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, 1997
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
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Securities registered under Section 12(b) of the Exchange Act: None
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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 $7,343,624.
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 by the
National Quotation Bureau as of June 1997 was approximately $5,910,710.
There were 4,838,803 shares of Common Stock outstanding as of June 11, 1997.
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 remote network
management and remote maintenance and security products for mission critical
voice and data communications networks. The Company's products provide for alarm
and fault monitoring, proactive administration and reporting capabilities which
are being 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), wide area networks (WANs), routers,
hubs, servers, Private Branch Exchange telephone switches ("PBXs") as well as
other network elements), 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 (the "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 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 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 (both
domestically and internationally) through the development of a family of modular
industry standards based hardware and software offerings designed to interface
with a customer's existing dial-up and/or in-
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band WAN communications and network management environment and/or on a
standalone basis. The Company believes that each of these offerings, when
combined with the programmability as provided by the Company's unique software,
support and meet the needs of a wide variety of customer element network
management and security requirements. The software is designed to permit easy
modification, thus allowing customized solutions for monitoring and controlling
telemanagement (intelligent agent) and/or network access. In other words, Secure
Remote Telemanagement and Telemaintenance.
The Company develops and markets a broad range of network
management, remote maintenance and security products for voice and data
communications networks. The Company's products are based upon a family of
hardware and software components which, when combined with the Company's
uniquely developed software "engine", provide programmability and easy
modification wherein customized solutions for network access, monitoring and
telemanagement of mission-critical applications and network elements can readily
be accommodated.
New Products and Markets
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In fiscal 1997, the Company continued its evolutionary development of
products to address its strategic direction and goals of establishing a position
in the combined data and voice Network Management/ Distributed Device Management
and Security marketplaces by introducing 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 network
elements. The SNS/2000 product family consists primarily of Sentinel 2000 and
Manager 2000.
These products integrate element monitoring, fault management and
security management as well as remote access and problem
identification/resolution into a powerful suite of network management solutions
to monitor, maintain and increase the operational integrity, availability and
access for mission-critical networks.
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 to manage and maintain these networks
increases exponentially. According to a third party study, "network downtime for
a typical network consisting of two servers and 100 personal computers" can cost
companies, on average, 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 and standards based devices, remains extremely costly
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
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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 their existing network management systems. Or, for maximum advantage, the
elements may be integrated into a comprehensive, secured telemanagement and
remote access control solution easily customized and tailored to meet specific
organizational requirements.
SECURE REMOTE TELEMANAGEMENT/ TELEMAINTENANCE. One major aspect of
the SNS/2000 family of products is its design which is to specifically reduce
network "downtime" by significantly enhancing and bringing new capabilities for
detection, reporting, handling and resolution of alarm/fault conditions. It also
directly addresses the requirement to manage both "legacy" as well as
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 standalone
network management and remote access solutions which can be fully integrated
into existing SNMP-based central management systems and/or Trouble Ticket
Management Systems. Its SNMP proxy agent capability enables non-SNMP legacy
devices, such as PBXs, to communicate with SNMP network managers (e.g.,
HP/Openview, Cabletron Spectrum, IBM's Netview, et al) 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, access and availability. All
network access and/or access to network elements may be channeled through a
secure central gateway where users are authenticated and transparently routed
only to authorized destinations. Network elements are continually monitored by
local intelligent agents to proactively detect (and in many cases resolve)
alarms and fault conditions as well as 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 1) resolved
via the intelligent agent technology of these products and/or 2) immediately
transmitted to the appropriate management center for analysis, trouble ticket
generation, corrective action, and escalation where appropriate. This enables
organizations to improve network availability through proactive response to
potential network problems before they manifest themselves in potential network
outages.
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
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offers remote access security solutions for host computers, LANs and WANs, as
well as other network elements by providing front-end barriers to prevent
unauthorized entry. Access control is managed, monitored and administered via a
client/server architecture. Centralized administration is provided to facilitate
ease of administration, monitoring and maintenance. Alerts are issued when user
defined events occur and/or thresholds are exceeded. 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 (Intelligent Agent) alarm filtering to reduce
network bandwidth consumption as well as insure delivery of critical
alarms/faults.
Multilevel alarm reporting with programmable escalation to insure
prompt response. PBX toll fraud detection and reporting to
reduce/minimize toll fraud loss potential.
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 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 Open DataBase Compliant ("ODBC") compliant
To allow easy integration with major database offerings (Oracle,
Sybase, SQL/Server, Informix, etc.)
Controlled Access & Ethernet Capabilities
Controlled vendor access for secure out-of-band device management and
administration. Ethernet and dial access allowing for redundant
access/reporting paths for increased network reliability. Distributed
intelligent agent 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, MicroFrame introduced
the Sentinel 2000. The Sentinel 2000 is a stand-alone, secure multi-port
programmable Remote Site Element Manager.
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It comes complete with integrated application software designed to provide
alarm/fault monitoring, security and remote access for controlling/managing
remote voice and data network elements 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. The Sentinel 2000 is a comprehensive site
element management solution that facilitates convenient, reliable, remote
network element telemanagement and telemaintenance of voice and data networks.
A powerful 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-based Manager 2000 software product
offering. The 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 and power management capabilities.
The Company has enjoyed early and strong acceptance of the Sentinel 2000 from
such companies as MCI, AT&T, Vyvx, Ameritech, U.S. West, TeleFinland, Kaiser
Permanente, and Telstra Australia. In fiscal 1997, the Company shipped
approximately 1,100 units of the Sentinel 2000, generating net revenues of
approximately $2,670,000, representing 36% of the Company's net revenues for the
year.
MANAGER 2000. During the fourth quarter of fiscal 1997, the Company
introduced a second member of the SNS/2000 family of products - Manager 2000.
Manager 2000 is a set of software applications that collectively provide a
comprehensive solution for remote site management, and the servicing of
real-time alarms being generated by remote monitoring equipment. Manager 2000
integrates the Sentinel 2000 and IPC/Secure Sentinel programmable remote site
managers with central-site management tools to provide maintenance managers and
technicians with a seamless network overview. Manager 2000 automates many
time-consuming remote management tasks for a faster response time, improved
fault isolation, identification and resolution, and differentiation of critical
and non-critical events. In conjunction with Sentinel systems, Manager 2000 can
limit access to maintenance ports and devices to authorized individuals only.
The authorized access is controlled at the central management site. This permits
frequent changes and the assignment of temporary privileges to outsiders.
Manager 2000 features include Alarm Processing, Trouble Ticket Management,
Secured Remote Site Access, Security, Remote Site Administration. All of this is
done based on industry standard architecture (Windows 3.1, Windows/95, Windows
N/T, ODBC, etc.), and is designed for scalability.
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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 offerings.
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 demand 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 (now Lucent Technologies), 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 Lucent Technologies' own label, as a security device for Lucent
Technologies' Definity PBX. Over 16,200 RPSD units have been shipped to Lucent
Technologies since 1991 and the Company has begun
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shipping the product to other customers as well. During fiscal 1997, sales from
the RPSD product line were responsible for approximately 15% of the Company's
overall revenue.
The Secure Sentinel(TM) 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 Secure Sentinels(TM)
offered and the functionality of each, shipping more than 10,900 units which has
accounted for more than $13,000,000 in revenue. During fiscal 1997, sales from
the Secure Sentinel(TM) product line were responsible for approximately 35% 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.
OVERALL TARGET MARKETS
The Company believes its products are well positioned to take
advantage of what it believes are current significant 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 cost effective, justifiable and possible
for more and more groups, and it becomes feasible to introduce sophisticated
networks into technologically less advanced regions regardless of size. At the
same time more of the organizations' data and other resources are being made
available to more users by
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means of these systems. These market dynamics are causing networks to become an
ever increasing and vital source of revenue generation as well as employee
productivity. Therefore, proactive management of these networks to insure
network availability, which, in turn supports employee productivity as well as
revenue generation, is increasingly becoming a necessary imperative for all
companies. Because of these market factors, the Company believes that the
security and network management issues resulting from this growth will generate
demand for the Company's products.
