SCHEDULE 14C
Information Required in Information Statement
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement [ ] Confidential, for Use of the
[ ] Definitive Information Statement Commission Only (as permitted
by Rule 14c-5(d)(2))
MICROFRAME, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
a. Title of each class of securities to which transaction applies:
Common Stock, par value $.001 per share
b. Aggregate number of securities to which transaction applies:
5,800,000
c. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$1.84 per share (average of high and low prices on September 16, 1998)
d. Proposed maximum aggregate value of transaction:
$10,627,000
<PAGE>
e. Total fee paid:
$2,134.40
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
a. Amount Previously Paid:
b. Form, Schedule or Registration Statement No.:
c. Filing Party:
d. Date Filed:
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MICROFRAME, INC.
21 MERIDIAN AVENUE
EDISON, NEW JERSEY 08820
(732) 494-4440
INFORMATION STATEMENT
This Information Statement is being furnished to holders of shares (the
"Shareholders") of common stock, par value $.001 per share (the "Common Stock"),
of MicroFrame, Inc., a New Jersey corporation (the "Company"). This Information
Statement is being furnished in order to notify the Shareholders that on or
about September 3, 1998 (the "Written Consent Date"), the Company received
written consents (the "Written Consents") in lieu of a meeting of the
shareholders of the Company from the holders of 2,903,760 shares of Common
Stock, representing approximately 54.3% of the total issued and outstanding
shares of voting stock of the Company (the "Written Consent Percentage"),
adopting resolutions approving (i) the purchase by the Company of all of the
outstanding share capital of SolCom Systems Limited ("SolCom"), a company
incorporated under the Companies Act 1985 of the United Kingdom (the
"Transaction") in exchange for an aggregate of 5,800,000 shares of Common Stock
and options to purchase shares of Common Stock and (ii) the adoption of the
Company's 1998 Stock Option Plan (the "Plan") and the Company's 1998 U.K. Sub-
Plan (the "Sub-Plan" and together with the Plan, the "Plans").
On March 9, 1998 and September 15, 1998, the Board of Directors
approved the Transaction and recommended that the Shareholders grant their
approval thereto. On September 15, 1998, the Board of Directors approved the
Plans and recommended that the Shareholders grant their approval thereto.
This Information Statement describing the Transaction and the Plans is
first being mailed or furnished to Shareholders on or about ________, 1998 and
neither the Transaction nor the Plans shall become effective until at least 20
days thereafter.
THIS INFORMATION STATEMENT IS FURNISHED FOR
INFORMATION PURPOSES ONLY.
THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND A PROXY.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED, OR INCORPORATED BY REFERENCE, IN THIS
INFORMATION STATEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER
PERSON. ALL INFORMATION CONTAINED IN THIS INFORMATION STATEMENT RELATING TO THE
COMPANY HAS BEEN SUPPLIED BY THE COMPANY AND ALL INFORMATION CONTAINED IN THIS
INFORMATION STATEMENT RELATING TO SOLCOM HAS BEEN SUPPLIED BY SOLCOM.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the U.S. Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York,
New York 10048 and at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material also can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates. Reports and other information concerning the Company may be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's web site is http://www.sec.gov.
INCORPORATION BY REFERENCE
This Information Statement incorporates by reference the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998 (the
"Company 10-KSB") and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1998 (the "Company 10- QSB"), which were
previously filed with the Commission. The Company 10-KSB and Company 10- QSB are
annexed hereto as Appendix F and Appendix G, respectively.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Information Statement and
prior to the date of the consummation of the Transaction shall be deemed to be
incorporated by reference in this Information Statement and to be a part hereof
from the respective dates of filing such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Information Statement to the extent that a statement contained in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Information Statement.
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SUMMARY
Item 1-Approval of the Transaction
The Company has agreed to purchase all of the outstanding share capital
of SolCom in exchange for a certain number of shares of Common Stock and options
to purchase shares of Common Stock, as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Common Stock to be issued/options to be granted by the Company...5,800,000
Approximate shares of Common Stock to be issued(1).........................4,600,000
Approximate number of options to be granted by the Company(1)..............1,200,000
Share capital of SolCom to be acquired by the Company......................All Shares
The Company's Nasdaq SmallCap Market Symbol................................MCFR
</TABLE>
Item 2-Adoption of 1998 Stock Option Plan and 1998 U.K. Sub-Plan
The Company's Board of Directors has approved the Company's 1998 Stock
Option Plan and 1998 U.K. Sub-Plan.
Aggregate shares of Common Stock for which options may be granted under Plans
...3,000,000
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1 The exact number of shares of Common Stock to be issued and options to
be granted in connection with the Transaction is a function of a
certain formula contained in the Share Purchase Agreement (as
hereinafter defined).
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------------------------------------
ITEM 1 - APPROVAL OF THE TRANSACTION
------------------------------------
INTRODUCTION
The Company, founded in 1982, designs, develops and markets a broad
range of remote network management and remote maintenance and security products
for mission critical voice and data communications networks. The Company's
products provide for alarm and fault monitoring, proactive administration and
reporting capabilities which are being used as a basis for remote network
management and maintenance. In addition, by incorporating a variety of hardware
and software options for security and user authentication, these products can
deter as well as prevent unauthorized dial-in and/or in-band access to network
elements and systems (such as computers, local area networks (LANs), wide area
networks (WANs), routers, hubs, servers, Private Branch Exchange telephone
switches ("PBXs") as well as other network elements), while allowing authorized
personnel access to perform needed administration and maintenance of host
devices and networks from remote locations.
The Company's principal business address is 21 Meridian Avenue, Edison,
New Jersey 08820 and its telephone number is (732) 494-4440.
SolCom, founded in 1992, is a developer of remote monitoring
technology. Originally approved by the Internet Engineering Task Force (IETF) in
1992, Remote MONitoring, or RMON, is a standard protocol for users to
proactively manage multiple LANs and WANs from a central site. RMON 1 identifies
errors, alerts administrators to network problems and baselines networks in
addition to its remote network analyzer capabilities. RMON's recent enhancement,
RMON 2, enables Network Managers to access higher-level network-wide application
and protocol information. RMON 2 also provides enterprise-wide and/or
point-to-point traffic statistics that enables trouble-shooting and network
capacity planning.
SolCom's principal business address is SolCom House, Meikle Road,
Kirkton Campus, Livingston EH 547 DE, Scotland and its telephone number is (011)
44-1506-461-707.
WRITTEN CONSENT IN LIEU OF MEETING
Under New Jersey law, the affirmative vote of the holders of a majority
of the outstanding Common Stock entitled to vote thereon is required to approve
the Share Purchase Agreement (as defined herein) and the transactions
contemplated thereby. Shareholders owning the Written Consent Percentage have
executed and delivered to the Company Written Consents in lieu of a meeting of
Shareholders approving and adopting the Share Purchase Agreement and authorizing
the consummation of the Transaction. Accordingly, no vote of any Shareholder is
necessary and Shareholder votes are not being solicited.
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REASONS/BACKGROUND FOR THE TRANSACTION
General Background. In recent years, the remote network management
marketplace has been characterized by intense competition, continual
technological innovation as well as improvements in both hardware and software
offerings. In light of these developments, the Company has from time to time
considered its strategic alternatives, including the licensing of additional
technologies, additional development of internal technologies, and the
possibilities of mergers or other strategic alliances to improve its position in
the marketplace. In June 1997, the Company concluded that it desired a
significant increase in its presence in the data network management market place
in order to develop and control its technologies and intellectual properties to
effectuate future growth. The Company identified the "RMON" technology and
determined that incorporation of such technology into the Company's existing
products would enhance the Company's products and marketability. The
complexities of the RMON technology led the Company to seek viable acquisition
candidates that already possessed such technology.
Introduction of Parties. In early 1998, the Company, as part of its
strategic search of companies offering RMON capabilities, authorized Mr. Jim
Segala, Director of Research and Development, to contact Mr. Hugh Evans,
Director of Development and Mr. Peter Wilson, Director of Marketing,
respectively, of Solcom to discuss potential licensing arrangements. Solcom, a
leading developer of RMON technology, had been previously considering its
strategic alternatives including: alliances, potential sale, possible IPO
alternatives and merger or acquisition possibilities. Mr. Segala reported
favorably on the technology and its potential synergies with the Company's suite
of products as well as its ability to accelerate the Company into the RMON
marketplace. Originally approved by the Internet Engineering Task Force (IETF)
in 1992, Remote MONitoring, or RMON, is a standard protocol for users to
proactively manage multiple LAN's and WAN's from a central site. RMON 1
identifies errors, alerts administrators to network problems and baselines
networks in an addition to its remote network analyzer capabilities. RMON 2
enables network managers to access higher-level network wide application and
protocol information. RMON 2 also provides enterprise-wide and/or point-to-point
traffic statistics that enables easy trouble shooting and effective network
management. This combination of technologies would enable the Company to offer
an integrated remote management solution, incorporating security, remote access,
monitoring of physical elements and monitoring of logical content.
In January 1998, as a follow-up to Mr. Segala's discussions
with Solcom, Mr. Stephen B. Gray, Chief Executive Officer of the Company,
arranged to meet with Mr. Wilson of Solcom at the Comnet 98 tradeshow in
Washington , D.C. to continue discussions. This initial meeting included Messrs.
Gray, John F. McTigue, the Company's Chief Financial Officer, and David Sawyer,
the Company's then Senior Vice President of Sales. During these discussions, the
possibility of the two companies considering a more strategic relationship apart
from merely a licensing arrangement was introduced. It was decided at this
meeting that each party would begin the initial stages of merger discussions
immediately and individually report to their respective board of directors to
obtain necessary approvals.
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Background of Discussions and Meetings. During February 1998, the
Company's Board of Directors authorized Messrs. Gray and McTigue to visit
Solcom's offices in Livingston, which occurred during the week of March 2-6,
1998. The purpose was to further seek out potential merits of the proposed
transaction, as well as potential financial impacts, operating synergies, staff
overlap if any, and any product/customer related overlap or synergies. This
meeting further established the Company's position that this transaction had
merits from a product, customer, staff, target market and financial perspective.
The following items were most significant: the target customer base was similar
and the products of both companies complimented each other as opposed to
competing with each other, Solcom was heavily staffed with engineers and needed
additional sales presence in the United States and the Company had an
established sales presence in the United States and Europe, and both had
significant customers that could be targeted by the products and services of the
other. At about this time, both companies exchanged preliminary financial
information.
On March 9, 1998, the Board of the Company authorized Mr. Gray and Mr.
McTigue to proceed with the proposed acquisition, and take any steps necessary,
including entering into a "letter of intent" and to perform the required due
diligence. This included retaining an investment banking firm to provide the
Board with a "Fairness Opinion", as well as retaining local accounting and legal
support in Scotland.
In March 1998, Messrs. Wilson and Evans, along with additional
engineering staff, visited the offices of the Company to perform the initial
stages of due diligence as well as inform the Company that the SolCom Board had
approved in principle the concept of being acquired by the Company. During the
visit, numerous matters were discussed with respect to products, customers and
organizational structures.
In April 1998, Messrs. McTigue and Gray returned to Solcom's facility
with representatives from Van Kasper and Company, the firm retained to advise
the Company's Board as to the fairness of the proposed transaction. During this
visit, Van Kasper was given unrestricted access to Solcom's staff and financial
records to allow them to perform the required services to enable them to
determine the fairness of the proposed transaction. It also allowed the
management of the two companies to further lay groundwork for the transaction,
prepare joint presentations for their respective Boards and begin to prepare a
model of the proposed financial plans of the combined entity.
On April 9, 1998, the Companies entered into a letter of intent to
acquire Solcom which was publicly announced pursuant to a press release on May
19, 1998.
On June 10, 1998, Van Kasper delivered its opinion to the Company's
Board of Directors as to the fairness of the Transaction to the Shareholders
from a financial point of view.
On June 23, 1998, the Company issued a press release announcing an
agreement with respect to the principle terms of the Transaction.
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During the period of April-August, 1998, the Company and SolCom
proceeded to negotiate a definitive agreement in connection with the
Transaction. During this timeframe, both companies continued operational and
strategy discussions with respect to the anticipated organization of the
combined entity subsequent to consummation of the Transaction as well as future
goals and objectives.
On August 17, 1998, the definitive Share Purchase Agreement was
executed and delivered by all parties thereto.
The Company's Reasons for the Transaction.
i. The combined entity will be able to provide a greater overall
technology delivery engine and, as a stronger company, will be
better able to capitalize on market opportunity; accordingly,
shareholder value will be likely to increase in the future;
ii. Both the Company and SolCom have a similar target market as
well as non- competing and complementary products, which,
together with each such entity's technology and expertise and
the superior technological and market background of SolCom's
management, will create the ability to reach a "critical mass"
with respect to growth and opportunity, the ability to develop
joint products (such as the RMON Engine) and the fostering of
economies of scale;
iii. The combined entity will offer a unified presence at
exhibitions and trade shows together with an enhanced joint
site on the Internet's World Wide Web which will provide the
opportunity for the combined entity to develop into a
recognized leader in its field;
iv. The Transaction could potentially result in substantial
additional revenues and accelerated growth in the long term,
which would enable the Company to improve its overall
financial position and results of operations;
v. The terms and conditions of the Share Purchase Agreement are
generally fair to the Shareholders. Accordingly, over the long
term, the issuance of the MicroFrame Shares would not be
likely to result in significant dilution to the Shareholders;
however, Shareholders in the short term will experience
immediate and substantial dilution. See "Risk Factors-Dilution
of Voting Power"; and
vi. The combination of the two companies would provide synergistic
benefits in connection with the consolidation of certain
redundant corporate functions and accordingly, the combined
entity should be able to operate in a more efficient and
profitable manner as a result of substantial cost reductions
and economies of scale.
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<PAGE>
SolCom's Reasons for the Transaction.
i. The combined entity will be able to provide a greater overall
technology delivery engine and, as a stronger company, will be
better able to capitalize on market opportunity; accordingly,
shareholder value will be likely to increase in the future;
ii. Both the Company and SolCom have a similar target market as
well as non- competing and complementary products, which,
together with each such entity's technology and expertise and
the superior technological and market background of SolCom's
management, will create the ability to reach a "critical mass"
with respect to growth and opportunity, the ability to develop
joint products (such as the RMON Engine) and the fostering of
economies of scale;
iii. The combined entity will offer a unified presence at
exhibitions and trade shows together with an enhanced joint
site on the Internet's World Wide Web which will provide the
opportunity for the combined entity to develop into a
recognized leader in its field;
iv. SolCom will achieve an increased sales, marketing and
distribution presence in the United States, which SolCom
believes will alleviate a significant barrier to sales and
profitability;
v. The Company is better capitalized and has greater managerial
depth than SolCom; accordingly, SolCom recognized that the
combined entity would be poised to take advantage of
opportunities in the technology field;
vi. SolCom's current capitalization is inadequate to produce the
kind of growth necessary for an acceptable return on
investment; as a result of its larger size, market position
and NASDAQ listing, it is easier for the Company to raise
capital; and
vii. The terms and conditions of the Share Purchase Agreement are
generally fair to the SolCom shareholders. SolCom concluded
that the possibility of appreciation of the Common Stock, when
balanced with all of the costs and challenges SolCom would
encounter by remaining independent, make the Transaction fair
and in the best interests of the SolCom shareholders.
FAIRNESS OPINION
General. The Company received a Fairness Opinion from Van Kasper &
Company, 600 California Street, Suite 1700, San Francisco, California 94108
("Van Kasper") dated as of June 10, 1998, opining as to the fairness of the
consideration received by the Company in connection with the Transaction (the
"Fairness Opinion"). Van Kasper is a private investment bank with no
affiliations with either the Company, SolCom or the Sellers.
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<PAGE>
The full text of the written opinion of Van Kasper, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Appendix B. The Van Kasper
opinion is directed to the Company's board of directors and does not constitute
a recommendation as to the benefits with respect to any individual Shareholder.
The summary contained herein is qualified in its entirety by reference to the
full text of such opinion attached hereto as Appendix B and incorporated herein
by reference.
Summary of Methods Utilized. Van Kasper utilized three (3) separate
valuation techniques in analyzing the Transaction, as follows:
Discounted Cash Flow Analysis. The discounted cash flow
analysis was performed using debt free operating cash flows based upon the
financial projections for (i) the Company, (ii) SolCom and (iii) the combined
entity as provided by the management of each such company. Certain discount
rates were utilized in each of the three models based upon the weighted average
cost of capital computed, in order to derive a valuation range for the operating
cash flow stream. Based upon the discounted cash flow analysis, Van Kasper
concluded that the Transaction was fair, from a financial point of view, to the
Shareholders.
Selected Publicly-Traded Comparable Companies Analysis. Van
Kasper searched various on-line sources and databases for publicly-traded
comparable companies. The searches initially located 419 potentially comparable
companies which Van Kasper narrowed down to 13 companies by eliminating
companies whose size or business was too dissimilar to that of the Company or as
to which the amount of publicly available data was insufficient. Van Kasper then
performed a detailed analysis of each of the remaining 13 companies and
eliminated an additional six companies whose revenue model was significantly
different. A detailed valuation of each of the remaining seven companies that,
as a group, best approximate the value of SolCom, were analyzed and derived by
applying adjusted average multiples of MVIC/estimated LTM Revenues define terms.
Based upon the selected publicly-traded comparable companies analysis, Van
Kasper concluded that the Transaction was fair, from a financial point of view,
to the Shareholders.
Comparable Merger and Acquisition Transactions Analysis. Van
Kasper researched a variety of merger and acquisition data sources, including
on-line databases, press releases and newspapers for transactions that have
occurred since January 1, 1996 and that involved companies that had annual
revenue between $5 million and $100 million per annum. Initially, 305
transactions were preliminarily located, 301 of which were subsequently
eliminated based upon business fit, transaction size, underlying deal structure
or lack of data with respect to such transactions. Utilizing the four remaining
transactions, Van Kasper derived a valuation of SolCom by applying the average
target company multiple of deal value/estimated LTM Revenues. Based upon the
comparable merger and acquisition transactions analysis, Van Kasper concluded
that the Transaction was fair, from a financial point of view, to the
Shareholders.
Method of Selection. The Board of Directors of the Company retained Van
Kasper to act as its financial advisor based upon its qualifications, experience
and expertise. Van Kasper, as part of its investment banking business, is
engaged in the valuation of businesses and securities in
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connection with mergers and acquisitions, private placements and valuations for
corporate and other purposes.
Relationship/Compensation. Pursuant to a letter agreement dated March
26, 1998, the Company agreed to pay Van Kasper a fee of $80,000 in connection
with the rendering of the opinion and up to an additional $20,000 in reasonable
expenses. The Company has had no material relationship with Van Kasper within
the last two (2) years and has no present intention to retain Van Kasper in
connection with any future services.
Management of the Company recommended the amount of consideration to be
delivered to the Sellers without any recommendation from Van Kasper.
In no event did the Company instruct Van Kasper with respect to the
methodologies or conclusions reached in connection with the Fairness Opinion or
impose any limitations on Van Kasper in respect thereof.
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THE PROPOSED TRANSACTION
General. The Company has agreed to purchase all of the outstanding
share capital of SolCom (the "Shares") pursuant to that certain share purchase
agreement dated as of August 17, 1998 entered into by and among the Company,
SolCom, each of the Sellers and certain representatives of the Sellers (the
"Share Purchase Agreement"), the full text of which, together with all exhibits
thereto, is annexed hereto as Appendix A, after which SolCom will be a
wholly-owned subsidiary of the Company. In consideration of the sale and
transfer of the Shares from the SolCom shareholders (the "Sellers") to the
Company, the Company shall issue to the Sellers an aggregate of 5,800,000 shares
of Common Stock and options to purchase shares of Common Stock. It is currently
estimated that the Company will issue approximately 4,600,000 shares of Common
Stock and grant approximately 1,200,000 options to purchase shares of Common
Stock. The final share/option breakdown shall be determined in accordance with
certain formulas set forth in greater detail below. See "Share Purchase
Agreement-Share Purchase."
The discussion in this Information Statement of the Transaction and the
description of the principal terms thereof are subject to and qualified in their
entirety by reference to the Share Purchase Agreement, which is incorporated
herein by reference. Shareholders are urged to read the Share Purchase Agreement
in its entirety.
Approval by the Board of Directors. The Board of Directors of the
Company believes that the Transaction is in the best interests of the Company
and the Shareholders and has unanimously approved the Transaction. The Board of
Directors' approval of the Transaction is based upon certain information
described in this Information Statement.
Approval by the Shareholders. A majority of the Shareholders of the
Company believe that the Transaction is in the best interests of the Company and
the Shareholders and such Shareholders have approved the Transaction pursuant to
the Written Consent.
Management of the Business Following the Proposed Transaction.
Effective as of the Closing, the Company's Board of Directors shall consist of
six (6) members, which will include two (2) representatives of SolCom or its
nominees. In addition, the officers of the Company as of the Closing shall
consist of the present officers of the Company, namely, Stephen B. Gray,
President, Chief Executive Officer and Chief Operating Officer, Michael
Radomsky, Executive Vice President and a Secretary, John F. McTigue, Chief
Financial Officer and Treasurer and Robert M. Groll, Vice President-Business
Development. Accordingly, as of the Closing, the Company will retain control of
the Board of Directors and the overall management of the Company.
Dissenters' Rights of Appraisal. In accordance with the applicable
provisions of the New Jersey Business Corporation Act (the "NJBCA"), any
Shareholder who has not executed the Written Consent shall have the right to
dissent therefrom and demand payment of the fair value of shares of Common Stock
owned by such Shareholder by delivering a notice to the Company of the
Shareholder's intention to so dissent within twenty (20) days of the date of the
notice from the Company to all non-consenting Shareholders delivered
simultaneously with the mailing of this
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Information Statement informing each such Shareholder of the right to dissent.
Reference is made to Sections 14A:10-12, 14A:11-1 and 14A:11-2 of the NJBCA, the
full texts of which are annexed hereto as Appendix H.
Effect on Shareholders. Following the consummation of the Transaction,
the number of issued and outstanding shares of Common Stock of the Company will
increase by an amount equal to the number of MicroFrame Shares issued to the
Sellers pursuant thereto. Shareholders of the Company will continue to have the
same voting, dividend and liquidation rights in the Company after the
Transaction. However, Shareholders of the Company will experience immediate and
substantial dilution in connection with their respective ownership of Common
Stock following the consummation of the Transaction.
Accounting Treatment of Transaction. The Transaction will be accounted
for by the Company under the "purchase method" of accounting in accordance with
generally accepted accounting principles. Accordingly, the aggregate
consideration paid by the Company in connection with the Transaction will be
allocated to SolCom's assets based upon their fair values, and the results of
operations of SolCom will be included in the results of operations of the
Company only for periods subsequent to the Closing Date.
Resale Restrictions. All shares of Common Stock received by Sellers
will be unregistered restricted securities under the Securities Act of 1933, as
amended (the "Act") and Regulation S promulgated thereunder. Sellers will be
permitted to sell certain shares held by them in accordance with Rule 144
promulgated under the Act. In general, Rule 144 as currently in effect provides
that an "affiliate" of the Company (as defined in Rule 144) or a person who has
beneficially owned "restricted securities" (as defined in Rule 144) for at least
one (1) year is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then-outstanding Common
Stock or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. Persons who are not deemed
affiliates of the Company and who have beneficially owned restricted securities
for at least two (2) years would be entitled to sell all of the shares of Common
Stock owned by them without regard to the volume limitation, manner-of-sale,
notice or current public information requirements.
Share Purchase Agreement.
Share Purchase. The Company shall purchase all of the
outstanding share capital of SolCom (the "Shares") pursuant to the Share
Purchase Agreement, after which SolCom will be a wholly-owned subsidiary of the
Company. In consideration of the sale and transfer of the Shares from the SolCom
shareholders (the "Sellers") to the Company, the Company shall issue to the
Sellers
(i) that number of shares of Common Stock (the "MicroFrame Shares"), in
proportion to each Seller's share ownership in SolCom, in accordance
with the following formula:
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a x 5,800,000
---------
a + b + c
where 'a' equals the number of Shares held by Sellers as of the Closing
(as such term is defined in the Share Purchase Agreement); 'b' equals
the number of ordinary shares of 1 pence each in the capital of SolCom
as of the Closing subject to options to subscribe therefor; and 'c'
equals the number of Third Party Shares (as such term is defined in the
Share Purchase Agreement) as of the Closing; and
(ii) that number of options to purchase shares of Common Stock equal to
(x) the total number of options to purchase shares of capital stock of
SolCom as of the Closing Date divided by (y) the Conversion Factor. The
Conversion Factor is determined in accordance with the following
formula:
a + b
---------
5,800,000
where 'a' equals the number of Shares held by Sellers as of the
Closing; and 'b' equals the number of ordinary shares of 1 pence each
in the capital of SolCom as of the Closing subject to options to
subscribe therefor.
Escrow. Approximately fifty (50%) percent of the MicroFrame
Shares to be issued will be held in escrow for a period of one year for the
purpose of permitting the Company to set off against any liabilities incurred by
the Company in the extent of breaches of representations and warranties or
covenants by the Sellers or SolCom pursuant to an escrow agreement to be entered
into by and among the Company, certain Sellers, the Sellers' Representatives (as
such term is defined in the Share Purchase Agreement) and Dundas & Wilson CS, as
escrow agent.
Exchange of Certificates. Upon the execution of the Share
Purchase Agreement, each Seller delivered or caused to be delivered to a
representative of the Sellers (the "Sellers' Representative") share certificates
representing the number of Shares owned by such Seller together with duly
executed share transfers to be held in custody by the Sellers' Representative
unless and until the Closing (as such term is defined in the Share Purchase
Agreement) occurs, at which time, the Sellers' Representative shall deliver the
Shares and transfers to the Company. In the event that the Closing does not
occur or the Share Purchase Agreement is terminated for any reason, the Sellers'
Representative must return the Shares and transfers to the Sellers forthwith. At
the Closing, the Company will deliver the MicroFrame Shares to the Sellers'
Representative.
Representations and Warranties. The Sellers have made certain
representations and warranties to the Company, including without limitation,
existence and qualification, capitalization, options, consents, material
contracts, financial statements, absence of undisclosed liabilities, tangible
and intangible property, title to assets, debt, absence of certain changes,
litigation, insurance, employee benefit plans, environmental matters, real
property, taxation, compliance with laws and permits, conflicts, suppliers and
customers, labor matters, bank
-13-
<PAGE>
accounts, creditors, officers, directors and key employees, insolvency, computer
systems and subsidiaries. The Company has made certain representations and
warranties to the Sellers, including without limitation, existence and
qualification, capitalization, authority, enforceability, consents and
approvals, public filings, the MicroFrame Shares and NASDAQ.
Covenants. The Sellers have made certain covenants to the
Company, including without limitation, conduct and preservation of business,
insurance, litigation, repayment of debts, notification of certain damage or
destruction, indemnification of brokerage, taxes, standstill, exclusivity and
technology. The Company has made certain covenants to the Sellers, including
without limitation, conduct and preservation of business, insurance, litigation,
notification of certain damage or destruction, indemnification of brokerage,
NASDAQ Listing, employee options, filings and registration rights.
Management after the Transaction. After the Closing, SolCom
will become a wholly-owned subsidiary of the Company. The initial directors of
the Company shall be Stephen B. Gray, Stephen M. Deixler, Michael Radomsky,
Alexander C. Stark, and two (2) additional nominees to be named by SolCom. In
addition, the officers of the Company as of the Closing shall consist of the
present officers of the Company, namely, Stephen B. Gray, President, Chief
Executive Officer and Chief Operating Officer, Michael Radomsky, Executive Vice
President and a Secretary, John F. McTigue, Chief Financial Officer and
Treasurer and Robert M. Groll, Vice President-Business Development.
Conditions to the Transaction. The respective obligations of
the Company and SolCom to consummate the Transaction is subject to the
fulfillment of certain conditions, including without limitation, filing with the
Securities and Exchange Commission (the "Commission") of this Information
Statement in definitive form, execution and delivery of certain ancillary
agreements, delivery of certain financial statements and opinions of counsel,
approval of a majority of the Shareholders, regulatory approvals, exemption from
registration under the Act for the issuance of the MicroFrame Shares, an update
to the Fairness Opinion, clearance from the Inland Revenue of the United
Kingdom,
Termination. The Share Purchase Agreement may be terminated
upon certain events, as follows: (i) written consent of the Buyer and the
Sellers or Sellers' Representatives, (ii) the failure of the Closing to occur
before December 31, 1998 or (iii) the failure to satisfy any of the closing
conditions set forth in Sections 8 and 9 of the Share Purchase Agreement without
waiver thereof prior to December 31, 1998. Upon termination of the Share
Purchase Agreement, all obligations of all parties terminate, except those
relating to non-solicitation, confidentiality and public announcements. In the
event of termination resulting from a failure of any of the Sellers to comply
with any provisions contained in the "Subscription of Shares on Closing & Debt
Free Amount" covenant contained in Section 7.18, the Funding Sellers (as such
term is defined in the Share Purchase Agreement) shall be liable to reimburse
Buyer for the entire amount of Buyer's actual legal, accounting and other
professional fees and disbursements not to exceed the aggregate of $400,000.
-14-
<PAGE>
Ancillary Agreements. Consummation of the Transaction is
conditioned upon the execution and delivery at the Closing of certain ancillary
agreements, including, among others, (i) an escrow agreement by and among Buyer,
certain Sellers, the Sellers' Representatives, and Dundas & Wilson, as escrow
agent, (ii) employment agreement amendments by and among Buyer and each of Peter
Wilson, Hugh Evans and Keith Laing, (iii) a registration rights agreement by and
among Buyer and the Sellers, (iv) certain opinions of counsel, (v) stock option
contracts with respect to employees of SolCom and (vi) a representation letter
of Francis DeLaura.
-15-
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet
MicroFrame, Inc.-As of June 30, 1998
SolCom Systems Ltd..-As of June 30, 1998
The following unaudited pro-forma consolidated balance sheet and statements of
operations give effect to the share purchase as if it had occurred on June 30,
1998 for balance sheet purposes and April 1, 1997 for statement of operations
purposes, and should be read in conjunction with the consolidated financial
statements of MicroFrame and SolCom for the relevant period and the related
notes thereto included, or incorporated by reference, elsewhere herein.
