paid during period for
Interest $ 34,095 $ 13,577
----------- -----------
Noncash investing and financing activities
In connection with acquisition of European Business Associates $ 78,124 $ --
----------- -----------
Issuance of common stock to officer $ -- $ 35,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Treasury Stockholders'
Shares Par Value Capital Deficit Stock Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 3,641,798 $ 3,642 $ 4,731,451 $(1,656,496) $ (4,000) $ 3,074,597
----------- ----------- ----------- ----------- ----------- -----------
Net income -- -- -- 364,797 -- 364,797
Issuance of common stock 45,000 45 37,955 -- -- 38,000
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1995 3,686,798 3,687 4,769,406 (1,291,699) (4,000) 3,477,394
----------- ----------- ----------- ----------- ----------- -----------
Net loss -- -- -- (1,993,700) -- (1,993,700)
Issuance of common stock 30,877 31 87,518 -- -- 87,549
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1996 3,717,675 $ 3,718 $ 4,856,924 $(3,285,399) $ (4,000) $ 1,571,243
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 1996 and 1995
1. ORGANIZATION:
THE COMPANY
MicroFrame, Inc. (the "Company"), founded in 1982, designs, develops and
markets a broad range of security, network management and remote
maintenance products for voice and data communications networks. By
incorporating a variety of hardware and software options for user
authentication, these products can deter unauthorized dial-in access to
both devices and systems (such as computers, local areas networks and
Private Branch Exchange telephone switches), while allowing authorized
personnel access to perform needed administration and maintenance of host
devices and networks from remote locations. The Company's products also
provide alarm monitoring and reporting capabilities, a basis for remote
network management and maintenance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MicroFrame, Inc. and its subsidiary (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less
at the time of purchase to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market,
and consists of hardware and software components designed to interface with
network communications environments.
The markets for the Company's products are characterized by rapidly
changing technology and the consequential obsolescence of relatively new
products. The Company has recorded certain estimated reserves against
inventories related to such technological obsolescence.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
which are generally three to five years. Expenditures for maintenance and
repairs, which do not extend the economic useful life of the related assets
are charged to operations as incurred. Gains or losses on disposal of
property and equipment are reflected in the statements of operations.
F-6
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CAPITALIZED SOFTWARE
The Company capitalizes computer software development costs in accordance
with the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS No. 86"). SFAS 86 requires that the Company
capitalize computer software development costs upon the establishment of
the technological feasibility of a product, to the extent that such costs
are expected to be recovered through future sales of the product.
The Company capitalized $333,170 of software development costs for fiscal
1996. These costs are amortized by the greater of the amount computed using
(i) the ratio that current gross revenues from the sales of software bear
to the total of current and anticipated future gross revenues from sales of
that software, or (ii) the straight-line method over the estimated useful
life of the product (generally three years). It is reasonably possible that
those estimates of anticipated future gross revenues, the remaining
estimated economic life of the product, or both will be reduced
significantly in the near term (due to competitive pressures). As a result,
the carrying amount of the capitalized software costs may be reduced
materially in the near term. Amortization expense totaled $278,453 and
$146,865 for fiscal 1996 and fiscal 1995, respectively.
GOODWILL
Goodwill is being amortized on a straight-line basis over ten years.
RESEARCH AND DEVELOPMENT COSTS
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development
expense.
REVENUE RECOGNITION POLICY
The Company records revenue in accordance with Statement of Position 91-1,
"Software Revenue Recognition" (the "SOP"). In accordance with the SOP, the
Company records revenue from product sales upon shipment to the customer if
there exists no significant vendor obligations and collectibility is
probable. Maintenance contracts are sold separately and maintenance revenue
is recognized on a straight-line basis over the period the service is
provided. At March 31, 1996 and 1995 the Company has deferred income
related to maintenance contracts of $258,856 and $202,478, respectively.
WARRANTY COSTS
Warranty costs associated with the sale of hardware and software are
accrued at the time of sale. The warranty reserve as of March 31, 1996 and
1995 included in other current liabilities amounts to $25,000 and $19,125,
respectively.
F-7
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
FAIR VALUE
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued payroll and related liabilities, deferred income,
and other current liabilities approximates fair value because of the
relatively short maturity of these instruments. The Company's line of
credit has a variable interest rate which adjusts with changes in market
interest rates and the book value of such indebtedness is deemed to
approximate fair value.
PER SHARE DATA
The per share data appearing in the statements of operations for the years
ended March 31, 1996 and 1995 has been prepared in accordance with the
Accounting Principles Board Opinion No. 15. Such amounts have been computed
based on the (loss) income for the period divided by the weighted average
number of shares of common stock outstanding during the period plus the
dilutive effects of common stock equivalents. For the year ended March 31,
1996, the weighted average number of shares outstanding excludes the number
of common shares issuable upon the exercise of outstanding stock options
and warrants since the inclusion would be anti-dilutive. For the fiscal
year ended March 31, 1995, the weighted average number of shares
outstanding includes the dilutive effect of options and warrants of 99,907.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax return. Under
this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets and
liabilities ("temporary differences") using enacted tax rates in effect for
the year in which the differences are expected to reverse. Recognition of a
deferred tax asset is allowed if future realization is more likely than
not.
F-8
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121") in March 1995.
SFAS 121 requires companies to review their long-lived assets and certain
identifiable intangibles (collectively, "Long-Lived Assets") for impairment
whenever events or changes in circumstances indicate that the carrying
value of a Long-Lived Asset may not be recoverable. Impairment is measured
using the lower of a Long-Lived Asset's book value or fair value, as
defined. The Company will be required to adopt the provisions of SFAS 121
at the beginning of the fiscal year ending March 31, 1997.
The Company believes that, based upon current operations and prospects, the
future adoption of SFAS 121 will not have a material impact on the
Company's financial position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") in October 1995. The Company will be required to adopt the
provisions of SFAS 123 at the beginning of the fiscal year ending March 31,
1997. SFAS 123 requires companies to estimate the fair value of common
stock, stock options, or other equity instruments ("Equity Instruments")
issued to employees using pricing models which take into account various
factors such as current price of the common stock, volatility and expected
life of the Equity Instrument. SFAS 123 permits companies to either provide
pro forma note disclosure, or adjust operating results, for the
amortization of the estimated value of the Equity Instrument over the
vesting period of the Equity Instrument. The Company has elected to account
for stock options under Accounting Principles Board Opinion No. 25 and will
disclose certain pro forma information beginning in fiscal 1997.
3. INVENTORY:
Inventory at March 31, 1996 and 1995 consists of the following:
1996 1995
------------ ------------
Raw materials $ 676,120 $ 347,962
Work-in-process 367,820 286,667
Finished goods 40,930 140,911
------------ ------------
$ 1,084,870 $ 775,540
============ ============
F-9
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
4. PROPERTY AND EQUIPMENT AT COST, NET:
At March 31, 1996 and 1995 property and equipment consists of the
following:
1996 1995
----------- ----------
Demonstration and service equipment $ 727,517 $ 503,636
Furniture and fixtures 175,174 162,250
Leasehold improvements 58,936 21,817
----------- ----------
961,627 687,703
Less: Accumulated depreciation and amortization (551,761) (370,118)
----------- ----------
Total $ 409,866 $ 317,585
=========== ==========
Depreciation and amortization of property and equipment for the years ended
March 31, 1996 and 1995 amounted to $147,520 and $65,267, respectively.
5. BANK BORROWINGS:
The Company has an available bank line of credit, through July 31, 1996, in
the amount of the lesser of $1,000,000, or 80% of the existing qualified
accounts receivable under 90 days. The line is collateralized by the
accounts receivable, inventory, equipment, and all other assets of the
Company. Any advances under the bank line are payable on demand, and bear
interest at the bank's prime rate (8.25% at March 31, 1996) plus 1%. At
March 31, 1996, $500,000 was outstanding under this line of credit.