REMOTE NETWORK MANAGEMENT AND REMOTE TELEMAINTENANCE MARKETS
The requirement for increased service levels and overall network
availability, especially for mission-critical networks, has created a rapidly
growing market demand for remote element network management and distributed
device management. Remote element network management offerings include alarm
monitoring systems which monitor network elements and their internal diagnostic
routines and fault tables, determine alarm status, and automatically execute
appropriate reporting and/or corrective action procedures.
Alarm Monitoring: With the Sentinel 2000 and Secure Sentinel(TM),
alarms can be transmitted/reported to central network management systems (such
as Cabletron's Spectrum, HP's Openview, IBM's Netview, etc.), trouble ticket
management packages (such as offered by Remedy), a single or multiple PCS
(personal communication system), personal pagers, etc. as well as provide for an
alarm to be escalated to ensure timely response. The Sentinel 2000 and Secure
Sentinel(TM) also allows programmed administration of the host devices via their
maintenance port connection.
Alarm Reporting: This provides for automatic transmission of
information regarding network element statuses, 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.
Environmental Monitoring and Control: Since communications
equipment is sensitive to changes in the physical environment, the Sentinel
2000, as well as the Secure Sentinel(TM), 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
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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.
SECURITY MARKET
As previously noted, widely distributed data and voice
communications networks incorporate numerous network elements and devices with
dial-in ports. The Company offers a variety of products, Manager 2000 and
SeGaSys(TM), which when combined with the Sentinel 2000 and/or Secure
Sentinel/IPCs, permits centralized control for secure remote access to all ports
on the network. All users (such as maintenance providers and others authorized
to service or administer devices in the network) dial a single telephone number
and/or are connected/authorized in-band for access. Upon successful validation
of access for the requested device, the user is automatically routed to the
target device by Manager 2000 and/or SeGaSys(TM). This eliminates the security
risk inherent in providing lists of telephone numbers and access codes for
numerous devices, as well as 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.
The Sentinel 2000 and IPC family of products - the Secure
Sentinel(TM) and the RPSD, are designed to secure the maintenance and
administration ports on a wide variety of network elements and communications
equipment. In addition to preventing unauthorized access through these ports,
the products can be customized to provide the following features:
Security Management: Provide a secure path to network elements both
via in-band (Ethernet) as well as out-of-band (dial up) protocols.
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 product offerings 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.
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(TM), 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.
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The Sentinel 2000, IPC and SeGaSys(TM) (DL-4000 and the SDS(TM))
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 standard programs
incorporated into these products 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.
SUPPORT SERVICES
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 programming and turnkey installations.
MARKETING AND DISTRIBUTION
The Company believes that the markets for remote element network
management, distributed device management, and security are rapidly emerging and
growing. 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(TM), data communications security products, have been sold and will
continue to be sold to major telecommunications companies, networking companies,
network security customers, systems integrators, facility managers and others,
via its direct sales organization, 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 well as internationally. As this sales and distribution network
is established and continues to grow, 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 integrators, facilities management
companies and network outsourcers.
With respect to the 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 Lucent Technologies, MCI, Southwestern Bell,
US WEST and Ameritech. During fiscal 1995, the Company expanded its distribution
into Canada through a non-exclusive distribution agreement with TTS Meridian
Systems, Inc. of Willowdale, Ontario, a Northern Telecom subsidiary. The Company
expects to continue seeking additional arrangements with the other network
element and PBX systems vendors and distributors in North America.
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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 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 an 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 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 were approximately $1,310,000 (21% of Total
Revenues) in fiscal 1996 and approximately $1,530,000 (21% of Total Revenues) in
fiscal 1997.
COMPETITION
The markets for remote element network management, distributed
device management as well as security products to monitor and control access to
computer and telecommunications network elements are 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 these markets are: (1) the products' ability to conform to the
network topologies and/or computer systems; (2) the products' ability to avoid
technological obsolescence; (3) the willingness and the ability of a vendor to
support customization, training, and installation; and (4) the price.
Although the Company believes that its present products and
services are competitive, the Company competes in its general markets 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 network management and telemaintenance situations, they
include TSB International, Inc. and Teltronics, Inc. Such companies may succeed
in producing and distributing competitive products more effectively
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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
The Company designs its products 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 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
The Company sells a substantial portion of its products to two
customers, Lucent Technologies and MCI. Sales to Lucent Technologies and MCI
represented 16.8% and 17.1%, respectively, of the Company's revenue in fiscal
1997. This is down from 23.8% and 24.8%, respectively, in fiscal 1996. The loss
of either of these customers could have a material adverse effect on the
Company's business. The improvement of fiscal 1996 (the first time in three
years where the total percentage of revenues generated to these two customers
fell below 50%) continued in fiscal 1997, as the combined percentage dropped to
34%. This is attributable to two factors: (1) a reduction in absolute revenues
of approximately $550,000 (18%) from year to year from these two customers; and
(2) an increase in North American revenues, exclusive of these two customers of
approximately $1,400,000 (68%).
The Company's installed customer base is estimated to number over
200 companies constituting more than 2,300 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 both fiscal 1997
and fiscal 1996.
Under an agreement with Lucent Technologies, the Company has been
manufacturing the RPSD for Lucent's resale to its PBX customers. As of the
fiscal year ended March 31, 1997, Lucent had purchased and installed more than
16,200 RPSD units.
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In fiscal 1996, MCI and the Company expanded their relationship
across multiple operating units within MCI, including that unit responsible for
outsourcing and MCI's joint venture with British Telecom, known as Concert, as
well as with SHL Systemhouse of Calgary, Canada.
INTELLECTUAL PROPERTY, LICENSES AND LABOR CONTRACTS
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 and the Secure Sentinel are registered trademarks
of the Company filed with the United States Patent and Trademark Office ("PTO").
The Company also has trademark applications pending with the PTO for SeGaSys,
Sentinel 2000, Sentinel 2000S, Manager 2000, PassKEY, SofKEY, Secure Network
Systems 2000, the MicroFrame Logo, the MicroFrame Wizard and the tagline "We
Bring Wizardry To Remote Network Management." Provided there is no opposition,
these trademarks shall be registered.
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
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.
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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 has developed a similar set of requirements
for its members and the Company has begun the compliance process of its products
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 1997, 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(TM) and RPSD - referred to
collectively as SNS/2000. As discussed previously, this family of products is
designed to address the growing demand for remote element network management and
security of mission-critical integrated voice and data networks. Research and
development expenses were $893,852 in fiscal 1997 and $713,441 in fiscal 1996.
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 6, 1997, the Company had 37 employees, all of whom are
full-time employees, and of which 12 are technical personnel, 10 are in sales,
marketing and support, 6 are in production and 9 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"). The Lease provides for a
monthly rental of $5,429 and shall expire on June 30, 1999.
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From the period commencing July 1, 1997 until June 30, 1999 the total monthly
rental shall be $5,579 per month. An additional 2,000 square feet of office
space and 2,600 square feet of warehouse space is currently leased to another
tenant with a concurrent expiration date of June 30, 1999. The Company is the
sole guarantor for the full performance of this tenant through the expiration
date.
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 and shall expire on June 30, 1999.
In addition, the Company currently leases 245 square meters of
office space in Antwerp, Belgium for its European operating headquarters.. This
lease provides for a monthly rental of 81,083 Belgian Francs per month US$2,316
at an exchange rate of 35BEF to 1US$) and shall expire on July 31, 2005, with an
option to the Company to terminate the lease on either July 31, 1999 and again
on July 31, 2002.
ITEM 3. LEGAL PROCEEDINGS.
The Company reached a settlement with the New York State Department
of Taxation and Finance in April 1997 as it related to a sales tax assessment of
$227,392 received in a Notice of Determination in March 1996. The settlement
amount of $55,513 was paid in full as of April 1997.
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 National Quotation Bureau through
August 16, 1995 and by NASDAQ from August 17, 1995 through March 31, 1997. The
quotations set forth below do not include retail markups, markdowns or
commissions and may not represent actual transactions.
HIGH LOW
---- ---
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
Fiscal 1997
June 30 $2.88 $1.75
September 30 2.25 1.06
December 31 2.56 1.50
March 31 2.44 1.56
HOLDERS
The Company believes that as of June 11, 1997 there were
approximately 373 record holders of its 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, 1997 and March 31, 1996. 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.
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Under the terms of the Company's credit agreement with United
National Bank (which acquired Farrington Bank, the original lender), the Company
may not, without the prior written consent of United National 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.
