-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BUDGBrUJJoSs4IEDzL2yhU1htT3EE6ZTmADUYC1uBRHPuvifEBvvs5EwQoBPb9H+ w3u4hRQAl+x6jZHoL72wCw== 0000016590-07-000002.txt : 20070330 0000016590-07-000002.hdr.sgml : 20070330 20070330141611 ACCESSION NUMBER: 0000016590-07-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBEX CORP CENTRAL INDEX KEY: 0000016590 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042442959 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-06933 FILM NUMBER: 07731658 BUSINESS ADDRESS: STREET 1: 115 FLANDERS ROAD CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 508-983-1200 MAIL ADDRESS: STREET 1: 115 FLANDERS ROAD STREET 2: . CITY: WESTBOROUGH STATE: MA ZIP: 01581 FORMER COMPANY: FORMER CONFORMED NAME: CAMBRIDGE MEMORIES INC DATE OF NAME CHANGE: 19801204 10KSB 1 doc10ksb.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ X ]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR [ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to Commission file number 0-6933 CAMBEX CORPORATION (Name of small business issuer in its charter) Massachusetts 04 244 2959 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 115 Flanders Road 01581 Westborough, Massachusetts (Zip Code) (Address of principal executive offices) Issuer's telephone number: 508-983-1200 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.10 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X No __ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB. [ X ] State issuer's revenues for its most recent fiscal year. $2,345,067 An Exhibit Index setting forth the exhibits filed herewith or incorporated by reference herein is included herein at Page A-1. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X The aggregate market value of the voting stock held by non-affiliates of Cambex Corporation as of March 22, 2007 was $2,625,038 based on the closing price of the common stock on that date. The number of shares of Cambex Corporation's preferred stock outstanding as of March 22, 2007: 84,701. The number of shares of Cambex Corporation's common stock outstanding as of March 22, 2007: 23,429,278. 2 PART I Item 1. Business. Overview A Massachusetts corporation, we are a designer and supplier of data storage products and solutions. Our products include memory for computing systems and fibre channel connectivity and storage products used to build storage area networks (SANs). We design, manufacture, and market memory products that enhance the performance and reliability of computing systems and networking devices. We have been selling memory products to our customers since 1970. A processor's memory is used to hold temporary instructions and data needed to execute tasks. This enables the computer's CPU to access instructions and data quickly. After upgrading a processor's memory, the computer will process data faster, because it will need to access its slower secondary storage (i.e., the disk drive) less frequently. We provide memory upgrade solutions for all of the major servers and workstations manufactured by IBM, Sun and Hewlett-Packard. Adding additional memory is both application transparent and the most cost-effective solution for eliminating many system performance bottlenecks. We began developing our current fibre channel SAN product business in 1997. SANs enhance and simplify the centralized management and sharing of data storage resources while providing improved availability, scalability, performance, and disaster recovery. SANs have been enabled by the emergence of fibre channel, a new generation of server to storage communications technology. We develop and offer fibre channel host bus adapters and hubs, high availability software, fibre channel disk storage arrays and management software for the deployment of SAN solutions. By reselling fibre channel hardware and software products from leading manufacturers, together with our internally developed products, we are able to offer customers a complete interoperable SAN solution. Founded in 1968, we have more than 35 years experience in providing electronic data storage products and solutions. For more than 30 years we were a supplier of IBM compatible mainframe computer memory having supplied memory and related products for seven generations of IBM mainframe computers. In 1997, in order to diversify our revenue stream as the mainframe memory market collapsed in the mid-1990s, we entered the fibre channel connectivity and disk array business. We sell our products domestically and internationally directly to end users and through OEM, systems integrator, and value added reseller (VAR) channels. We sell our memory products directly to end users and through VARs. Our SAN products are sold through OEM, systems integrator and VAR channels and to a limited extent directly to end users. Our executive offices are located at 115 Flanders Road, Westborough, Massachusetts 01581. Our telephone number is (508) 983-1200. Our Web site is located at http://www.cambex.com. 3 Industry Background In today's information-based economy, a company's information and databases are central to the value of the enterprise. The volume of business- critical data generated, processed, and stored has grown dramatically over the last decade. As a result, the ability to quickly access and manage large amounts of stored data is one of the most important challenges for organizations. Memory A computer typically accesses stored data from its own internal memory, internal hard disk drive, or external storage device such as a disk storage array or tape library. Memory provides the best performance, but is also the most expensive per storage unit (megabyte). Data retrieval from memory is more than 1000 times faster than retrieval from a disk drive. As CPU processing power is doubling every 18 months, data retrieval from disk storage is increasingly becoming a performance bottleneck. As a result, applications and users spend much of their time waiting for the retrieval of data resulting in lowered productivity. Recognizing the performance limitations of disk-based storage, the major server vendors have rearchitected their systems and processors to allow more data to be stored and accessed directly from memory. High-end servers from the major vendors (IBM, Sun Microsystems, Hewlett-Packard) now support more than 512 gigabytes of internal main memory. The need for fast data access, new servers with large memory capacities, and the decrease in memory prices is driving demand for memory upgrades. Memory upgrades for high volume computing systems and devices are typically packaged as memory modules which conform to standards defining dimensions, capacity, performance, interface and pin-out. We offer a broad range of standard memory upgrades, including single in-line memory modules ("SIMMs"), dual in-line memory modules ("DIMMs") and small outline DIMMs ("SO DIMMs"). Memory modules are compact circuit board assemblies consisting of dynamic random access memory ("DRAM") chips, which constitute the main memory of a computer system. Unlike memory for high volume computing systems, memory upgrades for high-end servers and mainframes typically involve proprietary designs. At the high- end, vendors focus on maximizing the performance, reliability, and diagnostic capabilities of the unique processor-to-memory architecture of their flagship products. This often results in proprietary memory module designs incorporating custom logic to support very high-speed memory bus protocols, error detection and correction, and self-test capabilities. Memory upgrades for computing systems and networking devices are available from the original equipment manufacturer as well as from third party memory vendors. In addition to competing with each other, third party vendors primarily compete with the original equipment manufacturers by providing fully compatible memory at a much lower price. Storage Area Networks Large quantities of business critical data are typically stored on external disk storage arrays. These disk arrays are either directly attached to the computer server or are accessed through a network connection. Due to the significant volume of data being stored in today's business environment, traditional direct attached and network attached architectures often do not adequately support the requirements of data-intensive enterprises. In response to the demand for high-speed and high-reliability storage-to-server connectivity, the fibre channel interconnect protocol was developed in the early 1990s. 4 A storage area network is a network of servers and data storage devices interconnected via fibre channel at gigabit speeds. SANs provide an open, extensible platform for storage access in data intensive environments like those used for web hosting, online transaction processing and data warehousing. Equally important, SANs can be significantly less expensive to maintain and expand than traditional storage architectures because they enable shared, high-speed access to stored data as well as centralized management. SANs use several basic components to make up the network, including the following: servers and workstations; fibre channel host bus adapters; fibre channel hubs and/or switches; disk and/or tape storage devices; copper or fiber optic cables; and management software. All the components must work together to deliver a functional SAN environment. Each server connects to a SAN through host bus adapters, which are printed circuit cards that fit in standard sockets on computer motherboards and enable high-speed data transfer. A host bus adapter connects the server to other devices in a SAN via cables. The cables connect the host bus adapter either directly to a fibre channel disk array or tape library or to a hub or a switch. Because fibre channel host bus adapter functions are regulated by software, each host bus adapter must include software designed to work with the particular operating system being used by the server/storage solution. These systems typically include all types of UNIX as well as Linux and Windows based operating systems. Hubs and switches are devices that direct the flow of data from one computing device to another. When connecting multiple servers to one or more storage devices, a hub or switch is used to create a fibre channel network. Hubs and switches simplify cabling and allow the non-disruptive addition or removal of servers or storage devices from the storage area network. Our Products Memory Products We offer a wide range of memory for the add-in memory market. Our add-in memory is used to upgrade workstations, servers, mainframes, printers, routers, and other high volume computing and networking products. Our memory is packaged as memory modules which conform to standards defining dimensions, capacity, performance, interface and pin-out. We offer a broad range of standard memory upgrades, including single in-line memory modules ("SIMMs"), dual in-line memory modules ("DIMMs") and small outline DIMMs ("SO DIMMs"). Memory modules are compact circuit board assemblies consisting of dynamic random access memory ("DRAM") chips, which constitute the main memory of a computer system. We provide memory upgrade solutions for most of the major servers and workstations manufactured by IBM, Sun and Hewlett-Packard. We also sell memory upgrades for laser printers and Cisco routers. Our memory products are designed to the same exacting specifications as original system memory and in most cases are identical in fit, form and function. 5 Fibre Channel SAN Products We are a developer, manufacturer and reseller of fibre channel products that enable users to deploy SANs. We have developed a family of host bus adapters, hubs and software that provide increased bandwidth and availability when deploying mission-critical SANs. Our fibre channel disk arrays allow the storage of large amounts of online data in a high performance, high availability environment. By offering other SAN products, including disk arrays, tape drives and libraries, switches, routers, and software, from other leading manufacturers, we are able to deliver a complete, tested and interoperable SAN solution to our customers when required. Technology We possess multi-disciplinary technological expertise, which we utilize in designing our memory and SAN products. Our expertise in designing memories includes (1) high-availability memory architecture and design including chip and board level sparing; (2) ASIC design utilizing high-speed semiconductor technologies and high-density packaging; and (3) comprehensive manufacturing test procedures - incorporating functional, thermal, voltage, and mechanical stress. Our expertise in developing fibre channel SAN products includes software design and development, embedded hardware design, system design, and systems integration. We believe that our expertise in these technologies provides us with competitive advantages in time-to-market, price/performance, interoperability and product capabilities. At our principal offices in Westborough, Massachusetts, we have established a systems integration lab to provide comprehensive functional and system level integration/interoperability testing between our fibre channel host bus adapters, hubs, disk arrays, and software with various computer platforms and fibre channel systems. Integration testing at our lab combines our products with various fibre channel SAN components to simulate the most commonly used functional configurations defined by our customers. The overall goal is to ensure enterprise class performance and interoperability in real world SAN deployments. Customers We sell our products to OEMs, resellers and directly to end-users. In 2005 and 2006, our largest customers included QLogic, Hewlett-Packard and Sun Microsystems. In the year ended December 31, 2006, our top five customers accounted for approximately 88% of our total net revenues, and, in the year ended December 31, 2005, our top five customers accounted for approximately 62% of our total net revenues. During 2006 and 2005, two customers exceeded 10% of total revenues. There is no assurance that current customers will remain our customers in the future and the loss of a major customer could have a material effect on our business. Customer Service and Support We offer customer service and support programs that include telephone and on-site support 24 hours a day, seven days a week. In addition, we have designed our products to allow easy diagnostics and administration. We employ systems engineers for pre- and post-sales support and technical support engineers for field support. 