In addition, the Company has available a credit facility, through July 31,
1996, in the amount of $150,000 to support 80% of capital expansion. This
facility is collateralized by the same assets noted in the previous
paragraph. In November 1995, $124,000 was borrowed against this facility
with a term of three years, payable monthly, at an interest rate of 8.55%.
At March 31, 1996, $111,587 was outstanding, of which $72,833 is
non-current. Future principal repayments under this loan are $38,754,
$42,476 and $30,357 for the years ending March 31, 1997, 1998 and 1999,
respectively.
The bank line of credit and capital expansion credit facility contain
various covenants which among other things, restrict payment of dividends
without prior approval from the bank, require the maintenance of certain
amounts of working capital and debt to tangible net worth ratio. At March
31, 1996, the Company was not in compliance with the working capital
covenant; subsequently the bank extended the term through October 31, 1996
and waived the covenant violation as it relates to the capital expansion
credit facility (see Note 14).
F-10
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
6. INCOME TAXES:
As of March 31, 1996, the Company has available, unused federal and state
net operating loss carryforwards of approximately $2,443,000 and
$1,022,000, respectively to offset future taxable income, expiring from
2001 through 2011. In addition, the Company has investment credit and
research and development credit carryforwards aggregating approximately
$97,000, which may provide future tax benefits, expiring from 1999 through
2002.
March 31,
1996 1995
------ ------
Effective tax rate reconciliation:
Statutory federal tax rate (34%) 34%
State taxes, net of federal benefit (6%) 6%
Non-deductible expenditures -- --
Effect of valuation allowance 81% --
Other -- (2.6%)
------ ------
41% 37.4%
------ ------
The tax effect of temporary differences and net operating loss
carryforwards which make up the significant components of the net deferred
tax asset and liability for financial reporting purposes at March 31, 1996
and 1995 are approximately as follows:
1996 1995
----------- ----------
Deferred tax assets:
Accounts receivable $ 40,000 $ 30,000
Inventory 130,000 29,486
Accrued expenses 121,645 7,600
Net operating loss carry forward 891,940 529,614
Research and development credit 97,307 63,000
Deferred tax liability:
Equipment (22,849) -
Capitalized Software (106,528) (84,800)
Valuation allowance (1,151,515) -
----------- ----------
Net $ - $ 574,900
=========== ==========
F-11
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
6. INCOME TAXES, CONTINUED:
SFAS 109 requires that a valuation allowance be recorded against tax assets
which are not likely to be realized. Due to the uncertain nature of their
ultimate realization based upon the current year loss, the Company has
established a full valuation allowance against the deferred tax assets of
$1,151,515.
7. STOCKHOLDERS' EQUITY:
During the year ended March 31, 1995, 20,000 shares of common stock granted
under the Company's stock option plans were exercised, for an aggregate
consideration of $3,000. In addition, an award of 25,000 shares of common
stock was made to an officer of the Company. The aggregate market value of
this award was $35,000 and was recorded as a charge to operations.
During the year ended March 31, 1996, 5,877 shares of common stock granted
under the Company's stock option plans were exercised, for an aggregate
consideration of $9,425. In addition, 25,000 shares of common stock were
issued as part of the consideration for the purchase of European Business
Associates BVBA (see Note 12). The aggregate fair market value of this
consideration was $78,124 and was recorded as part of the total
consideration paid for this acquisition.
F-12
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
7. STOCKHOLDERS' EQUITY, CONTINUED:
STOCK OPTION PLANS
In August 1984, the Company adopted its 1984 Stock Option Plan (the "Plan")
to authorize the granting of both options intended to qualify under the
provisions of Section 422A of the Internal Revenue Code, as amended, and
nonqualified options. The Plan also permits Stock Appreciation Rights
("SAR's") to be granted with an option. An optionee may be granted a SAR
with respect to the number of shares for which he is simultaneously granted
an option. A SAR provides the recipient with the right to receive cash or
stock having a value equal to the increase in value of the shares subject
to the SAR from the date of grant to the date of exercise. SAR's may be
exercised in addition to, but only at the same time and to the same extent
as, the related options. No SAR's have been granted by the Company.
The Plan provides that options to purchase a maximum of 220,000 shares
(subject to adjustment in certain circumstances) of the Company's common
stock. The exercise price of each option is fixed at the time of grant, but
must not be less than 100% (110% if the person granted such options owns
more than ten percent of the outstanding common stock) of the fair market
value of the common stock at the time the option is granted. The Plan
expired in August 1994, with options granted covering 209,800 of the
available shares. At March 31, 1996, 32,900 options remained to be
exercised.
In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan initially provided for the grant of options to
purchase a maximum of 250,000 shares of Common Stock. The 1994 Plan was
subsequently amended in July 1995 to increase the number of shares of
Common Stock for which options may be granted to a maximum of 750,000
shares. The aggregate fair market value (determined at the time the option
is granted) of shares which are exercisable during any calendar year by any
one individual may not exceed $100,000. The term of these non-transferable
stock options may not exceed ten years. The exercise price of these stock
options may not be less than 100% (110% of the person granted such options
owns more than ten percent of the outstanding common stock) of the fair
market value of one common stock subject to such option on the date of
grant. During the year ended March 31, 1996, the Company granted options to
purchase 116,533 shares of its common stock under the 1994 Plan.
WARRANTS
During October 1995, in connection with services being performed by a
consultant, the Company issued 250,000 warrants to the consultant to
purchase shares of the Company's common stock. Warrants to purchase 50,000
shares of common stock at $3.25 per share vested immediately. Warrants to
purchase each additional block of 50,000 shares of common stock are
exercisable at $3.75, $4.25, $4.75 and $5.25 per share, respectively and
shall vest on each three month anniversary of the agreement. The warrants
expire five years from the date of grant.
F-13
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
7. STOCKHOLDERS' EQUITY, CONTINUED:
Details of options granted are as follows: Option Price
Shares Per Share ($)
-------- ------------
Options outstanding at March 31, 1994 323,200 .15 to 5.00
Granted 293,545 1.72 to 3.00
Cancelled (242,900) 1.45 to 5.00
Exercised (20,000) .15
-------- ------------
Options outstanding at March 31, 1995 353,845 1.25 to 2.75
GrantedGrantedGrantedGrantedGranted 116,533 1.78 to 3.13
CancelledCancelledCancelledCancelledCancelled (28,503) 1.25 to 2.87
ExercisedExercisedExercisedExercisedExercised (5,877) 1.25 to 2.14
-------- ------------
Options outstanding at March 31, 1996 435,998 1.25 to 3.13
-------- ------------
Options exercisable at March 31,
1995 266,178 1.25 to 2.75
1996 366,171 1.25 to 3.13
8. COMMITMENTS:
OPERATING LEASES
In June 1993, the Company amended its lease for office and manufacturing
facilities. Such amendment extends the term of the lease until June 30,
1999. In July 1995, the Company executed an additional building lease for
the purpose of expanding its office and manufacturing facilities. The terms
of the new lease provide for an expiration date concurrent with that of the
existing building lease. The Company also leases office equipment and one
automobile under various leases expiring through March, 1999.
The fixed minimum payments under operating leases for future periods is as
follows:
Year ending March 31,
1997 $ 133,400
1998 148,100
1999 143,700
2000 38,000
2001 -
Thereafter -
-------------
Total minimum lease payments $ 463,200
-------------
Rent expense, in addition to allocated occupancy expenses, for the years
ended March 31, 1996 and 1995 approximated $119,300 and $79,800,
respectively.
