-----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, OABoDJxCkFBK++x/rBO6Iq6lvPeanxrmXJrX0200bu7elQcQuRV/CubRYZcJeQYP bDFLPrivDmB4B6ZHzruZQw== 0000016590-00-000002.txt : 20000331 0000016590-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0000016590-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBEX CORP CENTRAL INDEX KEY: 0000016590 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042442959 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-06933 FILM NUMBER: 586772 BUSINESS ADDRESS: STREET 1: 360 SECOND AVE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178906000 MAIL ADDRESS: STREET 1: 360 SECOND AVE STREET 2: 360 SECOND AVE CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: CAMBRIDGE MEMORIES INC DATE OF NAME CHANGE: 19801204 10-K 1 10K 1999 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period to Commission file number 0-6933 CAMBEX CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04 244 2959 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 360 Second Avenue 02451 Waltham, Massachusetts (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 781-890-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] An Exhibit Index setting forth the exhibits filed herewith or incorporated by reference herein is included herein at Page A-1. The aggregate market value of the voting stock held by non-affiliates of Cambex Corporation as of March 28, 2000 was $49,482,993 based on the closing price of the common stock on that date. The number of shares of Cambex Corporation's common stock outstanding as of March 28, 2000: 9,635,259. 2 PART I Item 1. Business. Overview The Company is a designer and supplier of Fibre Channel hardware and software solutions for building Storage Area Networks (SAN). The Company's products include Fibre Channel host bus adapters, hubs, high availability software and disk arrays for building SANs in heterogeneous open systems operating environments. The Company also provides add-on memory for IBM enterprise servers. The rapid growth in the demand for increasing amounts of data storage is being driven by data intensive applications including the Internet, e-commerce, online transaction processing, multimedia, and data warehousing. As the amount of data storage grows, enterprises need better ways to share, manage and protect their data assets. As a result, Fibre Channel has emerged as a high- speed storage interconnect for accessing a corporation's data residing on disk storage arrays and tape back-up libraries. Fibre Channel technology is used to build Storage Area Networks, a new storage architecture, which delivers the increased availability, scalability, data sharing capability, performance, and manageability necessary to effectively utilize ever increasing amounts of data storage. Products The Company designs and markets three primary product families: Fibre Channel infrastructure products, disk storage arrays, and add-on memory for IBM enterprise servers. The Company's Fibre Channel infrastructure products include Fibre Channel host bus adapters (HBA) and hubs. The Company's HBAs provide Fibre Channel connectivity for UNIX, Linux and Windows NT servers allowing them to substantially expand the size, speed and scalability of their data storage. The Company's Dynamic Path Failover software for use with its HBAs provides high availability, load balancing, and a two-fold performance boost when using two adapters in a host server. The Company's Fibre Channel hub enables users to construct star topology Fibre Channel Storage Area Networks and allows users to non-disruptively add or remove server and storage resources from the network. The Company's disk storage arrays provide ultra reliable, highly available storage for heterogeneous UNIX, Linux and Microsoft Windows NT environments. The Company markets disk arrays with Fibre Channel, SCSI, and SSA host connectivity options for building enterprise-wide Storage Area Networks. The Company's memory products include IBM compatible mainframe memory for IBM 9672 and Multiprise 2000 mainframe enterprise servers. The Company also sells or leases trade-in memory which it acquires from its customers when this memory is replaced by new memory. In most transactions, when the Company upgrades a computer system with its memory, the customer pays the Company in whole or in part with memory already resident on the machine. On certain occasions, the memory already resident on the customer's machine is more valuable than the Company's memory, and in those cases, the Company pays the difference to the customer, net of a customary gross profit for the Company. 3 Research and Development The Company maintains a research and development program directed to the development of new products and to the continued improvement and refinement of its present products. The Company continues to invest in the research and development of new and existing Fibre Channel infrastructure and disk storage array products. The dollar amount spent by the Company during each of its last three fiscal years on such activities was approximately $1,097,000 in 1999, $1,379,000 in 1998, and $2,322,000 in 1997. Sales & Marketing Cambex utilizes both direct and indirect sales channels to market its products. The direct sales force sells to the Company's past and present customer base as well as develops new large accounts that prefer dealing directly with the manufacturer. The Company's indirect sales force sells to distributors, systems integrators, value-added resellers, and original equipment manufacturers (OEMs). Customer Service & Support The Company arranges for maintenance and service of its products at the time of lease or sale on a monthly or lifetime fee per system basis. It normally provides this maintenance through its own maintenance personnel or through third party maintenance organizations supported by the Company's personnel. The Company has an agreement with IBM Global Services for maintaining its Fibre Channel infrastructure and disk array products. Manufacturing The Company subcontracts the printed circuit board assembly of its products to several companies. The Company performs final assembly and testing of its products at the Company's plant in Waltham, Massachusetts. Most of the electronic components used in the Company's products are purchased from outside suppliers and are either standard items or custom manufactured to the Company's design and specifications and are generally available from several sources. Competition Primary competition for the Company's Fibre Channel infrastructure products include products from Emulex Corporation, QLogic Corporation, Hewlett-Packard Corporation, Vixel Corporation, Gadzoox Networks, Inc. as well as a number of other companies. The Company's primary competition for its disk storage arrays include products from International Business Machines Corporation (IBM), EMC Corporation, and Sun Microsystems among others. The market for the Company's add-on memory products is dominated by IBM. The Company believes that its success in competing is dependent upon its ability to offer products with better cost/performance characteristics than the competition. In addition, the Company believes that other competitive factors are non-price factors such as product quality, reliability and product features, as well as service and support capability. 4 Competition in the Fibre Channel infrastructure, disk storage array, and add-on memory markets is intense. The markets are characterized by rapid technological advances resulting in the frequent introduction of new products and services and by price reductions in established product categories. IBM announcements concerning new systems, improved performance characteristics of existing systems and price reductions have had adverse effects on the markets for the Company's products in the past. A number of other companies, some of which are substantially larger and have substantially greater resources than the Company, are engaged in the manufacture and marketing of products similar to those manufactured and marketed by the Company. More aggressive market and product positioning by certain of these significantly larger competitors would have a material adverse effect on the Company's business, results of operations, financial condition and/or liquidity. Backlog As of December 31, 1999, the dollar amount of the Company's firm backlog was approximately $98,000. On the same date of the preceding year, the comparable amount was approximately $151,000. All such backlog was deliverable within a year. Such backlog has no material seasonal characteristics. All equipment ordered by customers is subject to acceptance and satisfactory performance as well as the Company's ability to meet delivery schedules. The Company believes that backlog is not a meaningful indication of future business. Patents Although the Company owns 26 patents, it does not consider its patent position to be significant from a competitive standpoint. Significant Customers During fiscal 1999 and 1998, sales to one customer accounted for 11% of the Company's sales each year. No single customer accounted for 10% or more of sales during fiscal 1997. Employees On March 28, 2000, the Company employed 26 persons. Item 2. Properties The Company leases approximately 68,000 square feet of floor space in Waltham, Massachusetts, under a lease for a term ending May 31, 2003. This facility consists of office, manufacturing and R & D space. The Company subleases approximately 34,000 square feet of this space (which is approximately 50% of the Company's total leased space) for a term ending May 31, 2003. On March 1, 2000, the Company entered into a sublease agreement pursuant to which the Company sublet approximately 8,000 square feet in its Waltham, Massachusetts facility (which is approximately 12% of the Company's total leased space). The term of the sublease is coterminous with the primary lease and expires on May 31, 2003. 