-----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, Gkhe91mSwqbkWUioT03cY6tGpIjkkfSL0pFF6nQWbKSDDHFYf/ye6pp0PlwgrX65 Oo5m2IKO6Z/SKo3Qr0Y/fg== 0000910680-96-000164.txt : 19960701 0000910680-96-000164.hdr.sgml : 19960701 ACCESSION NUMBER: 0000910680-96-000164 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROFRAME INC CENTRAL INDEX KEY: 0000754813 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 222413505 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13117 FILM NUMBER: 96588142 BUSINESS ADDRESS: STREET 1: 21 MERIDIAN RD CITY: EDISON STATE: NJ ZIP: 08820 BUSINESS PHONE: 2014944440 MAIL ADDRESS: STREET 1: 21 MERIDIAN RD CITY: EDISON STATE: NJ ZIP: 08820 10KSB 1 FOR YEAR ENDED 3/31/96 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No.: 0-13117 MICROFRAME, INC. ------------------------------------------------------- (Name of Small Business Issuer in Its Charter) New Jersey 22-2413505 - ------------------------------- ----------------------------------- (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 21 Meridian Road, Edison, New Jersey 08820 ------------------------------------ -------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (908) 494-4440 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value --------------- Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_] The issuer's revenues for its most recent fiscal year totaled $6,258,243. The aggregate market value of the voting stock held by non-affiliates computed by reference to the average of the bid and asked prices as reported on NASDAQ as of June 17, 1996 was approximately $6,291,014. There were 4,819,142 shares of Common Stock outstanding as of June 17, 1996. DOCUMENTS INCORPORATED BY REFERENCE None PART I ITEM 1. DESCRIPTION OF BUSINESS. General - ------- MicroFrame, Inc., a New Jersey corporation (the "Company"), founded in 1982, designs, develops and markets a broad range of network management and remote maintenance and security products for mission critical voice and data communications networks. The Company's products provide for alarm monitoring, proactive administration and reporting capabilities which are to be used as a basis for remote network management and maintenance. In addition, by incorporating a variety of hardware and software options for security and user authentication, these products can deter as well as prevent unauthorized dial-in and/or in-band access to network elements and systems (such as computers, local area networks (LANs) and Private Branch Exchange telephone switches ("PBXs")), while allowing authorized personnel access to perform needed administration and maintenance of host devices and networks from remote locations. In May 1993, the Company completed a private placement to accredited investors of an aggregate of 800,000 shares (after giving effect to a reverse stock split as noted below) of common stock, par value $.001 per share, of the Company ("Common Stock") for $1,000,000. In September 1993, the Company effected a one-for-five reverse stock split of the issued and outstanding shares of the Common Stock (the "Reverse Stock Split"). In September 1995, the Company formed a wholly-owned subsidiary, MicroFrame Europe N.V., which in turn acquired all of the issued and outstanding shares of capital stock of European Business Associates BVBA ("EBA") of Brussels, Belgium. In April 1996, the Company completed a private placement (the "1996 Private Placement") to accredited investors of an aggregate of 1,101,467 Units for $1,376,933.75, each Unit consisting of one share of Common Stock and one Class A Warrant and one Class B Warrant, each of which is exercisable into one share of Common Stock at an exercise price of $1.50 and $2.00, respectively. Principal Products and Markets - ------------------------------ The Company has established a strong customer base through the development of a family of modular standards oriented hardware and software components designed to interface with a customer's existing dial-up and/or in-band wide area network communications environment. The Company believes that each of these components, when combined with the programmability as provided by the Company's unique software, support and meet the needs of a wide variety of customer network management and security requirements. The software is designed to permit easy -2- modification, thus allowing customized solutions for monitoring and controlling telemaintenance and/or network access. In other words, Secure Remote Tele-Maintenance. The Company develops and markets a broad range of security, network management and remote maintenance products for voice and data communications networks. The Company's products are based upon a family of hardware and software components which, combined with a uniquely developed software "engine", provide programmability and easy modification. Customized solutions for network access, monitoring and telemaintenance of mission-critical applications can readily be accommodated. New Products and Markets - ------------------------ In fiscal 1996, the Company continued its evolutionary development of products to address the Network Management and Security marketplace and began to introduce a new family of products referred to collectively as SECURE NETWORK SYSTEMS/2000 ("SNS/2000"). This family of industry standards based products is designed to address the growing demand for remote network management of mission critical integrated voice and data networks. The SNS/2000 product family consists primarily of Sentinel 2000, Admin 2000, Manager 2000, Alert 2000 and SeGaSys 2000. These products uniquely integrate security management, remote access, fault management and problem identification/resolution into a powerful suite of network management solutions to monitor, maintain and increase the operational integrity and access to the voice and data network. As telecommunications networks continue to expand to support more and more mission-critical applications, the economic impact of downtime and the importance of secure remote access increases exponentially. According to a recent third party study, "network downtime" can cost companies up to $1,000 per minute in lost revenues and employee productivity. In addition, the technical support staff necessary to administer, support and maintain combined voice and data networks containing a large distributed base of legacy devices, remains distributed and inefficient. Faced with budget constraints and a lack of skilled staff resources due to downsizing programs, network and system managers today are searching for new tools to more effectively manage, secure and control their expanding and increasingly more complex networks. The SNS/2000 family of products provides cost effective solutions to these problems. The products are completely modular by design. Each product element provides a unique stand alone feature/function set enabling one to choose only the products needed to enhance the performance of the existing network management system. Or, for maximum advantage, the elements may be integrated into a comprehensive, secured telemaintenance and remote access control solution customized to specific organizational requirements. SECURE REMOTE TELEMAINTENANCE. One aspect of the SNS/2000 family of products is designed to specifically reduce network "downtime" due to ineffective detection, reporting, handling and resolution of alarm/fault conditions. It also directly addresses the requirement to manage both -3- "legacy" and standards-based communications resources across widely dispersed heterogeneous network environments. The SNS/2000 product set is fully Simple Network Management Protocol ("SNMP") compliant. It offers comprehensive stand alone network management and remote access solutions which can be fully integrated into existing SNMP-based management systems. Its SNMP proxy agent capability enables non-SNMP legacy devices, such as the PBX, to communicate with the SNMP network manager for more cohesive centralized control of all communications resources. SNS/2000 provides redundant, secured access and alarm monitoring to all network resource maintenance ports via both in-band and out-of-band connectivity to increase system reliability. All network access may be channeled through a secure central gateway where users are authenticated and transparently routed only to authorized destinations. Network resources are continually monitored by local intelligent agents to detect alarms and threshold violations. This monitoring includes ensuring that environmental conditions (e.g. temperature, moisture, battery voltage, etc.) at various points in the network are also within preset thresholds. Critical fault conditions are promptly identified and immediately transmitted to the appropriate management center for analysis, trouble ticket generation and corrective action. This enables organizations to improve network availability through proactive response to potential network problems. SECURE REMOTE ACCESS. A second aspect of the SNS/2000 family of products is designed to address a rapidly growing group of telecommuters who are redefining the boundaries of the traditional workplace. They are placing an increasing demand for convenient remote access to network resources. By opening the networks to meet these demands, the networks are left vulnerable to unauthorized entry. Such unauthorized access carries security liabilities and exposure to critical company resources, data and information. In addition, unauthorized users are consuming valuable network bandwidth, thus reducing availability for legitimate users. SNS/2000 offers remote access security solutions for host computers, LANs and wide area networks ("WANs") by providing front-end barriers to unauthorized entry. Access control is managed and monitored via a client/server architecture. Central administration is provided to facilitate ease of administration, monitoring and maintenance. Alerts are issued when user defined events occur. Extensive reporting capabilities are provided which are useful for identifying trends and analyzing network utilization. A wide choice of authentication technologies are supported and, based on operational needs, can easily be incorporated into the Company's remote access security solutions. SNS/2000 FEATURE/FUNCTION/BENEFIT SET. The primary benefits of SNS/2000 include: * SNMP Agent/Proxy Standards-based SNMP Proxy alarm reporting for non-compliant legacy devices. Centralized telemaintenance for both voice and data communications networks. * Alarm Reporting & Evaluation Distributed Rules Based alarm filtering to reduce network bandwidth consumption. Multilevel alarm reporting with programmable escalation to insure prompt response. PBX toll fraud detection and reporting to reduce fraud loss potential. -4- * Remote Maintenance & Monitoring Programmed monitoring of device fault tables to enable proactive maintenance activity. Locally executed auto-recovery procedures to reduce costly downtime. * Security Secured in-band/out-of-band maintenance access to insure network integrity. Secured remote telecommuting access to eliminate unauthorized network access. * Graphical User Interface ("GUI") Based System Central GUI based system administration for convenient system management. * Controlled Access & Ethernet Capabilities Controlled vendor access for secure out-of-band device servicing. Ethernet and dial access allowing for redundant access/reporting paths for increased network reliability. Distributed intelligent device controllers for reduced bandwidth utilization. * Buffering/Database Capabilities Central relational database with ad hoc report generation for convenient activity/utilization analysis. Buffering system for storage/retrieval of data (i.e. CDR Records, Critical Logs, etc.) SENTINEL 2000. The flagship member of the Company's new family of SNS/2000 products. In the first quarter of fiscal 1997, the Company introduced the Sentinel 2000. The Sentinel 2000 is a stand-alone, secure multi-port programmable Remote Site Manager. It is complete with integrated application software designed to provide security, monitor and control remote voice and data network devices via their out-of-band dial-up maintenance ports as well as via in-band Ethernet connectivity. The system provides device alarm/fault monitoring and reporting, SNMP management and SNMP proxy functionality, PCMCIA high speed modem(s) plus Ethernet connectivity, environmental monitoring and control, and secured in-band/out-of-band access to device maintenance and control ports. Sentinel 2000 is a comprehensive site management solution that facilitates convenient, reliable, centralized telemaintenance of global voice and data networks. An extremely powerful, robust and comprehensive offering, based on the Motorola 68360 Multi controller processor chip, the Sentinel 2000 is easily administered and maintained with the Company's new GUI Administration software, Admin 2000. Sentinel 2000 integrates a wide range of applications which provide for robust Remote Network Management of a wide range of network elements (either directly or via an SNMP proxy function), Access Security, Alarm Management, Environmental Monitoring and Control, PBX Toll Fraud Detection and Remote Device Reboot Facility. -5- Other Products and Markets - -------------------------- The Company's first major product success, the DL-4000(TM), was introduced in 1986 and is designed to protect mainframe computers from unauthorized dial-up access. Since that time, more than 1,000 units have been installed worldwide and the product continues to be a part of the Company's product offering. Recognizing that organizations were restructuring data processing away from centralized mainframes and into various network configurations, the Company re-engineered its original fixed-function, "black box" product into a flexible, programmable hardware/software system capable of securing access at a wide variety of "nodes" in the network. The foundation of this re-design was the development of a proprietary software "engine," which maximizes the programmability of the hardware, defining and controlling the functions to be performed by various hardware components. Beginning in 1991, the Company determined that an additional related market opportunity was developing with the proliferation of PBXs, voice mail systems and other privately-owned voice communications systems and security devices. The Company believes that theft of long distance telephone services ("toll fraud") through unauthorized access to these devices has resulted in substantial losses and thus the support of PBXs through the development and marketing of data communications security products is a good business to be engaged in due to customer demands for greater system reliability, protection against toll fraud and security against network intrusion. A vulnerability of these systems results from the fact that PBXs and other devices used in the voice communications system have what are referred to as remote maintenance and administrative "ports." These ports permit a system administrator or maintenance personnel to "dial in" or gain access to a device electronically, by telephone, and to monitor and, if necessary, change or manipulate the software and hardware embedded in the equipment. This can all be accomplished without having to be physically present at the site where the equipment is located. Without proper security, an unauthorized user can gain access to a system through one of these ports, a potential exposure of PBX customers to toll fraud. With a remote maintenance facility, PBX and other telecommunications product vendors can respond to and provide their customers with cost-effective solutions that address the customers demand for highly responsive service for their products. After initiating discussions with major PBX suppliers, the Company developed a group of products, referred to as "Intelligent Port Controllers" ("IPC"), designed to provide security for these dial access remote ports. Among these products are a Remote Port Security Device (RPSD(TM)), which was designed and manufactured exclusively for AT&T, beginning in 1991 and the Secure Sentinel(TM) family of devices, which were introduced by the Company in 1992. The RPSD is provided on an original equipment manufacturer ("OEM") basis under AT&T's own label, as a security device for AT&T's Definity PBX. Over 13,100 RPSD units have been shipped to AT&T since 1991 and the Company has begun shipping the product to other customers as well. -6- The Secure Sentinel is a family of programmable hardware platforms which combine security management of remote maintenance ports, protection against toll fraud, a comprehensive range of fault and alarm reporting functions and real-time call detail record analysis. Since its introduction, the Company has expanded both the number of models offered and the functionality of each, shipping more than 9,000 units which has accounted for more than $10,500,000 in revenue. During fiscal 1996, sales from the Secure Sentinel product line were responsible for approximately 50% of the Company's overall revenue. Beginning in fiscal 1993, the Company began offering a new product, the Secured Database Server (SDS(TM)). Like the DL-4000, this is a programmable system designed to prevent unauthorized dial-in access to a computer or data communications network. The SDS, however, incorporates the technology of the DL-4000 in a personal computer, allowing storage of greater amounts of user data, which permits a customer to both monitor a greater number of users and to store more detailed identification data about each user. The SDS also incorporates redundant processor elements, reducing the possibility of system down-time. This product is thus suitable for protecting significantly larger systems and is currently implemented by MCI to provide secured access for network administration of over 500 of its long distance service switching facilities, as well as for Chemical Bank, Key Corp., Lockheed/Marietta and other major companies worldwide. Building on the SDS, in fiscal 1994, the Company introduced the Secured Gateway System (SeGaSys(TM)), designed to provide centrally controlled access to and administration of a large number of remotely located maintenance ports on both voice and data communications devices. It consists of a "communication firewall" or secured gateway which controls and routes all access to remote port destinations, a central database management server which uses the SDS software to administer and control user access and resource authorizations, remote security modems and/or alarm reporting devices which provide fault/alarm management capabilities. SeGaSys effectively manages a number of Secure Sentinel devices located at remote locations which provide the security, alarm monitoring and reporting for those locations. The Company believes its products are well positioned to take advantage of what it perceives as current trends in data communications and voice communications networks. In the Company's view, organizations are seeking to increase productivity by providing sophisticated communications networks which connect all of their separate units, whether locally, nationally or internationally. As the price of equipment decreases and power increases, such networks become possible for more and more groups, regardless of size, and it becomes feasible to introduce sophisticated networks into technologically less advanced regions. At the same time more of the organizations' data and other resources are being made available to more users by means of these systems. Since many of these networks utilize dial-in lines, the Company believes that the security and network management issues resulting from this growth will generate demand for the Company's products. -7- Security - -------- The DL-4000 can be used to secure dial-up access to any host computer, LAN or WAN by monitoring and centrally administering up to 4,096 dial-up "ports" or telephone access points located in up to 256 locations. The SDS, as noted above, expands the number of users and other features of the DL-4000 by incorporating the same technology into a personal computer. Using "open system" software, the products allow the system administrator to configure each channel separately with one or more access control technologies as required by the application assigned to the channel or as preferred by the user. The IPC family of products - the Secure Sentinel and the RPSD, are designed to secure the maintenance and administration ports on PBX, voice mail and other voice communications equipment. In addition to preventing unauthorized access through these ports, the Secure Sentinel can be customized to provide the following features: SECURITY MANAGEMENT: The Secure Sentinel can monitor a host device's internal diagnostic routines and fault tables, determine if a particular alarm condition exists and execute appropriate reporting procedures or take corrective actions. PBX TOLL FRAUD/ABUSE CONTROL: PBXs and voice mail systems frequently permit dial-in users access to outbound trunk lines to enable users to take advantage of a Company's WATS lines or similar services. However, abuse of these services can result in substantial charges. The Secure Sentinel can be programmed to monitor and analyze all dial-in call activity to determine if current activity exceeds specified parameters or selected criteria indicative of potential toll fraud or abuse. If the activity exceeds the parameters, the system issues an alarm to the appropriate personnel or initiates protective procedures. Both the DL-4000 and the SDS incorporate a comprehensive, high level programming language and program editor developed specifically for these products, which is referred to as the Communication Control Language ("CCL"). This language allows the standard program incorporated in each Channel Control Card monitoring an individual dial-in line to be modified or enhanced easily to meet specific customer requirements. The incorporation of CCL into these products also facilitates the introduction of additional product enhancements. Network Management - ------------------ As noted above, widely distributed data communications networks may incorporate numerous devices with dial-in ports. The Company offers a software module, SeGaSys, with the DL-4000 and the SDS which permits a central device to control access to all ports on the network. All maintenance providers and others authorized to service or administer devices in the system dial a single telephone number for access. Upon successful validation of access for the requested device, the user is automatically routed to the target device by SeGaSys. This eliminates the security risk -8- inherent in providing lists of telephone numbers and access codes for numerous devices and reduces the burden of administering many remotely located security devices. Once authenticated and routed, the transaction (including session activity, if desired), is logged to a central database, available for audit review and analysis. Remote Maintenance - ------------------ The requirement for increased service levels, especially as they relate to mission-critical systems like PBXs has created a market for alarm monitoring systems to emerge. Alarm monitoring systems monitor host device's internal diagnostic routines and fault tables, determine alarm status, and automatically execute appropriate reporting and/or corrective action procedures. ALARM MONITORING: With the Secure Sentinel, alarms are transmitted to a single or multiple PCs, personal pagers, etc. and alarm reporting can be escalated to ensure timely response. The Secure Sentinel also allows programmed administration of the host device via the maintenance port connection. ENVIRONMENTAL MONITORING AND CONTROL: Since communications equipment is sensitive to changes in the physical environment, the Secure Sentinel can be enhanced to monitor changes in temperature, humidity, moisture, battery voltage, LED indicators and other similar environmental indicators to determine if current trends exceed pre-set limits. If such limits are exceeded, the device can be programmed to issue an appropriate alarm or take corrective action using multiple internal relays to activate necessary environmental controls. ALARM REPORTING: This provides for automatic transmission of information regarding network