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, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File 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: (732) 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 $10,217,911.
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 25, 1998 was approximately $17,531,345.
There were 5,296,479 shares of Common Stock outstanding as of June 25, 1998.
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, intranet and internet 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). In addition they continue
to allow 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-band WAN communications
and network management environment and/or on a standalone basis. The Company
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believes that each of these offerings, when combined with the programmability as
provided by the Company's software, support and meet the needs of wide varieties
of customer element network management and intranet/internet security
requirements. The software is designed to permit relatively easy modification,
thus allowing customized solutions for monitoring and controlling telemanagement
(intelligent agent) and/or network access.
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 that, when combined with the Company's software
"engine," provide programmability and modification wherein customized solutions
for network access, monitoring and telemanagement of mission-critical
applications and network elements can readily be accommodated.
In fiscal 1997 and continuing in fiscal 1998, the Company
continued its evolutionary development of products to address its strategic
direction and goal of establishing a competitive position in the combined data
and voice Network Management/ Distributed Device Management and Security
marketplaces. The introduction of a new family of products referred to
collectively as Secure Network Systems/ 2000 ("SNS/2000") based on 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,
Sentinel 2000S and Manager 2000.
These products integrate element monitoring, fault management and
security management as well as remote access and problem
identification/resolution into a 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
increase 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. The technical support staff necessary to administer, support and
maintain combined voice and data networks of a large distributed base of legacy
and standards-based networking devices remain 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 and
increasingly more complex networks. The Company believes that 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
stand-alone feature/function set enabling one to choose only the products needed
to enhance the performance of their existing network management systems. For
maximum advantage, the elements may be integrated into a secured telemanagement
and remote access control solution that can be customized and tailored to meet
specific organizational requirements.
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Secure Remote Telemanagement/Telemaintenance. One major aspect of
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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 stand-alone 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 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
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products is designed to address a rapidly growing group of telecommuters who are
redefining the boundaries of the traditional workplace. They are placing an
increasing demand for convenient remote access to network resources. By opening
the networks to meet these demands, the networks are left vulnerable to
unauthorized entry. Such unauthorized access carries security liabilities and
exposure to critical company resources, data and information. In addition,
unauthorized users are consuming valuable network bandwidth, thus reducing
availability for legitimate users. SNS/2000 offers remote access security
solutions for host computers, LANs and WANs, as well as other network elements
by providing front-end barriers to prevent unauthorized entry. Access control is
managed, monitored and administered via 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. Reporting capabilities are provided which are useful for
identifying trends and analyzing network utilization. A wide range of
authentication technology is supported and, based on operational needs, can be
incorporated into the Company's remote access security solutions.
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SNS/2000 feature/function/benefit set. The primary benefits of
SNS/2000 include:
o SNMP Agent/Proxy
Standards-based SNMP Proxy alarm reporting for non-compliant
legacy devices. Centralized telemaintenance for both voice and
data communications networks.
o 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.
o Remote Maintenance & Monitoring
Programmed monitoring of device fault tables to enable proactive
maintenance activity. Locally executed auto-recovery procedures to
reduce costly downtime.
o Security
Secured in-band/out-of-band access to insure network integrity.
Secured remote tele commuting access to eliminate unauthorized
network access.
o Graphical User Interface ("GUI") Based System
Central GUI-based system administration for convenient system
management.
o Open Database ("ODBC") Compliant
Integration with major database offerings (Oracle, Sybase,
SQL/Server, Informix, etc.)
o 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.
o 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. Represents 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 which utilizes 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 an element management solution that facilitates convenient, reliable,
remote network element telemanagement and telemaintenance of voice and data
networks.
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Based on the Motorola 68360 Multi-controller processor chip, the
Sentinel 2000 is administered and maintained with the Company's new GUI-based
Manager 2000 software product offering. The Sentinel 2000 integrates a wide
range of applications that provide for Secure Remote Network Management for a
wide variety of network elements (either directly or via an SNMP proxy
function). These include Access Security, Alarm Management, Environmental
Monitoring and Control, PBX Toll Fraud Detection and Remote Device Reboot and
power management capabilities.
The Company has continued seeing strong acceptance of the Sentinel
2000 from such companies as PTT Holland, MCI, AT&T, Vyvx, Ameritech, U.S. West,
TeleFinland, Kaiser Permanente, and Telstra Australia. In fiscal 1998, the
Company shipped approximately 2,500 units of the Sentinel 2000, generating net
revenues of approximately $6,000,000, representing 60% of the Company's net
revenues for the year. 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, a set of software applications that collectively provide a solution for
remote site-management and the servicing of real-time alarms 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, and
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.
New Products and Markets
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During fiscal 1998, the Company introduced the Sentinel 2000S
Slimline programmable Remote Site Manager that is designed to provide a "Virtual
Technician" that operates 24-hours-a- day, 7-days-a-week to manage, monitor and
provide secured remote access to voice, video, and data network elements such as
PBXs, bridges, hubs and routers. The Slimline is a lower-cost offering with a
feature set comparable to the Sentinel 2000(TM) from the Company, with the
exception of the 28 host port expandability.
The Sentinel 2000S Slimline provides alarm/fault management by
monitoring data from remote network elements. When the Sentinel determines an
alarm status, the appropriate corrective- action procedures are initiated, and
the alarms can be sent to a technician via ASCII text, pager or
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E-mail, or to a central SNMP management product such as HP OpenView or Cabletron
Spectrum. Alarms can be escalated if a timely response is not received. Network
security is managed by a variety of authentication technologies. The Sentinel
monitors, controls and logs all activity on each port and provides central
and/or local audit reports, and can also detect PBX toll fraud by monitoring CDR
ports for activity that violates pre-defined threshold levels in various call
classifications.
On April 9, 1998, the Company signed a letter of intent to acquire
privately held Solcom Systems, Ltd. (Solcom), based in Livingston, Scotland. The
Company proposes to issue to the shareholders of SolCom an aggregate of
approximately 5,600,000 shares of its common stock and/or options to purchase
shares of its common stock in exchange for all of the issued and outstanding
share capital and options of SolCom. SolCom is a leading developer of remote
monitoring (RMON) technology. Originally approved by the Internet Engineering
Task Force (IETF) in 1992, Remote MONitoring, or RMON, is a standard protocol
for users to proactively manage multiple LANS and WANs from a central site. RMON
1 identifies errors, alerts administrators to network problems and baselines
networks in addition to its remote network analyzer capabilities. RMON's recent
enhancement, RMON 2, enables trouble-shooting and effective network capacity
planning. Consummation of the transaction is subject to execution and delivery
of a definitive acquisition agreement, approval of the shareholders of both the
Company and Solcom as well as various regulatory approvals.
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. Thus the support of PBXs through the development
and marketing of data communications security products has witnessed substantial
customer demand for greater system reliability, protection against toll fraud
and security against network intrusion.
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A vulnerability of these systems results from the fact that PBXs
and other devices used in the voice communications system have 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 be
accomplished without having a physical presence 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 customer 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 the dial-in 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 commenced 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 that combine security management of remote maintenance ports,
protection against toll fraud, 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 12,000 units which has accounted for more than $14,500,000 in
revenue. During fiscal 1998, sales from the Secure Sentinel(TM) product line
were responsible for approximately 15% 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 downtime. 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.
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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. The SeGaSys system contains
a "communication firewall" or secured gateway that 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 that provide the
security, alarm monitoring and reporting for those locations.
Overall Target Markets
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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 view of the Company's
management, organizations are seeking to increase productivity by providing
sophisticated communications networks that 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 such organizations' data and other resources are
being made available to more users by 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
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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: 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 Remedy), a single or multiple PCS (personal
communication system), personal pagers,. as well as provide for an alarm
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to be escalated to ensure timely response. The Sentinel 2000 and Secure
Sentinel(TM) also allow 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 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
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As previously noted, widely distributed data and voice
communications networks incorporate network elements and devices with dial-in
ports. The Company offers a variety of products, e.g., 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
targeted device by the Manager 2000 system 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
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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.
The Sentinel 2000, IPC and SeGaSys(TM) incorporate a 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 to meet specific customer requirements. The incorporation
of CCL into these products also facilitates the introduction of additional
product enhancements.
Support Services
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In addition to the normal training, installation and repair
services, the Company also provides professional services, including consulting,
specialized programming and turnkey installations.
Marketing and Distribution
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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
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companies, network security customers, systems integrators, facility managers
and others via the Company's 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
has 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 established 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 to seek additional arrangements with the other network element and PBX
systems vendors and distributors in North America.
In connection with the foreign distribution of its products, the
Company appointed EBA of Brussels, Belgium in November 1993 as its exclusive
sales representative for Europe to provide sales and technical support to the
Company's authorized distributors and to directly sell the Company's products to
accounts in that region. In September 1995, the Company acquired through
MicroFrame Europe NV, its 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 market were approximately $1,530,000 (21%) in fiscal 1997
and approximately $2,500,000 (25%) in fiscal 1998.
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<PAGE>
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 the principal factors affecting competition
in this market include: (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 ability of a vendor to
support customization, training, and installation; and (4) 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 the context, such
competitors include Security Dynamics, Inc., Digital Pathways, Inc. and the Lee
Mah Data Systems Corp. In the remote network management and telemaintenance
context, they include TSB International, Inc. and Teltronics, Inc. Such
companies may succeed in producing and distributing competitive products more
effectively than the Company, and may also develop new products that 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 the parts generally required to manufacture its
products without any significant interruption or sudden price increase, although
there can be no assurance that the Company will be able to continue to do so.
The Company sometimes utilizes 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
situations, 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 should the need arise.
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<PAGE>
Dependence on Particular Customers
- - ----------------------------------
The Company has continued to expand its customer base and broaden
its sales mix. These efforts have resulted in the Company becoming less reliant
on any one particular customer. However, the Company sells a substantial portion
of its products to several major customers, i.e., PTT Holland, Lucent
Technologies and MCI. Sales to PTT Holland, Lucent Technologies, AT&T and MCI
represented approximately 61% of the Company's revenue in fiscal 1998. The loss
of any of these customers could have a material adverse effect on the Company's
business.
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 75% and 79% of the Company's revenue,
respectively, in fiscal 1998 and fiscal 1997.
Under an agreement with Lucent Technologies, the Company has been
manufacturing the RPSD for Lucent's resale to its PBX customers. As of the end
of fiscal 1998, Lucent had purchased and installed more than 17,000 RPSD units.
In fiscal 1996, MCI and the Company expanded their relationship
across multiple operating units within MCI, including that responsible for
outsourcing and "Concert", MCI's joint venture with British Telecom, as well as
with MCI/SHL.