A number of statements contained in this Report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include but are not limited to the recent
introduction of, and the costs associated with, a new product line; dependence
on the acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on certain third
parties; a limited customer base; and liability risks.
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 the distribution of its new family of products, continued international
business expansion and continuing its successful two-year trend of reducing its
reliance on two major customer organizations.
During fiscal 1997, 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,
integrates network management, security management, and 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 new
finished tested product of this next generation product family, the Sentinel
2000 in May, 1996 and volume production shipments began in June, 1996.
Approximately 1,100 units of the Sentinel 2000 were shipped in fiscal 1997. In
January, 1997, another member of the SNS/2000 family, the Manager 2000 , was
introduced. Manager 2000 is a set of software applications that collectively
provide a comprehensive tool for remote site management, and the servicing of
real-time alarms being generated by remote monitoring equipment.
The Company believes this next generation of products is beginning
to create the foundation and growth that will help the Company meet its goals
and objectives in the coming years. With the addition of several major new
customers, the Company continues to strengthen its established worldwide
customer base which includes major U.S. and International telecommunications
providers, PBX vendors, financial institutions, Fortune 500 companies and
numerous governmental agencies.
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The Company has more than 2,300 installations across North America, South
America, Europe and the Pacific Rim. The September 1995 acquisition of EBA has
caused the Company to focus more 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. A major new contractual
relationship was formed in fiscal 1997 as a result of this improved focus. After
announcing this new relationship with TELE Business Communications of Finland, a
subsidiary of Telecom Finland, in November, 1996, the Company proceeded to ship
over $260,000 of product, primarily the Sentinel 2000, in the last four months
of the fiscal year. Additionally, it expanded its distribution in the Pacific
Rim with a significant increase in shipments to Racal Australia.
The major concern of the Company over the past several years was
alleviated to a significant extent in fiscal 1997. The reliance on two major
customers, MCI and Lucent Technologies (formerly AT&T), for a significant
portion of its current revenue stream, was reduced as the Company forged several
strong new relationships domestically. The most significant of these was the new
contractual relationship formed in September 1996 with US WEST Communications
Services. Over the second half of fiscal 1997, shipments to US WEST exceeded
$600,000, all of it derived from the SNS/2000 family, both Sentinel 2000 and
Manager 2000. Ongoing solid relationships, primarily with Southwestern Bell
Communications, were maintained. Relationships begun in fiscal 1996 improved,
the primary example being Ameritech Information Systems. Finally, other new
relationships were formed, including Vyvx, Inc. and Sprint Communications. As a
result, overall revenues generated from the Company's two primary customers has
dropped from 60% in fiscal 1995 to 49% in fiscal 1996 to 34% in fiscal 1997.
However, these customers are still the two largest, and therefore, significantly
important to the Company. 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 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 Lucent Technologies, the Company has been manufacturing RPSDs
for Lucent's resale to its PBX customers. The RPSD is a secured access product,
provided under Lucent's own label, custom designed to operate with Lucent's PBX,
Key Systems and Voice Processing products, primarily the Definity product line.
As of the fiscal year ended March 31, 1997, Lucent had purchased and installed
more than 16,200 RPSDs since 1991. In October, 1995, the Company signed a
two-year renewal of an OEM agreement, through which Lucent purchases RPSDs. The
Company expects to continue the growth and development of its domestic customer
base outside of these two primary customers in fiscal 1998.
The Company's employee base dropped from 42 full-time employees in
fiscal 1996 to 37 full-time employees during fiscal 1997. It is anticipated that
the number of employees will increase throughout fiscal 1998 as the desired
return to profitability is achieved. These additional resources
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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 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's European operation also moved to a new, larger facility in Antwerp,
Belgium in August, 1996. The Company feels 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 and companies grow more reliant on these networks for revenue generation
and employee productivity, the recognition of system vulnerability will continue
to increase and the Company's products will be in greater demand. After the
unsatisfactory performance in fiscal 1996, the Company rebounded in fiscal 1997,
achieving Management's primary mission for the year of returning the Company to
profitability. The Company believes many significant events occurred to position
the Company for future growth.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
The Company's revenues for fiscal 1997 were $7,343,624 versus
revenues of $6,258,243 for fiscal 1996, an increase of 17.3%. The increase in
revenues is primarily attributable to the significant expansion of the Company's
customer base outside of its two major customers, MCI and Lucent Technologies,
especially in the United States. Net revenues generated in the U.S., excluding
MCI and Lucent increased from approximately $1,910,000 to $3,330,000 which
represented a 74% increase from year to year. The Company also showed
significant growth in the Pacific Rim, where net revenues (primarily
attributable to one major customer, Racal Australia) increased over threefold
from $98,000 to $350,000.
The Company's cost of sales increased from $2,789,855 for fiscal
year 1996 to $2,903,705 for fiscal year 1997. However, cost of sales as a
percentage of sales decreased from 44.6% for fiscal 1996 to 39.5% for fiscal
1997. This substantial decrease is primarily the result of a reduced provision
for inventory obsolescence (from $176,660 to $75,000, or approximately 1.0% of
revenue), a reduction in capitalized software amortization (from $279,000 to
$163,000, or approximately 1.6% of revenue), and a general improvement in
purchasing and materials efficiencies, which is responsible for the remaining
2.5% reduction. It is important to note that this improvement was achieved
despite the initial volume shipments of the Sentinel 2000. As new product
introductions generally carry higher initial costs, the Sentinel 2000 was no
exception. These initially lower gross margins were offset by improvements in
the Company's mature product lines. As the Sentinel 2000 matures, it is
reasonable to expect an improvement in gross margins as volume manufacturing and
purchasing efficiencies are achieved.
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Selling, general and administrative expenses decreased from
$4,043,356 for fiscal 1996 to $3,355,961 for fiscal 1997, a decrease of 17.0%.
As a percentage of revenues, the decrease was more pronounced as this reduction
occurred while revenues increased. Fiscal 1997 showed an improvement to 45.7% of
sales from 64.6% of sales in fiscal 1996. While approximately $250,000 of the
decrease was related to the one-time adjustments recorded at the end of fiscal
1996, the major factor contributing to this decrease was the Company's
commitment to reduce administrative overhead in order to achieve its targeted
goal for fiscal 1997 of a return to profitability.
Research and development costs, net of capitalized software
development, rose from $713,441 during fiscal year 1996 to $893,852 in fiscal
year 1997. As a percentage of sales, the Company's research and development
costs increased from 11.4% in fiscal year 1996 to 12.2% in fiscal year 1997.
This increase is directly attributable to the Company's increased activity
related to the development of the SNS/2000 family of products introduced in
fiscal 1997.
The income tax benefit of $141,165 in fiscal 1997 and the income
tax provision of $574,900 in fiscal 1996 relates to the Financial Accounting
Standards Board's Statement No. 109, "Accounting for Income Taxes." This
Statement, issued in February 1992, and adopted by the Company effective April
1, 1993, requires deferred tax assets and liabilities to be recorded for the
difference between the financial statement and tax bases of assets and
liabilities ("temporary differences") using enacted tax rates. 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." Due to the operating loss in fiscal 1996,
the realization of the deferred tax asset was more uncertain and, as a result,
the Company provided a full valuation allowance against deferred tax assets at
March 31, 1996. At March 31, 1997, the deferred tax asset and related valuation
allowance have been reduced primarily due to the utilization of Federal and
state net operating loss carryforwards.
Fiscal Year 1996 Compared to Fiscal Year 1995
- ---------------------------------------------
The results for fiscal 1996 were 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 Lucent
Technologies. The Company's performance in the other three 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 allowance against the deferred tax asset
on the books at March 31, 1995; (2) a $150,000 provision for inventory
obsolescence as the Company began 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
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assessment by the State of New York which the Company contested; (5) a $120,000
provision related to the separation of an officer; and (6) a $100,000 provision
related to the Company's vacation accrual. In addition, several minor
adjustments totalling $50,000 were made.
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 Lucent Technologies. The decrease of approximately $1.300,000 (from
$4,300,000 to $3,000,000) 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 $3,300,000 in fiscal
1996 from approximately $2,800,000 in fiscal 1995, representing an 18% increase.