status, alarms, etc. It allows for automatic escalation of alarms when there is no response. Information may be automatically transmitted to computers via modem, or to humans via pager and recorded voice. "HELP DESK" ENHANCEMENTS: Most data networks include a "help desk" operator, a resource available to assist other personnel and to resolve network problems encountered by dial-in users. The Company's proprietary HelpNET(TM) software permits the user to page the help desk terminal and automatically effect an interactive link with the help desk operator when the page is acknowledged. Without leaving the control station, the help desk operator can then directly observe and participate in the user's session with the relevant network device and, if necessary, take temporary command of the session to correct the problem, thus providing more cost-effective corrections than would occur if the help desk operator physically had to visit the device in question or had to "talk the user through" the necessary procedures. -9- Support Services - ---------------- In addition to the normal training, installation and repair services provided for all of its products, the Company also provides its customers with consulting, specialized programing and turnkey installations. Marketing and Distribution - -------------------------- The Company believes that the markets for data communications network management security and voice communications network management security may merge in the near future. Therefore, the Company is approaching each of these markets with an integrated marketing strategy. The SNS/2000 family of products, the DL-4000 and the SDS, data communications security products, have been sold and will continue to be sold to data network security customers through in-house telemarketing efforts and selected distributors. In fiscal 1995, the Company commenced expansion of its direct sales force and its network of distributors into major geographic markets in the United States. As this sales and distribution network is established, the telemarketing effort will be redirected to generate sales leads by the Company and to provide support for the field organization. In addition, the Company will look to continue to expand its channels of distribution via major systems and network outsourcers. With respect to the voice communications security market, the Company recognized that product sales could be effected more economically if major telecommunications companies could be convinced to promote the products to their own customers. The Company has been successful in establishing contractual relations in the United States with AT&T, MCI, Southwestern Bell Communications, Inc. and NORTEL West (formerly Pactel Meridian Systems, Inc.), a Northern Telecom subsidiary. During fiscal 1995, the Company expanded its distribution into Canada through a non-exclusive distribution agreement with TTS Meridian Systems, Inc. of Willowdale, Ontario, another Northern Telecom subsidiary. The Company expects to continue seeking additional arrangements with the other PBX systems vendors and distributors in North America. In connection with the foreign distribution of its products, the Company appointed EBA of Brussels, Belgium in November 1993, as its exclusive sales representative for Europe to provide sales and technical support to the Company's authorized distributors and to directly sell the Company's products to accounts in that region. In September 1995, the Company acquired through MicroFrame Europe NV, its newly formed wholly-owned subsidiary, all of the issued and outstanding shares of capital stock of EBA. In fiscal 1995, the Company signed a five-year agreement with LM Ericsson ("Ericsson") of Stockholm, Sweden, a global telecommunications equipment manufacturer and distributor. Ericsson has qualified for use and will promote the Company's Secure Sentinel products with Ericsson PBX equipment, worldwide, with initial roll-out in Europe, the Pacific Rim and the United States. During fiscal 1995, a three-year distribution agreement was also entered into with Racal Australia PTY, Ltd. ("Racal Australia") of Brookdale, South Wales, Australia, a wholly-owned subsidiary of Racal Electronics, plc of the United Kingdom. Racal Australia, which provides data communications, data security and digital cellular equipment throughout the Pacific Rim, will -10- distribute the Company's product line throughout Australia, New Zealand, Singapore and Hong Kong. Additionally, during fiscal 1995, the Company signed its first distribution agreement in Eastern Europe with Netlink of Prague, in the Czech Republic. With the acquisition of EBA in place and the maturation of the agreements consummated in previous years, the revenues related to the international segment increased from approximately $950,000 (13% of Total Revenues) in fiscal 1995 to approximately $1,300,000 (21% of Total Revenues) in fiscal 1996. Competition - ----------- The market for voice and data network management and security products to control access to computer and telecommunications is highly competitive. There can be no assurance that the proprietary technology which forms the basis for most of the Company's products will continue to enjoy market acceptance or that the Company will be able to compete successfully on an on-going basis. The Company believes that the principal factors affecting competition in the network management and security markets are: (1) the products' ability to meet a multiplicity of network management and security requirements; (2) the products' ability to conform to the network topologies and/or computer systems; (3) the products' ability to avoid technological obsolescence; (4) the willingness and the ability of a vendor to support customization, training, and installation; and (5) the price. Although the Company believes that its present products and services are competitive, the Company competes in its general market with a number of large computer, electronics and telecommunications manufacturers which have financial, research and development, marketing, and technical resources substantially greater than those of the Company. The Company also faces competition from a variety of niche market players. In security situations, they include Security Dynamics, Inc., Digital Pathways, Inc. and the Lee Mah Data Systems Corp. In remote maintenance situations, they include TSB International, Inc. and Teltronics, Inc. Such companies may succeed in producing and distributing competitive products more effectively than the Company can produce and distribute its products, and may also develop new products which compete effectively with those of the Company. Sources and Availability of Materials - ------------------------------------- The Company designs its products primarily utilizing readily available parts manufactured by multiple suppliers and the Company currently relies on and intends to continue to rely on these suppliers. The Company has been and expects to continue to be able to obtain all of the parts required to manufacture its products, without any significant interruption or sudden price increase, although there is no assurance of this. There are cases where the Company is utilizing a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to -11- redesign a feature of the affected device. In these cases, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effectuate a redesign or alternative course of action. Dependence on Particular Customers - ---------------------------------- The Company sells a substantial portion of its products to two customers, AT&T and MCI. Sales to AT&T and MCI represented 23.8% and 24.8%, respectively, of the Company's revenue in fiscal 1996. The loss of either of these customers could have a material adverse effect on the Company's business. Fiscal 1996 was the first time in three years where the total percentage of revenues generated to these two customers fell below 50%. This is attributable to three factors: (1) a reduction in absolute revenues of approximately $1.25M (29%) from year to year from these two customers; (2) an increase in North American revenues, exclusive of these two customers of approximately $50K (3%); and (3) an increase in European revenues of approximately $450K (38%). The Company's installed customer base is estimated to number over 185 companies in more than 2,100 customer sites worldwide. In the United States, virtually all of the Company's customers are Fortune 1,000 industrial companies and large U.S. financial institutions. Customers in the U.S. represented approximately 79% of the Company's revenue in fiscal 1996. Under an agreement with AT&T, the Company has been manufacturing the RPSD for AT&T's resale to its PBX customers. As of the fiscal year ended March 31, 1996, AT&T had purchased and installed more than 13,100 RPSD units. In fiscal 1996, MCI and the Company expanded their relationship across multiple operating units within MCI, including the unit responsible for outsourcing and MCI's joint venture with British Telecom, known as Concert. Intellectual Property, Licenses and Labor Contracts - --------------------------------------------------- The Company holds no patents on any of its technology. Although it does license some of its technology from third parties, it does not consider any of these licenses to be critical to the Company's operations. The Company has made a consistent effort to minimize the ability of competitors to duplicate the Company's software technology utilized in its products. However, there remains the possibility of duplication of the Company's products and competing products have already been introduced. MicroFrame's name is a registered trademark of the Company filed with the United States Patent and Trademark Office ("PTO"). The Company also has a trademark application pending with the PTO for the Intelligent Port Controller trademark. The Company is awaiting publication from the PTO on the trademarks Secure Sentinel and SeGaSys, provided there is no opposition, these trademarks shall be registered. -12- None of the Company's employees are represented by labor unions. The Company considers its relations with its employees to be satisfactory. Governmental Approvals Required and Effect of Government Regulation - ------------------------------------------------------------------- Due to the sophistication of the technology employed in the Company's devices, export of the Company's products is subject to governmental regulation. As required by law or demanded by customer contract, the Company routinely obtains approval of its products by Underwriters' Laboratories. Additionally, because many of the Company's products interface with telecommunications networks, its products are subject to several key Federal Communications Commission ("FCC") rules and thus FCC approval is necessary as well. Part 68 of the FCC rules contains the majority of the technical requirements with which telephone systems must comply to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration represents a determination by the FCC that telecommunication equipment interfacing with the public telephone network complies with certain interference parameters and other technical specifications. FCC Part 68 registration for the Company's products has been granted and the Company intends to apply for FCC Part 68 registration for all of its new and future products. Part 15 of the FCC rules requires equipment classified as containing a Class A computing device to meet certain radio and television interference requirements, especially as they relate to operation of such equipment in a residential area. Certain of the Company's products are subject to and comply with Part 15. The European Community is developing a similar set of requirements for its members and the Company has begun the process of compliance for Europe. Although the Company has not experienced any difficulties obtaining such approvals, failure to obtain approval for new and future products could have a material adverse effect on the Company's business. The Company has obtained licenses to export certain of its products in limited quantities to Sweden, Norway, Switzerland, South Africa, the United Kingdom, France, Italy, Germany, Australia and Singapore. Research and Development Activities - ----------------------------------- During fiscal 1996, the Company continued development of its "next generation" of products built on an entirely new architecture to ultimately replace its IPC products - the Secure Sentinel and RPSD - referred to collectively as SNS/2000. As discussed previously, this family of products is designed to address the growing demand for remote network management and security of mission critical integrated voice and data networks. Research and development expenses, net of capitalized software development, were $713,441 in fiscal 1996 and $488,339 in fiscal 1995. -13- Costs of Compliance with Environmental Laws - ------------------------------------------- The Company's business is not subject to regulations involving discharge of materials into the environment. Employees - --------- As of June 17, 1996, the Company has 37 employees of which 36 are full-time employees, and of which 11 are technical personnel, 9 are in sales, marketing and support, 9 are in production and 8 are in executive, financial and administrative capacities. ITEM 2. DESCRIPTION OF PROPERTY. The Company currently leases 8,900 square feet of space at 21 Meridian Road, Edison, New Jersey for its administrative, sales and marketing, and research and development functions. The Lease provides for a monthly rental of $5,412.50 and shall expire on June 30, 1999. The Company has amended the Lease to rent an additional 2,000 square feet of office space and an additional 2,600 square feet of warehouse space (currently occupied by a third party) commencing January 1, 1997, and terminating June 30, 1999. From the commencement date until June 30, 1997 the total monthly rental shall be $7,916.66 and from July 1, 1997 until June 30, 1999, the total monthly rental shall be $8,125.00. In addition, the Company currently leases 5,112 square feet of space at 300E Corporate Court, South Plainfield, New Jersey for its finance, manufacturing, and warehousing functions. This lease provides for a monthly rental of $3,408.00 and shall expire on June 30, 1999. ITEM 3. LEGAL PROCEEDINGS. In March 1996 the Company received a Notice of Determination from the New York State Department of Taxation and Finance in which a sales tax assessment was made in the sum of approximately $227,391.90, which includes interest and penalties. The Company believes that New York's position is without merit and is vigorously defending its position that no tax is owed. A conciliation conference will take place before the Bureau of Conciliation and Mediation Services of the New York State Department of Taxation and Finance. In the opinion of management of the Company amounts accrued for assessments in connection with sales tax are adequate and the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -14- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information - ------------------ The Company's Common Stock commenced trading on August 17, 1995 on the NASDAQ SmallCap Market under the symbol "MCFR". Prior to that date, the Common Stock was not traded on any registered national securities exchange, although several registered broker-dealers made a market in the Common Stock. The following table sets forth the high and low bid prices of the Common Stock in the over-the-counter market as reported by the National Quotation Bureau through August 16, 1995 and by NASDAQ from August 17,1995 through March 31, 1996. The quotations set forth below do not include retail markups, markdowns or commissions and may not represent actual transactions. HIGH LOW Fiscal 1995 June 30 $3.13 $1.50 September 30 2.50 1.00 December 31 2.00 1.00 March 31 3.00 1.25 Fiscal 1996 June 30 $2.88 $2.00 September 30 3.13 2.56 December 31 2.63 1.41 March 31 1.88 1.56 Holders - ------- As of June 17, 1996 there were approximately 388 record holders of the Company's Common Stock (including brokers holding in street name). Dividends - --------- The Company has not paid any cash dividends on its Common Stock during the two fiscal years ended March 31, 1996 and March 31, 1995. The Company presently intends to retain all earnings to finance its operations and therefore does not presently anticipate paying any cash dividends in the foreseeable future. Under the terms of the Company's credit agreement with CoreStates Bank, N.A. (formerly New Jersey National Bank) ("CoreStates Bank"), the Company may not, without the prior written -15- consent of CoreStates Bank, declare or pay any dividends in cash or otherwise on any shares of stock of the Company. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. Plan of Operation - ----------------- During the next 12 months, the Company will continue its effort to expand its existing customer relationships and marketplace penetration, while tightly controlling operating costs. The Company will place substantial emphasis on introducing and distributing its new family of products, international business expansion and reducing its reliance on its two major customer organizations. During fiscal 1996, the Company continued development of a new generation of products based on more advanced technology. The products were formally introduced at an industry trade show to enthusiastic customer reception in January, 1996. The new network management product family, known as SNS/2000, uniquely integrates network management, security management, fault management as well as problem resolution into a powerful suite of network management solutions. This technology will allow for increased operational integrity and access to voice and data networks. The Company began shipment of the prototype of the flagship member of this next generation product family, the Sentinel 2000, in May, 1996 and volume production shipments began in late June, 1996. Additional product family offerings are expected to become available throughout the remainder of fiscal 1997. The Company believes this next generation of products will create the foundation and growth to meet the Company's goals and objectives in the coming years. These new products will allow the Company to capitalize on its strength of an established worldwide customer base which includes major U.S. and International telecommunications providers, PBX vendors, financial institutions, Fortune 500 companies and numerous governmental agencies. The Company has more than 2,100 installations across North America, South America, Europe and the Pacific Rim. With the September 1995 acquisition of EBA, an even greater focus is being placed on expanding the international customer base. Based in Brussels, Belgium, EBA had acted as the Company's exclusive sales representative in the European market since November, 1993, providing both sales support and technical support to the Company's authorized distributors, as well as selling directly to accounts in the region. During the latter part of fiscal 1996, the Company's international revenue stream increased as it capitalized on relationships with new global PBX suppliers including LM Ericsson of Stockholm, Sweden and Alcatel Bell of Antwerp, Belgium. Additionally, it expanded its distribution agreements in Canada, Eastern and Western Europe and the Pacific Rim. A major concern of the Company continues to be the reliance on two major customers, MCI and AT&T, for a significant portion of its current revenue stream. This vulnerability was exposed in fiscal 1996 as discussed below. Its relationship with MCI extends to multiple operating units within the organization, each with divergent business needs and different market characteristics. The Company ships multiple products to MCI for security and alarm management of various internal -16- switch installations, including shipments to Concert Global Networks, MCI's joint venture with British Telecom, as well as to various outsource relations which MCI manages. In its relationship with AT&T, the Company has been manufacturing RPSDs for AT&T's resale to its PBX customers. The RPSD is a secured access product, provided under AT&T's own label, custom designed to operate with AT&T's PBX, Key Systems and Voice Processing products, primarily the Definity product line. As of the fiscal year ended March 31, 1996, AT&T had purchased and installed more than 13,100 RPSDs since 1991. In October, 1995, the Company signed a two-year renewal of an OEM agreement, through which AT&T purchases RPSDs. Under the terms of the renewal, the expected value of the contract to the Company over the full two-year period is $3.5M. The Company expects to continue the growth and development of its domestic customer base outside of these two primary customers in fiscal 1997. Increased revenues from fiscal 1995 to fiscal 1996 were experienced at several key customers, including Southwestern Bell and Nortel. New sources of revenues in fiscal 1996 included Ameritech, which has had significant order input with the Company in early fiscal 1997. The Company's employee base dropped from 45 full-time employees in fiscal 1995 to 42 full-time employees during fiscal 1996. It is anticipated that the Company will operate at this employee level throughout fiscal 1997. In the longer term, when a return to profitability is established, the Company expects to add additional employees. These additional resources would be devoted primarily to the marketing and development of a more extensive system integration capability which would enable the Company to gain an increasing share of the market. Due to the significant growth which the Company experienced in fiscal 1995, an additional facility in South Plainfield, New Jersey was leased with expiration terms concurrent with its existing lease in Edison, New Jersey. The operations group relocated to this facility in August, 1995. The Company believes that it has space adequate to meet its growth requirements for the foreseeable future. The Company believes that as data and voice networks continue to grow, the recognition of network vulnerability and consequential impact will continue to increase and the Company's products will be in greater demand. Despite the unsatisfactory performance in fiscal 1996, the Company believes many significant events, including the increased emphasis on new product development, increased worldwide customer base and the acquisition of EBA, position the Company for future growth. Management's primary mission in fiscal 1997 is to return the Company to profitability. RESULTS OF OPERATIONS Fiscal Year 1996 Compared to Fiscal Year 1995 - --------------------------------------------- The results for fiscal 1996 fell well below the Company's expectations. An operational loss of approximately $800,000 was supplemented by fourth quarter adjustments of approximately $1,200,000. The $800,000 loss was directly related to the quarter ended September 30, 1995 when revenues were negatively impacted by two simultaneous events at its two major customers: a "capital spending freeze" at MCI communications and an "overstocked" position regarding the Company's products due to a change in sales strategy at AT&T. The Company's performance in the other three -17- fiscal quarters was approximately at a break-even level in terms of operating results. However, in the quarter ended March 31, 1996, the Company recorded the following adjustments: (1) a $575,000 valuation reserve against the deferred tax asset on the books at March 31, 1995; (2) a $150,000 provision for inventory obsolescence as the Company is phasing out existing product lines in preparation for the introduction of the SNS/2000 family of products; (3) a $100,000 write-off of certain capitalized software costs; (4) a $100,000 provision related to a sales tax assessment by the State of New York which the Company is contesting; (5) a $120,000 provision related to the separation of an officer; and (6) a $100,000 provision relating to the Company's vacation accrual. In addition, several minor adjustments totalling $50,000 were made. The major adjustment relates to the Financial Accounting Standards Board's Statement No. 109, "Accounting for Income Taxes." This Statement, issued in February 1992, was adopted by the Company effective April 1, 1993. This