Intellectual Property, Licenses and Labor Contracts
- - ---------------------------------------------------
The Company holds no patents on any of its technology. Although
the Company licenses 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, the possibility of duplication of the Company's products
remains and competing products have already been introduced.
The Company's name and the Secure Sentinel name 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 Company's logo, the MicroFrame Wizard and the
tagline "We Bring Wizardry To Remote Network Management." The Company
anticipates that these trademarks shall be registered but there can be no
assurance that such will occur.
-14-
<PAGE>
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 products, export thereof is subject to governmental regulation. As
required by law or demanded by customer contract, the Company 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 that
often requires FCC approval.
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 requires telecommunication equipment interfacing with the public
telephone network comply with certain interference parameters and other
technical specifications. FCC Part 68 registration for the Company's products
has been granted and the Company intends to apply for FCC Part 68 registration
for all of its new and future products.
Part 15 of the FCC rules requires equipment classified as
containing a Class A computing device to meet certain radio and television
interference requirements, especially as they relate to operation of such
equipment in a residential area. Certain of the Company's products are subject
to and comply with Part 15.
The European Community 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 1998, the Company continued development of its "next
generation" of products built on a new architecture that is ultimately intended
to 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 in connection therewith were $1,117,151 in fiscal 1998 and
$893,852 in fiscal 1997.
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Costs of Compliance with Environmental Laws
- - -------------------------------------------
The Company's business is not subject to regulations involving
discharge of materials into the environment.
Employees
- - ---------
As of June 23, 1998, the Company had 46 employees, all of whom are
full-time employees, and of which 20 are technical personnel, 9 are in sales,
marketing and support, 7 are in production and 10 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 $5,428.55 and expires on June 30, 1999. From the period
commencing July 1, 1997 through June 30, 1999, the total monthly rental is
$5,579.17 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's obligations 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 $3,408.00 and expires 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$2,316.00 at an exchange rate of 35BEF to 1US$) and expires on July 31, 2005,
with an option of the Company to terminate the lease on either July 31, 1999 or
July 31, 2002, as applicable.
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 $227,391.90 imposed in a Notice of Determination in March 1996.
The settlement amount of $55,512.73 was paid in full as of April 1997.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-17-
<PAGE>
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, 1998. The
quotations set forth below do not include retail markups, markdowns or
commissions and may not represent actual transactions.
HIGH LOW
---- ---
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
Fiscal 1998
-----------
June 30 $1.88 $1.56
September 30 1.63 1.25
December 31 1.84 1.31
March 31 2.75 1.13
Holders
- - -------
The Company believes that as of June 25, 1998, there were
approximately 363 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, 1998 and March 31, 1997. 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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<PAGE>
Under the terms of the Company's credit agreement with United
National Bank, 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 capital 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
and the costs associated with, a new family of products; dependence on the
acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on 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 through
internal growth and the proposed acquisition of Solcom Systems, Ltd, a leading
developer of RMON technology, while tightly controlling operating costs. There
can be no assurance, however, that such acquisition will be consummated. The
Company anticipates placing substantial emphasis on the distribution of its new
family of products as well as its acquired products and begin development of a
new family of products based on a combination of existing features incorporated
in the Sentinel and Solcom's RMON technology, along with continued international
business expansion. The Company will also look to continue its three-year trend
of reducing its reliance on several major customer organizations, most notably,
MCI and Lucent.
During fiscal 1998, the Company continued its development of a new
generation of products based on more advanced technology. The products were
formally introduced at an industry trade show 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
suite of network management solutions. This technology will allow for increased
operational integrity and access to voice and data networks. The Company
commenced shipment of the new product of this next generation product family,
the Sentinel 2000 in May, 1996 and volume production shipments began in June,
1996. To date, approximately 3,000 units of the Sentinel 2000 have been shipped.
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 tools for remote site management and the servicing of real-time alarms
being generated by remote monitoring equipment. In October 1997 the Company
announced its newest product, the Sentinel 2000S Slimline, and began shipments
of this product in early 1998.
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<PAGE>
With the addition of several major new customers, the Company
continues to strengthen its worldwide customer base, which includes U.S. and
international telecommunications providers, Private Branch Exchange ("PBX")
vendors, financial institutions, Fortune 500 companies and governmental
agencies. The Company has more than 2,300 installations across North America,
South America, Europe and the Pacific Rim. The September 1995 acquisition of
European Business Associates ("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 fiscal 1996. As a result
of this continued focus, the Company entered into a relationship with PTT
Holland during fiscal 1998 for its Sentinel technology. This relationship
resulted in shipments of over $2,000,000 to PTT during the year ended March 31,
1998. The Company anticipates continuing this relationship into fiscal 1999.
Additionally, the Company expanded its distribution in the Pacific Rim with a
significant increase in shipments to Racal Australia.
During fiscal 1998, the Company forged several new domestic
relationships principally to offset a reduction in the Company's revenue stream
in respect of two major customers, MCI and Lucent Technologies (formerly AT&T).
The most significant was the new contractual relationship formed in September
1996 with US WEST Communications Services. Ongoing relationships, primarily with
Southwestern Bell Communications, were maintained. Relationships in fiscal 1996
improved, primarily Ameritech Information Systems. Finally, other new
relationships were formed, including Vyvx, Inc., Sprint Communications and in
fiscal 1998, PTT Holland. As a result of the above, 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 to 25% in fiscal 1998. In fiscal 1999,
the Company expects to continue to reduce such percentages through continued
diversification of its customer base and the creation of new relationships. MCI,
Lucent and PTT remain the three largest, and most significant to the Company.
The Company's 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 out-source relations which MCI manages. In its relationship with
Lucent Technologies, the Company has manufactured Remote Port Security Devices
(RPSDs) for Lucent's resale to its PBX customers. The RPSD is a secured-access
product provided under Lucent's own label and is 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.
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<PAGE>
The Company's employee base dropped from 42 full-time employees in
fiscal 1996 to 37 full-time employees during fiscal 1997. However, the Company's
employee base increased to 46 full-time during fiscal 1998 as the Company
returned to greater profitability. Additional resources resulting from such
profitability are being devoted primarily to the marketing and development of a
more extensive system integration capability that would enable the Company to
gain an increasing share of the market. Due to the growth that 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 Company's 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 believes that it has
space adequate to meet its growth requirements for the foreseeable future.
The Company believes that as data and voice networks continue to
grow and companies grow more reliant on such 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 such year of returning the Company to
profitability.
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared to Fiscal Year 1997
- - ---------------------------------------------
Revenues for the year ended March 31, 1998 were $10,217,911 as
compared with revenues of $7,343,624 for the year ended March 31, 1997, an
increase of approximately 39%. The increase was primarily due to increased
international shipments of the Company's Sentinel 2000 product combined with an
overall increase in Sentinel 2000 shipments. The Company continued to see
revenues with respect to the other member of the family of SNS products, the
Manager 2000.
The Company's revenues were positively impacted by increased
domestic sales and as a result of increased shipments to the European market,
including shipments under its contract with PTT Holland. Shipments to Europe
were approximately $3,000,000 for the year ended March 31, 1998 compared to
approximately $1,000,000 for the year ended March 31, 1997.
The Company's cost of goods sold increased to $4,285,134 for the
year ended March 31, 1998 compared to $2,903,705 for the year ended March 31,
1997 as a result of increased shipment levels. Cost of goods sold as a
percentage of sales increased from 40% for the previous comparable fiscal period
to 42% for this fiscal period, primarily due to the increased sales volume of
the Company's newer product line.
Research and development expenses, net of capitalized software
development, increased from $893,852 in the year ended March 31, 1997 to
$1,117,151 in the current fiscal year, an increase
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<PAGE>
of 25%. Research and development expenses as a percentage of revenues decreased
slightly from approximately 12% to 11%. Selling, general and administrative
expenses increased 32% from $3,355,961 for the prior year to $4,419,521 for the
year ended March 31, 1998. This increase was primarily the result of added sales
personnel during the fiscal year. However as a percentage of revenues, selling,
general and administrative expenses decreased from 46% for the previous period
to 43% for the current fiscal period.
The Company had income before taxes of $406,649 for the year ended
March 31, 1998 compared to income of $201,286 for the year ended March 31, 1997
primarily due to increased sales. The net income for the year ended March 31,
1998 was $711,310 compared to net income of $342,451 for the prior fiscal year.
At March 31, 1997, the Company had provided a partial valuation allowance
against its existing deferred tax assets. At March 31, 1998, the Company has
reversed the remaining approximately $300,000 of valuation allowance relating to
its federal net operating losses and has recorded a benefit for other
operational temporary difference items. The expiration dates for its net
operating losses range from the years 2001 through 2011.
Fiscal Year 1997 Compared to Fiscal Year 1996
- - ---------------------------------------------
The Company's revenues for fiscal 1997 were $7,343,624 as compared
with revenues of $6,258,243 for fiscal 1996, an increase of 17.3%. This increase
in revenues was primarily attributable to the 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
revenue attributable to MCI and Lucent, increased from approximately $1.91
million to $3.33 million that represented a 74% increase from fiscal 1997 to
fiscal 1996. The Company also showed substantial growth in the Pacific Rim,
where net revenues (primarily attributable to one major customer, Racal
Australia) increased over threefold from approximately $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 $150,000 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 was responsible for the remaining
2.5% reduction. This improvement was achieved despite the initial volume
shipments of the Sentinel 2000 that witnessed higher initial costs typically
associated with new product introductions. These initially lower gross margins
were more than offset by continuous improvements in the Company's mature product
lines.
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 such
decrease was related to the one-time adjustments recorded at the end of fiscal
1996, the major
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<PAGE>
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, increased 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
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 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 resent 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 carry forwards.
Liquidity and Capital Resources
- - -------------------------------
During fiscal 1998, the Company's financial position improved
substantially as assets increased from $4,682,373 to $6,375,432 and the
Company's working capital increased from $2,381,178 to $2,563,503, net of
deferred tax assets. The primary contributor to this improvement in the
Company's working capital position was net income of approximately $712,000.
Included in this income were non-cash charges of approximately $500,000 for
depreciation and amortization.
The Company's operations provided approximately $54,500 of cash,
which included a use of cash of approximately $55,000 to satisfy its New York
State tax settlement. The Company also utilized approximately $450,000 of cash
for capital and software-related expenditures and utilized approximately $50,000
of cash to pay down its long-term debt.
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, $72,644 remained outstanding on this
loan. The Company was informed in June, 1996, that the working
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<PAGE>
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). This
agreement provides the Company with a $500,000 line of credit to finance future
working capital requirements, collateralized by accounts receivable of the
Company.