F-14
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
8. COMMITMENTS, CONTINUED:
CONSULTING CONTRACT
The Company entered into a consulting agreement with an officer to become
effective upon the expiration (or mutually agreed upon termination) of his
employment agreement on May 2, 1995. The agreement provides that he will
not receive less than $40,000 per year nor more than $220,000 per year, the
amount of which is dependent on the level of services provided.
In connection with the acquisition of European Business Associates BVBA of
Brussels, Belgium from Marc Kegelaers (see Note 12), the Company entered
into a consulting agreement with Mr. Kegelaers for a term of five years.
The consulting agreement provides for a consulting fee $75,000, as well as
reimbursement of certain expenses.
Effective April 1, 1996, the Company did not renew the employment agreement
of one of its officers and entered into a compensation arrangement. This
arrangement was entered into, in part as a result of the Company not
achieving certain performance milestones for the year ended March 31, 1996,
pursuant to the officer's employment agreement. The agreement provides that
he will receive an aggregate sum of $100,000 payable at the rate of $15,000
per month, with payment upon execution of $10,000. In addition, the
agreement called for a continuation of Company benefits for the period of
the agreement, a monthly car allowance of $750 for the period of the
agreement, and options to purchase 23,196 shares of the Company's common
stock at an exercise price of $1.94 per share with an expiration date of
March 31, 2001. As a result of this agreement, the Company accrued $120,000
in the fiscal year ended March 31, 1996 to cover the costs of this
agreement.
9. CONTINGENT LIABILITIES:
The Company is involved in proceedings with respect to certain sales tax
matters. Total amounts included in other current liabilities and other
expense, net, related to these proceedings is $100,000 at March 31, 1996.
In the opinion of management of the Company, amounts accrued for
assessments in connection with sales tax are adequate and ultimate
resolution of these matters will not have a material effect on the
Company's consolidated financial position, results of operations or cash
flows.
F-15
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
10. EMPLOYEE BENEFIT PLANS:
Effective April 1, 1993, the Company adopted a defined contribution savings
plan. The terms of the plan provide for eligible employees ("participants")
who have met certain age and service requirements to participate by
electing to contribute up to 15% of their gross salary to the plan, as
defined, with the Company matching 30% of a participant's contribution up
to a maximum of 6% of gross salary, as defined. Company contributions vest
at the rate of 25% of the balance at each employee's second, third, fourth,
and fifth anniversary of employment. The employees' contributions are
immediately vested. The Company's contribution to the savings plan for the
years ended March 31, 1996 and 1995 was $29,729 and $24,482, respectively.
11. SALES:
Sales by geographic area for the years ended March 31, 1996 and 1995 are as
follows:
1996 1995
--------------- --------------
United States $ 4,946,702 $ 6,178,259
Europe 1,058,960 597,258
Pacific Rim 98,156 232,336
Other 154,425 118,538
--------------- --------------
6,258,243 7,126,391
=============== ==============
The Company sells a substantial portion of its products to two customers.
Sales to these customers amounted to $3,039,086 (49% of net sales) in 1996
and $4,288,238 in 1995 (60% of net sales), respectively. At March 31, 1996
and 1995, amounts due from these customers included in accounts receivable,
were $1,022,725 and $1,010,535, respectively. During fiscal 1996, sales
from the Secure Sentinel product line were responsible for approximately
50% of the Company's overall revenue. The loss of either of these two
customers would have a material adverse effect on the Company's financial
position and results of operations.
F-16
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
12. ACQUISITION OF EUROPEAN BUSINESS ASSOCIATES:
On September 15, 1995, MicroFrame Europe N.V., a newly formed wholly-owned
subsidiary, acquired all of the issued and outstanding shares of capital
stock of European Business Associates BVBA of Brussels, Belgium ("the
Seller"), a marketing organization which specializes in creating and
managing distribution networks and OEM relations for suppliers to the
telecommunications industry. MicroFrame Europe N.V. will serve as the
Company's European sales and distribution coordinator as well as provide
technical support services for the Company's authorized European
distributors.
The acquisition was accounted for under the purchase method of accounting.
The results of the operations of MicroFrame Europe N.V. are included with
the Company's results of operations from the date of acquisition. This
acquisition did not have a significant impact on the results of operations.
The Company issued cash and common stock valued at $128,125, assumed
liabilities of $59,783, and incurred $35,075 in additional costs related to
the acquisition. In addition, the Company shall pay the Seller, on each
anniversary for a period of five years, a cash and stock earn out as
stipulated in the Share Purchase Agreement. At March 31, 1996, the Company
has accrued approximately $25,000 for these costs. Total consideration as
allocated to the assets acquired was as follows:
Current assets $ 90,226
Property and equipment 29,497
Other assets 1,650
Goodwill 101,610
----------
$ 222,983
==========
13. FOURTH QUARTER DATA:
In the fourth quarter of fiscal 1996, the Company recorded the following
adjustments: a $574,900 valuation allowance against the deferred tax asset
(see Note 6); a $120,000 provision related to the separation of an officer
(see Note 8); a $100,000 provision related to the New York State sales tax
assessment (see Note 9), and a $100,000 provision relating to accrued
vacation. In addition, the Company determined that certain inventory, due
to discontinuance of product lines and capitalized software due to new
product development were obsolete. The Company recorded a $150,000
provision for inventory obsolescence and a $100,000 write-off of certain
capitalized software development costs.
F-17
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Years Ended March 31, 1996 and 1995
14. SUBSEQUENT EVENT:
In April, 1996, the Company sold 860,000 shares of common stock to
unrelated investors, at $1.25 per share and received net proceeds of
approximately $1,050,000. In conjunction with this sale, warrants to
purchase 860,000 shares of common stock with an exercise price of $1.50 and
warrants to purchase an additional 860,000 shares of common stock with an
exercise price of $2.00 were issued. These warrants expire in April, 2000.
In addition, the Company sold 241,467 shares of common stock to four
current shareholders of record who held the contractual right to maintain
their share of ownership. The Company received net proceeds of $301,834. In
conjunction with this sale, warrants to purchase 241,467 shares of common
stock with an exercise price of $1.50 and warrants to purchase an
additional 241,467 shares of common stock with an exercise price of $2.00
were issued. These warrants expire in April, 2000.
On June 21, 1996, the bank and the Company agreed to the following
repayment terms, for the existing line of credit at June 15, 1996 of
$400,000: $100,000 by July 31, 1996; $100,000 by August 31, 1996; $100,000
by September 29, 1996; and $100,000 by October 31, 1996. On June 17, 1996
the Company repaid $100,000. In addition, the bank agreed to honor the
existing terms of the capital expansion credit facility.
F-18
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in this City of
Edison and State of New Jersey, on June 27, 1996.
MICROFRAME, INC.
By: /s/ Stephen B. Gray
-----------------------
Stephen B. Gray, President and Chief
Operating Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title
-------------------
/s/ Stephen B. Gray
- --------------------------------
Stephen B. Gray, President and Chief
Operating Officer (Principal Executive Officer) June 27, 1996
/s/ Mark A. Simmons
- --------------------------------
Mark A. Simmons, Vice President -
Operations, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) June 27, 1996
/s/ Stephen M. Deixler
- --------------------------------
Stephen M. Deixler, Chairman of the
Board of Directors, Chief Executive Officer, Treasurer June 27, 1996
/s/ Michael Radomsky
- --------------------------------
Michael Radomsky, Executive Vice
President, Secretary, Director June 27, 1996
-40-
<PAGE>
/s/ William H. Whitney
- --------------------------------
William H. Whitney, Chief Technology
Officer, Assistant Secretary, Director June 27, 1996
/s/ Michehl R. Gent
- --------------------------------
Michehl R. Gent, Director June 27, 1996
/s/ Stephen P. Roma
- --------------------------------
Stephen P. Roma, Director June 27, 1996
/s/ David I. Gould June 27, 1996
- --------------------------------
David I. Gould, Director
AMENDMENT NO. 2 TO THE
BY-LAWS OF MICROFRAME, INC.