Statement provided the Company the opportunity to increase net income by $950,000 in the year ended March 31, 1994 by accruing the anticipated future benefits of applying the Company's available net operating loss carry forwards against anticipated future taxable income on which tax would otherwise be payable. The Statement also requires that the Company record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." As the Company's annual operating income (income or loss before income taxes, extraordinary items and cumulative effect on prior years) had increased from a loss of $163,825 in fiscal 1991 to profits of $19,998 in fiscal 1992, $245,715 in fiscal 1993, $390,902 in fiscal 1994 and $582,897 in fiscal 1995, the Company considered a valuation allowance to be unnecessary. At March 31, 1995, the deferred tax asset carried on the books had been reduced from the initial $950,000 to $574,900. However, due to the operating loss of $1,288,409 for the year ended March 31, 1996, the realization of this deferred tax asset is more uncertain. As a result, the Company provided a full valuation allowance of $574,900 against the deferred tax asset remaining at March 31, 1995. The Company is involved in proceedings with the State of New York with respect to sales tax matters. As a result, the Company accrued $100,000 in non-operational expense at March 31, 1996. The Company is contesting the stated violations and believes the amounts accrued for assessments in connection with sales tax are adequate and ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations, or cash flow. The Company's revenues for fiscal 1996 were $6,258,243 versus revenues of $7,126,391 for fiscal 1995, a decrease of 12.2%. The decrease in revenues is attributable to decreased sales of the Company's products to both MCI and AT&T. The decrease of approximately $1.3M (from $4.3M to $3.0M) represented a 29% reduction from the previous fiscal year. The majority of the shortfall occurred in the quarter ending September 30, 1995, with the remainder of the year stabilized at expected levels. In fact, sales to all other customers increased to approximately $3.3M in fiscal 1996 from approximately $2.8M in fiscal 1995, representing an 18% increase from year to year. Of this -18- total, international sales increased to approximately $1.3M from approximately $950K in fiscal 1995, representing a 38% increase from year to year. The Company's cost of sales decreased from $3,015,520 for fiscal year 1995 to $2,789,855 for fiscal year 1996. Cost of sales as a percentage of sales increased from 42.3% for fiscal 1995 to 44.6% for 1996 as a result of the one-time provision for excess and obsolete inventory of approximately $150,000, or 2.4% of revenue, as well as an increase of approximately $130,000, or 2.1% of revenue, in capitalized software amortization. Exclusive of these two items, the Company continued its positive trend begun in fiscal 1995 of reducing direct material and labor costs over the course of fiscal 1996. Selling, general and administrative expenses increased from $3,048,224 for 1995 to $4,043,356 for 1996, an increase from 42.8% to 64.6% as a percentage of sales. The major factors contributing to this increase were (1) the expansion of senior management and the domestic sales force late in fiscal 1995 and early in fiscal 1996 in preparation for the anticipated growth which did not materialize; and (2) costs associated with the separation of employees from the Company as part of the austerity measures implemented in the second half of the fiscal year. The Company's acquisition of its European subsidiary did not have a material effect on the Company's financial position or results of operations. Research and development costs, net of capitalized software development, rose from $488,339 during fiscal year 1995 to $713,441 in fiscal year 1996. As a percentage of sales, the Company's research and development costs increased from 6.9% in fiscal year 1995 to 11.4% in fiscal year 1996. This increase is directly attributable to the non-capitalized portion of the development of the SNS/2000 family of products. Fiscal Year 1995 Compared to Fiscal Year 1994 - --------------------------------------------- Revenues for the fiscal year 1995 were $7,126,391 versus revenues of $4,744,554 for fiscal year 1994, an increase of 50.2%. A major portion of the increase in revenues was attributed to increased sales of the Company's products to both MCI and AT&T, which totaled approximately $4.3M in fiscal year 1995. This was an increase from the prior year revenues of approximately $2.6M for these two customers. As of March 31, 1995, AT&T had purchased and installed more than 9,300 RPSD units. Additionally, international sales increased to approximately $950K in fiscal 1995 from approximately $400K in fiscal 1994, an increase of over 100%. The Company's cost of sales increased from $2,024,120 for fiscal year 1994 to $3,015,520 for fiscal year 1995. Cost of sales as a percentage of sales decreased from 42.7% for 1994 to 42.3% for 1995 as a result of the initial impact of new systems for planning, allowing for more effective purchasing and more "just in time" inventory acquisition. Selling, general and administrative expenses increased from $2,027,162 for 1994 to $3,048,224 for 1995, a slight increase from 42.7% to 42.8% as a percentage of sales. The major factor contributing to this increase was the Company's continued -19- commitment in fiscal 1995 to increase the size and scope of its sales and marketing organization and its customer support capabilities. Research and development costs, net of capitalized software development, rose from $296,696 during fiscal year 1994 to $488,339 in fiscal year 1995. As a percentage of sales, the Company's research and development costs increased from 6.3% in fiscal year 1994 to 6.9% in fiscal year 1995. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1996, the Company's financial position was impacted substantially as assets were reduced from $4,337,929 to $3,558,171, and the Company's working capital decreased from $2,341,895 to $837,064, net of any deferred taxes. The primary contributor to this reduction in the Company's working capital position was the Company's loss of $1,993,700. The Company enhanced its working capital position subsequent to the fiscal year ended March 31, 1996 in April and May 1996 with the completion of a private placement of 860,000 shares of the Company's Common Stock for net proceeds of approximately $1,050,000. In addition, 241,467 shares of the Company's Common Stock were issued in June 1996 to existing shareholders who had the contractual right to maintain their percentage ownership in the Company. Net proceeds of $301,834 were received. In addition, the Company's net revenues for the second half of fiscal 1996 were $3,651,000, representing a $7.3M annualized run rate. The Company expects to improve on this run rate in fiscal 1997 as a result of the expanded customer base and SNS/2000 family of products described earlier. At the same time, the Company expects to continue the austerity measures put in place in fiscal 1996, including no significant capital expansion and no increase in headcount from the March 31, 1996 level until a trend of profitability is restored. The Company has a credit agreement with CoreStates Bank for a credit line of $1,000,000 to finance future working capital requirements, secured by accounts receivable, inventory, equipment and all other assets of the Company. As of March 31, 1996, there was $500,000 outstanding under this working capital credit line, In addition, the Company has a $150,000 revolving credit facility with CoreStates Bank to finance purchases of machinery and equipment, convertible into a three-year secured term loan. The Company borrowed $124,000 against this facility in November, 1995, at which time this debt was converted into a three-year term loan. As of March 31, 1996, $111,587 remained outstanding on this loan. Subsequent to March 31, 1996, the Company was informed by CoreStates Bank that the working capital credit line would not be renewed at the expiration date of July 31, 1996. An agreement with the bank was reached to repay the outstanding balance ($300,000 at June 21, 1996) no later than October 31, 1996 in order to facilitate an orderly transition to a new credit facility. There will be no impact on the outstanding term loan. -20- Based on its current cash and working capital position as a result of the cash infusion from the private placement in the first quarter of fiscal 1997, its anticipation of increased revenue streams, and the continued austerity measures as to operational and capital expenditures, the Company believes that it has sufficient resources to meet its operational needs, including those described above, over the next twelve months. In fiscal 1997, the Company will be required to adopt the provisions of two recently issued accounting standards. Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" requires companies to review their long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable. The Company believes that, based upon current operations and prospects, the adoption of this Standard will not have a material impact on the Company's financial position or results of operations. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" requires companies to estimate the fair value of common stock, stock options, or other equity instruments ("Equity Instruments") issued to employees using pricing models which take into account various factors such as current price of the common stock, volatility and expected life of the Equity Instrument. The Standard permits companies to either provide pro forma footnote disclosure, or to adjust operating results, for the amortization of the estimated value of the Equity Instrument over the vesting period of the Equity Instrument. The Company has elected to account for stock options under Accounting Principles Board Opinion No. 15 and will disclose certain pro forma information beginning in fiscal 1997. ITEM 7. FINANCIAL STATEMENTS. The financial statements required hereby are located on pages F-1 through F-18. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. Previously reported on Forms 8-K dated January 10, 1996 and January 30, 1996. -21- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS AND EXECUTIVE OFFICERS Name Age Position Held with the Company ---- --- ------------------------------ Stephen M. Deixler 60 Chairman of the Board of Directors, Chief Executive Officer, Treasurer Stephen B. Gray 38 President and Chief Operating Officer Michael Radomsky 43 Executive Vice President, Secretary, Director William H. Whitney 41 Chief Technology Officer, Assistant Secretary, Director Mark A. Simmons 35 Vice President - Operations, Chief Financial Officer Robert M. Groll 62 Vice President - Marketing David I. Gould 65 Director Michehl R. Gent 55 Director Stephen P. Roma 48 Director All directors of the Company hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. The officers of the Company are elected by the Board of Directors at its first meeting after each annual meeting of the Company's shareholders and hold office until their successors are chosen and qualified, until their death, or until they resign or have been removed from office. STEPHEN M. DEIXLER has been Chairman of the Board of Directors since 1985 and has served as Chief Executive Officer of the Company since April 1996, as well as from June 1985 through October 1994. He was President of the Company from May 1982 to June 1985 and served as Treasurer of the Company from its formation in 1982 until September 1993 and currently has -22- served as Treasurer of the Company since October 1994. Mr. Deixler is also currently a director of Farrington Bank. During April 1995, Mr. Deixler sold his interest in Princeton Credit Corporation, a company engaged in the business of buying, selling, and leasing high technology products, to Greyvest Capital Inc., a Toronto Stock Exchange company. Prior to the sale, Mr. Deixler was Chairman of Princeton Credit Corporation. He previously served as President of Atlantic International Brokerage, a leasing company, which is a wholly owned subsidiary of Atlantic Computer Systems, Inc., which was liquidated as a result of the bankruptcy proceedings of its parent company, Atlantic Computer Systems PLC. Prior to holding this position, he was President and sole shareholder of Princeton Computer Associates, Inc. ("PCA"). PCA was a company engaged in the business of buying, selling and leasing of large-scale computer systems as well as functioning in consulting and facilities management and was sold to Atlantic Computer Systems, Inc. in 1988. STEPHEN B. GRAY has been President and Chief Operating Officer since April 1996. He also is a director of MicroFrame Europe N.V. He served as Senior Vice President-Sales, Marketing and Support of the Company from December 1994 through March 1996. From July 1993 through December 1994, Mr. Gray was an independent consultant, engaged in assisting both private and publicly-held companies with strategy development, internal operational reviews and shareholder value enhancement programs. From September 1988 through June 1993, he held a series of management positions within Siemens Nixdorf USA, the last as Vice President, (reporting to the Chief Executive Officer and Board of Directors), and a member of the executive committee overseeing Siemens Information Systems businesses in the United States. Prior to joining Siemens, Mr. Gray previously held a series of rapidly progressive positions within IBM including various technical, sales and marketing management assignments. MICHAEL RADOMSKY is an original founder of the Company and has been the Executive Vice President and a director since the Company's formation in 1982 and has served as Secretary of the Company since November 1994. He is currently responsible for all International Operations. Previously, he has been charged with multiple tasks, the most important being the identification of industry directions, and the technical appropriateness of Company designs as well as products acquired, licensed or jointly developed with others. In addition, Mr. Radomsky has been responsible for the design of network topologies for large corporate customers, ensuring compatibility for future products. Mr. Radomsky has also previously been responsible for the Company's technical support, purchasing and manufacturing operations. Prior to 1989, Mr. Radomsky was responsible for the mechanical and electronic engineering of the Company's products. WILLIAM H. WHITNEY is an original founder of the Company and has been the Vice President - Software Development (which title has currently been changed to Chief Technology Officer ) and a director since the Company's formation in 1982 and has served as Assistant Secretary of the Company since November 1994. Along with Mr. Radomsky, he developed all of the Company's initial products, including the DL-4000 and the IPC product line. As Chief Technology Officer, Mr. Whitney has been responsible for development of hardware and software for all of the Company's standard offerings, including all products being sold through OEM and distributor channels. -23- MARK A. SIMMONS has been the Company's Vice President - Operations and Chief Financial Officer since January 1995. His responsibilities include finance, administration, purchasing/materials management and production. Mr. Simmons is a finance professional and Certified Public Accountant. From 1987 through 1994, he was with the Communications Division of General Instrument Corporation where he served as Controller from 1992 through 1994 and Manager of Financial Reporting and Accounting Services from 1987 to 1992. From 1985 to 1987, Mr. Simmons was Accounting Manager for UGI Development Company, an oil and gas equipment supplier. Prior to this, he was with KPMG Peat Marwick. ROBERT M. GROLL has been Vice President - Marketing of the Company since March 1986. From 1970 until joining the Company in June 1985, as Director of Marketing, Mr. Groll was the President of PTM Associates, Inc. ("PTM"), a firm engaged in management consulting in the areas of technical marketing and computer system design. While with PTM, during 1983 and 1984, Mr. Groll became Vice President of Cable Applications, Inc. a New York corporation, where he was responsible for initiating and managing new product development efforts. DAVID I. GOULD, retired as Vice Chairman of the Board of Directors at the end of April 1995, a position which he had served since December 1993. He presently is a director of the Company and has been since April 1985 and he is President of Gould Consulting since May 1, 1995. He served as President and Chief Operating Officer of the Company from June 1985 until December 1993. He was Vice President-Marketing of the Company from April 1985 until June 1985. From 1982 until joining the Company in 1985, he was an officer of The Ultimate Corporation ("Ultimate"), a computer manufacturer listed on the New York Stock Exchange, eventually serving as Senior Vice President of Marketing. During his three years at Ultimate, Mr. Gould managed the growth of that company's revenues from $40 million to more than $100 million. MICHEHL R. GENT has been a director of the Company since October 1984 and is the President of the North American Electric Reliability Council ("NERC"), an association of the North American electric utilities responsible for establishing various operating standards and criteria for that industry. Mr. Gent joined NERC in 1980 as Executive Vice President and became President in 1982. From 1973 to 1980 he was the General Manager of the Florida Coordinating Group, a power pool of electric utilities in Florida. He holds a Master of Science in Electrical Engineering from the University of Southern California and is a Registered Professional Engineer. He also belongs to several industry professional groups and is the author of several technical papers. STEPHEN P. ROMA has been a director of the Company since August 1991 and since August 1994 is the President and Chief Executive Officer of Family Health and Fitness Center. During April 1995, he sold his interest in Princeton Credit Corporation, a company engaged in the business of buying, selling and leasing high technology products, to Greyvest Capital, Inc., a Toronto Stock Exchange company. Prior to the sale, Mr. Roma was President and Chief Operating Officer of Princeton Credit Corporation. He previously served as Vice President of Sales/Northeast Region of Atlantic Computer Systems, Inc., which was liquidated as a result of the bankruptcy proceedings of its parent company, Atlantic Computer Systems, PLC. Prior to holding this position, he was a -24- principal and President and Chief Operating Officer of Princeton Computer Group, Inc., which was sold to Atlantic Computer Systems, Inc. in 1988. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The following persons have failed to file on a timely basis certain reports required by Section 16(a) of the Securities Exchange Act of 1934 as follows: Each of Messrs. Stephen M. Deixler, Stephen P. Roma and Michehl R. Gent filed one late report, a Form 5 disclosing the grant of a non-employee stock option pursuant to the Company's 1994 Stock Option Plan, as amended (the "1994 Plan"). Mr. David I. Gould has filed two late reports, a Form 4, disclosing the sale of stock and a Form 5 disclosing the grant of a non-employee stock option pursuant to the Company's 1994 Plan. During the fiscal year ended March 31, 1996, the Company is not aware of other late filings, or failure to file, any other reports required by Section 16(a) of the Exchange Act. ITEM 10. EXECUTIVE COMPENSATION. The following table summarizes the compensation paid or accrued by the Company during the three fiscal years ended March 31, 1996, to those individuals who as of March 31, 1996 served as the Company's Chief Executive Officer during fiscal 1996 and to the Company's four most highly compensated officers other than those who served as the Chief Executive Officer during fiscal 1996 (these five executive officers being hereinafter referred to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation - -------------------------------------- ----------------------------------------------- Awards Payouts ------ ------- Other Annual Restricted Securities All Other Principal Compen- Stock Underlying LTIP Compen- Position Year Salary($) Bonus($) sation($) Award(s)($) Options (#) Payouts($) sation($) - -------- ---- --------- -------- --------- ----------- ----------- ---------- --------- Lonnie L. Sciambi 1996 186,700 -- -- -- 3,378 -- 1,620(3) President, Chief 1995 129,135(5) 39,375(4) -- -- 26,595 -- -- Executive Officer(1) Stephen B. Gray 1996 134,675 -- -- -- 2,309 -- -- President, Chief 1995 42,000(5) 2,213(2) -- -- 40,000 -- -- Operating Officer Michael Radomsky 1996 122,800 -- -- -- 8,208 -- 1,047(3) Executive Vice- 1995 111,588 2,910(2) -- -- 1,192 -- 1,997(3) President 1994 100,000 -- -- -- -- -- 2,770(3) William H. Whitney 1996 122,800 -- -- -- 8,136 -- 2,152(3) Chief Technology 1995 111,588 2,841(2) -- -- 1,209 -- 1,997(3) Officer 1994 100,000 -- -- -- -- -- 2,770(3) Robert M. Groll 1996 107,800 -- -- -- 7,837 -- 1,892(3) Vice-President 1995 100,000 2,410(2) -- -- 5,908 -- 1,800(3) Marketing 1994 100,000 -- -- -- -- -- 2,770(3)
-25- - ------------------------------- (1) On April 1, 1996, the Company did not renew its employment agreement with Mr. Sciambi in which he served as President and Chief Executive Officer of the Company and entered into a compensation agreement with him as of such date. See "Certain Relationships and Related Transactions." (2) Represents compensation earned under the Company's Incentive Bonus Plan for the fiscal year ended March 31, 1995 (the "Incentive Plan"). The Incentive Plan covers all Company employees and was effective as of October 1, 1994. The Incentive Plan is based on achievement in three specific areas - Company revenue, Company operating income, and individual/ departmental objectives. (3) Represents contribution of the Company under the Company's 401(k) Plan. (4) Represents $4,375 in compensation earned under the Incentive Plan as described in (2) above as well as a stock bonus award of 25,000 shares of the Company's Common Stock granted on October 11, 1994, pursuant to Mr. Sciambi's employment agreement with the Company, which shares had a fair market value of $1.40 per share on the date of grant or $35,000 in the aggregate. (5) Compensation for Messrs. Sciambi and Gray includes payments they earned as consultants of the Company in the amounts of $45,000 and $42,000, respectively. Messrs. Sciambi and Gray served as consultants to the Company prior to the time they became full-time employees pursuant to their employment agreements with the Company dated October 11, 1994 and March 27, 1995, respectively. -26- OPTION GRANTS IN FISCAL YEAR 1996 The following table sets forth certain information concerning stock option grants during the year ended March 31, 1996 to the Named Executive Officers (after giving effect to the Reverse Stock Split): Individual Grants ------------------------------------------------ Percent Number of of Total Securities Options Exercise Underlying Granted to or Base Options Employees in Price Expiration Name Granted(#) Fiscal Year ($/Sh) Date - ------------------ ---------- ----------- ------ ---------- Lonnie L. Sciambi 3,378 4.4% $2.87 (1) Stephen B. Gray 2,309 3.0% $2.87 (1) Michael Radomsky 2,208 2.9% $2.87 (1) 6,000 7.8% $2.56 4/16/00 William H. Whitney 2,136 2.8% $2.87 (1) 6,000 7.8% $2.56 4/16/00 Robert M. Groll 1,837 2.4% $2.87 (1) 6,000 7.8% $2.56 4/16/00 (1) One-third of options are exercisable on or after April 3, 1995 with an expiration date of March 31, 2000, an additional one-third are exercisable on or after April 1, 1996 with an expiration date of March 31, 2001 and an additional one-third are exercisable on or after April 3, 1997 with an expiration date of March 31, 2002. -27- AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning each exercise of stock options during the fiscal year ended March 31, 1996 by each of the Named Executive Officers and the number and value of unexercised options held by each of the Named Executive Officers on March 31, 1996 (after giving effect to the Reverse Stock Split).