On August 30, 1997, the Company's line of credit agreement with
United National Bank of Bridgewater, New Jersey expired. In November 1997 the
Company successfully negotiated with United National to provide the Company with
a $1,000,000 line of credit, collateralized by all business assets of the
Company, to finance future working capital requirements. As of March 31, 1998,
the Company had utilized $300,000 of this line.
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.
Effective with the first quarter of fiscal year 1999 the Company
will adopt SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes
the standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) as part of a full set of
financial statements. This statement requires that all elements of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Since this standards applies only to
the presentation of comprehensive income, it will not have any impact on the
Company's results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
15, 1997. This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management is currently evaluating the
impact of SFAS 131 on the financial statements.
In February 1998, the Financial Accounting Standards Board issued
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which becomes effective for the Company's financial statements for the
year ended March 31, 1999. SFAS No. 132 requires revised disclosures about
pension and other postretirement benefits plans and is not expected to have a
material impact on the Company's financial statements.
In June 1998, The Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" which
becomes effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other
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<PAGE>
contracts, and for hedging activities. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
Item 7. Financial Statements.
The financial statements required hereby are located on pages F-1
through F-20.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
-25-
<PAGE>
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 62 Chairman of the Board of Directors
Stephen B. Gray 40 President, Chief Executive Officer,
Chief Operating Officer, Director
Michael Radomsky 45 Executive Vice President, Secretary,
Director
William H. Whitney 43 Chief Technology Officer, Director
(resigned effective May 19,1998)
John F. McTigue 37 Vice President Operations, Chief Financial
Officer, Assistant Secretary and Treasurer
Robert M. Groll 64 Vice President Business Development
David I. Gould 67 Director (resigned effective June 16,1998)
Stephen P. Roma 50 Director
Alexander C. Stark 65 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.
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<PAGE>
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.
During April 1995, Mr. Deixler sold his interest in Princeton Credit
Corporation, a company engaged in the business of buying, selling, and leasing
high technology products, to Greyvest Capital Inc., a Toronto Stock Exchange
company. Prior to the sale, Mr. Deixler was Chairman of Princeton Credit
Corporation. He previously served as President of Atlantic International
Brokerage, a leasing company, which is a wholly owned subsidiary of Atlantic
Computer Systems, Inc., which was liquidated as a result of the bankruptcy
proceedings of its parent company, Atlantic Computer Systems PLC. Prior to
holding this position, he was President and sole shareholder of Princeton
Computer Associates, Inc. ("PCA"). PCA was a company engaged in the business of
buying, selling and leasing of large-scale computer systems as well as
functioning in consulting and facilities management and was sold to Atlantic
Computer Systems, Inc. in 1988.
STEPHEN B. GRAY has been President, 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.
ALEXANDER C. STARK JR. is the president of AdCon, Inc., a
consulting firm organized to advise and counsel senior officers of global
telecom companies. Mr. Stark previously worked for 40 years at AT&T. Ten of
those years he served as a Senior Vice President. Recently retired from AT&T,
Mr. Stark is a former member of the Institute of Radio Engineers and a past Vice
President and Treasurer and a past Vice President and Treasurer of Lambda Chi
Alpha. He is a former member of: the Board of Directors College Careers Fund of
Westchester; the Board of adjustment of Allendale; and the County Trust Company
Board of Advisors. He was the 1977 General Campaign Chairman, United Way of
Westchester, and cited by the National Conference of Christians and Jews for
imaginative community leadership. Mr. Stark was honored as the Distinguished
Engineer of the Year by Rutgers University in 1991. He also served for many
years as a Director-at Large of the American Electronics Association and Chaired
the International Public Affairs Committee.
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
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<PAGE>
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. Mr. Whitney has tendered his resignation from the Company
and the Board effective May 19,1998.
JOHN F. MCTIGUE has been the Company's Vice President - Operations
and Chief Financial Officer and Treasurer since July 1997. His responsibilities
include finance, administration, information systems, quality and production.
Mr. McTigue is a finance professional and Certified Public Accountant. From 1996
through 1997, he was with the Fundtech Corporation, a software developer where
he served as Chief Financial Officer. From 1989 to 1996, Mr. McTigue was with
Dawn Technologies, Inc, a manufacturer of high-tech goods, where he served as
the Chief Executive Officer from 1994 through 1996 and Chief Financial Officer
and Treasurer from 1989 through 1994.
Prior to this, he was with Rothstein Kass & Company.
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. Mr. Gould has tendered his
resignation from the Board of the Company effective June 16, 1998.
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<PAGE>
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!
Work Out 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-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 John F. McTigue filed one late report, a Form 4 disclosing the grant of
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, 1998, 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.
-29-
<PAGE>
Item 10. Executive Compensation.
The following table summarizes the compensation paid or accrued by
the Company during the three fiscal years ended March 31, 1998, to those
individuals who as of March 31, 1998 served as the Company's Chief Executive
Officer during fiscal 1998 and to the Company's four most highly compensated
officers other than those who served as the Chief Executive Officer during
fiscal 1998 (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($)(3) sation($) Award(s)($) Options (#) Payouts($) sation($)
- - --------- ---- --------- ----------- --------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Deixler 1998
Chairman, Chief 1997 14,000(1) -- -- -- 10,000 -- --
Executive Officer(1) 1996 -- -- -- -- -- -- --
Stephen B. Gray 1998 252,829 75,000
President, Chief 1997 163,386 -- -- -- 400,000 -- --
Executive Officer (2), 1996 134,675 -- -- -- 2,309 -- --
Chief Operating
Officer
Michael Radomsky 1998 139,858 42,839
Executive Vice- 1997 128,773 -- -- -- 90,000 -- 541(4)
President 1996 122,800 -- -- -- 8,208 -- 1,047(4)
William H. Whitney 1998 127,980 42,839
Chief Technology 1997 128,773 -- -- -- 90,000 -- 2,318(4)
Officer 1996 122,800 -- -- -- 8,136 -- 2,152(4)
John F. McTigue (5) 1998 92,482 100,760 1,418(4)
V-P, Operations, Chief
Financial Officer, Treasurer
And Assistant Secretary
Mark A. Simmons 1998
V-P, Operations, Chief 1997 116,956 -- -- -- 40,000 -- 2,105(4)
Financial Officer 1996 92,800 -- -- -- 6,579 -- 1,612(4)
- - ------------------------
</TABLE>
(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
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<PAGE>
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 consultant to the Company in
the amount of $42,000. Mr. Gray served as a consultant to the Company
prior to the time he became a full-time employee pursuant to his
employment agreement with the Company dated March 27, 1995.
(3) Represents compensation earned under the Company's Incentive Bonus
Plan for the fiscal year ended March 31, 1995 (the "Incentive Plan").
The Incentive Plan covers all Company employees and was effective as
of October 1, 1994. The Incentive Plan is based on achievement in
three specific areas - Company revenue, Company operating income, and
individual/ departmental objectives.
(4) Represents contribution of the Company under the Company's 401(k)
Plan.
(5) Represents compensation for the period from July 2, 1997 (date of
hire) through March 31, 1998.
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<PAGE>
Option Grants in Fiscal Year 1998
The following table sets forth certain information concerning
stock option grants during the year ended March 31, 1998 to the Named Executive
Officers:
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------------------
Percent
Number of of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- - ---- ----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Stephen M. Deixler 10,000(1) (1) $1.50 9/17/01
Stephen B. Gray 75,000(2) 4.2% $1.75 05/04/07
Michael Radomsky 42,839(2) 2.4% $1.75 05/04/07
William H. Whitney 42,839(2) 2.4% $1.75 05/04/07
John F. McTigue 70,760(2) 3.9% $1.34 07/02/07
30,000 2.5% $1.34 07/02/07
</TABLE>
(1) Represents stock options granted to Mr. Deixler under the 1994 Stock
Option Plan in consideration of his service to the Company as a
director.
(2) Represent options issued under a Time Accelerated Restricted Stock
Award Program (TARSAP).
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<PAGE>
Aggregated Option Exercises in Fiscal Year 1998
and Fiscal Year-End Option Values
The following table sets forth certain information concerning each
exercise of stock options during the fiscal year ended March 31, 1998 by each of
the Named Executive Officers and the number and value of unexercised options
held by each of the Named Executive Officers on March 31, 1998.
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexer- In-the-Money
Shares cised Options Options at
Acquired on Value at FY-End(#) FY-End($)(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
John F. McTigue
- - -----------------------
</TABLE>
(1) The average price for the Common Stock as reported by the National
Quotation Bureau on March 31, 1998 was $2.78 per share. Value is
calculated on the basis of the difference between the option exercise
price and $2.78 multiplied by the number of shares of Common Stock
underlying the options.
-33-
<PAGE>
Compensation of Directors
- - -------------------------
On September 17, 1997 Stephen M. Deixler, Stephen P. Roma, David
I. Gould and Alexander C. Stark, the Company's non-employee directors, were each
granted a non-employee director option. Pursuant to the Company's 1994 Plan,
each Director received an option 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.
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 has no employment agreements other then the employment
agreement with Stephen B. Gray, the Company's Chief Executive Officer and
President.
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 29,
1998, owns of record or is known by the Company to own beneficially, more than
five (5%) percent 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.
<TABLE>
<CAPTION>
Name and Address Shares Owned Percent of Class
- - ---------------- ------------ -----------------
<S> <C> <C>
Stephen M. Deixler (1) 760,532 15.4%
371 Eagle Drive
Jupiter, Florida 33477
David I. Gould (2) 199,337 4.0%
10844 White Aspen Way
Boca Raton, Florida 33428
Stephen B. Gray (3)(12) 517,309 9.7%
Michael Radomsky (4) 356,643 7.2%
8 Zaydee Drive
Edison, New Jersey 08837
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<PAGE>
Name and Address Shares Owned Percent of Class
- - ---------------- ------------ ----------------
William H. Whitney (5) 214,998 4.5%
15 Jackson Avenue
Chatham, New Jersey 07928
Robert M. Groll (6) 100,852 2.1%
52 Village Lane
Freehold, New Jersey 07728
John F. McTigue (7)(12) 100,760 2.0%
Stephen P. Roma (8) 484,399 9.8%
91 Durand Drive
Marlboro, New Jersey 07748
Special Situations Fund, III, L.P.(9) 855,863 16.7%
MGP Advisers Limited Partnership (9) 855,863 16.7%
AWM Investment Company, Inc. (9) 1,157,133 22.2%
Austin W. Marxe (9) 1,157,133 22.2%
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
Directors and executive
officers as a group (8 Persons) 2,779,825 45.8%
</TABLE>
(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 27,500 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.
-35-
<PAGE>
(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 52,500 shares of
common Stock which may be acquired pursuant to currently exercisable
non-employee director options under the 1994 Plan.