6 Sales and Marketing We sell our memory products principally to Fortune 1000 corporations, mid- level businesses, government institutions and resellers. Our sales strategy is to employ a business-to-business sales model that provides factory direct orders to end users and resellers. We will continue to focus significant direct sales efforts on Fortune 1000 enterprises. This sets us apart from most of our major competitors in the memory upgrade business who sell through reseller channels. Our goal is to establish ourselves as the vendor of choice for filling the majority of the memory upgrade needs within large corporations. Our marketing strategy consists primarily of telemarketing. We sell our fibre channel SAN products domestically and internationally to OEMs, systems integrators, and VARs as well as directly to end users in the United States. We target OEMs, systems integrators, and VARs who resell complete SAN solutions to end-users. Our sales and marketing strategy will continue to focus on the development of these indirect channel relationships. Our marketing efforts are focused on increasing awareness of our fibre channel products, promoting SAN-based solutions, and advocating industry-wide standards and interoperability. We plan to participate in industry associations to promote and further enhance fibre channel technology and increase our visibility as industry experts. We also plan to participate in select trade show events and SAN conferences to promote our products and to continue our efforts to educate potential customers on the value of SANs. Manufacturing, Test and Assembly We outsource the majority of our manufacturing, and we conduct quality assurance, manufacturing, engineering, documentation control and certain finish assembly and test operations at our headquarter facility in Westborough, Massachusetts. This approach enables us to reduce fixed costs and to provide flexibility in meeting market demands. We select suppliers primarily on the basis of technology, manufacturing capacity, quality and cost. Our reliance on third-party suppliers and manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, unavailability of, or delays in obtaining access to, certain product technologies and the absence of complete control over delivery schedules, manufacturing yields, and total production costs. The inability of our suppliers and third party manufacturers to deliver products of acceptable quality and in a timely manner or our inability to procure adequate supplies of our products could have a material adverse effect on our business, financial condition or operating results. Research and Development Our success will depend to a substantial degree upon our ability to develop and introduce in a timely fashion new products and enhancements to our existing products that meet changing customer requirements and emerging industry standards. We have made, and plan to continue to make, expenditures for research and development and to participate in the development of industry standards. However, because our net revenues declined in four of the five most recently completed fiscal years, our expenditures for research and development are significantly lower than the amount we expended for research and development five years ago. Over the last two fiscal years, our research and development expenses were approximately $871,000 in 2006, compared to $865,000 in 2005. Research and development expenses primarily consist of salaries and related costs of employees engaged in ongoing research, design and development activities and subcontracting costs. 7 Competition The markets in which we compete are intensely competitive and are characterized by frequent new product introductions, changing customer preferences and evolving technology and industry standards. Our competitors continue to introduce products with improved price/performance characteristics, and we will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business, operating results and financial condition. Our principal competitors in the memory upgrade business are the computer system original equipment manufacturers (OEMs) and third party memory vendors. The major system OEMs we compete against are International Business Machines Corporation, Sun Microsystems, Hewlett-Packard, and Dell. The major third party memory vendors we compete against are Kingston Technology and Dataram. Our principal competitors in the fibre channel SAN market include Emulex Corporation, QLogic Corporation and International Business Machines Corporation. Some of our OEM and reseller customers could develop products internally that would replace our products. The loss of opportunities to sell our products to any such OEM and reseller customers, in addition to the increased competition presented by these customers, could have a material adverse effect on our business, operating results and financial condition. Intellectual Property The intellectual property rights we have in our technology, which generally consists of programmable hardware logic, software and know-how associated with our product portfolio, principally arise from our own internal development efforts. We attempt to protect our technology through a combination of unpatented trade secrets, trademarks and contractual obligations. Our software products are protected by copyright laws. We cannot assure that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could have a material adverse effect on our business, financial condition or operating results. We may need to initiate litigation in the future to enforce our intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of our resources and could materially harm our business. In the future, we may receive notice of infringement claims of other parties' proprietary rights. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that such assertions or prosecutions could harm our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause delays in the development and release of our products, or require us to develop non- infringing technology or enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, or at all. For these reasons, infringement claims could materially harm our business. 8 Employees At March 22, 2007, we had 14 employees. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. Item 2. Description of Property. We currently lease approximately 15,000 square feet in an office facility in Westborough, Massachusetts pursuant to a lease that expires on June 30, 2009. Item 3. Legal Proceedings. There are no material legal proceedings pending against us. We are involved in certain legal proceedings arising in the ordinary course of business. We believe that the outcome of these proceedings will not have a material adverse effect on our financial condition. Item 4. Submission of Matters to a Vote of Security Holders. None. 9 PART II Item 5. Market for Common Equity and Related Stockholder Matters. Our common stock is listed for quotation on the over the counter bulletin board, under the symbol "CBEX". The approximate number of shareholders of record at March 22, 2007 was 489. The following table sets forth the range of the high and low closing bid prices for our common stock for each quarter during the years ended December 31, 2006 and December 31, 2005: 2006 2005 High Low High Low First Quarter 0.14 0.09 0.39 0.09 Second Quarter 0.20 0.10 0.28 0.12 Third Quarter 0.25 0.15 0.18 0.10 Fourth Quarter 0.21 0.14 0.18 0.09 We have not paid any cash dividends to date, and have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of the board of directors and to certain limitations imposed by the Massachusetts Corporation Laws. The timing, amount and form of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors. The series 1 bridge note purchase agreement provides that we may not pay cash dividends as long as the series 1 bridge note remains outstanding. With the consent of the holder of the series 1 bridge note and as long as we are not in default, we may pay dividends to preferred shareholders in accordance with our articles of organization and we may repurchase shares of our common stock issued upon the exercise of options granted under our stock option plans. Set forth in chronological order is information regarding securities convertible into or exercisable for shares of our common stock issued by Cambex within the past three years: None. We had no repurchases of equity securities in the fourth quarter of 2006. 10 Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-KSB. Please refer to "Special Note Regarding Forward-Looking Statements" for additional information. Comparison of fiscal years 2006 and 2005 Our revenues were $2,345,000 and $2,272,000 for 2006 and 2005, respectively. Revenues for 2006 increased 3% compared to revenues for the prior year due to increased sales of our fibre channel connectivity products. The increase was due to a large sale of our fibre channel connectivity software to a customer. The revenues for 2005 include $240,000 of revenue which had been deferred until the obligations for trade-in memory were satisfied in this period. Gross profit rate was 85% of revenues in 2006, compared to 80% of revenues in 2005. The increase was due to the product mix as there are higher gross margins on our fibre channel connectivity products and software than our memory products. Operating expenses in 2006 decreased by 1% in comparison to operating expenses in the prior year. Research and development expenses for 2006 increased 1% compared to the amount of these expenses in the prior year due to increases in personnel and additional product development costs. Selling expenses for 2006 decreased by 13% compared to the amount of these expenses in 2005 primarily due to decreases in personnel and related expenses. Other income (expense) in 2006 consists of other income of $666,000 relating to the reversal of accrued expenses and $65,000 of interest expense. Other income (expense) in 2005 consists of other income of $219,000 relating to the reversal of accrued expenses and $118,000 of interest expense. Net income for 2006 was $907,000 or $0.04 per share, as compared with net income of $230,000, or $0.01 per share, for 2005. Critical Accounting Policies Revenue Recognition We manufacture equipment for sale or lease. We follow the guidance in Staff Accounting Bulletin ("SAB") 104 in applying generally accepted accounting principles to revenue recognition in consolidated financial statements. We include items in revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable and collectibility is reasonably assured. Stock-Based Compensation In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment." SFAS 123(R) replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123(R) requires 11 that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) applies to all awards granted after the required effective date and shall not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased, or cancelled after the effective date. With the adoption of SFAS 123(R), the Company elected to amortize stock-based compensation for awards granted on or after the adoption of SFAS 123(R) on January 1, 2006, on a straight-line basis over the requisite service (vesting) period for the entire award. As permitted under SFAS 123, amended by SFAS 123(R), the Company elected to follow APB 25, and related interpretations in accounting for stock based awards to employees through December 31, 2005. Accordingly, compensation cost for stock options and nonvested stock grants was measured as the excess, if any, of the market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 153, "Exchange of Nonmonetary Assets", which is an amendment to APB Opinion No. 29. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS No. 153 is not expected to have a material impact on our financial position or results of operations. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS 154 is an amendment of APB Opinion 20 and FASB Statement No. 3. This statement changes the requirements for the accounting for and reporting of a change in accounting principal. This Statement applies to all voluntary changes in accounting principal and to changes required by an accounting pronouncement in unusual instances that the pronouncement does not include specific transition provisions. The Company does not expect the adoption of SFAS 154 to have an impact on its financial position or operating results. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 is an amendment to SFAS 133 and 140. SFAS 155 improves financial reporting by eliminating the exception from applying SFAS 133 to interest in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have an impact on its financial position or results of operations. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140." SFAS 156 is an amendment to SFAS 140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose 12 its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for all servicing assets and servicing liabilities transactions after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 156 to have an impact on its financial position or results of operations. In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of Interpretation No. 48 to have an impact on its financial position or results of operations. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have an impact on its financial position or results of operations. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)." SFAS improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS 158 is effective for fiscal years ending after December 15, 2006. The adoption of SFAS 158 did not have an impact on the Company's financial position or results of operations. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 13 15, 2007. The Company does not expect the adoption of SFAS 159 to have an impact on its financial position or results of operations. Inflation We did not experience any material adverse effects in 2005 or 2006 due to general inflation. Liquidity and Capital Resources During 2006, net cash provided by operating activities was $676,307. Net cash used in financing activities was $777,219, relating primarily to repayments under the loan agreement. We have a loan and security agreement with B.A. Associates, Inc. which is a corporation owned by Bruce D. Rozelle, a son-in-law of Joseph F. Kruy, our Chairman, President and Chief Executive Officer under which we may borrow up to $1,100,000. The outstanding balance due to B.A. Associates, Inc. was $225,000 at December 31, 2006. We also have notes payable of $429,643 at December 31, 2006 which include $275,000 of advances payable which are due on demand. The $275,000 of advances payable consists of borrowings from related parties. The notes payable balance of $154,643 includes $150,000 of the series 1 bridge financing note and $4,643 of accounts payable converted to notes payable. Our cash was $226,000 and $327,000 at December 31, 2006 and December 31, 2005, respectively. Working capital was a deficit of $2,757,000 and $3,666,000 at December 31, 2006 and at December 31, 2005, respectively. During fiscal 2007, we expect to acquire less than $100,000 of capital equipment. Our profitability and liquidity depends upon being able to maintain adequate revenue and gross profit levels. Management has also been working to secure additional capital. There is no assurance that such capital will be raised. Forward-Looking Statements The statements contained in "Management Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Annual Report on Form 10-KSB that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those reflected in the forward- looking statements. These forward-looking statements reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof or to publicly release the results of any revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents we file or have filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Item 7. Financial Statements. See financial statements, beginning at page F-2, incorporated herein by reference. 