---------------------------------
Pursuant to Section 3, Article VI of the By-laws of MicroFrame, Inc. (the
"Corporation"), the Board of Directors of the Corporation amends the By-Laws of
the Corporation as follows:
ARTICLE V
OFFICERS
Section 2. Duties and Authority of President - The first line shall be deleted
in its entirety, which states: "The president shall be chief executive officer
of the Corporation." The remainder of Section 2 is hereby ratified and confirmed
in its entirety.
PURCHASE AGREEMENT
May __, 1996
MicroFrame, Inc.
Edison, New Jersey
Re: Purchase of Units
Gentlemen:
1. The undersigned subscriber ("Subscriber") has reviewed the most recent proxy
statement and the most recent report on Form 10-KSB of MicroFrame, Inc. (the
"Company") and all reports on Form 10-QSB and 8-K since such report on Form
10-KSB. Subscriber has been given access to all exhibits referred to in these
reports, and it has had the opportunity to discuss the Company's affairs with
the Company's officers. The Company represents and warrants to the Subscriber
that all such filings and exhibits thereto are correct and accurate in all
material respects and state all facts necessary to make not misleading such
filings and exhibits thereto.
2. At a closing to occur concurrently herewith at the offices of the Company or
of its counsel (the "Closing"), the Company will sell to Subscriber the number
of Units set forth below, and Subscriber will purchase such Units from the
Company, at a cash purchase price per unit equal to $1.25. The purchase price
shall be paid by immediately available funds.
3. Each Unit consists of one share of Common Stock (a "Share"), one Class A
Warrant to purchase one share of Common Stock, and one Class B Warrant to
purchase one share of Common Stock. The Class A and the Class B Warrants are in
the form of an Exhibit to this Agreement and are collectively referred to as the
"Warrants." The Shares of Common Stock which may be acquired upon exercise of
the Warrants are referred to herein as the "Underlying Shares." The Units, the
Shares, and the Underlying Shares are collectively referred to herein as the
"Securities."
4. (a) Subscriber represents and warrants that it is purchasing the
Units solely for investment solely for its own account and not with a view to or
for the resale or distribution thereof except as permitted under the
registration statements referred to below.
(b) Subscriber understands that it may sell or otherwise transfer the
Securities only if the Securities are duly registered under the Securities Act
of 1933, as amended (the "Securities Act") and registered or qualified in every
applicable state or other jurisdiction, or if Subscriber shall have received the
favorable opinion of counsel to the Subscriber, which opinion of counsel shall
be satisfactory to counsel to the Company, to the effect that such sale or other
transfer may be made in the absence of registration under the Securities Act and
registration or qualification in every applicable state or other jurisdiction.
The certificates representing the Securities will be legended to
<PAGE>
reflect these restrictions, and stop transfer instructions will apply.
Subscriber realizes that the Securities are not a liquid investment.
5. (a) Not later than 60 days after the Closing, the Company will at its
expense file one registration statement on Form S-3 (or, if Form S-3 is not
available, on Form S-1) with respect to the Shares and the Underlying Shares.
The Company shall use its best efforts to cause such registration statement to
become effective not later than 90 days after the date of such request, and to
remain effective for four years, or if earlier, either until all Shares and
Underlying Shares have been sold under the registration statement or Rule 144 or
any similar rule is available for the sale of all Shares and Underlying Shares.
The Company represents and warrants that it is now eligible to file registration
statements on Form S-3 for secondary offerings.
(b) To the extent not already registered under paragraph (a) above,
Subscriber shall also be entitled at the Company's expense to include the Shares
and the Underlying Shares in any one or more registration statements (other than
on Form S-4 or S-8) which the Company files under the Securities Act at any time
after the Closing. The Company shall give to the Subscriber not less than 20
days' prior written notice of any prospective filing of any registration
statement aforesaid. In the case of underwritten offerings, registration under
this Section (b) shall be limited to that number of Shares and Underlying Shares
as in the good faith opinion of the underwriter can be sold without materially
and adversely affecting the Company's underwriting. In the event of any
underwritten offering in which Subscriber elects to participate, Subscriber
shall agree to be bound by the Underwriting Agreement and all documents
contemplated thereunder.
(c) The Company shall not be obligated to pay Subscriber's
underwriting discounts or the fees of Subscriber's personal counsel.
(d) All registrations shall be accompanied by blue sky clearances
in New York, New Jersey and such other States as Subscriber may reasonably
request.
(e) The Company shall supply Subscriber with a reasonable number
of copies of all registration materials and prospectuses. The Company and
Subscriber shall execute and deliver to each other and to any underwriters
indemnity agreements which are conventional in registered offerings of this type
in connection with the transfer of the Securities purchased hereunder.
(f) Subscriber may assign its registration rights in connection
with the transfer of the Securities purchased hereunder.
6. (a) Subscriber has not relied upon the advice of a "Purchaser
Representative" (as defined in Regulation D of the Securities Act) in evaluating
the risks and merits of this investment. Subscriber has the knowledge and
experience to evaluate the Company and the Shares and the risk and merits
relating thereto.
-2-
<PAGE>
(b) Subscriber acknowledges that Subscriber is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated
pursuant to the Securities Act of 1933, as amended ("Accredited Investor"), and
shall be such on the date any Underlying Shares are issued to the holder;
Subscriber's individual net worth, in the case of and individual only, exceeds
$1,000,000; and in the case of non-individual subscribers, all of its equity
owners or holders are Accredited Investors; Subscriber acknowledges that
Subscriber is able to bear the economic risk of losing Subscriber's entire
investment in the Units and understands that an investment in the Company
involves substantial risks; Subscriber has the power and authority to enter into
this agreement, and the execution and delivery of, and performance under this
agreement has been approved by all necessary corporate action and shall not
conflict with any rule, regulation, judgment or agreement applicable to the
Subscriber.
(c) Except as disclosed to the Company prior to the Closing,
Subscriber does not have any agreement or understanding with any other
subscriber for Units, and is acting independently with regard to its
subscription for purchase and ownership of the Units.
(d) Subscriber's current intent is to acquire the Units for
investment and not with a view to taking any of the actions described in Items
4(a) through 4(j) of Schedule 13D, and, if applicable to Subscriber, Subscriber
will duly file a true, accurate and complete form of report on Form 13-D
pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended.
7. This Agreement may not be changed or terminated except by written
agreement. It shall be binding on the parties and on their personal
representatives and permitted assigns.
8. This Agreement shall be governed by the internal laws of the State of
New Jersey.
9. Each party hereto shall be responsible for its own expenses with regard
to this Agreement.
Subscriber:
_______________________________________
Type or Print Name: ___________________
Address: ______________________________
Number of Units: ______________________
AGREED:
MICROFRAME, INC.
By: ___________________________________
-3-
<PAGE>
This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated, only if
registered by the Company under the Securities Act of 1933 (the "Act") and if
registered or qualified in every applicable state or other jurisdiction, or if
the Company has received the favorable opinion of counsel to the Holder, which
opinion and counsel shall be satisfactory to the counsel to the Company, to the
effect that such registration or qualification of the Warrant or the Underlying
Shares is not necessary in connection with such transfer, sale, assignment or
hypothecation.