(3) Includes 400,000 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted outside the
Company's 1994 Plan. Also includes 117,309 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 52,339 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 52,184 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted under the
Company's 1994 Plan.
(6) Includes 56,684 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted under the 1994 Plan.
(7) Includes 100,760 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 27,500 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 and subsequent information known to the Company. The
address of each of the reporting persons is 153 East 53rd Street, New
York, New York 10022. The Fund has sole voting and dispositive power
with respect to 855,863 shares; MGP has sole dispositive power with
respect to 855,863 shares; AWM has sole voting power with respect to
301,270 shares and sole
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<PAGE>
dispositive power with respect to 1,157,133 shares; and Mr. Marxe has
sole voting power with respect to 301,270 shares, shared voting power
with respect to 855,863 shares and sole dispositive power with
respect to 1,157,133 shares. MGP is a general partner of and
investment advisor to the Fund. AWM, which is primarily owned by Mr.
Marxe, is the sole general partner of MGP. Mr. Marxe, the principal
limited partner of MGP and the President of AWM, is principally
responsible for the selection, acquisition and disposition of the
portfolio securities by AWM on behalf of MGP, the Fund and another
fund that beneficially owns shares included in the shares
beneficially owned by AWM and Mr. Marxe. Also includes 267,242 shares
issuable upon exercise of currently exercisable Class A and Class B
Warrants of the 1996 Private Placement held by the Fund and MGP and
364,422 shares issuable upon exercise of currently exercisable Class
A and Class B Warrants of the 1996 Private Placement held by AWM and
Mr. Marxe.
(10) Includes 320,000 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996 Private
Placement.
(11) Includes 224,000 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996 Private
Placement.
(12) The address of such person is c/o the Company, 21 Meridian Avenue,
Edison, New Jersey 08820.
Item 12. Certain Relationships and Related Transactions.
Mr. David I. Gould, formerly an executive officer and director of
the Company entered into a consulting agreement with the Company, that became
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. During fiscal 1998, 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 the expiration of 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
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<PAGE>
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, 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 European Business Associates BVBA ("EBA")
of Brussels, Belgium from Marc Kegelaers, its sole shareholder. In connection
with such acquisition, MicroFrame Europe N.V. entered into a consulting
agreement with Mr. Kegelaers for a term of five years. The consulting agreement
provides for a consulting fee in the aggregate sum of U.S. $75,000 annually,
with annual 5% increases over the term, as well as the reimbursement of certain
expenses during the term.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Reference
- - ------- ----------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of the
Company 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 3.3 of the
Incorporation filed September 14, Form 10-KSB for the fiscal year ended March
1992 31, 1993 (the "1993 10-KSB")
3.4 Amendment to Certificate of Incorporated by reference to Exhibit 3.4 of
Incorporation filed September 20, Amendment No. 1 to the Registration
1993 Statement
7/14/98
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<PAGE>
Exhibit
No. Description Exhibit Reference
- - ------- ----------- -----------------
3.5 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of
Certificate Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (No.
33-66688) dated December 1, 1993
("Amendment No. 2 to the Registration
Statement")
10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4 of
the of the Form 10-K for the fiscal year ended
March 31, 1985
10.2 Amendment No. 2 to 1984 Stock Incorporated by reference to Exhibit 10.5 of
Option Plan 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 10.4 of
May 10, 1993 pursuant to Private the 1993 10-KSB
Placement
10.5 Employment Agreement dated as Incorporated by reference to Exhibit 10.5 of
of May 2, 1992 between David I. Amendment No. 2 to the Registration
Gould and the Company Statement
10.6 Loan Agreement between the Incorporated by reference to Exhibit 10.6 of
Company and New Jersey the 199310-KSB
National Bank
10.7 Letter Agreement dated April 28, Incorporated by reference to Exhibit 10.7 of
1993 between the Company and Amendment No. 1 to the Registration
New Jersey National Bank Statement
10.8 Form of Consulting Agreement Incorporated by reference to Exhibit 10.8 of
between David I. Gould and the Amendment No. 1 to the Registration
Company Statement
7/14/98
-39-
<PAGE>
Exhibit
No. Description Exhibit Reference
- - ------- ----------- -----------------
10.9 Agreement between American Incorporated by reference to Exhibit 10.9 of
Telephone and Telegraph Amendment No. 2 to the Registration
Company and the Company dated Statement
September 17, 1993
10.10 Joint Marketing Agreement Incorporated by reference to Exhibit 10.10 of
between MCI Telecommunica Amendment No. 2 to the Registration
tions Corporation and the Statement
Company dated September 1,
1992, together with Amendment
No. 1 dated July 7, 1993
10.11 Employment Agreement dated as Incorporated by reference to Exhibit 10.11 of
of January 1, 1994 between Form 10-KSB for the fiscal year ended March
Michael Radomsky and the 31, 1994 (the "1994 10-KSB")
Company
10.12 Employment Agreement dated as Incorporated by reference to Exhibit 10.12 of
of January 1, 1994 between the 1994 10-KSB
William H. Whitney and the
Company
10.13 Employment Agreement dated as Incorporated by reference to Exhibit 10.13 of
of January 1, 1994 between the 1994 10-KSB
Robert M. Groll and the Company
10.14 Employment Agreement dated as Incorporated by reference to Exhibit 10.15 of
of January 1, 1994 between P. Amendment No. 2 to the Registration
David Bocksch and the Company Statement
10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15 of
the 1994 10-KSB
10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16 of
Agreement between the Company Form 10-QSB for the quarter ended
and CoreStates Bank, N.A. dated September 30, 1994
September 8, 1994.
10.17 Consulting Agreement between Incorporated by reference to Exhibit 10.17 to
the Company and P. David Form 8-K dated November 30, 1994
Bocksch dated November 14,
1994
7/14/98
-40-
<PAGE>
Exhibit
No. Description Exhibit Reference
- - ------- ----------- -----------------
10.18 Employment Agreement dated as Incorporated by reference to Exhibit 10.18 to
of October 11, 1994 between the Form 10-QSB for the quarter ended December
Company and Lonnie L. Sciambi 31, 1994
10.19 Incentive Bonus Plan of the Incorporated by reference to Exhibit 10.19 to
Company for the fiscal year ended Form 10-QSB for the quarter ended December
March 31, 1995 31, 1994
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20 to
Company to the Securities and Form 8-K dated March 13, 1995
Exchange Commission relating to
Item 4 of Form 8-K
10.21 1994 Stock Option Plan Incorporated by reference 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 10.22 of
Agreement dated December 19, the 1994 10-KSB
1994 between the Company and
Cameron Towey Neilson, Inc.
10.23 Purchase Agreement dated Incorporated by reference to Exhibit 10.23 of
December 21, 1994 between the the 1994 10-KSB
Company and Ericsson Business
Networks AB
10.24 Employment Agreement dated as Incorporated by reference to Exhibit 10.24 of
of March 27, 1995 between the the 1994 10-KSB
Company and Stephen B. Gray
10.25 Letter dated April 5, 1995 from Incorporated by reference to Exhibit 10.25 of
the Company to P. David Bocksch the 1994 10-KSB
terminating his Consulting
Agreement
10.26 Incentive Bonus Plan of the Incorporated by reference to Exhibit 10.26 of
Company for the fiscal year ending the 1994 10-KSB
March 31, 1996
7/14/98
-41-
<PAGE>
Exhibit
No. Description Exhibit Reference
- - ------- ----------- -----------------
10.27 Letter of Intent dated April 9, Filed herewith
1998 With Solcom Systems, Ltd.
10.28 Line of Credit Agreement with Filed herewith
United National Bank Dated
November 17, 1997
23.1 Consent of Pricewaterhouse Filed herewith
Coopers LLP
</TABLE>
(b) Reports on Form 8-K
On May 19, 1998, the Company filed a Current Report on Form 8-K
disclosing a press release in connection with the execution of a letter of
intent relating to the Company's proposed acquisition of SolCom Systems Limited.