14 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 8A. Controls and Procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, our principal executive officer and principal financial officer, Joseph F. Kruy, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a- 15(e) and 15d-15(e) under the Exchange Act and concluded that our disclosure controls and procedures are effective so as to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported as and when required. There were no significant changes in our internal control over financial reporting or in other factors that could significantly affect our internal controls over financial reporting subsequent to the date of our most recent evaluation. Item 8B. Other Information. None. 15 PART III Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act. The following table shows the name, age and position of each of our executive officers and directors. Name Age Position Joseph F. Kruy (1) 75 President, Chief Executive Officer, Treasurer and Chairman of the Board and a Director C.V. Ramamoorthy, Ph.D. (1)(2) 80 Director Robert J. Spain, Ph.D. (1)(2) 69 Director Lois P. Lehberger 50 Clerk, Vice President and Controller ___________________ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Joseph F. Kruy has served as our President, Chief Executive Officer and a member of our board of directors since our inception in 1968. Mr. Kruy has served as our Chairman of the Board since October 1975. Mr. Kruy holds a B.S. and a Diploma Engineering degree in electrical engineering from the Technical University of Budapest. C.V. Ramamoorthy, Ph.D. has been a member of our board of directors since our inception in 1968. Since prior to 1995, Dr. Ramamoorthy has been a Professor of Electrical Engineering and Computer Sciences at the University of California Berkeley. Dr. Ramamoorthy holds a B.S. in physics from the University of Madras, India, a M.S. in mechanical engineering from the University of California Berkeley and a M.S. and a Ph.D. from Harvard University. Robert J. Spain, Ph.D. has been a member of our board of directors since 1995. Dr. Spain was also our Vice President of Research from 1969 to 1977. Since prior to 1995, Dr. Spain has been the President of CFC, Inc., an electronic component manufacturing company. Dr. Spain holds a B.S.E.E. and a M.S.E.E. from the Massachusetts Institute of Technology and a Doctor of Science from Paris, Sorbonne. Lois P. Lehberger joined Cambex in June 1978 and has served as our controller since August 1998, and our Vice President since November 1999. Mrs. Lehberger was appointed clerk in May 2001. Mrs. Lehberger is responsible for our accounting and financial control functions. Mrs. Lehberger holds a B.A. in economics and accounting from the College of the Holy Cross. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than ten percent of 16 a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of common stock (Forms 3, 4 and 5) with the Securities and Exchange Commission. Officers, directors and greater-than- ten-percent holders are required to furnish the Company with copies of all such forms, which they have filed. Based solely upon a review of Forms 3 and Forms 4 furnished to the Company during the most recent fiscal year, and Forms 5 with respect to its most recent fiscal year, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act were timely filed, as necessary, by the officers, directors and security holders required to file the same during the fiscal year ended December 31, 2006. Item 10. Executive Compensation. The following table provides certain summary information concerning compensation awarded to, earned by, or paid to our Chief Executive Officer and each of our other executive officers for services rendered to Cambex in all capacities during the fiscal years ended December 31, 2006 and December 31, 2005. Summary Compensation Table Annual Long Term Compensation(1) Compensation Awards Name and Position Year Salary Bonus Options(#) Joseph F. Kruy 2006 $200,000(2) $39,031 - Chairman, President and CEO 2005 $200,000(2) $ 9,902 - Lois P. Lehberger 2006 $ 80,000 $ 9,758 - Vice President, 2005 $ 80,000 2,475 - Controller and Clerk (1)The columns for "Other Annual Compensation" and "All Other Compensation" have been omitted because there is no such compensation required to be reported. (2)Includes $100,000 for which payment has been deferred in 2006 and 2005. Stock Options The following table contains information concerning the grant of stock options under our Year 2000 Equity Incentive Plan to the executive officers named in the Summary Compensation Table. Each of the option grants listed below vests in five equal installments on the first through the fifth anniversaries of the date of grant. 17 Option Grants in Last Fiscal Year Individual Grants Number of % of Total Securities Options Underlying Granted to Exercise Options Employees in Price Expiration Name (#) Fiscal Year ($/Share) Date Joseph F. Kruy - - - - Lois P. Lehberger - - - - Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Value of Unexercised Number of In-the-money Options at Options at December 31,2006 December 31,2006(1) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized Unexercisable Unexercisable Joseph F. Kruy - - -/- -/- Lois P. Lehberger - - 140,000/10,000 -/- (1) The closing price of our Common Stock on December 31, 2006 was $0.16 per share. The numbers shown reflect the value of options accumulated over all years of employment. Employment Contracts and Termination Agreements We entered into an employment agreement with Joseph F. Kruy on November 18, 1994. An extension of the term of this employment agreement to December 31, 2009 was approved by our board of directors in March 2007. Under his employment agreement, Mr. Kruy is engaged to serve as our Chairman of the Board, President and Chief Executive Officer. Except for illness, reasonable vacations and other customary exceptions, during the term of the agreement, Mr. Kruy is to devote all of his working time and attention to the performance of his duties and responsibilities at Cambex. Mr. Kruy is to be paid a minimum annual base salary of $200,000 per year. Mr. Kruy is also entitled to participate in our Incentive Bonus Plan and is eligible to receive an annual bonus up to 4% of our pre-tax profit, as that term is defined in the Incentive Bonus Plan. If Mr. Kruy voluntarily terminates his employment with us, he is entitled to receive his base annual compensation through the date of termination and any amount that he may be entitled to receive under the Incentive Bonus Plan in accordance with the terms of that Plan. If, after Mr. Kruy voluntarily terminates his employment with us, he accepts employment during the remaining then current term of his agreement with an entity that directly competes with us, then we may cease paying Mr. Kruy any further amounts. If we terminate Mr. Kruy's employment for reasons other than for cause or if we give another person either the title or the powers of the Chief Executive Officer, then Mr. Kruy is entitled to continue to receive his annual base salary through the end of the then current term of the agreement, and is entitled to receive any incentive bonus that would have 18 been earned under the Incentive Bonus Plan during the fiscal year in which his employment was terminated. If, following termination of Mr. Kruy's employment with us, he accepts employment elsewhere before December 31, 2009, then we do not have to continue to pay Mr. Kruy for the year ending December 31, 2009. Moreover, if on the date of termination of Mr. Kruy's employment with us, our assets are in the hands of a receiver, an assignee for the benefit of creditors, trustee in bankruptcy, debtor-in-possession or other entity for the benefit of creditors or if our consolidated net worth is less than our consolidated net worth at December 31, 1999, then we have no obligation to pay Mr. Kruy any amount after termination of his employment. We compensate our non-employee directors with an annual fee of $10,000 and a fee of $1,000 for each meeting of the board of directors attended. In March 2005, the board of directors authorized the non-employee director compensation to be converted from cash to shares of our common stock at a price of $0.15 per share. In 2005, 1,118,333 shares were issued to the non- employee directors as compensation for past services as a member of the board of directors. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table presents information regarding the beneficial ownership of Cambex's common stock as of March 22, 2007, by: each person, or group of persons, known to us to be the beneficial owner of more than five percent of our outstanding shares of common stock; each of our directors; each of our executive officers; and all current directors and officers of Cambex as a group. Unless otherwise noted in the table, the address for each person listed in the table is c/o Cambex Corporation, 115 Flanders Road, Westborough, MA 01581. Name and Address (#)Shares of Common of Beneficial Owner Stock Beneficially Owned(1) Percent of Class(2) Joseph F. Kruy (3) 5,522,739 23.2% Estate of Richard E. Calvert(4) 2,314,586 9.7 c/o Huntington National Bank 1227 East Front Street Traverse City, MI 49685 Peter J. Kruy (5) 1,597,164 6.6 H. Terry Snowday, Jr.(6) 1,575,302 6.7 7784 East Shore Road Traverse City, MI 49686 Bruce D. Rozelle(7) 1,300,000 5.3 9 Webster Circle Sudbury, MA 01776 C.V. Ramamoorthy (8) 616,656 2.6 Robert J. Spain (9) 251,083 1.1 Lois P. Lehberger (10) 140,000 * 19 All directors and executive officers as a group (4 persons) (11) 6,530,478 27.2 _______________ * Represents beneficial ownership of less than 1%. (1) Beneficial ownership for purposes of the table is determined in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock issuable upon the exercise of options and warrants held by that person that are currently exercisable or exercisable within 60 days following March 22, 2007 (May 21, 2007) are deemed to be outstanding. These shares, however, are not considered outstanding for purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes, we believe that the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned by them, subject to community property laws where applicable. (2) Percentage of ownership is based on 23,429,278 shares of common stock outstanding as of March 22, 2007. (3) Includes 100,000 shares of common stock issuable upon exercise of stock purchase warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007). Includes 270,200 shares of common stock issuable upon conversion of Series A Preferred stock issued in 2002. This number also includes 56,250 shares held by the Kruy Family Trust, for which Mr. Kruy's wife and children are the beneficial owners. Mr. Kruy disclaims beneficial ownership of these shares. Of these shares of common stock, 979,239 are subject to the terms of a stock pledge agreement dated as of January 18, 2000 (the "Kruy Pledge Agreement"), among Joseph F. Kruy, Cambex and SovCap Equity Partners, Ltd., Arab Commerce Bank Ltd., and Correllus International Ltd. Provided that Cambex is not in default under the series 1 bridge note purchase agreement dated as of January 18, 2000 (the "Bridge Note Purchase Agreement"), among Cambex and SovCap Equity Partners, Ltd., Arab Commerce Bank Ltd., and Correllus International Ltd., the series 1 bridge financing notes issued pursuant to the Bridge Note Purchase Agreement, or the Kruy Pledge Agreement, Mr. Kruy has the right to vote the pledged shares. (4) Includes 469,200 shares of common stock issuable upon conversion of Series A Preferred stock issued in 2002. (5) Includes 960,164 shares owned by CyberFin Corporation, a corporation wholly owned by Peter J. Kruy, 135,000 shares subject to currently exercisable options, and 500,000 shares issuable upon exercise of stock purchase warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007). Of these shares of common stock, 730,228 are subject to the terms of a stock pledge agreement dated as of January 18, 2000 (the "CyberFin Pledge Agreement"), among CyberFin, Cambex, and SovCap Equity Partners, Ltd., Arab Commerce Bank Ltd., and Correllus International Ltd. Provided that Cambex is not in default under the Bridge Note Purchase Agreement, the series 1 bridge financing notes, or the CyberFin Pledge Agreement, CyberFin has the right to vote the pledged shares. (6) Includes 107,610 shares of common stock issuable upon conversion of Series A Preferred stock issued in 2002. 