Of this total, international sales increased to approximately $1,300,000 from
approximately $950,000 in fiscal 1995, representing a 38% increase from fiscal
1995 to fiscal 1996.
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 fiscal 1996 as a result
of provisions 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 $4,084,254 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.
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LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company's financial position improved
substantially as assets increased from $3,558,171 to $4,682,373, and the
Company's working capital increased from $837,064 to $2,381,178, net of deferred
taxes. The primary contributor to this improvement in the Company's working
capital position was the completion of the 1996 Private Placement of 860,000
shares of the Company's Common Stock for net proceeds of approximately
$1,030,000. 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
approximately $300,000 were received from this issuance to existing
shareholders. Of these total proceeds from the issuances of stock, $500,000 was
used to pay down in full the Company's line of credit which had been outstanding
at March 31, 1996. Excluding the net proceeds of the Private Placement, the
Company's working capital position improved over $200,000, which approximates
the Company's income before income tax benefit for fiscal 1997.
The Company previously had a credit agreement with CoreStates Bank
("CoreStates") for a credit line of $1,000,000 to finance future working capital
requirements, collateralized by accounts receivable, inventory, equipment and
all other assets of the Company, as well as a $150,000 credit facility to
finance purchases of machinery and equipment, convertible into a three-year
secured term loan when utilized. 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, 1997, $72,664 remained outstanding on this
loan. The Company was informed in June, 1996, that the working capital credit
line would not be renewed upon its expiration date of July 31, 1996. The
outstanding balance was repaid by the Company on September 5, 1996, in
accordance with an agreement with CoreStates. On August 30, 1996, the Company
executed a credit agreement with Farrington Bank of North Brunswick, New Jersey
(subsequently acquired by United National Bank of Bridgewater, New Jersey). The
agreement provides the Company with a $500,000 line of credit to finance future
working capital requirements, collateralized by accounts receivable of the
Company. The agreement expires on August 30, 1997. No amount of this credit line
had been utilized as of March 31, 1997.
Based on its current cash and working capital position, as well as
its available line of credit, the Company believes that it will have sufficient
capital to meet its operational needs over the next twelve months.
In fiscal 1998, the Company will be required to adopt the
provisions of the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
is effective for financial statements for annual periods ending after December
15, 1997. SFAS 128 establishes standards for the computation, presentation and
disclosure requirements for earnings per share. The adoption of this standard is
not expected to have a material impact on the Company's reported earnings per
share.
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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.
None
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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 61 Chairman of the Board of Directors, Treasurer
Stephen B. Gray 39 President, Chief Executive Officer,
Chief Operating Officer, Director
Michael Radomsky 44 Executive Vice President, Secretary, Director
William H. Whitney 42 Chief Technology Officer, Assistant Secretary,
Director
Mark A. Simmons 36 Vice President - Operations, Chief Financial
Officer
Robert M. Groll 63 Vice President - Marketing
David I. Gould 66 Director
Stephen P. Roma 49 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 served as Chief Executive Officer of the Company from April 1996
to May 1997, as well as from June 1985 through October 1994. He was President of
the Company from May 1982 to June 1985. Mr. Deixler served as Treasurer of the
Company from its formation in 1982 until September 1993 and since October 1994.
Mr. Deixler served on the Board of Directors of Farrington Bank until its
acquisition by United National Bank on February 27, 1997. During April 1995, Mr.
Deixler sold his interest in Princeton Credit Corporation, a company engaged in
the business of buying, selling, and leasing high
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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, Chief Operating Officer and a
director since April 1996. He was elected to serve in the additional capacity as
the Chief Executive Officer in May 1997. 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
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 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 Chief Technology Officer (formerly titled Vice President - Software
Development) 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.
26
<PAGE>
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 in 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.
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 Wow!
WorkOut World, a chain of neighborhood Health and Fitness Centers. 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 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 David I. Gould
filed one late report on Form 5, disclosing the grant of a non-
27
<PAGE>
employee stock option pursuant to the Company's 1994 Stock Option Plan, as
amended (the "1994 Plan"). Each of Messrs. Stephen B. Gray, Michael Radomsky,
William Whitney and Mark Simmons filed one late report, a Form 4 disclosing the
grant of a non-plan stock option. Mr. William Whitney has filed two late reports
on Form 4, disclosing the sale of stock. During the fiscal year ended March 31,
1997, 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, 1997, to those
individuals who as of March 31, 1997 served as the Company's Chief Executive
Officer during fiscal 1997 and to the Company's four most highly compensated
officers other than those who served as the Chief Executive Officer during
fiscal 1997 (these five executive officers being hereinafter referred to as the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ---------------------------------------------------------------------
Awards Payouts
-------------------------- ------------------------
Other
Annual Restricted Securities All Other
Principal Compen- Stock Underlying LTIP Compen-
Position Year Salary ($) Bonus($) sation($) Awards(s)($) Options (#) Payouts ($) sation($)
- -------- ---- ---------- -------- --------- ------------ ----------- ----------- ---------
<S> <C> <C> <C>
Stephen M. Deixler 1997 14,000(1) -- -- -- 10,000 -- --
Chairman, Chief 1996 -- -- -- -- -- -- --
Executive Officer(1) 1995 -- -- -- -- -- -- --
Stephen B. Gray 1997 163,386 -- -- -- 400,000 -- --
President, Chief 1996 134,675 -- -- -- 2,309 -- --
Executive Officer (2), 1995 42,000(2) 2,213(3) -- -- 40,000 -- --
Chief Operating Officer
Michael Radomsky 1997 128,773 -- -- -- 90,000 -- 541(4)
Executive Vice- 1996 122,800 -- -- -- 8,208 -- 1,047(4)
President 1995 111,588 2,910(3) -- -- 1,192 -- 1,997(4)
William H. Whitney 1997 128,773 -- -- -- 90,000 -- 2,318(4)
Chief Technology 1996 122,800 -- -- -- 8,136 -- 2,152(4)
Officer 1995 111,588 2,841(3) -- -- 1,209 -- 1,997(4)
Mark A. Simmons 1997 116,956 -- -- -- 40,000 -- 2,105(4)
V-P, Operations, Chief 1996 92,800 -- -- -- 6,579 -- 1,612(4)
Financial Officer 1995 16,012 1,513(3) -- -- 20,000 -- 177(4)
</TABLE>
28
<PAGE>
(1) The Company does not have a written employment agreement with Mr. Stephen
M. Deixler, the Company's Chairman of the Board. However, under an informal
agreement, the Company has agreed to pay him $1,000 per day to perform such
services as jointly agreed to by the Company and Mr. Deixler, and approved
by the Board of Directors. Mr. Deixler ceased to serve as the Chief
Executive Officer of the Company on May 19, 1997.
(2) Mr. Gray was elected to serve in the additional capacity as the Chief
Executive Officer of the Company on May 19, 1997. Compensation for Mr. Gray
includes payments he earned as a consultant of the Company in the amounts
of $42,000. Mr. Gray served as a consultant to the Company prior to the
time he became a full-time employee pursuant to his employment agreement
with the Company dated March 27, 1995.
(3) Represents compensation earned under the Company's Incentive Bonus Plan for
the fiscal year ended March 31, 1995 (the "Incentive Plan"). The Incentive
Plan covers all Company employees and was effective as of October 1, 1994.
The Incentive Plan is based on achievement in three specific areas -
Company revenue, Company operating income, and individual/ departmental
objectives.
(4) Represents contribution of the Company under the Company's 401(k) Plan.
29
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997
The following table sets forth certain information concerning stock
option grants during the year ended March 31, 1997 to the Named Executive
Officers (after giving effect to the Reverse Stock Split):
Individual Grants
--------------------------------------------------------
Percent
Number of of Total
Securities Options
Underlying Granted to Exercise or
Options Employee in Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
---- ---------- ----------- ------ ----
Stephen M. Deixler 10,000(1) (1) $1.50 9/17/01
65,784 5.3% $1.31 (2)
Stephen B. Gray 400,000 32.3% $1.16 9/25/06
45,850 3.7% $1.31 (2)
Michael Radomsky 90,000 7.3% $1.16 9/25/06
45,850 3.7% $1.31 (2)
William H. Whitney 90,000 7.3% $1.16 9/25/06
39,869 3.2% $1.31 (2)
Mark A. Simmons 40,000 3.2% $1.16 9/25/06
(1) Represents stock options granted to Mr. Deixler under the 1994 Stock Option
Plan in consideration of his service to the Company as a non-employee
director. Mr. Deixler is not considered an employee of the Company
(2) Represent options issued under a Time Accelerated Restricted Stock Award
Program (TARSAP). These options were terminated by mutual agreement between
the Company and the Named Executive Officers on March 31, 1997.