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustments Pro Forma
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 447,186 0 $ 447,186
Accounts receivable, less allowance for doubtful
accounts of $126,000 3,578,280 148,500 3,726,780
Inventory, net 1,887,644 504,900 2,392,544
Deferred tax assets, 371,822 371,822
Prepaid expenses and other current assets 186,172 56,100 242,272
-------------------------------------------------------------------
Total current assets 6,471,104 709,500 7,180,604
Property and equipment, less accumulated depreciation of
$568,687 458,685 221,100 679,785
Capitalized software, less accumulated amortization of 433,682 1,700,000 (Note 2) 2,133,682
$1,106,354
Deferred tax assets, net 2,745 2,745
Goodwill 73,005 3,120,850 (Note 2) 3,193,855
Security deposits 39,348 39,348
Other assets 293,135 0 (293,135 (Note 2) 0
-------------------------------------------------------------------
Total assets $ 7,771,704 930,600 4,527,715 $ 13,230,019
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowing $ 600,000 181,500 $ 781,500
Current portion of long-term debt 18,817 18,817
Accounts payable 1,066,763 912,450 1,979,213
Accrued payroll and related liabilities 225,541 225,541
Deferred income 268,751 268,751
Other current liabilities 452,673 435,600 888,273
-------------------------------------------------------------------
Total current liabilities 2,632,545 1,529,550 4,162,095
-------------------------------------------------------------------
Other liabilities 69,529 75,900 145,429
Commitments and contingencies
Stockholders' equity
Common stock 5,403 640,200 (634,400) 11,203
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued
Additional paid-in capital 7,143,363 1,092,300 18,754,900 26,990,563
Stock subscription receivable
Accumulated deficit (2,070,494) (2,410,650) (13,589,485) (18,070,629)
Cumulative translation adjustment (4,642) 3,300 (3,300) (4,642)
-------------------------------------------------------------------
5,073,630 (674,850) 4,527,715 8,926,495
Less - Treasury stock, 400 shares, at cost (4,000) 0 (4,000)
-------------------------------------------------------------------
Total stockholders' equity 5,069,630 (674,850) 4,527,715 8,922,495
-------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,771,704 930,600 4,527,715 $ 13,230,019
===================================================================
</TABLE>
-16-
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-Twelve Months Ended March 31, 1998
SolCom Systems, Ltd.-Nine Months Ended March 31, 1998
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustment Pro Forma
<S> <C> <C> <C>
Net Sales $ 10,217,911 $ 1,701,150 $ $ 11,919,061
Cost of sales 4,285,134 364,650 340,000 (Note 3) 4,989,784
-------------- ------------- ---------------------- -------------
5,932,777 1,336,500
Gross margin 6,929,277
1,117,151 435,600 1,552,751
Research and Development expenses
Selling, general and administrative expenses 4,419,521 1,592,250 445,835 (Note 3) 6,457,606
-------------- ------------- ---------------------- -------------
Income (loss) from operations 396,105 (691,350) 785,835 (1,081,080)
-------------- ------------- ----------------------
Interest income 14,888 1,650 16,538
Interest expense (4,344) (34,650) (38,994)
406,649 (724,350) (785,835) (1,103,536)
Income (loss) before income tax provision (benefit)
Income tax provision (benefit) (304,661) 0 (136,000) (440,661)
-------------- ------------- ---------------------- -------------
Net income (loss) $ 711,310 $ (724,350) $ (649,835) $ (662,875)
============== ============= ====================== =============
Per share data (Note 5)
Net income (loss) per share
Basic $ 0.15 $ (0.06)
Diluted $ 0.14 $ (0.06)
Weighted average number of common shares 4,840,357 10,640,357
outstanding basic
Weighted average number of common shares
outstanding diluted
</TABLE>
-17-
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-As of June 30, 1998
SolCom Systems Ltd..-As of June 30, 1998
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustments Pro Forma
<S> <C> <C> <C> <C>
Net sales $ 2,963,973 392,700 $ 3,356,673
Cost of sales 1,008,005 90,750 85,000 (Note 3) 1,183,755
-------------- ----------- ------------------- ----------------
Gross Margin 1,955,968 301,950 2,172,918
Research and development expenses 412,967 125,400 538,367
Selling, general and administrative expenses
(Note 3) 1,219,648 549,450 111,460 (Note 2) 1,180,558
-------------- ----------- ------------------- ----------------
Income (loss) from operations 323,353 (372,900) (246,007)
Interest income 2,336 1,650 3,986
Interest expense (8,969) (26,400) (35,369)
-------------- ----------- ------------------- ----------------
Income (loss) before income tax provision (benefit) 316,720 (397,650) (196,460) (277,390)
Income tax provision (benefit) 155,576 0 (34,000) 121,576
-------------- ----------- ------------------- ----------------
Net income (loss) $ 161,144 (397,650 (162,460) $ (398,966)
============== =========== =================== ================
Per share data (Note 5)
Net income (loss) per share
Basic $ 0.03 $ (0.04)
-------------- ----------------
Diluted $ 0.02 $ (0.04)
-------------- ----------------
Weighted average number of common shares
outstanding basic 5,134,272 10,934,272
--------------
Weighted average number of common shares
outstanding diluted 7,042,534 10,934,272
--------------
</TABLE>
-18-
<PAGE>
MicroFrame, Inc.
SolCom Systems, Ltd.
Notes to Unaudited Proforma Combined Financial Statements
1 Basis of Presentation
MicroFrame and SolCom entered into a definitive agreement that provides
for the purchase of all outstanding share capital of SolCom by
MicroFrame. The transaction will be accounted for by the "purchase"
method of accounting with MicroFrame as the purchaser of SolCom.
2 Application of Purchase of SolCom
The Company has used the maximum number of shares to be issued in the
transaction as a basis of determining the consideration for the
transaction. The Company has used an average price of the stock at the
time the definitive terms and conditions were announced to the public
($3.37 per share) to value the 5,800,000 shares. The consideration will
ultimately be adjusted once the composition of shares and stock options
are known.
The Company has estimated that transaction costs will be approximately
$600,000. The Company had incurred approximately $293,000 of costs as
of June 30, 1998. This amount has been released in the pro forma
adjustment column to become part of the estimated purchase price
allocation.
While the Company has not formally allocated the purchase price of the
transaction, it has used estimates from a third-party appraisal company
to arrive at the value of existing technology ($1,700,000), which has
been classified as capitalized software, the amount to be reflected as
in-process research and development ($16,000,000) and goodwill
($3,120,850). These estimates will be refined upon the final purchase
price allocation. Management believes that these are reasonable
estimates for pro forma purposes.
3 Inter-Company Transactions
There were no inter-company transactions between MicroFrame and Solcom
during the periods presented.
4 Weighted Average Shares and Earnings Per Share
The weighted average shares outstanding has been adjusted to reflect
the issuance of 5,800,000 shares of MicroFrame's common stock (the
maximum potential) as a result of this transaction. The actual number
of shares of common stock issued is likely to be lower, with the
balance of the consideration in the form of stock options.
-19-
<PAGE>
RISK FACTORS
Risks Relating to an Investment in the Company
References to the "Company" include the Company and SolCom as the
post-Closing combined entity, except where otherwise indicated or appropriate
within the context thereof.
Competition. The market for network management and remote maintenance
and security products for mission critical voice an data communications networks
is highly competitive. There can be no assurance that the proprietary technology
which forms the basis for most of the Company's family of modular standards
oriented hardware and software components will continue to enjoy market
acceptance or that the Company will be able to compete successfully on an
on-going basis. The Company believes that the principal factors affecting
competition in the network management networks are: (1) the products' ability to
meet a multiplicity of network management and security requirements; (2) the
products' ability to conform to the network topologies and/or computer systems;
(3) the products' ability to avoid technological obsolescence; (4) the
willingness and the ability of a vendor to support customization, training, and
installation; and (5) the price. Although the Company believes that its present
products and services are competitive, the Company competes with a number of
large computer, electronics and telecommunications manufacturers which have
financial, research and development, marketing, and technical resources
substantially greater than those of the Company. Such companies may succeed in
producing and distributing competitive products more effectively than the
Company can produce and distribute its products, and may also develop new
products which compete effectively with those of the Company.
Limited Protection From Duplication of Proprietary Products. The
Company holds no patents on any of its technology. Although it does license some
of its technology from third parties, it does not consider any of these licenses
to be critical to the Company's operations.
The Company has made a consistent effort to minimize the ability of
competitors to duplicate the Company's software technology utilized in its
products. However, there remains the possibility of duplication of the Company's
products and competing products have already been introduced.
No Dividends. The Company has not paid any cash dividends on its Common
Stock. The Company presently intends to retain all earnings to finance its
operations and, therefore, does not presently anticipate paying any cash
dividends in the foreseeable future.
Possible Volatility of Market Price of the Company's Securities.
Because of the nature of the industry in which the Company operates, the market
price of the Company's securities is highly volatile. Factors such as
announcements by the Company or others of technological innovations, new
commercial products, regulatory approvals or proprietary rights developments,
and competitive developments all may have a significant impact on the future
business prospects of the Company and the market price of the Company's
securities.
-20-
<PAGE>
Rapid Industry Change and Technological Change. The Company's success
will depend on the continued and expanded use of its existing products and
services, and its ability to develop new products and services or adapt existing
products and services to keep pace with change in the communication industry.
There can be no assurance that the Company will be successful in modifying or
developing its existing or future products in a timely manner, or at all. If the
Company is unable, due to resource, technological or other constraints, to
adequately anticipate or respond to changing market, customer or technological
requirements, the Company's business, financial condition and results of
operations will be materially adversely affected. Further, there can be no
assurance that products or services developed by others will not render the
Company's products and services non-competitive or obsolete.
Technological Factors; Uncertainty of Product Development; Unproven
Technology. The Company's products are currently being utilized by a limited
number of customers and there can be no assurance that they will prove to be
sufficiently reliable in widespread commercial use. It is common for hardware
and software as complex and sophisticated as that incorporated in the Company's
products to experience errors or "bugs" both during development and subsequent
to commercial introduction. There can be no assurance that any errors in the
Company's existing or future products will be identified, and if identified,
corrected. Any such errors could delay commercial introduction of new products
and require modifications in products that have already been installed.
Remedying such errors has been and may continue to be costly and time consuming.
Delays in remedying any such errors could materially adversely affect the
Company's competitive position with respect to existing or new technologies and
products offered by its competitors.
Dependence on Key Personnel. The Company's success depends in large
part on the continued services of its key management, sales, engineering,
research and development and operational personnel and on its ability to
continue to attract, motivate and retain highly qualified employees and
independent contractors on those areas. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting, motivating and retaining key personnel. The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon the Company's business condition and results
of operations.
Potential Fluctuations in Quarterly Performance. The Company has
experienced fluctuations in its quarterly operating results and anticipates that
such fluctuations will continue and could intensify. The Company's quarterly
operating results may vary significantly depending on a number of factors,
including the timing of the introduction or acceptance of new products and
services offered by the Company, changes in the mix of products and services
provided by the Company, long sales cycles, changes in regulations affecting the
Company's business, changes in the Company's operating expenses, uneven revenue
streams, and general economic conditions. Revenue recognition for the Company's
products is based upon various performance criteria and varies from customer to
customer and product to product. There can be no assurance that the Company's
levels of profitability will not vary significantly among quarterly periods or
that in future quarterly periods the Company's results of operations will not be
below prior results or the
-21-
<PAGE>
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock could be materially adversely affected.
Possible Need for Additional Financing. In the event of unanticipated
technical or other problems, the Company may be required to seek additional
financing. There can be no assurance that additional financing will be available
on acceptable terms, or at all.
Government Regulation and Legal Uncertainties. Due to the
sophistication of the technology employed in the Company's devices, export of
the Company's products is subject to governmental regulation. As required by law
or demanded by customer contract, the Company routinely obtains approval of its
products by Underwriters' Laboratories. Additionally, because many of the
Company's products interface with telecommunications networks, its products are
subject to several key Federal Communications Commission ("FCC") rules and thus
FCC approval is necessary as well.
Part 68 of the FCC rules contains the majority of the technical
requirements with which telephone systems must comply to qualify for FCC
registration for interconnection to the public telephone network. Part 68
registration represents a determination by the FCC that telecommunication
equipment interfacing with the public telephone network complies with certain
interference parameters and the Company intends to apply for FCC Part 68
registration for all of its new and future products.
Part 15 of the FCC rules requires equipment classified as containing a
Class A computing device to meet certain radio and television interference
requirements, especially as such requirements relate to operations of such
equipment in a residential area. Certain of the Company's products are subject
to Part 15.
The European Community is developing a similar set of requirements for
its members and the Company has begun the process of compliance for Europe.
Potential Future Sales Pursuant to Rule 144. Sale of substantial
amounts of Common Stock in the public market could adversely affect the market
price for the Common Stock. As of August 10, 1998, 988,174 shares of the
Company's Common Stock were held by officers, directors and certain principal
stockholders of the Company and an additional 892,922 shares of the Company's
Common Stock will be held by such persons upon their exercise of currently
exercisable stock options and warrants. Such shares of Common Stock may not be
freely resold as they are "restricted securities" under Rule 144, as promulgated
by the Commission pursuant to the 1933 Act, as amended, and the rules and
regulations thereunder. Rule 144 provides, in essence, that a stockholder who is
an affiliate of the Company, after holding restricted securities for a period of
one year, may sell them in an unsolicited brokerage transaction within a three
month period in an amount which does not exceed the greater of 1% of the then
outstanding Common Stock or the average weekly trading volume during the four
calendar weeks prior to such sale. Non-affiliated stockholders holding
restricted securities for more than two years are not subject to volume
limitations and may sell unlimited amounts of Common Stock under Rule
-22-
<PAGE>
144. The price of the Company's Common Stock might be adversely affected if a
substantial portion of the Common Stock are sold pursuant to Rule 144.
Risks Relating to the Transaction
Operating Losses. SolCom has experienced substantial net operating
losses for each of the fiscal years ended June 30, 1996 and 1997 and the nine
months ended March 31, 1998 of $78,000, 919,000 and $724,000, respectively.
SolCom anticipates that operating losses will continue into the near future.
Accordingly, there can be no assurance that consummation of the Transaction will
result in profitability for SolCom or the Company.
Competition. The business of the combined entity is highly competitive.
Many of the entities with which the Company will compete subsequent to the
consummation of the Transaction have substantially greater financial and other
resources than the Company and SolCom combined. Competitors include Net Scout
Inc., Hewlett-Packard, Inc., 3Com Corp., Technically Elite, Bay Networks Inc.,
Shomiti Systems Inc., Visual Networks, Inc., Concord Communications, Inc. and
Sync Research, Inc. The Company may be unable to successfully compete in this
environment.
No Assurance that the Company Will Realize Anticipated Benefits from
Transaction. The Transaction involves the combination of certain aspects of two
companies that have operated independently. Accordingly, there can be no
assurance that SolCom can be successfully integrated into the Company or that
the Company and the Shareholders (including persons who become Shareholders as a
result of the Transaction) will ultimately realize any of the anticipated
benefits of the Transaction.
Potential Lack of Update to Fairness Opinion. Although the Company has
received an opinion from Van Kasper & Company dated June 10, 1998 to the effect
that, as of such date and based upon certain matters as stated therein, the
terms of the Transaction are fair to the Shareholders from a financial point of
view, there can be no assurance that the Company will receive an update to such
opinion that will be satisfactory to the Company's board of directors. Since the
receipt of such update is a condition to the Company's obligation to close, the
failure to receive such could result in a failure to consummate the Transaction.
Dilution of Voting Power. Consummation of the Transaction will result
in an approximate 50% increase in the number of shares of Common Stock
outstanding. The Shareholders will, therefore, experience an immediate
corresponding dilution of their respective voting power following such
consummation.
-23-
<PAGE>
OUTSTANDING VOTING SECURITIES
As of the Written Consent Date, there were 5,346,884 issued and
outstanding shares of Common Stock. Each holder of Common Stock is entitled to
one vote for each share held by such holder.
The NJBCA provides in substance that unless the Company's certificate
of incorporation provides otherwise, shareholders may take action (except for
the election of directors) without a meeting and without prior notice if a
consent or consents in writing, setting forth the action so taken, is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to take such action at a meeting at which all
shares entitled to vote thereon were present. Under the applicable provisions of
the NJBCA, such action is effective when written consents from holders of record
of a majority of the outstanding shares of voting stock are executed and
delivered to the Company within 60 days of the earliest dated consent delivered
in accordance with the NJBCA.
In compliance with the provisions of the NJBCA and the Company's
certificate of incorporation, on or about the Written Consent Date, the
Shareholders executed and delivered to the Company the Written Consents in lieu
of a meeting of the Shareholders representing the Written Consent Percentage,
approving and adopting the Share Purchase Agreement, the agreements contemplated
thereby and authorizing the consummation of the Transaction and the Plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Written Consent Date, the
ownership of the Company's Common Stock by (i) each person who is known by the
Company to own of record or beneficially more than five percent (5%) of the
Company's Common Stock, (ii) each of the Company's directors, (iii) the
Company's Chief Executive Officer and the most highly compensated executive
officers with aggregate compensation which exceeds $100,000 and (iv) all
directors and officers as a group. Except as otherwise indicated, the
shareholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
Name and Address Shares Owned Percent of Class
- ---------------- ------------ ----------------
<S> <C> <C>
Stephen M. Deixler (1) 760,532 14.1%
371 Eagle Drive
Jupiter, Florida 33477
Stephen B. Gray (2)(10) 477,309 8.8%
Michael Radomsky (3) 356,643 6.6%
8 Zaydee Drive
Edison, New Jersey 08837
-24-
<PAGE>
Name and Address Shares Owned Percent of Class
- ---------------- ------------ ----------------
Robert M. Groll (4) 100,852 1.9%
52 Village Lane
Freehold, New Jersey 07728
John F. McTigue (5)(10) 100,760 1.9%
Special Situations Fund, III, L.P.(6) 855,863 15.8%
MGP Advisers Limited Partnership (6) 855,863 15.8%
AWM Investment Company, Inc. (6) 1,157,133 21.4%
Austin W. Marxe (6) 1,157,133 21.4%
Jay Associates LLC (7) 480,000 8.8%
1118 Avenue J
Brooklyn, New York 11230
Alpha Investments LLC (8) 336,000 6.2%
5611 North 16th Street #300
Phoenix, Arizona 85016
Alexander C. Stark (9) 85,000 1.6%
356 Eagle Drive
Jupiter, Florida 33477 403,569 7.5%
Stephen P. Roma
91 Durand Drive
Marlboro, New Jersey 07748
Directors and executive 1,881,096 34.8%
officers as a group (6 Persons)
- --------------------------
</TABLE>
(1) Does not include 214,436 shares of Common Stock owned by Mr. Deixler's
wife, mother, children and grandchildren as to which shares Mr. Deixler
disclaims beneficial ownership. Includes 120,406 shares of Common Stock
held by Merrill Lynch Pierce Fenner & Smith custodian f/b/o Stephen M.
Deixler, IRA. Includes 27,500 shares of Common Stock which may be
acquired pursuant to currently exercisable options. Also includes
53,330 shares issuable upon exercise of currently exercisable Class A
and Class B Warrants.
(2) Includes 477,309 shares of Common Stock which may be acquired pursuant
to currently exercisable options.
(3) Includes 142,339 shares of Common Stock which may be acquired pursuant
to currently exercisable options.
-25-
<PAGE>
(4) Includes 56,684 shares of Common Stock which may be acquired pursuant
to currently exercisable options.
(5) Consists of 100,760 shares of Common Stock which may be acquired
pursuant to currently exercisable options.
(6) Special Situations Fund III, L.P., a Delaware limited partnership (the
"Fund"), MGP Advisers Limited Partnership, a Delaware limited
partnership ("MGP"), AWM Investment Company, Inc., a Delaware
corporation ("AWM"), and Austin W. Marxe have filed a Schedule 13G, the
latest amendment of which is dated January 27, 1997. All presented
information is based on the information contained in the Schedule 13G.
The address of each of the reporting persons is 153 East 53rd Street,
New York, New York 10022. The Fund has sole voting and dispositive
power with respect to 855,863 shares; MGP has sole dispositive power
with respect to 855,863 shares; AWM has sole voting power with respect
to 301,270 shares and sole dispositive power with respect to 1,157,133
shares; and Mr. Marxe has sole voting power with respect to 301,270
shares, shared voting power with respect to 855,863 shares and sole
dispositive power with respect to 1,157,133 shares. MGP is a general
partner of and investment advisor to the Fund. AWM, which is primarily
owned by Mr. Marxe, is the sole general partner of MGP. Mr. Marxe, the
principal limited partner of MGP and the President of AWM, is
principally responsible for the selection, acquisition and disposition
of the portfolio securities by AWM on behalf of MGP, the Fund and
another fund that beneficially owns shares included in the shares
beneficially owned by AWM and Mr. Marxe. Also includes 267,242 shares
issuable upon exercise of currently exercisable Class A and Class B
Warrants held by the Fund and MGP and 364,422 shares issuable upon
exercise of currently exercisable Class A and Class B Warrants held by
AWM and Mr. Marxe.
(7) Includes 320,000 shares issuable upon exercise of currently exercisable
Class A and Class B Warrants.
(8) Includes 224,000 shares issuable upon exercise of currently exercisable
Class A and Class B Warrants.
(9) Includes 35,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options.
(10) The address of such person is c/o the Company, 21 Meridian Avenue,
Edison, New Jersey 08820.
MARKET PRICE
The Common Stock is traded on The NASDAQ SmallCap System. The high and
low sales prices for the Common Stock on May 19, 1998, the day before the
Company publicly announced an executed letter of intent to enter into the Share
Purchase Agreement and the Transaction, were $4.31 and $4.13, respectively.
-26-
<PAGE>
INFORMATION WITH RESPECT TO MICROFRAME
This Information Statement incorporates by reference the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998 (the
"Company 10-KSB") and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1998 (the "Company 10-QSB"), which were previously
filed with the Commission and are annexed hereto as Appendix F and Appendix G,
respectively. As of the date of this Information Statement, the Company has not
filed any reports pursuant to the Exchange Act subsequent to the Company 10-
QSB.
Year 2000 Compliance
The Company currently estimates that its costs associated with Year 2000
compliance will not have a material adverse effect on the Company's business,
financial condition or results of operations.
-27-
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company.
The information set forth below should be read in conjunction with "Pro Forma
Condensed Financial Statements" contained in this Information Statement as well
as "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto
incorporated by reference in this Information Statement. The Consolidated
Statement of Operations data set forth below for each of the two years ended
March 31, 1998 and the consolidated balance sheet data at March 31, 1998 are
derived from, and are qualified by reference to, the audited consolidated
financial statements contained in the Company 10-KSB annexed hereto as Appendix
F, and should be read in conjunction with those financial statements and the
notes thereto. The consolidated balance sheet data at March 31, 1996, 1995 and
1994 are derived from the audited consolidated balance sheets of the Company at
those aforementioned dates, which are not incorporated by reference in this
Information Statement. The Consolidated Statement of Operations data for each of
the three years ended March 31, 1996, 1995 and 1994 are derived from audited
consolidated financial statements not incorporated by reference in this
Information Statement. The balance sheet data as of June 30, 1998 and the
statement of operations data for the three months ended June 30, 1998 have been
derived from unaudited consolidated financial statements included in the
Company's Form 10-QSB as of June 30, 1998, which has been incorporated by
reference in this Information Statement. The historical financial information
may not be indicative of the Company's future performance.
<TABLE>
<CAPTION>
Year Ended(1)
--------------------------------------------------------------------------
Three Months
1994 1995 1996 1997 1998 ended 6/30/98
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 4,744,554 $ 7,126,391 $ 6,258,243 $ 7,343,624 $ 10,217,911 $ 2,963,973
Income Before
Cumulative Effect of
an Accounting Change 233,092 364,797 1,993,700) 342,457 721,310 167,344
Cumulative Effect of an
Accounting Change 950,000 --- --- --- --- ---
Income (Loss) from
Continuing Operations 1,183,902 364,797 1,993,700) 342,451 711,310 161,144
Earnings Per Share 0.35 0.10 (0.54) 0.07 0.15 0.03
Total Assets 3,885,587 4,337,929 3,558,171 4,682,373 6,375,432 7,771,704
Long-Term Obligations 0 0 (72,833) (30,398) 0 0
Dividends Declared 0 0 0 0 0 0
- --------------------------
</TABLE>
1 Balance Sheet data is at March 31 of each respective year and June 30, 1998.
-28-
<PAGE>
INFORMATION WITH RESPECT TO SOLCOM
Description of Business
General
SolCom, founded in 1992, is a developer of remote monitoring
technology. Originally approved by the Internet Engineering Task Force (IETF) in
1992, Remote MONitoring, or RMON, is a standard protocol for users to
proactively manage multiple local area networks (LANs) and wide area networks
(WANs) from a central site. RMON 1 identifies errors, alerts administrators to
network problems and baselines networks in addition to its remote network
analyzer capabilities. RMON's recent enhancement, RMON 2, enables network
managers to access higher-level network-wide application and protocol
information. RMON 2 also provides enterprise-wide and/or point-to-point traffic
statistics that enables trouble-shooting and network capacity planning.
SolCom's products provide for traffic analysis and monitoring for a
wide range of network media applications and allow companies to provide network
trouble shooting and traffic and protocol analysis of distributed remote sites
from a central location. SolCom provides a wide range of media via dedicated
hardware with all information being delivered and available via Graphical User
Interfaces (GUI) that are available for Microsoft Windows and NT and a range of
UNIX platforms.
Financial Information About Industry Segments
This section incorporates by reference SolCom's financial statements
attached as Exhibit E hereto.
Principal Products and Markets
SolCom has an expanding base of both end-users and resellers in Europe
and the United States. SolCom has also developed a strong "Original Equipment
Manufacturer" (OEM) relationship with an industry leading network equipment
supplier who manufactures SolCom products under license. SolCom is headquartered
in Livingston, Scotland with a sales and marketing subsidiary, SolCom Systems,
Inc., in Reston, Virginia.
SolCom' typical end-user customer profile consists of large,
knowledge-based organizations with multiple distributed sites over a large
geographical area. The SolCom product range is developed to allow network
managers of companies that have large distributed LANs and WANs to control their
distributed sites from a central site.
Hardware Products. The SolCom range of hardware (generically referred
to as "probes") are devices that are distributed to LANs and WANs and perform
data collection and consolidation functions. Each probe connects to a specific
media type, e.g., Ethernet, Token Ring or FDDI.
-29-
<PAGE>
SolCom currently produces 18 different products that cover 8 different types of
LAN and WAN media applications.
Software Products. in order to utilize SolCom's hardware products,
SolCom has developed a "Graphical Use Interface" that operates over a variety of
platforms, including Windows 95, Windows NT and UNIX.
SolCom believes that its combination of software and hardware-products
provides a unique set of capabilities for network managers within the SolCom
target market and brings the following technical and business benefits to these
companies.
Key Technical Benefits:
o Quick resolution of user problems
o Easy access to information
o Control of multiple WAN and LANs
o Proactive and reactive analysis
o Scaleable solutions
o Low cost entry
o Standards based
Key Business Benefits:
o Less user down time
o Rapid response to network user problems
o Fewer remote site visits
o Better use of technical expertise
o Reduced network administration
o Improved network design
New Products and Markets.
During the last 12 months, SolCom has developed and introduced a range
of products that enhances SolCom's ability to provide large scale enterprise
management solutions. SolCom has developed an "RMON Engine" which gives it the
ability to rapidly develop and provide multi port and high port density RMON
probes. The RMON Engine-based product range brings the following benefits with
respect to previous SolCom products:
o High Media Port Densities
o Faster Processor
o Lower build costs
o Scaleable architecture
o Mixed media in a single platform
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<PAGE>
o Higher memory density
o Portable Firmware
SolCom has also introduced a reporting package known as "SolCom Stats"
which provides a reporting solution that collects RMON 1 and 2 data from
multiple-distributed RMON probes, collates the data into either custom or
pre-configured reports that provide long term trend analysis, and distributes
such data automatically on a timed basis to a printer, via e-mail or through any
standard web browser.
SolCom products are designed to allow target markets to properly plan
their respective infrastructures, providing information as to the identity of
link utilizers and the applications and levels thereof. SolCom products allow
companies to minimize the time to locate faults by providing a distributed fault
analysis capability that allows managers from a central site to immediately
assess the extent and nature of such faults.
RMON 2 Business Benefits.
Enhanced management information can be obtained from the latest
addition to the IETF RMON Specification, the RMON 2 (RFC 2021). This
specification enhances the type and quality of information that can be delivered
to both the chief information officer and network manager of any enterprise
organization.
RMON 2 will allow organizations to police internet usage, provide usage
statistics by both the host and conversation at the network and applications
layers. Network managers will be able to determine not only the identity of a
network user but which resources such users are utilizing and with which
applications.
Network managers with a properly implemented RMON solution can deliver
business benefits to any organization by delivering information that can
maximize uptime and user productivity by ensuring minimum down time and lowest
response times. RMON delivers these benefits by providing information, through
network monitoring, that can allow the network manager to take proactive steps
to ensure that the network performs properly and in the event of a network
failure, identity the fault source as quickly as possible. Since many network
faults are intermittent in nature, the continuous monitoring provided by RMON
increases the likelihood that network faults can be detected and corrected, with
the additional benefit of carrying out such tasks at remote sites.
The following are some of the benefits that the SolCom RMON products
provide in connection with a wide variety of media types and applications:
-31-
<PAGE>
<TABLE>
<CAPTION>
Business Benefits
(Questions you can RMON Groups
Benefits Description answer) Used
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Link and Are your links under Are you paying too RMON 1 History,
Network Usage utilized or over utilized, much for under utilized RMON 2 User
who is causing the usage, networks? Are busy History, Protocol
who is hogging the networks interfering Distribution.
bandwith, which with your ability to
protocols are the most carry out work in a
bandwidth hungry, what timely manner? Can
times of the day are your "chatty" protocols on
networks under strain your network be
and when are they quiet? reconfigured to lessen
usage? Can retiming of
batch jobs (e.g.
Backups) save
resource?