Value of Unexercised Number of Securities In-the-Money Shares Underlying Unexercised Options at Acquired on Value Options at FY-End(#) FY-End($)(1) Name Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ----------- ------------------------- ------------------------- Lonnie L. Sciambi -- -- 26,657/3,316 $2,700/$0 Stephen B. Gray -- -- 30,770/11,539 $0/$0 Michael Radomsky -- -- 7,133/2,267 $0/$0 William H. Whitney -- -- 7,115/2,230 $0/$0 Robert M. Groll -- -- 21,915/1,830 $7,420/$0
- ----------------------- (1) The average price for the Common Stock as reported by NASDAQ on March 31, 1996 was $1.938 per share. Value is calculated on the basis of the difference between the option exercise price and $1.938 multiplied by the number of shares of Common Stock underlying the options. COMPENSATION OF DIRECTORS On October 1, 1995, each of Stephen M. Deixler, Stephen P. Roma, David I. Gould and Michehl R. Gent, the Company's non-employee directors were granted a non-employee director option pursuant to the Company's 1994 Plan to purchase 10,000 shares of Common Stock exercisable -28- as to 2,500 shares upon each three-month anniversary of the date of grant, provided that such individual continues to serve as a non-employee director of the Company on such dates. In addition, the Company adopted a policy commencing October 1, 1995, that all non-employee directors traveling more than fifty miles to a meeting of the Board of Directors shall be reimbursed for all reasonable travel expenses. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS The Company entered into employment agreements with each of Messrs. Robert M. Groll, Michael Radomsky and William H. Whitney, which commenced as of January 1, 1994 and expire on December 31, 1996. Each agreement provides for a salary of not less than $100,000 per year to continue through the term of the agreement unless terminated for cause. Each agreement also provides each executive during the term with reimbursement for reasonable expenses and fringe benefits that generally are available to the Company's executives. Each of the executives have agreed not to disclose any confidential information of the Company during the term of his employment or thereafter and will not compete with the Company for a period of two years following termination of his employment. On April 1, 1996, the Board of Directors did not renew the Company's employment agreement with Mr. Lonnie L. Sciambi, the Company's then President and Chief Executive Officer and simultaneously approved a compensation agreement between the Company and Mr. Sciambi to be effective as of such date. See "Certain Relationships and Related Transactions". On March 27, 1995, the Company entered into an employment agreement with Mr. Stephen B. Gray, in which he was appointed Senior Vice President - Sales, Marketing and Support for a period of one (1) year with an option to renew for two (2) additional years. The agreement provides for an initial annual salary of $125,000 from the commencement of the agreement until March 31, 1995 ("Initial Salary") with additional annual increases or decreases in the Initial Salary based upon the Company's performance in the prior fiscal year measured against the achievement by the Company of certain performance goals as established by the Board of Directors with respect to certain weighted performance criteria. Pursuant to the employment agreement, Mr. Gray also received 40,000 options to acquire 40,000 shares of Common Stock under the Company's 1994 Plan. In addition, Mr. Gray shall receive in accordance with the agreement, reimbursement for reasonable expenses and fringe benefits that generally are available to the Company's executives. Mr. Gray has agreed not to disclose to anyone confidential information of the Company during the term of his employment or thereafter and will not compete with the Company for a period of two years following termination of his employment. On April 29, 1996, the Board of Directors of the Company elected Mr. Gray as the President and Chief Operating Officer of the Company and an employment agreement reflecting the terms of Mr. Gray's employment in this capacity is currently being negotiated between the Company and Mr. Gray. -29- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number of shares of the Company's Common Stock, owned by each person or institution who, as of June 17, 1996, owns of record or is known by the Company to own beneficially, more than 5% of such securities, and by each of the Company's Named Executive Officers and by its Directors, and all of the directors and executive officers as a group, and the percentage of such securities owned by each such person and the group. Unless otherwise indicated, such persons have sole voting and investment power with respect to shares listed as owned by them. Name and Address Shares Owned* Percent of Class - ---------------- ------------- ---------------- Stephen M. Deixler(1) 738,032 15.1% 371 Eagle Drive Jupiter, Florida 33477 David I. Gould(2) 325,137 6.7% 10844 White Aspen Way Boca Raton, Florida 33428 Michael Radomsky(3) 222,670 4.6% 8 Zaydee Drive Edison, New Jersey 08837 William H. Whitney (4) 116,044 2.4% 15 Jackson Avenue Chatham, New Jersey 07928 Robert M. Groll(5) 67,198 1.4% 52 Village Lane Freehold, New Jersey 07728 Michehl R. Gent 49,159 1.1% 916 Aspen Drive Plainboro, New Jersey 08536 Stephen P. Roma(6) 461,899 9.5% 91 Durand Drive Marlboro, New Jersey 07748 -30- Name and Address Shares Owned* Percent of Class - ---------------- ------------- ---------------- Lonnie L. Sciambi(7) 76,510 1.6% 262 N. Maple Avenue Basking Ridge, New Jersey 07920 Stephen B. Gray(8) 31,540 ** 37 Shy Creek Road Alexandria, New Jersey 08867 Special Situations Fund, III, L.P.(9) 855,863 14.2% MGP Advisers Limited Partnership (9) 855,863 14.2% AWM Investment Company, Inc. (9) 1,164,133 22.4% Austin W. Marxe (9) 1,164,133 22.4% Jay Associates LLC (10) 480,000 9.3% 1118 Avenue J Brooklyn, New York 11230 Alpha Investments LLC (11) 336,000 6.7% 5611 North 16th Street #300 Phoenix, Arizona 85016 Ora Gichtin (12) 300,000 6.0% 6316 Greenspring Avenue #304 Baltimore, Maryland 21209 Jules Nordlicht (12) 300,000 6.0% 225 West Beach Avenue Long Beach, New York 11561 Directors and executive officers as a group (9 Persons) 2,042,731 40.1% - --------------- * All shares and per share amounts have been adjusted to take into account the Company's Reverse Stock Split. ** Less than 1% of the outstanding shares of Common Stock. -31- (1) Does not include 214,436 shares of Common Stock owned by Mr. Deixler's wife, mother, children and grandchildren as to which shares Mr. Deixler disclaims beneficial ownership. Includes 90,000 shares of Common Stock of which Mr. Deixler is the beneficial owner, and which have been issued to and are registered in the name of Olen and Company custodian f/b/o Stephen M. Deixler. Also includes 5,000 shares of Common Stock which may be acquired pursuant to currently exercisable non-employee director options under the 1994 Plan. Also includes 53,330 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement. (2) Includes 50,000 shares of Common Stock which may be acquired pursuant to currently exercisable options granted outside the Company's 1984 Stock Option Plan and the 1994 Plan. Also includes 5,000 shares of Common Stock which may be acquired pursuant to currently exercisable non-employee director options under the 1994 Plan. (3) Includes 8,266 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the Company's 1994 Plan. (4) Includes 8,230 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the Company's 1994 Plan. (5) Includes 10,000 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the Company's 1984 Plan. Also includes 13,030 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the 1994 Plan. (6) Includes 47,877 shares of Common Stock held by Donaldson, Lufkin & Jenrette Securities Corporation custodian f/b/o Stephen P. Roma, IRA. Includes 8,400 shares of Common Stock held by Mr. Roma and his wife as joint tenants. Also includes 5,000 shares of Common Stock which may be acquired pursuant to currently exercisable non-employee director options under the 1994 Plan. Also includes 53,330 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement. Does not include 1,200 shares of Common Stock held by Mr. Roma as custodian for his son or 29,108 shares owned by Mr. Roma's wife, some of which are held in Mrs. Roma's individual retirement account, as to which shares Mr. Roma disclaims beneficial ownership. (7) Includes 51,510 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the 1994 Plan. (8) Includes 31,540 shares of Common Stock which may be acquired pursuant to currently exercisable options granted under the 1994 Plan. -32- (9) Special Situations Fund III, L.P., a Delaware limited partnership (the "Fund"), MGP Advisers Limited Partnership, a Delaware limited partnership ("MGP"), AWM Investment Company, Inc., a Delaware corporation ("AWM"), and Austin W. Marxe have filed a Schedule 13G, the latest amendment of which is dated January 5, 1996. All presented information is based on the information contained in the Schedule 13G and subsequent information known to the Company. The address of each of the reporting persons is 153 East 53rd Street, New York, New York 10022. The Fund has sole voting and dispositive power with respect to 855,863 shares; MGP has sole dispositive power with respect to 855,863 shares; AWM has sole voting power with respect to 308,270 shares and sole dispositive power with respect to 1,164,133 shares; and Mr. Marxe has sole voting power with respect to 308,270 shares, shared voting power with respect to 855,863 shares and sole dispositive power with respect to 1,164,133 shares. MGP is a general partner of and investment advisor to the Fund. AWM, which is primarily owned by Mr. Marxe, is the sole general partner of MGP. Mr. Marxe, the principal limited partner of MGP and the President of AWM, is principally responsible for the selection, acquisition and disposition of the portfolio securities by AWM on behalf of MGP, the Fund and another fund that beneficially owns shares included in the shares beneficially owned by AWM and Mr. Marxe. Also includes 267,242 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement held by the Fund and MGP and 364,422 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement held by AWM and Mr. Marxe. (10) Includes 320,000 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement. (11) Includes 224,000 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement. (12) Includes 200,000 shares issuable upon exercise of currently exercisable Class A and Class B Warrants of the 1996 Private Placement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Mr. David I. Gould, formerly an executive officer and a current director of the Company entered into a consulting agreement with the Company which become effective on May 1, 1995 upon the expiration date of his employment agreement on April 30, 1995. The consulting agreement provides for a four-year term, with an automatic one year renewal, and compensation at the rate of $1,000 per day for services provided. The consulting agreement further provides that Mr. Gould will not receive less than $40,000 nor more than $220,000 per year, and that the rendering of any services above $40,000 must be with the prior approval of the Company. -33- On April 1, 1996, the Company entered into a six-month compensation agreement with Mr. Lonnie L. Sciambi, a former executive officer and director of the Company after not renewing its existing employment agreement with Mr. Sciambi. The compensation agreement provides for compensation in the aggregate sum of $100,000, as well as certain benefits during the term. In addition, Mr. Sciambi was granted a stock option under the Company's 1994 Plan to purchase 23,196 shares of Common Stock. In April 1996, the Company completed the 1996 Private Placement to accredited investors of an aggregate of 1,101,467 Units for gross proceeds of $1,376,933.75, each Unit consisting of one share of Common Stock and one Class A Warrant and one Class B Warrant, each of which are exercisable into one share of Common Stock. Stephen M. Deixler, an executive officer and a director of the Company and Stephen P. Roma, a director of the Company, who each held preemptive rights to purchase Units in this offering, each purchased 26,665 Units at a price of $1.25 per Unit for aggregate consideration of $33, 331.25. Additionally, in connection with the 1996 Private Placement, Special Situations Fund III, L.P., also the holder of preemptive rights purchased 133,621 Units at $1.25 for aggregate consideration of $167,026.25. In September 1995, the Company formed a wholly-owned subsidiary, MicroFrame Europe N.V., which, in turn, acquired all of the issued and outstanding shares of capital stock of European Business Associates BVBA ("EBA") of Brussels, Belgium from Marc Kegelaers, its sole shareholder. In connection with such acquisition, MicroFrame Europe N.V. entered into a consulting agreement with Mr. Kegelaers for a term of five years. The consulting agreement provides for a consulting fee in the aggregate sum of U.S.$75,000, as well as the reimbursement of certain expenses during the term. -34- Item 13. Exhibits, List and Reports on Form 8-K. (a) Exhibits and Index of Exhibits
Exhibit No. Description Exhibit Reference --- ----------- ----------------- 3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of Company the Form 10-K for the fiscal year ended March 31, 1992 (the "1992 10-K") 3.2 By-Laws of the Company Incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Company's Registration Statement on Form SB-2 (No. 33-66688) dated October 26, 1993 ("Amendment No. 1 to the Registration Statement") 3.3 Amendment No. 2 of the Company's Filed herewith By-Laws 3.4 Amendment to Certificate of Incorporated by reference to Exhibit 3.3 of Incorporation filed September 14, 1992 the Form 10-KSB for the fiscal year ended March 31, 1993 (the "1993 10-KSB") 3.5 Amendment to Certificate of Incorporated by reference to Exhibit 3.4 of Incorporation filed September 20, 1993 Amendment No. 1 to the Registration Statement 3.6 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of Certificate Amendment No. 2 to the Company's Registration Statement on Form SB-2 (No. 33-66688) dated December 1, 1993 ("Amendment No. 2 to the Registration Statement") 10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4 of the of the Form 10-K for the fiscal year ended March 31, 1985 10.2 Amendment No. 2 to 1984 Stock Incorporated by reference to Exhibit 10.5 Option Plan of the Form 10-K for the fiscal year ended March 31, 1986 (the "1986 10-K") -35- Exhibit No. Description Exhibit Reference --- ----------- ----------------- 10.3 Lease Agreement Incorporated by reference to Exhibit 10.6 of the Form 10-K for the fiscal year ended March 31, 1991 (the "1991 10-K") 10.4 Stock Purchase Agreement dated May Incorporated by reference to Exhibit 10.4 10, 1993 pursuant to Private Placement of the 1993 10-KSB 10.5 Employment Agreement dated as of Incorporated by reference to Exhibit 10.5 May 2, 1992 between David I. Gould of Amendment No. 2 to the Registration and the Company Statement 10.6 Loan Agreement between the Company Incorporated by reference to Exhibit 10.6 and New Jersey National Bank of the 199310-KSB 10.7 Letter Agreement dated April 28, 1993 Incorporated by reference to Exhibit 10.7 between the Company and New Jersey of Amendment No. 1 to the Registration National Bank Statement 10.8 Form of Consulting Agreement Incorporated by reference to Exhibit 10.8 between David I. Gould and the of Amendment No. 1 to the Registration Company Statement 10.9 Agreement between American Incorporated by reference to Exhibit 10.9 Telephone and Telegraph Company and of Amendment No. 2 to the Registration the Company dated September 17, Statement 1993 10.10 Joint Marketing Agreement between Incorporated by reference to Exhibit 10.10 MCI Telecommunications Corporation of Amendment No. 2 to the Registration and the Company dated September 1, Statement 1992, together with Amendment No. 1 dated July 7, 1993 10.11 Employment Agreement dated as of Incorporated by reference to Exhibit 10.11 January 1, 1994 between Michael of Form 10-KSB for the fiscal year ended Radomsky and the Company March 31, 1994 (the "1994 10-KSB") -36- Exhibit No. Description Exhibit Reference --- ----------- ----------------- 10.12 Employment Agreement dated as of Incorporated by reference to Exhibit 10.12 January 1, 1994 between William H. of the 1994 10-KSB Whitney and the Company 10.13 Employment Agreement dated as of Incorporated by reference to Exhibit 10.13 January 1, 1994 between Robert M. of the 1994 10-KSB Groll and the Company 10.14 Employment Agreement dated as of Incorporated by reference to Exhibit 10.15 January 1, 1994 between P. David of Amendment No. 2 to the Registration Bocksch and the Company Statement 10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15 of the 1994 10-KSB 10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16 Agreement between the Company and of Form 10-QSB for the quarter ended CoreStates Bank, N.A. dated September 30, 1994 September 8, 1994. 10.17 Consulting Agreement between the Incorporated by reference to Exhibit 10.17 Company and P. David Bocksch dated to Form 8-K dated November 30, 1994 November 14, 1994 10.18 Employment Agreement dated as of Incorporated by reference to Exhibit 10.18 October 11, 1994 between the to Form 10-QSB for the quarter ended Company and Lonnie L. Sciambi December 31, 1994 10.19 Incentive Bonus Plan of the Company Incorporated by reference to Exhibit 10.19 for the fiscal year ended March 31, to Form 10-QSB for the quarter ended 1995 December 31, 1994 10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20 Company to the Securities and to Form 8-K dated March 13, 1995 Exchange Commission relating to Item 4 of Form 8-K 10.21 1994 Stock Option Plan Incorporated by reference to Exhibit 10.29 (as amended on July 17, 1995) of Form 10-QSB for the quarter ended September 30, 1995. -37- Exhibit No. Description Exhibit Reference --- ----------- ----------------- 10.22 Non-Qualified Stock Option Agreement Incorporated by reference to Exhibit 10.22 dated December 19, 1994 between the of the Form 10-KSB for the fiscal year Company and Cameron Towey Neilson, ended March 31, 1995 (the "1995 10- Inc. KSB"). 10.23 Purchase Agreement dated December Incorporated by reference to Exhibit 10.23 21, 1994 between the Company and of the 1995 10-KSB Ericsson Business Networks AB 10.24 Employment Agreement dated as of Incorporated by reference to Exhibit 10.24 March 27, 1995 between the Company of the 1995 10-KSB. and Stephen B. Gray 10.25 Letter dated April 5, 1995 from the Incorporated by reference to Exhibit 10.25 Company to P. David Bocksch of the 1995 10-KSB terminating his Consulting Agreement 10.26 Incentive Bonus Plan of the Company Incorporated by reference to Exhibit 10.26 for the fiscal year ending March 31, of the 1995 10-KSB 1996 10.27 Employment Agreement dated as of Incorporated by reference to Exhibit 10.27 July 1, 1995 between the Company and of Form 10-QSB for the quarter ended Mark A. Simmons September 30, 1995 10.28 Lease Agreement dated as of July 20, Incorporated by reference to Exhibit 10.28 1995 between 46.25 Associates, L.P. of Form 10-QSB for the quarter ended and the Company for premises at the September 30, 1995 Middlesex (New Jersey) Business Center 10.29 Share Purchase Agreement (EBA) Incorporated by reference to Exhibit 10.30 dated September 15, 1995 between of Form 10-QSB for the quarter ended Marc Kegelaers and MicroFrame September 30, 1995 Europe N.V. -38- Exhibit No. Description Exhibit Reference --- ----------- ----------------- 10.30 Consulting Agreement dated as of Incorporated by reference to Exhibit 10.31 September 15, 1995 between Marc of Form 10-QSB for the quarter ended Kegelaers and MicroFrame Europe September 30, 1995 N.V. 10.31 Termination Letter dated September Incorporated by reference to Exhibit 10.32 15, 1995 from European Business of Form 10-QSB for the quarter ended Associates BVBA to the Company September 30, 1995 10.32 Letter from Price Waterhouse LLP to Incorporated by reference to Exhibit 10.33 the Securities and Exchange of Form 8-K dated January 30, 1996 Commission relating to Item 4 of Form 8-K 10.33 Form of Purchase Agreement dated Filed herewith April 1996 pursuant to the 1996 Private Placement 10.34 Consulting Agreement between the Filed herewith Company and Lonnie L. Sciambi dated April 1, 1996 10.35 Fiscal 1997 Incentive Plan Filed herewith 23 (a) Consent of Price Waterhouse LLP Filed herewith 23 (b) Consent of Coopers and Lybrand LLP Filed herewith (b) Reports on Form 8-K