30
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning each
exercise of stock options during the fiscal year ended March 31, 1997 by each of
the Named Executive Officers and the number and value of unexercised options
held by each of the Named Executive Officers on March 31, 1997 (after giving
effect to the Reverse Stock Split).
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexer- In-the-Money
Shares cised Options Options at
Acquired on Value at FY-End(#) FY-End ($)(1)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stephen M. Deixler -- -- 15,000/5,000 $1,250/$1,250
Stephen B. Gray -- -- 202,309/200,000 $118,000/$118,000
Michael Radomsky -- -- 99,400/0 $53,100/$0
William H. Whitney -- -- 99,345/0 $53,100/$0
Mark A. Simmons -- -- 46,579/0 $23,600/$0
</TABLE>
- -----------------------
(1) The average price for the Common Stock as reported by the National
Quotation Bureau on March 31, 1997 was $1.75 per share. Value is calculated
on the basis of the difference between the option exercise price and $1.75
multiplied by the number of shares of Common Stock underlying the options.
COMPENSATION OF DIRECTORS
On September 17, 1996, each of Stephen M. Deixler, Stephen P. Roma
and David I. Gould, 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 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.
31
<PAGE>
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
July 1, 1994 and expire on June 30, 1997. 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 disability payments, reimbursement for reasonable expenses and
fringe benefits that generally are available to the Company's executives. Each
of the executives has 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
arrangement between the company and Mr. Sciambi to be effective as of such date.
See "Certain Relationships and Related Transactions."
Mr. Simmons has tendered his resignation as an employee and officer
of the Company. His resignation is not effective, by its terms, until June 30,
1997.
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 11,
1997, owns of record or is known by the Company to own beneficially, more than
5% of such securities, and by the Company's Named Executive Officers and by its
Directors, both individually and 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) 750,532 15.3%
371 Eagle Drive
Jupiter, Florida 33477
David I. Gould (2) 275,837 5.6%
10844 White Aspen Way
Boca Raton, Florida 33428
32
<PAGE>
Stephen B. Gray (3) 202,309 4.0%
37 Shy Creek Road
Alexandria, NJ 08867
Michael Radomsky (4) 313,804 6.4%
8 Zaydee Drive
Edison, New Jersey 08837
William H. Whitney (5) 182,159 3.7%
15 Jackson Avenue
Chatham, New Jersey 07928
Robert M. Groll (6) 82,913 1.7%
52 Village Lane
Freehold, New Jersey 07728
Mark A. Simmons (7) 46,579 1.0%
218 Victoria Court
Doylestown, Pennsylvania 18901
Stephen P. Roma (8) 474,399 9.7%
91 Durand Drive
Marlboro, New Jersey 07748
Special Situations Fund, III, L.P.(9) 855,863 16.8%
MGP Advisers Limited Partnership (9) 855,863 16.8%
AWM Investment Company, Inc. (9) 1,170,133 22.5%
Austin W. Marxe (9) 1,170,133 22.5%
Jay Associates LLC (10) 480,000 9.3%
1118 Avenue J
Brooklyn, New York 11230
Alpha Investments LLC (11) 336,000 6.6%
5611 North 16th Street #300
Phoenix, Arizona 85016
33
<PAGE>
Jules Nordlicht (12) 300,000 6.1%
255 West Palm Beach
Long Beach, New York 11561
Directors and executive
officers as a group (8 Persons) 2,328,532 42.1%
- ------------------
* All shares and per share amounts have been adjusted to take into account
the Company's Reverse Stock Split.
(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 120,406 shares of
Common Stock held by Merrill Lynch Pierce Fenner & Smith custodian
f/b/o Stephen M. Deixler, IRA. Includes 17,500 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 17,500 shares of
common Stock which may be acquired pursuant to currently exercisable
non-employee director options under the 1994 Plan.
(3) Includes 200,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 2,309 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted under the Company's
1994 Plan.
(4) Includes 90,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 9,400 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted under the Company's
1994 Plan.
(5) Includes 90,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 9,345 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted under the Company's
1994 Plan.
(6) 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
34
<PAGE>
28,745 shares of Common Stock which may be acquired pursuant to
currently exercisable options granted under the 1994 Plan.
(7) Includes 40,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 6,579 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted under the Company's
1994 Plan.
(8) 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 17,500 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.
(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 27, 1997. All presented
information is based on the information contained in the Schedule 13G,
as amended. 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 314,270 shares and sole dispositive power with
respect to 1,170,133 shares; and Mr. Marxe has sole voting power with
respect to 314,270 shares, shared voting power with respect to 855,863
shares and sole dispositive power with respect to 1,170,133 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
35
<PAGE>
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) All presented information is based upon information contained in the
Schedule 13G filed in August 1996. 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 currently a
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. In the fiscal year ended March 31, 1997, Mr. Gould was
paid $40,000 under this agreement.
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 the Company's employment agreement with Mr.
Sciambi. The compensation agreement provided 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 the aggregate consideration of $33,331.25
Additionally, in connection with the 1996 Private Placement,
36
<PAGE>
Special Situations Fund III, L.P., also the holder of preemptive rights
purchased 133,621 Units at $1.25 for the 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 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 annually, with annual 5% increases over the term,
as well as the reimbursement of certain expenses during the term.
37
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits and Index of Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Exhibit Reference
- ----------- ----------- -----------------
<C> <S>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit
Company 3.2 of 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 to Certificate of Incorporated by reference to Exhibit
Incorporation filed September 14, 3.3 of the Form 10-KSB for the
1992 fiscal year ended March 31, 1993
(the "1993 10-KSB")
3.4 Amendment to Certificate of Incorporated by reference to Exhibit
Incorporation filed September 20, 3.4 of Amendment No. 1 to the
1993 Registration Statement
3.5 Form of Specimen Common Stock Incorporated by reference to Exhibit
Certificate 3.5 of 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
38
<PAGE>
10.2 Amendment No. 2 to 1984 Stock Incorporated by reference to Exhibit
Option Plan 10.5 of the Form 10-K for the fiscal
year ended March 31, 1986 (the
"1986 10-K")
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 Incorporated by reference to Exhibit
May 10, 1993 pursuant to Private 10.4 of the 1993 10-KSB
Placement
10.5 Employment Agreement dated as Incorporated by reference to Exhibit
of May 2, 1992 between David I. 10.5 of Amendment No. 2 to the
Gould and the Company Registration Statement
10.6 Loan Agreement between the Incorporated by reference to Exhibit
Company and New Jersey National 10.6 of the 199310-KSB
Bank
10.7 Letter Agreement dated April 28, Incorporated by reference to Exhibit
1993 between the Company and 10.7 of Amendment No. 1 to the
New Jersey National Bank Registration Statement
10.8 Form of Consulting Agreement Incorporated by reference to Exhibit
between David I. Gould and the 10.8 of Amendment No. 1 to the
Company Registration Statement
10.9 Agreement between American Incorporated by reference to Exhibit
Telephone and Telegraph Company 10.9 of Amendment No. 2 to the
and the Company dated September Registration Statement
17, 1993
39
<PAGE>
10.10 Joint Marketing Agreement Incorporated by reference to Exhibit
between MCI Telecommunications 10.10 of Amendment No. 2 to the
Corporation and the Company Registration Statement
dated September 1, 1992, together
with Amendment No. 1 dated July
7, 1993
10.11 Employment Agreement dated as Incorporated by reference to Exhibit
of January 1, 1994 between 10.11 of Form 10-KSB for the fiscal
Michael Radomsky and the year ended March 31, 1994 (the
Company "1994 10-KSB")
10.12 Employment Agreement dated as Incorporated by reference to Exhibit
of January 1, 1994 between 10.12 of the 1994 10-KSB
William H. Whitney and the
Company
10.13 Employment Agreement dated as Incorporated by reference to Exhibit
of January 1, 1994 between Robert 10.13 of the 1994 10-KSB
M. Groll and the Company
10.14 Employment Agreement dated as Incorporated by reference to Exhibit
of January 1, 1994 between P. 10.15 of Amendment No. 2 to the
David Bocksch and the Company Registration 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
Agreement between the Company 10.16 of Form 10-QSB for the
and CoreStates Bank, N.A. dated quarter ended September 30, 1994
September 8, 1994.