MICROFRAME, INC.
[CLASS A WARRANT]
[CLASS B WARRANT]
DATED: as of _____________
Number of Shares:
Holder:
Address:
________________________________________
THIS CERTIFIES THAT the Holder is entitled to purchase from MicroFrame, Inc., a
New Jersey corporation (hereinafter called the "Company"), at [$1.50 per share
for Class A] [$2.00 per share for Class B] the number of shares of the Company's
common stock set forth above ("Common Stock").
1. (a) All rights granted under this Warrant shall expire at 5:00 p.m., New York
City time, on [the fourth anniversary of the date of grant], and no such shares
of Common Stock may be acquired under this Warrant from and after such date.
2. This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated, only if
registered by the Company under the Act and registered and qualified in every
applicable state or other jurisdiction or if the Company has received the
favorable opinion of counsel to the holder, which opinion and counsel shall be
satisfactory to counsel to the Company, to the effect that registration of the
Warrant or the Underlying Shares and registration and qualification in every
applicable state is not necessary in connection with such transfer, sale,
assignment or hypothecation. The Underlying Shares shall be appropriately
legended to reflect this restriction and stop transfer instructions shall apply.
The restriction on transfer contained in this Section shall apply to all
successive transfers.
-4-
<PAGE>
3. The Common Stock underlying this Warrant is entitled to registration
rights under a separate agreement with Holder.
4. Any permitted assignment of this Warrant shall be effected by the Holder
by (i) executing an appropriate form of assignment; (ii) surrendering the
Warrant for cancellation at the office of the Company, accompanied by the
opinion of the counsel referred to above; and (iii) unless in connection with an
effective registration statement which covers the sale of this Warrant (it being
understood that no registration rights have been granted for the sale of this
Warrant, as distinguished from the sale of the Shares underlying this Warrant)
and or the Shares underlying the Warrant, delivery to the Company of the
statement by the Holder (in a form acceptable to the Company and its counsel)
that such Warrant is being acquired by the Holder for investment and not with a
view to its distribution or resale; whereupon the Company shall issue, in the
name or names specified by the Holder (including the Holder) new Warrants
representing in the aggregate rights to purchase the same number of Shares as
are purchasable under the Warrant surrendered. Such Warrants shall be
exercisable immediately upon any such assignment of the number of Warrants
assigned.
5. The term "Holder" should be deemed to include any transferee Holder of
this Warrant.
6. The Company covenants and agrees that all shares of Common Stock which may be
issued upon exercise hereof will, upon issuance, be duly and validly issued,
fully paid and non-assessable and no personal liability will attach to the
Holder thereof.
7. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
8. In the event that while this Warrant is outstanding, the outstanding
shares of Common Stock of the Company are at any time increased or decreased or
changed into or exchanged for a different number or kind of share or other
security of the Company or of another Corporation through reorganization,
merger, consolidation, liquidation, recapitalization, stock split, combination
of shares or stock dividends payable with respect to such Common Stock,
appropriate adjustments in the number and kind of such securities then subject
to this Warrant shall be made effective as of the date of such occurrence so
that the position of the Holder upon exercise will be the same as it would have
been had he owned immediately prior to the occurrence of such events the Common
Stock subject to this Warrant. Such adjustment shall be made successively
whenever any event listed above shall occur and the Company will notify the
Holder of the Warrant of each such adjustment. Any fraction of a share resulting
from any adjustment shall be eliminated and the price per share of the remaining
shares subject to this Warrant adjusted accordingly.
9. The rights represented by this Warrant may be exercised at any time
within the period above specified by (i) surrender of this Warrant (with the
purchase form at the end hereof properly executed) at the principal executive
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company); (ii) payment to the Company of the
exercise price for the number of
-5-
<PAGE>
Shares specified in the above-mentioned purchase form together with applicable
stock transfer taxes, if any; and (iii) unless in connection with an effective
registration statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the Holder (in a form
acceptable to the Company and its counsel) that such Shares are being acquired
by the Holder for investment and not with a view to their distribution or
resale.
The certificates for the Common Stock so purchased shall be delivered
to the Holder within a reasonable time, not exceeding ten (10) business days
after all requisite documentation has been provided, after the rights
represented by this Warrant shall have been so exercised, and shall bear a
restrictive legend with respect to any applicable securities laws.
10. This Warrant shall be governed by and construed in accordance with the
local laws of the State of New Jersey. The New Jersey courts shall have
exclusive jurisdiction over this instrument and the enforcement thereof. Service
of process shall be effective if by certified mail, return receipt requested.
All notices shall be in writing and shall be deemed given upon receipt by the
party to whom addressed. This instrument shall be enforceable by decrees of
specific performances as well as other remedies.
IN WITNESS WHEREOF, MicroFrame, Inc. has caused this Warrant to be signed
by its duly authorized officers under its corporate seal, and to be dated as of
the date set forth above.
MICROFRAME, INC.
By: ___________________________________
-6-
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase rights represented by such Warrant
for, and to purchase thereunder, _____ shares of no par value Common Stock and
herewith makes payment of $__________ thereof, and requests that the
certificates for shares of Common Stock be issued in the name(s) of, and
delivered to
_______________________________
whose address(es) is (are) ____________________________________________________.
Dated: ________________, 19___
_______________________________
_______________________________
Address
-7-
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto ______________ the right to purchase shares of Common Stock
represented by the foregoing Warrant to the extent of __________ shares of
Common Stock, and appoints ___________________________ attorney to transfer such
rights on the books of __________________________, with full power of
substitution in the premises.
Dated: ________________, 19___
____________________________
Holder
____________________________
Address
In the presence of:
-8-
CONSULTING AGREEMENT
AGREEMENT, made as of April 1, 1996, between MICROFRAME, INC.,
a New Jersey corporation having its principal office at 21 Meridian Road,
Edison, New Jersey 08820 (the "Company"), and LONNIE L. SCIAMBI, an individual
residing at 262 North Maple Avenue, Basking Ridge, New Jersey 07920 (the
"Consultant").
WITNESSETH:
WHEREAS, Consultant has resigned as an employee and officer o
the Company; and
WHEREAS, the Company desires to have Consultant render, and
Consultant desires to render, certain consulting services from time to time on
the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. CONSULTING SERVICES; CONSULTING TERM.
(a) The Company hereby retains Consultant to
perform and Consultant agrees to render to the Company on the terms and
conditions herein set forth, such consultative and advisory services as may be
requested by the Board of Directors, the President and Chief Operating Officer
and the Chief Executive Officer of the Company, including but not limited to,
rendering advice to the Company on potential strategic alliances, mergers and
acquisitions and future financings and rendering such other advisory services as
are consistent with Consultant's position.
(b) The Consultant's obligation to perform
consulting services under this Agreement shall commence on the date hereof and
shall continue for a period of six (6) months thereafter, unless earlier
terminated as provided under the terms and conditions of this Agreement (the
"Consulting Term").
(c) Consultant will make himself available to the
Company during the Consulting Term, as hereinafter defined, at such places and
at such times as shall be mutually convenient for Consultant and the Company.
Consultant shall report only to the Board of Directors and the President and
Chief Operating Officer and the Chief Executive Officer of the Company during
the Consulting Term. Consultant covenants and agrees that during the Consulting
Term he will devote his time and efforts to the furtherance of the interests of
the business of the Company and its subsidiaries and affiliates.