20 (7) Consists of 1,300,000 shares issuable upon exercise of stock purchase warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007) held by B.A. Associates. Bruce Rozelle, a son-in-law of Joseph F. Kruy, has both voting and investment control over B.A. Associates. Mr. Rozelle disclaims beneficial ownership of these shares. (8) Includes 67,500 shares of common stock issuable upon exercise of stock purchase warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007). (9) Includes 32,750 shares of common stock issuable upon exercise of stock purchase warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007). (10) Consists of 140,000 shares subject to options exercisable within 60 days following March 22, 2007 (or by May 21, 2007). (11) Includes 601,450 shares subject to options and warrants exercisable within 60 days following March 22, 2007 (or by May 21, 2007) and stock issuable upon conversion of Series A Preferred stock. See footnotes (3)through (10) above. Solely for the purpose of calculating the aggregate market value of voting stock held by non-affiliates of the Company as set forth on the Cover Page, it was assumed that only directors and executive officers on the calculation date together with spouses and dependent children of such persons constituted affiliates. Item 12. Certain Relationships and Related Transactions, and Director Independence. On November 9, 1998, we entered into a Loan and Security Agreement with B.A. Associates, Inc. (BAA), which is a corporation owned by Bruce Rozelle, a son-in-law of Joseph F. Kruy, our Chairman, President and Chief Executive Officer. This Loan and Security Agreement, as amended by a First Amendment to Loan and Security Agreement dated March 15, 1999, and further amended through December 27, 2001 (as so amended, the "BAA Loan Agreement"), allows us to borrow up to $1,100,000, which is the maximum that may be outstanding at any one time. Under the BAA Loan Agreement, we granted BAA a first priority security interest in all of our accounts, instruments, documents, general intangibles, equipment, inventory, and proceeds of any of the foregoing. We are obligated to pay all amounts that we receive from collections of our accounts receivable to BAA not less frequently than each week until the outstanding loan amount plus interest, which accrues at a 12% annual rate, is fully paid. Under the terms of the BAA Loan Agreement, originally BAA received a warrant for the purchase of 1.3 million shares of common stock, at an exercise price of $0.22 per share. In consideration for increasing the amount of available funds, the Company agreed to issue an additional warrant to BAA for the purchase of 400,000 shares of our common stock, at an exercise price of $1.25 per share. We believe that the borrowing arrangements we made with BAA were on terms at least as favorable to us as we would have expected from lenders unrelated to us and relatives of Mr. Kruy. In June through August 2003, we borrowed $200,000 from Joseph F. Kruy. We also entered into Loan and Security Agreements with Mr. Kruy. Our payment obligations under these Loan and Security Agreements (the "2003 Loan Agreements") are evidenced by 12% Notes due in June through August 2004. Under the 2003 Loan Agreements, we granted Mr. Kruy a first priority security interest in all of our accounts, instruments, documents, general intangibles, equipment, inventory, and proceeds of any of the foregoing. We believe that 21 the borrowing arrangements we made with Mr. Kruy were on terms at least as favorable to us as we would have expected from lenders unrelated to us. As of December 31, 2006, the balance outstanding under the above and prior Loan and Security Agreements is $275,000 of which $225,000 is owed to Joseph F. Kruy and $50,000 is owed to the estate of Richard E. Calvert. Item 13. Exhibits. The following documents are filed as part of this report: (1) The financial statements listed in the index to financial statements appearing at page F-1 of this report, which index is incorporated in this item by reference. (2) See the exhibit index following on page A-1. Item 14. Principal Accountant Fees and Services. Audit Fees The aggregate fees we agreed to pay Sullivan Bille, P.C. for professional services rendered for the audit of the Company's annual financial statements on Form 10-KSB and the review of financial statements included in Form 10-QSB for the year ended December 31, 2006 is up to $57,300 and for the year ended December 31, 2005 was $50,950. Audit Related Fees There were no fees billed in 2006 and 2005 for assurance and related services provided by the Company's principal accountants. Tax Fees During 2006 and 2005, there were no fees billed for tax compliance, tax advice, and tax planning professional services rendered by the Company's principal accountants. All Other Fees There were no fees billed in 2006 and 2005 for products and other services provided by the Company's principal accountants. The Audit Committee approved 100% of the fees paid to the principal accountants for audit-related, tax and other fees. The Audit Committee pre- approves all non-audit services to be provided by the auditor in accordance with the Audit Committee Charter. There were no hours expended on the principal accountant's engagement to audit the Company's financial statements for 2006 that were attributed to work performed by persons other than the principal accountant's full time, permanent employees. 22 EXHIBIT INDEX The following exhibits are filed herewith or incorporated by reference herein. Exhibit 3.1 Restated Articles of Organization of Cambex Corporation (included as Exhibit 3.1 to the Company's Registration Statement on Form SB-2, declared effective with the Commission on November 7, 2000, Reg. No. 333-43294, and incorporated herein by reference). 3.2 Restated By-laws of Cambex Corporation (included as Exhibit 3.2 to the Company's Registration Statement on Form SB-2, declared effective with the Commission on November 7, 2000, Reg. No. 333-43294, and incorporated herein by reference). 3.3 Series A Preferred Stock Certificate of Designations (included as Exhibit 10.37 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002 and incorporated herein by reference). 4.1 Specimen Stock Certificate (included as Exhibit 4.1 to the Company's Registration Statement on Form SB-2, declared effective with the Commission on November 7, 2000, Reg. No. 333-43294, and incorporated herein by reference). 4.2 Registration Rights Agreement among the Company and the Purchasers identified therein (the "Sovereign Purchasers") dated as of January 18, 2000 (included as Exhibit 4.1 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.1 Employment Agreement between Joseph F. Kruy and the Company, dated as of November 18, 1994 (included as Exhibit 10.1 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.2 Incentive Bonus Plan (included as Exhibit 10.2 to the Company's Registration Statement on Form SB-2, declared effective with the Commission on November 7, 2000, Reg. No. 333-43294, and incorporated herein by reference). 10.3 1987 Combination Stock Option Plan (included as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1987, and incorporated herein by reference). 10.4 2000 Equity Incentive Plan (included as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference). A-1 23 EXHIBIT INDEX(CONTINUED) 10.5 Series 1 Bridge Note Purchase Agreement among the Company and the Sovereign Purchasers dated as of January 18, 2000 (included as Exhibit 10.7 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.6 Escrow Agreement among the Company, the Sovereign Purchasers and Suntrust Bank, Atlanta dated as of January 6, 2000 (included as Exhibit 10.8 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.7 Placement Agent Agreement between the Company and Sovereign Capital Advisors, LLC ("Sovereign Advisors") dated as of January 18, 2000 (included as Exhibit 10.9 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.8 Guaranty Agreement among Joseph F. Kruy, the Company and the Sovereign Purchasers dated as of January 18, 2000. (included as Exhibit 10.10 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.9 Guaranty Agreement among CyberFin Corporation, the Company and the Sovereign Purchasers dated as of January 18, 2000 (included as Exhibit 10.11 to the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.10 Stock Pledge Agreement by Joseph F. Kruy in favor of the Sovereign Purchasers dated as of January 18, 2000 (included as Exhibit 10.12 to the Company's Amendment to the Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.11 Stock Pledge Agreement by CyberFin Corporation in favor of the Sovereign Purchasers dated as of January 18, 2000 (included as Exhibit 10.13 to the Company's Amendment to the Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.12 Series 1 Bridge Financing Note in favor of Arab Commerce Bank Ltd. dated as of February 9, 2000 (included as Exhibit 10.22 to the Company's Amendment to the Quarterly Report on Form 10-Q/A for the quarter ended April 1, 2000, and incorporated herein by reference). 10.13 Loan and Security Agreement, as amended, by and between the Company and BA Associates, Inc. (included as Exhibit 10.27 to the Company's Registration Statement on Form SB-2 filed with the Commission on November 29, 2000, Reg. No. 333-50936, and incorporated herein by reference.) A-2 24 EXHIBIT INDEX(CONTINUED) 10.14 Fifth Amendment to Loan and Security Agreement, as amended, by and between the Company and B.A. Associates, Inc., dated as of December 27, 2000 (included as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference). 10.15 Form of Warrant Certificate between the Company and B.A. Associates, Inc. (included as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference). 10.16 Sixth Amendment to Loan and Security Agreement, as amended, by and between the Company and B.A. Associates, Inc., dated as of December 27, 2001 (included as Exhibit 10.30 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001 and incorporated herein by reference). 10.17 Lease by and between the Company and Bertech Flanders, LLC dated as of April 24, 2003 (included as Exhibit 10.33 to the Company's Quarterly Report on 10QSB for the quarter ended March 31, 2003, and incorporated herein by reference). 21.1 List of subsidiaries of the Company. 31.1 Certification as required by section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification as required by section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code). 99.1 Risk Factors. A-3 25 CAMBEX CORPORATION AND SUBSIDIARIES (Information required by Part II, Item 7 and Part III, Item 13 of Form 10-KSB) FINANCIAL STATEMENTS Page Report of Independent Public Accountants F - 2 Consolidated Balance Sheets - December 31, 2006 and 2005 F - 3 Consolidated Statements of Operations for the Years Ended December 31, 2006 and December 31, 2005 F - 5 Consolidated Statements of Stockholders' Investment for the Years Ended December 31, 2006 and December 31, 2005 F - 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and December 31, 2005 F - 7 Notes to Consolidated Financial Statements F - 8 F-1 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders of Cambex Corporation We have audited the accompanying consolidated balance sheet of Cambex Corporation (a Massachusetts corporation) and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' investment and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cambex Corporation and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. SULLIVAN BILLE, P.C. CERTIFIED PUBLIC ACCOUNTANTS Tewksbury, Massachusetts March 26, 2007 F-2 27 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND DECEMBER 31, 2005 ASSETS DECEMBER 31, DECEMBER 31, 2006 2005 CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 225,835 $ 326,747 ACCOUNTS RECEIVABLE, Less Reserves of $26,000 in 2006 and $29,000 in 2005 43,233 175,141 INVENTORIES 51,845 154,121 PREPAID EXPENSES 16,141 57,648 TOTAL CURRENT ASSETS $ 337,054 $ 713,657 PROPERTY AND EQUIPMENT, at cost: MACHINERY AND EQUIPMENT $ 422,468 $ 422,468 FURNITURE AND FIXTURES 14,186 14,186 $ 436,654 $ 436,654 LESS - ACCUMULATED DEPRECIATION 433,654 431,654 NET PROPERTY AND EQUIPMENT $ 3,000 $ 5,000 TOTAL ASSETS $ 340,054 $ 718,657 The accompanying notes are an integral part of these consolidated financial statements. F-3 28 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND DECEMBER 31, 2005 LIABILITIES AND STOCKHOLDERS' INVESTMENT DECEMBER 31, DECEMBER 31, 2006 2005 CURRENT LIABILITIES: LOAN AGREEMENT $ 225,000 $ 967,219 NOTES PAYABLE 429,643 464,643 ACCOUNTS PAYABLE 156,240 154,918 OTHER LIABILITIES 522,993 1,188,828 ACCRUED EXPENSES 1,760,052 1,604,386 TOTAL CURRENT LIABILITIES $ 3,093,928 $ 4,379,994 STOCKHOLDERS' INVESTMENT: PREFERRED STOCK, $ 1.00 PAR VALUE PER SHARE AUTHORIZED - 3,000,000 SHARES SERIES A - ISSUED - 84,701 shares in 2006 and 98,223 shares in 2005 $ 84,701 $ 98,223 SERIES B - ISSUED - 37,240 shares in 2005 - 37,240 COMMON STOCK, $ .10 PAR VALUE PER SHARE AUTHORIZED - 25,000,000 SHARES ISSUED - 23,429,278 shares in 2006 and 22,742,162 shares in 2005 2,342,928 2,274,216 CAPITAL IN EXCESS OF PAR VALUE 19,846,252 19,864,202 RETAINED EARNINGS (DEFICIT) (25,027,755) (25,935,218) TOTAL STOCKHOLDERS' INVESTMENT $ (2,753,874) $ (3,661,337) TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 340,054 $ 718,657 The accompanying notes are an integral part of these consolidated financial statements. F-4 29 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005 Year Ended Year Ended December 31, December 31, 2006 2005 REVENUES $ 2,345,067 $ 2,272,191 COST OF SALES 356,959 447,508 Gross profit $ 1,988,108 $ 1,824,683 OPERATING EXPENSES: Research and development $ 870,881 $ 865,252 Selling 319,881 366,839 General and administrative 490,971 463,850 Total operating expenses $ 1,681,733 $ 1,695,941 OPERATING INCOME $ 306,375 $ 128,742 OTHER INCOME (EXPENSE) 601,088 101,476 INCOME BEFORE INCOME TAXES $ 907,463 $ 230,218 Provision for income taxes - - NET INCOME $ 907,463 $ 230,218 BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.04 $ 0.01 Weighted Average Common Shares Outstanding 23,262,000 20,700,000 Weighted Average Common and Common Equivalent Shares Outstanding 23,262,000 20,700,000 The accompanying notes are an integral part of these consolidated financial statements. F-5 30 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (NOTE 7) FOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005 Common Stock Capital in Retained Cost of $.10 Excess of Earnings Shares of Par Value Par Value (Deficit)Common Stock Held in Treasury BALANCE AT DECEMBER 31, 2004, before reclassification $1,986,561 $20,498,545 $(26,165,436)$(888,971) Reclassification of common stock held in treasury ( 154,526) ( 734,445) - 888,971 BALANCE, DECEMBER 31, 2004, as reclassified 1,832,035 19,764,100 (26,165,436) - ADD: Net income - - 230,218 - Conversion of Preferred Stock to Common Stock 114,000 (4,000) - - Dividends 39,992 (39,992) - - Conversion of Notes Payable and interest to Common Stock 176,356 88,177 - - Conversion of Accrued Expenses to Common Stock 111,833 55,917 - - BALANCE AT DECEMBER 31, 2005 $2,274,216 $19,864,202 $(25,935,218)$ - ADD: Net income - - 907,463 - Conversion of Preferred Stock to Common Stock 52,116 (1,354) - - Dividends 16,596 (16,596) - - BALANCE AT DECEMBER 31, 2006 $2,342,928 $19,846,252 $(25,027,755)$ - Series A Series B Preferred Stock Preferred Stock $1.00 Par Value $1.00 Par Value BALANCE AT DECEMBER 31, 2004 $ 98,223 $ 147,240 ADD: Conversion of Preferred Stock to Common Stock - (110,000) BALANCE AT DECEMBER 31, 2005 $ 98,223 $ 37,240 ADD: Conversion of Preferred Stock to Common Stock ( 13,522) ( 37,240) BALANCE AT DECEMBER 31, 2006 $ 84,701 $ - The accompanying notes are an integral part of these consolidated financial statements. F-6 31 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005 Year Ended Year Ended December 31, December 31, 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 907,463 $ 230,218 Adjustments to reconcile net income