5 Item 3. Legal Proceedings The Company is involved in certain legal proceedings arising in the ordinary course of business. The Company believes that the outcome of these proceedings will not have a material adverse effect on the Company's financial condition. Item 4. Submission of Matters to a Vote of Security Holders. None. 6 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is traded over the counter. The approximate number of shareholders of record at March 28, 2000 was 538. The high and low sales prices for the Company's stock for each quarter during the years ended December 31, 1999 and December 31, 1998 are as follows: 1999 1998 High Low High Low First Quarter 0.33 0.16 0.34 0.28 Second Quarter 1.03 0.20 0.71 0.28 Third Quarter 3.13 0.69 0.52 0.28 Fourth Quarter 4.50 1.50 0.35 0.15 The Company has not paid dividends on its common stock in the past and does not expect to do so in the foreseeable future. Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Form 10-K. 7 Year Year Year Year Four Year Ended Ended Ended Ended Months Ended Ended December December December December December August 1999 1998 1997 1996 1995 1995 (In thousands, except per share amounts) Revenues $ 3,402 $ 3,749 $ 10,066 $ 22,917 $ 8,509 $35,152 Net income(loss) 96 (2,773) ( 6,597) ( 8,632) ( 2,855) ( 9,899) Per share data: Net income(loss) 0.01 ( 0.30) ( 0.72) ( 0.96) ( 0.32) ( 1.14) Weighted Average Common and Common Equivalent Shares Outstanding 10,390 9,300 9,100 9,000 8,920 8,700 Total assets $ 1,474 $ 1,474 $ 3,928 $ 13,033 $26,212 $32,027 Long-term debt 1,274 1,064 ----- ------ ------ ------ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Fiscal 1999 as compared with Fiscal 1998 The Company's revenues were $3,402,000 and $3,749,000 in 1999 and 1998, respectively. The Company's increase in revenues for Fibre Channel connectivity products in 1999 was offset by a decrease in service revenue. Cost of sales as a percentage of revenues was 42% and 79% in 1999 and 1998, respectively. The improved gross profit was due to product mix and decreased fixed costs. Research and development expenses represented 32% ($1,097,000) and 37% ($1,379,000) in 1999 and 1998, respectively. Sales and general and administrative expenses were $1,386,000 and $2,002,000 in 1999 and 1998, respectively. The reduction in expenses is due principally to the cost savings achieved from putting in place additional expense controls. Extraordinary income for 1999 consists of payment of other liabilities at a discount from face value. Other expense in 1998 was primarily legal and professional fees. 8 Fiscal 1998 as compared with Fiscal 1997 The Company's revenues were $3,749,000 and $10,066,000 in 1998 and 1997, respectively. The Company's revenues for mainframe storage and client/server products declined significantly in 1998. Cost of sales as a percentage of revenues was 79% and 94% in 1998 and 1997, respectively. Inventory write-downs in 1997 were approximately $2,700,000. Their effect on the cost of sales percentage was 28% in 1997. Research and development expenses represented 37% ($1,379,000) and 23% ($2,322,000) in 1998 and 1997, respectively. Sales and general and administrative expenses were $2,002,000 and $4,489,000 in 1998 and 1997, respectively. The reduction in expenses is due to the cost savings achieved from outsourcing certain activities and putting in place additional expense controls. Inflation The Company did not experience any material adverse effects in 1999, 1998 and 1997 due to general inflation. Liquidity and Capital Resources In November, 1999, the Company raised $550,000, including $125,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company and $125,000 from Philip C. Hankins, a Director of the Company, in cash from the issuance of 12% Notes Payable (the "Notes"), which are not due before November, 2000. In addition to the Note, each holder was issued a Stock Purchase Warrant (the "Warrant"), the exercise of which will allow the warrant holder to purchase two shares of common stock, at approximately $2.00 per share, for each dollar invested through the issuance of the Notes. From June 1, 1998 through August 18, 1999, the Company has raised approximately $1,270,000, including approximately $560,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company, in cash from the issuance of 10% Secured Subordinated Convertible Promissory Notes. Under the terms of the Notes, which are due on April 30, 2003, the holders may convert the notes into shares of common stock at a conversion price of $0.22 per share. In addition to the Note, each holder was issued a Stock Purchase Warrant, the exercise of which will allow the warrant holder to purchase one share of common stock, at $0.50 per share, for each dollar invested through the issuance of the Notes. On November 9, 1998, the Company entered into a loan and security agreement with a lender company, hereafter referred to as "Lender" which is owned by a relative of Joseph F. Kruy, Chairman and Chief Executive Officer of the Company, under which the Company may borrow up to a maximum of $650,000 being outstanding at any one time. Such loan is fully secured by all assets of the Company. The Company pays all collections from accounts receivable to the Lender not less frequently than each week until the outstanding loan amount plus related interest, which accrues at a 12% annual rate, is fully paid. Under the terms of the loan agreement, the Lender receives a warrant for the purchase of two shares of common stock, at $0.22 per share, for each dollar loaned to the Company. 9 Subsequent to the end of 1999, the Company raised an additional $2,000,000 in cash from the issuance of 8% Convertible Bridge Notes which are due in August and September, 2000. The notes are convertible at a weighted average share price of $4.08. The Company may redeem the notes at any time during the term of the notes. If the Company does not redeem the notes prior to maturity and the Company's stock price falls below certain levels, the holders are entitled to acquire additional shares. In addition to the notes, warrants to purchase 300,000 shares of common stock were issued at weighted average exercise prices of $4.54 per share. As discussed more fully in Note 1 to the financial statements, the Company has suffered recurring losses from operations. Consequently, the Company's ability to continue as a going concern, is dependent upon several factors, including the Company's ability to raise additional capital. The additional financing will be used to fund continuing operations of the Company, particularly in development, sales and marketing. The Company's management believes it has taken the appropriate corrective actions to reduce expenses through consolidation of the workforce and outsourcing certain operations and to increase revenue through new strategic alliances and selling products with improved gross margins. There are no assurances that such actions will increase revenues. The Company's cash and marketable securities were $367,000 and $211,000 at December 31, 1999 and December 31, 1998, respectively. Working capital was a negative $2,125,000 and $1,575,000 at December 31, 1999 and at December 31, 1998, respectively. During 1999, the Company expended $9,000 for capital equipment to support its growth. During fiscal 2000, the Company expects to acquire less than $100,000 of capital equipment. Year 2000 As stated previously, the Company evaluated the impact of changes necessary to achieve a year 2000 date conversion. As expected, the Company did not experience a material impact on future results due to conversion or noncompliance. Forward-Looking Statements The statements contained in "Management Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Annual Report on Form 10-K that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those reflected in the forward-looking statements. These forward-looking statements reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof or to publicly release the results of any revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents the Company files or has filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. 10 Item 8. Financial Statements and Supplementary Data. See financial statements, beginning at page F-2, incorporated herein by reference. Unaudited quarterly financial data pertaining to the results of operations for 1999 and 1998 are as follows: Q1 Q2 Q3 Q4 (In thousands, except per share amounts) December 31, 1999 Revenues $ 1,390 $ 613 $ 867 $ 532 Gross Profit (Loss) 765 368 553 293 Net Income (Loss) 101 167 213 ( 385) Earnings (Loss) Per Share 0.01 0.02 0.02 ( 0.04) December 31, 1998 Revenues $ 909 $ 930 740 $ 1,170 Gross Profit (Loss) 46 172 13 551 Net Income (Loss) ( 990) ( 637) ( 941) ( 205) Earnings (Loss) Per Share ( 0.11) ( 0.07) ( 0.10) ( 0.02) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 11 PART III Item 10. Directors and Executive Officers of the Registrant. Directors and Executive Officers of the Company are as follows: Positions and Offices with the Company: Name Business Experience During Last Five Years Joseph F. Kruy Director since 1968. Chairman of the Board of Age: 68 Directors, President and CEO. Philip C. Hankins Director since 1979. President, Charter Age: 68 Information Corporation (Information Processing). C. V. Ramamoorthy Director since 1968. Professor of Electrical Age: 73 Engineering and Computer Sciences, University of California at Berkeley. Robert J. Spain Director since 1995. President, CFC, Inc. Age: 62 (Electronic Components Manufacturing) Peter J. Kruy Executive Vice President, Treasurer and Chief Age: 37 Financial Officer from August, 1998 to date; President and Chief Executive Officer of Jupiter Technology, Inc. from 1994 to 1998. Lois P. Lehberger Vice President and Controller from November, 1999 Age: 43 to date; Controller from August, 1998 to November, 1999; Manager of Corporate Accounting December, 1990 to August, 1998; employed by the Company since June, 1978. 