10.17 Consulting Agreement between the Incorporated by reference to Exhibit
Company and P. David Bocksch 10.17 to Form 8-K dated November
dated November 14, 1994 30, 1994
10.18 Employment Agreement dated as Incorporated by reference to Exhibit
of October 11, 1994 between the 10.18 to Form 10-QSB for the
Company and Lonnie L. Sciambi quarter ended December 31, 1994
40
<PAGE>
10.19 Incentive Bonus Plan of the Incorporated by reference to Exhibit
Company for the fiscal year ended 10.19 to Form 10-QSB for the
March 31, 1995 quarter ended December 31, 1994
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit
Company to the Securities and 10.20 to Form 8-K dated March 13,
Exchange Commission relating to 1995
Item 4 of Form 8-K
10.21 1994 Stock Option Plan Incorporated by reference from the
Company's Proxy Statement dated
August 15, 1994 for the Company's
Annual Meeting of Shareholders
held on September 19, 1994
10.22 Non-Qualified Stock Option Incorporated by reference to Exhibit
Agreement dated December 19, 10.22 of the Form 10-KSB for the
1994 between the Company and fiscal year ended March 31, 1995
Cameron Towey Neilson, Inc. (the "1995 10-KSB")
10.23 Purchase Agreement dated Incorporated by reference to Exhibit
December 21, 1994 between the 10.23 of the 1995 10-KSB
Company and Ericsson Business
Networks AB
10.24 Employment Agreement dated as Incorporated by reference to Exhibit
of March 27, 1995 between the 10.24 of the 1995 10-KSB
Company and Stephen B. Gray
10.25 Letter dated April 5, 1995 from the Incorporated by reference to Exhibit
Company to P. David Bocksch 10.25 of the 1995 10-KSB
terminating his Consulting
Agreement
10.26 Incentive Bonus Plan of the Incorporated by reference to Exhibit
Company for the fiscal year ending 10.26 of the 1995 10-KSB
March 31, 1996
10.27 Employment Agreement dated as Incorporated by reference to Exhibit
of July 1, 1995 between the 10.27 of Form 10-QSB for the
Company and Mark A. Simmons quarter ended September 30, 1995
41
<PAGE>
10.28 Lease Agreement dated as of July Incorporated by reference to Exhibit
20, 1995 between 46.25 10.28 of Form 10-QSB for the
Associates, L.P. and the Company quarter ended September 30, 1995
for premises at the Middlesex (New
Jersey) Business Center
10.29 Share Purchase Agreement (EBA) Incorporated by reference to Exhibit
dated September 15, 1995 between 10.30 of Form 10-QSB for the
Marc Kegelaers and MicroFrame quarter ended September 30, 1995
Europe N.V.
10.30 Consulting Agreement dated as of Incorporated by reference to Exhibit
September 15, 1995 between Marc 10.31 of Form 10-QSB for the
Kegelaers and MicroFrame Europe quarter ended September 30, 1995
N.V.
10.31 Termination Letter dated Incorporated by reference to Exhibit
September 15, 1995 from 10.32 of Form 10-QSB for the
European Business Associates quarter ended September 30, 1995
BVBA to the Company
10.32 Letter from Price Waterhouse LLP Incorporated by reference to Exhibit
to the Securities and Exchange 10.33 of Form 8-K dated January
Commission relating to Item 4 of 30, 1996
Form 8-K
10.33 Form of Purchase Agreement dated Incorporated by reference to Exhibit
April 1996 pursuant to the 1996 10.33 of the Form 10-KSB for the
Private Placement fiscal year ended March 31, 1996
(the "1996 10-KSB")
10.34 Consulting Agreement between the Incorporated by reference to Exhibit
Company and Lonnie L. Sciambi 10.34 of the 1996 10-KSB
dated April 1, 1996
10.35 Fiscal 1997 Incentive Plan Incorporated by reference to Exhibit
10.35 of the 1996 10-KSB
23 (a) Consent of Coopers and Lybrand LLP Filed herewith
(b) Reports on Form 8-K
None
</TABLE>
42
<PAGE>
Index to Financial Statements
Report of Independent Accountants. F-1
Consolidated Balance Sheets as of March 31, 1997 and March 31, 1996. F-2
Consolidated Statements of Operations for the years
ended March 31, 1997 and 1996. F-3
Consolidated Statements of Cash Flows for the years ended March 31,
1997 and 1996. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 1997 and March 31, 1996. F-5
Notes to Consolidated Financial Statements. F-6-18
43
<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 19, 1997.
MICROFRAME, INC.
By: /s/ Stephen B. Gray
--------------------------------------
Stephen B. Gray, President, Chief
Executive Officer, 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
- -------------------------------------- June 19, 1997
Stephen B. Gray, President, Chief
Executive Officer, Chief Operating
Officer (Principal Executive Officer)
/s/ Mark A. Simmons
- -------------------------------------- June 19, 1997
Mark A. Simmons, Vice President -
Operations, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Stephen M. Deixler
- -------------------------------------- June 19, 1997
Stephen M. Deixler, Chairman of the
Board of Directors, Treasurer
/s/ Michael Radomsky
- -------------------------------------- June 19, 1997
Michael Radomsky, Executive Vice
President, Secretary, Director
/s/ William H. Whitney
- -------------------------------------- June 19, 1997
William H. Whitney, Chief Technology
Officer, Assistant Secretary, Director
<PAGE>
/s/ Stephen P. Roma
- -------------------------------------- June 19, 1997
Stephen P. Roma, Director
/s/ David I. Gould
- -------------------------------------- June 19, 1997
David I. Gould, Director
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Consolidated Balance Sheets as of March 31, 1997
and March 31, 1996 F-2
Consolidated Statements of Operations for the years
ended March 31, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the years
ended March 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended March 31, 1997 and March 31, 1996 F-5
Notes to Consolidated Financial Statements F-6-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MicroFrame, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of MicroFrame, Inc.