to net cash provided by(used in)operating activities: Depreciation $ 2,000 $ 1,000 Amortization of prepaid expenses 8,147 6,800 Obligations for trade-in memory - ( 240,000) Reversal of accrued expenses ( 665,835) ( 219,216) Change in assets and liabilities: Accounts receivable 131,908 122,564 Inventory 102,276 ( 1,859) Prepaid expenses 33,360 11,853 Accounts payable 1,322 ( 120,345) Accrued expenses 155,666 73,641 Other liabilities - 39,025 Total adjustments $( 231,156)$( 326,537) Net cash provided by(used in) operating activities $ 676,307 $( 96,319) CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of equipment, net $ - $( 6,000) Net cash provided by(used in)investing activities $ - $( 6,000) CASH FLOWS FROM FINANCING ACTIVITIES: Increase(decrease) in notes payable $( 35,000)$( 60,000) Net borrowings(repayments) under loan agreement ( 742,219) 175,296 Net cash provided by (used in) financing activities $( 777,219)$ 115,296 Net increase (decrease) in cash and cash equivalents $( 100,912)$ 12,977 Cash and cash equivalents at beginning of year 326,747 313,770 Cash and cash equivalents at end of year $ 225,835 $ 326,747 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ - $ 50 Income Taxes - - Non-cash financing and investing activities: Conversion of note payable and interest to Common Stock $ - $ 264,533 Conversion of accrued expenses to Common Stock - 167,750 The accompanying notes are an integral part of these consolidated financial statements. F-7 32 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (1) Business Operations We are a designer and supplier of data storage products and solutions. Our products include memory for computing systems and fibre channel connectivity and storage products used to build storage area networks (SANs). We sell our products to OEMs, resellers and directly to end-users. In 2005 and 2006, our largest customers included QLogic, Hewlett-Packard and Sun Microsystems. In the year ended December 31, 2005, our top five customers accounted for approximately 62% of our total net revenues, and, in the year ended December 31, 2006, our top five customers accounted for approximately 88% of our total net revenues. During 2005 and 2006, two customers exceeded 10% of total revenues. There is no assurance that current customers will remain our customers in the future and the loss of a major customer could have a material effect on our business. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Cambex Corporation and its wholly-owned subsidiaries. All subsidiaries are inactive. All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition We manufacture equipment for sale or lease. We follow the guidance in Staff Accounting Bulletin ("SAB") 104 in applying generally accepted accounting principles to revenue recognition in consolidated financial statements. We include items in revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable and collectibility is reasonably assured. Inventories Inventories, which include materials, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following: December 31, December 31, 2006 2005 Raw materials $ 19,193 $ 104,461 Work-in-process 8,410 14,491 Finished goods 24,242 35,169 Total $ 51,845 $ 154,121 F-8 33 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (2) Summary of Significant Accounting Policies - Continued Property and Equipment We provide for depreciation and amortization on a straight- line basis to amortize the cost of property and equipment over their estimated useful lives as follows: Machinery and equipment 3- 8 Years Furniture and fixtures 3- 8 Years Maintenance and repair items are charged to expense when incurred; renewals or betterments are capitalized. If property is sold or otherwise disposed of, our policy is to remove the related cost and accumulated depreciation from the accounts and to include any resulting gain or loss in income. Depreciation expense of $2,000 and $1,000, was recorded for the periods ended December 31, 2006 and December 31, 2005, respectively. Net Income Per Common Share Basic income per share amounts are based on the weighted average number of common shares outstanding during each year. Diluted income per share amounts are based on the weighted average number of common shares and common share equivalents outstanding during each year to the extent such equivalents have a dilutive effect on the income per share. For the years ended December 31, 2006 and 2005, common share equivalents (options, warrants and convertible preferred stock) were not included in diluted income per share because the inclusion of the common stock equivalents would have had an antidilutive effect on the computation of diluted income per share. Cash and Cash Equivalents Cash and cash equivalents are recorded at cost which approximates market value and includes instruments purchased with maturities of less than three months. Disclosures about the Fair Value of Financial Instruments Our financial instruments consist mainly of cash, cash equivalents, accounts receivable, accounts payable, notes payable and a revolving credit agreement. The carrying amounts of these financial instruments approximate their fair value due to the short-term nature of these instruments. F-9 34 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (2) Summary of Significant Accounting Policies - Continued Use of Estimates The preparation of consolidated 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 disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Segment Reporting SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," became effective for periods beginning after December 31, 1997. This statement requires the presentment of information about the identifiable components comprising an enterprise's business activities. We have determined that there are no separately reportable operating segments and, therefore, do not present separate reporting segments in the consolidated financial statements. Stock-Based Compensation In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment." SFAS 123(R) replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123(R) requires that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) applies to all awards granted after the required effective date and shall not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased, or cancelled after the effective date. With the adoption of SFAS 123(R), the Company elected to amortize stock-based compensation for awards granted on or after the adoption of SFAS 123(R) on January 1, 2006, on a straight-line basis over the requisite service (vesting) period for the entire award. As permitted under SFAS 123, amended by SFAS 123(R), the Company elected to follow APB 25, and related interpretations in accounting for stock based awards to employees through December 31, 2005. Accordingly, compensation cost for stock options and nonvested stock grants was measured as the excess, if any, of the market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. F-10 35 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (2) Summary of Significant Accounting Policies - Continued Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 153, "Exchange of Nonmonetary Assets", which is an amendment to APB Opinion No. 29. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS No. 153 is not expected to have a material impact on our financial position or results of operations. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS 154 is an amendment of APB Opinion 20 and FASB Statement No. 3. This statement changes the requirements for the accounting for and reporting of a change in accounting principal. This Statement applies to all voluntary changes in accounting principal and to changes required by an accounting pronouncement in unusual instances that the pronouncement does not include specific transition provisions. The Company does not expect the adoption of SFAS 154 to have an impact on its financial position or operating results. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 is an amendment to SFAS 133 and 140. SFAS 155 improves financial reporting by eliminating the exception from applying SFAS 133 to interest in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have an impact on its financial position or results of operations. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140." SFAS 156 is an amendment to SFAS 140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the F-11 36 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (2) Summary of Significant Accounting Policies - Continued entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for all servicing assets and servicing liabilities transactions after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 156 to have an impact on its financial position or results of operations. In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of Interpretation No. 48 to have an impact on its financial position or results of operations. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have an impact on its financial position or results of operations. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)." SFAS improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS 158 is effective for fiscal years ending after December 15, 2006. The adoption of SFAS 158 did not have an impact on the Company's financial position or results of operations. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure many F-12 37 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (2) Summary of Significant Accounting Policies - Continued financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have an impact on its financial position or results of operations. (3) Income Taxes In accordance with SFAS No. 109, "Accounting For Income Taxes", deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The following table presents a reconciliation between taxes provided at the statutory federal income tax rate and the actual tax provision recorded for the following periods: Year ended Year ended December December 2006 2005 Provision (credit) at federal statutory rate $ 308,500 $ 78,300 State tax provision (credit), net of federal tax benefit 57,200 14,600 Change in valuation allowances (365,800) ( 93,200) Other 100 300 $ -0- $ -0- We have federal net operating loss carryovers totalling $24,800,000 which expire through the year ended December 31, 2023. F-13 38 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (3) Income Taxes - Continued The tax effects of the significant items which comprise the deferred tax liability and tax asset, as of fiscal 2006 and 2005 are as follows: December December 2006 2005 Assets Reserves not currently deductible for tax purposes $ 371,000 $ 620,000 State tax net operating loss carryforward 2,421,000 2,448,000 Federal net operating loss carryforward 7,635,000 7,720,000 Employee benefits 21,000 26,000 Net deferred tax asset $10,448,000 $10,814,000 Valuation allowance (10,448,000) (10,814,000) Tax asset 0 0 Tax refunds receivable 0 0 Total tax asset 0 0 Due to the uncertainty of the realizability of the deferred tax assets, we have established a valuation allowance for the net deferred tax assets. (4) Short Term Borrowings We have a loan and security agreement with a related party referred to in Note 11. The outstanding balance due to the related party was $225,000 and $967,219 at December 31, 2006 and 2005, respectively. Notes payable of $429,643 at December 31, 2006 and $464,643 at December 31, 2005 include $275,000 of advances payable from related parties, which are due on demand. These notes are further described in Note 11. The balances of $154,643 and $189,643 as of December 31, 2006 and December 31, 2005, respectively, include $4,643 and $ 39,643, respectively, of accounts payable converted to notes payable and include $150,000 of series 1 bridge financing notes issued in 2000. F-14 39 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (4) Short Term Borrowings - Continued The series 1 bridge financing notes bore interest at the rate of 8% per annum prior to maturity. Since maturity, interest is accruing on these notes at a rate of 12% per annum. These bridge notes are convertible into shares of our common stock at any time at a weighted average per share price of $4.08. Following conversion of the bridge notes, if Arab Commerce Bank Ltd. does not realize at least a 20% gain on shares of common stock that they choose to sell during the 90 days following conversion, then Arab Commerce Bank Ltd. is entitled to acquire additional shares of common stock at a price of $0.10 per share through the exercise of repricing warrants. In addition to these bridge notes and the attached repricing warrants, we issued warrants to purchase 300,000 shares of common stock. These warrants have a weighted average exercise price of $4.54 per share. There is no value associated with these warrants recorded on our books. (5) Earnings Per Share Earnings per share are computed by dividing net income by the average number of common shares and common stock equivalents outstanding during the year. The weighted average number of common shares outstanding during the years ended December 31, 2006 and 2005 were approximately 23,262,000 and 20,700,000, respectively. Common stock equivalents include the net additional number of shares that would be issuable upon the exercise of the outstanding common stock options and warrants (see Note 9) and conversion of preferred stock, assuming that we reinvested the proceeds to purchase additional shares at market value. Common stock equivalents also include shares of common stock that would be issuable upon conversion of subordinated promissory convertible notes. Options and warrants to purchase 3,702,858 and 5,159,909 weighted average shares of common stock during the years ended December 31, 2006 and December 31, 2005, respectively, were not included in the computation of diluted income per share because to do so would have had an antidilutive effect on the computation of income per share. Weighted average shares issuable from convertible notes of 24,630 were not included in the diluted earnings per share because to do so would have had an antidilutive effect on the computation of earnings per share. As more fully described in Note 9, options and warrants to purchase 3,213,750 and 4,431,550 shares of common stock outstanding at December 31, 2006 and 2005, respectively, and 24,630 shares of common stock issuable upon conversion of notes outstanding at December 31, 2006 and 2005 could potentially dilute basic income (loss) per share in the future. F-15 40 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (6) Preferred Stock We are authorized to issue up to 3,000,000 shares of preferred stock, $1.00 par value per share, of which 84,701 and 135,463 shares are issued and outstanding as of December 31, 