During the quarter ended March 31, 1996, the Company filed two reports on Form 8-K dated January 10, 1996 and January 30, 1996 under Item 4. -39- MICROFRAME, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1996 AND 1995 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants F-1 Report of Independent Accountants F-1.1 Consolidated Balance Sheets as of March 31, 1996 and March 31, 1995 F-2 Consolidated Statements of Operations for the years ended March 31, 1996 and 1995 F-3 Consolidated Statements of Cash Flows for the years ended March 31, 1996 and 1995 F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996 and March 31, 1995 F-5 Notes to Consolidated Financial Statements for the years ended March 31, 1996 and 1995 F-6-18 COOPERS & LYBRAND L.L.P. (LETTERHEAD) REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MicroFrame, Inc. and Subsidiary: We have audited the accompanying consolidated balance sheet of MicroFrame, Inc. and Subsidiary (the "Company") as of March 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 1996 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. New York, New York June 21, 1996 F-1 REPORT OF INDEPENDENT ACCOUNTANTS May 19, 1995 To the Board of Directors and Stockholders of MicroFrame, Inc. In our opinion, the accompanying balance sheet and the related statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of MicroFrame, Inc. (the "Company") at March 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /S/ Price Waterhouse LLP PRICE WATERHOUSE LLP F-1.1 MICROFRAME, INC. AND SUBSIDIARY Consolidated Balance Sheets as of March 31, 1996 and 1995
ASSETS 1996 1995 ----------- ----------- Current assets Cash and cash equivalents $ 48,302 $ 490,261 Accounts receivable, less allowance for doubtful accounts of $100,000 and $75,000, respectively 1,540,561 1,912,304 Inventory 1,084,870 775,540 Deferred tax asset -- 400,000 Prepaid expenses and other current assets 77,426 24,325 ----------- ----------- Total current assets 2,751,159 3,602,430 Property and equipment at cost, net 409,866 317,585 Capitalized software, less accumulated amortization of $649,332 and $370,879, respectively 266,319 211,602 Goodwill, less accumulated amortization of $5,766 and $0, respectively 95,844 -- Security deposits 34,983 31,412 Deferred tax asset -- 174,900 ----------- ----------- Total assets $ 3,558,171 $ 4,337,929 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank borrowings $ 538,754 $ -- Accounts payable 395,619 354,427 Accrued payroll and related liabilities 285,651 240,900 Deferred income 258,856 202,478 Other current liabilities 435,215 62,730 ----------- ----------- Total current liabilities 1,914,095 860,535 ----------- ----------- Commitments and contingencies (Notes 8 and 9) Long-term debt 72,833 -- Stockholders' equity Common stock - par value $.001 per share; authorized 50,000,000 shares, issued 3,718,075 shares and outstanding 3,717,675 shares at March 31, 1996; issued 3,687,198 shares and outstanding 3,686,798 shares at March 31, 1995 3,718 3,687 Preferred stock - par value $10 per share; authorized 200,000 shares, none issued -- -- Additional paid-in capital 4,856,924 4,769,406 Accumulated deficit (3,285,399) (1,291,699) ----------- ----------- 1,575,243 3,481,394 Less - Treasury stock, 400 shares, at cost (4,000) (4,000) ----------- ----------- Total stockholders' equity 1,571,243 3,477,394 ----------- ----------- Total liabilities and stockholders' equity $ 3,558,171 $ 4,337,929 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-2 MICROFRAME, INC. AND SUBSIDIARY Consolidated Statements of Operations for the years ended March 31, 1996 and 1995
1996 1995 ----------- ----------- Net sales $ 6,258,243 $ 7,126,391 Cost of sales 2,789,855 3,015,520 ----------- ----------- Gross margin 3,468,388 4,110,871 Research and development expenses 713,441 488,339 Selling, general and administrative expenses 4,043,356 3,048,224 ----------- ----------- (Loss) income from operations (1,288,409) 574,308 Interest income 3,649 10,392 Interest expense (34,917) (1,803) Other expense, net (99,123) -- ----------- ----------- (Loss) income before income tax provision (1,418,800) 582,897 Income tax provision 574,900 218,100 ----------- ----------- Net (loss) income $(1,993,700) $ 364,797 =========== =========== Per share data Net (loss) income per share $ (0.54) $ 0.10 ----------- ----------- Weighted average number of common shares outstanding 3,703,476 3,761,894 ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-3 MICROFRAME, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows for the years ended March 31, 1996 and 1995
1996 1995 ----------- ----------- Cash flows from operating activities Net (loss) income $(1,993,700) $ 364,797 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 431,739 212,132 Provision for bad debts 89,121 35,000 Provision for inventory obsolescence 176,660 Deferred tax provision 574,900 218,100 Stock compensation expense -- 35,000 (Increase) decrease in Accounts receivable 289,525 (812,063) Inventory (465,863) 258,796 Prepaid expenses and other current assets (24,773) (17,841) Security deposits (1,921) (13,782) Increase (decrease) in Accounts payable 10,887 (96,961) Accrued payroll and related liabilities 40,311 180,091 Deferred income 56,378 52,484 Other current liabilities 347,447 (72,559) ----------- ----------- Net cash (used) provided by operating activities (469,289) 343,194 ----------- ----------- Cash flows from investing activities Capital expenditures (210,304) (205,897) Capitalized software (333,170) (141,842) Acquisition of European Business Associates, net of cash acquired (50,208) -- ----------- ----------- Net cash used in investing activities (593,682) (347,739) ----------- ----------- Cash flows from financing activities Proceeds of short-term borrowings 500,000 -- Proceeds of long-term debt 124,000 -- Repayments of debt (12,413) (13,511) Issuance of common stock 9,425 3,000 ----------- ----------- Net cash provided (used) by financing activities 621,012 (10,511) ----------- ----------- Net (decrease) in cash and cash equivalents (441,959) (15,056) Cash and cash equivalents - beginning of period 490,261 505,317 ----------- ----------- Cash and cash equivalents - end of period $ 48,302 $ 490,261 =========== =========== Supplemental information Cash paid during period for Interest $ 34,095 $ 13,577 ----------- ----------- Noncash investing and financing activities In connection with acquisition of European Business Associates $ 78,124 $ -- ----------- ----------- Issuance of common stock to officer $ -- $ 35,000 ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 MICROFRAME, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996 and 1995
Additional Total Common Stock Paid-in Accumulated Treasury Stockholders' Shares Par Value Capital Deficit Stock Equity ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1994 3,641,798 $ 3,642 $ 4,731,451 $(1,656,496) $ (4,000) $ 3,074,597 ----------- ----------- ----------- ----------- ----------- ----------- Net income -- -- -- 364,797 -- 364,797 Issuance of common stock 45,000 45 37,955 -- -- 38,000 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1995 3,686,798 3,687 4,769,406 (1,291,699) (4,000) 3,477,394 ----------- ----------- ----------- ----------- ----------- ----------- Net loss -- -- -- (1,993,700) -- (1,993,700) Issuance of common stock 30,877 31 87,518 -- -- 87,549 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1996 3,717,675 $ 3,718 $ 4,856,924 $(3,285,399) $ (4,000) $ 1,571,243 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended March 31, 1996 and 1995 1. ORGANIZATION: THE COMPANY MicroFrame, Inc. (the "Company"), founded in 1982, designs, develops and markets a broad range of security, network management and remote maintenance products for voice and data communications networks. By incorporating a variety of hardware and software options for user authentication, these products can deter unauthorized dial-in access to both devices and systems (such as computers, local areas networks and Private Branch Exchange telephone switches), while allowing authorized personnel access to perform needed administration and maintenance of host devices and networks from remote locations. The Company's products also provide alarm monitoring and reporting capabilities, a basis for remote network management and maintenance. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of MicroFrame, Inc. and its subsidiary (collectively, the "Company"). All material intercompany accounts and balances have been eliminated. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market, and consists of hardware and software components designed to interface with network communications environments. The markets for the Company's products are characterized by rapidly changing technology and the consequential obsolescence of relatively new products. The Company has recorded certain estimated reserves against inventories related to such technological obsolescence. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statements of operations. F-6 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: CAPITALIZED SOFTWARE The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). SFAS 86 requires that the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. The Company capitalized $333,170 of software development costs for fiscal 1996. These costs are amortized by the greater of the amount computed using (i) the ratio that current gross revenues from the sales of software bear to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product (generally three years). It is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near term (due to competitive pressures). As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term. Amortization expense totaled $278,453 and $146,865 for fiscal 1996 and fiscal 1995, respectively. GOODWILL Goodwill is being amortized on a straight-line basis over ten years. RESEARCH AND DEVELOPMENT COSTS The Company charges all costs incurred to establish the technological feasibility of a product or enhancement to research and development expense. REVENUE RECOGNITION POLICY The Company records revenue in accordance with Statement of Position 91-1, "Software Revenue Recognition" (the "SOP"). In accordance with the SOP, the Company records revenue from product sales upon shipment to the customer if there exists no significant vendor obligations and collectibility is probable. Maintenance contracts are sold separately and maintenance revenue is recognized on a straight-line basis over the period the service is provided. At March 31, 1996 and 1995 the Company has deferred income related to maintenance contracts of $258,856 and $202,478, respectively. WARRANTY COSTS Warranty costs associated with the sale of hardware and software are accrued at the time of sale. The warranty reserve as of March 31, 1996 and 1995 included in other current liabilities amounts to $25,000 and $19,125, respectively. F-7 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. FAIR VALUE The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and related liabilities, deferred income, and other current liabilities approximates fair value because of the relatively short maturity of these instruments. The Company's line of credit has a variable interest rate which adjusts with changes in market interest rates and the book value of such indebtedness is deemed to approximate fair value. PER SHARE DATA The per share data appearing in the statements of operations for the years ended March 31, 1996 and 1995 has been prepared in accordance with the Accounting Principles Board Opinion No. 15. Such amounts have been computed based on the (loss) income for the period divided by the weighted average number of shares of common stock outstanding during the period plus the dilutive effects of common stock equivalents. For the year ended March 31, 1996, the weighted average number of shares outstanding excludes the number of common shares issuable upon the exercise of outstanding stock options and warrants since the inclusion would be anti-dilutive. For the fiscal year ended March 31, 1995, the weighted average number of shares outstanding includes the dilutive effect of options and warrants of 99,907. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities ("temporary differences") using enacted tax rates in effect for the year in which the differences are expected to reverse. Recognition of a deferred tax asset is allowed if future realization is more likely than not. F-8 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121") in March 1995. SFAS 121 requires companies to review their long-lived assets and certain identifiable intangibles (collectively, "Long-Lived Assets") for impairment whenever events or changes in circumstances indicate that the carrying value of a Long-Lived Asset may not be recoverable. Impairment is measured using the lower of a Long-Lived Asset's book value or fair value, as defined. The Company will be required to adopt the provisions of SFAS 121 at the beginning of the fiscal year ending March 31, 1997. The Company believes that, based upon current operations and prospects, the future adoption of SFAS 121 will not have a material impact on the Company's financial position or results of operations. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. The Company will be required to adopt the provisions of SFAS 123 at the beginning of the fiscal year ending March 31, 1997. SFAS 123 requires companies to estimate the fair value of common stock, stock options, or other equity instruments ("Equity Instruments") issued to employees using pricing models which take into account various factors such as current price of the common stock, volatility and expected life of the Equity Instrument. SFAS 123 permits companies to either provide pro forma note disclosure, or adjust operating results, for the amortization of the estimated value of the Equity Instrument over the vesting period of the Equity Instrument. The Company has elected to account for stock options under Accounting Principles Board Opinion No. 25 and will disclose certain pro forma information beginning in fiscal 1997. 3. INVENTORY: Inventory at March 31, 1996 and 1995 consists of the following: 1996 1995 ------------ ------------ Raw materials $ 676,120 $ 347,962 Work-in-process 367,820 286,667 Finished goods 40,930 140,911 ------------ ------------ $ 1,084,870 $ 775,540 ============ ============ F-9 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 4. PROPERTY AND EQUIPMENT AT COST, NET: At March 31, 1996 and 1995 property and equipment consists of the following: 1996 1995 ----------- ---------- Demonstration and service equipment $ 727,517 $ 503,636 Furniture and fixtures 175,174 162,250 Leasehold improvements 58,936 21,817 ----------- ---------- 961,627 687,703 Less: Accumulated depreciation and amortization (551,761) (370,118) ----------- ---------- Total $ 409,866 $ 317,585 =========== ========== Depreciation and amortization of property and equipment for the years ended March 31, 1996 and 1995 amounted to $147,520 and $65,267, respectively. 5. BANK BORROWINGS: The Company has an available bank line of credit, through July 31, 1996, in the amount of the lesser of $1,000,000, or 80% of the existing qualified accounts receivable under 90 days. The line is collateralized by the accounts receivable, inventory, equipment, and all other assets of the Company. Any advances under the bank line are payable on demand, and bear interest at the bank's prime rate (8.25% at March 31, 1996) plus 1%. At March 31, 1996, $500,000 was outstanding under this line of credit. In addition, the Company has available a credit facility, through July 31, 1996, in the amount of $150,000 to support 80% of capital expansion. This facility is collateralized by the same assets noted in the previous paragraph. In November 1995, $124,000 was borrowed against this facility with a term of three years, payable monthly, at an interest rate of 8.55%. At March 31, 1996, $111,587 was outstanding, of which $72,833 is non-current. Future principal repayments under this loan are $38,754, $42,476 and $30,357 for the years ending March 31, 1997, 1998 and 1999, respectively. The bank line of credit and capital expansion credit facility contain various covenants which among other things, restrict payment of dividends without prior approval from the bank, require the maintenance of certain amounts of working capital and debt to tangible net worth ratio. At March 31, 1996, the Company was not in compliance with the working capital covenant; subsequently the bank extended the term through October 31, 1996 and waived the covenant violation as it relates to the capital expansion credit facility (see Note 14). F-10 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 6. INCOME TAXES: As of March 31, 1996, the Company has available, unused federal and state net operating loss carryforwards of approximately $2,443,000 and $1,022,000, respectively to offset future taxable income, expiring from 2001 through 2011. In addition, the Company has investment credit and research and development credit carryforwards aggregating approximately $97,000, which may provide future tax benefits, expiring from 1999 through 2002. March 31, 1996 1995 ------ ------ Effective tax rate reconciliation: Statutory federal tax rate (34%) 34% State taxes, net of federal benefit (6%) 6% Non-deductible expenditures -- -- Effect of valuation allowance 81% -- Other -- (2.6%) ------ ------ 41% 37.4% ------ ------ The tax effect of temporary differences and net operating loss carryforwards which make up the significant components of the net deferred tax asset and liability for financial reporting purposes at March 31, 1996 and 1995 are approximately as follows: 1996 1995 ----------- ---------- Deferred tax assets: Accounts receivable $ 40,000 $ 30,000 Inventory 130,000 29,486 Accrued expenses 121,645 7,600 Net operating loss carry forward 891,940 529,614 Research and development credit 97,307 63,000 Deferred tax liability: Equipment (22,849) - Capitalized Software (106,528) (84,800) Valuation allowance (1,151,515) - ----------- ---------- Net $ - $ 574,900 =========== ========== F-11 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 6. INCOME TAXES, CONTINUED: SFAS 109 requires that a valuation allowance be recorded against tax assets which are not likely to be realized. Due to the uncertain nature of their ultimate realization based upon the current year loss, the Company has established a full valuation allowance against the deferred tax assets of $1,151,515. 