12 Item 11. Executive Compensation. The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the other executive officers of the Company (determined as of the end of the last fiscal year) for the fiscal years ended December 31, 1999, December 31, 1998, and December 31, 1997. Summary Compensation Table Annual Compensation Commissions Salary Salary and Incentive Name and Position Year Paid Deferred(1) Bonuses Joseph F. Kruy 1999 $200,000 $ - $ - Chairman, President and CEO 1998 $200,000 $ - $ - 1997 $136,270 $63,730 $ - Peter J. Kruy 1999 $ 85,000 $ - $ - Executive Vice President and 1998 $ 34,327 $ - $ - Chief Financial Officer 1997 $ - $ - $ - Lois P. Lehberger(2) 1999 $ 6,539 $ - $ - Vice President and 1998 $ - $ - $ - Controller 1997 $ - $ - $ - Long Term Compensation Awards All Other Name and Position Year Options(#) Compensation Joseph F. Kruy 1999 - $ - Chairman, President and CEO 1998 - $ - 1997 - $ - Peter J. Kruy 1999 300,000 $ - Executive Vice President and 1998 - $ - Chief Financial Officer 1997 - $ - Lois P. Lehberger 1999 25,000 $ - Vice President and 1998 - $ - Controller 1997 - $ - (1) The Deferred Salary of $63,730 was incorporated into Mr. Kruy's loan to the Company in exchange for a 10% secured subordinated promissory note. (2) Mrs. Lehberger became an executive officer of the Company in November, 1999. Directors who are not employed by the Company receive an annual fee of $10,000 and a fee of $1,000 for each meeting of the Board attended. 13 Stock Options The following table contains information concerning the grant of stock options under the Company's Year 1997 Combination Stock Option Plan and the Year 2000 Equity Incentive Plan to the executive officers named in the Summary Compensation Table. Option Grants in Last Fiscal Year Individual Grants Potential Realizable Value at % of Total Assumed Annual Value Options Rates of Stock Price Options Granted to Exercise Appreciation for Granted Employees in Price Expiration Option Term ($)(1) Name (#) Fiscal Year ($/Share) Date 0% 5% 10% Joseph F. Kruy - - - - - - - Peter J. Kruy 300,000 24.91% $0.26 6/09 12,000 69,000 156,000 Lois P. Lehberger(2) 75,000 6.23% $0.26 6/09 3,000 17,250 39,000 25,000 2.08% $2.10 11/09 9,250 48,000 107,750 (1) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the options were granted to their expiration date. This table does not take into account any appreciation in the price of the stock to date. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock and the date on which the options are exercised. The Company does not necessarily agree that this procedure fairly values the options involved. (2) Includes options granted during 1999 prior to Mrs. Lehberger becoming an executive officer. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Value of Unexercised Number of In-the-money Options at Options at December 31,1999 December 31,1999(1) Shares Acquired Value Exercisable/ Exercisable/ Name Unexercisable Unexercisable Joseph F. Kruy - - -/- -/- Peter J. Kruy - - -/300,000 -/786,000 Lois P. Lehberger - - 2,000/102,500 5,520/222,900 (1) The closing price of the Company's Common Stock on December 31, 1999 was $2.88. The numbers shown reflect the value of options accumulated over all years of employment. 14 Compensation Committee Interlocks and Insider Participation The Compensation Committee is presently comprised of the Board of Directors. Mr. Kruy, the Company Chairman of the Board of Directors, President and CEO, participates as a member of the Board in compensation decisions, excluding decisions regarding his own compensation. Employment Contracts and Termination Agreements Mr. Kruy is employed under an agreement which provides for his full-time employment as Chairman of the Board of Directors, President and Chief Executive Officer of the Company until December 31, 2002. Pursuant to an employment agreement dated November 18, 1994, the Company has agreed to pay Mr. Kruy minimum base compensation of $200,000 per year and an incentive bonus pursuant to the Company's Incentive Bonus Plan in an amount equal to 4% of the Company's pre-tax profit, as defined, beginning in fiscal 1995 for each fiscal year during the term of the agreement. If another person is given either the title or the powers of the Chief Executive Officer, Mr. Kruy will be entitled to resign and continue to be paid his fixed and incentive compensation, subject to mitigation, through December 31, 2002. Report on Executive Compensation The Company has designed its compensation program to compensate employees, including its executives, in a consistent manner to promote a cooperative effort toward common goals of quality performance. Compensation is set at levels which the Company believes will attract, motivate, and retain employees who can achieve these goals. Compensation for the Company's executive officers consists of base salary, bonus and stock options. Base salaries and stock options are approved by the Compensation Committee presently comprised of the Board of Directors based upon a review of the responsibilities of the officer as well as a review of the base salaries and stock options of similar positions in other high technology companies of comparable revenues. The Company believes that a substantial portion of an employee's compensation should be based on the performance of the Company. Therefore, the Company has an Incentive Bonus Plan which provides for annual cash bonuses to certain key employees of the Company based on the Company's operating results for the year up to an aggregate maximum of 15% of the Company's pre-tax income. As of December 31, 1999, approximately 10 employees were eligible to participate in this plan. Of the executive officers, Mr. Kruy was a participant in this plan in 1999. The amount of each individual bonus is determined at the discretion of the Board of Directors. BOARD OF DIRECTORS Joseph F. Kruy Philip C. Hankins C.V. Ramamoorthy Robert J. Spain 15 Item 12. Security Ownership of Certain Beneficial Owners and Management. (#)Shares of Common Stock Beneficially Owned Name as of December 31, 1999 Percent of Class Joseph F. Kruy 1,399,940(1) 14.67% Philip C. Hankins 105,000 1.10% C.V. Ramamoorthy 99,156 1.04% Robert Spain - - Peter J. Kruy 962,164(2) 10.08% Lois P. Lehberger 2,000(3) 0.02% All directors and executive officers as a group (6 persons) 2,568,260(3)(4) 26.91% (1) Includes 56,250 shares owned by Mr. Kruy as co-trustee for his wife and children. (2) Includes 960,164 shares held by CyberFin Corporation, which is owned by Peter Kruy. (3) Includes 2,000 shares as to which options are exercisable currently or within 60 days. (4) Directors and officers have shared investment power with respect to 56,250 shares and sole voting power with respect to 2,512,010 shares. Solely for the purpose of calculating the aggregate market value of voting stock held by non-affiliates of the Company as set forth on the Cover Page, it was assumed that only directors and executive officers on the calculation date together with spouses and dependent children of such persons constituted affiliates. Item 13. Certain Relationships and Related Transactions. In November, 1999, the Company raised $550,000, including $125,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company and $125,000 from Philip C. Hankins, a Director of the Company, in cash from the issuance of 12% Notes Payable (the "Notes"), which are not due before November, 2000. In addition to the Note, each holder was issued a Stock Purchase Warrant (the "Warrant"), the exercise of which will allow the warrant holder to purchase two shares of common stock, at approximately $2.00 per share, for each dollar invested through the issuance of the Notes. From June 1, 1998 through August 18, 1999, the Company has raised approximately $1,270,000, including approximately $560,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company, in cash from the issuance of 10% Secured Subordinated Convertible Promissory Notes. Under the terms of the Notes, which are due on April 30, 2003, the holders may convert the notes into shares of common stock at a conversion price of $0.22 per share. In addition to the Note, each holder was issued a Stock Purchase Warrant, the exercise of which will allow the warrant holder to purchase one share of common stock, at $0.50 per share, for each dollar invested through the issuance of the Notes. 16 On November 9, 1998, the Company entered into a loan and security agreement with a lender company, hereafter referred to as "Lender" which is owned by a relative of Joseph F. Kruy, Chairman and Chief Executive Officer of the Company, under which the Company may borrow up to a maximum of $650,000 being outstanding at any one time. Such loan is fully secured by all assets of the Company. The Company pays all collections from accounts receivable to the Lender not less frequently than each week until the outstanding loan amount plus related interest, which accrues at a 12% annual rate, is fully paid. Under the terms of the loan agreement, the Lender receives a warrant for the purchase of two shares of common stock, at $0.22 per share, for each dollar loaned to the Company. 17 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) The financial statements listed in the index to financial statements appearing at page F-1 of this report, which index is incorporated in this item by reference. (2) The financial statement schedules as set forth in the above-mentioned index to financial statements. (3) See the exhibit index following on page A-1. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 18 EXHIBIT INDEX The following exhibits are filed herewith or incorporated by reference herein. Exhibit 3.1 Articles of Organization of Cambex Corporation, as amended (incorporated herein by reference to Exhibit 1.1 to Form 10-K for the fiscal year ended August 31, 1981). 