Internet Usage Host and Conversation What resources are RMON 2 Network
Statistics: most targeted on your Layer Host Table,
Who are the biggest network and by whom? RMON 2 Network
users of the Internet or Information on usage Layer Matrix Table,
your Intranet? Where are that can be used to Network Layer and
they going? assign costs by either Application Layer
department or user. Top N Tables
Policing Policy Host and Conversation Have the ability to RMON 2 Network
Statics: track non valid use of Layer Host Table,
What are users doing on the Internet, Job RMON 2 Network
the Internet? Searches, Shopping Layer Matrix Table,
Malls and Network Layer and
Pornography. Ensure Application Layer
users are working, not Top N Tables
surfing.
Security Host Statistics: Who is Search for non-valid IP RMON 2 Network
on your net and do they addresses and see what Layer Host and
have access rights? resource they have Matrix Tables
been trying to access.
-32-
<PAGE>
Business Benefits
(Questions you can RMON Groups
Benefits Description answer) Used
- ----------------------------------------------------------------------------------------------------------
Planning Network and A properly planned and All statistical groups.
Application Layer implemented network is
Information: Use the the most cost effective
various statistics to network. This can only
properly plan for changes be obtained by having
in network usage, either accurate information to
increased numbers of begin with and
users, change of monitoring changes and
application type or both. implementation.
Fault Finding Tracking and Technical Support All statistical groups,
Pinpointing Faults: responds to faults enhanced filtering
Enhanced information quicker, downtime and using RMON 2
delivered by RMON 2 lost user productivity is Network layer and
ensures that fault finding minimized. User Application layer
is more seamless and confidence is high. information.
easier to carry out.
</TABLE>
Marketing and Distribution.
Original Equipment Manufacturer (OEM). SolCom has attracted substantial
OEM and "re-badge" opportunities and, presently, approximately 50% of its gross
income derives from such opportunities. SolCom has developed relationships with
certain significant participants in the network management markets and the
introduction of its latest products are likely to expand these opportunities. In
the nine months ended March 31, 1998, SolCom earned (pound)534,000 ($881,000)
from OEM sources.
European Market. SolCom sells to corporate end-users via a reseller
channel. These resellers typically have an established customer base to which
they introduce the SolCom products and to whom they usually sell complementary
tools. SolCom has established relationships of this type in the UK and Germany
and has recognized the need to expand the same throughout Europe. SolCom
currently has 11 authorized business partners with whom it has established
contractual relationships and 4 unauthorized resellers who are carrying the
product to establish market viability before formalizing the relationship. In
the nine months ended March 31, 1998, SolCom realized (pound)330,000 ($544,000)
from this market.
United States Market. SolCom has had a presence in the United States
since 1994 through an agency relationship with EQSOR, and since 1996 SolCom
Systems, Inc., a wholly-owned subsidiary of SolCom, has had 5 full time
employees providing sales and marketing functions with a particular emphasis on
the US federal government. The US office has established a number of reseller
relationships with both commercial and federal contractors and has
-33-
<PAGE>
established presence on 3 GSA contracts. In the nine months ended March 31,
1998, SolCom realized (pound)168,000 ($277,000) from this market. SolCom has
identified that the US, which accounts for 55% of the global market for its
products, is key to SolCom's future growth.
For a more detailed discussion of the financial information about
SolCom's foreign and domestic operations and export sales, this section
incorporates by reference SolCom's financial statements attached as Exhibit E
hereto.
Competition.
Both the network management market in general and the niche market
targeted by SolCom specifically (i.e., RMON) are highly competitive. SolCom
believes that it is well positioned in this market with key differentiation from
competitors, including overall coverage and media spread of the RMON products;
the performance of the SolCom product set; the port densities and price
performance ratios of SolCom products and SolCom's fault finding capabilities
together with short- and long-term reporting capabilities.
SolCom's principal competitors include NetScout Inc., Hewlett-Packard,
Inc., Technically Elite, Visual Networks, Inc., Sync Research, Inc., Net2Net,
Desktalk and Concord Communications, Inc. Additional general competitors include
3Com Corp. and Bay Networks Inc., who have internal embedded RMON solutions.
Sources and Availability of Raw Materials.
SolCom designs its hardware products utilizing readily available parts
from major manufacturers, which are obtainable through multiple suppliers and it
intends to continue with this approach. While SolCom does not anticipate any
significant price increases or supply interruption, there can be no assurance of
this.
Working Capital and Inventory
SolCom derives its working capital from share capital and revenue from
sales. SolCom maintains a low inventory of finished products, although in order
to support its product range, inventories of components and sub-assemblies are
maintained at a relatively high level. As a general practice customer purchases
are built to order. SolCom does not have a return policy, although it honors
returns and replacement of defective merchandise. The level of returned
inventory is not material to SolCom's business. SolCom customarily provides
30-day payment terms to its customers. Management believes these practices to be
consistent with industry practices.
Dependence on Particular Customers.
SolCom has one large OEM vendor that accounts for approximately 50% of
its business and contributes significantly to SolCom's profit. SolCom has in
place 3-year extendible contracts
-34-
<PAGE>
with the OEM client but it is SolCom's intention to decrease its dependence on
this customer through the growth of its own channel business.
Intellectual Property, Licenses and Labor Contracts.
SolCom holds no patents on any of its technologies but does license
some technology from third parties. These third party licenses are not critical
to SolCom's operations. SolCom has made significant efforts to ensure that its
products are difficult to copy or compete with in the market but competitive
products of a similar nature have been introduced to the market. None of
SolCom's logos or style have been trademarked or copyrighted. None of SolCom's
employees are in any labor union and SolCom believes it has a satisfactory
relationship with each such employee.
Employees.
As of March 31, 1998, SolCom and its subsidiary employed 32 employees,
all but two of whom are full time. As of that date, there were 13 engineers, 2
in customer support, one internal IT, 1 in QA, 4 in sales, 3 in marketing, 3 in
production, 2 in Finance and 3 in administration.
Description of Property.
The Company currently leases 4,000 square feet of space at 1 Meikle
Road, Livingston, Scotland from Scottish Enterprise at a rent of (pound)43,000
($71,000) per year, and 436 square feet in a managed office facility at 1801
Robert Fulton Drive, Reston, Virginia, at a rent of $3,817 per month.
Legal Proceedings.
SolCom is not a party to any material pending legal proceedings.
Market Price of and Dividends on SolCom's Common Equity and Related Stockholder
Matters
There is no established United States or foreign public trading market
for any of SolCom's common equity securities. As of the date of this filing,
there are approximately twenty (20) holders of the common stock of SolCom.
SolCom has not declared or paid any dividends on its common stock.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
SolCom has had no changes of, or disagreements with, its accountants.
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<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data of SolCom. The
information set forth below should be read in conjunction with "Pro Forma
Condensed Financial Statements", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included in this Information Statement. The
Consolidated Statement of Operations data set forth below for each of the two
years ended March 31, 1998 and the consolidated balance sheet data at March 31,
1998 are derived from, and are qualified by reference to, the audited
consolidated financial statements included in this Information Statement, and
should be read in conjunction with those financial statement and the notes
thereto.
<TABLE>
<CAPTION>
SolCom Systems Ltd.
Consolidated Figures 1993-1998
(1998 figures are for 9 months ended 31 March 1998)
(Balance Sheet data is at March 31 of each respective year)
(Estimated Conversion Rate as of September 1, 1998 = 1.6 U.S. dollars per U.K. pound sterling)
UK FORMAT US GAAP FORMAT
1993 1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ------------ ----------- ------------ ---------- -----------
(pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Sales 61,891 399,789 524,615 788,450 972,141 1,028,145 1,003,000 1,031,000
Profit/(Loss) (48,292) (30,279) 18,299 14,868 (513,563) (406,110) (557,000) (439,000)
Profit/(Loss) per share (26.80) (0.94) 0.57 0.45 (0.02) (0.01) (0.02) (0.01)
Total Assets 18,419 197,000 286,000 767,000 818,000 1,012,000 645,000 624,000
Long Term Liabilities 7,407 17,296 13,655 47,867 106,947 18,336 106,000 18,000
Preference Shares 30,000 30,000 30,000 30,000 30,000 30,000 30,000
Reserve for Preference 5,100 15,300 25,500 35,700 46,212 -- --
Dividend & Dividend on
Redemption
</TABLE>
-36-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
SolCom's financial statements and notes thereto and the other financial
information included elsewhere in this Information Statement. Except for the
historical information contained herein, the discussions in this Information
Statement contain forward-looking statements that involve risks and
uncertainties. SolCom's actual results could differ materially from those
discussed herein.
SolCom's financial statements for the fiscal year ended June 30, 1996
have been audited and were prepared in accordance with U.K. GAAP. SolCom's
financial statements for the fiscal year ended June 30, 1997, and for the three
fiscal quarters ended March 31, 1998, have been audited and were prepared in
accordance with both U.K. and U.S. GAAP. SolCom's financial statements for the
fiscal quarter and fiscal year ended June 30, 1998 were prepared in accordance
with both U.K. and U.S. GAAP, but are unaudited. Financial information quoted
herein for 1996, 1997 and 1998 relates to the twelve months ended June 30 in
each year, referring to statements prepared in accordance with U.K. GAAP for
1996 and U.S. GAAP for 1997 and 1998.
Overview
SolCom designs, develops and markets high-performance, remote
monitoring devices for network applications. SolCom expects that substantially
all of its revenue for the foreseeable future will be derived from the sale and
license of its remote monitoring devices and network management software in the
corporate and government markets.
SolCom had a net profit in 1996 of (pound)14,868 ($23,045). SolCom's
net loss for 1997 and 1998 was (pound)557,000 ($919,000) and (pound)665,000
($1.081 million), respectively.
SolCom's future financial performance will depend in part on the
successful development, introduction and customer acceptance of new products in
the future. The success of new products depends on a number of factors,
including proper selection of such products, successful and timely completion of
product development, judging product demand correctly, market acceptance of
SolCom's new products, securing production capacity for manufacturing of devices
and SolCom's ability to offer new products at competitive prices. Many of these
factors are outside the control of SolCom.
There can be no assurance that SolCom will be able to identify new
product opportunities successfully, will develop and bring to market new
products, will achieve design wins or will be able to respond effectively to new
technological changes or product announcement by others. A failure in any of
these areas would have a material adverse effect on SolCom's business, financial
condition and operating results.
SolCom expects that its products will be subject to significant pricing
pressures in the future. In addition, SolCom expects to continue to increase its
operating expenses for personnel and new product development. Yield or other
production problems or shortages of supply may
-37-
<PAGE>
increase SolCom's manufacturing costs. If SolCom does not achieve increased
levels of revenues commensurate with these increased levels of operating
expenses, SolCom's operating results will be materially adversely affected.
There can be no assurance as to the level of sales or earnings experienced by
SolCom in any given period in the future.
SolCom's operating results are expected to be subject to quarterly and
other fluctuations due to a variety of factors, including increased competitive
pressures, fluctuations in manufacturing yields, availability and cost of
products from SolCom's suppliers, the timing of new product announcements and
introductions by SolCom, its customers or its competitors, changes in the mix of
products sold, the gain or loss of significant customers, increased research and
development expenses associated with new product introductions, market
acceptance of SolCom's products and new or enhanced versions of SolCom's product
obsolescence, the timing of significant orders, and changes in pricing policies
by SolCom, its competitors or its suppliers. SolCom's operating results also
could be adversely affected by economic conditions generally or in various
geographic areas where SolCom or its customers do business, other conditions
affecting the timing of customer orders, or order cancellations or rescheduling.
Many of the factors listed above are outside the control of SolCom, are
difficult to forecast, and could materially affect SolCom's quarterly or annual
operating results.
Results of Operations
Revenue. SolCom's revenue is derived principally from the sale of RMON
devices and accompanying software. SolCom recognizes revenue from product sales
to customers upon shipment.
SolCom's revenues in 1996, 1997 and 1998 were (pound)758,000 ($1.174
million), (pound)1.003 million ($1.655 million) and (pound)1.269 million ($2.094
million), respectively. The increase from 1997 to 1998 (27%) was greater than
SolCom's market growth of 20% but lower than management's expectations.
Management attributes this to a delay of approximately 6 months in fully
implementing SolCom's RMON 2 technology to its full product range, as well as
the departure of SolCom's European sales manager. RMON 2 has now been fully
implemented and the sales manager has been replaced successfully. The RMON 2
delay also affected other vendors and while the delay affected financial
performance it is not expected to carry any competitive penalty moving forward.
SolCom obtains significant revenue from royalties on its products which
have been licensed to third parties pursuant to OEM contracts with certain
customers. Royalty revenues in 1996, 1997 and 1998 were (pound)149,231
($231,308), (pound)332, 830 ($549,170) and (pound)645,336 ($1.065 million),
respectively. Royalty revenues increased 137% from 1996 to 1997, and 94% from
1997 to 1998. The increases were principally due to a broadening of the range of
SolCom's licensed products. Management expects this growth to continue over the
next 12 months.
SolCom believes that it is in a strong market and extremely well
positioned to show strong growth over the next 12 months. The need for network
management products is increasing and there is, as yet, no clear or strong
leader in the field.
-38-
<PAGE>
Cost of Revenue. Cost of revenue consists primarily of purchases of
materials and contract manufacturing costs, shipping costs, and write-downs for
excess or obsolete inventory. SolCom's cost of revenue in 1996, 1997 and 1998
was (pound)205,758 ($318,925), (pound)193,000 ($318,450) and (pound)276,000
($455,400), respectively. Cost of revenue increased 43% from 1997 to 1998.
Expressed as a percentage of revenue, cost of revenue increased very slightly,
from 19% in 1997 to 22% in 1998.
Cost of revenue and the corresponding gross profit or loss could be
affected in the future by various factors, including changes in the proportion
of total revenue contributed by royalties, the sales volume of SolCom's
products, competitive pressures and inventory write-downs.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits, non-recurring engineering and design
services, cost of development tools and software, cost of manufacturing
prototypes and consultant costs. For the purpose of U.K. GAAP financial
statements, SolCom has capitalized certain product development expenditures.
Financial statements prepared in accordance with U.S. GAAP do not include such
capitalization.
SolCom's research and development expenses in 1996, 1997 and 1998 were
(pound)112,298 ($174,062), (pound)201,619 ($332,671) and (pound)299,935
($494,893), respectively. Research and development expenses increased 91% from
1996 to 1997 and 49% from 1997 to 1998. The increase in research and development
expenses over these periods was primarily due to the development and
implementation of RMON 2 and the introduction of new hardware products including
the RMON engine and the range of WAN and ATM probes. SolCom anticipates that it
will continue to devote substantial resources to research and development and
that these expenses will increase in absolute dollars in 1999.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of salaries, benefits, commissions and bonuses earned by sales,
marketing and administrative personnel, promotional and trade show expenses and
travel expenses.
SolCom's marketing and sales expenses for 1996, 1997 and 1998 were
(pound)91,243 ($141,247), (pound)132,705 ($218,963) and (pound)99,634
($164,396), respectively. Marketing and sales expenses increased 55% from 1996
to 1997 and decreased 25% from 1997 to 1998. The decrease was primarily due to a
reallocation of SolCom's resources to research and development.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries, benefits and bonuses earned by executive
and administrative personnel and fees for professional and legal services.
SolCom's general and administrative expenses for 1996, 1997 and 1998
were (pound)345,884 ($536,120), (pound)940,295 ($1.551 million) and (pound)1.173
million ($1.936 million), respectively. General and administrative expenses
increased 189% from 1996 to 1997 and 25% from 1997 to 1998. These increases were
primarily due to expansion of the business in connection with broadening of the
product range, the introduction of RMON 2 and opening of the office in the
United States.
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<PAGE>
Interest Expense and Interest Income. SolCom has no material interest
expense or interest income.
Liquidity and Capital Resources
Since inception, SolCom has financed its operations primarily through
private sales of stock. As of June 30, 1998, SolCom had no available cash or
cash equivalents.
To date, SolCom's investing activities have consisted primarily of
purchases of property and equipment. Although SolCom spent (pound)157,000
($259,050) on capital expenditures in 1997, a 223% increase over 1996, SolCom
spent only (pound)39,000 ($64,350) on capital expenditures in 1998, a decrease
of 75%. This was due primarily to a decrease in available cash. Following the
acquisition by MicroFrame, SolCom will need its capital expenditures to increase
in order to further expand its research and development initiatives and to grow
its employee base as the business grows. The timing and amount of future capital
expenditures will depend primarily on SolCom's future growth.
Subsequent to the transactions contemplated by this Information
Statement, SolCom's capital resources will be provided by MicroFrame. In the
event such transactions were not consummated, SolCom's current cash and cash
equivalents would not provide sufficient liquidity to fund operations without
additional debt or equity financing, and SolCom would need to raise additional
capital through the issuance of debt or equity securities. Although management
believes that such financing would be available from existing or new investors
or lenders, there can be no assurance that SolCom would be able to raise
additional financing or that it would be available on terms satisfactory to
SolCom, if at all. If such financing were not available, SolCom would need to
reevaluate its operating plans.
Year 2000 Compliance
SolCom currently estimates that its costs associated with Year 2000
compliance will not have a material adverse effect on SolCom's business,
financial condition or results of operations.
-40-
<PAGE>
-----------------------------------------------
ITEM 2 - ADOPTION OF 1998 STOCK OPTION PLAN AND
1998 U.K. SUB-PLAN
------------------------------------------------
The following is a summary of the Company's 1998 Stock Option Plan (the
"Plan"), substantially in the form annexed hereto as Appendix C, and the
Company's 1998 U.K. Sub-Plan (the "Sub-Plan" and together with the Plan, the
"Plans"), substantially in the form annexed hereto as Appendix D.
Eligibility. Options may be granted under the Plan to key employees (including
directors and officers who are key employees) and to consultants and directors
who are not employees of the Company. Options under the Sub-Plan may only be
granted to those individuals who are employees, consultants and/or directors of
SolCom and who reside in the U.K. Although options under the Plan may be granted
to such individuals, it is the Company's intention to grant options under the
Plan only to individuals who are not employees, consultants and/or directors of
SolCom and who do not reside in the U.K.
Stock Subject to the Plan. The aggregate number of shares of Common Stock for
which options may be granted under the Plans is 3,000,000, subject to adjustment
in the future as described below. It is currently estimated that approximately
1,200,000 options will be granted in connection with the Sub-Plan. Such shares
may consist either in whole or in part of authorized but unissued shares of
Common Stock or Common Stock held by the Company in its treasury. Common Stock
related to the unexercised portion of any terminated, expired, cancelled or
terminated option will be made available for future option grants under the Plan
or Sub-Plan, as applicable.
Administration. Both of the Plans are administered by the Board of Directors of
the Company which, to the extent it determines, may delegate its powers with
respect to the administration of the Plans to a committee of the Board (the
"Committee") consisting of not less than two (2) directors, each of whom is a
"non-employee director" within the meaning of Rule 16b-3 (or any successor rule
or regulation) promulgated under the Exchange Act. Unless otherwise provided in
the by-laws of the Company, a majority of the members of the Committee
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, and any acts approved in writing by all
members without a meeting, will be the acts of the Committee.
Terms and Conditions of Options. Each option granted under the Plans will be
evidenced by an appropriate contract (the "Option Contract") which will contain
such terms and conditions not inconsistent with the Plans as may be determined
by the Board or Committee in its discretion.
An option (or any installment thereof), to the extent then exercisable,
will be exercised by giving written notice to the Company at its principal
office, stating which option is being exercised, specifying the number of shares
of Common Stock as to which such option is being exercised and accompanied by
payment in full of the aggregate exercise price therefor (or the amount due on
exercise if the Option Contract, in the case of the Plan only, permits
installment
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<PAGE>
payments) (a) in cash and/or a certified check or (b) in the case of the Plan
only and not the Sub- Plan, with the authorization of the Committee, with cash,
a certified check and/or previously acquired shares of Common Stock, having an
aggregate fair market value on the date of exercise equal to the aggregate
exercise price of all options being exercised; provided, however, that in no
case may shares be tendered if such tender would require the Company to incur a
charge against its earnings for financial accounting purposes.
An optionee will not have the rights of a shareholder with respect to
the shares of Common Stock to be received upon the exercise of an option until
the date of issuance of a stock certificate to him for such shares or, in the
case of uncertificated shares, until the date an entry is made on the books of
the Company's transfer agent representing such shares; provided, however, that
until such stock certificate is issued or until such book entry is made, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a shareholder with
respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or
issued under the Plans.
Nothing in the Plans or in any option granted in connection therewith
will confer on any optionee any right to continue as an employee, consultant or
director of the Company or of any of its subsidiaries, or interfere in any way
with any right to terminate such relationship at any time for any reason
whatsoever without liability to the Company.
Except as may otherwise be expressly provided in the applicable Option
Contract, an optionee who ceases to be an employee, consultant or director of
the Company for any reason may exercise such option, to the extent exercisable
on the date of such termination, at any time within three months after the date
of termination, but not thereafter and in no event after the date the option
would otherwise have expired; provided, however, that if such optionee's
employment, consultancy or directorship is terminated for cause, such option
shall terminate immediately. Except as may otherwise be expressly provided in
the applicable Option Contract, if an optionee dies (a) while he is employed by,
or a consultant to, the Company or any of its subsidiaries (b) within three
months after the termination of his employment or consulting relationship with
the Company or any of its subsidiaries (unless such termination was for cause or
without the consent of the Company) or (c) within one year following the
termination of such employment or consulting relationship by reason of his
disability, the options granted to him as an employee of, or consultant to, the
Company or any of its subsidiaries, may be exercised, to the extent exercisable
on the date of his death, by his legal representative, at any time within one
year after death, but not thereafter and in no event after the date the option
would otherwise have expired. Except as may otherwise be expressly provided in
the applicable Option Contract, any optionee whose employment or consulting
relationship with the Company or its subsidiaries has terminated by reason of
his disability may exercise such options, to the extent exercisable upon the
effective date of such termination, at any time within one year after such date,
but not thereafter and in no event after the date the option would otherwise
have expired.
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<PAGE>
No option granted under the Plans may be assigned or transferred except
by will or by the applicable laws of descent and distribution; and each such
option may be exercised during the optionee's lifetime only by the optionee or
his legal representative. Except as otherwise provided, options may not be
assigned, transferred, pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise) and will not be subject to execution,
attachment or similar process and any attempted assignment, transfer, pledge,
hypothecation or disposition shall be null and void ab initio and of no force or
effect.
Adjustment with respect to Options. In the event of any change in the
outstanding Common Stock of the Company be reason of a stock dividend,
recapitalization, merger in which the Company is the surviving corporation,
spinoff, split-up, combination or exchange of shares or the like, which results
in a change in the number or kind of shares of Common Stock which is outstanding
immediately prior to such event, the aggregate number and kind of shares subject
to the Plan, the aggregate number and kind of shares subject to each outstanding
option and the exercise price thereof shall be appropriately adjusted by the
Board of Directors, whose determination will be conclusive and binding on all
parties thereto. Such adjustment may provide for the elimination of fractional
shares that might otherwise be subject to options without payment therefor.
In the event of (a) the liquidation or dissolution of the Company, (b)
a merger in which the Company is not the surviving corporation or a
consolidation, or (c) a transaction (or series of related transactions) in which
(i) more than 50% of the outstanding Common Stock is transferred or exchanged
for other consideration or (ii) shares of Common Stock in excess of the number
of shares of Common Stock outstanding immediately preceding the transaction are
issued (other than to shareholders of the Company with respect to their stock in
the Company), any outstanding options shall terminate upon the earliest such
event, unless other provision is made therefor in the transaction.
Term and Amendment. The Plans will terminate on June 11, 2008, unless sooner
terminated by the Board. The Board may also amend the Plans (subject, in certain
instances, to shareholder approval or, in the case of the Sub-Plan, approval of
the U.K. Inland Revenue). The rights of optionees under options outstanding at
the time of the termination or amendment of the Plans will not be adversely
affected (without the written consent of the optionee) by reason of the
termination or amendment and will continue in accordance with the terms of the
option (as then in effect or thereafter amended).
Compliance with Securities Laws. It is a condition to the exercise of any option
granted pursuant to either of the Plans that either (a) a registration statement
under the Act, with respect to the shares of Common Stock to be issued upon such
exercise shall be effective and current at the time of exercise, or (b) there is
an exemption from registration under the Act for the issuance of shares of
Common Stock upon such exercise. Nothing in the Plans should be construed as
requiring the Company to register shares subject to any option under the Act.
The Committee may require the optionee to execute and deliver to the
Company representations and warranties, in form, substance and scope
satisfactory to the Committee, which
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<PAGE>
the Committee determines are necessary or convenient to facilitate the
perfection of an exemption from the registration requirements of the Act,
applicable state securities laws or other legal requirements, including without
limitation, that (a) the shares of Common Stock to be issued upon the exercise
of the option are being acquired by the optionee for the optionee's own account,
for investment only and not with a view to the resale or distribution thereof,
and (b) any subsequent resale or distribution of shares of Common Stock by such
optionee will be made only pursuant to (i) a registration statement under the
Act which is effective and current with respect to the shares of Common Stock
being sold or (ii) a specific exemption from the registration requirements of
the Act, but in claiming such exemption, the optionee, prior to any offer of
sale or sale of such shares of Common Stock, shall provide the Company with a
favorable written opinion of counsel, satisfactory to the Company in form,
substance and scope and satisfactory to the Company as to the applicability of
such exemption to the proposed sale or distribution.
In addition, if at any time the Committee determines that the listing
or qualification of the shares of Common Stock subject to such option on any
securities exchange, NASDAQ, or under any applicable law, or that the consent or
approval of any governmental agency or regulatory body is necessary or desirable
as a condition to, or in connection with, the granting of an option or the
issuance of shares of Common Stock thereunder, such option may not be granted or
exercised in whole or in part, as the case may be, unless such listing,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee.
Federal Income Tax Consequences.
The following is a general summary of the federal income tax
consequences under the Internal Revenue Code of 1986, as currently in effect
(the "Code"), with respect to options under the Plans. This description is based
on current law. It should be understood that this summary is not exhaustive and
that special rules not specifically discussed herein may apply in certain
situations. Optionees should consult with their own tax advisors with respect to
the tax consequences inherent in the ownership and exercise of stock options and
the ownership and disposition of the underlying securities.
Grant of Options. The optionee will not recognize any income for
federal income tax purposes, and the Company will not be entitled to any
deduction, upon the grant of an option.
Exercise with Cash. Generally, in the case of an Incentive Stock Option
(as such term is defined in the Code), an optionee will not recognize any
taxable income at the time an option is exercised, and in the case of a
Non-Qualified Stock Option (as such term is defined in the Code), an optionee
will recognize ordinary taxable income at the time an option is exercised in an
amount equal to the excess of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price. The optionee's tax basis
in the stock acquired upon the exercise of an option will equal the exercise
price of the option plus the ordinary taxable income so recognized. The Company
generally will not be entitled to a compensation deduction for federal income
tax purposes in the case of an Incentive Stock Option, and will be entitled to a
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compensation deduction for federal income tax purposes in the case of a
Non-Qualified Stock Option at the same time as, and in the same amount that, the
optionee recognizes such income.
Special Rules for Exercises Using Previously Owned Shares. If
previously owned shares are surrendered in full or partial payment of the
exercise price of an option, gain or loss generally will not be recognized by
the optionee upon the exercise of such option to the extent the optionee
receives shares which on the date of exercise have a fair market value equal to
the fair market value of the shares surrendered in exchange therefor
("Replacement Shares").
The optionee will have an aggregate basis in the Replacement Shares
equal to the basis of the shares surrendered, increased by any ordinary income
required to be recognized in the disposition of the previously acquired shares.
The optionee's holding period for the Replacement Shares generally includes the
period during which the surrendered shares were held.
Any shares received by the optionee on such exercise in addition to the
Replacement Shares will be treated in the same manner as a cash exercise of an
option for no consideration.
Sale of Underlying Shares. When an optionee subsequently disposes of
the shares of Common Stock received upon exercise of an option, he or she will
recognize long-term or short-term capital gain or loss (depending upon the
holding period) in an amount equal to the difference between the sale price and
the optionee's tax basis. Long-term capital gain is generally subject to more
favorable tax treatment than ordinary income or short-term capital gain.
Proposed legislation would treat long-term capital gain even more favorably.
There can be no assurance, however, that such proposed legislation will be
enacted.
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<PAGE>
If you have any questions regarding this Information Statement, the
Transaction or the Plans, please contact Mr. John F. McTigue, the Company's
Chief Financial Officer, at:
MicroFrame, Inc.
21 Meridian Avenue
Edison, New Jersey 08820
(732) 494-4440
By Order of the Board of Directors
Stephen B. Gray
President and Chief Executive Officer
_________, 1998
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INDEX OF APPENDICES
APPENDIX A Share Purchase Agreement
APPENDIX B Fairness Opinion
APPENDIX C 1998 Stock Option Plan
APPENDIX D 1998 U.K. Sub-Plan
APPENDIX E Financial Statements of SolCom
APPENDIX F MicroFrame,Inc. Form 10-KSB for the period ended March 31, 1998
APPENDIX G MicroFrame,Inc. Form 10-QSB for the period ended June 30, 1998
APPENDIX H New Jersey Business Corporation Act ss.14A:10-12, ss.14A:11-1 and
ss.14A:11-2
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APPENDIX A
----------
SHARE PURCHASE AGREEMENT
<PAGE>
SHARE PURCHASE AGREEMENT
with respect to all of the issued share capital
of
SolCom Systems Limited
<PAGE>
SHARE PURCHASE AGREEMENT
AGREEMENT, by and among MICROFRAME, INC., a New Jersey corporation (the
"Buyer"), each of the persons whose names and addresses are set forth in columns
1 and 2 of Schedule 1 annexed hereto (each, a "Seller" and collectively, the
"Sellers"), and SOLCOM SYSTEMS LIMITED, a company incorporated under the
Companies Act 1985 of the United Kingdom (the "U.K.") and having its registered
office at Solcom House, Meikle Road, Kirkton Campus, Livingston (the "Company").