(d) In the event that during the Consulting Term,
Consultant introduces to the Company a buyer for the Company's business and/or a
potential acquisition or joint venture candidate for the Company and provided
that the Board of Directors of the Company approves such
<PAGE>
transaction and further provided that such sale and/or acquisition is closed no
later than twelve (12) months after the expiration of the Consulting Term, then
Consultant shall receive a fee in an amount to be negotiated by the Company and
the Consultant, but one intended in principle to apply the so-called Lehman
formula, payable in cash or in kind as the parties may agree. Consultant
acknowledges that he will not receive a fee or any other consideration from the
Company in connection with any transaction between the Company and Bogen
Communications and between the Company and Infinity Partners, Ltd.
2. CONSULTING FEES; REIMBURSABLE EXPENSES.
(a) Subject to the terms and conditions herein,
for the full and complete performance of the duties and services to be rendered
by Consultant and the covenants, representations, warranties and agreements made
by Consultant hereunder, the Company agrees to pay Consultant a consulting fee
in the aggregate sum of $100,000 ("Consulting Fee"), payable as follows:
(i) a one-time payment in the sum of $10,000
upon execution of this Agreement, the receipt of which is
hereby acknowledged by Consultant; and
(ii) subject to Paragraph 2(a)(iii) below, the
aggregate sum of $90,000 in six (6) equal consecutive
monthly installments on the first (1st) day of each month,
commencing April 1, 1996, upon the Company's receipt of
monthly invoices from Consultant.
(iii) It is understood and agreed by the parties
that any amounts paid by the Company to the Consultant as salary on or after
April 1, 1996, in connection with his prior employment agreement that relates to
the period following April 1, 1996 shall reduce the amounts payable to
Consultant pursuant to paragraph 2(a)(ii) above and Consultant acknowledges and
agrees that such amounts paid as salary may be offset against the installments
of the Consulting Fee to be paid to him pursuant to said paragraph.
(b) During the Consulting Term, the Company shall
reimburse Consultant for any actual and reasonable out-of-pocket travel and
entertainment expenses incurred by him which are necessary for Consultant to
perform his duties under this Agreement pursuant to Paragraph 1 above, which
expenses are approved in advance by the President and Chief Operating Officer of
the Company, upon the submission of appropriate documentation with respect
thereto.
(c) Consultant shall be responsible for payment
of all federal, state and local taxes and similar payments from the monthly
Consulting Fee and for all fees earned under this Agreement pursuant to
Paragraph 1(d) and shall indemnify the Company and hold the Company harmless
from any claim that the Company is obligated to make such payments.
-2-
<PAGE>
3. RELATIONSHIP OF PARTIES. It is specifically agreed and
understood that the relationship of Consultant to the Company hereto is that of
an independent contractor and this Agreement and the services to be rendered by
Consultant to the Company shall not for any purpose whatsoever or in any way or
manner create any partnership, agency, joint venture, employer-employee or other
relationship between the Company, on the one hand, and Consultant, on the other
hand. In no event shall Consultant be able to bind the Company. Consultant shall
not allege or take the position in any administrative or legal proceeding or
otherwise that his relationship with the Company is other than that of an
independent contractor of the Company.
4. STOCK OPTIONS.
(a) As additional consideration for the services
to be rendered by Consultant under this Agreement, the Company, subject to the
terms and conditions of the 1994 Stock Option Plan of the Company (the "Plan"),
hereby grants to Consultant as of the date hereof, a Consultant Option (as
defined in the Plan), to purchase an aggregate of 23,196 shares of common stock,
$.001 par value per share, of the Company (the "Common Stock") at $1.94 per
share, being the fair market value of such shares of Common Stock as of the date
hereof. A copy of the Consultant Stock Option Contract is annexed hereto as
Exhibit A and is made a part hereof.
(b) In the event Consultant's consultancy
terminates on the Early Termination Date, as hereinafter defined in Paragraph
6(a), and provided Consultant has complied with the terms and conditions herein,
the Company agrees to grant to Consultant or his estate on the business day
preceding the Early Termination Date (the "Termination Option Date") an
additional Consultant Option to purchase such number of shares of Common Stock
to be determined by dividing the fair market value of a share of Common Stock
(as determined in accordance with the Plan) on the Termination Option Date by
the aggregate amount of the Consulting Fee which remains unpaid and is owed to
the Consultant as of the Termination Option Date. Any such additional Consultant
Option shall contain substantially the same terms and provisions as are
contained in Exhibit A.
5. CONSULTING BENEFITS.
(a) During the Consulting Term the Company shall
reimburse Consultant, upon the submission of invoices, for the expenses incurred
by Consultant for the continuation of Consultant's health and medical benefits
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") under
the Company's current plan in place for its employees.
(b) Consultant shall receive no other retirement,
profit sharing, health benefits or any other similar benefits which may at any
time be payable to employees of the Company pursuant to any plan or policy of
the Company relating to such benefits, except as set forth in Paragraph 5(a)
herein.
-3-
<PAGE>
(c) During the Consulting Term Consultant shall
receive an automobile allowance of seven hundred and fifty ($750) dollars per
month.
(d) During the Consulting Term office space and
services will be provided to Consultant as determined by the President and Chief
Operating Officer of the Company in order for Consultant to perform his
consulting services hereunder. Notwithstanding the foregoing, Consultant shall
not be provided with Amex or other credit cards or E-Mail. Consultant hereby
acknowledges and represents to the Company that there are currently no
obligations outstanding with respect to any credit cards used by him in
connection with his services to the Company.
6. TERMINATION.
(a) In the event that Consultant secures a full-
time position elsewhere prior to the expiration of the Consulting Term, then
upon five (5) days written notice by the Company to Consultant, this Agreement
shall terminate as of the date set forth in the notice (the "Early Termination
Date"), and provided Consultant has complied with the terms and conditions
hereunder, Consultant shall receive in lieu of the balance of the Consulting Fee
which would be owed to Consultant through the expiration of the Consulting Term,
a Consultant Option as stated above in Paragraph 4(b) and the Company shall have
no further obligations to Consultant hereunder, except for the payment of any
fees which Consultant may be entitled to under Paragraph 1(d) herein.
(b) The Company may terminate the relationship
with Consultant immediately for Cause (as hereinafter defined). Upon any such
termination, the Company shall be released from any and all further obligations
under this Agreement, except that the Company shall be obligated to provide
Consultant with such portion of the Consulting Fee that has already been earned
by Consultant through the date of such termination and any Consultant Options
granted under this Agreement shall immediately terminate. Consultant will not be
entitled to the payment of any other compensation or fees or benefits upon
termination of this Agreement pursuant to this Paragraph 6, including any fees
which Consultant may be entitled to under Paragraph 1(d) herein. Notwithstanding
termination, Consultant's obligations under Paragraphs 7, 8, 9 and 10 shall
continue pursuant to the terms and conditions of this Agreement.
For the purposes of this Agreement, "Cause" shall include,
without limitation, the following:
(i) the willful and continued failure by the Consultant to
substantially perform his services hereunder which
amounts to a material neglect of his services to the
Company;
(ii) the willful engaging by the Consultant in misconduct
which is materially injurious to the Company;
(iii) the conviction of the Consultant of a felony;
-4-
<PAGE>
(iv) the failure of the Consultant to comply with any
material provision of this Agreement which has not
been cured within thirty (30) days after written
notice of such noncompliance has been given by the
Company to the Consultant, or
(v) the failure to comply with such material policies,
procedures or directions of the Company as have been
established on or prior to the date hereof by its
Board of Directors and consistent with the terms of
this Agreement, which failure has not been cured
within thirty (30) days after notice of such
noncompliance has been given by the Company to the
Consultant.