3.1.1 Articles of Amendment to Articles of Organization filed with the Massachusetts Secretary of State on December 11, 1987 (incorporated herein by reference to Exhibit 3.1.1 to Form 10-K for the fiscal year ended August 31, 1987). 3.1.2 Articles of Amendment to Articles of Organization filed with the Massachusetts Secretary of State on June 8, 1988 (incorporated herein by reference to Exhibit 3.1.2 to Form 10-K for the fiscal year ended August 31, 1988). 3.1.3 Articles of Amendment to Articles of Organization filed with the Massachusetts Secretary of State on January 23, 1992 (incorporated herein by reference to Exhibit 3.1.3 to Form 10-K for the fiscal year ended August 31, 1993). 3.2 By-Laws of Cambex Corporation, as amended (incorporated herein by reference to Exhibit 1.2 to Form 10-K for the fiscal year ended August 31, 1981). 10.1 Employment Agreement between Joseph F. Kruy and Cambex Corporation, dated as of April 22, 1987 (incorporated herein by reference to Exhibit 10.1.1 to Form 10-K for the fiscal year ended August 31, 1987). 10.2 Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended August 31, 1983). 10.4 1985 Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended August 31, 1985). 10.6 1987 Combination Stock Option Plan (incorporated herein by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended August 31, 1987). 10.8 9021 Memory Products Business Acquisition Agreement dated January 10, 1992 between the Company and EMC Corporation (incorporated herein by reference to Exhibit 1 to Form 8-K dated January 14, 1992). 19 Exhibit Index - Continued Exhibit - Continued 10.9 Cambex Corporation Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended August 31, 1994). 10.10 Revolving Credit Agreement dated April 15, 1993 between the Company and the First National Bank of Boston (incorporated herein by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended August 31, 1994). 10.11 Cambex Corporation Reorganization Plan (incorporated herein by reference to Exhibit 10.11 to Form 8-K for April 23, 1998). 10.12 Cambex Corporation 2000 Equity Incentive Plan 23 Consent of Independent Public Accountants. 27 Financial Data Schedule 20 CAMBEX CORPORATION AND SUBSIDIARIES (Information required by Part II, Item 8 and Part IV, Item 14 of Form 10-K) FINANCIAL STATEMENTS Page Report of Independent Public Accountants F - 2 Consolidated Balance Sheets - December 31, 1999 and 1998 F - 3 Consolidated Statements of Operations for the Years Ended December 31, 1999, December 31, 1998 and December 31, 1997 F - 4 Consolidated Statements of Stockholders' Investment for the Years Ended December 31, 1999, December 31, 1998 and December 31, 1997 F - 5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, December 31, 1998 and December 31, 1997 F - 6 Notes to Consolidated Financial Statements F - 7 SUPPLEMENTARY SCHEDULE FOR THE YEARS ENDED DECEMBER 31, 1999, DECEMBER 31, 1998 AND DECEMBER 31, 1997 Schedule Number II Valuation and Qualifying Accounts F-23 Schedules other than those referred to above have been omitted, as they are not required or the information is included elsewhere in the financial statements or the notes thereto. 21 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Stockholders of Cambex Corporation: We have audited the accompanying consolidated balance sheets of Cambex Corporation (a Massachusetts corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' investment and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cambex Corporation and subsidiaries as of December 31, 1999, and 1998 and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of the financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. BELANGER & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS Chelmsford, Massachusetts March 29, 2000 22 F-2 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 ASSETS 1999 1998 CURRENT ASSETS Cash and cash equivalents $ 366,743 $ 211,452 Accounts receivable, less reserves of $100,000 in 1999 and $100,000 in 1998 202,466 514,335 Current portion of investment in sales-type leases, net of unearned interest income of $400 in 1998 - 25,820 Inventories 622,430 303,720 Prepaid expenses 65,995 72,852 Total current liabilities $ 1,257,634 $ 1,128,179 LEASED EQUIPMENT, at cost, net of accumulated depreciation of $208,000 in 1998 $ - $ - PROPERTY AND EQUIPMENT, at cost Machinery and equipment $ 3,052,887 $ 3,044,199 Furniture and fixtures 162,625 247,173 Leasehold improvements 602,092 602,092 $ 3,817,604 $ 3,893,464 Less-Accumulated depreciation and amortization 3,639,196 3,585,441 $ 178,408 $ 308,023 OTHER ASSETS Other $ 37,830 $ 37,830 Total Assets $ 1,473,872 $ 1,474,032
CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 LIABILITIES AND STOCKHOLDERS' INVESTMENT 1999 1998 CURRENT LIABILITIES: Loan Agreement $ 601,029 $ 393,424 Notes payable 550,000 - Accounts payable 463,675 408,841 Obligations for trade-in memory 286,250 360,250 Other liabilities-short term portion 967,558 1,146,168 Accrued expenses- Payroll and related 117,524 136,349 Income and other taxes 63,981 83,869 Other 332,344 173,821 Total current liabilities $ 3,382,361 $ 2,702,722 LONG TERM DEBT $ 1,273,730 $ 1,063,730 OTHER LIABILITIES-LONG TERM PORTION $ 2,324,540 $ 3,173,007 DEFERRED REVENUE $ 100,116 $ 255,366 Total Liabilities $ 7,080,747 $ 7,194,825 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT Preferred Stock, $1.00 par value per share- Authorized--3,000,000 shares Issued--None Common Stock, $.10 par value per share- Authorized--25,000,000 Issued--11,076,232 shares in 1999 and 11,072,582 shares in 1998 1,107,623 1,107,258 Capital in excess of par value 15,970,199 15,966,625 Accumulated other comprehensive income 101,989 88,134 Retained earnings (deficit) (21,931,920) (22,028,044) Less-Cost of shares held in treasury- 1,534,356 in 1999 and 1998 (854,766) (854,766) Total Stockholders' Investment $ (5,606,875) $ (5,720,793) Total Liabilities and Stockholders' Investment $ 1,473,872 $ 1,474,032
The accompanying notes are an integral part of these consolidated financial statements. 23 F-3 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended Year ended Year ended December 31, December 31, December 31, 1999 1998 1997 REVENUES Sales $ 2,175,481 $ 1,600,644 $ 6,667,693 Professional services 1,226,252 2,148,289 3,398,699 Total revenues $ 3,401,733 $ 3,748,933 $ 10,066,392 COST OF SALES 1,422,430 2,967,406 9,501,543 Gross profit 1,979,303 781,527 564,849 OPERATING EXPENSES: Research and development $ 1,096,806 $ 1,379,094 $ 2,321,925 Selling 778,839 1,241,385 3,193,271 General and administrative 607,408 760,578 1,295,465 $ 2,483,053 $ 3,381,057 $ 6,810,661 OPERATING INCOME (LOSS) $ (503,750) $ (2,599,530) $ (6,245,812) OTHER INCOME (EXPENSE): Interest expense (173,265) (70,000) (74,477) Interest income 405 3,641 17,674 Other income (expense) 14,827 (107,288) (84,861) INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND INCOME TAXES $ (661,783) $ (2,773,177) $ (6,387,476) Professional fees $ - $ - $ (210,000) INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS $ (661,783) $ (2,773,177) $ (6,597,476) Provision for income taxes $ - $ - $ - INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS $ (661,783) $ (2,773,177) $ (6,597,476) Extraordinary Items (Note 15) 757,907 - - NET INCOME (LOSS) $ 96,124 $ (2,773,177) $ (6,597,476) OTHER COMPREHENSIVE INCOME, NET OF TAX: Foreign Currency translation adjustments 13,855 27,378 (122,599) OTHER COMPREHENSIVE INCOME $ 13,855 $ 27,378 $ (122,599) TOTAL COMPREHENSIVE INCOME(LOSS) $ 109,979 $ (2,745,799) $ (6,720,075) TOTAL COMPREHENSIVE INCOME (LOSS) PER COMMON SHARE $ 0.01 $(0.30) $(0.74) Weighted Average Common and Common Equivalent Shares Outstanding 10,390,000 9,300,000 9,100,000
The accompanying notes are an integral part of these consolidated financial statements. 24 F-4 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT Common Stock Capital in Accumulated Retained Cost of $.10 Excess of Other Comprehensive Earnings Shares Held Par Value Par Value Income (Deficit) in Treasury BALANCE AT DECEMBER 31, 1996 $1,061,414 $15,792,105 $183,355 $(12,657,391) $(854,766) ADD: Net loss $ - $ - $ - $ (6,597,476) $ - Exercise of employee stock options 90 135 - - - Stock Purchase Plan Shares 2,107 22,543 - - - Translation adjustment - - (122,599) - - BALANCE AT DECEMBER 31, 1997 $1,063,611 $15,814,783 $ 60,756 $(19,254,867) $(854,766) ADD: Net loss $ - $ - $ - $ (2,773,177) $ - Exercise of employee stock options 600 120 - - - Stock Purchase Plan Shares 5,386 1,077 - - - Issuance of shares pursuant to reorganization plan 37,661 150,645 - - - Translation adjustment - - 27,378 - - BALANCE AT DECEMBER 31, 1998 $1,107,258 $15,966,625 $ 88,134 $(22,028,044) $(854,766) ADD: Net income $ - $ - $ - $ 96,124 $ - Exercise of employee stock options 365 74 - - - Issuance of warrants - 3,500 - - - Translation adjustment - - 13,855 - - BALANCE AT DECEMBER 31, 1999 $1,107,623 $15,970,199 $101,989 $(21,931,920) $(854,766)