-42-
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 1998 and 1997
Index to Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of March 31, 1998
and March 31, 1997 F-2
Consolidated Statements of Operations for the years
ended March 31, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the years ended March 31, 1998 and March 31, 1997 F-5
Notes to Consolidated Financial Statements F-6-20
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
MicroFrame, Inc. and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of MicroFrame,
Inc. and Subsidiary (the "Company") at March 31, 1998 and 1997, and the results
of their operations, cash flows and changes in stockholders' equity for each of
the two years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
June 26, 1998
F-1
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Balance Sheets
as of March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 507,726 $ 539,214
Accounts receivable, less allowance for doubtful
accounts of $126,000 and $100,000, respectively 2,667,319 1,898,810
Inventory, net 1,425,351 1,030,343
Current deferred tax assets 366,137 314,242
Prepaid expenses and other current assets 153,568 120,990
----------------- ------------------
Total current assets 5,120,101 3,903,599
Property and equipment at cost, net 421,701 343,123
Capitalized software, less accumulated amortization
of $1,054,827 and $812,257, respectively 396,351 315,568
Noncurrent deferred tax assets 326,083 -
Goodwill, less accumulated amortization of $26,130
and $16,230, respectively 75,480 85,380
Security deposits 35,716 34,703
----------------- ------------------
Total assets $ 6,375,432 $ 4,682,373
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 300,000 -
Current portion of long-term debt 30,009 42,266
Accounts payable 910,842 361,537
Accrued payroll and related liabilities 348,397 280,512
Deferred income 181,573 268,518
Other current liabilities 405,263 255,346
----------------- ------------------
Total current liabilities 2,176,084 1,208,179
----------------- ------------------
Commitments and contingencies (Notes 8 and 9)
Deferred tax liabilities 196,394 173,077
Long-term debt - 30,398
Stockholders' equity:
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued
Common stock - par value $.001 per share; authorized 50,000,000 shares,
issued 4,849,531 shares, outstanding 4,849,131 shares and subscribed
50,000 shares at March 31, 1998; issued 4,839,203 shares and outstanding
4,838,803 shares at March 31, 1997 4,899 4,839
Additional paid-in capital 6,345,613 6,212,828
Stock subscription receivable (104,000) -
Accumulated deficit (2,231,638) (2,942,948)
Cumulative translation adjustment (7,920) -
----------------- ------------------
4,006,954 3,274,719
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------------- ------------------
Total stockholders' equity 4,002,954 3,270,719
----------------- ------------------
Total liabilities and stockholders' equity $ 6,375,432 $ 4,682,373
================= ==================
</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, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------
<S> <C> <C>
Net sales $ 10,217,911 $ 7,343,624
Cost of sales 4,285,134 2,903,705
------------------ ----------------
Gross margin 5,932,777 4,439,919
Research and development expenses 1,117,151 893,852
Selling, general and administrative expenses 4,419,521 3,355,961
------------------ ----------------
Income from operations 396,105 190,106
Interest income 14,888 35,560
Interest expense (4,344) (24,380)
------------------ ----------------
Income before income tax benefit 406,649 201,286
Income tax benefit (304,661) (141,165)
------------------ ----------------
Net income $ 711,310 $ 342,451
================== ================
Per share data:
Basic $ 0.15 $ 0.07
Diluted $ 0.14 $ 0.07
------------------ ----------------
Weighted average number of common shares outstanding 4,840,357 4,730,713
------------------ ----------------
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
F-3
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 711,310 342,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 485,738 360,263
Provision for doubtful accounts 26,000 55,751
Provision for inventory obsolescence (15,000) 75,000
Noncash stock-based compensation charge 15,150 --
Deferred tax provision (354,661) (141,165)
Changes in operating assets and liabilities:
Accounts receivable (794,509) (414,000)
Inventory (380,008) (20,473)
Prepaid expenses and other current assets (32,578) (43,564)
Security deposits (1,013) 280
Accounts payable 549,305 (34,082)
Accrued payroll and related liabilities 67,885 10,738
Deferred income (86,945) 9,662
Other current liabilities 141,997 (179,869)
----------------- -----------------
Net cash provided by operating activities 332,671 20,992
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (311,846) (120,131)
Capitalized software (323,353) (212,174)
----------------- -----------------
Net cash used in investing activities (635,199) (332,305)
----------------- -----------------
Cash flows from financing activities:
Borrowings under line of credit 300,000 --
Repayments of debt (42,655) (538,923)
Issuances of common stock 13,695 1,341,148
----------------- -----------------
Net cash provided by financing activities 271,040 802,225
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (31,488) 490,912
Cash and cash equivalents - beginning of period 539,214 48,302
----------------- -----------------
Cash and cash equivalents - end of period $ 507,726 539,214
================= =================
Supplemental information:
Cash paid during period for interest $ 4,344 24,380
----------------- -----------------
Noncash investing and financing activities:
Common stock issued in connection with European Business
Associates share earn out agreement 12,538 15,877
================= =================
</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, 1998 and 1997
<TABLE>
<CAPTION>
Additional Stock Cumulative Total
Common Stock Paid-in Subscription Accumulated Translation Treasury Stockholders'
Shares Par Capital Receivable Deficit Adjustment Stock Equity
Value
----------- ----------- ------------ -------------- -------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,1996 3,717,675 3,718 $ 4,856,924 $ (3,285,399) $ $ (4000) $ 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
----------- ----------- ------------ -------------- -------------- ------------- --------- -----------
Net income 711,310 711,310
Issuances of common stock 10,328 10 13,685 13,695
Noncash stock-based
compensation 15,150 15,150
Stock subscription 50,000 50 103,950 $ (104,000)
Translation adjustments (7,920) (7,920)
----------- ----------- ------------ -------------- -------------- ------------- --------- -----------
Balance, March 31, 1998 4,899,131 4,899 $ 6,345,613 $ (104,000) $ (2,231,638) $ (7,920) $ (4,000) $ 4,002,954
=========== =========== ============ ============== ============== ============= ========= ===========
</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 (Continued)
For the Years Ended March 31, 1998 and 1997
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended March 31, 1998 and 1997
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 in the period of disposal.
F-6
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
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 $323,353 and $212,174 of software development
costs for fiscal 1998 and 1997, 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 $242,570 and $162,925 for
fiscal 1998 and fiscal 1997, respectively.
Goodwill
Goodwill, which represents the excess of cost over the net assets of
acquired companies, 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 from product sales upon shipment to the
customer if no significant vendor obligations exist 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, generally one year. At March 31, 1998 and 1997,
the Company has deferred income related to maintenance contracts of
$181,573 and $268,518 respectively.
F-7
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
2. Summary of Significant Accounting Policies (Continued)
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, 1998
and 1997 included in other current liabilities amounts to $45,000 and
$35,000, respectively.
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. The significant estimates include the allowance for doubtful
accounts, allowance for inventory obsolescence, deferred tax asset
valuation allowance and depreciation and amortization lives.
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
Earnings per share has been calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
The weighted average number of common shares outstanding during 1998
and 1997 were used to compute basic earnings per share. Diluted
earnings per share is computed using the weighted average number of
common shares outstanding plus the dilutive potential common shares
outstanding. Dilutive potential common shares are additional common
shares assumed to be exercised, which approximated 355,000 and 238,000
in 1998 and 1997, respectively.
F-8
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
2. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The financial statements of the foreign subsidiary were prepared in
local currency and translated into U.S. dollars based on the current
exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations.
Translation adjustments are reflected as foreign currency translation
adjustments in stockholders' equity and, accordingly, have no effect on
net income. Transaction adjustments for the foreign subsidiary are
included in income.
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 1998 presentation.
3. Inventory:
Inventory, net of reserve for obsolescence of $185,000 and $200,000 at
March 31, 1998 and 1997, respectively, consists of the following:
1998 1997
------------------ ---------------------
Raw materials $ 818,132 $ 625,583
Work-in-process 525,918 374,802
Finished goods 81,301 29,958
------------------ ---------------------
$ 1,425,351 $ 1,030,343
================== =====================
F-9
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
4. Property And Equipment At Cost, Net:
At March 31, 1998 and 1997 property and equipment consists of the
following:
1998 1997
--------------- ----------------
Demonstration and service equipment $ 1,125,987 $ 832,478
Furniture and fixtures 195,767 180,940
Leasehold improvements 71,850 68,340
--------------- ----------------
1,393,604 1,081,758
Less: Accumulated depreciation (971,903) (738,635)
--------------- ----------------
Total $ 421,701 $ 343,123
=============== ================
Depreciation expense for property and equipment for the years ended
March 31, 1998 and 1997 amounted to $233,268 and $186,874,
respectively.
5. Bank Borrowings:
The Company has an available line of credit through July 30, 1998, in
the amount of $1,000,000. At March 31, 1998, $300,000 had been drawn
down under this line of credit. All amounts were unused at March 31,
1997. The line is collateralized by all business assets 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, 1998) 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 its 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, 1998 and 1997, respectively, $30,009 and
$72,664 was outstanding. Future principal repayments under this loan
are $30,009 for the year ending March 31, 1999.
The bank line of credit contains a covenant which restricts the payment
of a dividend without the prior approval of the bank.
F-10
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
6. Income Taxes:
As of March 31, 1998, the Company has available federal and foreign net
operating loss carryforwards of approximately $896,000 and $914,000,
respectively, to offset future taxable income. The federal 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 $136,098,
which may provide future tax benefits, expiring from 1999 through 2002.
The components of the income tax benefit for the years ended March 31,
1998 and 1997 are as follows:
1998 1997
--------------- ----------------
Current:
Federal $ 16,000 -
State 34,000 -
--------------- ----------------
50,000 -
--------------- ----------------
Deferred:
Federal $ (301,442) $ (119,990)
State (53,219) (21,175)
--------------- ----------------
(354,661) (141,165)
--------------- ----------------
$ (304,661) $ (141,165)
=============== ================
The reasons for the difference between the Company's effective tax rate
and the United States federal statutory rate are as follows:
March 31,
---------------------------
1998 1997
-------------- -----------
Effective tax rate reconciliation:
Statutory federal tax rate 34% 34%
State taxes, net of federal benefit 6% 6%
Effect of reversal of valuation allowance (76)% (70)%
Foreign loss with no benefit 29% 53%
Utilization of NOL's (70)% (93)%
Other 2% -
-------------- -----------
(75)% (70)%
============== ===========
F-11
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
6. Income Taxes (Continued)
The tax effect of temporary differences which make up the significant
components of the net deferred tax asset and liability at March 31,
1998 and 1997 are as follows:
1998 1997
-------------- ---------------
Current deferred tax assets:
Inventory $ 214,000 $ 192,000
Accrued expenses 83,737 82,242
Allowance for doubtful accounts 68,400 40,000
-------------- ---------------
Total current deferred tax assets $ 366,137 $ 314,242
============== ===============
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 715,669 $ 834,324
Research and development credit 136,098 131,046
Alternative minimum tax credit 21,572
-------------- ---------------
Total noncurrent deferred tax assets 873,339 965,370
Valuation allowance (547,256) (965,370)
-------------- ---------------
Net noncurrent deferred tax assets $ 326,083 $ -
============== ===============
Deferred tax liabilities:
Depreciation $ (37,854) $ (46,849)
Capitalized software (158,540) (126,228)
-------------- ---------------
Total deferred tax liabilities $ (196,394) $ (173,077)
============== ===============
The Company has recorded a valuation allowance against the foreign net
operating loss carryforwards and the research and development credit as
it is more likely than not that such assets will not be realized. The
change in the valuation allowance is due to the reversal of the
valuation allowance recorded against the remaining federal net
operating loss carry forwards, as management believes these assets are
more likely than not to be utilized based on existing temporary taxable
differences and expected levels of future taxable income, as well as
the utilization of federal and state net operating loss carryforwards
offset partially by the increase in foreign net operating loss
carryfowards during the year ended March 31, 1998.
F-12
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity:
During the year ended March 31, 1998, the Company entered into a stock
subscription agreement with one of its directors, under which the
director agreed to acquire 50,000 shares of the Company's Common Stock.
During the years ended March 31, 1998 and 1997, respectively, options
to purchase 500 and 9,500 shares of common stock under the Company's
stock option plans were exercised, for an aggregate consideration of
$625 and $15,755. In addition, 9,828 and 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 $13,070 and $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 $2.00 were issued. These warrants expire in
April, 2000.
In addition, the Company sold 241,467 shares of common stock to four
current shareholders of record who held the contractual right to
maintain their share of ownership. The Company received net proceeds of
$301,834. In conjunction with this sale, warrants to purchase 241,467
shares of common stock with an exercise price of $1.50 and warrants to
purchase an additional 241,467 shares of common stock with an exercise
price of $2.00 were issued.
These warrants expire in April, 2000.
Warrants
During October 1995, in connection with services being performed by a
consultant, the Company issued 250,000 warrants to the consultant to
purchase shares of the Company's common stock. Warrants to purchase
50,000 shares of common stock at $3.25 per share vested immediately.
Warrants to purchase each additional block of 50,000 shares of common
stock are exercisable at $3.75, $4.25, $4.75 and $5.25 per share,
respectively, and shall vest on each three month anniversary of the
agreement. The warrants expire five years from the date of grant.
F-13
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Stock Option Plans
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
under the 1994 Plan, of which 270,483 options were exercisable.