7. NONDISCLOSURE; NONCOMPETITION.
(a) The Consultant agrees not to use or disclose,
either during the Consulting Term or at any time thereafter, except with the
prior written consent of the Company, any trade secrets, proprietary
information, or other information that the Company considers confidential
relating to formulas, designs, processes, suppliers, machines, compositions,
improvements, inventions, operations, manufacturing, processing, marketing,
distributing, selling, cost and pricing data, master files or consumer lists
utilized by the Company, or any confidential information (including but not
limited to salary compensation) on the employees, and all other similar
confidential information material to the conduct of the business, which is not
presently generally known to the public and which was obtained or acquired by
the Consultant while he was in the employ of the Company or which is obtained or
acquired by Consultant as a result of this consultancy relationship; provided,
however, that this provision shall not preclude the Consultant from (i) the use
of or disclosure of such information which presently is known generally to the
public or which subsequently comes into the public domain, other than by way of
disclosure in violation of this Agreement or in any other unauthorized fashion,
or (ii) disclosure of such information required by law or court order, in which
case the Consultant will give the Company three business days written notice
(or, if disclosure is required to be made in less than three business days, then
such notice shall be given as promptly as practicable after determination that
disclosure may be required) of the nature of the law or order requiring
disclosure and the disclosure to be made in accordance therewith.
(b) During the Consulting Term and for a period
of two years from the date hereof, the Consultant shall not, within the United
States or Canada, directly or indirectly: (i) own, manage, operate, join,
control, participate in, invest in, or otherwise be connected with, in any
manner, whether as an officer, director, employee, partner, investor,
consultant, lender or otherwise, any business entity which is engaged in, or is
on any way related to the business of the Company and its affiliates as
currently constituted and as constituted during the Consulting Term, or (ii) on
the Consultant's behalf or on behalf of anyone else engaged in such line of
business of the Company and its affiliates as currently constituted and as
constituted during the Consulting Term (A) persuade or attempt to persuade any
employee of the Company and its affiliates to leave the employ of the Company or
to become employed by any person other than the Company and its affiliates, (B)
persuade or attempt to persuade any current client or former client of the
Company and its affiliates
-5-
<PAGE>
to cease doing business with, or to reduce the amount of business it does or
intends or anticipates doing with, the Company and its affiliates, or (C)
solicit the business of any such clients or former clients with respect to the
business of the Company and its affiliates as currently and future constituted.
(c) Nothing herein contained shall be deemed to
prohibit the Consultant from investing in securities of a business entity if the
securities of such entity are listed for trading on a national securities
exchange or traded in the over-the-counter market and the Consultant's holdings
therein represent less than five percent of the total number of shares or
principal amount of other securities of such entity outstanding.
(d) It is expressly agreed by Consultant that the
nature and scope of each of the provisions set forth above in this Paragraph 7
are reasonable and necessary. If, for any reason, any aspect of the above
provisions as it applies to Consultant is determined by a court of competent
jurisdiction or an arbitrator to be unreasonable or unenforceable, the
provisions shall only be modified to the minimum extent required to make the
provisions reasonable and/or enforceable, as the case may be. Consultant
acknowledges and agrees that his services are of unique character and expressly
grants to the Company or any successor or assign the right to enforce the above
provisions through the use of all remedies available at law or in equity,
including, but not limited to, injunctive relief.
8. COMPANY PROPERTY.
(a) Consultant shall promptly disclose in writing
to the Board of Directors of the Company all inventions, discoveries, designs,
developments, processes, software programs, works of authorship, formulas, data,
techniques and any other improvements conceived, devised, created, or developed
by Consultant (either alone or with others) during the Consulting Term
(collectively, "Invention"), and Consultant shall transfer and assign to the
Company all right, title and interest in and to such Invention, including any
and all domestic and foreign patent rights, domestic and foreign copyright
rights therein, and any renewal thereof. Such disclosure is to be made promptly
after the conception of each Invention, and each Invention is to become and
remain the property of the Company, whether or not patent or copyright
applications are filed thereon by the Company. On request of the Company,
Consultant shall execute from time to time, during or after the termination of
this Agreement, such further instruments including, without limitation,
applications for patents and copyrights and assignments thereof as may be deemed
necessary or desirable by the Company to effectuate the provisions of this
Paragraph 8.
(b) All records, files, lists, including computer
generated lists, drawings, documents, equipment and similar items relating to
the Company's business which Consultant prepared or received from the Company
during the course of Consultant's prior employment or which Consultant shall
prepare or receive during the Consulting Term shall remain the Company's sole
and exclusive property. Upon termination of this Agreement, and in any event at
the request of the Company at any time, Consultant shall promptly return to the
Company all property of the Company
-6-
<PAGE>
in his possession. Consultant further represents that he will not copy or cause
to be copied, print out or cause to be printed out any software, documents or
other materials originating with or belonging to the Company. Consultant
additionally represents that, upon termination of his consultancy with the
Company or earlier at the request of the Company, he will not retain in his
possession any such software, documents or other materials in machine or human
readable form.
9. REMEDY. It is mutually understood and agreed that
Consultant's services are special, unique, unusual, extraordinary and of an
intellectual character giving them a peculiar value, the loss of which cannot be
reasonably or adequately compensated in damages in an action at law.
Accordingly, in the event of any breach of this Agreement by Consultant,
including, but not limited to, the breach of the non-disclosure,
non-solicitation and non-compete clauses under Paragraphs 7 and 8 hereof, the
Company shall be entitled to equitable relief by way of injunction or otherwise
in addition to any damages which the Company may be entitled to recover. In
addition, the Company shall be entitled to reimbursement from Consultant, upon
request, of any and all reasonable attorneys' fees and expenses incurred by it
in enforcing any term or provision of this Agreement.
10. REPRESENTATIONS AND WARRANTIES OF CONSULTANT. (a) In
order to induce the Company to enter into this Agreement, Consultant hereby
represents and warrants to the Company as follows: (i) Consultant has the legal
capacity and unrestricted right to execute and deliver this Agreement and to
perform all of his obligations hereunder; (ii) the execution and delivery of
this Agreement by Consultant and the performance of his obligations hereunder
will not violate or be in conflict with any fiduciary or other duty, instrument,
agreement, document, arrangement or other understanding to which Consultant is a
party or by which he is or may be bound or subject; and (iii) Consultant is not
a party to any instrument, agreement, document, arrangement or other
understanding with any person (other than the Company) requiring or restricting
the use or disclosure of any confidential information or the provision of any
employment, consulting or other services.
(b) Consultant hereby agrees to indemnify and hold
harmless the Company from and against any and all losses, costs, damages and
expenses (including, without limitation, its reasonable attorneys' fees)
incurred or suffered by the Company resulting from any breach by Consultant of
any of his representations or warranties set forth in Paragraph 10(a) above.
11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Consultant that the execution, delivery of this
Agreement and the performance by the Company of its obligations hereunder have
been duly authorized by all necessary corporate action and does not violate any
agreement by which it is a party or law by which it is bound.
12. NOTICES. All notices or other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or by courier service or if mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, or by telecopy (with a hand
copy to follow), in all cases addressed to the party for whom intended at his or
its
-7-
<PAGE>
address set forth below (or to such other address as a party shall have
designated by notice in writing to the other party given in the manner provided
by this paragraph):
If to the Company:
MicroFrame, Inc.
21 Meridian Road
Edison, New Jersey
Attention: Stephen B. Gray, President and Chief Operating Officer
Telecopy: (908) 494- 4570
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: James Alterbaum, Esq.
Telecopy: (212) 704-6288
If to Consultant:
Mr. Lonnie L. Sciambi
262 North Maple Avenue
Basking Ridge, New Jersey 07920
Telecopy: (908) 953-9420
with a copy to:
Norman H. Donald III, Esq.