The accompanying notes are an integral part of these consolidated financial statements. 25 F-5 CAMBEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ 96,124 $(2,773,177) $(6,597,476) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation $ 131,603 $ 283,243 $ 569,207 Amortization - - - Provision for losses on accounts receivable - - - Provision for losses on inventory - - 2,300,000 Amortization of prepaid expenses 7,822 24,892 28,990 Common stock/warrants issued in lieu of cash - 194,769 - Changes in assets and liabilities: Decrease(increase) in accounts receivable 311,869 686,008 734,365 Decrease(increase) in inventory (318,710) 1,109,205 2,487,108 Decrease(increase) in investment in sales-type leases 25,820 59,299 501,072 Decrease in prepaid taxes - - 2,335,295 Decrease(increase) in prepaid expenses (965) 23,439 (14,452) Decrease in other assets - - - Increase(decrease) in accounts payable 54,834 112,422 (4,033,219) Increase(decrease) in obligations for trade-in memory (74,000) 360,250 (1,036,235) Increase(decrease) in accrued expenses 119,810 (67,686) (857,512) Increase(decrease) in deferred revenue (155,250) 239,888 (1,007,273) Increase(decrease) in other liabilities (1,027,077) 4,319,175 - Increase)decrease) in liabilities subject to compromise - (6,325,273) 6,325,273 Total adjustments $ (924,244) $ 1,019,631 $ 8,332,619 Net cash provided by (used in) operating activities $ (828,120) $(1,753,546) $ 1,735,143 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment, net $ (1,988) $ 3,500 $ 22,878 Net cash provided by (used in) investing activities $ (1,988) $ 3,500 $ 22,878 CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in notes payable $ 760,000 $ 1,063,730 $ - Proceeds from the sale of common stock and warrants 3,939 720 24,875 Net borrowings(repayments) under loan agreement 207,605 393,424 - Net borrowings(repayments) under revolving credit agreement - - (1,800,000) Net cash provided by(used in) financing activities $ 971,544 $ 1,457,874 $(1,775,125) Effect of exchange rate changes on cash 13,855 27,378 (122,599) Net increase(decrease) in cash and cash equivalents $ 155,291 $ (264,794) $ (139,703) Cash and cash equivalents at beginning of year 211,452 476,246 615,949 Cash and cash equivalents at end of year 366,743 211,452 476,246 Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 13,265 $ - $ 43,477 Income taxes - - - Refunds received from the Internal Revenue Service - - 2,335,295 Reorganization professional fees - - 210,000
The accompanying notes are an integral part of these consolidated financial statements. 26 F-6 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (1) Liquidity As further described in Note 12, from June 1, 1998 through August 18, 1999, the Company raised $1,270,000 in cash from the issuance of 10% Subordinated Convertible Promissory Notes, of which $700,000 was used to pay pre-petition debt and legal and professional fees resulting from the Company filing a voluntary petition for relief under Chapter 11 of the bankruptcy code on October 10, 1997 with the United States Bankruptcy Court in Boston, Massachusetts. The Company's reorganization plan was confirmed by the Court in April, 1998. Subsequently, the Company emerged from Chapter 11 on April 23, 1998. As described in the Company's Plan, the success of the Plan is dependent upon several factors, including the Company's ability to raise additional capital. The additional financing will be used to fund continuing operations of the Company, particularly in development, sales and marketing. The Company also has a loan and security agreement under which the Company may borrow up to $650,000 outstanding at any one time. During 1999, the Company raised $550,000 in cash from the issuance of notes payable with interest at 12% per annum and maturities of November, 2000. The Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. The Company's management believes it has taken the appropriate corrective actions to reduce expenses through consolidation of the workforce and outsourcing certain operations and to increase revenue through the sale of new products, new strategic alliances and selling products with improved gross margins. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the company be unable to continue as a going concern. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Cambex Corporation and its wholly-owned subsidiaries (the Company). All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Company manufactures equipment for sale or lease. Revenue from product sales is recognized at the time the hardware and software are shipped. The Company accepts memory in trade as consideration in certain revenue transactions. Revenue is recorded at the net cash received. When the memory is subsequently sold, the amount received is recorded as revenue. Service and other revenues are recognized ratably over the contractual period or as the services are provided. Under certain equipment leases which qualify as sales type leases, the present value of noncancelable payments is currently 27 F-7 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (2) Summary of Significant Accounting Policies - Continued included in revenues as sales, and all related costs, exclusive of the residual value of the equipment, are currently included in cost of sales. The unearned interest is recognized over the noncancelable term of the lease. The Company has deferred revenue associated with the sale of certain products that have future performance obligations. For equipment leased under operating lease agreements, revenue is recognized over the lease term and the equipment is depreciated over its estimated useful life. License fees are amortized over the useful life of the technologies being licensed. Inventories Inventories, which include materials, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following: December 31, December 31, 1999 1998 Raw materials $ 419,984 $ 228,524 Work-in-process 78,572 51,215 Finished goods 123,874 23,981 $ 622,430 $ 303,720 Property and Equipment The Company provides for depreciation and amortization on a straight- line basis to amortize the cost of property and equipment over their estimated useful lives as follows: Leasehold improvements 2-10 Years Machinery and equipment 3- 8 Years Furniture and fixtures 3- 8 Years Leased equipment 3- 5 Years Maintenance and repair items are charged to expense when incurred; renewals or betterments are capitalized. 28 F-8 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (2) Summary of Significant Accounting Policies - Continued If property is sold or otherwise disposed of, the Company's policy is to remove the related cost and accumulated depreciation from the accounts and to include any resulting gain or loss in income. Depreciation expense of $131,603, $283,243, and $569,207, was recorded for the periods ended December 31, 1999, December 31, 1998, and December 31, 1997, respectively. Net Income (Loss) Per Common Share On January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 replaces the presentation of primary income (loss) per share with a dual presentation of basic income (loss) per share and diluted income (loss) per share for each year for which a statement of operations is presented. Basic income (loss) per share amounts are based on the weighted average number of common shares outstanding during each year. Diluted income (loss) per share amounts are based on the weighted average number of common shares and common share equivalents outstanding during each year to the extent such equivalents have a dilutive effect on the income (loss) per share. For the year ended December 31, 1999, common stock equivalents had no material effect on the computation of earnings per share. For the years ended December 31, 1998 and 1997, common share equivalents were not included in diluted income (loss) per share because the Company incurred a loss for each year. The inclusion of the common stock equivalents would have had an antidilutive effect on the computation of diluted income (loss) per share. Cash and Cash Equivalents Cash and cash equivalents are recorded at cost which approximates market value. Cash equivalents include certificates of deposit, government securities and money market instruments purchased with maturities of less than three months. 29 F-9 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (2) Summary of Significant Accounting Policies - Continued Stock Options and Employee Stock Purchase Plan Proceeds from the sale of newly issued stock to employees under the Company's stock option plans and Employee Stock Purchase Plan are credited to common stock to the extent of par value and the excess to capital in excess of par value. Income tax benefits attributable to stock options are credited to capital in excess of par value. Disclosures about the Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash, cash equivalents, accounts receivable, investment in sales-type leases, property held for sale, accounts payable, notes payable, and a revolving credit agreement. The carrying amounts of these financial instruments approximate their fair value due to the short-term nature of these instruments, except for the following. Under the reorganization plan described in Note 1 to the financial statements, other liabilities of approximately $4,300,000 are expected to be paid over a 30 month period which commenced in October 1998, without interest. Accordingly, the net present value of these payments approximate $2,200,000 at December 31, 1999 assuming an interest rate of 8.50%, $3,800,000 at December 31, 1998 assuming an interest rate of 7.44% and $4,000,000 at December 31, 1997 assuming an interest rate of 9%. 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 disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". SFAS No. 121 requires that long- lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 30 F-10 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (2) Summary of Significant Accounting Policies - Continued The statement also requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at the lower of the carrying amount or fair value less cost to sell. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. The Company's review was based on the assumption that the Company continues as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the company be unable to continue as a going concern. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement requires that changes in stockholders' equity from transactions and events other than those resulting from investments by and distributions to stockholders be reflected in comprehensive income or loss. All prior year financial statements have been reclassified to comply with this statement. Segment Reporting SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," became effective for periods beginning after December 31, 1997. This statement requires the presentment of information about the identifiable components comprising an enterprise's business activities. The Company has determined that there are no separately reportable operating segments and, therefore, does not present separate reporting segments in the financial statements. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for such plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price of the stock (See Note 9). 31 F-11 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (3) Business, Operations and Segment Information The Company is a designer and supplier of Fibre Channel hardware and software solutions for building Storage Area Networks (SAN). The Company's products include Fibre Channel host bus adapters, hubs, high availability software and disk arrays for building SANs in heterogeneous open systems operating environments. The Company also provides add-on memory for IBM enterprise servers. The Company sells its equipment to end users, resellers, distributors and OEMs. The Company's principal customers operate in a wide variety of industries and in a broad geographical area. No single customer or distributor accounted for 10% or more of total sales in fiscal year 1997. During years 1998 and 1999, one customer accounted for 11% of total revenues each year. Foreign sales were 23% in 1997 and less than 10% of total revenues in fiscal 1998 and 1999. (4) Income Taxes In accordance with SFAS No. 109, "Accounting For Income Taxes", deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The following table presents the components of income (loss) before income taxes: Year ended Year ended Year ended December 31, December 31, December 31, 1999 1998 1997 Domestic $( 531,000) $(2,549,000) $(5,689,000) Foreign ( 131,000) ( 224,000) ( 908,000) $( 662,000) $(2,773,000) $(6,597,000) 32 F-12 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (4) Income Taxes - Continued The following table presents a reconciliation between taxes provided at the statutory federal income tax rate and the actual tax provision recorded for the following periods: Year ended Year ended Year ended December December December 1999 1998 1997 Provision (credit) at federal statutory rate $ 32,700 $( 943,000) $(2,243,000) State tax provision (credit), net of federal tax benefit 14,300 ( 160,000) (358,000) Foreign and other losses for which no benefits have been recorded 44,400 76,000 309,000 Change in valuation allowances ( 90,800) 1,047,000 2,007,000 Other ( 600) ( 20,000) 285,000 $ -0- $ -0- $ -0- 33 F-13 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (4) Income Taxes - Continued The Company has federal net operating loss carryovers totalling $16,271,000 which expire through the year ended December 31, 2014. The tax effects of the significant items which comprise the deferred tax liability and tax asset, as of fiscal 1999, 1998 and 1997 are as follows: December December December 1999 1998 1997 Assets Reserves not currently deductible for tax purposes $1,584,000 $1,920,000 $ 1,874,000 State tax net operating loss carryforward 1,612,000 1,565,000 1,335,000 Federal net operating loss carryforward 5,012,000 4,859,000 4,114,000 Employee benefits 41,000 47,000 96,000 Other 49,000 154,000 76,000 Total deferred tax assets $8,298,000 $8,545,000 $ 7,495,000 Liabilities Fixed asset basis difference $ (164,000) $ 0 $ 0 Other 158,000 (45,000) (42,000) Total deferred tax liabilities $ ( 6,000) (45,000) $ (42,000) Net deferred tax asset $8,292,000 $8,500,000 $ 7,453,000 Valuation allowance (8,292,000) (8,500,000) (7,453,000) Tax asset 0 0 0 Tax refunds receivable 0 0 0 Total tax asset 0 0 0 Due to the uncertainty of the realizability of the deferred tax assets, the Company has established a valuation allowance for the net deferred tax assets. 34 F-14 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (5) Short Term Borrowings The Company has a loan and security agreement with a related party referred to in Note 12. The outstanding balance due to the related party was $601,029 and $393,424 at December 31, 1999 and 1998, respectively. Notes payable of $550,000 at December 31, 1999 represent advances payable which are due November, 2000. These notes include amounts of $250,000 from related parties. These notes are further described in Note 12. During 1993, the Company obtained a $10 million unsecured, revolving line of bank credit, bearing interest at the prime rate plus one-half percent with a commitment fee of 3/8 of 1% per year on the unused portion. The Company was required to repay any borrowings under this revolving credit line on March 29, 1996. During the second quarter of 1996, the Company agreed with its bank to extend and modify its Revolving Credit Agreement. As of December 31, 1996, $1,800,000 remained outstanding under this Agreement. Subsequent to the end of the year, the Company received its refund from the Internal Revenue Service and repaid its bank in full and the agreement was terminated. Consequently, the bank released its security interest in the Company's accounts receivable, inventory and general intangibles. (6) Long-Term Debt and Related Matters Long-term debt at December 31, 1999 and 1998 consists of the following: 1999 1998 Subordinated Convertible Notes with interest rate of 10% due April 30, 2003 $1,273,730 $1,063,730 Less: Current maturities -0- -0- Total $1,273,730 $1,063,730 Of the advances received for the notes, approximately $560,000 was received from a related party and is discussed in Note 12. 35 F-15 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (6) Long-Term Debt and Related Matters - Continued The maturities of long-term debt for each of the succeeding five years subsequent to December 31, 1999 are as follows: Year Amount 2000 -0- 2001 -0- 2002 -0- 2003 $1,273,730 Thereafter -0- Total $1,273,730 (7) Earnings Per Share Earnings per share are computed by dividing net income by the average number of common shares and common stock equivalents outstanding during the year. The weighted average number of common shares outstanding during the years ended December 31, 1999, 1998 and 1997 were approximately 9,540,000, 9,300,000, and 9,100,000, respectively. Common stock equivalents include the net additional number of shares that would be issuable upon the exercise of the outstanding common stock options and warrants (see Note 9), assuming that the Company reinvested the proceeds to purchase additional shares at market value. Common stock equivalents also include shares of common stock that would be issuable upon conversion of subordinated promissory convertible notes. Options and warrants to purchase 143,851 and 259,305 weighted average shares of common stock during the years ended December 31, 1998 and 1997, respectively, were not included in the computation of diluted loss per share because to do so would have had an antidilutive effect on the computation of loss per share. Weighted average shares of 855,313 common stock equivalents had no material effect on the computation of earnings per share for the year ended December 31, 1999. Weighted average shares issuable from convertible notes of 5,235,261 were not included in the diluted earnings per share because to do so would have had an antidilutive effect on the computation of earnings per share. As more fully described in Note 9, options and warrants to purchase 4,959,423, 94,970 and 187,420 shares of common stock outstanding at December 31, 1999, 1998 and 1997, respectively, and 5,235,261 shares of common stock issuable upon conversion of notes outstanding at December 31, 1999 could potentially dilute basic income (loss) per share in the future. 36 F-16 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (8) Commitments and Contingencies At December 31, 1999, the Company had minimum rental commitments under long- term, noncancelable operating leases for facilities and other equipment as follows: Due during Fiscal Year 2000 $ 381,924 2001 $ 381,924 2002 $ 381,924 2003 $ 159,134 $1,304,906 Total rental expense, including the cost of short-term equipment leases, real estate taxes and insurance paid to the landlord and charged to operations approximated $213,000 for the year ended December 31, 1999, $260,000 for the year ended December 31, 1998, and $1,160,000 for the year ended December 31, 1997. During 1997, 1998, 1999 and 2000, the Company entered into agreements to sublet portions of its facilities to unrelated parties. In the ordinary course of business, the Company is involved in legal proceedings. The Company believes that the outcome of these proceedings will not have a material adverse effect on the Company's financial condition or results of operations. (9) Stock Options and Warrants On November 12, 1999, the Company established and on December 23, 1999, shareholders approved the Year 2000 Equity Incentive Plan. The Year 2000 Equity Incentive Plan provides for the delivery of up to 1,500,000 shares. On March 7, 1997, the Company established the 1997 Stock Option Plan. The Year 2000 Equity Incentive Plan replaces the 1997 Plan for all future options. At December 31, 1999, the Company had three stock option plans for officers and certain employees under which 2,564,320 shares were reserved and options for 1,475,000 shares were available for future grants. Options are granted at not less than 85%, or in certain cases, not less than 100%, of the fair market value of the common stock on the date of grant. Options outstanding have a term of ten years and become exercisable in installments as determined by the Board of Directors. The plans' options vest between one through six years and all expire between January 6, 2002 and November 12, 2009. 