and Subsidiary (the "Company") as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of March 31, 1997 and 1996 and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrabd, LLP
New York, New York
May 27, 1997
F-1
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Balance Sheets
as of March 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 539,214 $ 48,302
Accounts receivable, less allowance for doubtful
accounts of $100,000 1,898,810 1,540,561
Inventory 1,030,343 1,084,870
Deferred tax asset 314,242 --
Prepaid expenses and other current assets 120,990 77,426
----------- -----------
Total current assets 3,903,599 2,751,159
Property and equipment at cost, net 343,123 409,866
Capitalized software, less accumulated amortization
of $812,257 and $649,332, respectively 315,568 266,319
Goodwill, less accumulated amortization of
$16,230 and $5,766, respectively 85,380 95,844
Security deposits 34,703 34,983
----------- -----------
Total assets $ 4,682,373 $ 3,558,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 42,266 $ 538,754
Accounts payable 361,537 395,619
Accrued payroll and related liabilities 280,512 285,651
Deferred income 268,518 258,856
Other current liabilities 255,346 435,215
----------- -----------
Total current liabilities 1,208,179 1,914,095
----------- -----------
Commitments and contingencies (Notes 8 and 9)
Deferred tax liabilities 173,077 --
Long-term debt 30,398 72,833
Stockholders' equity:
Common stock - par value $.001 per share; authorized
50,000,000 shares, issued 4,839,203 shares and
outstanding 4,838,803 shares at March 31, 1997
issued 3,718,075 shares and outstanding 3,717,675
shares at March 31, 1996; 4,839 3,718
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued -- --
Additional paid-in capital 6,212,828 4,856,924
Accumulated deficit (2,942,948) (3,285,399)
----------- -----------
3,274,719 1,575,243
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------- -----------
Total stockholders' equity 3,270,719 1,571,243
----------- -----------
Total liabilities and stockholders' equity $ 4,682,373 $ 3,558,171
=========== ===========
</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, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 7,343,624 $ 6,258,243
Cost of sales 2,903,705 2,789,855
----------- -----------
Gross margin 4,439,919 3,468,388
Research and development expenses 893,852 713,441
Selling, general and administrative expenses 3,355,961 4,043,356
----------- -----------
Income (loss) from operations 190,106 (1,288,409)
Interest income 35,560 3,649
Interest expense (24,380) (34,917)
Other expense, net -- (99,123)
----------- -----------
Income (loss) before income tax (benefit) provision 201,286 (1,418,800)
Income tax (benefit) provision (141,165) 574,900
----------- -----------
Net income (loss) $ 342,451 $(1,993,700)
=========== ===========
Per share data:
Net income (loss) per share $ 0.07 $ (0.54)
----------- -----------
Weighted average number of common shares outstanding 4,968,782 3,703,476
----------- -----------
</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, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 342,451 $(1,993,700)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 360,263 431,739
Provision for doubtful accounts 55,751 89,121
Provision for inventory obsolescence 75,000 176,660
Deferred tax provision (141,165) 574,900
Changes in operating assets and libefore effect
of acquisitions:
Accounts receivable (414,000) 289,525
Inventory (20,473) (465,863)
Prepaid expenses and other current assets (43,564) (24,773)
Security deposits 280 (1,921)
Accounts payable (34,082) 10,887
Accrued payroll and related liabilities 10,738 40,311
Deferred income 9,662 56,378
Other current liabilities (179,869) 347,447
----------- -----------
Net cash provided by (used in) operating activities 20,992 (469,289)
----------- -----------
Cash flows from investing activities:
Capital expenditures (120,131) (210,304)
Capitalized software (212,174) (333,170)
Acquisition of European Business Associates, net of cash acquired -- (50,208)
----------- -----------
Net cash used in investing activities (332,305) (593,682)
----------- -----------
Cash flows from financing activities:
Proceeds of short-term borrowings -- 500,000
Proceeds of long-term debt -- 124,000
Repayments of debt (538,923) (12,413)
Issuance of common stock 1,341,148 9,425
----------- -----------
Net cash provided by financing activities 802,225 621,012
----------- -----------
Net increase (decrease) in cash and cash equivalents 490,912 (441,959)
Cash and cash equivalents - beginning of period 48,302 490,261
----------- -----------
Cash and cash equivalents - end of period $ 539,214 $ 48,302
=========== ===========
Supplemental information:
Cash paid during period for interest $ 24,380 $ 34,095
----------- -----------
Noncash investing and financing activities: Common stock issued in
connection with acquisition of
European Business Associates and related share earn out
agreement $ 15,877 $ 78,124
=========== ===========
</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, 1997 and 1996
<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, 1995 3,686,798 $ 3687 4,769,406 (1,291,699) (4,000) 3,477,394
----------- ----------- ----------- ----------- ----------- -----------
Net loss -- -- -- (1,993,700) -- (1,993,700)
Issuances 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
----------- ----------- ----------- ----------- ----------- -----------
Net income 342,451 -- 342,451
Issuances of common stock 1,121,128 1,121 1,355,904 -- -- 1,357,025
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 4,838,803 $ 4,839 $ 6,212,828 $(2,942,948) $ (4,000) $ 3,270,719
=========== =========== =========== =========== =========== ===========
</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, 1997 and 1996
1. ORGANIZATION:
THE COMPANY
MicroFrame, Inc., 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 area 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 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
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, 1997 AND 1996
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 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 $212,174 and $333,170 of software development
costs for fiscal 1997 and 1996, respectively. 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 $162,925 and $278,453 for
fiscal 1997 and fiscal 1996, 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, 1997 and 1996, the Company
has deferred income related to maintenance contracts of $268,518 and
$258,856, 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, 1997
and 1996 included in other current liabilities amounts to $35,000 and
$25,000, respectively.
F-7
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
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 OF FINANCIAL INSTRUMENTS
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.
LONG-LIVED ASSETS
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"), requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset in question may not be recoverable. The Company
adopted SFAS 121 during fiscal 1997 and there was no material impact on
the Company's financial position or results of operations.
PER SHARE DATA
The per share data appearing in the statements of operations for the
years ended March 31, 1997 and 1996 has been prepared in accordance with
the Accounting Principles Board Opinion No. 15. For the year ended March
31, 1997, such amounts have been computed based on the income for the
period divided by the weighted average number of shares of common stock
outstanding during the period plus the dilutive effects of approximately
238,000 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 their inclusion would have been anti-dilutive.
F-8
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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
it is more likely than not that the asset will be realized in the
future.
RECLASSIFICATION
The Company has reclassified certain prior year amounts to conform with
the 1997 presentation.
3. INVENTORY:
Inventory, net of reserve for obsolescence of $200,000 and $150,000 at
March 31, 1997 and 1996, respectively, consists of the following:
1997 1996
---------- ----------
Raw materials $ 625,583 $ 676,120
Work-in-process 374,802 367,820
Finished goods 29,958 40,930
---------- ----------
$1,030,343 $1,084,870
---------- ----------
F-9
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
4. PROPERTY AND EQUIPMENT AT COST, NET:
At March 31, 1997 and 1996 property and equipment consists of the
following:
1997 1996
----------- -----------
Demonstration and service equipment $ 832,478 $ 727,517
Furniture and fixtures 180,940 175,174
Leasehold improvements 68,340 58,936
----------- -----------
1,081,758 961,627
Less: Accumulated depreciation (738,635) (551,761)
----------- -----------
Total $ 343,123 $ 409,866
=========== ===========
Depreciation expense for property and equipment for the years ended
March 31, 1997 and 1996 amounted to $186,874 and $147,520, respectively.
5. BANK BORROWINGS:
The Company has an available line of credit through August 30, 1997, in
the amount of $500,000. All amounts were unused at March 31, 1997. The
line is collateralized by the accounts receivable of the Company. Any
advances under the bank line are payable at maturity, and bear interest
at the Wall Street prime rate (8.5% at March 31, 1997) plus 0.5%. At
March 31, 1996, $500,000 was outstanding under a line of credit. The
final installment on this outstanding line of credit was made on
September 5, 1996 at which time the bank line was closed.
In addition, the Company had an outstanding facility of $150,000 to
support 80% of capital expansion. In November 1995, $124,000 was
borrowed against the facility with a term of three years, payable
monthly, at an interest rate of 8.55%. Upon expiration of this facility
at July 31, 1996, the bank agreed to honor the existing terms of this
credit facility. At March 31, 1997 and 1996, $72,664 and $111,587 was
outstanding, of which $30,398 is non-current at March 31, 1997. Future
principal repayments under this loan are $42,266, and $30,398 for the
years ending March 31, 1998 and 1999, respectively.
The bank lines of credit and facilities 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.
F-10
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
6. INCOME TAXES:
As of March 31, 1997, the Company has available, federal, state and
foreign net operating loss carryforwards of approximately $1,975,206,
$660,561 and $458,000, respectively, to offset future taxable income.
The federal and state net operating loss carryforwards expire during the
years 2001 through 2011. In addition, the Company has investment credit
and research and development credit carryforwards aggregating
approximately $131,046, which may provide future tax benefits, expiring
from 1999 through 2002.
March 31,
-----------------------------
1997 1996
----------- -----------
Effective tax rate reconciliation:
Statutory federal tax rate 34% (34)%
State taxes, net of federal benefit 6% (6)%
Effect of valuation allowance (70)% 78%
Foreign loss with no benefit 53% 3%
Utilization of NOL's (93)% --
----------- -----------
(70)% 41%
----------- -----------
The tax effect of temporary differences which make up the significant
components of the net deferred tax asset and liability at March 31, 1997
and 1996 are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Accounts receivable $ 40,000 $ 40,000
Inventory 192,000 130,000
Accrued expenses 82,242 121,645
Net operating loss carryforward 834,324 947,378
Research and development credit 131,046 97,307
Deferred tax liability:
Equipment (46,849) (22,849)
Capitalized software (126,228) (106,528)
Valuation allowance (965,370) (1,206,953)
----------- -----------
Net deferred tax asset $ 141,165 $ --
=========== ===========
The change in the valuation allowance is primarily due to the
utilization of federal and state net operating loss carryforwards during
the year ended March 31, 1997.