2006 and December 31, 2005, respectively. The 84,701 shares outstanding as of December 31, 2006 are Series A Convertible Preferred shares. Of the 135,463 preferred shares outstanding, shares outstanding as of December 31, 2005, 98,223 shares are Series A Convertible Preferred shares and 37,240 are Series B Convertible Preferred shares. The Series A Convertible Preferred shares have a dividend rate of 12%, when and if declared by the Company's Board of Directors. Holders of shares of Series A Preferred stock are not entitled to any voting rights for any shares of Series A Preferred stock which they hold. The Series A Preferred Stock is convertible into shares of common stock, at any time at the holder's option. The holder's of the 84,701 shares of Series A Preferred Stock could convert their preferred shares into 847,010 shares of common stock. In 2005, 110,000 shares of Series B Preferred Stock and dividends were converted into 1,539,924 shares of common stock, including 399,924 shares relating to dividends. Upon an optional conversion, dividends accrued at the rate of 12% are payable in shares of common stock. In 2006, 13,522 shares of Series A Preferred stock was converted into 135,220 shares of common stock and the remaining 37,240 shares of Series B Preferred stock and dividends were converted into 551,896 shares of common stock, including 165,954 shares relating to dividends. (7) Stockholders' Investment Effective July 1, 2004, the Commonwealth of Massachusetts adopted a legislative act that resulted in a new Massachusetts corporation law. Under the Act, the general concept of treasury stock is no longer in place. As a result, any shares of stock that are purchased by the corporation are returned to unissued status. Because the new law was effective July 1, 2004, the reclassifications necessary have been reflected on the Consolidated Balance Sheets and in the Consolidated Statements of Stockholders' Investment. (8) Commitments and Contingencies At December 31, 2006, we had minimum rental commitments under long-term, noncancelable operating leases for facilities and other equipment as follows: Due during Fiscal Year 2007 177,371 2008 183,488 2009 91,744 Total $ 452,603 Total rental expense, including the cost of short-term equipment leases, real estate taxes and insurance paid to the landlord and charged to operations approximated $258,000 for the year ended December 31, 2006 and $248,000 for the year ended December 31, 2005. F-16 41 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (8) Commitments and Contingencies - Continued In the ordinary course of business, we are involved in legal proceedings. We believe that the outcome of these proceedings will not have a material adverse effect on our financial condition or results of operations. (9) Stock Options and Warrants On March 7, 1997, we established the 1997 Stock Option Plan. As of December 31, 2006, there were 364,000 options to purchase shares of our common stock outstanding under the 1997 Plan. On November 12, 1999, the 1997 Plan was cancelled. On November 12, 1999, we established and on December 23, 1999, shareholders approved the Year 2000 Equity Incentive Plan. The Year 2000 Equity Incentive Plan provides for the issuance of up to 1,500,000 shares of our common stock and 607,000 options to purchase shares of our common stock were outstanding as of December 31, 2006. The Year 2000 Equity Incentive Plan replaces the 1997 Plan for all future options. At December 31, 2006, we had three stock option plans for officers and certain employees under which 1,864,000 shares were reserved and options for 893,000 shares were available for future grants. Options are granted at not less than 85%, or in certain cases, not less than 100%, of the fair market value of the common stock on the date of grant. Options outstanding have a term of ten years and become exercisable in installments as determined by the Board of Directors. The plans' options vest between one through six years and all expire between March 7, 2007 and March 25, 2015. Stock option activity for the two years ended December 31, 2006 was as follows: Option Shares Number of shares Option Price of common stock per share covered by options Outstanding at December 31, 2004 1,113,800 $.06 - $5.30 Granted 215,000 .09 - .16 Exercised, cancelled or Expired (140,000) .09 - .16 Outstanding at December 31, 2005 1,188,800 $.06 - $5.30 Granted - Exercised, cancelled or Expired (217,800) .06 - .26 Outstanding at December 31, 2006 971,000 $.09 - $5.30 As of December 31, 2006 and 2005, options for 933,000 and 1,008,800 shares were exercisable at aggregate option prices of $671,360 and $679,816, respectively. F-17 42 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (9) Stock Options and Warrants - Continued Effective January 1, 2006, the Company adopted the fair value method which is considered the preferable accounting method, of recording stock-based employee compensation as contained in SFAS No. 123 (R). As prescribed in SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", the Company elected to use the "prospective method." The prospective method requires expense to be recognized for all awards granted, modified or settled beginning in the year of adoption. Historically, the Company applied the intrinsic method as provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and accordingly, no compensation cost had been recognized for stock options in prior periods. As a result of adopting the fair value method for stock compensation, all future awards will be expensed over the stock options' vesting period. Had compensation cost for these plans been determined consistent with SFAS No. 123 for the year ended December 31, 2005, our net income(loss) and income(loss) per share would have been changed to the following pro forma amounts: Year ended December 31, 2005 Net Income: As Reported (000's) 230 Pro Forma 200 Basic and Diluted EPS: As Reported 0.01 Pro Forma 0.01 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions for grants in the periods presented. Year ended December 31, 2005 Assumptions: Risk free interest rate 4.17% Expected dividend yield 0% Expected life in years 10 As of December 31, 2006 and 2005, warrants to purchase 2,242,750 and 3,242,750 shares of common stock at weighted average prices of $0.32 and $0.36 per share were outstanding and an equal number of shares were reserved for issuance. Our shareholders have approved an increase from 25,000,000 to 50,000,000 shares in the aggregate number of shares of common stock authorized to be issued by the Company. F-18 43 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (10) Incentive Bonus Plan and 401(k) Profit Sharing Retirement Plan We have an incentive bonus plan under which certain key employees as a group are entitled to receive additional compensation up to a maximum of 15% of our pre-tax income, as defined. There were provisions of $68,000 and $17,000 for additional compensation in 2006 and 2005, respectively. On September 1, 1988, we established the Cambex Corporation 401(k) Profit Sharing Retirement Plan (the Plan). Under the Plan, employees are allowed to make pre-tax retirement contributions. In addition, we may provide matching contributions based on pre-established rates. Each year the Board of Directors determines whether matching contributions will be made and in what amounts. There was no matching contribution in 2006 or 2005. We offer no post-retirement benefits other than those provided under the Plan. (11) Related Party Transactions On November 9, 1998, we entered into a Loan and Security Agreement with B.A. Associates, Inc. (BAA), which is a corporation owned by Bruce D. Rozelle, a son-in-law of Joseph F. Kruy, our Chairman, President and Chief Executive Officer. This Loan and Security Agreement, as amended by a First Amendment to Loan and Security Agreement dated March 15, 1999, and further amended through December 27, 2001 (as so amended, the "BAA Loan Agreement"), allows us to borrow up to $1,100,000, which is the maximum that may be outstanding at any one time. Under the BAA Loan Agreement, we granted BAA a first priority security interest in all of our accounts, instruments, documents, general intangibles, equipment, inventory, and proceeds of any of the foregoing. We pay all amounts that we receive from collections of our accounts receivable to BAA not less frequently than each week until the outstanding loan amount plus interest, which accrues at a 12% annual rate, is fully paid. Under the terms of the BAA Loan Agreement, originally BAA received a warrant for the purchase of 1.3 million shares of common stock, at an exercise price of $0.22 per share. In consideration for increasing the amount of available funds, the Company agreed to issue an additional warrant to BAA for the purchase of 400,000 shares of our common stock, at an exercise price of $1.25 per share. We believe that the borrowing arrangements we made with BAA were on terms at least as favorable to us as we would have expected from lenders unrelated to us and relatives of Mr. Kruy. F-19 44 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 and 2005 (Continued) (11) Related Party Transactions - Continued In April through July 2002, we borrowed $125,000 from Joseph F. Kruy and $50,000 from Richard E. Calvert. We also entered into separate Loan and Security Agreements with Messrs. Kruy and Calvert. Our payment obligations under these Loan and Security Agreements (the "2002 Loan Agreements") are evidenced by 12% Notes due in April through July 2003. Under the 2002 Loan Agreements, we granted each of Messrs. Kruy and Calvert a first priority security interest in all of our accounts, instruments, documents, general intangibles, equipment, inventory, and proceeds of any of the foregoing. Under the terms of the 2002 Loan Agreements, Messrs. Kruy and Calvert received a warrant to purchase up to one share of common stock for each dollar loaned to us, at an exercise price of $0.25 per share. We believe that the borrowing arrangements we made with Mr. Kruy and others were on terms at least as favorable to us as we would have expected from lenders unrelated to us. In June through August 2003, we borrowed $200,000 from Joseph F. Kruy. We also entered into Loan and Security Agreements with Mr. Kruy. Our payment obligations under these Loan and Security Agreements (the "2003 Loan Agreements") are evidenced by 12% Notes due in June through August 2004. Under the 2003 Loan Agreements, we granted Mr. Kruy a first priority security interest in all of our accounts, instruments, documents, general intangibles, equipment, inventory, and proceeds of any of the foregoing. We believe that the borrowing arrangements we made with Mr. Kruy were on terms at least as favorable to us as we would have expected from lenders unrelated to us. As of December 31, 2006, the balance outstanding under these Loan Agreements is $275,000 of which $225,000 is owed to Joseph F. Kruy and $50,000 is owed to Richard E. Calvert. F-20 45 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAMBEX CORPORATION By: /s/Joseph F. Kruy Joseph F. Kruy, President March 30, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated as of March 30, 2007. By: /s/ Joseph F. Kruy Joseph F. Kruy, Chairman of the Board, President (Principal Executive Officer) By: /s/ Robert J. Spain Robert J. Spain, Director By: /s/ C. V. Ramamoorthy C. V. Ramamoorthy, Director 46 EX-21.1 2 sublist.txt List of Subsidiaries Subsidiary Jurisdiction Cambex Securities Corporation Massachusetts Cambex UK Ltd. England EX-31.1 3 cert.txt Certifications: I, Joseph F. Kruy, certify that: 1. I have reviewed this annual report on Form 10-KSB of Cambex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 30, 2007 /s/ Joseph F. Kruy Joseph F. Kruy President and Treasurer (principal executive officer and principal financial officer) EX-32.1 4 cert32.txt Exhibit 32.1 Form of Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, Joseph F. Kruy, the chief executive officer and chief financial officer of Cambex Corporation, certify that (i) This annual report on Form 10KSB for the fiscal year ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) The information contained in this annual report on Form 10KSB fairly presents, in all material respects, the financial condition and results of operations of Cambex Corporation. Dated: March 30, 2007 /s/ Joseph F. Kruy Joseph F. Kruy President and Treasurer [principal executive officer and principal financial officer] This certification accompanies this annual report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 10 of the Securities Exchange Act of 1934, as amended. EX-99.1 5 riskfactors.txt RISK FACTORS Risks Related to Our Business We have developed relationships with potential OEM, distribution channel and end user customers and a decision by any one of these potential customers not to purchase our products, or any cancellation or delay of orders that may be placed by any of these potential customers may have a significant and adverse affect on our net revenues Historically, a limited number of OEMs, distribution channel and end user customers have accounted for a significant majority of our total net revenues in each fiscal period. For example, sales to our top five customers accounted for approximately 88% and 62% percent of net revenues for the fiscal years ended December 31, 2006 and 2005, respectively. We have established relationships with a small number of potential OEM, distribution channel and end user customers. If any one of these potential customers decides not to purchase our products or decides to purchase our products in quantities that are below our expectations, then our net revenues will be adversely affected. We have and expect to continue to experience substantial period-to-period fluctuations in future operating results because, among other factors, we depend to a significant extent upon revenues from a small number of customers. Our sales cycle typically involves a lengthy qualification cycle during which there is a need to expend significant resources in addressing customer specifications. Because of the length of the sales cycle, we may experience a delay between increasing expenses for research and development and sales and marketing efforts and the generation of higher revenues, if any, from such expenditures. The purchase of our products or of solutions that incorporate our products typically involves significant internal procedures associated with the evaluation, testing, implementation and acceptance of new technologies. This evaluation process frequently results in a lengthy sales process, typically ranging from three months to longer than a year, and subjects the sales cycle associated with the purchase of our products to a number of significant risks, including