7. STOCKHOLDERS' EQUITY: During the year ended March 31, 1995, 20,000 shares of common stock granted under the Company's stock option plans were exercised, for an aggregate consideration of $3,000. In addition, an award of 25,000 shares of common stock was made to an officer of the Company. The aggregate market value of this award was $35,000 and was recorded as a charge to operations. During the year ended March 31, 1996, 5,877 shares of common stock granted under the Company's stock option plans were exercised, for an aggregate consideration of $9,425. In addition, 25,000 shares of common stock were issued as part of the consideration for the purchase of European Business Associates BVBA (see Note 12). The aggregate fair market value of this consideration was $78,124 and was recorded as part of the total consideration paid for this acquisition. F-12 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 7. STOCKHOLDERS' EQUITY, CONTINUED: STOCK OPTION PLANS In August 1984, the Company adopted its 1984 Stock Option Plan (the "Plan") to authorize the granting of both options intended to qualify under the provisions of Section 422A of the Internal Revenue Code, as amended, and nonqualified options. The Plan also permits Stock Appreciation Rights ("SAR's") to be granted with an option. An optionee may be granted a SAR with respect to the number of shares for which he is simultaneously granted an option. A SAR provides the recipient with the right to receive cash or stock having a value equal to the increase in value of the shares subject to the SAR from the date of grant to the date of exercise. SAR's may be exercised in addition to, but only at the same time and to the same extent as, the related options. No SAR's have been granted by the Company. The Plan provides that options to purchase a maximum of 220,000 shares (subject to adjustment in certain circumstances) of the Company's common stock. The exercise price of each option is fixed at the time of grant, but must not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of the common stock at the time the option is granted. The Plan expired in August 1994, with options granted covering 209,800 of the available shares. At March 31, 1996, 32,900 options remained to be exercised. In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan initially provided for the grant of options to purchase a maximum of 250,000 shares of Common Stock. The 1994 Plan was subsequently amended in July 1995 to increase the number of shares of Common Stock for which options may be granted to a maximum of 750,000 shares. The aggregate fair market value (determined at the time the option is granted) of shares which are exercisable during any calendar year by any one individual may not exceed $100,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% of the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one common stock subject to such option on the date of grant. During the year ended March 31, 1996, the Company granted options to purchase 116,533 shares of its common stock under the 1994 Plan. WARRANTS During October 1995, in connection with services being performed by a consultant, the Company issued 250,000 warrants to the consultant to purchase shares of the Company's common stock. Warrants to purchase 50,000 shares of common stock at $3.25 per share vested immediately. Warrants to purchase each additional block of 50,000 shares of common stock are exercisable at $3.75, $4.25, $4.75 and $5.25 per share, respectively and shall vest on each three month anniversary of the agreement. The warrants expire five years from the date of grant. F-13 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 7. STOCKHOLDERS' EQUITY, CONTINUED: Details of options granted are as follows: Option Price Shares Per Share ($) -------- ------------ Options outstanding at March 31, 1994 323,200 .15 to 5.00 Granted 293,545 1.72 to 3.00 Cancelled (242,900) 1.45 to 5.00 Exercised (20,000) .15 -------- ------------ Options outstanding at March 31, 1995 353,845 1.25 to 2.75 GrantedGrantedGrantedGrantedGranted 116,533 1.78 to 3.13 CancelledCancelledCancelledCancelledCancelled (28,503) 1.25 to 2.87 ExercisedExercisedExercisedExercisedExercised (5,877) 1.25 to 2.14 -------- ------------ Options outstanding at March 31, 1996 435,998 1.25 to 3.13 -------- ------------ Options exercisable at March 31, 1995 266,178 1.25 to 2.75 1996 366,171 1.25 to 3.13 8. COMMITMENTS: OPERATING LEASES In June 1993, the Company amended its lease for office and manufacturing facilities. Such amendment extends the term of the lease until June 30, 1999. In July 1995, the Company executed an additional building lease for the purpose of expanding its office and manufacturing facilities. The terms of the new lease provide for an expiration date concurrent with that of the existing building lease. The Company also leases office equipment and one automobile under various leases expiring through March, 1999. The fixed minimum payments under operating leases for future periods is as follows: Year ending March 31, 1997 $ 133,400 1998 148,100 1999 143,700 2000 38,000 2001 - Thereafter - ------------- Total minimum lease payments $ 463,200 ------------- Rent expense, in addition to allocated occupancy expenses, for the years ended March 31, 1996 and 1995 approximated $119,300 and $79,800, respectively. F-14 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 8. COMMITMENTS, CONTINUED: CONSULTING CONTRACT The Company entered into a consulting agreement with an officer to become effective upon the expiration (or mutually agreed upon termination) of his employment agreement on May 2, 1995. The agreement provides that he will not receive less than $40,000 per year nor more than $220,000 per year, the amount of which is dependent on the level of services provided. In connection with the acquisition of European Business Associates BVBA of Brussels, Belgium from Marc Kegelaers (see Note 12), the Company entered into a consulting agreement with Mr. Kegelaers for a term of five years. The consulting agreement provides for a consulting fee $75,000, as well as reimbursement of certain expenses. Effective April 1, 1996, the Company did not renew the employment agreement of one of its officers and entered into a compensation arrangement. This arrangement was entered into, in part as a result of the Company not achieving certain performance milestones for the year ended March 31, 1996, pursuant to the officer's employment agreement. The agreement provides that he will receive an aggregate sum of $100,000 payable at the rate of $15,000 per month, with payment upon execution of $10,000. In addition, the agreement called for a continuation of Company benefits for the period of the agreement, a monthly car allowance of $750 for the period of the agreement, and options to purchase 23,196 shares of the Company's common stock at an exercise price of $1.94 per share with an expiration date of March 31, 2001. As a result of this agreement, the Company accrued $120,000 in the fiscal year ended March 31, 1996 to cover the costs of this agreement. 9. CONTINGENT LIABILITIES: The Company is involved in proceedings with respect to certain sales tax matters. Total amounts included in other current liabilities and other expense, net, related to these proceedings is $100,000 at March 31, 1996. In the opinion of management of the Company, amounts accrued for assessments in connection with sales tax are adequate and ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. F-15 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 10. EMPLOYEE BENEFIT PLANS: Effective April 1, 1993, the Company adopted a defined contribution savings plan. The terms of the plan provide for eligible employees ("participants") who have met certain age and service requirements to participate by electing to contribute up to 15% of their gross salary to the plan, as defined, with the Company matching 30% of a participant's contribution up to a maximum of 6% of gross salary, as defined. Company contributions vest at the rate of 25% of the balance at each employee's second, third, fourth, and fifth anniversary of employment. The employees' contributions are immediately vested. The Company's contribution to the savings plan for the years ended March 31, 1996 and 1995 was $29,729 and $24,482, respectively. 11. SALES: Sales by geographic area for the years ended March 31, 1996 and 1995 are as follows: 1996 1995 --------------- -------------- United States $ 4,946,702 $ 6,178,259 Europe 1,058,960 597,258 Pacific Rim 98,156 232,336 Other 154,425 118,538 --------------- -------------- 6,258,243 7,126,391 =============== ============== The Company sells a substantial portion of its products to two customers. Sales to these customers amounted to $3,039,086 (49% of net sales) in 1996 and $4,288,238 in 1995 (60% of net sales), respectively. At March 31, 1996 and 1995, amounts due from these customers included in accounts receivable, were $1,022,725 and $1,010,535, respectively. During fiscal 1996, sales from the Secure Sentinel product line were responsible for approximately 50% of the Company's overall revenue. The loss of either of these two customers would have a material adverse effect on the Company's financial position and results of operations. F-16 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 12. ACQUISITION OF EUROPEAN BUSINESS ASSOCIATES: On September 15, 1995, MicroFrame Europe N.V., a newly formed wholly-owned subsidiary, acquired all of the issued and outstanding shares of capital stock of European Business Associates BVBA of Brussels, Belgium ("the Seller"), a marketing organization which specializes in creating and managing distribution networks and OEM relations for suppliers to the telecommunications industry. MicroFrame Europe N.V. will serve as the Company's European sales and distribution coordinator as well as provide technical support services for the Company's authorized European distributors. The acquisition was accounted for under the purchase method of accounting. The results of the operations of MicroFrame Europe N.V. are included with the Company's results of operations from the date of acquisition. This acquisition did not have a significant impact on the results of operations. The Company issued cash and common stock valued at $128,125, assumed liabilities of $59,783, and incurred $35,075 in additional costs related to the acquisition. In addition, the Company shall pay the Seller, on each anniversary for a period of five years, a cash and stock earn out as stipulated in the Share Purchase Agreement. At March 31, 1996, the Company has accrued approximately $25,000 for these costs. Total consideration as allocated to the assets acquired was as follows: Current assets $ 90,226 Property and equipment 29,497 Other assets 1,650 Goodwill 101,610 ---------- $ 222,983 ========== 13. FOURTH QUARTER DATA: In the fourth quarter of fiscal 1996, the Company recorded the following adjustments: a $574,900 valuation allowance against the deferred tax asset (see Note 6); a $120,000 provision related to the separation of an officer (see Note 8); a $100,000 provision related to the New York State sales tax assessment (see Note 9), and a $100,000 provision relating to accrued vacation. In addition, the Company determined that certain inventory, due to discontinuance of product lines and capitalized software due to new product development were obsolete. The Company recorded a $150,000 provision for inventory obsolescence and a $100,000 write-off of certain capitalized software development costs. F-17 MICROFRAME, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Years Ended March 31, 1996 and 1995 14. SUBSEQUENT EVENT: In April, 1996, the Company sold 860,000 shares of common stock to unrelated investors, at $1.25 per share and received net proceeds of approximately $1,050,000. In conjunction with this sale, warrants to purchase 860,000 shares of common stock with an exercise price of $1.50 and warrants to purchase an additional 860,000 shares of common stock with an exercise price of $2.00 were issued. These warrants expire in April, 2000. In addition, the Company sold 241,467 shares of common stock to four current shareholders of record who held the contractual right to maintain their share of ownership. The Company received net proceeds of $301,834. In conjunction with this sale, warrants to purchase 241,467 shares of common stock with an exercise price of $1.50 and warrants to purchase an additional 241,467 shares of common stock with an exercise price of $2.00 were issued. These warrants expire in April, 2000. On June 21, 1996, the bank and the Company agreed to the following repayment terms, for the existing line of credit at June 15, 1996 of $400,000: $100,000 by July 31, 1996; $100,000 by August 31, 1996; $100,000 by September 29, 1996; and $100,000 by October 31, 1996. On June 17, 1996 the Company repaid $100,000. In addition, the bank agreed to honor the existing terms of the capital expansion credit facility. F-18 SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Edison and State of New Jersey, on June 27, 1996. MICROFRAME, INC. By: /s/ Stephen B. Gray ----------------------- Stephen B. Gray, President and Chief Operating Officer In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature and Title ------------------- /s/ Stephen B. Gray - -------------------------------- Stephen B. Gray, President and Chief Operating Officer (Principal Executive Officer) June 27, 1996 /s/ Mark A. Simmons - -------------------------------- Mark A. Simmons, Vice President - Operations, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) June 27, 1996 /s/ Stephen M. Deixler - -------------------------------- Stephen M. Deixler, Chairman of the Board of Directors, Chief Executive Officer, Treasurer June 27, 1996 /s/ Michael Radomsky - -------------------------------- Michael Radomsky, Executive Vice President, Secretary, Director June 27, 1996 -40- /s/ William H. Whitney - -------------------------------- William H. Whitney, Chief Technology Officer, Assistant Secretary, Director June 27, 1996 /s/ Michehl R. Gent - -------------------------------- Michehl R. Gent, Director June 27, 1996 /s/ Stephen P. Roma - -------------------------------- Stephen P. Roma, Director June 27, 1996 /s/ David I. Gould June 27, 1996 - -------------------------------- David I. Gould, Director EX-3.(II) 2 EX.3.3 - AMENDED BY-LAWS AMENDMENT NO. 2 TO THE BY-LAWS OF MICROFRAME, INC. --------------------------------- Pursuant to Section 3, Article VI of the By-laws of MicroFrame, Inc. (the "Corporation"), the Board of Directors of the Corporation amends the By-Laws of the Corporation as follows: ARTICLE V OFFICERS Section 2. Duties and Authority of President - The first line shall be deleted in its entirety, which states: "The president shall be chief executive officer of the Corporation." The remainder of Section 2 is hereby ratified and confirmed in its entirety. EX-10 3 EX.10.33 - PURCHASE AGREEMENT PURCHASE AGREEMENT May __, 1996 MicroFrame, Inc. Edison, New Jersey Re: Purchase of Units Gentlemen: 1. The undersigned subscriber ("Subscriber") has reviewed the most recent proxy statement and the most recent report on Form 10-KSB of MicroFrame, Inc. (the "Company") and all reports on Form 10-QSB and 8-K since such report on Form 10-KSB. Subscriber has been given access to all exhibits referred to in these reports, and it has had the opportunity to discuss the Company's affairs with the Company's officers. The Company represents and warrants to the Subscriber that all such filings and exhibits thereto are correct and accurate in all material respects and state all facts necessary to make not misleading such filings and exhibits thereto. 2. At a closing to occur concurrently herewith at the offices of the Company or of its counsel (the "Closing"), the Company will sell to Subscriber the number of Units set forth below, and Subscriber will purchase such Units from the Company, at a cash purchase price per unit equal to $1.25. The purchase price shall be paid by immediately available funds. 3. Each Unit consists of one share of Common Stock (a "Share"), one Class A Warrant to purchase one share of Common Stock, and one Class B Warrant to purchase one share of Common Stock. The Class A and the Class B Warrants are in the form of an Exhibit to this Agreement and are collectively referred to as the "Warrants." The Shares of Common Stock which may be acquired upon exercise of the Warrants are referred to herein as the "Underlying Shares." The Units, the Shares, and the Underlying Shares are collectively referred to herein as the "Securities." 4. (a) Subscriber represents and warrants that it is purchasing the Units solely for investment solely for its own account and not with a view to or for the resale or distribution thereof except as permitted under the registration statements referred to below. (b) Subscriber understands that it may sell or otherwise transfer the Securities only if the Securities are duly registered under the Securities Act of 1933, as amended (the "Securities Act") and registered or qualified in every applicable state or other jurisdiction, or if Subscriber shall have received the favorable opinion of counsel to the Subscriber, which opinion of counsel shall be satisfactory to counsel to the Company, to the effect that such sale or other transfer may be made in the absence of registration under the Securities Act and registration or qualification in every applicable state or other jurisdiction. The certificates representing the Securities will be legended to reflect these restrictions, and stop transfer instructions will apply. Subscriber realizes that the Securities are not a liquid investment. 5. (a) Not later than 60 days after the Closing, the Company will at its expense file one registration statement on Form S-3 (or, if Form S-3 is not available, on Form S-1) with respect to the Shares and the Underlying Shares. The Company shall use its best efforts to cause such registration statement to become effective not later than 90 days after the date of such request, and to remain effective for four years, or if earlier, either until all Shares and Underlying Shares have been sold under the registration statement or Rule 144 or any similar rule is available for the sale of all Shares and Underlying Shares. The Company represents and warrants that it is now eligible to file registration statements on Form S-3 for secondary offerings. (b) To the extent not already registered under paragraph (a) above, Subscriber shall also be entitled at the Company's expense to include the Shares and the Underlying Shares in any one or more registration statements (other than on Form S-4 or S-8) which the Company files under the Securities Act at any time after the Closing. The Company shall give to the Subscriber not less than 20 days' prior written notice of any prospective filing of any registration statement aforesaid. In the case of underwritten offerings, registration under this Section (b) shall be limited to that number of Shares and Underlying Shares as in the good faith opinion of the underwriter can be sold without materially and adversely affecting the Company's underwriting. In the event of any underwritten offering in which Subscriber elects to participate, Subscriber shall agree to be bound by the Underwriting Agreement and all documents contemplated thereunder. (c) The Company shall not be obligated to pay Subscriber's underwriting discounts or the fees of Subscriber's personal counsel. (d) All registrations shall be accompanied by blue sky clearances in New York, New Jersey and such other States as Subscriber may reasonably request. (e) The Company shall supply Subscriber with a reasonable number of copies of all registration materials and prospectuses. The Company and Subscriber shall execute and deliver to each other and to any underwriters indemnity agreements which are conventional in registered offerings of this type in connection with the transfer of the Securities purchased hereunder. (f) Subscriber may assign its registration rights in connection with the transfer of the Securities purchased hereunder. 