Of the options granted in 1998, 455,645 were granted under the
Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The
options vest after seven years, however, under the TARSAP the vesting
is accelerated to the last day of the current fiscal year if the
Company meets certain predetermined sales and net income targets. The
Company met the targets for 1998 and, as such, all options granted
under the TARSAP in 1998 vested as of March 31, 1998.
Other Options
During the year ended March 31, 1998, the Company issued 30,000 options
to a consultant, of which 15,000 were immediately vested and 15,000
were to vest contingent on an extension of the consulting agreement.
This agreement and the unvested options were subsequently terminated.
Compensation expense of $15,150 was recorded relative to the grant of
the original 15,000 options during 1998.
During September 1996, the Company issued options to certain officers
and directors 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-14
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Accounting for Stock-Based Compensation
The Company continues to apply 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 1998 and 1997, consistent with the provisions of SFAS
No. 123, the Company's net income and basic earnings per share would
have been reduced by $426,614 and $.09 and $462,088 and $.10,
respectively.
The proforma effect on net income for fiscal 1998 and 1997 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 1998 and 1997 were $1.00 and $.96, respectively. The fair
value of each option grant for the Company's common stock is estimated
on the date of the grant using the Black Scholes option pricing model,
with the following weighted average assumptions used for grants in
fiscal 1998 and 1997:
1998 1997
------------------------------------------
Expected volatility 77% 77%
Risk-free interest rate 6.34% 6.56%
Expected option lives 5.54 years 6.34 years
F-15
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Accounting for Stock-Based Compensation (Continued)
Details of options granted are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Option Price
Shares Price Per Share ($)
-------------- --------------------- -----------------
<S> <C> <C> <C>
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
Granted 807,740 1.78 1.34 to 3.13
Canceled (79,937) 1.85 1.25 to 2.87
Exercised (500) 1.25 1.25
-------------- -----------------
Options outstanding at March 31, 1998 1,794,796 1.60 1.16 to 3.13
Options exercisable at March 31, 1998 1,425,932 1.65 1.16 to 3.13
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted
Years of Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Weighted
---------------------- ---------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$1.16 - $1.72 876,422 5.02 $ 1.25 615,422 $ 1.26
$1.83 - $2.14 817,542 4.81 $ 1.83 709,922 $ 1.81
$2.25 - $3.13 100,832 3.12 $ 2.86 100,588 $ 2.86
</TABLE>
F-16
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
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 lease expires in August 1999.
The fixed minimum payments under operating leases for future periods is
as follows:
Year ending March 31,
1999 $ 150,800
2000 44,500
2001 0
2002 0
2003 0
Thereafter 0
------------------
Total minimum lease payments $ 195,300
==================
Rent expense, in addition to allocated occupancy expenses, for the
years ended March 31, 1998 and 1997 approximated $153,954 and $145,700,
respectively.
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 $33,000 and $40,000, respectively, for the
years ended March 31, 1998 and 1997.
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.
F-17
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
9. Contingent Liabilities:
From time to time the Company and its subsidiary may be involved in
legal proceedings, claims and assessments arising in the ordinary
course of business. In the opinion of management, the outcome of such
current legal proceedings, claims and assessments would not have a
material effect on the Company's reported financial position, results
of operations or cash flows as of and for the years ended March 31,
1998 and 1997.
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, 1998 and 1997 was $28,222 and $27,641, respectively.
The Company has a plan in effect under which its employees earn a bonus
if the Company meets a predetermined revenue target for the year. The
Company met the target for 1998 and has accrued approximately $117,000
for payment of bonuses under the plan.
11. Sales:
Sales by geographic area for the years ended March 31, 1998 and 1997
are as follows:
1998 1997
------------------ ----------------------
United States $ 7,435,586 $ 5,813,584
Europe 2,677,193 1,047,980
Pacific Rim 23,611 349,732
Other 81,521 132,328
------------------ -----------------
$ 10,217,911 $ 7,343,624
================== =================
The Company sold a substantial portion of its products to four
customers. Sales to these customers amounted to $6,232,390 (61% of net
sales) in 1998 and $2,547,894 in 1997 (35% of net sales), respectively.
At March 31, 1998 and 1997, amounts due from these customers included
in accounts receivable, were $1,279,486 and $1,022,787, respectively.
The loss of any of these customers would have a material adverse effect
on the Company's financial position and results of operations.
F-18
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
12. 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, 1998 and periodically throughout 1998, the
Company had deposits in this financial institution in excess of the
amount insured by the FDIC.
13. Impact of The Future Adoption of Recently Issued Accounting Standards:
Effective with the first quarter of fiscal year 1999 the Company will
adopt SFAS No. 130, "Reporting Comprehensive Income". SFAS 130
establishes the standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) as
part of a full set of financial statements. This statement requires
that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Since this standards applies only to the presentation of
comprehensive income, it will not have any impact on the Company's
results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information"
which becomes effective for financial statements for periods beginning
after December 15, 1997. This Statement establishes standards for the
way that public business enterprises report information about operating
segments in annual financial reports and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. Management is currently
evaluating the impact of SFAS 131 on the financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which becomes effective for the Company's financial
statements for the year ended March 31, 1999. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefits
plans and is not expected to have a material impact on the Company's
financial statements.
In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" which
becomes effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The adoption of this standard is not expected to have a
material impact on the Company's financial statements.
F-19
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
14. Subsequent Events:
On June 23, 1998, the Company entered into an agreement to acquire
Solcom Systems, Ltd. ("Solcom"), a developer of remote monitoring
technology, for approximately 5.6 million shares of the Company's
common stock. The acquisition is expected to be completed in the second
quarter of 1999.
The acquisition of Solcom will be accounted for under the purchase
method, whereby the purchase price will be allocated to the underlying
assets and liabilities based upon their estimated fair values.
F-20
<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 29, 1998.
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 29, 1998
- - --------------------------------------
Stephen B. Gray, President, Chief
Executive Officer, Chief Operating
Officer (Principal Executive Officer)
/s/ John F. McTigue June 29, 1998
- - ----------------------------------------------------
John F. McTigue, Vice President -
Operations, Chief Financial Officer, Treasurer and
Assistant secretary (Principal Financial Officer and
Principal Accounting Officer)
/s/ Stephen M. Deixler June 29, 1998
- - -------------------------------------------------
Stephen M. Deixler, Chairman of the
Board of Directors, Treasurer
<PAGE>
/s/ Michael Radomsky
- - ---------------------------------------
Michael Radomsky, Executive Vice June 29, 1998
President, Secretary, Director
/s/ Stephen P. Roma June 29, 1998
- - ---------------------------------------
Stephen P. Roma, Director
/s/ Alexander C. Stark June 29, 1998
- - --------------------------------------
Alexander C. Stark, Director
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Reference
------ ----------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of the Form 10-
Company 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 Incorporation Incorporated by reference to Exhibit 3.3 of the Form
filed September 14, 1992 10-KSB for the fiscal year ended March 31, 1993 (the
"1993 10-KSB)
3.4 Amendment to Certificate of Incorporation Incorporated by reference to Exhibit 3.4 of Amendment
filed September 20, 1993 No. 1 to the Registration Statement
3.5 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of Amendment
Certificate No. 2 to the Company's Registration Statement on Form
SB-2 (No. 33-66688) dated December 1, 1993
("Amendment No. 2 to the Registration Statement")
10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4 of the of the
Form 10-K for the fiscal year ended March 31, 1985
10.2 Amendment No. 2 to 1984 Stock Option Incorporated by reference to Exhibit 10.5 of the Form 10-
Plan 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 May 10, Incorporated by reference to Exhibit 10.4 of the 1993 10-
1993 pursuant to Private Placement KSB
10.5 Employment Agreement dated as of May Incorporated by reference to Exhibit 10.5 of Amendment
2, 1992 between David I. Gould and the No. 2 to the Registration Statement
Company
10.6 Loan Agreement between the Company Incorporated by reference to Exhibit 10.6 of the 199310-
and New Jersey National Bank KSB
10.7 Letter Agreement dated April 28, 1993 Incorporated by reference to Exhibit 10.7 of Amendment
between the Company and New Jersey No. 1 to the Registration Statement
National Bank
<PAGE>
Exhibit
No. Description Exhibit Reference
------ ----------- -----------------
10.8 Form of Consulting Agreement between Incorporated by reference to Exhibit 10.8 of Amendment
David I. Gould and the Company No. 1 to the Registration Statement
10.9 Agreement between American Telephone Incorporated by reference to Exhibit 10.9 of Amendment
and Telegraph Company and the Company No. 2 to the Registration Statement
dated September 17, 1993
10.10 Joint Marketing Agreement between MCI Incorporated by reference to Exhibit 10.10 of
Telecommunications Corporation and the Amendment No. 2 to the Registration Statement
Company dated September 1, 1992,
together with Amendment No. 1 dated
July 7, 1993
10.11 Employment Agreement dated as of Incorporated by reference to Exhibit 10.11 of Form 10-
January 1, 1994 between Michael KSB for the fiscal year ended March 31, 1994 (the "1994
Radomsky and the Company 10-KSB")
10.12 Employment Agreement dated as of Incorporated by reference to Exhibit 10.12 of the 1994
January 1, 1994 between William H. 10-KSB
Whitney and the Company
10.13 Employment Agreement dated as of Incorporated by reference to Exhibit 10.13 of the 1994
January 1, 1994 between Robert M. Groll 10-KSB
and the Company
10.14 Employment Agreement dated as of Incorporated by reference to Exhibit 10.15 of
January 1, 1994 between P. David Amendment No. 2 to the Registration Statement
Bocksch and the Company
10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15 of the 1994
10-KSB
10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16 of Form 10-
Agreement between the Company and QSB for the quarter ended September 30, 1994
CoreStates Bank, N.A. dated September 8,
1994.
10.17 Consulting Agreement between the Incorporated by reference to Exhibit 10.17 to Form 8-K
Company and P. David Bocksch dated dated November 30, 1994
November 14, 1994
10.18 Employment Agreement dated as of Incorporated by reference to Exhibit 10.18 to Form 10-
October 11, 1994 between the Company QSB for the quarter ended December 31, 1994
and Lonnie L. Sciambi
10.19 Incentive Bonus Plan of the Company for Incorporated by reference to Exhibit 10.19 to Form 10-
the fiscal year ended March 31, 1995 QSB for the quarter ended December 31, 1994
<PAGE>
Exhibit
No. Description Exhibit Reference
------ ----------- -----------------
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20 to Form 8-K
Company to the Securities and Exchange dated March 13, 1995
Commission relating to 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 Agreement Incorporated by reference to Exhibit 10.22 of the 1994
dated December 19, 1994 between the 10-KSB
Company and Cameron Towey Neilson,
Inc.