WHEREAS, the Sellers are the registered holders and, save in the case of the
trustees whose names are set forth on Schedule 1 ("the Trustees") and Anderson
Strathern Nominees Limited, and any other person registered in the register of
members of the Company as a/c holder or nominee or bare trustee ("Other Nominee
Holders") beneficial owners of all of the ordinary shares of 1 pence each, in
the capital of the Company in issue at the date hereof (the "Ordinary Shares")
all of the ordinary shares in issue and held by the Sellers on Closing being
hereinafter referred to as "the Shares";
WHEREAS, the Company, together with the Subsidiary (as defined in Section 3.4 of
this Agreement), are in the business of providing computer network management
for data communications networks (the "Business");
WHEREAS, the Buyer desires to purchase from the Sellers, and the Sellers desire
to sell to the Buyer, all of the Shares on the terms and subject to the
conditions set forth below, and the parties desire to engage in various related
transactions, as hereinafter set forth.
WHEREAS, there are 30,000 cumulative redeemable preference shares of (pound)1
each in the capital of the Company and the registered holder and beneficial
owner thereof has on the date hereof entered into a separate agreement in the
agreed terms with the Company and the Buyer whereby after subdivision and
conversion of the redeemable preference shares immediately prior to Closing the
Buyer will acquire 731428 ordinary shares of 1 pence each and 2,268,572
preference shares of 1 pence each in the capital of the Company from such holder
("the LIFE Agreement").
WHEREAS the Sellers have undertaken to procure that immediately prior to Closing
a third party (or whom failing certain Sellers) will subscribe for such number
of ordinary shares of 1 pence each in the capital of the Company as shall
provide the Company with the Funding as referred to in Section 7.18 hereof all
in terms of this Agreement.
WHEREAS the Company has issued to certain Sellers (pound)150,000 in nominal
amount of convertible unsecured loan stock ("CULS") which is convertible into
ordinary shares of 1 pence in the capital of the Company on or prior to Closing
and which is redeemable in accordance with the loan stock instrument executed by
the Company on July 23 1998.
WHEREAS the Company is party to:- (i) an Investment Agreement among the Company,
the Executive Directors (as therein defined) and the Investors (as therein
defined) dated March 17, 1993 (the "Main Investment Agreement"); (ii) an
Investment Agreement among the Company, the Lothian
<PAGE>
Investment Fund for Enterprise Limited ("LIFE") and the Directors (as therein
defined) dated December 21, 1993 ("the LIFE Investment Agreement") and (iii) an
Investment Agreement among the Company and the Investors (as therein defined)
dated June 28, 1996 ("the Third Investment Agreement") and has at the date
hereof entered into three agreements in the forms set out in Exhibit J whereby
the Main Investment Agreement, the LIFE Investment Agreement and the Third
Investment Agreement respectively will terminate on the Closing Date.
INTERPRETATION
(A) In this Agreement, unless otherwise specified or the context otherwise
requires:-
(aa) reference to this Agreement or the Agreement shall include the
Recitals and the Schedules and Exhibits;
(aa) reference to a Section is to a Section of this Agreement;
(aa) reference to the Schedules or part thereof is to the Schedules to
this Agreement or to a part thereof;
(aa) words importing any gender shall include the other genders;
(aa) words importing natural persons shall include corporations and vice
versa;
(aa) words importing the singular only shall include the plural and vice
versa;
(aa) words importing the whole shall be treated as including a reference
to any part thereof;
(aa) any word or expression the definition of which is contained or
referred to in the Companies Acts as hereinafter defined or the
Income and Corporation Taxes Act 1970 ("Taxes Act 1970") or the
Income and Corporation Taxes Act 1988 ("Taxes Act 1988") all of the
UK shall be construed as having the meaning thereby attributed to it
(the definition in the Companies Acts to prevail where the same
expression is defined in the Companies Acts and the Taxes Act 1970
and/or the Taxes Act 1988); and
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(aa) reference to any statute, regulation, directive, treaty or part
thereof shall be construed as reference thereto as amended or
re-enacted from time to time and shall be construed as including
references to any provision of which they are re-enactments and
shall be construed as including references to any order, instrument,
regulation or other subordinate legislation made pursuant thereto
provided that nothing in the provisions set out above shall permit
any extension or increase in the liability of the Sellers or any of
them under this Agreement or permit the creation of any such
liability which would not otherwise have been created where there is
an amendment or re-enactment enacted or coming into force after the
date of this Agreement.
(B) Where any of the Warranties (as such term is hereinafter defined) is
qualified by the expression "to the best of the knowledge,
information and belief of the Executive Directors" that Warranty
shall be deemed to include additional statements that the knowledge,
information and belief or awareness of any one of William Hugh
Evans, Peter Atholl Wilson and Peter MacLaren (the "Executive
Directors") shall be the knowledge, information and belief or
awareness of all the Executive Directors together and that it has
been made after reasonable enquiry only of the Company and/or the
Subsidiary's advisers, insurers, employees and major customers and
suppliers (major in this context meaning 10% by volume to or by the
Company in the 12 months preceding the date of this Agreement), into
the subject matter of the Warranty. Where any of the Warranties is
qualified by the expression "so far as the Executive Directors are
aware" that Warranty shall be deemed to include additional
statements that the actual knowledge of any of the Executive
Directors shall be the actual knowledge of all the Executive
Directors together but without having made any enquiry of any nature
whatsoever.
(C) In construing this Agreement the eiusdem generis rule shall not
apply and accordingly the interpretation of general words shall not
be restricted by being preceded by words indicating a particular
class of acts, matters or things or being followed by particular
examples.
(D) In this Agreement the headings to Sections and sub-sections are
inserted for convenience only and shall not affect the construction
of this Agreement.
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<PAGE>
(E) As used in this Agreement: (a) the term "person" shall mean and
include an individual, a partnership, a joint venture, a limited
liability company, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof;
and (b) the term "affiliate" or "Affiliate" in relation to the
Subsidiary or the Buyer shall have the meaning set forth in Rule
12b-2 of the General Rules and Regulations promulgated under the
Securities Exchange Act of 1934, as amended, of the USA or in
relation to any individual shall mean any spouse, brother, sister or
lineal ascendant or descendant and in relation to a company (other
than the Subsidiary) shall mean any subsidiary or subsidiary
undertaking or holding company of such company as these terms are
defined in the Companies Acts; and (c) the term Companies Acts shall
mean the Companies Acts 1985 and 1989, the Business Names Act 1985,
the Companies Consolidation (Consequential Provisions) Act 1985, the
Company Directors Disqualification Act 1986, and Part V of the
Criminal Justice Act 1993, together and all of the UK.
(F) In this Agreement the expression "Third Party Shares" shall mean the
ordinary shares of 1 pence each in the capital of the Company
referred to in the fourth and fifth recitals hereof to be acquired
by a third party or third parties who is or are not a Seller or
Sellers and the expression "Investor SPA" shall mean any
agreement(s) entered into by the Company with a third party or third
parties who is or are not a Seller or Sellers after the date hereof
for the subscription of shares in the Company as referred to in the
fifth recital hereof and the expression "Termination Agreements"
shall mean the deeds of release of certain investment agreements in
the form annexed as Exhibit J and referred to in the recitals hereof
and the expression "A & S Deed of Adherence" shall mean the deed of
adherence in the form annexed as Exhibit K, and "Retrocession" shall
mean the retrocession of certain life policies by Lothian Investment
Fund for Enterprise Limited in the form annexed as Exhibit L.
SECTION 1
PURCHASE AND SALE OF THE SHARES
1.1 Sale and Purchase of Shares
At the closing provided for in Section 2 (the "Closing"), and upon the
terms and subject to the conditions of this Agreement, each Seller
shall sell to the Buyer all of the Shares registered in the name of
such Seller on Closing, and the Buyer shall purchase all of the Shares
registered in the name of each Seller.
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<PAGE>
1.2 Delivery of MicroFrame Shares
1.2.1 The aggregate consideration for the sale of the Shares shall be that
number of shares of common stock (the "Common Stock") par value of
$.001 per share of the Buyer (the "MicroFrame Shares") as shall be
calculated at Closing in accordance with the following formula
a x 5,800,000
a + b + c
where 'a' equals the number of Shares held by Sellers in issue in the
capital of the Company at the Closing Date; and 'b' equals the number
of ordinary shares of 1 pence each in the capital of the Company at the
Closing Date subject to options to subscribe and 'c' equals the number
of Third Party Shares in issue at the Closing Date ("Consideration").
Without prejudice to the provisions of Section 8 in respect of
condition 8 (r) (i) not being satisfied in the event that the condition
set forth in Section 8 (r) (ii) is not satisfied for any reason
whatsoever the parties explicitly agree and acknowledge that the Buyer
shall have the option in its sole discretion either (i) not to proceed
to Closing with no liability to the Buyer or the Sellers or (ii)
proceed to Closing in which event the aggregate consideration for the
sale of the Shares shall be reduced by a number equal to 15% of the
Consideration.
1.2.2 The MicroFrame Shares shall be allocated to and amongst the Sellers pro
rata to their holdings of Shares at the Closing Date. Where any Seller
shall have a fractional entitlement to a MicroFrame Share such
fractional entitlement shall be rounded upwards to the nearest whole
number of MicroFrame Shares.
1.2.3. At the Closing the Buyer shall cause the MicroFrame Shares (except for
the Escrowed MicroFrame Shares, as such term is defined in Section 1.4)
as shown in the Closing Share Allocation List referred to in Section
7.28 to be delivered to the Sellers' Representatives as such term is
hereinafter defined which delivery shall constitute a good discharge to
the Buyer in respect thereof.
1.3 Issuance and Delivery of Shares
Each Seller has delivered to the Sellers' Representatives share
certificates representing the number of Ordinary Shares set forth
opposite such Seller's name on Schedule 1, together with share
transfers duly executed in blank, in proper form for transfer, to be
held in custody by the Sellers' Representatives pending Closing. The
Sellers' Representatives shall hold these documents in their joint
custody until and unless the Closing occurs, at which time (subject to
satisfaction or waiver in accordance with the terms of this Agreement
of the conditions precedent set out in Sections 8 and 9) they shall
deliver such certificates
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<PAGE>
and such transfers to the Buyer, provided that, in the event that this
Agreement is terminated prior to the Closing for any reason, the
Sellers' Representatives shall return the certificates and transfers to
the solicitors acting for the appropriate Sellers forthwith. The
Ordinary Shares to be sold pursuant to this Agreement shall be sold by
each Seller to the Buyer free and clear of any and all Liens (as
defined in Section 5.1).
1.3.1 At Closing the relevant Sellers shall deliver to the Buyer's UK Legal
Advisers share transfers duly executed in blank in proper form for
transfer together with covering share certificates in respect of the
Shares (for the purposes of this Section 1.3.1 other than the Ordinary
Shares). The Shares (for the purposes of this Section 1.3.1 other than
the Ordinary Shares) to be sold pursuant to this Agreement shall be
sold by such Sellers to the Buyer free and clear of any and all Liens.
1.4 Escrowed MicroFrame Shares
At Closing, the Buyer shall deliver to Dundas & Wilson CS, Saltire
Court, Edinburgh EH1 2ET (the "Escrow Agent"), stock certificates in
respect of MicroFrame Shares on behalf of the Sellers as set out under
Escrowed MicroFrame Shares in the Closing Share Allocation List
referred to in Section 7.28 calculated as follows:-the total number of
Escrowed MicroFrame Shares shall equal 50 per cent of the total number
of MicroFrame Shares issued as Consideration (or shall be as close
thereto as practicable taking into account the rounding upwards
referred to below) and shall be contributed by the Sellers as follows:
(i) As to 400,000 MicroFrame Shares from Peter Atholl Wilson
(ii) As to 400,000 MicroFrame Shares from William Hugh Evans
(iii) As to 200,000 MicroFrame Shares from Peter MacLaren
and each Seller (including the Executive Directors) shall be obliged to
contribute such Sellers' Pro Rata Share (as defined below in this
Section) of the balance of Escrowed MicroFrame Shares which require to
be delivered to the Escrow Agent (and where fractions arise they shall
be rounded upwards). For the purposes of this Section each Seller's Pro
Rata Share shall mean a fraction (a) the numerator of which is (i) in
the case of a Seller who is not an Executive Director, the total number
of MicroFrame Shares issued to that Seller and (ii) in the case of a
Seller who is an Executive Director, the total number of MicroFrame
Shares issued to that Executive Director minus the number of MicroFrame
Shares set out opposite such Executive Director's name above; and (b)
the denominator of which is the aggregate number of MicroFrame Shares
issued by the Buyer to the Sellers (less 1,000,000 MicroFrame
Shares).which Escrowed MicroFrame Shares shall be held by the Escrow
Agent on deposit and in custody and released in accordance with the
terms of that certain escrow agreement by and among the Buyer, the
Sellers, the
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<PAGE>
Sellers' Representatives and the Escrow Agent substantially in the form
annexed hereto as Exhibit A (the "Escrow Agreement"). Notwithstanding
the deposit and escrow of certain MicroFrame Shares each of the Sellers
shall continue to be entitled to vote, attend meetings and receive from
the Buyer all materials in respect of their Escrowed MicroFrame Shares
as holders of common stock of the Buyer.
SECTION 2
TIME AND PLACE OF THE CLOSING
The closing of the transactions contemplated herein (the "Closing") shall take
place at the offices of Semple Fraser, 10 Melville Crescent, Edinburgh, Scotland
on a date as soon as practicable following the satisfaction or waiver in
accordance with the terms of this Agreement of all conditions set forth in
Sections 8 and 9 herein, but in no event after December 31 1998, unless
otherwise agreed by the Buyer and the Sellers Representatives on behalf of the
Sellers. The time and date upon which the Closing occurs is herein referred to
as the "Closing Date."
SECTION 3
WARRANTIES OF THE SELLERS
The Sellers hereby warrant to the Buyer, as of the date hereof, as follows (the
relevant warranties as set out in this Section 3 being referred to as "the
Warranties") subject to matters fairly disclosed in the letter from the Sellers
to the Buyer (including the contents and matters apparent from the face of the
documents annexed to that letter) disclosing matters for the purpose of this
Section 3 and delivered to and accepted in writing by or on behalf of the Buyer
immediately prior to the Buyer's execution hereof (the "Disclosure Letter") and
subject as hereinafter set out in particular to Sections 4 and 11 of this
Agreement.
In the Warranties the expression "significant" shall, except where the context
otherwise requires, mean that if the statement to which the expression
significant is attributable had not been so qualified, breach or failure to
comply with that absolute statement would result in a loss or liability to the
Company or the Subsidiary (and ignoring for these purposes the provisions of
Section 4 hereof) of a sum in excess of $20,000.
3.1 Existence and Qualification
The Company is a company duly incorporated and validly existing under
the laws of Scotland, with full power and authority to conduct its
business and to own and operate its assets and properties as conducted
and operated.
3.2 Capitalization
The authorized share capital of the Company is (pound)657,500, of which
only the Ordinary Shares and 30,000 cumulative redeemable preference
shares of (pound)1 each (the "Preference Shares") are
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currently issued. All of the Ordinary Shares or, at the Closing Date,
the Shares are duly authorized, validly allotted and issued, fully paid
or credited as fully paid. Save as set out in this Agreement there are
no agreements, commitments or arrangements in force providing for the
issue or allotment of any share or loan capital of the Company,
including options, warrants or rights to purchase or subscribe for, or
any security or instrument convertible into or exchangeable for, any
share or loan capital of the Company. The Company owns all of the
issued and outstanding shares of common stock of the Subsidiary.
3.3 Options or Other Rights
There is no outstanding right, subscription, warrant, call, pre-emptive
right, option or other agreement of any kind to purchase or otherwise
to receive from the Company any shares of the capital or any other
security of the Company, and there is no outstanding security of any
kind convertible into any share capital of the Company.
3.4 Subsidiaries
Schedule 3.4 sets forth (i) the name, date and jurisdiction of
incorporation, and the percentage and number of outstanding shares
owned at any time by the Company, of each person, firm or entity
("person") which the Company beneficially owns or owned or has or had
the power to vote 50% or more of the securities or shares of any class
of such person (the "Subsidiary") and (ii) the name of each of the
Company's affiliates (other than the Subsidiary), including joint
venture affiliates, and the nature of the affiliation. The Company owns
all of the shares of capital stock of the Subsidiary set forth in
Schedule 3.4 free and clear of any Lien. All such shares are duly
authorized and are validly issued, fully paid and non-assessable. There
is no outstanding right, subscription, warrant, call, pre-emptive
right, option or other agreement of any kind to purchase or otherwise
to receive from the Company any shares of the capital stock or any
other security of, or any proprietary interest in, the Subsidiary. The
Company does not directly or indirectly own any investment in any of
the capital stock or share capital of, or any proprietary interest in,
any person other than the Subsidiary.
3.5 Consents and Approvals; No Violation
The execution and performance by the Sellers of this Agreement and the
consummation by the Sellers of the transactions contemplated hereby
will not (a) conflict with or breach any provision of the Memorandum
and Articles of Association of the Company; (b) require the Company to
make any filing or registration with, or obtain any other permit,
authorization, consent or approval of, any governmental or regulatory
authority; (c) conflict with, violate or breach any provision of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in a modification
of, any of the terms, covenants, undertakings, conditions or provisions
of, or give rise to a right to terminate or accelerate or increase the
amount of payment due under, any note, bond, mortgage, security,
charge, indenture, deed of trust, license, franchise, permit, lease,
sublease, contract,
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agreement, or other instrument, commitment or obligation to which the
Company is a party, or by which it or any of its respective properties
or assets may be bound; (d) result in the creation of any Lien on any
of the properties or assets of the Company; (e) violate any order,
writ, injunction, interdict, decree, judgement, or ruling of any court
or governmental authority, applicable to the Company or the assets of
the Company; or (f) violate any statute, law, rule or regulations
applicable to the Company or to the securities, properties, assets or
business of the Company.
3.6 Material Contracts
(a) The Company has not entered into and is not bound by any Material
Contracts (as defined below).
(b) "Material Contracts" (if any) means any Contract (as defined
below):-
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(i) that provides for aggregate future payments by the Company of
more than $10,000; (ii) that was entered into other than in the
ordinary and usual course of business; (iii) that has an unexpired
term exceeding one year and may not be terminated in accordance
with its terms upon less than 90 days notice without any
obligation, liability, penalty or premium (other than a nominal
cancellation fee or charge); (iv) that was entered into with any
Seller, any officer, director or any employee of the Company or any
member of the family or any affiliate of the foregoing; (v) that
constitutes a collective bargaining recognition or other similar
agreement; (vi) that constitutes or contains a guarantee or
indemnity by or otherwise imposes upon the Company liability for
the obligations or liabilities of another; (vii) that involves the
borrowing or lending of money; (viii) that involves an agreement
with any bank, finance company or similar organization for the sale
of any products of the Company on credit or the provision of
services on credit; (ix) that involves the sale by or to the
Company of products or services on consignment; (x) that is or
contains a power of attorney; (xi) that contains any provision or
term for renegotiation or redetermination of price; (xii) that
restricts the Company from carrying on its business as presently
conducted anywhere in the world or which otherwise restricts the
ability of the Company, or any affiliate thereof to engage in any
other business anywhere in the world; (xiii) that contains any
warranty terms or undertakings in addition to the warranties or
undertakings normally and usually given by a person employed in the
same or similar business as the Company in connection with the sale
of its products or the provision of its services; (xiv) pursuant to
which the Company may hold any interest which has a value in excess
of $20,000 owned or claimed by the Company in or to any Tangible
Property (as defined in Section 3.9); (xv) that provides for
maintenance or management of any Properties (as defined in Section
3.10(a)); or (xvi) that is a contract for hire or rent, hire
purchase or purchase by way of credit sale or periodical payment.
There are no Material Contracts which are not in writing.
(c) The term "Contract" means and includes any contract, agreement,
commitment, mortgage, security, charge, debt instrument, security
agreement, license, guarantee, lease, sublease, charter, franchise,
power of attorney, agency and other agreement or arrangement
constituting a binding obligation of the Company, whether or not in
writing.
(d) The Contracts (other than Material Contracts (if any)) to which the
Company is a party, do not involve the payment by the Company of
more than $10,000 per year, individually or $50,000 per year in the
aggregate to the Company or the Business.
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(e) There is not, and there has not been claimed or to the best of the
knowledge, information and belief of the Executive Directors,
(having made no enquiry of the other parties to any Material
Contract) alleged by any person, with respect to any Material
Contract, any existing significant default, or event of default,
or event that with notice or lapse of time or both would
constitute a significant default or event of default on the part
of the Company or, so far as the Executive Directors are aware, on
the part of the other party or parties thereto. The Material
Contracts are in full force and effect and constitute the legal,
valid and binding obligations of the Company. No other party to a
Material Contract has asserted the right, and to the best of the
knowledge information and belief of the Executive Directors
(having made no enquiry of the other parties to any Material
Contract) no basis exists for the assertion of any right, to
renegotiate or unilaterally vary the terms or conditions of any
Material Contract.
3.7 Financial Statements
3.7.1 The Company has delivered to the Buyer the following financial
statements:-
(a) The financial statements of the Company for the year ended June 30
1997 and for the nine months ended March 31 1998 (the "March 1998
Accounts") audited in accordance with UK generally accepted
auditing standards and complying with the requirements of the
Companies Acts and with all relevant statements of UK accounting
practice and financial reporting standards and generally accepted
accounting principles ("GAAP") consistently applied, and certified
by Grant Thornton, giving a true and fair view of the state of
affairs of the Company at March 31 1998 and June 30 1997, as
appropriate, and of its losses for the periods then ended.
(b) The unaudited financial statements of the Subsidiary for the
periods ended June 30 1997 and March 31 1998 (the "Subsidiary
March 1998 Accounts"), prepared in accordance with the accounting
policies adopted by the Company consistently applied and generally
accepted accounting principles of the UK.
(c) Consolidated financial statements prepared in conformity with
generally accepted accounting principles in the USA comprising
consolidated balance sheets of the Company and its Subsidiary as
at March 31 1998 and June 30 1997 and the related consolidated
statements of operations, shareholders' deficit and cash flows for
the nine months ended March 31 1998 and the year ended June 30
1997.
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These financial statements are audited in accordance with
generally accepted auditing standards in the USA and have been
certified by Grant Thornton and are prepared in accordance with
and in a form meeting the requirements of the provisions of
Regulations S - X of the Securities Act of 1933, as amended.
3.8 Absence of Undisclosed Liabilities
The Company does not have any material liabilities which would require
to be disclosed in its audited financial statements in accordance with
generally accepted accounting principles of the UK other than those
that (i) are set forth or adequately reserved against in the March 1998
Accounts; or (ii) were incurred since March 31, 1998 (the "Balance
Sheet Date") in the normal ordinary and usual course of business.
3.9 Tangible Property
The plant, machinery, equipment, hardware, software, furniture,
leasehold improvements, fixtures, vehicles, structures, any related
capital items and other tangible property of the Company used in the
Business as operated by the Company (the "Tangible Property") is in
good operating condition and repair for its intended purpose, ordinary
wear and tear excepted, and to the best of the knowledge, information
and belief of the Executive Directors the Company has not received
intimation that it is in violation of any existing law or any building,
zoning, health, safety or other ordinance, code or regulation
applicable to the Company and by which the Company is bound.
3.10 Property
a) The Property briefly described in Schedule 3.10 ("the Property")
comprises all the freehold, feuhold and leasehold land ("the
expression "land" being deemed herein to include buildings and
other fixed structures) owned, used or occupied by the Company save
for the Office Suites at 1801 Robert Fulton Drive, Reston VA 22091
(the "Reston Property"). (For the avoidance of doubt, the Reston
Property is not covered by this Section 3.10);
b) Save as disclosed, the Company has no actual or contingent
obligations or liabilities in relation to any lease of land apart
from the Property and the Reston Property.
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c) To the best of the knowledge, information and belief of the
Executive Directors, in respect that the Property is leasehold,
when the Lease was granted the then Landlords were infeft, there
were no unduly onerous or unusual conditions or restrictions
contained in the title deeds which would prevent or adversely
affect to a significant extent the Company from carrying on the
business currently carried on at the Property. The Company is in
physical and actual occupation of the Property on an exclusive
basis and there are no, and at the Closing Date the Company will
not have (1) granted or agreed to grant any assignations, sub
leases, charges or subsidiary rights of occupation in respect of
the Property or (2) in any way or for any purpose have or agreed to
dispose of, encumber or otherwise deal with the Tenant's interest
in or part with or share occupation of the Property in whole or in
part.
d) All rents and other sums properly due, and demanded under the lease
of the Property have been paid to date and to the best of the
knowledge, information and belief of the Executive Directors the
Company has not received any notice of irritancy or of any breach
for which the Company is responsible as tenants of the Property of
any of the terms of the lease documentation as aftermentioned. Nor
is the Company aware of any breach of the Landlords' obligations
under the said lease documentation.
e) In respect that the Property is leasehold it is held under the
lease documentation brief details of which are set out in Schedule
3.10 and, save as disclosed by the said lease documentation, the
lease documentation has not been and prior to the Closing Date will
not be amended or varied. There are no rent reviews which are or
will at the Closing Date be in the course of being determined.
Further there are no Tenant's consent applications which are or
will at the Closing Date be outstanding or in the course of
consideration.
f) In so far as the Executive Directors are aware the Company has not
received any enforcement or other notices advising them of any
actual or impending actions or proceedings in respect of the
Property.
g) The Company is not engaged in any litigation or arbitration
proceedings in connection with the Property and so far as the
Company is aware no circumstances exist which are likely to give
rise to any.
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<PAGE>
h) To the best of the knowledge, information and belief of the
Executive Directors the Property is not affected by any outstanding
disputes, notices or complaints which affect the Company's use
and/or continued use of the Property for the purposes for which
they are now used, namely for the purposes of engineering design,
software development, sales, marketing and administration and
manufacturing and stockholding. In so far as the Executive
Directors are aware there are no matters affecting the Property
which would prevent or materially restrict the Company from
carrying on the businesses currently carried on at the Property in
any material respect.
3.11 Intangible Property
3.11.1 The Company has not registered any trade marks, trade names, service
marks, copyrights, design rights, logos, jingles, advertising slogans,
patents, franchises, permits or similar rights authorisations or made
any applications therefor. The Company uses both the Company names and
related logos and devices (if any) "SolCom" and "SolCom Systems" and
the mark and related logos and devices (if any) "LANmaster" in relation
to its Business and products. These are not registered nor has there
been any attempt to register them.
3.11.2 The Company uses or has ownership of the copyright and/or design right
(as appropriate) in the following products and/or drawings of or in
relation to the same:
(a) Software
1. RMON Utilities Version 3.06.
2. Web Reporter.
(b) Hardware and Firmware
1. LRE - Single Port Ethernet Probe.
2. LRE4 - 4 Port Ethernet Probe.
3. LRE100 - Single Port 100 Mbps Ethernet Probe.
4. LRE100/4 - 4 Port 100 Mbps Ethernet Probe.
5. LRT-Single Port Token Ring Probe.
6. LRT-FDDI Probe.
7. LRENG-E-RMON Engine with 4 Port Daughter Cards.
8. LRENG-TR-RMON Engine with 2 Port Token Ring Cards.
9. LRENG-E100FD-RMON Engine with Full Duplex 100
Ethernet Daughter Cards.
10. LRENG-WAN-V-RMON Engine with V-Series WAN Card.
11. LRENG-WAN-TI-RMON Engine with TI WAN Card.
12. LRENG-WAN-E1-RMON Engine with E1 WAN Card.
13. LRENG-ATM-OC3-RMON Engine with OC3 ATM Card.
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14. LRENG-ATM-UTP-RMON Engine with UTP ATM Card.
15. LRENG-ATM-DS3-RMON Engine with DS3 ATM Card.
16. LRENG-WAN-T3-RMON Engine with E3 ATM Card.
17. LRENG-WAN-T3-RMON Engine with T3 WAN Card.
18. LRENG-WAN-HSSI-RMON Engine with HSSI WAN Card.
3.11.3 All documents, reports and other written information produced by the
Company are the copyright of the Company, including all the manuals
prepared by the Company in respect of the products listed above.
3.11.4 In addition, the Company in carrying out its business, purchases
components from third parties which incorporate third party Rights,
which the Company incorporates into the Company's products which are
then sold or licensed on to the Company's customers.
3.11.5 The Company licences technology to Hewlett Packard under the HPT
Agreement.
3.11.6 The Company licences technology from GulfBay Network Systems Inc (now
known as Red Point).
3.11.7 The Company does from time to time enter into reseller arrangements in
respect of its products.
3.11.8 The Company also licenses the Hewlett Packard Multiport Token Ring
Daughter Card design and Hewlett Packard Full Duplex Fast Ethernet
Daughter Card design from Hewlett Packard.
3.11.9 The Company has not been sued or to the best of the knowledge,
information and belief of the Executive Directors, been threatened with
suit, or action for infringement, violation or breach of any Rights. To
the best of the knowledge information and belief of the Executive
Directors there is not the existence of any basis whereby any Right or
License could be claimed, opposed or attacked by any other person or
might cease to be valid and enforceable. The Company has received no
intimation of any infringement, violation or breach of any Right or
Licences or any of them by any other person.
3.12 Title to Assets
3.12.1 Other than assets and properties disposed of, or subject to purchase or
sales orders, in the ordinary and usual course of business since the
Balance Sheet Date, the Company owns all of its assets and properties,
including, without limitation, all of the assets and properties
reflected on or in the March 1998 Accounts, in each case free and clear
of any Lien or other encumbrance whatsoever, except for Liens
specifically and expressly set forth or disclosed in the March 1998
Accounts.
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3.12.2 The Company is supplied with or sold components by third parties for
incorporation into the Company's products in terms of, inter alia, the
following agreements:
(aa) Purchase agreement with XP plc attached as Disclosure Document 46;
(aa) Purchase agreement with Macro Group Limited (letter setting out
terms attached as Disclosure Document 195);
(aa) Purchase agreement with Advanced Crystal Technology (fax setting
out terms attached as Disclosure Document 189); and
(aa) Purchase Agreement with Micro Call Limited (fax setting out terms
attached as Disclosure Document 48).
The Company purchases components from third parties which the Company
incorporates into the Company's products which are sold or licensed to
the Company's resellers or end user customers.
3.12.3 The Company uses both the "Token Ring" and "FDDI" technology in its
products. Where any of the assets used or possessed by the Company are
supplied under retention of title terms all sums due to the suppliers
thereof are reflected in the books of account of the Company as
creditors.