6. (a) Subscriber has not relied upon the advice of a "Purchaser Representative" (as defined in Regulation D of the Securities Act) in evaluating the risks and merits of this investment. Subscriber has the knowledge and experience to evaluate the Company and the Shares and the risk and merits relating thereto. -2- (b) Subscriber acknowledges that Subscriber is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated pursuant to the Securities Act of 1933, as amended ("Accredited Investor"), and shall be such on the date any Underlying Shares are issued to the holder; Subscriber's individual net worth, in the case of and individual only, exceeds $1,000,000; and in the case of non-individual subscribers, all of its equity owners or holders are Accredited Investors; Subscriber acknowledges that Subscriber is able to bear the economic risk of losing Subscriber's entire investment in the Units and understands that an investment in the Company involves substantial risks; Subscriber has the power and authority to enter into this agreement, and the execution and delivery of, and performance under this agreement has been approved by all necessary corporate action and shall not conflict with any rule, regulation, judgment or agreement applicable to the Subscriber. (c) Except as disclosed to the Company prior to the Closing, Subscriber does not have any agreement or understanding with any other subscriber for Units, and is acting independently with regard to its subscription for purchase and ownership of the Units. (d) Subscriber's current intent is to acquire the Units for investment and not with a view to taking any of the actions described in Items 4(a) through 4(j) of Schedule 13D, and, if applicable to Subscriber, Subscriber will duly file a true, accurate and complete form of report on Form 13-D pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended. 7. This Agreement may not be changed or terminated except by written agreement. It shall be binding on the parties and on their personal representatives and permitted assigns. 8. This Agreement shall be governed by the internal laws of the State of New Jersey. 9. Each party hereto shall be responsible for its own expenses with regard to this Agreement. Subscriber: _______________________________________ Type or Print Name: ___________________ Address: ______________________________ Number of Units: ______________________ AGREED: MICROFRAME, INC. By: ___________________________________ -3- This Warrant and the Common Stock issuable on exercise of this Warrant (the "Underlying Shares") may be transferred, sold, assigned or hypothecated, only if registered by the Company under the Securities Act of 1933 (the "Act") and if registered or qualified in every applicable state or other jurisdiction, or if the Company has received the favorable opinion of counsel to the Holder, which opinion and counsel shall be satisfactory to the counsel to the Company, to the effect that such registration or qualification of the Warrant or the Underlying Shares is not necessary in connection with such transfer, sale, assignment or hypothecation. MICROFRAME, INC. [CLASS A WARRANT] [CLASS B WARRANT] DATED: as of _____________ Number of Shares: Holder: Address: ________________________________________ THIS CERTIFIES THAT the Holder is entitled to purchase from MicroFrame, Inc., a New Jersey corporation (hereinafter called the "Company"), at [$1.50 per share for Class A] [$2.00 per share for Class B] the number of shares of the Company's common stock set forth above ("Common Stock"). 1. (a) All rights granted under this Warrant shall expire at 5:00 p.m., New York City time, on [the fourth anniversary of the date of grant], and no such shares of Common Stock may be acquired under this Warrant from and after such date. 2. This Warrant and the Common Stock issuable on exercise of this Warrant (the "Underlying Shares") may be transferred, sold, assigned or hypothecated, only if registered by the Company under the Act and registered and qualified in every applicable state or other jurisdiction or if the Company has received the favorable opinion of counsel to the holder, which opinion and counsel shall be satisfactory to counsel to the Company, to the effect that registration of the Warrant or the Underlying Shares and registration and qualification in every applicable state is not necessary in connection with such transfer, sale, assignment or hypothecation. The Underlying Shares shall be appropriately legended to reflect this restriction and stop transfer instructions shall apply. The restriction on transfer contained in this Section shall apply to all successive transfers. -4- 3. The Common Stock underlying this Warrant is entitled to registration rights under a separate agreement with Holder. 4. Any permitted assignment of this Warrant shall be effected by the Holder by (i) executing an appropriate form of assignment; (ii) surrendering the Warrant for cancellation at the office of the Company, accompanied by the opinion of the counsel referred to above; and (iii) unless in connection with an effective registration statement which covers the sale of this Warrant (it being understood that no registration rights have been granted for the sale of this Warrant, as distinguished from the sale of the Shares underlying this Warrant) and or the Shares underlying the Warrant, delivery to the Company of the statement by the Holder (in a form acceptable to the Company and its counsel) that such Warrant is being acquired by the Holder for investment and not with a view to its distribution or resale; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) new Warrants representing in the aggregate rights to purchase the same number of Shares as are purchasable under the Warrant surrendered. Such Warrants shall be exercisable immediately upon any such assignment of the number of Warrants assigned. 5. The term "Holder" should be deemed to include any transferee Holder of this Warrant. 6. The Company covenants and agrees that all shares of Common Stock which may be issued upon exercise hereof will, upon issuance, be duly and validly issued, fully paid and non-assessable and no personal liability will attach to the Holder thereof. 7. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 8. In the event that while this Warrant is outstanding, the outstanding shares of Common Stock of the Company are at any time increased or decreased or changed into or exchanged for a different number or kind of share or other security of the Company or of another Corporation through reorganization, merger, consolidation, liquidation, recapitalization, stock split, combination of shares or stock dividends payable with respect to such Common Stock, appropriate adjustments in the number and kind of such securities then subject to this Warrant shall be made effective as of the date of such occurrence so that the position of the Holder upon exercise will be the same as it would have been had he owned immediately prior to the occurrence of such events the Common Stock subject to this Warrant. Such adjustment shall be made successively whenever any event listed above shall occur and the Company will notify the Holder of the Warrant of each such adjustment. Any fraction of a share resulting from any adjustment shall be eliminated and the price per share of the remaining shares subject to this Warrant adjusted accordingly. 9. The rights represented by this Warrant may be exercised at any time within the period above specified by (i) surrender of this Warrant (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the exercise price for the number of -5- Shares specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) unless in connection with an effective registration statement which covers the sale of the shares underlying the Warrant, the delivery to the Company of a statement by the Holder (in a form acceptable to the Company and its counsel) that such Shares are being acquired by the Holder for investment and not with a view to their distribution or resale. The certificates for the Common Stock so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days after all requisite documentation has been provided, after the rights represented by this Warrant shall have been so exercised, and shall bear a restrictive legend with respect to any applicable securities laws. 10. This Warrant shall be governed by and construed in accordance with the local laws of the State of New Jersey. The New Jersey courts shall have exclusive jurisdiction over this instrument and the enforcement thereof. Service of process shall be effective if by certified mail, return receipt requested. All notices shall be in writing and shall be deemed given upon receipt by the party to whom addressed. This instrument shall be enforceable by decrees of specific performances as well as other remedies. IN WITNESS WHEREOF, MicroFrame, Inc. has caused this Warrant to be signed by its duly authorized officers under its corporate seal, and to be dated as of the date set forth above. MICROFRAME, INC. By: ___________________________________ -6- PURCHASE FORM (To be signed only upon exercise of Warrant) The undersigned, the holder of the foregoing Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant for, and to purchase thereunder, _____ shares of no par value Common Stock and herewith makes payment of $__________ thereof, and requests that the certificates for shares of Common Stock be issued in the name(s) of, and delivered to _______________________________ whose address(es) is (are) ____________________________________________________. Dated: ________________, 19___ _______________________________ _______________________________ Address -7- TRANSFER FORM (To be signed only upon transfer of the Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto ______________ the right to purchase shares of Common Stock represented by the foregoing Warrant to the extent of __________ shares of Common Stock, and appoints ___________________________ attorney to transfer such rights on the books of __________________________, with full power of substitution in the premises. Dated: ________________, 19___ ____________________________ Holder ____________________________ Address In the presence of: -8- EX-10 4 EX.10.34 - CONSULTING AGREEMENT CONSULTING AGREEMENT AGREEMENT, made as of April 1, 1996, between MICROFRAME, INC., a New Jersey corporation having its principal office at 21 Meridian Road, Edison, New Jersey 08820 (the "Company"), and LONNIE L. SCIAMBI, an individual residing at 262 North Maple Avenue, Basking Ridge, New Jersey 07920 (the "Consultant"). WITNESSETH: WHEREAS, Consultant has resigned as an employee and officer o the Company; and WHEREAS, the Company desires to have Consultant render, and Consultant desires to render, certain consulting services from time to time on the terms herein provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. CONSULTING SERVICES; CONSULTING TERM. (a) The Company hereby retains Consultant to perform and Consultant agrees to render to the Company on the terms and conditions herein set forth, such consultative and advisory services as may be requested by the Board of Directors, the President and Chief Operating Officer and the Chief Executive Officer of the Company, including but not limited to, rendering advice to the Company on potential strategic alliances, mergers and acquisitions and future financings and rendering such other advisory services as are consistent with Consultant's position. (b) The Consultant's obligation to perform consulting services under this Agreement shall commence on the date hereof and shall continue for a period of six (6) months thereafter, unless earlier terminated as provided under the terms and conditions of this Agreement (the "Consulting Term"). (c) Consultant will make himself available to the Company during the Consulting Term, as hereinafter defined, at such places and at such times as shall be mutually convenient for Consultant and the Company. Consultant shall report only to the Board of Directors and the President and Chief Operating Officer and the Chief Executive Officer of the Company during the Consulting Term. Consultant covenants and agrees that during the Consulting Term he will devote his time and efforts to the furtherance of the interests of the business of the Company and its subsidiaries and affiliates. (d) In the event that during the Consulting Term, Consultant introduces to the Company a buyer for the Company's business and/or a potential acquisition or joint venture candidate for the Company and provided that the Board of Directors of the Company approves such transaction and further provided that such sale and/or acquisition is closed no later than twelve (12) months after the expiration of the Consulting Term, then Consultant shall receive a fee in an amount to be negotiated by the Company and the Consultant, but one intended in principle to apply the so-called Lehman formula, payable in cash or in kind as the parties may agree. Consultant acknowledges that he will not receive a fee or any other consideration from the Company in connection with any transaction between the Company and Bogen Communications and between the Company and Infinity Partners, Ltd. 2. CONSULTING FEES; REIMBURSABLE EXPENSES. (a) Subject to the terms and conditions herein, for the full and complete performance of the duties and services to be rendered by Consultant and the covenants, representations, warranties and agreements made by Consultant hereunder, the Company agrees to pay Consultant a consulting fee in the aggregate sum of $100,000 ("Consulting Fee"), payable as follows: (i) a one-time payment in the sum of $10,000 upon execution of this Agreement, the receipt of which is hereby acknowledged by Consultant; and (ii) subject to Paragraph 2(a)(iii) below, the aggregate sum of $90,000 in six (6) equal consecutive monthly installments on the first (1st) day of each month, commencing April 1, 1996, upon the Company's receipt of monthly invoices from Consultant. (iii) It is understood and agreed by the parties that any amounts paid by the Company to the Consultant as salary on or after April 1, 1996, in connection with his prior employment agreement that relates to the period following April 1, 1996 shall reduce the amounts payable to Consultant pursuant to paragraph 2(a)(ii) above and Consultant acknowledges and agrees that such amounts paid as salary may be offset against the installments of the Consulting Fee to be paid to him pursuant to said paragraph. (b) During the Consulting Term, the Company shall reimburse Consultant for any actual and reasonable out-of-pocket travel and entertainment expenses incurred by him which are necessary for Consultant to perform his duties under this Agreement pursuant to Paragraph 1 above, which expenses are approved in advance by the President and Chief Operating Officer of the Company, upon the submission of appropriate documentation with respect thereto. (c) Consultant shall be responsible for payment of all federal, state and local taxes and similar payments from the monthly Consulting Fee and for all fees earned under this Agreement pursuant to Paragraph 1(d) and shall indemnify the Company and hold the Company harmless from any claim that the Company is obligated to make such payments. -2- 3. RELATIONSHIP OF PARTIES. It is specifically agreed and understood that the relationship of Consultant to the Company hereto is that of an independent contractor and this Agreement and the services to be rendered by Consultant to the Company shall not for any purpose whatsoever or in any way or manner create any partnership, agency, joint venture, employer-employee or other relationship between the Company, on the one hand, and Consultant, on the other hand. In no event shall Consultant be able to bind the Company. Consultant shall not allege or take the position in any administrative or legal proceeding or otherwise that his relationship with the Company is other than that of an independent contractor of the Company. 4. STOCK OPTIONS. (a) As additional consideration for the services to be rendered by Consultant under this Agreement, the Company, subject to the terms and conditions of the 1994 Stock Option Plan of the Company (the "Plan"), hereby grants to Consultant as of the date hereof, a Consultant Option (as defined in the Plan), to purchase an aggregate of 23,196 shares of common stock, $.001 par value per share, of the Company (the "Common Stock") at $1.94 per share, being the fair market value of such shares of Common Stock as of the date hereof. A copy of the Consultant Stock Option Contract is annexed hereto as Exhibit A and is made a part hereof. (b) In the event Consultant's consultancy terminates on the Early Termination Date, as hereinafter defined in Paragraph 6(a), and provided Consultant has complied with the terms and conditions herein, the Company agrees to grant to Consultant or his estate on the business day preceding the Early Termination Date (the "Termination Option Date") an additional Consultant Option to purchase such number of shares of Common Stock to be determined by dividing the fair market value of a share of Common Stock (as determined in accordance with the Plan) on the Termination Option Date by the aggregate amount of the Consulting Fee which remains unpaid and is owed to the Consultant as of the Termination Option Date. Any such additional Consultant Option shall contain substantially the same terms and provisions as are contained in Exhibit A. 5. CONSULTING BENEFITS. (a) During the Consulting Term the Company shall reimburse Consultant, upon the submission of invoices, for the expenses incurred by Consultant for the continuation of Consultant's health and medical benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") under the Company's current plan in place for its employees. (b) Consultant shall receive no other retirement, profit sharing, health benefits or any other similar benefits which may at any time be payable to employees of the Company pursuant to any plan or policy of the Company relating to such benefits, except as set forth in Paragraph 5(a) herein. -3- (c) During the Consulting Term Consultant shall receive an automobile allowance of seven hundred and fifty ($750) dollars per month. (d) During the Consulting Term office space and services will be provided to Consultant as determined by the President and Chief Operating Officer of the Company in order for Consultant to perform his consulting services hereunder. Notwithstanding the foregoing, Consultant shall not be provided with Amex or other credit cards or E-Mail. Consultant hereby acknowledges and represents to the Company that there are currently no obligations outstanding with respect to any credit cards used by him in connection with his services to the Company. 