F-11
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
7. STOCKHOLDERS' EQUITY:
During the year ended March 31, 1997, options to purchase 9,500 shares
of common stock under the Company's stock option plans were exercised,
for an aggregate consideration of $15,755. In addition, 10,161 shares of
common stock were issued as part of the stock earn out as stipulated in
the Share Purchase Agreement (see Note 12). The aggregate fair value of
this consideration was $15,877.
During the year ended March 31, 1996, options to purchase 5,877 shares
of common stock 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 consideration of $78,124 was recorded as part of the
total consideration paid for this acquisition.
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 $1,023,559. 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 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 were issued. These warrants expire in April, 2000.
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-12
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
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 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. At March 31, 1997, 18,800 options remained
outstanding to be exercised.
In August 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan"). The 1994 Plan as amended increased the number of shares of
common stock for which options may be granted to a maximum of 1,250,000
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% if the
person granted such options owns more than ten percent of the
outstanding common stock) of the fair market value of one common stock
on the date of grant. During the year ended March 31, 1997, the Company
granted options to purchase 657,629 shares of its common stock under the
1994 Plan. At March 31, 1997, 298,693 options were outstanding against
the 1994 Plan, of which 270,483 options were exercisable.
OTHER OPTIONS
During September 1996, the Company issued options to purchase 620,000
shares of the Company's common stock, of which 420,000 vested
immediately and 100,000 vest each April 1 of 1998 and 1999. Options
expire ten years from the date of grant. The exercise price of the
options is equal to the market value of the Company's stock on the date
of grant.
The Company also has outstanding options to purchase 130,000 shares of
the Company's stock. Options expire in terms ranging from 5 to 10 years
from the date of grant. The exercise price of the options is equal to
the market value of the Company's stock on the date of grant.
F-13
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
7. STOCKHOLDERS' EQUITY (CONTINUED):
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its options. Accordingly, no compensation cost has
been recognized for its fixed stock option plans in its results of
operations.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). If the Company had elected to recognize
compensation costs based on the fair value at the date of grant for
awards in fiscal 1997 and 1996, consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced/increased by $770,146 and $0.15 and $128,375 and
$0.03, respectively.
The proforma effect on net income for fiscal 1997 and 1996 may not be
representative of the pro forma effect on net income of future years
because the SFAS No. 123 method of accounting for pro forma compensation
expense has not been applied to options granted prior to April 1, 1995.
The weighted-average fair values at date of grant for options granted
during fiscal 1997 and 1996 were $0.96 and $1.57, respectively. The fair
value of each option grant for the Company's common stock is estimated
on the date of the grant using the Black Scholes option pricing model,
with the following weighted average assumptions used for grants in
fiscal 1997 and 1996: expected volatility of 77%; risk-free interest
rate of 6.56; and expected option lives of 6.76 years.
Details of options granted are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Option Price
Shares Price Per Share ($)
----------- --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at March 31, 1995 353,845 2.07 1.25 to 2.75
Granted 116,533 2.38 1.78 to 3.13
Canceled (28,503) 1.53 1.25 to 2.87
Exercised (5,877) 1.60 1.25 to 2.14
----------- ------------
Options outstanding at March 31, 1996 435,998 2.11 1.25 to 3.13
Granted 1,277,629 1.31 1.16 to 2.00
Canceled (636,634) 1.55 1.25 to 3.13
Exercised (9,500) 1.66 1.25 to 1.83
----------- ------------
Options outstanding at March 31, 1997 1,067,493 1.49 1.16 to 2.87
Options exercisable at March 31, 1997 839,283 1.56 1.16 to 2.87
</TABLE>
F-14
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
7. STOCKHOLDERS' EQUITY (CONTINUED):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Years of Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$1.16 - $1.72 722,800 8.69 $ 1.22 501,550 $ 1.22
$1.83 - $2.14 277,438 3.77 $ 1.92 273,836 $ 1.92
$2.25 - $2.87 67,255 4.84 $ 2.68 63,897 $ 2.67
</TABLE>
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. In August 1996, the Company
executed a building lease for its European operation in Antwerp,
Belgium. The terms of the lease are for expiration in August 2005, with
options to terminate in August 1999 or August 2002.
The fixed minimum payments under operating leases for future periods is
as follows:
Year ending March 31,
1998 $ 155,100
1999 150,800
2000 44,500
2001 0
2002 0
Thereafter 0
-----------
Total minimum lease payments $ 350,400
===========
Rent expense, in addition to allocated occupancy expenses, for the years
ended March 31, 1997 and 1996 approximated $145,700 and $119,300,
respectively.
F-15
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
8. COMMITMENTS (CONTINUED):
CONSULTING CONTRACT
The Company entered into a consulting agreement with an officer which
became effective upon the expiration (or mutually agreed upon
termination) of his employment agreement on May 2, 1995. The agreement
provides that the officer 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. The costs incurred related to the consulting
agreement are $40,000 and $36,667, respectively, for the years ended
March 31, 1997 and 1996.
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 an annual consulting
fee of $75,000 with 5% annual increments, 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 provided that the officer receive an aggregate sum of
$100,000 payable at the rate of $15,000 per month, with an initial
payment 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 was 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 was $100,000 at March
31, 1996, respectively. During the year ended March 31, 1997 a
settlement was reached which resulted in no additional liability to the
Company.
F-16
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
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 in cash 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, 1997 and
1996 was $27,641 and $29,729, respectively.
11. SALES:
Sales by geographic area for the years ended March 31, 1997 and 1996 are
as follows:
1997 1996
---------- ----------
United States $5,813,584 $4,946,702
Europe 1,047,980 1,058,960
Pacific Rim 349,732 98,156
Other 132,328 154,425
---------- ----------
$7,343,624 $6,258,243
========== ==========
The Company sells a substantial portion of its products to two
customers. Sales to these customers amounted to $2,484,939 (34% of net
sales) in 1997 and $3,039,086 in 1996 (49% of net sales), respectively.
At March 31, 1997 and 1996, amounts due from these customers included in
accounts receivable, were $1,022,787 and $1,022,725, respectively. The
loss of either of these two customers would have a material adverse
effect on the Company's financial position and results of operations.
12. RELATED PARTY TRANSACTION:
A director of the Company was also a director of the financial
institution through which the Company has an available line of credit.
The director's position with the financial institution was dissolved as
a result of the acquisition of the financial institution on February 28,
1997.
13. CONCENTRATION OF CREDIT RISK:
The Company maintains deposits in a financial institution which is
insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. At March 31, 1997 and periodically throughout 1997, the
Company had deposits in this financial institution in excess of the
amount insured by the FDIC.
F-17
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
14. 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, 1997 and 1996, respectively, the Company has accrued
approximately $27,400 and $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
========
15. OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"), which is effective for financial statements for
annual periods ending after December 15, 1997. SFAS 128 establishes
standards for the computation, presentation and disclosure requirements
for earnings per share. The adoption of this standard is not expected to
have a material impact on reported earnings per share.
F-18
CONSENT OF INDEPENDENT ACCOUNTANTS
-------
We consent to the incorporation by reference in the registration statement of
Microframe, Inc. on Form S-3 (File No. 333-09507) of our report dated May 27,
1997, on our audits of the consolidated financial statements of Microframe, Inc.
as of March 31, 1997 and 1996, and for the years ended March 31, 1997 and 1996,
which report included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand LLP
New York, New York
June 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000754813
<NAME> MICROFRAME, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 539,214
<SECURITIES> 0
<RECEIVABLES> 1,998,810
<ALLOWANCES> (100,000)
<INVENTORY> 1,030,343
<CURRENT-ASSETS> 3,903,599
<PP&E> 1,081,759
<DEPRECIATION> (738,636)
<TOTAL-ASSETS> 4,682,373
<CURRENT-LIABILITIES> 1,208,179
<BONDS> 0
0
0
<COMMON> 4,839
<OTHER-SE> 3,265,880
<TOTAL-LIABILITY-AND-EQUITY> 4,682,373
<SALES> 7,343,624
<TOTAL-REVENUES> 7,343,624
<CGS> 2,903,705
<TOTAL-COSTS> 7,153,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,380
<INCOME-PRETAX> 201,286
<INCOME-TAX> (141,165)
<INCOME-CONTINUING> 342,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,451
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