3.13 Complete Business; Assets
The personal property, intangible assets and other rights owned or
leased by or licensed to the Company, in the aggregate, represent all
of such assets which are necessary to conduct the Business as operated
by the Company in the manner in which it has been conducted by the
Company. No part of the Business is conducted by or through any person
or entity other than the Company and the Subsidiary.
3.14 Debtors
All debts reflected on or in the March 1998 Accounts, and all debts
arising subsequent to the Balance Sheet Date, have arisen out of arms
length transactions entered into in the ordinary and usual course of
business of the Company. All items that were required by generally
accepted accounting principles of the UK to be reflected as debts on or
in the March 1998 Accounts are so reflected and are collectible in full
in the aggregate to the extent not reserved for in the March 1998
Accounts in accordance with UK generally accepted accounting
principles. Debts which shall have arisen after the Balance Sheet Date
are collectible in full subject to a provision not exceeding the
equivalent provision made in the March 1998 Accounts and are not
subject to any set-off, counter claim, credit or return policy.
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3.15 Absence of Certain Changes
Since the Balance Sheet Date the Company has not:
(a) altered its Memorandum of Association or Articles of Association or
merged with or into or consolidated with any other person,
subdivided, consolidated or in any way reclassified any shares of
its share capital or changed or agreed to change in any manner or in
any way the rights of its issued share capital or any part thereof
or the character or scope of its business or the manner in which it
is conducted;
(b) issued or sold or purchased, or issued options or rights to
subscribe to, or entered into any contracts or commitments to issue
or sell or purchase, any shares in its share capital;
(c) entered into or amended any employment or service agreement or any
terms and conditions of employment, entered into or amended any
agreement with any trade union or labour association or organisation
representing any employee, adopted, entered into, or amended any
employee benefit plan or scheme;
(d) incurred any indebtedness for borrowed money whatsoever;
(e) declared or paid any dividends or declared or made any other
distributions of any kind to its shareholders or made any direct or
indirect redemption, cancellation, purchase or other acquisition of
any shares in its issued share capital;
(f) collected its debts other than in the ordinary and usual course of
business consistent with past practice or deferred payment of its
creditors other than in the ordinary and usual course of business
consistent with past practice, or changed its policies either with
respect to the collection of debts or the payment of creditors;
(g) waived any right of value to its business, made any change in its
accounting methods, practices, procedures or policies or made any
change in depreciation or amortization policies or rates adopted by
it or made any change in the type or timing of lodgement of its tax
elections;
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changed to a significant extent any of its business policies,
including, without limitation, advertising, marketing, pricing,
purchasing, distribution, personnel, sales, returns, its budget or
product acquisition policies, or the type, nature or composition of
its products or services;
(h) made any wage or salary, bonus or commission increase, or increase
in any other direct or indirect compensation or benefit, for or to
any of its officers, directors, employees, consultants, agents or
other authorized representatives, or made any accrual for or
commitment or agreement to make or pay the same;
(i) made any loan or advance in excess of $2,000 to any of its
shareholders, officers, directors, employees, consultants, agents or
other authorized representatives (other than travel advances made in
the ordinary and usual course of business), or made any other loan
or advance other than in the ordinary and usual course of business;
(j) made any payment or commitment to pay any severance or termination
pay or terminal payment to any of its officers, directors,
employees, consultants, agents or other authorized representatives;
(k) except in the ordinary and usual course of business (i) entered into
any lease (as lessor or lessee) or sublease (as sublessor or
sublessee); (ii) sold, abandoned or made any other disposition or
disposal of any of its assets or properties with a value in the
aggregate in excess of $7,500 or any interest therein; or (iii)
granted or suffered any Lien on any of its assets or properties;
(l) except in the ordinary and usual course of business incurred or
assumed any debt, obligation or liability known or which ought to be
known (whether absolute or contingent and whether or not currently
due and payable) of an amount in excess of $10,000;
(m) suffered or experienced any damage, destruction or loss adversely
affecting the assets, properties, business, operations, condition
(financial or otherwise) of the Company taken as a whole, whether or
not covered by insurance;
(n) made any significant change in the type, nature, composition or
quality of its products or services, or made any significant change
in product or service specifications or prices or terms of
distribution of such products or services;
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(o) terminated or failed to renew, or to the best of the knowledge,
information and belief of the Executive Directors, received any
intimation to terminate or fail to renew, any contract or agreement
that is significant to the assets, business or operations of the
Company;
(p) except in the ordinary and usual course of business, entered into
any agreement or other transaction significant to the business or
operations of the Company;
(q) entered into any agreement, arrangement or understanding, whether in
writing or otherwise, to take any action described in this Section
3.15.
3.16 Litigation
There are no proceedings, investigations, inquiries or actions or
administrative or arbitration proceedings (collectively, "Proceedings")
by or against the Company in process or to the best of the knowledge,
information and belief of the Executive Directors having made
reasonable enquiry only of their professional advisers and employees
pending or threatened against the Company, or the transactions
contemplated by this Agreement, nor are there any judgements, decrees
or orders either naming the Company or enjoining the Company, as party.
3.17 Insurance
Schedule 3.17 sets forth a list and brief description (specifying the
insurer and the policy number or covering note number, describing each
pending claim thereunder of more than $10,000, setting forth the
aggregate amounts paid out under each such policy up to the date hereof
and the aggregate limit, if any, of the insurer's liability thereunder)
of all policies of fire liability, product liability, workmen's
compensation, employer's liability, business interruption, personal
accident, vehicular and other insurance held by or on behalf of the
Company. To the best of the knowledge, information and belief of the
Executive Directors all such policies are in full force and effect. The
premiums thereunder are paid up to date. The Company is not in material
default with respect to any provision or term contained in any such
policy and has not failed to give any notice or present any claim under
any such policy in due and timely fashion. There are no outstanding
unpaid claims under any such policies. The Company has received no
notice of cancellation or non-renewal of any such policy. There has
been no material inaccuracy in any application for any such policies or
to the best of knowledge, information and belief of the Executive
Directors any similar state of facts which constitutes the basis for
termination, cancellation, non-renewal or avoidance of any such
policies of insurance.
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3.18 Employee Benefit Plans
(a) Company.
(b) The Company is not a party to and has no obligation to provide and
does not participate in or contribute to any scheme or arrangement
for the provision of any pension, retirement, death, sickness,
disability, accident or healthcare benefits, allowances or any
other similar benefits to or for the benefit of any of its present
or former officers, employees or any of their families or
dependants.
(c) The Company has complied with all PAYE and NIC requirements in
respect of the salary sacrifice contributions for the following
employees Evans, Wilson, Gwynn, Ramsay and Struthers ("Pensionable
Employees). The Pensionable Employees have agreed to allow their
remuneration to be reduced by the amount of monthly premiums set
out in the Disclosure Letter and the Company has paid a
corresponding amount to the personal pension arrangements of the
Pensionable Employees set out in the Disclosure Letter. The
Pensionable Employees are the only employees in respect of whom
such arrangements are in place.
(d) The Company's profit related pay scheme has at all times since its
implementation been operated in accordance with the rules of the
scheme and the provisions of all applicable taxation legislation,
any alteration in its terms has been notified pursuant to section
177B(3) of Taxes Act 1988, at no time has the scheme been
de-registered and full details of the scheme have been provided to
the Buyer.
Environmental Matters
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(a) In this Section 3.19 the following words shall have the following
meanings unless the context otherwise requires:- "Activities" means
any activity, operation or process carried out by the Company at
the Property. "Environment" means any and all living organisms
(including man), ecosystems, property and the media or air
(including air in buildings, natural or man-made structures, below
or above ground) water (including water within drains and sewers),
controlled waters (as defined in section 30A of the Control of
Pollution Act 1974) and land (including under any water and whether
above or below surface); "Environmental Consent" means any consent,
approval, permit, licence, order, filing, authorisation, exemption,
registration, permission, reporting or notice requirement and any
related agreement required under any Environmental Law;
"Environmental Laws" means all international, European Union,
national, federal, state or local statutes, bylaws, orders,
regulations subordinate legislation or common law and all orders,
and equivalent controls having the force of law concerning the
protection of human health the protection or prevention of harm to
the Environment which are binding in relation to the Property;
"Hazardous Substance" means any natural or artificial substance
material or waste (whether solid, liquid, gas, noise, ion, vapour,
electromagnetic or radiation) regulated by any Environmental Laws
or which is capable of causing harm to or have a deleterious effect
on the Environment
(b) As far as the Executive Directors are aware the Company holds all
Environmental Consents necessary for the Activities. The Company
has not received any notice of and so far as the Executive
Directors are aware there are no circumstances that may lead to the
revocation, modification or suspension of, or that may prejudice or
require significant expenditure for the renewal, extension, grant
or transfer of any current Environmental Consents in relation to
the Property.
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(c) To the best of the information, knowledge and belief of the
Executive Directors the Company has not received (i) notice of any
breach of or (ii) any notice or information which implies liability
or any potential liability under any Environmental Laws in so far
as relating to the Property and/or the Activities. To the best of
the knowledge information and belief of the Executive Directors,
there are no civil or criminal proceedings or suits pending against
the Company in relation to the Property and/or the Activities
arising from a breach by the Company of any Environmental Law and
so far as the Executive Directors are aware there are no
circumstances of which they are aware prior to the Closing Date
which may lead to such proceedings or suits against the Company
whether before or after the Closing.
(d) To the best of the knowledge, information and belief of the
Executive Directors, there has not been any disposal, storage,
release, leakage, migration, spill, discharge, entry, deposit or
emission of any Hazardous Substance into the Environment caused by
the Activities and in so far as the Executive Directors are aware
no third party has deposited or disposed of any Hazardous Substance
at or under the Property.
3.20 Deliveries of Documents; Corporate Records
(a) The copies of all documents, instruments, agreements and
contracts annexed to the Disclosure Letter are accurate copies
and complete copies.
(b) The only directors of the Company and the Secretary are the
persons whose names are listed as such in Schedule 3.20.
(c) The Register of Members and other statutory books of the Company
are up to date, contain a true and accurate record of the matters
with which they should deal, and the minute books of the Company
have been properly kept, contain a true and accurate record of
the business conducted at the meetings to which they relate. No
notice or allegation that any of the foregoing is incorrect or
should be rectified has been received by the Company or any of
the Sellers.
(d) All charges and securities granted by the Company have, if
relevant, been registered in accordance with the provisions of
all applicable legislation.
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(e) All documents of title relating to individual assets of the
Company having a value in excess of $10,000 and an executed copy
of all significant written agreements to which the Company is a
party, are in the possession of the Company.
3.21 Tax Matters
(a) There has not been any transaction, arrangement, event or omission
occurring after the Balance Sheet Date:-
(i) which has given rise or will give rise: (a) to income
or gains being deemed to arise to, or supplies being
deemed to be made by, the Company for taxation purposes
where the benefit does not actually accrue to the
Company, or (b) to any Taxation (as such term is
hereinafter defined) otherwise being assessable or
chargeable on the Company when the relevant income or
gains do not in fact accrue to or the relevant supplies
are not in fact made by, the Company; or
(ii) the taxation treatment of which is to the best of the
knowledge information and belief of the Executive
Directors or may become the subject of any dispute with
any taxation authority.
(b) The Company has not within the last six years:-
(i) been the subject of an investigation by the Inland
Revenue or any other relevant taxation authority; or
(ii) been the subject of any discovery notified to the
Company by the Inland Revenue or any other relevant
taxation authority;
and to the best of the knowledge information and belief of the
Executive Directors there are no facts or matters which are likely
to or may lead to any such investigation or discovery.
(c) The March 1998 Accounts make proper provision or reserve, in
accordance with the principles set out in the notes included in the
March 1998 Accounts, for all Taxation for which the Company was at
the Balance Sheet Date liable to pay or would be liable to pay
within 3 months of the Balance Sheet Date:
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(i) on or in respect of or by reference to any profits,
gains or income of the Company for any period ended on
or before the Balance Sheet Date; or
(ii) on or in respect of any distribution paid or made by
the Company on or before the Balance Sheet Date; or
(iii) in respect of any act, event, omission, transaction or
other matter which occurred or took place or was
entered into on or before the Balance Sheet Date and
for which a provision should be made in accordance with
proper accounting practice.
(d) The March 1998 Accounts make full and sufficient provision for
deferred taxation in accordance with SSAP 15.
(e) No transaction has been entered into or event occurred since the
Balance Sheet Date in consequence of which the Company could be
liable to Taxation and/or a penalty pursuant to any of Taxes Act
1988 sections 34 to 37; 703 to 709; 770 to 774; or 776 to 787.
(f) The Company has not carried out or been engaged in any transaction
or arrangement such that the law provides that there may be
substituted for the amount or value or the actual consideration
given or received or to be given or received) by the Company any
different amount or value for taxation purposes.
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(g) No application has been made relating to the Company within the
period of six years preceding the date hereof under the provisions
of any of:-
Taxation of Capital Gains Act 1992 ("TCGA") section 139(5) (company
reconstruction or amalgamation);
Taxes Act 1988 section 215 (demergers);
Taxes Act 1988 section 225 (purchase of own shares);
Taxes Act 1988 section 707 (transactions in securities);
Taxes Act 1988 section 765 (migration of companies);
Taxes Act 1988 section 776(11) (transactions in land);
TCGA section 138 (reconstructions or amalgamations);
(h) The Company has properly and punctually submitted to all relevant
taxation authorities (whether of the U.K. or the United States
("U.S.")) all returns, given all notices and supplied all other
information which it is required by law to make and made all
appropriate claims for reliefs and allowances, applications and
computations.
(i) All such returns, information, notices, claims, applications and
computations are true, complete and accurate computations in all
significant respects, give disclosure of all significant facts and
circumstances and are not the subject of any question or dispute
notified to the Company and are not to the best of the knowledge
information and belief of the Executive Directors likely to become
the subject of any question or dispute with any taxation authority.
(j) All payments by the Company to any person which ought to have been
made under deduction of Taxation have been so made and the Company
has (if required by law to do so) accounted to the relevant
taxation authority for the Taxation so deducted.
(k) The Company is not liable as agent or lessee for any taxation
liability of another person.
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(l) No UK taxation authority has agreed to operate any special
arrangement (being an arrangement which is not based on a strict
and detailed application of the relevant legislation or on
generally published statements of practice or generally published
extra-statutory concessions) in relation to the Company's affairs.
(m) There are set out in Schedule 3.21 details of all matters relating
to Taxation in respect of which the Company (whether alone or
jointly with any other person) has an outstanding entitlement or
obligation:-
(i) to make any claim (including a supplementary claim)
for relief from Taxation the making of which has been
assumed in preparing the March 1998 Accounts;
(ii) to make any election for one type of relief, or one
basis, system or method of Taxation as opposed to
another the making of which has been assumed in
preparing the March 1998 Accounts;
(iii) to make any appeal (including a further appeal)
against an assessment to Taxation;
(iv) to make any application for the postponement of
payment of Taxation; or
(v) to submit any return or provide particulars or
information to any taxation authority.
(n) The Company has complied with all notices served on it by any
taxation authority and no such notice remains outstanding.
(o) The Company has duly and punctually paid all Taxation which it has
become liable to pay and it has not within the period of six years
preceding the date hereof been liable to pay any penalty, fine or
surcharge in connection with Taxation.
(p) The Company has not since the Balance Sheet Date made or agreed to
make any distributions within the meaning of Taxes Act 1988 section
209 (meaning of "distribution").
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(q) The Company has not issued any share capital or securities as paid
up other than by receipt of new consideration within the meaning of
Taxes Act 1988 section 254.
(r) No balancing charge under Capital Allowances Act 1990 ("CAA 1990")
(or other legislation relating to any capital allowances) would be
made on the Company on the disposal of any pool of assets (that is
to say all those assets expenditure relating to which would be
taken into account in computing whether a balancing charge would
arise on a disposal of any of those assets) or of any asset not in
such a pool, on the assumption that a disposal is made for a
consideration equal to the book value shown in or adopted for the
purpose of the March 1998 Accounts for the assets in the pool.
(s) To the best of the knowledge information and belief of the
Executive Directors all expenditure incurred by the Company or
which it may incur under any subsisting commitment on the provision
of machinery or plant on or before June 30 1997 has qualified and
expenditure on or after that date will qualify (if not deductible
as a trading expense of a trade carried on by the Company) for
writing down allowances under CAA 1990 Part II (machinery and
plant) if a claim is made.
(t) Since the Balance Sheet Date nothing has happened as a result of
which: there may be made against the Company a balancing charge
under CAA 1990; or any disposal value may be brought into account
under CAA 1990 section 24 (writing down allowances and balancing
adjustments); or there may be any recovery of excess relief within
CAA 1990 Sections 46 or 47 (recovery of excess relief); or a
relevant event occurs within the meaning of CAA 1990 section 138
(scientific research).
(u) There is not any dispute between the Company and any other person
as to the entitlement to capital allowances under sections 51 to 59
of CAA 1990 and so far as the Executive Directors are aware there
is no circumstance and there are no circumstances which could give
rise to, any dispute between the Company and any other person as to
the entitlement to capital allowances under CAA 1990 sections 51 to
59 (fixtures).
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(v) The Company has not made any election under CAA 1990 section 37
(short life assets) so far as the Executive Directors are aware nor
has been taken to have made an election under sub-section (8)(c) of
that section.
(w) The book value shown in or adopted for the purposes of the March
1998 Accounts as the value of each of the assets of the Company on
the disposal of which a chargeable gain or allowable loss could
arise does not exceed the amount deductible under TCGA section 38
(expenditure: general) (excluding any indexation allowance) in
respect of each such asset.
(x) The Company does not have an interest in any assets which are
wasting assets within TCGA section 44 (wasting assets) and which do
not qualify for capital allowances.
(y) The Company has not made nor is entitled to make any claims under
any of TCGA sections 152, 153, 165, 172, 175, 242, 243 or 247
insofar as such claims affect or would affect the chargeable gain
or allowable loss which would arise on a disposal by the Company of
any of its assets.
(z) The Company has not made nor is it entitled to make any claim or
election under either of TCGA section 24 (assets lost or destroyed)
or TCGA section 161(3) (appropriations to or from stock). The
Company has not, since the Balance Sheet Date, appropriated any
asset forming part of its trading stock for any other purpose.
(aa) The Company has not since the Balance Sheet Date been a party to
any depreciatory transactions for the purpose of TCGA section 176
(transactions in a group) or so far as the Executive Directors are
aware which could be treated as a depreciatory transaction under
TCGA section 177 (dividend stripping).
(bb) The Company has not been a party to any value shifting arrangements
under any of TCGA sections 29, 30 or 34 (value shifting).
(cc) The Company has not made nor is entitled to make any claim under
TCGA section 280 (consideration due after time of disposal) to pay
by instalments tax on chargeable gains.
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(dd) The Company has not disposed of or acquired any asset in
circumstances falling within TCGA sections 17 or 19 and is not
entitled to any capital loss to which TCGA Section 18(3) applies.
(ee) No reorganisation of the share capital of the Company within the
provisions of TCGA sections 126 to 130 has taken place.
(ff) No capital gain chargeable to corporation tax will accrue to the
Company on the disposal of any debt owed to the Company where the
disposal proceeds equal the value of the debt in the March 1998
Accounts.
(gg) No allowable loss which might accrue on the disposal by the Company
of any share in or security of any company is liable to be reduced
by the application of TCGA section 176, Taxes Act 1988 sections 421
and 422.
(hh) The Company is a registered and taxable person for the purposes of
the Value Added Taxes Act 1994 ("VATA 1994") and has complied with
and observed in all significant respects the terms of all statutory
provisions, directions, conditions, notices and agreements with
H.M. Customs and Excise relating to value added tax. The Company
has maintained and obtained accounts, records, invoices and other
documents (as the case may be) appropriate or requisite for the
purposes of value added tax which are complete, correct and
up-to-date in all significant respects.
(ii) The Company:-
(i) is not, nor in the two years prior to the date of
this Agreement has been, in arrears with any payments
or returns or notifications under any statutory
provisions, directions, conditions or notices
relating to value added tax, or so far as the
Executive Directors are aware liable to any
forfeiture or penalty or interest or surcharge or to
the operation of any penalty, interest or surcharge
provision;
(ii) has not been required by H M Customs and Excise to
give security;
(iii) is not, and has not agreed to become, an agent,
manager or factor for the purposes of VATA 1994
section 47 (agents etc) of any person who is not
resident in the United Kingdom;
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(iv) has not since the end of the last prescribed
accounting period made, and to the best of the
knowledge information and belief of the Executive
Directors will not make prior to Closing, any
supplies that are exempt supplies; and
(v) has not received a notice under VATA 1994 paragraph 2
Schedule 6 (valuation - special cases) directing that
the value of goods supplied by the Company be taken
to be their open market value.
(aa) The Company has not since the Balance Sheet Date been, and will not
prior to Closing be, treated as having made any supply of goods or
services for the purposes of value added tax where no supply has in
fact been made by the Company.
(kk) The Company does not use any schemes made under any of the
following regulations: Value Added Tax (Supplies by Retailers)
Regulations 1972 (special schemes for retailers); Value Added Tax
(Cash Accounting) Regulations 1987 (cash accounting scheme); or
Value Added Tax (Annual Accounting) Regulations 1988 (annual
accounting scheme).
(ll) The Company has never received a surcharge liability notice under
VATA 1994 section 59 (default surcharge) or a penalty liability
notice under VATA 1994 section 64 (persistent misdeclarations).
(mm) There is set out in Schedule 3.21 with express reference to this
warranty a true, accurate and complete list of all land, buildings
and civil engineering works in which the Company has an interest,
stating in respect of each, and each part of each, such land,
building or work:-
whether an election to waive exemption under VATA
1994 paragraph 2(1) Schedule 10 has been made;
whether it is or was intended for use of a dwelling,
for a relevant residential purpose or a relevant
charitable purpose;
whether it is or was a freehold building or freehold
civil engineering work that was completed for value
added tax purposes less than three years prior to the
date of this Agreement, and if so, when;
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whether it is or was a building or work subject to a
developmental tenancy, development lease or
developmental licence as defined in Note 1 to Item 1
of Schedule 9 to VATA 1994; and
whether it is a freehold building or freehold civil
engineering work that has not been completed for
value added tax purposes.
(nn) The Company is not required to pay amounts on account of value
added tax under any order made under VATA 1994 section 28 (payments
on account).
(oo) The Company is a close company within the terms of section 414
Taxes Act 1988.
(pp) The Company has no liability to Taxation under the provisions of
Taxes Act 1988 sections 418 to 422 (close companies).
(qq) The Company has never made any transfer of the kind described in
TCGA 1992 section 125 (transfers of assets at undervalue).
(rr) All National Insurance Contributions and sums payable by the
Company to the Inland Revenue under the PAYE system up to the date
hereof have been paid and to the best of the knowledge information
and belief of the Executive Directors the Company has made all such
deductions and retentions as should have been made under section
203 Taxes Act 1988 and all regulations made thereunder.
(ss) The Company has received no notifications or notices under Taxes
Act 1988 section 166 (benefits in kind: notices of nil liability).
(tt) The Company does not operate any scheme approved under Taxes Act
1988 section 202 (charities: payroll deduction scheme) or
registered under Taxes Act 1988 Part V, Chapter III (profit-related
pay).
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(uu) No officer or employee of the Company is a beneficiary or potential
beneficiary of a qualifying employee share ownership trust as
defined in FA 1989 Schedule 5 (employee share ownership trusts).The
Company implemented a share scheme which was approved under the
Taxes Act 1988 Schedule 9 on June 5, 1997 and at all times since
approval, all conditions have been fulfilled, such that approval
could not be withdrawn. The options granted under this scheme have
been notified to the Buyer and these have been validly granted
under the terms of the scheme.
(vv) Since the Balance Sheet Date the Company has not received any
payment to which Taxes Act 1988 sections 601 to 603 applies
(pension scheme surpluses: payments to employers).
(ww) All sums payable under the existing arrangements for remunerating
any person who is or has been an officer or employee of the Company
or a dependant of any such person and for rewarding persons
rendering services to the Company are deductible for the purposes
of Taxes Act 1988 section 74 or 75 (deductions).
(xx) So far as the Executive Directors are aware there is no instrument
which is necessary to establish the Company's title to any right or
asset which is liable to stamp duty in the U.K. or elsewhere but
which has not been duly stamped or which would attract stamp duty
if brought within the relevant jurisdiction.
(yy) To the best of the knowledge information and belief of the
Executive Directors the Company has duly paid all stamp duty and
stamp duty reserve tax to which it is, has been or may be made
liable and there is no liability to any penalty in respect of such
duty or tax.
(zz) The Company is and always has been resident only in the UK for
taxation purposes. The Company is not liable to Taxation in any
jurisdiction other than the UK. The Company has never carried on
any trade, business or other activities outside the UK other than
the export of its goods and/or services in the ordinary and normal
course of its business or other than through the Subsidiary.
(aaa) The Company has not issued any shares on the basis that such issue
entitles or is intended to entitle the subscribers to relief under
Taxes Act 1988 Section 289.
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(bbb) The Company has not issued any share capital to which the
provisions of Taxes Act 1988 Section 249 or TCGA Section 141(1)
could apply nor does the Company own any such share capital.
(ccc) Within the period of three years ending with the date hereof and
within the context of section 768 of the Taxes Act 1988 there has
been no major change in the nature or conduct of any trade or
business carried on by the Company nor has the scale of the
activities in any trade or business carried on by the Company at
any time become small or negligible for the purposes of that
section.
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3.22 Compliance with Laws; Permits, Etc
(a) The Company is in compliance with, and no default or violation or
breach exists under, any and all laws applicable to it (including
directives, rules, regulations, codes, guidance notes, injunctions,
interdicts, judgements, orders, decrees and rulings thereunder)
including but without limitation those of the European Community
(collectively, "Laws and Requirements of Laws") (except where the
failure to be in such compliance will not (i) have significant
adverse effect on the Company, (ii) prevent the continued operation
of the Business as operated by the Company following the Closing
Date in the manner heretofore conducted and with no less scope and
extent without the incurrence of any additional significant expense
by the Company, or (iii) subject the Company to any penalty or
enforcement or equivalent action as a result thereof). Since March
31, 1995, no investigation has been conducted by any governmental
authority which has resulted in assessment of any monetary penalty
or sum levied or imposed on the Company in excess of $1,000. The
Company has (but excluding for the purposes of this Section 3.22
(a) any of the following relating to Taxation) duly filed all
reports and returns required by law to be filed by it with
governmental authorities; and obtained all governmental or
regulatory permits, certificates, licenses, approvals,
registrations and authorizations ("Permits") which are required by
law by it in connection with and related to its business and
operations (except where the failure to have made such filing or
have such Permit will not (i) have a significant adverse effect on
the Company, (ii) prevent the continued operation of the Business
following the Closing Date in the manner heretofore conducted and
with no less scope and extent without the incurrence of any
significant additional expense by the Company, or (iii) subject the
Company or the Buyer to any penalty or enforcement or equivalent
action as a result thereof). The Company is in compliance with such
Permits in all material respects, all of which are in full force
and effect, and to the best of the knowledge, information and
belief of the Executive Directors no proceedings for the suspension
or cancellation of any of them is pending or threatened. Schedule
3.22 contains a complete list or description of all such Permits,
including the expiration dates thereof, and any Permits that are
not transferable or which would cease to be in full force and
effect as a result of the transactions herein contemplated are so
designated on such Schedule. The Company has made timely
application for renewals of all such Permits.
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(b) Since March 31 1995 the Company has not made any illegal payment to
officers or employees of any governmental or regulatory body or its
own officers or employees, or made any illegal payment to customers
for the sharing of fees or to customers or suppliers for rebate or
discount of charges or made any such payment to customers or
suppliers outside the ordinary and normal course of business, or
engaged in any other reciprocal practices which are illegal, or
made any illegal payment or given any other illegal consideration
to purchasing agents or other representatives of customers in
respect of sales made or to be made by the Company.
3.23 Conflicts
None of the Executive Directors nor any affiliate of any of the
foregoing (a) has any direct or indirect interest in (i) any entity
that does any business with, or directly competes with, the Company or
(ii) the Business as operated by the Company, or (b) has any
contractual relationship with the Company other than being a
shareholder of the Company or other than such relationship as relates
to being an employee of the Company or officer or director of the
Company or affiliate thereof or other than being the holder of options
to subscribe for shares in the share capital of the Company.
3.24 Suppliers and Customers
Schedule 3.24 sets forth the twenty (20) largest suppliers by
expenditure of the Company (the "Major Suppliers") and fifteen (15)
largest customers by turnover to the Company (the "Major Customers") of
the Company for the nine (9) months ended March 31, 1998. No such
supplier or customer has cancelled or otherwise modified or so far as
the Executive Directors are aware intends to cancel or otherwise modify
its agreement with the Company or decrease or limit its services,
supplies or materials to the Company or its usage or purchase of the
services or products of the Company and to the best of the knowledge,
information and belief of the Executive Directors (but having made no
enquiry of any such customer or supplier) the change of control of the
Company resulting from the acquisition of the Shares by the Buyer will
not entitle any such supplier or customer to terminate any such
agreement with the Company.
3.25 Labour Matters
(a) No employee of the Company is covered by nor is the Company party
to a collective bargaining agreement or recognition agreement.
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(b) Since March 31 1995 there has been, no strike, lockout, picketing,
work stoppages or other labour troubles or industrial disputes
with respect to the Company and, to the best of the knowledge
information and belief of the Executive Directors, no such
strikes, picketing, lockouts, work stoppages or labour troubles or
industrial disputes are threatened or currently pending.
(c) There does not currently exist, and to the best of the knowledge,
information and belief of the Executive Directors there is not
currently threatened, any grievance proceeding, or complaint by or
on behalf of an employee.
(d) The Company is in compliance in all significant respects with all
provisions of all applicable laws, regulations, policies,
procedures and contractual obligations relating to employment,
employment practices, wages, hours, discrimination, safety and
health of employees, workers compensation, withholding of wages,
and terms and conditions of employment. All personnel manuals,
handbooks, policy and procedure manuals applicable to the
employees of the Company have been made available to the Buyer.