6. TERMINATION. (a) In the event that Consultant secures a full- time position elsewhere prior to the expiration of the Consulting Term, then upon five (5) days written notice by the Company to Consultant, this Agreement shall terminate as of the date set forth in the notice (the "Early Termination Date"), and provided Consultant has complied with the terms and conditions hereunder, Consultant shall receive in lieu of the balance of the Consulting Fee which would be owed to Consultant through the expiration of the Consulting Term, a Consultant Option as stated above in Paragraph 4(b) and the Company shall have no further obligations to Consultant hereunder, except for the payment of any fees which Consultant may be entitled to under Paragraph 1(d) herein. (b) The Company may terminate the relationship with Consultant immediately for Cause (as hereinafter defined). Upon any such termination, the Company shall be released from any and all further obligations under this Agreement, except that the Company shall be obligated to provide Consultant with such portion of the Consulting Fee that has already been earned by Consultant through the date of such termination and any Consultant Options granted under this Agreement shall immediately terminate. Consultant will not be entitled to the payment of any other compensation or fees or benefits upon termination of this Agreement pursuant to this Paragraph 6, including any fees which Consultant may be entitled to under Paragraph 1(d) herein. Notwithstanding termination, Consultant's obligations under Paragraphs 7, 8, 9 and 10 shall continue pursuant to the terms and conditions of this Agreement. For the purposes of this Agreement, "Cause" shall include, without limitation, the following: (i) the willful and continued failure by the Consultant to substantially perform his services hereunder which amounts to a material neglect of his services to the Company; (ii) the willful engaging by the Consultant in misconduct which is materially injurious to the Company; (iii) the conviction of the Consultant of a felony; -4- (iv) the failure of the Consultant to comply with any material provision of this Agreement which has not been cured within thirty (30) days after written notice of such noncompliance has been given by the Company to the Consultant, or (v) the failure to comply with such material policies, procedures or directions of the Company as have been established on or prior to the date hereof by its Board of Directors and consistent with the terms of this Agreement, which failure has not been cured within thirty (30) days after notice of such noncompliance has been given by the Company to the Consultant. 7. NONDISCLOSURE; NONCOMPETITION. (a) The Consultant agrees not to use or disclose, either during the Consulting Term or at any time thereafter, except with the prior written consent of the Company, any trade secrets, proprietary information, or other information that the Company considers confidential relating to formulas, designs, processes, suppliers, machines, compositions, improvements, inventions, operations, manufacturing, processing, marketing, distributing, selling, cost and pricing data, master files or consumer lists utilized by the Company, or any confidential information (including but not limited to salary compensation) on the employees, and all other similar confidential information material to the conduct of the business, which is not presently generally known to the public and which was obtained or acquired by the Consultant while he was in the employ of the Company or which is obtained or acquired by Consultant as a result of this consultancy relationship; provided, however, that this provision shall not preclude the Consultant from (i) the use of or disclosure of such information which presently is known generally to the public or which subsequently comes into the public domain, other than by way of disclosure in violation of this Agreement or in any other unauthorized fashion, or (ii) disclosure of such information required by law or court order, in which case the Consultant will give the Company three business days written notice (or, if disclosure is required to be made in less than three business days, then such notice shall be given as promptly as practicable after determination that disclosure may be required) of the nature of the law or order requiring disclosure and the disclosure to be made in accordance therewith. (b) During the Consulting Term and for a period of two years from the date hereof, the Consultant shall not, within the United States or Canada, directly or indirectly: (i) own, manage, operate, join, control, participate in, invest in, or otherwise be connected with, in any manner, whether as an officer, director, employee, partner, investor, consultant, lender or otherwise, any business entity which is engaged in, or is on any way related to the business of the Company and its affiliates as currently constituted and as constituted during the Consulting Term, or (ii) on the Consultant's behalf or on behalf of anyone else engaged in such line of business of the Company and its affiliates as currently constituted and as constituted during the Consulting Term (A) persuade or attempt to persuade any employee of the Company and its affiliates to leave the employ of the Company or to become employed by any person other than the Company and its affiliates, (B) persuade or attempt to persuade any current client or former client of the Company and its affiliates -5- to cease doing business with, or to reduce the amount of business it does or intends or anticipates doing with, the Company and its affiliates, or (C) solicit the business of any such clients or former clients with respect to the business of the Company and its affiliates as currently and future constituted. (c) Nothing herein contained shall be deemed to prohibit the Consultant from investing in securities of a business entity if the securities of such entity are listed for trading on a national securities exchange or traded in the over-the-counter market and the Consultant's holdings therein represent less than five percent of the total number of shares or principal amount of other securities of such entity outstanding. (d) It is expressly agreed by Consultant that the nature and scope of each of the provisions set forth above in this Paragraph 7 are reasonable and necessary. If, for any reason, any aspect of the above provisions as it applies to Consultant is determined by a court of competent jurisdiction or an arbitrator to be unreasonable or unenforceable, the provisions shall only be modified to the minimum extent required to make the provisions reasonable and/or enforceable, as the case may be. Consultant acknowledges and agrees that his services are of unique character and expressly grants to the Company or any successor or assign the right to enforce the above provisions through the use of all remedies available at law or in equity, including, but not limited to, injunctive relief. 8. COMPANY PROPERTY. (a) Consultant shall promptly disclose in writing to the Board of Directors of the Company all inventions, discoveries, designs, developments, processes, software programs, works of authorship, formulas, data, techniques and any other improvements conceived, devised, created, or developed by Consultant (either alone or with others) during the Consulting Term (collectively, "Invention"), and Consultant shall transfer and assign to the Company all right, title and interest in and to such Invention, including any and all domestic and foreign patent rights, domestic and foreign copyright rights therein, and any renewal thereof. Such disclosure is to be made promptly after the conception of each Invention, and each Invention is to become and remain the property of the Company, whether or not patent or copyright applications are filed thereon by the Company. On request of the Company, Consultant shall execute from time to time, during or after the termination of this Agreement, such further instruments including, without limitation, applications for patents and copyrights and assignments thereof as may be deemed necessary or desirable by the Company to effectuate the provisions of this Paragraph 8. (b) All records, files, lists, including computer generated lists, drawings, documents, equipment and similar items relating to the Company's business which Consultant prepared or received from the Company during the course of Consultant's prior employment or which Consultant shall prepare or receive during the Consulting Term shall remain the Company's sole and exclusive property. Upon termination of this Agreement, and in any event at the request of the Company at any time, Consultant shall promptly return to the Company all property of the Company -6- in his possession. Consultant further represents that he will not copy or cause to be copied, print out or cause to be printed out any software, documents or other materials originating with or belonging to the Company. Consultant additionally represents that, upon termination of his consultancy with the Company or earlier at the request of the Company, he will not retain in his possession any such software, documents or other materials in machine or human readable form. 9. REMEDY. It is mutually understood and agreed that Consultant's services are special, unique, unusual, extraordinary and of an intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in the event of any breach of this Agreement by Consultant, including, but not limited to, the breach of the non-disclosure, non-solicitation and non-compete clauses under Paragraphs 7 and 8 hereof, the Company shall be entitled to equitable relief by way of injunction or otherwise in addition to any damages which the Company may be entitled to recover. In addition, the Company shall be entitled to reimbursement from Consultant, upon request, of any and all reasonable attorneys' fees and expenses incurred by it in enforcing any term or provision of this Agreement. 10. REPRESENTATIONS AND WARRANTIES OF CONSULTANT. (a) In order to induce the Company to enter into this Agreement, Consultant hereby represents and warrants to the Company as follows: (i) Consultant has the legal capacity and unrestricted right to execute and deliver this Agreement and to perform all of his obligations hereunder; (ii) the execution and delivery of this Agreement by Consultant and the performance of his obligations hereunder will not violate or be in conflict with any fiduciary or other duty, instrument, agreement, document, arrangement or other understanding to which Consultant is a party or by which he is or may be bound or subject; and (iii) Consultant is not a party to any instrument, agreement, document, arrangement or other understanding with any person (other than the Company) requiring or restricting the use or disclosure of any confidential information or the provision of any employment, consulting or other services. (b) Consultant hereby agrees to indemnify and hold harmless the Company from and against any and all losses, costs, damages and expenses (including, without limitation, its reasonable attorneys' fees) incurred or suffered by the Company resulting from any breach by Consultant of any of his representations or warranties set forth in Paragraph 10(a) above. 11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to Consultant that the execution, delivery of this Agreement and the performance by the Company of its obligations hereunder have been duly authorized by all necessary corporate action and does not violate any agreement by which it is a party or law by which it is bound. 12. NOTICES. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or by courier service or if mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or by telecopy (with a hand copy to follow), in all cases addressed to the party for whom intended at his or its -7- address set forth below (or to such other address as a party shall have designated by notice in writing to the other party given in the manner provided by this paragraph): If to the Company: MicroFrame, Inc. 21 Meridian Road Edison, New Jersey Attention: Stephen B. Gray, President and Chief Operating Officer Telecopy: (908) 494- 4570 with a copy to: Parker Chapin Flattau & Klimpl, LLP 1211 Avenue of the Americas New York, New York 10036 Attention: James Alterbaum, Esq. Telecopy: (212) 704-6288 If to Consultant: Mr. Lonnie L. Sciambi 262 North Maple Avenue Basking Ridge, New Jersey 07920 Telecopy: (908) 953-9420 with a copy to: Norman H. Donald III, Esq. Brock, Fensterstock, Silverstein, McAuliffe & Wade 153 E. 56th St. (56th Floor) New York, New York 10022 Telecopies: (212) 371-5500 and (770) 772-6291 Notices shall be deemed to have been delivered on the date five (5) days after mailing if mailed as provided above or on the date of delivery if delivered by hand or courier service. 13. AMENDMENTS, MODIFICATIONS, WAIVERS. No amendment, modification or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by the Company and Consultant (in the case of an amendment or supplement) or, except as otherwise provided herein, by the waiving party (in the case of a waiver). -8- 14. APPLICABLE LAW. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of New Jersey, without giving effect to its conflicts of law or choice of law rules. 15. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, except as otherwise provided below, shall be settled by arbitration in New York City, administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof; provided however, that notwithstanding the above, any matter with respect to which an injunction or other equitable relief is sought shall be decided by any of the State Courts located within the County of Middlesex, State of New Jersey and Federal Courts located in the State of New Jersey and the parties hereby consent to the exclusive jurisdiction of same, waive any and all objections to venue in the County of Middlesex and agree that service of process on the parties may be made in the manner provided for the giving of notices pursuant to Paragraph 12 hereof, in each case with respect to any arbitration, suit, action or other proceeding arising under or relating to this Agreement. 16. ENTIRE AGREEMENT; SURVIVAL. This Agreement, together with (a) the Consultant Stock Option Contract, dated April 1, 1996, between the Company and Consultant which is annexed hereto as Exhibit A, (b) the Agreement and General Release dated April 29, 1996 between the Company and Consultant, and (c) the three Letters of Resignation dated April 1, 1996 by Consultant, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and replaces all prior agreements, understandings and representations, oral or written, with regard to such matters. In the event that the Consultant : (i) does not timely execute, or (ii) timely revokes the Agreement and General Release pursuant to Paragraphs 13 and 14 thereof, this Agreement and the Consultant Sock Option Contract shall be null, void and of no effect. 17. SEVERABILITY. If any term or provision of this Agreement shall be held to be illegal, invalid or unenforceable under applicable law, it shall not affect the continued legality, validity and enforceability of each remaining term and provision hereof, each of which shall continue in full force and effect. 18. FULL UNDERSTANDING. Consultant represents and agrees that he fully understands his right to discuss all aspects of this Agreement with his private attorney, that to the extent, if any, that he desired, he availed himself of this right, that he has carefully read and fully understands all of the provisions of this Agreement, that he is competent to execute this Agreement, that his agreement to execute this Agreement has not been obtained by any duress and that he freely and voluntarily enters into it, and that he has read this document in its entirety and fully understands the meaning, intent and consequences of this document which is that it constitutes a consulting agreement. 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED BENEFICIARIES. Neither this Agreement, nor any of Consultant's rights, powers, duties or obligations hereunder, may be assigned by Consultant. This Agreement shall be binding upon and inure to the benefit of Consultant -9- and his heirs and legal representatives and the Company and its affiliates and subsidiaries and their successors and assigns. Successors of the Company shall include, without limitation, any corporation or corporations acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, purchase, lease or otherwise, and such successor shall thereafter be deemed "the Company" for the purpose hereof. 20. COUNTERPARTS. This Agreement may be executed in one or more counterparts and shall become effective when one or more counterparts have been signed and delivered by each of the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. MICROFRAME, INC. By: /s/ Stephen B. Gray ---------------------------------- Name: Stephen B. Gray Title: President and Chief Operating Officer /s/ Lonnie L. Sciambi ------------------------------------- LONNIE L. SCIAMBI -10- EX-10 5 EX.10.35 - FISCAL 1997 INCENTIVE MICROFRAME, INC. FISCAL 1997 INCENTIVE PLAN Effective 4/1/96 THE FISCAL 1997 INCENTIVE PLAN HAS THE FOLLOWING ELEMENTS: -REVENUE BASED INCENTIVE -OPERATING PROFIT BASED INCENTIVE REVENUE BASED INCENTIVE: (STOCK OPTIONS ONLY) - --------------------------------------------- STOCK OPTION: (Min. payout at plan -- 325K OPTIONS) - -All calculated Stock options earned/ calculated against a $8.8M Revenue target. This is a binary earnout. All options are earned only if/ when we hit $8.8M in Revenue. This is an all or nothing bonus. - -Minimum level of achievement to activate plan =$8.8M in revenues. - -Stock option pool calculated as 2% of revenues and base number of stock options per employee determined by pro-rata salary combined with performance rating of employee then factored by the following: - -Stock options earned/ allocated as follows: a)Non-managers 1 times calculated entitlement b)Managers 1.5 times calculated entitlement c)Exec. level 3 times calculated entitlement - -Stock options price calculated under the current authorized MicroFrame, Inc. ISO stock option plan via the Time Accelerated Restricted Stock Option Plan (TARSP) and distributed at the end of the current fiscal year upon achievement of targets as outlined above. MICROFRAME FISCAL 1977 INCENTIVE PLAN Effective 4/1/96 OPERATING PROFIT BASED INCENTIVE: (CASH/STOCK OPTIONS) - ------------------------------------------------------ Minimum level of achievement to activate plan =target $498K Oper. Result Profit. No Maximum payout on plan. Total cash and stock options determined by the computed percentage achievement of actual results verses goal of $498K. CASH PORTION: (PAYOUT AT PLAN =$50K) Profit based incentive to equal 10% of Pre-tax Operating Result w/ payment per employee determined by pro-rata salary combined with performance rating of employee. STOCK OPTION PORTION: (PAYOUT AT PLAN -- 100K OPTIONS) Options paid as in Revenue incentive section using the same formulas -2- EX-23 6 EX.23 (A) CONSENT PRICE WATERHOUSE LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statement No. 33-61837 of MicroFrame, Inc. on Form S-8 of our report dated May 19, 1995 appearing on page F-1.1 of MicroFrame, Inc.'s Annual Report on Form 10-KSB for the year ended March 31, 1996. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP New York, New York June 27, 1996 EX-23 7 EX.23(B) - CONSENT COOPERS AND LYBRAND CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of MicroFrame, Inc. on Form S-8 (File No. 33-61837) of our report dated June 21, 1996 on our audit of the consolidated financial statements as of March 31, 1996 and for the year then ended which report is included in this Annual Report on Form 10-KSB. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. New York, New York June 27, 1996 EX-27 8 FDS -- FOR YEAR ENDED 3/31/96
5 0000754813 MICROFRAME, INC. YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 48,302 0 1,640,561 (100,000) 1,084,870 2,751,159 961,627 (551,761) 3,558,171 1,914,095 0 0 0 3,718 1,567,525 3,558,171 6,258,243 6,258,243 2,789,855 7,546,652 99,123 0 34,917 (1,418,800) 574,900 (1,993,700) 0 0 0 (1,993,700) (0.54) (0.54)
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