10.23 Purchase Agreement dated December 21, Incorporated by reference to Exhibit 10.23 of the 1994
1994 between the Company and Ericsson 10-KSB
Business Networks AB
10.24 Employment Agreement dated as of Incorporated by reference to Exhibit 10.24 of the 1994
March 27, 1995 between the Company 10-KSB
and Stephen B. Gray
10.25 Letter dated April 5, 1995 from the Incorporated by reference to Exhibit 10.25 of the 1994
Company to P. David Bocksch terminating 10-KSB
his Consulting Agreement
10.26 Incentive Bonus Plan of the Company for Incorporated by reference to Exhibit 10.26 of the 1994
the fiscal year ending March 31, 1996 10-KSB
10.27 Letter of Intent dated April 9, 1998 With Filed herewith
SolCom Systems, Ltd.
10.28 Line of Credit Agreement with United Filed herewith
National Bank Dated November 17, 1997
23.1 Consent of Pricewaterhouse Coopers LLP Filed herewith
</TABLE>
Exhibit 10.27
MICROFRAME, INC.
21 Meridian Avenue
Edison, New Jersey 08820
April 9, 1998
CONFIDENTIAL
- - ------------
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
Livingston EH547DE
Scotland
SolCom Systems, Inc.
1801 Robert Fulton Drive
Suite 400
Reston, Virginia 20191
Shareholders of SolCom Systems Limited
set forth on Signature Page hereto
Gentlemen:
MicroFrame, Inc., a New Jersey corporation ("MicroFrame") is
pleased to present to you this Letter of Intent with respect to MicroFrame's
interest in acquiring, as set forth in Sections 1 through 6 below (the
"Transaction"), all of the outstanding stock of SolCom Systems Limited, a
corporation organized under the laws of Scotland (the "Parent") and SolCom
Systems, Inc., a Delaware corporation and wholly-owned subsidiary of SolCom (the
"Subsidiary" and together with the Parent, "SolCom").
<PAGE>
The following Sections 1 through 5 of this Letter of Intent
reflect our current mutual understanding of the matters described therein
(collectively, the "Non-Binding Provisions"). Except as set forth in Section 6
hereof, none of the provisions set forth herein shall be binding upon any of the
parties hereto, and none of the parties to this Letter of Intent shall have any
liability to any other party based upon, arising from or relating to any of the
Non-Binding Provisions.
The terms of our proposal regarding the Transaction are as
follows:
1. Basic Transaction. MicroFrame or a newly-formed wholly-owned
subsidiary corporation of MicroFrame would acquire all or
substantially all of the outstanding capital stock or assets of
SolCom through a statutory merger or other acquisition structure.
The parties will consult with their respective attorneys,
accountants and advisors for the purpose of entering into a
definitive merger agreement or other applicable definitive
agreement together with any other necessary or appropriate
agreements or instruments (collectively referred to herein as the
"Merger Agreement"). In structuring the Transaction and the
Merger Agreement, the parties would seek to qualify for "pooling
of interest" accounting treatment and would seek to minimize any
taxes applicable to the Transaction or to the parties and their
respective affiliates and subsidiaries after the completion of
the Transaction, including, but not limited to, the treatment of
the Transaction as a tax-free reorganization under United States
and United Kingdom laws, the reduction or elimination of income
taxes, capital gains taxes and withholding taxes, and the
utilization and preservation of tax attributes (e.g., net
operating losses and foreign tax credits) arising prior to and
subsequent to completion of the Transaction. In connection with
the Transaction, MicroFrame may elect to reincorporate in the
State of Delaware.
2. Issuance of MicroFrame Common Stock. At the closing of the
Transaction pursuant to the Merger Agreement (the "Closing"),
MicroFrame would issue to the shareholders and optionholders of
SolCom that number of shares of common stock of MicroFrame, par
value $.001 per share (the "Common Stock"), or, in the case of
optionholders, if appropriate and agreed to by the parties,
options therefor, equal to one hundred (100%) percent of the sum
of (i) the number of issued and outstanding shares of Common
Stock as of the date of the Merger Agreement and (ii) any and all
outstanding options to purchase shares of Common Stock
(collectively, the "Merger Shares"), it being the intention of
the parties to exclude from the calculation of the Merger Shares
any and all outstanding warrants to purchase shares of Common
Stock. The Merger Shares would be issued in accordance with
Regulation S pursuant to the Securities Act of 1933, as amended
(the "Act") or other exemption under the Act as determined by
MicroFrame and its counsel. The Merger Shares would be
"restricted securities" within the meaning of the Act and could
only be resold in accordance with an exemption under the Act
satisfactory to counsel for MicroFrame or upon an effective
registration statement with respect to the Merger Shares.
3. Representations and Warranties. MicroFrame, SolCom and Peter
Wilson, Peter McLaren and Hugh Evans, as principal shareholders
of the Parent (collectively, the "Shareholders"), together with
any other shareholders of the Parent to be agreed to by
<PAGE>
the parties, will be expected to make representations and
warranties upon terms mutually agreed to by the relevant parties
and subject to disclosure schedules in the Merger Agreement. The
Merger Agreement will contain certain limitations of liability to
be agreed to by the parties with respect to the representations
and warranties and the indemnities referred to below.
4. Indemnification. MicroFrame, SolCom and the Shareholders would
also agree to indemnify each other in the Merger Agreement
against various potential liabilities, upon terms mutually agreed
to by the relevant parties and subject to disclosure schedules in
the Merger Agreement.
5. Conditions to Proposed Transaction. The Merger Agreement would
contain such representations, warranties, indemnities, conditions
and agreements appropriate to transactions of this nature as may
be agreed to by the relevant parties and in addition, would
specifically provide that the closing of the Transaction would be
subject to the following terms and conditions in a manner, form
and substance acceptable to MicroFrame, SolCom and their
respective attorneys:
a. completion of due diligence satisfactory to the parties,
which due diligence would be completed prior to the
execution and delivery of the Merger Agreement;
b. receipt of all necessary consents and approvals of
governmental bodies, lenders, lessors, vendors, landlords,
and other contractual and third parties;
c. absence of any material adverse change in SolCom's or
MicroFrame's business, financial condition, assets,
prospects or operations from the execution of the Merger
Agreement until such time as the Transaction is
consummated;
d. absence of material pending or threatened litigation with
respect to SolCom or MicroFrame;
e. delivery of a legal opinion, closing certificates and
other appropriate documentation requested by MicroFrame,
SolCom and their respective counsel as agreed by the
parties;
f. delivery by SolCom of (i) audited financial statements of
SolCom through March 31, 1998 and (ii) unaudited "stub
period" financial statements for subsequent periods
satisfactory to MicroFrame and its accountants, which
financial statements shall be prepared in a format
consistent with accounting policies in effect with respect
to those audited financial statements, together with
short-term projections for the period from April 1, 1998
through March 31, 1999 prepared in a quarterly format; and
delivery by MicroFrame of audited financial statements of
MicroFrame for the year ended March 31, 1998 and unaudited
"stub period" financial statements for subsequent periods,
which financial statements shall be prepared in accordance
with United States Generally Accepted Accounting
Principles;
<PAGE>
g. approval of the Transaction by the shareholders of
MicroFrame and SolCom;
h. clearance by the Securities and Exchange Commission (the
"Commission") of an Information Statement pursuant to
Regulation 14C under the Securities Exchange Act of 1934,
as amended;
i. delivery of a fairness opinion in connection with the
Transaction satisfactory to the boards of directors of
MicroFrame and SolCom, which opinion would be delivered
prior to the execution and delivery of the Merger
Agreement;
j. election to the MicroFrame Board of Directors of two (2)
nominees selected by SolCom; and
k. piggyback registration rights with respect to the Merger
Shares and an undertaking by MicroFrame to use its best
efforts to register the Merger Shares with the Commission
within 12 months of the consummation of the Transaction.
6. Binding Provisions. Upon execution by SolCom and the Shareholders
of this Letter of Intent, the matters described in each of the
following subsections of this Section 6 (collectively, the
"Binding Provisions") shall constitute the valid, legally binding
and enforceable agreements of the respective parties bound
therein and shall continue indefinitely from the date hereof
except as otherwise explicitly set forth herein.
a. Exclusivity. SolCom, the Shareholders and MicroFrame
acknowledge that each such party will devote substantial
time and resources and incur substantial expenses in
connection with the investigation and documentation of the
Transaction. To induce each such party to devote such time
and resources and to incur such expenses, the parties
agree that prior to the earlier of (I) the date of the
execution and delivery by the parties of the Merger
Agreement or (II) forty- five (45) days from the date
hereof, they will not (without the prior written consent
of the other party) directly or indirectly, nor will they
knowingly permit any officer, director, employee, agent or
advisor of MicroFrame or SolCom, as the case may be, to:
(i) solicit, initiate, accept, encourage or engage in any
discussions with respect to proposals or offers from any
corporation, partnership, limited liability entity, trust
or any other person or entity, or any group thereof,
relating to (A) any acquisition, purchase or option to
purchase any of the shares of capital stock of SolCom or
MicroFrame or any of the assets (other than sales of
inventory in the ordinary course of business) of, or any
other equity interest in, SolCom or MicroFrame, or (B) any
merger, consolidation or other form of business
combination or joint venture with SolCom or MicroFrame;
(ii) continue (and cause any officer, director, employee,
agent or advisor of SolCom or MicroFrame to discontinue)
any of the foregoing in the event that such has commenced
prior to the execution of this Letter of Intent; or (iii)
furnish to any such person or entity any information with
respect to any of the foregoing. If any party receives any
such proposals or offers, such party shall notify the
other party in writing of such proposals or offers as
promptly as reasonably practicable.