(e) Set forth in Schedule 3.25 is a list of all persons whose
employment was terminated by the Company in the last three years.
(f) The Company is not liable for any severance pay or other payments
to any employee or former employee due to the termination of
employment and will not have any liability under any benefit or
severance plan, policy, practice, program or agreement, as a
result of the transactions contemplated hereunder.
3.26 Bank Accounts
Schedule 3.26 sets forth the names and locations of all banks,
depositories and other financial institutions in which the Company has
an account, including any brokerage account, or safe deposit box and
the names of all persons authorized to draw thereon or to have access
thereto.
3.27 Creditors
Schedule 3.27 sets forth a true and correct and complete list of all
trade creditors of the Company as of June 30, 1998 in excess of $10,000
to any one payee.
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3.28 Officers, Directors and Key Employees
Schedule 3.28 sets forth (i) the name, title and total annual
compensation or remuneration of each officer and director of the
Company and (ii) the name, title and total annual compensation or
remuneration of each other employee or consultant of the Company whose
current annual rate of compensation or remuneration (including bonuses
and commissions) exceeds $ 50,000 and (iii) all wage or salary
increases or bonuses or commissions received by such persons since
March 31, 1997, and any commitment or agreement by the Company to pay
such increases or bonuses or commissions. Included in Schedule 3.28 is
a copy of any written employment, consultancy , commission, severance
or similar arrangement with any such person and of terms and conditions
of employment, which documents set forth the entire understanding of
the Company, on the one hand, and such person, on the other hand, with
respect to the employment, engagement and/or severance of such person.
None of such persons has indicated to the Company or to any of its
officers or directors any intention on the part of such person to
terminate such person's relationship with the Company. No negotiations
for any increase in the remuneration or benefits of any officer or
employee of the Company are in process. No employee of the Company is
currently on maternity leave or authorized medical leave. No past
employee of the Company has a right to return to work or has or may
have a right to be reinstated or re-engaged.
3.29 Insolvency
(a) No order has been made, petition presented or meeting convened
for the purpose of considering a resolution for the winding up
of the Company;
(b) No petition has been presented for an administration order to be
made in relation to the Company;
(c) No receiver has been appointed in respect of the whole or in
part of any of the property, assets and/or undertaking of the
Company;
(d) No composition in satisfaction of the debt of the Company or
scheme of arrangement of its affairs or compromise or
arrangement between it and its creditors and/or members of any
class of its creditors and/or members has been proposed,
sanctioned or approved.
(e) The Company is not unable to pay its debts within the meaning of
Section 123 of the Insolvency Act 1986 of the UK.
3.30 Grants
The Company has not done or agreed to do anything as a result of which
either:-
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(a) any investment or other grant paid to the Company is or may be
liable to be refunded or repaid in whole or in part; or
(b) any such investment or other grant for which application has been
made by the Company may not be paid or may be reduced.
3.31 Computer System
(a) Details of all hardware leases and software licences granted
to the Company in relation to the computer software and equipment
used or operated by the Company in its business (the "Computer
System") and all escrow agreements, maintenance agreements and
facilities management services agreements in respect of the same
and any computer bureaux and disaster recovery agreement to which
the Company is a party are set out in Schedule 3.31.
(b) Subject to the terms of all applicable agreements the Company
has full use of its Computer System and is legally entitled to use
the same.
(c) The change of control of the Company contemplated by this
Agreement will not affect the continued right of the Company to
have full use of its Computer System as envisaged in Section 3.31
(b).
(d) The continued right of the Company to have full use of its
Computer System as envisaged in Section 3.31 (b) is not subject to
the grant of any additional rights to third parties permitting
them to access and/or use its Computer System on a sole or shared
basis.
3.32 Subsidiaries; etc
The Subsidiary is a corporation duly organised, validly existing and in
good standing under the laws of its jurisdiction of incorporation and
has the corporate power and lawful authority to own, lease and operate
its assets, properties and business and to carry on its business as now
being and as heretofore conducted. The Subsidiary is duly qualified or
otherwise authorized as a foreign corporation to transact business and
is in good standing in each jurisdiction set forth next to its name on
Schedule 3.32, which is the only jurisdiction in which such
qualification or authorization is required. Except as set forth on
Schedule 3.32, the Subsidiary does not file any franchise, income or
other tax returns in any other jurisdiction based upon the ownership or
use of property therein or the derivation of income therefrom. There is
no outstanding right, subscription, warrant, call, pre-emptive right,
option or other agreement of any kind to purchase or otherwise to
receive from the Subsidiary any shares of the capital stock or any
other security of, or any proprietary interest in, the Subsidiary, and
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there is no outstanding security of any kind convertible into such
capital stock or proprietary interest. The Subsidiary does not directly
or indirectly own any investment in any of the capital stock or share
capital of, or any other proprietary interest in, any other person.
3.33 Consents and Approvals; No Violation
The execution and performance by the Sellers of this Agreement and the
consummation by the Sellers of the transactions contemplated hereby do
not and will not: (a) conflict with or breach any provision of the
Certificate or Articles of Incorporation or By-laws, or other governing
documents of the Subsidiary; (b) require the Subsidiary to make any
filing or registration with, or obtain any other permit, authorization,
consent or approval of, any governmental or regulatory authority; (c)
conflict with, violate or breach any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in a modification of, any of the
terms, covenants, undertakings, conditions or provisions of, or give
rise to a right to terminate or accelerate or increase the amount of
payment due under, any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, lease, sublease, contract, agreement, or
other instrument, commitment or obligation to which the Subsidiary is a
party, or by which it or any of its respective properties or assets may
be bound, including without limitation any fee mortgages creating a
Lien on the Real Property (as hereinafter defined) or any part thereof;
(d) result in the creation of any Lien on any of the properties or
assets of the Subsidiary; (e) violate any order, writ, injunction,
interdict, decree, judgement, or ruling of any court or governmental
authority, applicable to the Subsidiary or the assets of the
Subsidiary; or (f) violate any statute, law, rule or regulations
applicable to the Subsidiary or to the securities, properties, assets
or business of the Subsidiary.
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3.34 Subsidiary Material Contracts
(a) The Subsidiary has not entered into and is not bound by any
Subsidiary Material Contracts (as defined below).
(b) "Subsidiary Material Contracts" (if any) means any Contract (as
defined below) (i) that provides for aggregate future payments by
the Subsidiary of more than $10,000; (ii) that was entered into
other than in the ordinary and usual course of business; (iii)
that has an unexpired term exceeding one year and may not be
terminated in accordance with its terms upon less than 90 days
notice without any obligation, liability, penalty or premium
(other than a nominal cancellation fee or charge); (iv) that was
entered into with any Seller, any officer, director or any
employee of the Subsidiary or any member of a Seller's family or
any affiliate of the foregoing; (v) that constitutes a collective
bargaining recognition or other labour agreement; (vi) that
constitutes or contains a guarantee or indemnity by or otherwise
imposes upon the Subsidiary liability for the obligations or
liabilities of another; (viii) that involves an agreement with any
bank, finance company or similar organization for the sale of any
products of the Subsidiary on credit or the provision of services
on credit; (ix) that involves the sale by or to the Subsidiary of
products or services on consignment; (x) that is or contains a
power of attorney; (xi) that contains any provision or term for
renegotiation or redetermination of price; (xii) that restricts
the Subsidiary from carrying on its business as presently
conducted anywhere in the world or which otherwise restricts the
ability of the Subsidiary or any affiliate thereof to engage in
any other business anywhere in the world; (xiii) that contains any
warranty terms or undertakings in addition to the warranties or
undertakings normally and usually given by the Subsidiary in
connection with the sale of its products or the provision of its
services; (xiv) pursuant to which the Subsidiary may hold any
interest which has a value in excess of $2,500 owned or claimed by
the Subsidiary in or to any Subsidiary Tangible Property (as
defined in Section 3.37); (xv) that provides for maintenance or
management of any Real Property (as defined in Section 3.38); or
(xvi) that is a contract for hire or rent, hire purchase or
purchase by way of credit sale or periodical payment. There are no
Subsidiary Material Contracts which are not in writing.
(c) The term "Contract" means and includes any oral or written
contract, agreement, commitment, mortgage, debt instrument,
security agreement, license, guarantee, lease, sublease, charter,
franchise, power of attorney, agency and other agreement or
arrangement constituting a binding obligation of the Subsidiary
whether or not in writing.
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(d) The Contracts (other than Subsidiary Material Contracts (if any))
to which the Subsidiary is a party do not involve the payment by
the Subsidiary of more than $20,000 per year in the aggregate or
$10,000 per year in any individual case and are not otherwise
significant, individually or in the aggregate to the Subsidiary or
the Business as operated by the Subsidiary.
(e) There is not, and there has not been claimed or to the best of the
knowledge, information and belief of the Executive Directors (but
having made no enquiry of the other parties to any Subsidiary
Material Contract) alleged by any person, with respect to any
Subsidiary Material Contract, any existing significant default, or
event of default, or event that with notice or lapse of time or
both would constitute a significant default or event of default on
the part of the Subsidiary or, so far as the Executive Directors
are aware but without having made any enquiry, on the part of the
other party or parties thereto. Subject to the effect of any
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganisation or similar laws affecting creditors rights
generally the Subsidiary Material Contracts are in full force and
effect and constitute the legal, valid and binding obligations of
the Subsidiary and, so far as the Executive Directors are aware
the other parties thereto. No other party to a Subsidiary Material
Contract has asserted the right, and so far as the Executive
Directors are aware no basis exists for the assertion of any
right, to renegotiate the terms or conditions of any Subsidiary
Material Contract.
3.35 [Intentionally blank].
3.36 Absence of Undisclosed Liabilities
The Subsidiary does not have any material liabilities which would be
required to be disclosed in its financial statements in accordance with
generally accepted accounting principles other than those that (i) are
set forth or adequately reserved against in the Subsidiary March 1998
Accounts; or (ii) were incurred since the Balance Sheet Date in the
ordinary and usual course of business.
3.37 Tangible Property
The plant, machinery, equipment, hardware, software, furniture,
leasehold improvements, fixtures, vehicles, structures, any related
capital items and other tangible property of the Subsidiary used in the
Business as operated by the Subsidiary (the "Subsidiary Tangible
Property") is in good operating condition and repair for its intended
purpose, ordinary wear and tear excepted to the best of the knowledge,
information and belief of the Executive Directors, and the Subsidiary
has not received intimation that it is in violation of any existing
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law or any building, zoning, health, safety or other ordinance, code or
regulation applicable to the Subsidiary and by which it is bound.
3.38 Real Property
(i) The Subsidiary does not own any real property. Schedule 3.38
contains a true, correct and complete list and summary of all the
(i) leases, subleases, licenses, occupancy rights, interests in
and other agreements, and all amendments or modifications thereto
or assignments thereof (collectively, "Real Property Documents")
in relation to any real property (the land, buildings and other
improvements covered by the Real Property Documents being herein
called the "Real Property") which the Subsidiary holds, uses or
occupies or has the right to use or occupy, now or in the future.
There is no real property of any kind whatsoever used by the
Subsidiary except for the Real Property. The Sellers have
heretofore delivered to the Buyer true, correct and complete
copies of all Real Property Documents. Each Real Property Document
is valid and in full force and effect, all rent and other sums and
charges payable by the Subsidiary thereunder are current, no
notice of default, alleged breach or termination under any Real
Property Document is outstanding, and, to the best of the
knowledge, information and belief of the Executive Directors , no
termination event or condition or uncured default or breach on the
part of the Subsidiary or any other person exists under or in
relation to any Real Property Document, and no event has occurred
and no condition exists which, with the giving of notice or the
lapse of time or both, would constitute such a default or breach
or termination event or condition. None of the Sellers has any
ownership, economic or similar interest in any of the Real
Property or any lease of real property relating to the Subsidiary
other than as set forth on Schedule 3.38.
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(ii) All certificates, permits, licenses, approvals, consents,
authorizations and others (collectively, the "Real Property
Permits") (i) of all governmental and other authorities and
agencies having jurisdiction over the Real Property, and (ii) from
all insurance companies ("Insurance Organizations") and (iii) in
the case of leasehold property under the terms of the relevant
lease or tenancy agreement, required to have been issued to the
Subsidiary or the owner of the Real Property or otherwise to
enable the Real Property to be lawfully occupied and used for all
of the purposes for which it is currently occupied, have been
lawfully issued and are in full force and effect. Neither any
Seller nor to the best of the knowledge, information and belief of
the Executive Directors, the Subsidiary, has received or been
informed by a third party of the receipt by it of any notice from
any governmental, local and other authority having jurisdiction
over the Real Property or from any Insurance Organization
threatening a suspension, revocation, modification or cancellation
of any Real Property Permit or of any policy of insurance
currently owned or held by the Subsidiary or in which the
Subsidiary, and/or any Seller have an interest (collectively,
"Insurance Policies") and, so far as the Executive Directors are
aware, there is no basis for the issuance of any such notice or
the taking of any such action. The Subsidiary has not done or
omitted to do anything whereby the Insurance Policies or any of
them have or may become void or voidable and all requisite
insurances are in force and all current premiums are fully paid.
Except as set forth on Schedule 3.38, no action by the Subsidiary
or any Seller is required in order that all Real Property Permits
and Insurance Policies will remain in full force and effect
following legal completion of the transaction provided for herein.
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(iii) The Real Property is in compliance in all significant respects
with all applicable building, zoning, subdivision, environmental
and other land use and similar laws and codes (collectively, "Real
Property Laws"), and neither the Subsidiary nor any Seller has
received or is aware of any notice of violation or breach or
claimed violation or breach of any Real Property Law. The Real
Property and its continued use, occupancy and operation as
currently used, occupied and operated does not constitute a
nonconforming or unlawful use under any Real Property Law and the
continued existence, use, occupancy and operation of each
improvement, and the right and ability to repair and/or replace
such improvement in the event of casualty, is not dependent on any
special permit, exception, approval or variance. So far as the
Executive Directors are aware there is not any pending or
anticipated change in any Real Property Law which would have a
material adverse effect upon the ownership, alteration, use,
occupancy or operation of the Real Property or any portion
thereof. Neither the Subsidiary nor any Seller has received notice
of any dispute currently existing with any local governmental or
quasi-governmental authority having jurisdiction over the Real
Property with respect to any Real Property Law or the application
thereof to the Real Property.
(iv) Since March 31, 1998, no portion of the Real Property has suffered
any damage by fire or other cause, which has not been completely
repaired and restored to no less than its former condition prior to
such damage.
3.39 Intangible Property
There are no trademarks, trade names, trade dress rights, service
names, service marks, copyrights, design rights, logos, advertising
slogans, patents, franchises or permits or similar intangible or
intellectual property rights, or applications therefor, including
registrations and applications for registration thereof
(collectively, the "Subsidiary Rights") owned by the Subsidiary or
used in the Business as operated by the Subsidiary or license
agreements with respect to any Subsidiary Rights as to which the
Subsidiary is licensor or licensee ("Subsidiary Licenses"). The
Subsidiary has not been sued or to the best of the knowledge,
information and belief of the Executive Directors been threatened
with suit, or action for infringement, violation or breach of any
Subsidiary Rights. The Executive Directors are not aware of (i) the
existence of any basis whereby any Subsidiary Right or Subsidiary
License could be claimed, opposed or attacked by any other person
or might cease to be valid and enforceable or (ii) any
infringement, violation or breach of such Subsidiary Rights or
Subsidiary Licenses or any of them by any other person.
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3.40 Title to Assets
Other than assets and properties disposed of, or subject to purchase or
sales orders, in the ordinary and usual course of business since the
Balance Sheet Date, the Subsidiary owns all of its assets and
properties, including, without limitation, all of the assets and
properties reflected on or in the Subsidiary March 1998 Accounts in
each case free and clear of any Lien or other encumbrance whatsoever,
except for Liens specifically and expressly set forth or disclosed in
the Subsidiary March 1998 Accounts.
3.41 Complete Business; Assets
The personal property, intangible assets and other rights owned or
leased by or licensed to the Subsidiary, in the aggregate, represent
all such assets as are necessary to conduct the Business in or from the
US in the manner in which it has been conducted by the Subsidiary. No
part of the Business in the US is conducted by or through any person or
entity other than the Company and the Subsidiary.
3.42 Accounts and Notes Receivable.
All accounts and notes receivable reflected on or in the Subsidiary
March 1998 Accounts, and all accounts of the Subsidiary and notes
receivable of the Subsidiary arising subsequent to the Balance Sheet
Date, have arisen out of arms length transactions entered into in the
ordinary and usual course of business of the Subsidiary. All items that
were required by generally accepted accounting principles or financial
reporting standards to be reflected as accounts and notes receivable of
the Subsidiary on the Subsidiary March 1998 Accounts are so reflected.
Such notes, accounts and other receivables are collectible in full in
the aggregate to the extent not reserved for in the Subsidiary March,
1998 Accounts in each and every respect and are not subject to any
set-off, counter claim, credit or return policy not specifically and
expressly set out or disclosed in such accounts.
3.43 Absence of Certain Changes
Since the Balance Sheet Date, the Subsidiary has not:
(a) amended its Certificate of Incorporation or By-laws or any similar
governing documents or merged with or into or consolidated with
any other person, subdivided, consolidated or in any way
reclassified any shares of its capital stock or changed or agreed
to change in any manner or in any way the rights of its
outstanding capital stock or the character or scope of its
business or the manner in which it is conducted;
(b) issued or sold or purchased, or issued options or rights to
subscribe to, or entered into any contracts or commitments to
issue or sell or purchase, any shares of its capital stock;
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(c) entered into or amended any employment or service agreement or any
terms and conditions of employment, entered into or amended any
agreement with any labour union or association or organisation
representing any employee, adopted, entered into, or amended any
employee benefit plan or scheme;
(d) incurred any indebtedness for borrowed money whatsoever; (e)
declared or paid any dividends or declared or made any other
distributions of any kind to its shareholders (other than
dividends or distributions paid by the Subsidiary to the Company),
or made any direct or indirect redemption, retirement,
cancellation, purchase or other acquisition of any shares of its
capital stock;
(f) collected its accounts receivable other than in the ordinary and
usual course of business consistent with past practice or deferred
payment of its accounts payable other than in the ordinary and
usual course of business consistent with past practice, or changed
its policies either with respect to the collection of accounts
receivable or the payment of accounts payable;
(g) waived any right of value to its business, made any change in its
accounting methods, practices, procedures or policies or made any
change in depreciation or amortization policies or rates adopted
by it or made any change in its tax elections;
(h) changed to a significant extent any of its business policies,
including, without limitation, advertising, marketing, pricing,
purchasing, distribution, personnel, sales, returns, its budget or
product acquisition policies, or the type, nature or composition
of its products or services;
(i) made any wage or salary, bonus or commission increase, or increase
in any other direct or indirect compensation or benefit, for or to
any of its officers, directors, employees, consultants, agents or
other authorized representatives, or made any accrual for or
commitment or agreement to make or pay the same;
(j) made any loan or advance in excess of $5,000 to any of its
shareholders, officers, directors, employees, consultants, agents
or other authorised representatives (other than travel advances
made in the ordinary and usual course of business), or made any
other loan or advance other than in the ordinary and usual course
of business;
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(k) made any payment or commitment to pay any severance or termination
pay or terminal payment to any of its officers, directors,
employees, consultants, agents or other authorised
representatives;
(l) except in the ordinary and usual course of business: (i) entered
into any lease (as lessor or lessee) or sublease (as sublessor or
sublessee); (ii) sold, abandoned or made any other disposition or
disposal of any of its assets or properties with a value in the
aggregate in excess of $7,500 or any interest therein; or (iii)
granted or suffered any Lien on any of its assets or properties;
(m) except in the ordinary and usual course of business incurred or
assumed any debt, obligation or liability known or which ought to
be known (whether absolute or contingent and whether or not
currently due and payable);
(n) suffered or experienced any damage, destruction or loss adversely
affecting the assets, properties, business, operations, condition
(financial or otherwise) of the Subsidiary, taken as a whole,
whether or not covered by insurance;
(o) made any significant change in the type, nature, composition or
quality of its products or services, or made any change in product
or service specifications or prices or terms of distribution of
such products or services;
(p) terminated or failed to renew, or received any written threat or
notice to terminate or fail to renew, any Subsidiary Material
Contract or other agreement that is significant to the assets,
properties, business, operations, condition (financial or
otherwise) of the Subsidiary;
(q) entered into any agreement, arrangement or understanding, whether
in writing or otherwise, to take any action described in this
Section 3.43.
3.44 Litigation
Except with respect to Taxes and Tax Returns (as defined in and covered
by Section 3.49), there are no private or governmental law suits,
proceedings, claims, investigations, inquiries or actions or
administrative or arbitration proceedings (collectively, "Proceedings")
by or against the Subsidiary in process or, to the best of the
knowledge, information and belief of the Executive Directors having
made reasonable enquiry only of their professional advisers and
employees, pending or threatened against the Subsidiary, or the
transactions contem plated by this Agreement, nor are there any
judgements, decrees or orders either naming the Subsidiary or enjoining
the Subsidiary, as party.
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3.45 Insurance
Schedule 3.45 sets forth a list and brief description (specifying the
insurer and the policy number or covering note number with respect to
binders, describing each pending claim thereunder of more than $10,000,
setting forth the aggregate amounts paid out under each such policy
through the date hereof and the aggregate limit, if any, of the
insurer's liability thereunder) of all policies or binders of fire,
liability, product liability, workmen's compensation, employer's
liability, business interruption, personal accident, vehicular and
other insurance held by or on behalf of the Subsidiary. Such policies
and binders are in full force and effect. The Subsidiary is not in
default with respect to any provision contained in any such policy or
binder and has not failed to give any notice or present any claim under
any such policy or binder in due and timely fashion. There are no
outstanding unpaid claims under any such policy or binder. To the best
of the knowledge, information and belief of the Executive Directors the
Subsidiary has received no notice of cancellation or non-renewal of any
such policy or binder. There has been and is no significant inaccuracy
in any application for any such policies or to the best of the
knowledge, information and belief of the Executive Directors any
similar state of facts which constitutes the basis for termination,
cancellation, non-renewal or avoidance of any such insurance.
3.56 Employee Benefit Plans
(i) Schedule 3.46 sets forth each employee benefit plan (as defined in
section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), presently maintained by, or
contributed to by the Subsidiary or by any Seller for the benefit
of employees of the Subsidiary (the "Benefit Plans"). For purposes
of this Section 3.46, the term "Subsidiary" includes any entity
which is or at any relevant time was a member of a "controlled
group of corporations" (within the meaning of Section 414(b) of
the Internal Revenue Code of 1986, as amended (the "Code")) with
the Subsidiary or under "common control" (within the meaning of
Section 414(c) of the Code) with the Subsidiary.
(ii) The Subsidiary and each of the Benefit Plans are in compliance
with the applicable provisions of ERISA, and those provisions of
the Code applicable to the Benefit Plans.
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(iii) All premium payments or other contributions to, and payments from,
the Benefit Plans which may have been required to be made in
accordance with the Benefit Plans have been timely made. All such
premiums or other contributions to the Benefit Plans, and all
payments under the Benefit Plans, except those to be made by an
insurer, for any period ending through March 31, 1998, that are
not yet, but will be, required to be made are properly accrued and
reflected on the Subsidiary March 31, 1998 Accounts or are set
forth in Schedule 3.46.
(iv) Each of the Benefit Plans intended to qualify under section 401(a)
of the Code does so qualify and the Subsidiary has received
favourable determinations from the Internal Revenue Service to
that effect. All reports, returns and similar documents with
respect to the Benefit Plans required to be filed with any
government agency or distributed to any Benefit Plan participant
have been duly and timely filed or distributed.
(v) The Subsidiary has complied with the notice and continuation
coverage requirements of section 4980B of the Code ("COBRA") and
the regulations thereunder with respect to each Benefit Plan that
is, or was during any taxable year of the Subsidiary for which the
statute of limitations on the assessment of federal income taxes
remains open, by consent or otherwise, a group health plan within
the meaning of section 4980B(g) of the Code.
(vi) At no time has (i) the Subsidiary or (ii) any other employer that
is, or, at any relevant time, was, together with the Subsidiary,
treated as a "single employer" under sections 414(b), 414(c) or
414(m) of the Code, incurred any liability which could subject the
Buyer or the Subsidiary to any liability under sections 4062, 4063
or 4064 of ERISA.
(vii) At no time has the Subsidiary or any affiliate thereof
contributed, or been required to contribute to, (i) a
multi-employer pension plan within the meaning of section 3(37) of
ERISA or (ii) a defined benefit plan within the meaning of section
3(35) of ERISA.
(viii) The Subsidiary has not incurred nor is reasonably likely to incur
any liability with respect to any plan or arrangement that would
be included within the definition of "Benefit Plan" hereunder but
for the fact that such plan or arrangement was terminated before
the date of this Agreement.
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(ix) The Subsidiary does not maintain and never has maintained or
contributed, nor been required to contribute to any Benefit Plan
providing medical, health or life insurance or other welfare
benefits for retired or terminated employees, their spouses or
their dependants (regardless of whether retirement has occurred or
will occur in the future).
3.47 Environmental Matters
(a) The operations of the Subsidiary as heretofore conducted do not
violate in any significant respect any Environmental Laws (as
defined hereinafter). The Subsidiary has complied in all
significant respects with all Environmental Laws and the
Subsidiary has no significant liability under any Environmental
Law. "Environmental Laws" means any and all applicable local,
national, state or federal Permits and Laws and Requirements of
Laws (as defined in Section 3.50) relating to environmental
protection, pollution control or environmental contamination, or
the Management (as defined in Section 3.47) of Hazardous
Substances (as defined in Section 3.47) or Subsidiary Permits (as
defined in Section 3.50) and Laws and Requirements of Laws with
regard to record keeping, notification and reporting requirements
respecting Hazardous Substances, including, but not limited to,
the Resource Conservation & Recovery Act, 42 U.S.C.ss.6901 et
seq., as amended ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C.ss.9601 et seq,
as amended ("CERCLA"), the Federal Water Pollution Control Act, 33
U.S.C.ss.1251 et seq., as amended ("FWPCA"), the Safe Drinking
Water Act, 21 U.S.C. ss.349, 42 U.S.C.ss.ss.201, 300f , as amended
("SDWA"), the Clean Air Act, 42 U.S.C.ss.7401 et seq., as amended
("CAA"), and the Toxic Substances Control Act, 15 U.S.C.ss.2601 et
seq., as amended ("TSCA"), and analogous state laws.
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(b) No notice, citation, summons or order has been issued, no
complaint has been filed, no penalty has been assessed and to the
best of the knowledge, information and belief of the Executive
Directors no investigation or review is in process pending or, so
far as the Executive Directors are aware but without having made
any enquiry, threatened, by any federal, state, local, national or
foreign governmental or regulatory agency or authority: (i) with
respect to any alleged violation or breach or illegal liability by
the Subsidiary of any Environmental Law; or (ii) with respect to
any alleged failure by the Subsidiary to have any Permit; or (iii)
with respect to any use, possession, generation, treatment,
storage, recycling, transportation or arrangement for
transportation or disposal deposit or escape (collectively,
"Management") of any substance or waste regulated under any
Environmental Laws ("Hazardous Substances"), including, without
limitation, hazardous substances, as defined by CERCLA, petroleum
products, radioactive materials and asbestos, by or on behalf of
the Subsidiary.
(c) The Subsidiary has not received any request for information,
notice of claim, complaint, demand or notification that it is or
may be responsible or potentially responsible or liable with
respect to any threatened or actual Release (as hereinafter
defined) of any Hazardous Substance. No Haz ardous Substance with
respect to which the Subsidiary exercised or was responsible for
Management has come to be located at any site which is listed (or,
to the knowledge of the Executive Directors, is proposed for
listing) under CERCLA, on the Comprehensive Environmental Response
Compensation and Liability Information System ("CERCLIS") or on
any similar state or national list, or which is the subject of
federal, state, national or local enforcement or similar actions
or other investigations. No oral or written notification of a
Release or threat of Release of a Hazardous Substance has been
filed by or on behalf of the Subsidiary or in relation to any real
property now or previously owned, operated or leased by the
Subsidiary. No such real property is listed (or to the knowledge
of the Executive Directors, is proposed for listing) on the
National Priority List promulgated pursuant to CERCLA, on CERCLIS
or on any similar state list of sites.
(d) The Subsidiary has not Managed any Hazardous Substances on any
property now or previously owned, operated or leased by the
Subsidiary in a manner which is in violation of any Environmental
Law, or will give rise to any liability or obligation under any
Environmental Law against or of the Subsidiary.
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(e) No polychlorinated biphenyls ("PCBs") or asbestos-containing
materials are or have been present at any property now owned,
operated or leased by the Subsidiary. With respect to any property
previously owned, operated or leased by the Subsidiary, no PCBs or
asbestos-containing materials were or had been present at any
property at the time such property was disposed of by the
Subsidiary.
(f) There are no underground storage tanks, active or abandoned, at
any property now owned, operated or leased by the Subsidiary. With
respect to any property previously owned, operated or leased by
the Subsidiary, there were no underground storage tanks, active or
abandoned, at such property at the time such property was disposed
of by the Subsidiary.
(g) No Hazardous Substance has been released, spilled, leaked,
discharged, disposed of, pumped, poured, emitted, emptied,
injected, leached, dumped or allowed to escape ("Release") by the
Subsidiary, anyone else who was an agent, employee or contractor
of the Subsidiary or anyone for whose acts the Subsidiary may be
liable, at, to, on, about, from or under any property now or
previously owned, operated or leased by the Subsidiary which will
result in any significant liability or obligation to or of the
Subsidiary.
(h) There are no environmental liens or deed restrictions on any
properties owned or leased by the Subsidiary and no actions by any
federal, national, state, local or foreign governmental or
regulatory agency or authority have been taken or are so far as
the Executive Directors are aware pending, or threatened that
could subject any of such properties to such liens, require the
carrying out of any remedial work or any interruption of the
Business as carried on by the Subsidiary.
(i) The Sellers have caused to be delivered to the Buyer true, correct
and complete copies of all environmental studies, audits, tests,
reviews or other analyses, and reports of all environmental
inspections and investigations, conducted by, or at the request of
or with the permission of the Subsidiary in relation to any
property now or previously owned, operated, or leased by the
Subsidiary.