budgetary constraints and internal acceptance reviews. The length of our sales cycle also varies substantially from customer to customer. Because we anticipate that none of our potential customers will be, and none of our current customers are, contractually obligated to purchase any fixed amount of products from us in the future, they may stop placing orders with us at any time, regardless of any forecast they may have previously provided. If any of our significant customers stop or delay purchases, our revenues and operating results would be adversely affected, which could cause our stock price to decline. We cannot be certain that we will retain our current OEM, distribution channel or end user customers or that we will be able to recruit additional or replacement customers. As is common in an emerging technology industry, agreements with OEMs and distribution channel customers are typically non-exclusive and often may be terminated by either party without cause. Moreover, many OEM and distribution channel customers carry competing product lines. If we were to suddenly lose one or more important OEM, distribution channel or end user customers or potential customers to a competitor, our business, operating results or financial condition could be materially adversely affected. Moreover, OEM customers could develop products internally that would replace our products. The resulting reduction in sales of our products to any OEM customers, in 1 addition to the increased competition presented by these customers, could have a material adverse effect on our business, operating results or financial condition. The failure of OEM customers to keep pace with rapid technological change and to successfully develop and introduce new products could adversely affect our net revenues Our ability to generate increased revenues depends significantly upon the ability and willingness of OEM customers to develop and promote products on a timely basis that incorporate our technology. If OEM customers do not successfully develop and market the solutions that incorporate our products, then sales of our products to OEM customers will be adversely affected. The ability and willingness of OEM customers to develop and promote such products is based upon a number of factors beyond our control. Delays in product development could adversely affect our market position or customer relationships We have experienced delays in product development in the past and may experience similar delays in the future. Given the short product life cycles in the markets for our products, any delay or unanticipated difficulty associated with new product introductions or product enhancements could cause us to lose customers and damage our competitive position. Prior delays have resulted from numerous factors, such as: changing product specifications; difficulties in hiring and retaining necessary personnel; difficulties in reallocating engineering resources and other resource limitations; lack of adequate capital to fund product development efforts; difficulties with independent contractors; changing market or competitive product requirements; unanticipated engineering complexity; undetected errors or failures in software and hardware; and delays in the acceptance or shipment of products by customers. We expect the average selling prices and associated gross margins of our products to continue to decrease, which may reduce our revenues or gross profits The markets for memory, fibre channel connectivity and disk storage products have experienced erosion of average selling prices and gross margins due to a number of factors, including competitive pricing pressures and rapid technological change. The gross margins for our memory products is lower than the gross margins for our fibre channel connectivity and disk storage products. We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We anticipate that the average selling prices of our products will decrease in the future in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Therefore, to maintain our gross margins, we must develop and introduce on a timely basis, new products and product enhancements and continually reduce our product costs. Our failure to do so would cause our 2 revenue and gross margins to decline, which could materially adversely affect our operating results and cause the price of our common stock to decline. If our business improves rapidly, our operations may be negatively impacted and we may be required to incur substantial costs to upgrade our infrastructure. We may need additional working capital financing and we may not be able to obtain such financing If our business expands rapidly, then a significant strain may be placed on our resources. Unless we manage such growth effectively, we may make mistakes in operating our business such as inaccurate sales forecasting, incorrect material planning or inaccurate financial reporting, which may result in unanticipated fluctuations in our operating results. Our management team has had limited experience managing rapidly growing companies on a public or private basis. We may not be able to install adequate control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. The loss of or failure to attract and retain key technical, sales and marketing and managerial personnel could adversely affect our business Our success depends to a significant degree upon the performance and continued service of engineers involved in the development of our memory and fibre channel technology and technical support of products and customers. Our success also depends to a significant degree upon the continued contributions of our key management, sales and marketing and manufacturing personnel. Accordingly, our future success depends upon our ability to attract, train and retain such technical, sales and marketing and managerial personnel. Except for an employment agreement with Joseph F. Kruy, our Chairman, President and Chief Executive Officer, we do not have employment agreements with any of these personnel. We do not maintain key person life insurance on any of our personnel. As we further develop our product line we will need to increase the number of sales and marketing personnel as well as technical staff members with experience in hardware and software development. We are currently seeking to hire additional skilled experienced sales personnel. Competition for such highly skilled employees in our industry is intense, and we cannot be certain that we will be successful in recruiting or retaining such personnel. Our employees may leave and subsequently compete against us. The loss of key employees could have a material adverse effect on our business, operating results or financial condition. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Insiders have and will continue to have substantial control over us and could delay or prevent a change in our corporate control, which may negatively affect your investment Our officers and directors control the vote of approximately 25.3% of the outstanding shares of our common stock prior to the exercise of any outstanding warrants or options or the issuance of shares issuable upon the conversion of Series A Preferred stock held by them. As a result, they may be able to significantly influence all matters requiring approval by our stockholders, including the election of directors. 3 Because we rely on a limited number of third party suppliers and manufacturers, and failures by any of these third parties to provide key components or to manufacture and assemble products of sufficient quality and quantity could cause us to delay product shipments, which could result in delay or lost revenues or customer dissatisfaction Advanced Printed Circuit Technology fabricates our printed circuit boards, and various subcontractors, such as Circuit Technology, Inc., perform assembly of our memory and host bus adapters boards. We have no long-term contracts with Advanced Printed Circuit Technology or Circuit Technology, Inc. Also, key components that we use in our products may, from time to time, only be available from single sources with which we do not have long-term contracts. In particular, QLogic Corporation is currently the sole supplier of certain components in certain of our host bus adapters. The components we use for our products are based on an emerging technology and may not be available with the performance characteristics or in the quantities that we require. Accordingly, our major suppliers are not obligated to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order. Moreover, any inability to supply products due to a lack of components or to redesign products to incorporate alternative components in a timely manner could materially adversely affect our business, operating results or financial condition. If any of our third-party manufacturers experiences delays, disruptions, capacity constraints or quality control problems in its manufacturing operations, then product shipments to our customers could be delayed, which would negatively impact our net revenues, competitive position and reputation. We have no long-term integrated circuit device supply contracts and are dependent on a small number of suppliers to supply integrated circuit devices, which represent approximately 90% of our component costs. Our dependence on a small number of suppliers and our limited number of long-term supply contracts expose us to several risks, including the inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Micron Semiconductor Electronics and Samsung Semiconductor currently supply a majority of the DRAM integrated circuit devices used in our DRAM memory products. A disruption in or termination of our supply relationship with any of these significant suppliers by natural disaster or otherwise, or our inability to develop relationships with new suppliers, if required, would cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with our customers, and would increase our costs and/or prices. Our business would be harmed if we fail to effectively manage the manufacture of our products. Because we place orders with our suppliers and manufacturers based on our forecasts of expected demand for our products, if we inaccurately forecast demand, we may be unable to obtain adequate manufacturing capacity or adequate quantities of components to meet our customers' delivery requirements, or we may accumulate excess inventories. We may in the future need to find new suppliers and contract manufacturers in order to increase our volumes or to reduce our costs. We may not be able to find suppliers or contract manufacturers that meet our 4 needs, and even if we do, qualifying a new contract manufacturer and commencing volume production is expensive and time consuming. If we are required or elect to change suppliers or contract manufacturers, we may lose revenues, and our customer relationships may suffer. We may be unable to maintain a steady supply of components The electronics industry has experienced in the past, and may experience in the future, shortages in IC devices, including DRAM, and SRAM memory. We have experienced and may continue to experience delays in component deliveries and quality problems, which have caused and could in the future cause delays in product shipments. In addition, we have required and could in the future require the redesign of some of our products. In addition, industry capacity has, from time to time, become constrained such that some vendors, which supply components for our products have placed their customers, ourselves included, on allocation. This means that while we may have customer orders, we may not be able to obtain the materials that we need to fill those orders in a timely manner. Our products are complex and may contain undetected hardware, firmware or software errors or may fail to achieve interoperability standards that could lead to an increase in our costs, reduce our net revenues, or damage our reputation In order to satisfy our customers, the solutions that we design require several different products to work together in a seamless fashion. Our solutions may fail to achieve various interoperability standards necessary to satisfy our customers. Moreover, products as complex as ours frequently contain undetected hardware, firmware or software errors when first introduced or as new versions are released. We have from time to time found errors in existing products, and we may from time to time find errors in our existing, new or enhanced products. Failure to achieve interoperability among products or the occurrence of hardware, firmware or software errors in various products could adversely affect sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, cause significant customer relations problems and could result in product returns and loss of revenue. Steps taken to protect our intellectual property may not be adequate to protect our business, and if so, we may be unable to compete effectively We primarily rely on unpatented trade secrets to protect our proprietary rights. We seek to protect these secrets, in part, through confidentiality agreements with employees, consultants, and our customers and potential customers. If these agreements are breached, or if our trade secrets become known to, or are independently developed by competitors, we may not have adequate remedies for such breach. We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain such technology as trade secrets. In addition, the laws of some of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same 5 extent as the laws of the United States, or at all. Our failure to protect our intellectual property rights could have a material adverse effect on our business, operating results or financial condition. We may become involved in costly and lengthy patent infringement or intellectual property litigation which could divert management attention, cause us to incur significant costs and prevent us from selling our products We may receive communications from third parties alleging infringement of patents or other intellectual property rights, and there is the chance that third parties may assert infringement claims against us. Any such claims, with or without merit, could result in costly and time-consuming litigation or cause product shipment delays that would adversely affect our business, financial condition or operating results. It is possible that holders of patents or other intellectual property rights may assert rights that apply broadly to our industry, and that such patent or other intellectual property rights, if valid, may apply to our products or technology. These or other claims may require us to stop using the challenged intellectual property or to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. Our business, operating results or financial condition could be materially adversely affected if we were to fail to obtain such royalty or licensing agreements in a timely manner or on reasonable terms. Failure to comply with governmental regulations by our OEM customers or us could reduce our sales or require design modifications Our products are subject to U.S. Department of Commerce and Federal Communications Commission regulations as well as various standards established by various state, local and foreign authorities. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic foreign regulatory approvals or certificates, could materially harm our business by reducing our sales or requiring design modifications to our products or the products of OEM customers. U.S. export laws also prohibit the export of our products to a number of countries deemed by the United States to be hostile. These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market than we or our customers are. The U.S. government may not approve future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised. Our quarterly operating results are volatile and may cause our stock price to fluctuate and the price of our common stock could fall if quarterly results are lower than investor expectations and you may lose all or part of your investment Our revenues and operating results have varied on a quarterly basis in the past and are likely to vary significantly from quarter to quarter in the future. The variations in our revenues and operating results are due to a number of factors, many of which are outside of our control, including among others: 6 Changes in our operating expenses; Our ability to develop and market new products; The ability of our contract manufacturers and suppliers to produce and supply our products in a timely manner; The market acceptance of our new memory and fibre channel products; The timing of the introduction or enhancement of products by us, OEM and distribution channel customers, and competitors; The level of product and price competition; Our ability to expand our relationship with OEMs, distribution channel and end user customers; Activities of and acquisitions by our competitors; Changes in technology, industry standards or consumer preferences; Changes in the mix of products sold, as our fibre channel connectivity products typically have higher margins than our memory and disk array products; Personnel changes; Changes in customer budgeting cycles and the timing of their purchase decisions; and General economic conditions. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance. It is possible that in some future periods our operating results will be below the expectations of investors. In this event, the price of our common stock will likely decline. We generally do not have a significant backlog of unfilled orders. As a result, our revenues in a given quarter depend substantially on orders booked in that quarter. A decrease in the number of orders we receive is likely to adversely and disproportionately affect our quarterly operating results. Our expense levels are partially based on our expectations of future sales. Therefore, our expenses may be disproportionately large as compared to sales in a quarter with reduced orders. As a result, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any shortfall in sales in relation to our quarterly expectations or any delay of customer orders would likely have an immediate and adverse impact on our business, quarterly operating results and financial condition. Risks Related to Our Industry We are subject to the cyclical nature of the semiconductor industry and continued deterioration of the current cycle could adversely affect our business The semiconductor industry, including the memory markets in which we compete, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns in the past and is currently experiencing a significant downturn that may get worse. Industry downturns are often connected with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been 7 characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. The continuation or worsening of the current downturn in the industry and any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our integrated circuits. Such shortages could have a material adverse effect on our business and operating results. Our operating results may suffer because of increasing competition in the memory and fibre channel connectivity markets The market in which we compete is intensely competitive. As a result, we face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Our competitors continue to introduce products with improved price/performance characteristics, and we will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business, operating results and financial condition. We cannot be certain that we will be able to compete successfully against either current or potential competitors in the future. Many of our current and potential competitors have substantially greater financial, technical, marketing and distribution resources than we have. We face the threat of potential competition from new entrants into the memory market, including large technology companies that may develop or acquire differentiating technology and then apply their resources, including established distribution channels and brand recognition, to obtain significant market share. It is also possible that we will face increased competition due to mergers or consolidations of existing or potential competitors. Emerging companies attempting to obtain a share of the existing market act as potential competition as well. We may not be able to maintain or improve our competitive position because of the intense competition in our industry We conduct business in an industry characterized by intense competition, rapid technological change, evolving industry standards, declining average sales prices and rapid product obsolescence. Our competitors include many large domestic and international companies that have substantially greater financial, technical, marketing, distribution and other resources, broader product lines, lower cost structures, greater brand recognition and longer- standing relationships with customers and suppliers. As a result, our competitors are able to respond better to new or emerging technologies or standards and to changes in customer requirements. Our competitors are able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price. We expect to face competition from existing competitors and new and emerging companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features. In addition, some of our significant suppliers are also our competitors, many of whom have the ability to manufacture competitive 8 products at lower costs as a result of their higher levels of integration. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally. Competition may arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We expect our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of our products. In addition, our competitors may develop enhancements to or future generations of competitive products that may render our technology or products obsolete or uncompetitive. In our industry, technology and other standards change rapidly, and we may be unable to keep pace with changes and could hinder our ability to compete effectively The market for our products is characterized by rapidly changing technology, evolving industry standards and the frequent introduction of new products and enhancements. If we do not keep pace with these changes, we may lose market share to our competitors and fail to meet our financial and operational objectives. Because many of our products are designed to work with software produced by third parties, our operating results could be adversely affected if such third parties delay introduction of new versions of their software for which we have designed new products or if they make unanticipated modifications to such software. Our future success depends in a large part on our ability to enhance our existing products and to introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards. We cannot be certain that we will be successful in designing, supplying and marketing new products or product enhancements that respond to such changes in a timely manner and achieve market acceptance. We also cannot be certain that we will be able to develop the underlying core technologies necessary to create new products and enhancements, or that we will be able to license the core technologies from third parties. Additionally, changes in technology and customer preferences could potentially render our current products uncompetitive or obsolete. If we are unable, for technological or other reasons, to develop new products or enhance existing products in a timely manner in response to technological and market changes, our business, operating results and financial condition would be materially adversely affected. Risks Related to the Securities Markets The application of the "penny stock rules" could adversely affect the market price of our common stock On March 22, 2007, the last sales price of our common stock was $0.15. Because the trading price of our common stock is less than $5.00 per share 9 and our common stock no longer trades on the Nasdaq National Market, our common stock comes within the definition of a "penny stock." The "penny stock rules" impose additional sales practice requirements on broker-dealers who sell our securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, broker-dealers must satisfy certain additional administrative criteria in order to effectuate sales of our common stock, including disclosure of the broker-dealer's compensation received for such transaction, any compensation received by a person associated with the broker-dealer for this transaction and disclosing certain information to the investor in writing. These additional burdens imposed on broker-dealers may restrict the ability of broker-dealers to sell our securities and may affect your ability to resell our common stock. Among the requirements of transacting in penny stock is that broker-dealers effecting transactions in penny stock are required to deliver to the investors, a document containing specific information about penny stock, and to receive a manually signed and dated acknowledgement of receipt of such document from investors, prior to effecting such transactions. Such requirements may have the effect of making your investment in our common stock less liquid because the rules will decrease the number of potential investors and thereby reducing demand for our stock. The issuance of shares to SovCap Equity Partners, Arab Commerce Bank, and others may cause significant dilution in the value of our common stock The issuance of shares of our common stock to SovCap Equity Partners and Arab Commerce Bank will dilute the equity interest of existing stockholders and could have an adverse effect on the market price of our common stock. As of December 31, 2006, we had 4,085,390 shares of common stock reserved for possible future issuances upon, among other things, the conversion of the series 1 bridge financing note held by Arab Commerce Bank, the conversion of Series A Preferred shares, and the exercise of outstanding options and warrants. We may seek additional financing, which would result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. Additional issuances of capital stock would result in a reduction of current shareholders' percentage interest in Cambex. If the exercise price of any outstanding options or warrants is lower than the price per share of common stock at the time of the exercise, then the price per share of common stock may decrease because the number of shares of common stock outstanding would increase without a corresponding increase in the dollar amount assigned to stockholders' equity. The addition of a substantial number of shares of common stock into the market, including those issuable upon conversion of the Series A Preferred shares, or by the registration of any other of our securities under the Securities Act may significantly and negatively affect the prevailing market price for our common stock. Furthermore, future sales of shares of common stock issuable upon the exercise of outstanding options and warrants may have a depressive effect on the market price of the common stock, as these warrants and options would be more likely to be exercised at a time when the price of the common stock is in excess of the applicable exercise price. 10 Our stock price is volatile and may drop unexpectedly, which could cause you to lose all or part of your investment The stock market in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. Changes in general economic conditions or developments in the data storage, technology, and personal computer and workstation markets that affect investor confidence could have a dramatic impact on the market price of our common stock. Also, changes in estimates of our earnings as well as any of the factors described in this "Risk Factors" section could have a significant impact on the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. We may be a target of such litigation in the future. If we become the subject of securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources and could seriously harm our business, financial condition and results of operations. We may engage in future acquisitions that dilute our stockholders' equity and cause us to incur debt or assume contingent liabilities We may pursue acquisitions that could provide new technologies or products. Future acquisitions may involve the use of significant amounts of cash, potentially dilutive issuances of equity or equity-linked securities, the incurrence of debt, or amortization expenses related to goodwill and other intangible assets. In addition, acquisitions involve numerous risks, including: difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; the diversion of management's attention from other business concerns; risks of entering markets in which we have no or limited prior experience; and the potential loss of key employees of the acquired company. In the event that such an acquisition does occur and we are unable to successfully integrate businesses, products, technologies or personnel that we acquire, our business, operating results or financial condition could be materially adversely affected. If you invest in our common stock, you should not expect to receive a current return because we do not pay, and have no foreseeable plans to pay cash dividends on our common stock We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the growth and expansion of our business and for general corporate purposes. 11 -----END PRIVACY-ENHANCED MESSAGE-----