Brock, Fensterstock, Silverstein, McAuliffe & Wade
153 E. 56th St. (56th Floor)
New York, New York 10022
Telecopies: (212) 371-5500
and
(770) 772-6291
Notices shall be deemed to have been delivered on the date five (5)
days after mailing if mailed as provided above or on the date of delivery if
delivered by hand or courier service.
13. AMENDMENTS, MODIFICATIONS, WAIVERS. No amendment,
modification or waiver of any provision of this Agreement shall be effective
unless the same shall be in writing and signed by the Company and Consultant (in
the case of an amendment or supplement) or, except as otherwise provided herein,
by the waiving party (in the case of a waiver).
-8-
<PAGE>
14. APPLICABLE LAW. This Agreement shall be governed by,
and construed and enforced in accordance with the laws of the State of New
Jersey, without giving effect to its conflicts of law or choice of law rules.
15. ARBITRATION. Any controversy or claim arising out of
or relating to this Agreement, or the breach thereof, except as otherwise
provided below, shall be settled by arbitration in New York City, administered
by the American Arbitration Association under its Commercial Arbitration Rules,
and judgment on the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof; provided however, that notwithstanding the
above, any matter with respect to which an injunction or other equitable relief
is sought shall be decided by any of the State Courts located within the County
of Middlesex, State of New Jersey and Federal Courts located in the State of New
Jersey and the parties hereby consent to the exclusive jurisdiction of same,
waive any and all objections to venue in the County of Middlesex and agree that
service of process on the parties may be made in the manner provided for the
giving of notices pursuant to Paragraph 12 hereof, in each case with respect to
any arbitration, suit, action or other proceeding arising under or relating to
this Agreement.
16. ENTIRE AGREEMENT; SURVIVAL. This Agreement, together
with (a) the Consultant Stock Option Contract, dated April 1, 1996, between the
Company and Consultant which is annexed hereto as Exhibit A, (b) the Agreement
and General Release dated April 29, 1996 between the Company and Consultant, and
(c) the three Letters of Resignation dated April 1, 1996 by Consultant,
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes and replaces all prior agreements, understandings
and representations, oral or written, with regard to such matters. In the event
that the Consultant : (i) does not timely execute, or (ii) timely revokes the
Agreement and General Release pursuant to Paragraphs 13 and 14 thereof, this
Agreement and the Consultant Sock Option Contract shall be null, void and of no
effect.
17. SEVERABILITY. If any term or provision of this Agreement
shall be held to be illegal, invalid or unenforceable under applicable law, it
shall not affect the continued legality, validity and enforceability of each
remaining term and provision hereof, each of which shall continue in full force
and effect.
18. FULL UNDERSTANDING. Consultant represents and agrees
that he fully understands his right to discuss all aspects of this Agreement
with his private attorney, that to the extent, if any, that he desired, he
availed himself of this right, that he has carefully read and fully understands
all of the provisions of this Agreement, that he is competent to execute this
Agreement, that his agreement to execute this Agreement has not been obtained by
any duress and that he freely and voluntarily enters into it, and that he has
read this document in its entirety and fully understands the meaning, intent and
consequences of this document which is that it constitutes a consulting
agreement.
19. SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED
BENEFICIARIES. Neither this Agreement, nor any of Consultant's rights, powers,
duties or obligations hereunder, may be assigned by Consultant. This Agreement
shall be binding upon and inure to the benefit of Consultant
-9-
<PAGE>
and his heirs and legal representatives and the Company and its affiliates and
subsidiaries and their successors and assigns. Successors of the Company shall
include, without limitation, any corporation or corporations acquiring, directly
or indirectly, all or substantially all of the assets of the Company, whether by
merger, consolidation, purchase, lease or otherwise, and such successor shall
thereafter be deemed "the Company" for the purpose hereof.
20. COUNTERPARTS. This Agreement may be executed in one
or more counterparts and shall become effective when one or more counterparts
have been signed and delivered by each of the parties.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
MICROFRAME, INC.
By: /s/ Stephen B. Gray
----------------------------------
Name: Stephen B. Gray
Title: President and Chief Operating
Officer
/s/ Lonnie L. Sciambi
-------------------------------------
LONNIE L. SCIAMBI
-10-
MICROFRAME, INC.
FISCAL 1997 INCENTIVE PLAN
Effective 4/1/96
THE FISCAL 1997 INCENTIVE PLAN HAS THE FOLLOWING ELEMENTS:
-REVENUE BASED INCENTIVE
-OPERATING PROFIT BASED INCENTIVE
REVENUE BASED INCENTIVE: (STOCK OPTIONS ONLY)
- ---------------------------------------------
STOCK OPTION: (Min. payout at plan -- 325K OPTIONS)
- -All calculated Stock options earned/ calculated against a $8.8M Revenue target.
This is a binary earnout. All options are earned only if/ when we hit $8.8M in
Revenue. This is an all or nothing bonus.
- -Minimum level of achievement to activate plan =$8.8M in revenues.
- -Stock option pool calculated as 2% of revenues and base number of stock options
per employee determined by pro-rata salary combined with performance rating of
employee then factored by the following:
- -Stock options earned/ allocated as follows:
a)Non-managers 1 times calculated entitlement
b)Managers 1.5 times calculated entitlement
c)Exec. level 3 times calculated entitlement
- -Stock options price calculated under the current authorized MicroFrame, Inc.
ISO stock option plan via the Time Accelerated Restricted Stock Option Plan
(TARSP) and distributed at the end of the current fiscal year upon achievement
of targets as outlined above.
MICROFRAME
FISCAL 1977 INCENTIVE PLAN
Effective 4/1/96
OPERATING PROFIT BASED INCENTIVE: (CASH/STOCK OPTIONS)
- ------------------------------------------------------
Minimum level of achievement to activate plan =target $498K Oper. Result Profit.
No Maximum payout on plan. Total cash and stock options determined by the
computed percentage achievement of actual results verses goal of $498K.
<PAGE>
CASH PORTION: (PAYOUT AT PLAN =$50K)
Profit based incentive to equal 10% of Pre-tax Operating Result w/ payment per
employee determined by pro-rata salary combined with performance rating of
employee.
STOCK OPTION PORTION: (PAYOUT AT PLAN -- 100K OPTIONS)
Options paid as in Revenue incentive section using the same formulas
-2-
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement
No. 33-61837 of MicroFrame, Inc. on Form S-8 of our report dated May 19, 1995
appearing on page F-1.1 of MicroFrame, Inc.'s Annual Report on Form 10-KSB for
the year ended March 31, 1996.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
June 27, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
MicroFrame, Inc. on Form S-8 (File No. 33-61837) of our report dated June 21,
1996 on our audit of the consolidated financial statements as of March 31, 1996
and for the year then ended which report is included in this Annual Report on
Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
June 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000754813
<NAME> MICROFRAME, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 48,302
<SECURITIES> 0
<RECEIVABLES> 1,640,561
<ALLOWANCES> (100,000)
<INVENTORY> 1,084,870
<CURRENT-ASSETS> 2,751,159
<PP&E> 961,627
<DEPRECIATION> (551,761)
<TOTAL-ASSETS> 3,558,171
<CURRENT-LIABILITIES> 1,914,095
<BONDS> 0
0
0
<COMMON> 3,718
<OTHER-SE> 1,567,525
<TOTAL-LIABILITY-AND-EQUITY> 3,558,171
<SALES> 6,258,243
<TOTAL-REVENUES> 6,258,243
<CGS> 2,789,855
<TOTAL-COSTS> 7,546,652
<OTHER-EXPENSES> 99,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,917
<INCOME-PRETAX> (1,418,800)
<INCOME-TAX> 574,900
<INCOME-CONTINUING> (1,993,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,993,700)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