(j) So far as the Executive Directors are aware there are no facts or
circumstances concerning existing or previously owned, operated or
leased properties or businesses of the Subsidiary that could lead
to any future environmental claims, liabilities or
responsibilities of or against the Subsidiary or the Buyer under
any Environmental Law.
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3.48 Deliveries of Documents; Corporate Records
(a) The minute books and stock books of the Subsidiary have been made
available to the Buyer.
(b) The only directors of the Subsidiary are the persons whose names
are listed in Schedule 3.48.
3.49 Tax Matters
Except as set forth on Schedule 3.49
(a) The Subsidiary has duly and timely filed all foreign, federal,
state and local Tax Returns (as hereinafter defined) required to
be filed by it on or before the date hereof with the appropriate
governmental authority. All Tax Returns filed by the Subsidiary
are true, correct and complete in all significant respects and the
Subsidiary has duly and timely paid all Taxes (as hereinafter
defined) required to be paid by it to the extent that the same
have become due and payable on or before the date hereof and has
adequately accrued on its books and records any such amounts for
which liability exists on the date hereof but which are not due
and payable on or before the date hereof. The Subsidiary has
complied in all respects with all applicable laws, rules and
regulations relating to the reporting, payment, collection and
withholding of Taxes and has duly and timely collected or withheld
and duly and timely paid over to the proper governmental
authorities all Taxes required to be so collected or withheld and
paid over.
(b) The Sellers have delivered to the Buyer copies of all federal,
state, local and foreign Tax Returns of the Subsidiary for all
periods ending in calendar years 1997 and 1996 together with
copies of all notices, reports and correspondence from any Tax
authority relating to any audit, investigation, claim or
examination of any Tax Returns or any action or Proceeding
relating thereto. Set forth on Schedule 3.49 is a list of all
jurisdictions in which the Subsidiary has filed any Tax Return
since 1993.
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(c) The Subsidiary does not file and has not at any time filed, a
consolidated Tax Return as a member of an "affiliated group"
(within the meaning of section 1504(a) of the Code of which the
Subsidiary is an includible corporation within the meaning of
section 1504(b) of the Code) or as a member of a similar group
under any provision of federal, state, local or foreign law. The
Subsidiary does not have any liability for Taxes of any person
under Treasury regulations section 1.1502-6 (or other similar
provision of federal, state, local or foreign law), as a
transferee or successor, by contract (including, but not limited
to, any tax sharing or tax indemnity agreement) or otherwise.
(d) Schedule 3.49 sets forth for the Subsidiary all federal tax
elections under the Code that are currently in effect.
(e) Since 1995, there has not been nor so far as the Executive
Directors are aware will there be (i) any material change in the
rates or basis of assessment of any Tax or (ii) any Tax deficiency
proposed or threatened against the Subsidiary.
(f) No audit, investigation, litigation, examination, reassessment or
other judicial or administrative proceeding notified to the
Subsidiary is pending or so far as the Executive Directors are
aware proposed or threatened with regard to any Tax Return of the
Subsidiary or any Tax for which the Subsidiary is or may be
liable. All Taxes asserted or proposed of which the Subsidiary has
received notice and for which the Subsidiary is or may be liable
as a result of any proceeding described in the preceding sentence
have been paid or properly reflected in the Subsidiary March 1998
Accounts.
(g) No extension of time with respect to any date on which any Tax
Return was or is to be filed by the Subsidiary is in force, and no
waiver or agreement is in force for the extension of time for the
assessment, payment or collection of any Tax of the Subsidiary or
any Tax for which the Subsidiary is or may be liable.
(h) The Subsidiary is not a "United States real property holding
corporation" within the meaning of section 897(c)(2) of the Code.
(i) There has not been applied for, granted, or agreed to any
accounting method change for which the Subsidiary will be required
to take into account any adjustment under section 481 of the Code
or any similar provisions of the Code or the corresponding
provision of federal, state, local or foreign law. The Subsidiary
has not requested or received a ruling from any Tax authority.
There is no power of attorney in effect relating to any Tax for
which the Subsidiary may be liable.
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(j) No deficiency for any Tax has been assessed with respect to the
Subsidiary which has not been paid or otherwise satisfied in full.
To the best of the knowledge, information and belief of the
Executive Directors there are no Liens for Taxes upon the assets
or properties of the Subsidiary.
(k) No election under section 341(f) of the Code has been made or
shall be made prior to the Closing Date to treat the Subsidiary as
a consenting corporation, as defined in section 341 of the Code.
(l) There is no closing agreement, within the meaning of section 7121
of the Code or any analogous provision of applicable state, local
or foreign law relating to the Subsidiary.
(m) The Subsidiary is not a party to any agreement, plan, contract or
arrangement that would result, separately or in the aggregate, in
the payment of "any excess parachute payments" within the meaning
of section 280G of the Code.
(n) No jurisdiction where the Subsidiary does not file a Tax Return
has made a claim that the Subsidiary is required to file a Tax
Return for such jurisdiction.
(o) The Subsidiary has not elected to be treated as a partnership or
other pass through entity for purposes of foreign, federal, state
or local law.
(p) For purposes of this Section, the term "Tax" or "Taxes" shall mean
all taxes, levies, assessments, charges and fees, including,
without limitation, income, gross receipts, excise, property,
sales, use, ad valorem, transfer, profits, severance, stamp,
occupation, property, capital, occupancy, recording, license,
payroll, withholding, employment, unemployment, estimated, social
security and franchise or other governmental tax, imposed by the
United States, or any state, county, local or foreign government
or subdivision or agency thereof on the Subsidiary and/or any of
its assets or business activities or for which the Subsidiary is
or may be liable; and such term shall include any interest,
penalties, costs or other additions to tax imposed in connection
therewith.
(q) For purposes of these Warranties, the term "Tax Return" shall mean
any return (including any information return and amended return),
declaration, report, claim for refund or credit, estimate or
statement relating to or regarding Taxes, which is or was required
to be filed under federal, foreign, state or local law or which
was actually filed, whether on a consolidated, combined, unitary,
separate or other basis.
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3.50 Compliance with Laws; Permits, Etc
The Subsidiary is in compliance with, and no significant default
or violation or breach exists under, any and all laws applicable
to it (including directives, rules, regulations, codes, guidance
notes, injunctions, interdicts, judgements, orders, decrees and
rulings thereunder) (collectively, "Laws and Requirements of
Laws") (except where the failure to be in such compliance will not
(i) have significant adverse effect on the Subsidiary, (ii)
prevent the continued operation of the Business as operated by the
Subsidiary following the Closing Date substantially in the manner
heretofore conducted and with no less scope and extent without the
incurrence of any additional significant expense by the
Subsidiary, or (iii) subject the Subsidiary to any penalty or
enforcement or equivalent action as a result thereof). Since March
31, 1995, no investigation has been conducted by any governmental
authority which has resulted in assessment of any monetary penalty
or sum levied or imposed on the Subsidiary in excess of $5,000.
The Subsidiary has (but excluding for the purposes of this Section
3.50 (a) any of the following relating to taxation) duly filed all
reports and returns required by law to be filed by it with
governmental authorities and obtained all governmental or
regulatory permits, certificates, licenses, approvals,
registrations and authorizations ("Subsidiary Permits") which are
required by law by it in connection with and related to its
business and operations (except where the failure to have made
such filing or have such Permit will not (i) have a significant
adverse effect on the Subsidiary, (ii) prevent the continued
operation of the Business as operated by the Subsidiary following
the Closing Date substantially in the manner heretofore conducted
and with no less scope and extent without the incurrence of any
significant additional expense by the Subsidiary, or (iii) subject
the Subsidiary or the Buyer to any penalty or enforcement or
equivalent action as a result thereof). The Subsidiary is in
significant compliance with such Subsidiary Permits in all
significant respects, all of which are in full force and effect,
and to the best of the knowledge, information and belief of the
Executive Directors no proceedings for the suspension or
cancellation of any of them is pending or threatened. Schedule
3.50 contains a complete list or description of all such
Subsidiary Permits, including the expiration dates thereof, and
any Subsidiary Permits that are not transferable or which would
cease to be in full force and effect as a result of the
transactions herein contemplated are so designated on such
Schedule. The Subsidiary has made timely application for renewals
of all such subsidiary Permits.
Since March 31 1995 the Subsidiary has not made any illegal
payment to officers or employees of any governmental or regulatory
body or its own officers or employees, or made any illegal payment
to customers for the sharing of fees or to customers or suppliers
for rebating or rebate or discount of charges, or made any such
payment to customers or suppliers outside the ordinary and normal
course of business or engaged in any other principal practices
which are illegal or made any illegal payment or given any other
illegal consideration to purchasing agents or other
representatives of customers in respect of sales made or to be
made by the Subsidiary.
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3.51 Conflicts
None of the Executive Directors nor any affiliate of any of the
foregoing (a) has any direct or indirect interest in (i) any entity
that does any business with, or directly competes with, the Subsidiary
or (ii) the Business as operated by the Subsidiary, or(b) has any
contractual relationship with the Subsidiary other than such
relationship as relates to being an employee of the Subsidiary or
officer or director of the Company or Subsidiary or affiliate thereof.
3.52 Suppliers and Customers
Schedule 3.52 sets forth the nine (9) largest suppliers by expenditure
of the Subsidiary (the "Major Subsidiary Suppliers") and ten (10)
largest customers by turnover of the Subsidiary (the "Major Subsidiary
Customers") of the Subsidiary for the year ended March 31, 1998, and
each other supplier or customer of significance meaning a purchaser of
in excess of $25,000 of goods or services or a provider of in excess of
$25,000 of goods or services to the business of the Subsidiary. No such
supplier or customer has cancelled or otherwise modified or so far as
the Executive Directors are aware intends to cancel or otherwise modify
its agreement with the Subsidiary or decrease or limit its services,
supplies or materials to the Subsidiary or its usage or purchase of the
services or products of the Subsidiary.
3.53 Labour Matters
(a) No employee of the Subsidiary is covered by a collective
bargaining agreement or recognition agreement and no collective
bargaining or recognition agreement binding on the Subsidiary
restricts the Subsidiary in any way whatsoever.
(b) There is not currently pending, and since March 31, 1995 there has
not been, any strike, lockout, picketing, work stoppages or other
labour troubles or industrial disputes with respect to the
Subsidiary and, so far as the Executive Directors are aware, no
such strikes, picketing, lockouts, slow downs, work stoppages or
labour troubles or industrial disputes are threatened.
(c) There does not currently exist, and so far as the Executive
Directors are aware there is not currently threatened, any
grievance, arbitration proceeding, charge or complaint filed on
behalf of an employee or labour organization, before the National
Labour Relations Board, the Equal Employment Opportunity
Commission, state and local civil rights agencies, federal or
state departments of labour, the various occupational health and
safety agencies or any judicial or other legal or arbitration
forum with respect to the Subsidiary.
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(d) No representation question exists or has been raised with respect
to employees of the Subsidiary within the last three years. There
are no campaigns being conducted to solicit cards or authorization
from employees of the Subsidiary to be represented by any labour
organization. In addition, the Subsidiary has not performed any
act which might be construed as recognition of any labour
organization.
(e) The Subsidiary is currently in compliance in all significant
respects with all applicable laws, regulations, policies,
procedures and contractual obligations relating to employment,
employment practices, wages, hours, discrimination, safety and
health of employees, workers compensation, unemployment insurance,
withholding of wages, and terms and conditions of employment.
(f) The Subsidiary has not closed any plant or facility, effectuated
any mass layoff of employees as defined under the Workers
Adjustment and Retraining Notification Act (or other similar state
law), or implemented any early retirement or separation program
within the past three years nor has the Subsidiary planned or
announced any such action. Set forth in Schedule 3.53 is a list of
all persons whose employment was terminated by the Subsidiary in
the last three years.
(g) The Subsidiary is not liable for any severance pay or other
payments to any employee or former employee due to the termination
of employment and will not have any significant liability under
any benefit or severance plan, policy, practice, program or
agreement which exist or may be deemed to exist under an
applicable law, as a result of the transactions contemplated
hereunder.
3.54 Bank Accounts
Schedule 3.54 sets forth the names and locations of all banks,
depositories and other financial institutions in which the Subsidiary
has an account, including any brokerage account, or safe deposit box
and the names of all persons authorized to draw thereon or to have
access thereto.
3.55 Accounts Payable
Schedule 3.55 sets forth a true and correct and complete list of all
accounts payable of the Subsidiary as of June 30 1998 in excess of
$10,000 to any one payee.
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3.56 Officers, Directors and Key Employees
Schedule 3.56 sets forth (i) the name, title and total annual
compensation or remuneration of each officer and director of the
Subsidiary and (ii) the name, title and total annual compensation or
remuneration of each other employee or consultant of the Subsidiary
whose current annual rate of compensation or remuneration (including
bonuses and commissions) exceeds $20,000. Included in Schedule 3.56 is
a copy of any written employment, consulting, commission, severance or
similar arrangement with any such person and of terms and conditions of
employment, which documents set forth the entire understanding of the
Subsidiary, on the one hand, and such person, on the other hand, with
respect to the employment, engagement and/or severance of such person.
None of such persons has indicated to the Subsidiary or to any of its
officers or directors any intention on the part of such person to
terminate such person's relationship with the Subsidiary. No
negotiations for any increase in the remuneration or benefits of any
officer or employee of the Subsidiary are current.
3.57 Subsidiary Computer System
(a) Details of all hardware leases and software
licences granted to the Subsidiary in relation to
the computer software and equipment used or
operated by the Subsidiary in its business (the
"Subsidiary Computer System") and all escrow
agreements, maintenance agreements and facilities
management agreements in respect of the same and
any computer bureaux and disaster recovery
agreement to which the Subsidiary is a party are
set out in Schedule 3.57
(b) Subject to the terms of all applicable agreements
the Subsidiary has full use of its Subsidiary
Computer System and is legally entitled to use the
same.
(c) The continued right of the Subsidiary to have full
use of the Subsidiary Computer System as envisaged
in Section 3.57(b) is not subject to the grant of
any additional rights to third parties permitting
them to access and/or use the Subsidiary Computer
system on a sole or shared basis.
3.58 Commissions
No broker, finder, agent or similar intermediary has acted on behalf of
the Company or the Subsidiary in connection with this Agreement or the
transactions contemplated hereby and that there are no brokerage
commissions, finders fees or similar fees or commissions payable in
connection therewith based on any agreement, arrangement or undertaking
with the Company or the Subsidiary or any action taken by the Company
or the Subsidiary.
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Notwithstanding the terms of any of the Warranties, the only Warranties
which shall apply to taxation referable to the Company and the
Subsidiary shall be those Warranties set out in Section 3.21 and
Section 3.49 and the only Warranties which shall apply to heritable,
leasehold or real property of the Company and the Subsidiary shall be
those set out in Section 3.10 and Section 3.38.
Each of the Warranties set out herein is separate and several and enforceable
accordingly and shall not be limited by any other.
By its execution hereof the Buyer hereby irrevocably agrees with and undertakes
to each of the Sellers that (without prejudice to Section 11.1 but
notwithstanding any other provision of this Agreement or any rule of law to the
contrary):-
the Disclosure Letter and Supplemental Disclosure Letter (if any) forms
and shall be deemed to have formed part of this Agreement in accordance with the
terms of the Disclosure Letter and the Supplemental Disclosure Letter (if any)
as if such terms were fully set out mutatis mutandis herein;
the entire contents of the Disclosure Letter and Supplemental
Disclosure Letter (if any) including, without limitation, all the contents and
matters apparent from the face of the documents annexed thereto such documents
annexed to the Disclosure Letter having been supplied to the Buyer within a
reasonable period prior to the date hereof and all other general disclosures set
out in paragraph D of the Disclosure Letter or set out in the Supplemental
Disclosure Letter (if any) shall in accordance with their terms be deemed to
have been fairly disclosed to the Buyer.
Subject to Section 14.11 the Warranties in this Section are provided for the
benefit of the Buyer only.
SECTION 4
LIMITATIONS ON LIABILITY
In this Agreement the expression "Relevant Claim" means a claim in respect of
breach of any of the Warranties given in Section 3 or Section 10.2 or the
warranties given in Section 10.5 of this Agreement in each case as given on
signing of this Agreement and immediately before the Closing Date or a claim
under Section 12 or Section 5.2 and the liability of the Sellers shall in
respect of these matters be limited as follows:
4.1 No Relevant Claim may be made unless written notice detailing a
specific breach of warranty, or of the facts giving rise to a claim
under Section 12, and containing details of the facts giving rise to
the claim in so far as they are known at the time of giving notice and
the general nature of the claim and approximate amount thereof, which
shall be a reasonable estimate taking into account the facts available
at the relevant time and (but without limiting the validity of the
notice or claim) how this was calculated, shall have been given by the
Buyer to each of the Sellers with a copy to the Sellers'
Representatives as soon as practicable after the Buyer or the Company
or the Subsidiary as the case may be first becomes aware of the
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matters or circumstances giving or which may give rise thereto and in
any event before the date falling twelve (12) months after the Closing
Date in the case of any Relevant Claim other than any Relevant Claim
under Section 12, or the provisions of Sections 3.19, 3.21, 3.47 or
3.49, in which event in respect of Sections 3.19 and 3.47 the notice
must be given in any event before the date falling twenty four (24)
months after the Closing Date and in respect of Sections 3.21 or 3.49
or Section 12 before the date falling forty eight (48) months after the
Closing Date.
4.2 Any Relevant Claim for breach of warranty which is validly notified
within the required period aforesaid shall (unless previously settled
or withdrawn), and subject to Section 4.4 and Section 4.6, be deemed to
have been waived or withdrawn in the event that legal proceedings in
respect thereof are not issued and served on each of the Sellers with a
copy to the Sellers' Representatives within six (6) months of written
notice of the Relevant Claim first being given aforesaid. Time shall be
of the essence for the purposes of the foregoing.
4.3 The liability of the Sellers for breach of Warranty in Section 3 or
Section 10.2 or Section 10.5 shall be excluded or limited to the extent
that the fact, event or matter giving rise to the breach or claim is
fairly disclosed in the Disclosure Letter or, where the context so
requires, the Supplemental Disclosure Letter including in either case
the contents and matters apparent from the face of the documents
annexed thereto.
4.4 No Relevant Claim may be made in respect of any breach of warranty
which is in respect of a contingent liability save where notice of the
contingent liability is given within the period referred to in Section
4.1, the contingent liability becomes an actual liability within six
(6) months of the notice and where such claim is not settled or
resolved proceedings are commenced by the Buyer within six (6) months
after the contingent liability becomes actual.
4.5 The Sellers liability for a Relevant Claim shall be excluded or
limited:-
(a) to the extent that the claim arises or is increased as a result of
any legislation or governmental legislation or any administrative or
judicial decision not in force or in effect at the date hereof; or
any change in law or in the interpretation of law (but excluding for
these purposes any Relevant Claim arising from re-enacted legislation
where there would not have been a Relevant Claim but for that
re-enactment) or the withdrawal or amendment of any extra statutory
concessions or practice made by a taxation authority after the date
hereof; or
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(b) to the extent that the Relevant Claim arises or is increased as a
result of any accounting methods, policies, principles or practices
or bases used or the application thereof in future accounts of the
Company and/or the Subsidiary being different from the treatment or
application of the same utilised in preparing the March 1998 Accounts
or the Subsidiary March 1998 Accounts save where any such different
treatment or application is implemented in order more properly to
comply with generally accepted accounting standards in force at the
date hereof; or
(c) to the extent that there is a corresponding reduction in the
liability to make a payment of taxation or an increase in the amount
of any repayment of taxation available to the Company or the
Subsidiary for the same or another accounting period ending on or
before Closing; or
(d) to the extent that it would not have arisen but for any Reliefs
available to the Company or the Subsidiary at Closing being utilised
in respect of taxation attributable to any act, omission or
transaction occurring or entered into after that date or resulting
from or calculated by reference to any income, profits or gains
earned, accrued or received or deemed to have been earned, received
or accrued after that date except that Section 4.5 (d) and Section
4.15 shall not prevent the Buyer making a Claim where a Liability to
Taxation of the Company is created or increased by a further
adjustment to income profits or gains arising in an accounting period
ending on or before Closing, in circumstances where the trading
losses available for the purposes of Corporation tax or where
relevant the appropriate foreign equivalent and arising on or before
Closing, cannot be set against that Liability to Taxation, or be
reduced by the adjustment to income profits or gains; or
(e) to the extent it was paid or discharged prior to Closing; or
(f) to the extent that it would not have arisen (or would not have arisen
at the time that it does arise) but for any claim, disclaimer,
notice, election, consent or return (or withdrawal or revocation or
amendment thereof) made or given (or omitted to be made or given in
any requisite period) for any taxation purpose (including without
limitation in respect of any capital allowances) after Closing unless
the same was assumed to be made or given (or, as the case may be,
omitted to be made or given) in or for the purpose of the March 1998
Accounts or the Subsidiary March 1998 Accounts (as appropriate). This
Section 4.5 (f) shall not apply where any such claim, disclaimer,
notice, election, consent or return (or withdrawal, revocation or
amendment thereof) necessarily results from an adjustment to a
pre-Closing period required by any taxation authority; or
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(g) to the extent the Sellers have asked for written consent after the
date hereof to the fact, matter or event giving rise to the Relevant
Claim and the Buyer has given such written consent acknowledging the
provisions of this Section, but for the avoidance of doubt anything
provided for in this Agreement in or pursuant to Section 8 shall not
be deemed to be consented to by the Buyer for the purposes of this
Section; or
(h) if the Buyer assigns its rights hereunder in breach of Section 14.11
or makes or purports to make a declaration of trust in breach of
Section 14.11; or
(i) to the extent that it would not have arisen but for any transfer,
winding up or cessation after Closing of any trade or business
carried on by the Company or the Subsidiary taking place after the
Closing Date or any significant increase in the capital of the
Company or the Subsidiary after the Closing Date; or
4.6 Recovery
Where the Buyer or the Company and/or the Subsidiary is/are at any
relevant time and only in respect of breach of Warranty or Section 10.2
actually entitled to recover from some other person including an
insurer any sum in respect of a matter giving rise to a Relevant Claim
the Buyer shall, and shall procure that the Company or the Subsidiary
shall, take all reasonably necessary steps to enforce such recovery
prior to taking any action against the Sellers (and each of the
Executive Directors shall and hereby undertakes to assist the Buyer,
the Company and/or the Subsidiary in taking all such necessary steps)
but the Buyer shall be entitled to notify the Relevant Claim under
Section 4.1 mutatis mutandis, provided that the Buyer is able to comply
with such Section mutatis mutandis. The Sellers shall have no liability
in respect of such Relevant Claim unless proceedings are raised against
each of the Sellers with a copy to the Sellers' Representatives within
three (3) months following the Buyer's failure to recover in whole or
in part the relevant sums from the third party. In the event that the
Buyer or the Company or the Subsidiary shall recover any amount from
such other person the amount of the subsequent Relevant Claim against
the Sellers shall be reduced by the amount recovered less all Taxation
thereon and any excess incurred or sustained under any insurance policy
and less all reasonable costs, charges and expenses incurred by the
Buyer or the Company or the Subsidiary in recovering that sum from such
other person.
4.7 The Sellers and each Seller shall have no liability to any party
arising from or in connection with or in respect of Relevant Claims
unless the Sellers' aggregate liability in respect of all Relevant
Claims exceeds $60,000 in which event the Sellers shall only be liable
for the excess of such liability or liabilities over $60,000 in
accordance with Section 11.
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4.8 Nothing in this Agreement restricts the general obligation at law to
mitigate loss and the Buyer shall take all reasonable steps to mitigate
loss arising from Relevant Claims for breach of Warranty or Section
10.2 or a claim under Section 5.2.
Conduct of Claims
4.9 The Buyer shall procure that if it or the Company or the Subsidiary
becomes aware of circumstances likely to give rise to a Relevant Claim
for breach of Warranty or Section 10.2 or a claim under Section 5.2 it
shall as soon as practicable after the matter first comes to its notice
aforesaid give written notice thereof to the Sellers with a copy to the
Sellers' Representatives and shall procure that:-
(a) none of the Buyer and/or the Company and/or the Subsidiary shall
make any admission of liability, agreement, settlement or compromise
or otherwise take any action in relation thereto without the prior
written consent of the Sellers' Representatives (such consent not to
be unreasonably withheld or delayed); and
(b) each of the Buyer and the Company and the Subsidiary will at all
times promptly give to the Sellers' Representatives all information
and documents in its or their possession or under its or their
control relevant to the Relevant Claim, and such access to their
premises and personnel, as may be reasonably requested from time to
time upon reasonable notice being given; and
(c) each of the Buyer and the Company and the Subsidiary will at all
times permit the Sellers' Representatives to take such action on its
behalf as the Sellers Representatives may from time to time
reasonably think appropriate to avoid, resist, appeal, compromise,
defend, mitigate or otherwise deal with the claim or the liability
the subject thereof including permitting the Sellers'
Representatives in their own name on behalf of the Sellers or in the
name of the Company or the Subsidiary to conduct relevant
proceedings or pursue any rights of the Buyer or the Company or the
Subsidiary or any of them in respect thereof, subject always to the
Buyer and the Company and the Subsidiary first being indemnified and
secured to their reasonable satisfaction against any losses, costs,
interest, damages and expenses which they may thereby incur and
provided always that the Sellers' Representatives shall not take any
steps which in the reasonable opinion of the Buyer would have an
adverse effect on the business of the Buyer or the Company or the
Subsidiary in which event the Buyer may terminate the right of the
Sellers or the Sellers' Representatives under this Section upon
notice being served upon the Sellers' Representatives.
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4.10 The Buyer shall not be entitled to recover under the Warranties,
Section 5.2, Section 10.2, Section 10.5 and/or Section 12 more than
once in respect of the same loss, liability or damage and without
limitation no Relevant Claim in respect of the same loss, liability or
damage may be made under more than one of Section 3, Section 5.2,
Section 10.2, Section 10.5 and Section 12.
4.11 The Buyer acknowledges that it does not enter into this Agreement on
the basis of and does not rely upon any warranty or representation
other than the Warranties contained in Section 3 and the warranties
contained in Sections 5 and 10.5 of this Agreement.
4.12 The Buyer confirms that it has not already formulated and does not
presently contemplate making a Relevant Claim.
4.13 No breach of this Agreement shall give the Buyer the right to rescind
this Agreement following Closing.
4.14 The number of MicroFrame Shares (including any Escrowed MicroFrame
Shares) retained by or returned to the Buyer in respect of a Relevant
Claim for which a Seller is liable shall together with cash paid to the
Buyer if any pursuant to Section 11 be treated as a reduction of the
consideration for the Shares sold by such Seller.
5.15 The Buyer hereby undertakes to each of the Sellers not voluntarily and
deliberately to do any thing or allow any act within its control to be
done after Closing which it knows would, of itself, create or increase
the liability of the Sellers or any of them for breach of Warranty or
Section 10.2 or Section 10.5 or under Section 12 except that Section
4.5 (d) and Section 4.15 shall not prevent the Buyer making a Claim
where a Liability to Taxation of the Company is created or increased by
a further adjustment to income profits or gains arising in an
accounting period ending on or before Closing, in circumstances where
the trading losses available for the purposes of Corporation tax or
where relevant the appropriate foreign equivalent and arising on or
before Closing, cannot be set against that Liability to Taxation, or be
reduced by the adjustment to income profits or gains.
4.16 Each limitation of liability in this Agreement and each other right or
remedy included in this Agreement or implied by operation of law shall
be construed independently and shall not be limited by, or limit the
interpretation of, any other limitation of liability, right or remedy
included in this Agreement or implied by operation of law.
4.17 The Buyer will compensate each of the Sellers and indemnify each of the
Sellers in respect of all reasonable costs and expenses directly
incurred or sustained by that Seller in connection with claims against
that Seller under this Agreement which do not result in liability being
established against that Seller, and the Sellers in accordance with
Section 11 will compensate the Buyer and indemnify the Buyer in respect
of all reasonable costs and expenses directly
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incurred or sustained by the Buyer in connection with claims
successfully resolved in favour of the Buyer.
4.18 The Sellers shall have no liability to the Buyer arising under or in
relation to this Agreement except in respect of a claim which is
resolved, agreed or determined or settled in favour of the Buyer and
results in liability being established.
4.19 The Buyer acknowledges that, in the absence of fraud, in respect of any
misrepresentations or untrue statements made to it in connection with
the purchase of the Shares, the Buyer shall be entitled, to the extent
there is a breach of Warranty under Section 3 or 10.2 breach of
warranty under Section 5 or Section 10.5, to claim in respect of such
breach in accordance with the terms of this Agreement and shall not be
entitled to any other remedy.
4.20 If payment or satisfaction is made by the Sellers or any of them in
respect of a Relevant Claim or MicroFrame Shares are returned by the
Sellers (whether under the Escrow Agreement or otherwise) and the Buyer
or the Company or the Subsidiary subsequently recovers or receives from
a third party a sum directly attributable to the subject matter of the
claim, and the Buyer will take all reasonable steps to so recover, the
Buyer and the relevant company shall be liable forthwith after the
receipt of such sum to reimburse to each of the relevant Sellers the
net amount received (after deducting all reasonable costs and expenses
incurred in the recovery and all Taxation suffered or to be suffered
thereon) but not in any event exceeding the amount originally paid or
satisfied by the relevant Sellers in respect of the Relevant Claim.
4.21 The Sellers shall have no liability for Relevant Claims after the
Company or the Subsidiary has ceased to be an affiliate of the Buyer.
4.22 Where a breach of Warranty under Sections 3.21 and 3.49 results in an
increase in the income gains or profits of the Company or the
Subsidiary for the purposes of UK corporation tax or a foreign
equivalent a claim for breach of that Warranty or under Section 10.2
may only be made to the extent that tax losses arising in respect of an
accounting period ending before the Closing Date cannot be set against
such increase or be reduced by such increase at the relevant time..
4.23 The liability of the Sellers in respect of Relevant Claims and other
claims under this Agreement shall be further limited as set out in
Section 11.
4.24 The Sellers shall have no liability in respect of a Relevant Claim or
under Sections 7.18 or Schedule 7.18 arising only from the grant of
share options in the Buyer pursuant to this Agreement or arising only
from the grant of share options in the Company after the date of this
Agreement to employees of the Company.