37 F-17 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (9) Stock Options and Warrants - Continued Stock option activity for the three years ended December 31, 1999 was as follows: Option Shares Number Option Price Outstanding at December 31, 1996 368,820 .25 - 16.15 Granted - - Exercised, cancelled or expired (181,400) .25 - 10.41 Outstanding at December 31, 1997 187,420 .35 - 16.15 Granted - - Exercised, cancelled or expired ( 92,450) .12 - 16.15 Outstanding at December 31, 1998 94,970 .12 Granted 1,204,500 .12 - 2.10 Exercised, cancelled or Expired (210,150) .12 - 1.67 Outstanding at December 31, 1999 1,089,320 .12 - 2.10 As of December 31, 1999 and 1998, options for 161,620 and 27,970 shares were exercisable at aggregate option prices of $33,524 and $3,356, respectively. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income(loss) and income(loss) per share would have been changed to the following pro forma amounts: Year ended Year ended Year ended December 31, December 31, December 31, 1999 1998 1997 Net Income (Loss): As Reported (000's) 96 (2,773) (6,597) Pro Forma 96 (2,773) (6,597) Basic and Diluted EPS:As Reported 0.01 ( 0.30) ( .72) Pro Forma 0.01 ( 0.30) ( .72) 38 F-18 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (9) Stock Options and Warrants - Continued The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions and values for grants in the periods presented. Year ended Year ended Year ended December 31, December 31, December 31, 1999 1998 1997 Assumptions: Risk free interest rate 6.92% N/A N/A Expected dividend yield 0% N/A N/A Expected life in years 10 N/A N/A Expected volatility 129.2% N/A N/A Values: Weighted average fair value of options granted 2.85 0 0 Weighted average exercise price .43 .12 1.94 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to September 1, 1994, the resulting pro forma compensation cost may not be representative of that to be expected in future years. As of December 31, 1999 and 1998, warrants to purchase 3,870,103 and 1,063,730 shares of common stock at weighted average prices of $0.82 and $0.50 per share, repectively, were outstanding and an equal number of shares were reserved for issuance. (10) Incentive Bonus Plan and 401(k) Profit Sharing Retirement Plan The Company has an incentive bonus plan under which certain key employees as a group are entitled to receive additional compensation up to a maximum of 15% of the Company's pre-tax income, as defined. There was no provision in 1999, 1998 or 1997. On September 1, 1988, the Company established the Cambex Corporation 401(k) Profit Sharing Retirement Plan (the Plan). Under the Plan, employees are allowed to make pre-tax retirement contributions. In addition, the Company may provide matching contributions based on pre-established rates as determined by the Board of Directors. The Company's contributions have been in the form of Cambex common stock since fiscal 1994. The Company offers no post-retirement benefits other than those provided under the Plan. 39 F-19 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (11) Employee Stock Purchase Plan On December 20, 1993, the Company established the Cambex Corporation Employee Stock Purchase Plan (the Plan), which was approved by the shareholders. On August 31, 1998, the Board of Directors voted, subject to shareholder approval, to increase the number of shares to cover the number of shares purchased under the Plan during the period January 1, 1998 to June 30, 1998 and to terminate the Plan. Under the Plan, employees could elect to have a specified percentage of their wages withheld through payroll deduction and purchase common stock shares at 85% of the lower of the fair market value of Common Stock on the first or last trading day of each Purchase Period. There were two (2) Purchase Periods each year - the first six months and the last six months of each calendar year. During fiscal 1998, fiscal 1997 and fiscal 1996, there were 53,862, 21,069, and 50,060 shares issued under the Plan, respectively. At December 31, 1999, there were 160,708 shares reserved for issuance under the Plan. (12) Related Party Transactions In November, 1999, the Company raised $550,000, including $125,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company and $125,000 from Philip C. Hankins, a Director of the Company, in cash from the issuance of 12% Notes Payable (the "Notes"), which are not due before November, 2000. In addition to the Note, each holder was issued a Stock Purchase Warrant (the "Warrant"), the exercise of which will allow the warrant holder to purchase two shares of common stock, at approximately $2.00 per share, for each dollar invested through the issuance of the Notes. From June 1, 1999 through August 18, 1999, the Company has raised $210,000, including $100,000 from Joseph F. Kruy, Chairman, President and Chief Executive Officer of the Company, in cash from the issuance of 10% Secured Subordinated Convertible Promissory Notes. On June 1, 1998, the Company raised approximately $1,060,000, including approximately $460,000 from Joseph F. Kruy, in cash from the issuance of 10% Secured Subordinated Convertible Promissory Notes. Under the terms of the Notes, which are due on April 30, 2003, the holders may convert the notes into shares of common stock at a conversion price of $0.22 per share. In addition to the Note, each holder was issued a Stock Purchase Warrant, the exercise of which will allow the warrant holder to purchase one share of common stock, at $0.50 per share, for each dollar invested through the issuance of the Notes. Additional warrants to purchase approximately 96,000 shares of common stock, at $0.50 per share were issued on June 1, 1999 in relation to interest due on the June 1, 1998 notes. 40 F-20 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (12) Related Party Transactions - Continued On November 9, 1998, the Company entered into a loan and security agreement with a lender company, hereafter referred to as "Lender" which is owned by a relative of Joseph F. Kruy, Chairman and Chief Executive Officer of the Company, under which the Company may borrow up to a maximum of $650,000 being outstanding at any one time. Such loan is fully secured by all assets of the Company. The Company pays all collections from accounts receivable to the Lender not less frequently than each week until the outstanding loan amount plus related interest, which accrues at a 12% annual rate, is fully paid. Under the terms of the loan agreement, the Lender receives a warrant for the purchase of two shares of common stock, at $0.22 per share, for each dollar loaned to the Company. (13) Events (Unaudited) Subsequent to date of Report of Independent Public Accountants Subsequent to the end of 1999, the Company raised an additional $2,000,000 in cash from the issuance of 8% Convertible Bridge Notes which are due in August and September, 2000. The notes are convertible at a weighted average share price of $4.08. The Company may redeem the notes at any time during the term of the notes. If the Company does not redeem the notes prior to maturity and the Company's stock price falls below certain levels, the holders are entitled to acquire additional shares. In addition to the notes, warrants to purchase 300,000 shares of common stock were issued at weighted average exercise prices of $4.54 per share. On March 1, 2000, the Company entered into a Sublease Agreement with a third party pursuant to which the Company sublet approximately 8,000 square feet in its Waltham, Massachusetts facility (which is approximately 12% of the Company's total leased space). The term of the sublease is coterminous with the primary lease and expires on May 31, 2003. (14) Credit Risk The Company maintains cash balances at financial institutions located in Massachusetts. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 1999, the Company's uninsured cash balances total $246,606. The Company's subsidiaries maintain cash balances at several financial institutions located throughout Europe. These cash balances are subject to normal currency exchange fluctuations. At December 31, 1999, the Company's overseas cash balances total $18,678. 41 F-21 CAMBEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (Continued) (15) Extraordinary Items Extraordinary income in 1999 consists of the payment of other liabilities at a discount from face value. The per share amount of the gain on the extinguishment of debt is $0.07. 42 F-22 CAMBEX CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Additions Charged To Balance at (Recovered Balance Beginning From) Writeoffs/ at End of Year Income Deductions of Year ---------- ----------- --------- ------- YEAR ENDED DECEMBER 31, 1997 Reserve for doubtful accounts $ 131,000 $ - $ - $131,000 YEAR ENDED DECEMBER 31, 1998: Reserve for doubtful accounts $ 131,000 $ - $ (31,000)$100,000 YEAR ENDED DECEMBER 31, 1999: Reserve for doubtful accounts $ 100,000 $ - $ - $100,000 43 F-23 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAMBEX CORPORATION By: /s/Joseph F. Kruy Joseph F. Kruy, President March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated as of March 30, 2000. By: /s/ Joseph F. Kruy Joseph F. Kruy, Chairman of the Board, President and Treasurer (Principal Executive Officer) By: /s/ Peter J. Kruy Peter J. Kruy, Executive Vice President (Principal Financial and Accounting Officer) By: /s/ Robert J. Spain Robert J. Spain, Director By: /s/ Philip C. Hankins Philip C. Hankins, Director By: /s/ C. V. Ramamoorthy C. V. Ramamoorthy, Director 44 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 2-77667 and 33-18072). BELANGER & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS Chelmsford, Massachusetts March 29, 2000 EX-10.12 2 CAMBEX CORPORATION 2000 EQUITY INCENTIVE PLAN EXHIBIT 10.12 CAMBEX CORPORATION 2000 EQUITY INCENTIVE PLAN 1. PURPOSE The purpose of this 2000 Equity Incentive Plan (the "Plan") is to advance the interests of CAMBEX CORPORATION (the "Company") by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's common stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans or Supplemental Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an Award is canceled, grant another Award in its place on such terms as the Board shall specify), except that the Board may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Board and all other determinations and actions of the Board made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Board to make adjustments under Section 7.3 or Section 8.6. The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. On and after registration of the Stock under the Securities Exchange Act of 1934 (the "1934 Act"), the Board shall delegate the power to select directors and officers to receive awards under the Plan and the timing, pricing and amount of such Awards to a committee, all members of which shall be disinterested persons within the meaning of Rule 16b-3 under the 1934 Act. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the plan may be made prior to that date (but after Board adoption of the Plan), subject to such approval of the Plan. No Award may be granted under the Plan after December 31, 2009, but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to the adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 1,500,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or any of its subsidiaries ("Employees") and other persons or entities (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TYPES OF AWARDS 6.1. OPTIONS (a) Nature of Options. An Option is an Award entitling the recipient on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) Exercise Price. The exercise price of an Option will be determined by the Board subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent shareholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (3) The Board may reduce the exercise price of an Option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) Duration of Options. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent shareholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Board at the time the Option was granted. (d) Exercise of Options. Options granted under any single Award will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time and from time to time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Board and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) Payment for Stock. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Board at or after grant of the Option), (i) through the delivery of shares of Stock which have been outstanding for at least six months (unless the Board expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Board, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note or personal check. (f) Discretionary Payments. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Board may cancel the option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. The Board may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Board. 6.2. STOCK APPRECIATION RIGHTS. (a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Board), determined in whole or in part by reference to appreciation in Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Board may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Board to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Board may also grant Stock Appreciation Rights providing that following a change in control of the Company, as determined by the Board, the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such change in control over the fair market value of a share of Stock on the date the Right was granted. (b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (4) The Stock Appreciation Right will be transferable only with the related option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) Exercise of Independent Stock Appreciation Rights. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Board. 6.3. RESTRICTED AND UNRESTRICTED STOCK (a) Nature of Restricted Stock Award. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Board. (c) Rights as a Stockholder. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) Restrictions. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined in Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) Notice of Election. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) Other Awards Settled with Restricted Stock. The Board may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) Unrestricted Stock. The Board may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value of the Stock. 6.4. DEFERRED STOCK. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6 is granted, the Board may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5 PERFORMANCE AWARDS; PERFORMANCE GOALS (a) Nature of Performance Awards. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Board) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Board to be important to the success of the Company. The Board will determine the Performance Goals, the period or period during which performance is to be measured and all other terms and conditions applicable to the Award. (b) Other Awards Subject to Performance Condition. The Board may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 6.6 LOANS AND SUPPLEMENTAL GRANTS. (a) Loans. The Company may take a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in connection with the purchase of Stock under the Award or with the payment of any federal, state and local income tax with respect to income recognized as a result of the Award. The Board will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) Supplemental Grants. In connection with any Award, the Board may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed- up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs federal income tax liability with respect to the Award. 7. EVENTS AFFECTING OUTSTANDING AWARDS. 7.1. DEATH. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Board may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined by the Board. 7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death), of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of one month (or such longer period as the Board may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Board casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Board, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiary, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change, will be forfeited and the Award canceled as of the date of such Status Change unless otherwise determined by the Board. 7.3. CERTAIN CORPORATE TRANSACTION. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards will terminate as of the effective date of the covered transaction, and the following rules shall apply; (a) Subject to paragraphs (b) and (c) below, the Board may in its sole discretion, prior to the effective date of the covered transaction, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock, (3) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award, and Supplemental Grant which would have been made or provided with the passage of time had the transaction not occurred and the Participant not suffered a Status Change (or died), and (4) forgive all or any portion of the principal of or interest on a Loan. (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of the covered transaction, the Board may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of the covered transaction notwithstanding paragraph (a) above. (c) With respect to an outstanding Award held by a participant who, following the covered transaction, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in such transaction or an affiliate of such a corporation, the Board may, in lieu of the action described in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate grant to the Participant a replacement award which, in the judgment of the Board, is substantially equivalent to the Award. 8. GENERAL PROVISIONS 8.1. DOCUMENTATION OF AWARDS Awards will be evidenced by such written instruments, if any, as may be prescribed by the Board from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Board may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Board may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. CONDITIONS ON DELIVERY OF STOCK The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. TAX WITHHOLDING. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Board will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Board may permit the Participant or such other person to elect at such time and in such manner as the Board provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. If at the time an ISO is exercised the Board determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security. 8.5. NONTRANSFERABILITY OF AWARDS No Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during an employee's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). 8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Board will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. (b) In any event referred to in paragraph (a), the Board will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Board may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Board that adjustments are appropriate to avoid distortion in the operation of the Plan. 8.7. EMPLOYMENT RIGHTS, ETC. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. DEFERRAL OF PAYMENTS. The Board may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8.9. PAST SERVICES AS CONSIDERATION Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Board may determine that such price has been satisfied by past services rendered by the Participant. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which stock be issued to Employees. The Board may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code and to continue to qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act. EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 367 0 302 100 622 1258 3818 3639 1474 3382 0 0 0 1108 (6715) 1474 3402 3402 1422 1422 0 0 173 (662) 0 (662) 0 758 0 96 0.01 0.01
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