<PAGE>
b. Standstill. In the event that the Transaction is
consummated, for a period of one (1) year from the date of
such consummation, the Shareholders shall not acquire any
shares of Common Stock except in accordance with the
Merger Agreement.
c. Access. For the period through and including the earlier
of (I) the date of the execution and delivery by the
parties of the Merger Agreement or (II) forty-five (45)
days from the date hereof, each of SolCom and MicroFrame
shall hereafter provide to each other complete access to
its facilities, books and records, in each instance during
normal business hours and upon reasonable notice, and
shall cause its directors, officers, employees,
accountants, attorneys, agents, advisors and
representatives (collectively, "Representatives") to
cooperate fully with SolCom or MicroFrame, as the case may
be, and their respective Representatives in connection
with the Transaction, the review and investigation of each
party, and the assets, contracts, liabilities, operations,
records and other aspects of the business of SolCom and
MicroFrame.
d. Confidentiality. The parties hereby acknowledge and agree
that MicroFrame and the Subsidiary are parties to a
certain Mutual Non-Disclosure Agreement dated as of
January 30, 1998 (the "Non-Disclosure Agreement"). The
parties hereto hereby agree that the Non-Disclosure
Agreement shall (i) additionally apply in each and every
respect to the Parent and the Shareholders and (ii) be
supplemented such that neither SolCom, the Shareholders
nor MicroFrame shall, for a period of two (2) years from
the date hereof, solicit directly or indirectly, or cause
any third party to solicit directly or indirectly on
behalf of any party, as the case may be, any employee of
any other party or its affiliates (while such persons are
so employed by such other party or its affiliates) for
employment or other services.
e. Conduct of Business. For the period through and including
the earlier of (I) the date of the execution and delivery
by the parties of the Merger Agreement or (II) forty-five
(45) days from the date hereof, (i) each of SolCom and
MicroFrame shall hereafter (A) conduct its business and
operations only in the ordinary course, (B) not engage in
any material transaction outside the ordinary course
without the other party's prior written consent, and (C)
use its reasonable commercial efforts to preserve intact
its business organization, keep available the services of
its employees, and maintain satisfactory relationships
with suppliers, contractors, customers, potential
customers and others having business relationships with
such party; and (ii) except as otherwise required by
applicable law or contract (as determined in the sole
discretion of counsel to MicroFrame), MicroFrame shall not
issue any new equity securities or securities convertible
into equity securities.
f. Disclosure. Except as and to the extent required by law or
by the rules and regulations of NASDAQ (as determined in
the sole discretion of counsel to MicroFrame), without the
prior written consent of each of MicroFrame and SolCom,
neither SolCom or the Shareholders, on the one hand, nor
MicroFrame,
<PAGE>
on the other hand, shall, and each shall direct each
Representative of such party not to, directly or
indirectly make any public comment, statement or
communication with respect to, or otherwise disclose or
permit the disclosure or existence of discussions
regarding, a possible transaction among them or any of the
terms, conditions or other aspects of the Transaction
proposed in this Letter of Intent.
g. Costs. SolCom and MicroFrame shall each be responsible for
and bear its respective costs and expenses (including,
without limitation, any fees of attorneys, accountants,
brokers or finders) incurred in connection with this
Letter of Intent or the proposed Transaction, provided
that, in the event that during the time period subsequent
to the execution of this Letter of Intent and prior to the
execution and delivery of the Merger Agreement, either
SolCom or the Shareholders, on the one hand, or
MicroFrame, on the other hand, breaches any provision of
this Section 6 to any material extent and such breach, if
capable of remedy, is not remedied to the satisfaction of
the other parties within a period of fourteen (14) days of
notice such breach having been delivered to the other
relevant parties, the other party shall be entitled to
terminate this Letter of Intent and shall be entitled to
liquidated damages in an amount equal to the lesser of (i)
such party's actual legal, accounting and other costs
reasonably incurred in connection with the Transaction or
(ii) $150,000. Each of the parties hereto hereby
represents and warrants to the other parties that no
broker's or finder's fees have been or will be incurred by
any of them in connection with this Letter of Intent or
the proposed Transaction. SolCom shall only incur
liability hereunder if and to the extent that SolCom may
lawfully incur such liability in accordance with the
applicable laws of Scotland.
h. Governing Law; Venue. This Letter of Intent shall be
governed by and construed in accordance with the laws of
the State of New York without giving effect to conflict or
choice of law principles thereof. The parties hereto
hereby consent to the jurisdiction and venue of the
federal and state courts located in New York County, New
York, in any action or proceeding relating to the subject
matter of this Letter of Intent.
i. Entire Agreement; Assignment. This Letter of Intent,
together with the Non- Disclosure Agreement, as amended
herein, constitutes the entire agreement between the
parties, superseding all prior oral and written
agreements, understandings, representations and warranties
and courses of conduct dealing between the parties with
respect to the subject matter hereof. Except as otherwise
provided herein, this Letter of Intent may be amended or
modified only by a writing executed by each of the
parties. No party may assign this Letter of Intent or any
of its respective rights or obligations hereunder without
the prior written consent of the other parties.
j. Survival. This Letter of Intent shall be superseded in all
respects upon the execution and delivery of the Merger
Agreement, provided that, in the event that
<PAGE>
this Letter of Intent is terminated prior to the execution
and delivery of the Merger Agreement, Sections 6(a), (d),
(g) and (h) shall survive such termination in accordance
with their respective terms notwithstanding such
termination.
Kindly indicate your approval and agreement with the foregoing by
executing this Letter of Intent in the space provided below and returning a copy
thereof to the undersigned.
Very truly yours,
MICROFRAME, INC.
By: -----------------------
Stephen B. Gray, President
AGREED AND ACCEPTED:
SOLCOM SYSTEMS LIMITED
By:______________________________
Name:
Title:
SOLCOM SYSTEMS, INC.
By:______________________________
Name:
Title:
SHAREHOLDERS:
- - --------------------------------
Peter Wilson
- - --------------------------------
Peter McLaren
- - --------------------------------
Hugh Evans
Exhibit 10.28
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,000,000.00 11-17-1997 07-31-1998 NEW LINE U 921101700;01 LGW
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MicroFrame, Inc. (TIN: 22-2413505) Lender: UNITED NATIONAL BANK
21 Meridian Road 1130 ROUTE 22 EAST
Edison, NJ 08820 P.O. BOX 6000
BRIDGEWATER, NJ 08807
- - --------------------------------------------------------------------------------
Principal Amount: $1,000,000.00 Initial Rate: 9.000%
Date of Note: November 17, 1997
PROMISE TO PAY. Microframe, Inc. ("Borrower") promises to pay to UNITED NATIONAL
BANK ("Lender"), or order, in lawful money of the United States of America, the
principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
Borrower also promises to pay all applicable fees and expenses.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on July
31, 1998. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning December 17, 1997, and all subsequent interest
payments are due on the same day of each month after that. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index, which is the "Prime Rate"
with respect to any day means the rate of interest adopted and made public from
time to time by the Chase Manhattan Bank, New York, N.Y.; or its successors, as
its Prime Rate, but does not reflect the rate of interest charged to any
particular class of borrower. In the event that there should be a change in the
announced Prime Rate of Chase Manhattan Bank which would result in a change in
the rate of interest on this Note, then, in that event, the rate of interest
herein shall change accordingly as of the date of the said change without notice
to the Borrower(s) or any Endorser, Guarantor, or Surety. Any such change shall
not effect or alter any of the terms and conditions of this Note, all of which
shall remain in full force and effect (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notice to Borrower. Lender
<PAGE>
PROMISSORY NOTE
(Continued)
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.500 percentage points over
the Index, resulting in an initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment. This late charge shall be paid to
Lender by Borrower for the purpose of defraying the expense incident to the
handling of the delinquent payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of or levy on any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within thirty (30) days; or (b) if
the cure requires more than thirty (30) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if
<PAGE>
PROMISSORY NOTE
(Continued)
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
This Note has been delivered to Lender and accepted by Lender in the State of
New Jersey. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of SOMERSET County, the State of New
Jersey. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other. This Note shall be governed by and construed in accordance with the
laws of the State of New Jersey.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a Perfected Security Interest by UCC-1
filings on business assets.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized as provided in this paragraph to
request advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
Stephen B. Gray, President; and John F. McTigue, Vice President & Chief
Financial Officer. Advances under this line are at the sole discretion of the
Bank and are in minimum amounts of One Thousand ($1,000.00) Dollars. To induce
the Bank to accept this Note and make advances under this Note, the undersigned
waives any rights that it may have arising out of past or present agreements or
representations that would obligate the Bank to make such advances. Requests for
such advances can be made by crediting the undersigned account # 400-335-9 (the
Borrower's account). Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note or
by Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
<PAGE>
PROMISSORY NOTE
(Continued)
ANNUAL RENEWAL. Not withstanding the foregoing, the unpaid principal balance of
the Note shall be due and payable, if not called earlier, together with all
accrued and unpaid interest, fees and charges from the date of this Note to July
31, 1998. The Lender will have the option to renew the Line of Credit created by
this Note and may terminate it at its absolute discretion by giving thirty (30)
days written notice to the Borrower at any time. Should the Bank choose not to
renew the facility, the Borrower(s) shall pay the Bank the entire outstanding
principal balance together with all accrued and unpaid interest, thereon and all
other unpaid fee, charges, and expenses.
BORROWER'S FINANCIAL STATEMENTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower shall furnish Lender with, as soon
as available, but in no event later than ninety (90) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower(s) as being true and correct.
INTERIM FINANCIAL STATEMENTS. Borrower shall furnish Lender with, as soon as
available, but in no event later than sixty (60) days after the end of each
fiscal quarter, Profit and Loss Statements and Account Receivables list and
aging report. All financial reports required to be provided under this Agreement
shall be supplied by Borrower, prepared on a consistent basis and certified by
Borrower as being true and correct.
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct
from Borrower's account numbered 400-335-9 the amount of any loan payment. If
the funds are insufficient to cover any payment, Lender shall not be obligated
to advance funds to cover the payment. At any time and for any reason, Borrower
or Lender may voluntarily terminate Automatic Payments.
BORROWING BASE REQUIREMENTS. Borrower covenants and agrees with Lender that
while this Agreement is in effect: I) Maximum borrowings shall be the lesser of
a) $1,000,000.00; or b) 75.000% of aggregate amount of "Eligible Accounts." II)
Eligible Accounts shall be Accounts Receivable that are under ninety (90) days
evidenced by monthly Borrowing Base Certificate. III) Monthly Accounts
Receivable aging reports are to be submitted to Lender, as soon as available,
but in no case later than ten (10) days after the end of each month. IV) Lender
will reserve the right to conduct an audit of Accounts Receivable, twice
annually, at the Borrower's expense or at any time and frequency should a
condition of default exist.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
<PAGE>
PROMISSORY NOTE
(Continued)
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MicroFrame, Inc.
By:________________________________________
John F. McTigue, Vice President
ATTEST:
____________________________________________ (Corporate Seal)
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
---------
We consent to the incorporation by reference in the registration statements of
MicroFrame, Inc. on Form S-3 (File No. 333-09507) and Form S-8 (File Nos.
33-61837 and 333-14681) of our report dated June 26, 1998, on our audits of the
consolidated financial statements of MicroFrame, Inc. and Subsidiary as of March
31, 1998 and 1997, and for the years ended March 31, 1998 and 1997, which report
is included in this Annual Report on Form 10-KSB.
/s/ Pricewaterhouse Coopers LLP
New York, New York
July 10, 1998