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4.25 The Sellers shall not be liable for a breach of Warranty and as updated
under Section 10.2, in Sections 3.21 or 3.49, or under Section 10.2 or
under Section 12 where the Liability to Taxation arises in respect of
or by reference to an Event occurring or deemed to occur after Closing
or income, profits or gains arising or deemed to arise after Closing
would not have arisen but for tax losses arising in respect of an
accounting period ending before Closing ceasing to be available or
being reduced by reason of an adjustment in respect of an accounting
period ending before Closing. For the purposes of this Clause 4.25 an
accounting period shall be deemed to commence on 1 April, 1998 and end
on Closing. Provided that if there is a Liability to Taxation under
Section 12 or a liability arising from a breach of Warranty as updated
under Section 10.2 arising in respect of a pre-Closing period which
arises in respect of, or by reference to, an Event as defined in
Section 12 occurring or deemed to occur after Closing the Sellers
subject to the terms of this Agreement will be liable to the Buyer.
4.26 The Sellers shall not be liable for any breach of Warranty or under
Section 10.2 to the extent that the matter is adequately provided for
in the calculation of the Debt Free Amount in the Estimated Statement
as referred to in Section 7.18 and Schedule 7.18 in respect of known
debts or obligations which are irrecoverable or could reasonably be
expected to be irrecoverable and to the extent that the Company is in
receipt of funds in an amount equal to that provision at Closing
pursuant to implementation of the provisions of Section 7.18.
SECTION 5
INDIVIDUAL WARRANTIES OF EACH SELLER
5.1 Each Seller hereby warrants to the Buyer as
follows:
(a) Title to Shares
Such Seller owns legally and (except in the case of the Trustees,
Anderson Strathearn Nominees Limited and Other Nominee Holders)
beneficially, free and clear of all mortgages, pledges, security
interests, liens, charges, encumbrances, equities, claims,
rights, options or restrictions ("Liens"), the Ordinary Shares
set forth opposite such Seller's name on Schedule 1 and, at the
Closing Date, his Shares (other than the Ordinary Shares), and,
upon Closing, the Buyer will acquire good and valid title to his
Shares, free and clear of any Lien.
(b) Authority to Execute and Perform Agreements
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Such Seller has the full legal right and power and all authority
and approval required to enter into, execute and implement this
Agreement and the agreements contemplated hereby, in so far as
such Seller is party thereto, and to perform fully such Seller's
obligations in connection therewith or pursuant thereto. This
Agreement and the agreements contemplated hereby in so far as
such Seller is party thereto are the valid and binding
obligations of such Seller enforceable in accordance with their
respective terms. The execution and implementation of this
Agreement, the consummation of the transactions contemplated
hereby and the performance in each case by such Seller of this
Agreement, and the agreements contemplated hereby, insofar as
such Seller is party thereto in accordance with their respective
terms and conditions do not and will not so far as such Seller is
aware (i) require the approval or consent of any foreign,
federal, state, national, county, local or other governmental or
regulatory body; (ii) conflict with or result in any breach or
violation of any of the terms and conditions of, or constitute
(or with notice or lapse of time or both constitute) a default
under, any certificate of incorporation, document of
constitution, statute, regulation, order, judgement or decree
applicable to such Seller or to the Ordinary Shares or at the
Closing Date the Shares held by such Seller, or any instrument,
contract or other agreement to which such Seller is a party or by
or to which such Seller is, or the Ordinary Shares or at the
Closing Date the Shares held by such Seller are, bound or
subject; or (iii) result in the creation of any Lien on the
Ordinary Shares or at the Closing Date the Shares held by such
Seller. Each Seller has delivered to the Buyer by annexure to the
Disclosure Letter a true accurate and complete copy of all
shareholder agreements if any to which such Seller is a party
relating to such Seller's Shares.
(c) No Obligations
Effective at the Closing, neither the Company nor the Subsidiary
has or will have or owe any liability or obligation (accrued or
unaccrued, choate or inchoate, contingent or otherwise) to such
Seller other than obligations, if any, in respect of then current
salary earned prior to the Closing Date.
(d) Regulation S
(i) Such Seller (but excluding for these purposes
Frances Loretta DeLaura) is not a U.S. Person as
that term is defined under Regulation S
("Regulation S") promulgated under the Securities
Act of 1933, as amended (the "Act") and is not
acquiring the MicroFrame Shares to be acquired
hereunder by such Seller for the account or
benefit of any U.S.
Person.
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(ii) Such Seller (excluding Frances Loretta DeLaura)
shall resell the MicroFrame Shares to be acquired
hereunder by such Seller only in accordance with
Regulation S, pursuant to registration under the
Act, or pursuant to an available exemption from
registration therefrom and such Seller
acknowledges that certificates representing the
MicroFrame Shares to be acquired hereunder by such
Seller shall contain restrictive legends to the
effect thereof or as otherwise required by
applicable law.
(iii) This Agreement has been executed by, and the
MicroFrame Shares to be acquired hereunder by such
Seller (but excluding for these purposes Frances
Loretta DeLaura) have been offered to, such Seller
outside the "United States" (as defined in Rule
902(p) of Regulation S) and the MicroFrame Shares
to be acquired hereunder by such Seller are being
acquired in an "offshore transaction" (as defined
in Rule 902(i) of Regulation S).
(iv) Each Seller is acquiring the MicroFrame Shares to
be acquired hereunder by such Seller for his own
account for investment purposes only and not with
a view to or for resale in connection with any
distribution of any MicroFrame Shares.
The warranties given in this Section 5 by each Seller are given solely by such
Seller in relation to himself and not in relation to any other Seller and solely
in relation to the Ordinary Shares or, at the Closing Date the Shares held or to
be held by such Seller and accordingly one Seller shall not be liable in any way
for any breach of the warranties in this Section 5 by any other Seller.
5.2 Indemnification re: information statement
The Sellers hereby indemnify and hold harmless Buyer from and
against any and all liabilities, claims or damages (including
without limitation, attorneys' fees) arising out of or relating
to any untrue statement of a material fact contained in the
Information Statement and approved in writing by the Executive
Directors to be filed with the Commission (as such term is
hereinafter defined) or omission to state a material fact
required to be stated therein or necessary in order to make the
statements, in the light of the circumstances under which they
were made, not misleading, in each instance to the extent that
such fact or omission relates to the Company and is based solely
upon information provided to the Buyer or its counsel or
representatives by the Company or any Seller as set forth on
Schedule 5.2 annexed hereto.
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SECTION 6
WARRANTIES BY THE BUYER
The Buyer warrants to each of the Sellers as follows subject to matters
fairly disclosed in Schedule 6.1(g) disclosing facts or matters for the purpose
of this Section 6 and subject as hereinafter set out in particular, but without
limitation, to Section 6.2:
(a) Authority of Buyer
The Buyer has the full corporate power and authority to enter
into, execute and implement this Agreement and the agreements
contemplated hereby in so far as the Buyer is a party thereto and
to perform fully the Buyer's obligations hereunder and thereunder
and in connection therewith and herewith. The execution of this
Agreement and the agreements contemplated hereby, the consummation
of the transactions contemplated in connection herewith and the
performance by the Buyer of this Agreement and the agreements
contemplated hereby in so far as the Buyer is a party thereto in
accordance with their respective terms and conditions have been
duly authorized by all necessary corporate action on the part of
the Buyer except for the required approval of its shareholders and
no other proceedings on the part of the Buyer other than the
requisite shareholder approval are necessary in connection
therewith.
(b) Enforceability
This Agreement and the agreements contemplated hereby to which the
Buyer is a party constitute the legal, valid and binding
agreements of the Buyer enforceable against it in accordance with
their respective terms except as such enforceability is limited by
laws relating to bankruptcy, insolvency or specific performance.
(c) Existence and Qualification
The Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of New Jersey, with full
corporate power and authority and all necessary licences,
authorisations, consents and approvals to conduct its business and
to own and operate its assets and properties as conducted and
operated.
(d) Consents and Approvals; No Violation
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The execution and performance by the Buyer of this Agreement and
the other agreements to be entered into by it pursuant hereto, the
consummation by the Buyer of the transactions contemplated hereby
and by such other agreements and the compliance by the Buyer with
the provisions hereof and of such other agreements do not and will
not (a) except as otherwise set forth in this Agreement require
the Buyer to make any filing or registration with, or obtain any
other permit, authorization, consent or approval of, any
governmental or regulatory authority or any third party; (b)
conflict with or breach any provision of the Certificate of
Incorporation or By-laws of the Buyer; (c) conflict with, violate
or breach any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, or result in a modification of, any of the terms,
covenants, conditions or provisions of, or give rise to a right to
terminate or accelerate or increase the amount of payment due
under, any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which the Buyer is a
party, or by which it or any of its properties or assets may be
bound, except for such as to which requisite waivers or consents
either have been obtained or the obtaining of which has been
expressly waived in writing by the Sellers' Representatives on
behalf of the Sellers; (d) conflict with, result in a breach or
violation of, or constitute a default under any agreement
applicable to the Buyer, to which the Buyer may be party or by
which the Buyer may be bound or affected; (e) result in the
creation of any Lien on any asset of the Buyer; (f) violate any
order, writ, injunction, decree, judgement, or ruling of any court
or governmental authority, applicable to the Buyer or the assets
of the Buyer; or (g) violate any statute, law, rule or regulation
applicable to the Buyer or the assets of the Buyer.
(e) Public Filings
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The Buyer is current with respect to all filings required to be
made by the Buyer with the U.S. Securities and Exchange Commission
(the "Commission") pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and all information
contained in any such filings, to the extent applicable to the
Buyer or its business and operations including without limitation
all financial information and information in relation to
intellectual property or trading relationships or contracts, is
true and correct in all material respects. Such filings did not
contain any untrue statement of a material fact or omit to state
any material fact when made necessary to make the statements
contained therein in the light of the circumstances under which
they were made not misleading and nothing has occurred since the
date of the filing which would render any of the information,
untrue, incomplete or incorrect in any material respect as at the
date thereof.
(f) MicroFrame Shares.
The MicroFrame Shares, when issued and delivered by the Buyer in
accordance with the terms contained in this Agreement, will be
duly authorized, validly issued, fully paid and nonassessable.
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(g) Capitalisation
The authorised capital stock of the Buyer consists of 50,000,000
shares of common stock, $0.001 par value and 200,000 shares of
Preferred Stock, $ 10 par value. As of July 14 1998 there were
issued 5,296,879 shares of common stock and outstanding 5,296,479
shares of common stock, no shares of preferred stock, employee
stock options to purchase an aggregate of 1,067,493 shares of
common stock (of which 839,283 were exercisable as of July 14
1998) All outstanding shares of capital stock of the Buyer have
been duly authorised and validly issued and are fully paid. Except
as set forth in Schedule 6.1(g) there were at July 14, 1998 no
outstanding (i) shares of capital stock, stock appreciation rights
or "phantom" stock or other equity interests or any form of
security or instrument convertible into equity interests of the
Buyer (ii) securities of the Buyer convertible into or
exchangeable for shares of capital stock or other securities of
the Buyer or (iii) options, warrants or other rights to acquire
from the Buyer any capital stock, securities stock appreciation
rights or "phantom" stock or other equity interests of the Buyer
(the items in sub sections (i), (ii) and (iii) being referred to
collectively as the "Buyer Securities"). Except as set forth in
Schedule 6.1(g) there were at July 14, 1998 no outstanding
obligations of the Buyer (or any of its subsidiaries), actual or
contingent, to issue or deliver or to repurchase, redeem or
otherwise acquire any Buyer Securities whether now or at any time
in the future or any pre-emption rights to equity securities in
the Buyer. Except as set forth on Schedule 6.1 (g), from July 14,
1998 until the date of this Agreement, the Buyer has issued no (i)
shares or capital stock, except upon exercise of options or
warrants outstanding as at July 14, 1998 or (ii) options, warrants
or other securities convertible into equity interests of the
Buyer.
(h) Obligations/SEC Filings : Financial Statements
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(i) The Buyer has timeously filed all forms, reports
and documents required to be filed by the Buyer
with the Commission within the last two (2) years
and has delivered or made available to the
Sellers' Representatives, in the form filed with
the Commission (i) the Buyer's registration
statement on Form S- 3, (ii) Annual Reports on
Form 10-K SB for fiscal years ended March 31,
1996, 1997 and 1998 (iii) all proxy statements
relating to Buyer's meetings of stockholders
(whether annual or special) held in 1998, (iv) all
amendments and supplements to all such reports and
registration statements filed by the Buyer with
the Commission. All such required forms, reports
and documents (including those enumerated in
sub-sections (i) through (iv) of the preceding
sentence) are referred to herein as the
"Commission Reports". So far as the Buyer is aware
as of the respective dates, the Commission Reports
(i) were prepared substantially in accordance with
the requirements of the Securities Act of 1933 as
amended or the Securities Exchange Act of 1934 as
amended as the case may be, and the rules and
regulations of the Commission thereunder
applicable to such Commission Reports and (ii) did
not at the time they were filed (or if amended or
superseded by a filing prior to the date hereof,
then on the date of such amending or superseding
filing) contain any untrue statements of a
material fact or omit to state a material fact
required to be stated therein or necessary in
order to make the statements therein, in the light
of the circumstances under which they were made,
not misleading. None of the Buyer's subsidiaries
is required to file independently any forms,
reports or other documents with the Commission.
(ii) Each of the consolidated financial statements
(including, in each case, any related notes
thereto) contained in the Commission Reports,
including any Commission Reports filed (i)
complied as to form in all material respects with
the published rules and regulations of the
Commission with respect thereto, (ii) was prepared
in accordance with U.S. generally accepted
accounting principles applied on a consistent
basis throughout the periods involved (except as
may be indicated in the notes thereto) and (iii)
fairly presented the financial position of the
Buyer and its subsidiaries as at the respective
dates thereof and the consolidated results of its
operations and cash flows for the periods
indicated.
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(iii) The Buyer has heretofore made available to the
Executive Directors a complete and correct copy of
any amendments or modifications that have not yet
been filed with the Commission, but that are
required to be filed, to agreements, documents or
other instruments which previously had been filed
by the Buyer with the Commission pursuant to the
Securities Act or the Exchange Act.
(i) NASDAQ Obligations
The Buyer has complied in all material respects with the
obligations imposed upon it under applicable NASDAQ Listing
Rules.
(j) Brokerages
There are no brokerage commissions, finders fees or similar fees
or commissions payable by the Buyer in connection with this
Agreement based on any agreement, arrangement or undertaking
with the Buyer or any action taken by the Buyer.
6.2 Limitation
No claim may be made by the Sellers or any of them for breach of any
provision contained in this Section 6 unless written notice detailing a
specific breach of warranty and containing details of the claim shall
have been given by the Sellers Representatives on behalf of the Sellers
or any of them to the Buyer on or before the Closing Date except with
respect to the provisions contained in Sections 6.1(a), 6.1(b), 6.1(c)
and 6.1(f) in respect of which such notice shall have been given by the
Sellers Representatives on behalf of the Sellers to the Buyer before
the date falling twelve (12) months after the Closing Date. The maximum
aggregate liability of the Buyer for a claim under this Section 6 shall
not exceed $200,000.
SECTION 7
COVENANTS OF THE PARTIES
Where in this Section there is reference to the Executive Directors
"using all reasonable endeavours" that shall not mean that they are
required to perform any act in breach of any law of the UK or the State
of New York, USA. Where in this Agreement there is reference to the
Executive Directors or any of them undertaking to do any act, if any of
the Executive Directors ceases to be an employee of or non executive
director or part time adviser or consultant to the Company, that
Executive Director shall continue to have that obligation to the extent
that it can be performed by him as shareholder in the Company and all
relevant references to his or "all" "reasonable endeavours" (on his
part) shall mutatis mutandis be read accordingly.
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7.1 Conduct of Business
From the date hereof until the Closing Date, the Executive Directors
shall use all reasonable endeavours to cause the Company and the
Subsidiary to, conduct their business in the ordinary and usual course
provided that with the prior written consent of the Buyer not to be
unreasonably withheld or delayed, the Company shall have the right to
issue further ordinary shares of 1 pence each to any or all of the
Sellers .
7.2 Preservation of Business
From the date hereof until the Closing Date, the Executive Directors
shall use all reasonable endeavours to cause the Company and the
Subsidiary to, preserve their business organization intact, keep
available the services of their present officers, employees,
consultants and agents, maintain their present suppliers and customers,
preserve their goodwill and maintain their corporate and business
records with at least the same care and diligence as has been applied
thereto to date.
7.3 Insurance
From the date hereof until the Closing Date, the Executive Directors
shall use all reasonable endeavours to cause the Company and the
Subsidiary to, maintain in force (including necessary renewals thereof)
the insurance policies listed on Schedule 3.17, except to the extent
that they may be replaced with equivalent policies appropriate to
insure the assets, properties and business of the Company and the
Subsidiary to the same extent as currently insured at the same or lower
rates or at rates approved in writing by the Buyer. Litigation
From the date hereof until the Closing Date, the Executive Directors
shall notify promptly the Buyer of any actions or proceedings raised
against the Company or the Subsidiary intimation of which has been
received by way of written notice by any one of the Executive Directors
of the type described in Section 3.16 or Section 3.44 that are
commenced or, to the best of their knowledge, information and belief
having made reasonable enquiry only of their professional advisers and
employees threatened against the Company or the Subsidiary or against
any officer, director, employee, consultant, agent, shareholder or
other authorised representative of the Company or the Subsidiary with
respect to the Company or the Subsidiary or the business of the Company
or the Subsidiary.
7.5 Corporate Examinations and Investigations
Prior to the Closing Date, the Buyer shall be entitled, through its
employees and representatives, to make such investigation of the
assets, properties, business and operations of the Company and the
Subsidiary, and such examination of the books, records and financial
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condition of the Company and the Subsidiary as the Buyer may reasonably
require. Any such investigation and examination shall be conducted at
reasonable times and under reasonable circumstances following
reasonable notice and the Company and the Subsidiary and the Executive
Directors shall co-operate fully therein. No investigation by the Buyer
shall diminish or obviate or otherwise affect any of the
representations, warranties, covenants, undertakings or agreements of
the Sellers under this Agreement. In order that the Buyer may have full
opportunity to make such business, accounting and legal review,
examination or investigation as it may reasonably require of the
business and affairs of the Company and the Subsidiary, the Executive
Directors shall furnish and shall use all reasonable endeavours to
cause the Company and the Subsidiary to furnish the representatives of
the Buyer during such period with all such information and copies of
such documents concerning the affairs of the Company and the Subsidiary
as such representatives may reasonably request and cause its officers,
employees, consultants, agents, accountants and attorneys to co-operate
with such representatives in connection with such review and
examination. Payment of Seller Debts
Prior to or concurrently with the Closing, each Seller shall, and shall
cause each affiliate of him to, pay to the Company or the Subsidiary
any amounts owed by such person to the Company or the Subsidiary.
A. Notification of Certain Damage or Destruction
From the date hereof until the Closing Date, the Executive Directors
shall notify the Buyer in writing (or cause the Company to notify the
Buyer in writing) of any damage, destruction, or loss suffered or
experienced by the Company or the Subsidiary that materially adversely
affects the assets, properties, business, operations, condition
(financial or otherwise) of the Company and the Subsidiary taken as a
whole. Such notice shall be given to the Buyer promptly following the
occurrence or incurrence of such damage, destruction or loss.
7.8 Taxes
To the extent not filed by the Company or the Executive Directors prior
to the Closing Date, the Executive Directors shall after Closing
prepare or cause to be prepared, at the Company's cost and expense and
in a manner consistent with past practice, and provide or cause to be
provided to the Buyer all Pre-Closing Corporation Tax Returns of the
Company and Federal corporate income tax and corporate state income tax
returns of the Subsidiary due with respect to all taxable periods
ending on or before the Closing Date (each, a "Pre- Closing Tax
Period"). At least ten (10) days prior to the date on which a
Pre-Closing Tax Return is due to be filed (including any extensions)
with the appropriate Tax authority pursuant to applicable law, the
Executive Directors shall deliver the Pre-Closing Tax Return to the
Buyer. Upon the Buyer's review of and consent to a Pre-Closing Tax
Return, such consent not to be unreasonably withheld or delayed the
Buyer shall file (or cause the Company or the Subsidiary to file) the
Pre-Closing Tax Return and pay by the due date (or
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cause the Company or the Subsidiary to pay) to the appropriate
governmental entity all amounts due with respect to the Pre-Closing Tax
Return.
(a) From and after the date hereof until the Closing Date, the
Executive Directors shall not, and the Executive Directors shall
cause the Company and the Subsidiary not to, make, amend or revoke
any election with respect to any Tax matter or change any Tax or
accounting practice or procedure without the prior written consent
of the Buyer.
(b) From and after the date hereof until the Closing Date the Company
shall accrue for any liability to corporation tax arising out of
the profits during that period.
7.10 Conduct of Business of Buyer
From the date hereof until the Closing Date the Buyer shall use all
reasonable endeavours to conduct its business in the ordinary and usual
course.
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7.11 Preservation of Business of Buyer
From the date hereof until the Closing Date the Buyer shall use all
reasonable endeavours to preserve its business organisation intact,
keep available the services of its present officers, employees,
consultants and agents, maintain its present suppliers and customers
save in each case where it is not in the interests of the Buyer to do
so, preserve its goodwill and maintain its corporate and business
records with at least the same care and diligence as has been applied
thereto to date.
7.12 Insurance of Buyer
From the date hereof until the Closing Date the Buyer shall use all
reasonable endeavours to maintain in force (including necessary
renewals thereof) the insurance policies maintained by it at the date
hereof, except to the extent that they may be replaced with equivalent
policies appropriate to insure the assets, properties and business of
the Buyer to the same extent as currently insured.
7.13 Litigation of the Buyer
From the date hereof until the Closing Date the Buyer shall notify
promptly the Sellers' Representatives of any material actions or
proceedings raised against the Buyer that are commenced or threatened
against the Buyer or against any officer, director, employee,
consultant, agent, shareholder or other authorised representative of
the Buyer with respect to the Buyer or the business of the Buyer and by
way of written notice.
7.14 Corporate Examinations and Investigations of the Buyer
Prior to the Closing Date the Sellers' Representatives or other
representatives of investors or bona fide potential investors in the
Company shall be entitled to make such investigation of the assets,
properties, business and operations of the Buyer and such examination
of the books, records and financial condition of the Buyer as the
Sellers' Representatives or any of the foregoing may reasonably require
for the purpose of enabling the Sellers to meet their obligations to
procure third party funding under Section 7.18. Any such investigation
and examination shall be conducted at reasonable times and under
reasonable circumstances following reasonable notice.
7.15 Notification of Certain Damage or Destruction of the Buyer
From the date hereof until the Closing Date the Buyer shall notify
promptly the Sellers' Representatives in writing of any damage,
destruction or loss suffered or experienced by the Buyer that
materially adversely affects the assets, properties, business,
operations, condition (financial or otherwise) of the Buyer taken as a
whole. Such notice shall be given to the
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Sellers' Representatives promptly following the occurrence or
incurrence of such damage, destruction or loss.
7.16 NASDAQ SmallCap Market Listing
The Buyer agrees to effectuate the listing on the NASDAQ Small Cap
Market prior to or simultaneously with the Closing Date of the total
number of MicroFrame Shares issued or to be issued as consideration
hereunder together with shares of Common Stock to be issued pursuant to
all options to be granted pursuant to this Agreement and to use all
reasonable endeavours to maintain and keep such listing in full force
and effect.
7.17 Board of Directors of the Buyer
The Sellers shall have the right to nominate two nominees to the Board
of Directors of the Buyer as of the Closing Date by the delivery to the
Buyer of a written notice from the Sellers Representatives and the
Buyer covenants that the total number of directors shall not exceed
five (5) at that date prior to the appointment of such nominees. If the
Sellers Representatives have not delivered a notice in respect of one
or both of such appointees prior to the Closing Date, they shall
continue to be entitled to deliver such a notice following the Closing
Date in respect of either or both appointees not previously notified.
7.18 Subscription of Shares on Closing & Debt Free Amount
Prior to the Closing hereunder, the Sellers shall use all reasonable
endeavours to procure funding from a third party or parties by way of
subscription for ordinary shares of 1 pence each in the capital of the
Company of such amount as shall equal the Debt Free Amount as set out
in the Estimated Statement (as provided for in Schedule 7.18) ("the
Funding").In the event that the whole or any part of the Funding has
not been made available and completed prior to the Closing Date then
each of the undernoted Sellers (each a "Funding Seller") hereby binds
and obliges himself and undertakes to supply the relevant shortfall to
the Company at Closing in the percentages set out opposite his name:
Name Subscription Percentages
- ---- ------------------------
Peter MacLaren 6.25
Peter Wilson 12.5
Hugh Evans 12.5
Helen Sealey 11.72
Andrew Sealey 7.03
Lady Margaret Elliot 8.75
Brian Souter 15
Ann Gloag 7.5
Michael Rutterford 12.5
June Georgina Rutterford 6.25
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In so far as a Funding Seller is the holder of CULS such Seller shall
convert the whole of the CULS held by him into ordinary shares of 1
pence in the capital of the Company by no later than two business days
prior to the Closing Date in so far as such CULS shall not have been
converted, redeemed or repaid by that date.In the case of breach of
this Section 7.18 by either the Sellers or by the Funding Sellers or
any Funding Seller then the sole party with any rights in respect of
such breach shall be the Buyer and the sole rights of the Buyer shall
be either (i) to proceed to Closing but in that event the Buyer shall
have no rights against the Sellers or the Funding Sellers or any of
them in respect of their failure to procure or supply such Funding or
(ii) to terminate this Agreement under Section 13.1 and in that event
the provisions of Section 13.2 (a) shall apply and neither the Sellers
nor the Funding Sellers or any of them shall have any obligation to the
Buyer whether to make payment or otherwise other than to pay the sum to
the Buyer as set out in Section 13.2 (a).The Buyer hereby consents to
the issue of such further ordinary shares of 1 pence each in the
capital of the Company contemplated by this Section 7.18.The provisions
of Section 7.26 shall not apply to this Section 7.18.
7.19 Consents
Each of the parties hereto covenants and agrees that he, she or it
shall use all reasonable efforts to obtain consents of all third
parties and governmental authorities necessary to the consummation of
the transactions contemplated by this Agreement including but without
limitation in the form of Exhibit Q those from Clydesdale Bank public
limited company, British Coal Enterprise Limited ("BCE") and Lothian
and Edinburgh Enterprise Limited ("Consents") (excluding for these
purposes The Scottish Office). The Buyer acknowledges that the consent
of BCE is given on the basis that the relevant loans shall be repaid
following the Closing for which the Buyer shall be solely liable and
the Sellers shall have no responsibility therefor.
7.20 Employee Options
7.20.1 The Buyer undertakes to the Sellers and each of the relevant employees
as soon as practicable after Closing and subject to approval of the
Inland Revenue in the United Kingdom (and hereby undertakes to use its
best endeavours to obtain such approval as soon as practicable after
Closing) to constitute a stock option plan solely for such employees
("the Sub Plan").
The Buyer undertakes to file with the SEC a registration statement on
form S8 in respect of all common stock to be issued to option holders
thereunder.The Buyer shall as soon as practicable after Closing deliver
to the members of the Company's UK Inland Revenue approved employee
share option scheme a letter substantially in the form annexed hereto
as Exhibit IIn the event of the relevant employees electing to accept
options to subscribe for shares of common stock par value $.001 per
share of the Buyer in the Sub Plan and in exchange releasing and
discharging their rights under the UK Inland Revenue approved employee
share option scheme the options of the Buyer in the Sub Plan to be
granted to such
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employees who so elect shall be calculated in accordance with the
formula set out below and in the event of the relevant employees
electing to accept the first option set out in the letter annexed
hereto as Exhibit I the options of the Buyer in its 1998 Stock Option
Plan to be granted to such employees who so elect shall be calculated
as set out below.
7.20.2 The total number of options in the Buyer to be issued to all option
holders in the Company as at the Closing Date (of both approved and
unapproved options) shall be the number of options in the Company at
the Closing Date divided by the Conversion Factor (set out below) with
any fractions rounded up to the nearest whole number. If members of the
UK Inland Revenue approved scheme elect for options under the Sub-Plan
then the exercise price shall be not manifestly less than fair market
value of shares of common stock of the Buyer on or around the date of
grant as shall be agreed between the Buyer and the UK Share Valuation
Division and if the employees opt for options in the Buyer's 1998 Stock
Option Plan then the exercise price shall be the current exercise price
of the existing options in the Company multiplied by the Conversion
Factor (as defined below) and converted into US$ at the exchange rate
specified in Section 14 (the "Exchange Rate").
Each of the undernoted Sellers has been granted unapproved options in
the Company subject to the exercise prices and last dates for exercise
all as set out below
Exercise Price (pound)0.0375 (pound)0.1084 (pound)0.14
Last date of Exercise 31 Dec 2003 21 Aug 2007 30 Nov 2007
Fran DeLaura 350,000
Hugh Evans 2,920,000 938,607
Keith Laing 100,000 148,531
Peter MacLaren 1,240,000 474,255
Peter Wilson 2,920,000 938,607
The Buyer undertakes that it will on the Closing Date enter into a
Stock Option Contract substantially in the form annexed as Exhibit H
with each of such Sellers and with employees of the Company as the case
may be who have been granted unapproved options subject to the release
and discharge by such employees of such unapproved option rights. Each
of such Sellers shall enter into such Stock Option Contract in respect
of such Seller's separate holding of options in terms of which each of
such Sellers shall be entitled to receive options in the Buyer under
the Buyer's 1998 Stock Option Plan (substantially in the form annexed
hereto
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as Exhibit N) in exchange for the release and discharge of any
unapproved option rights in the Company (and in the case of Peter
MacLaren his options shall be exerciseable within twenty five (25)
months of the termination of his present engagement with the Company).
The relevant number of options in the Buyer to be received by such
Seller or such employee as the case may be in respect of each separate
holding of options shall be equal to the number of options in the
Company held by such Seller or employee as the case may be divided by
the Conversion Factor and the relevant exercise price of options in the
Buyer (in respect of each separate holding of options) shall be the
relevant exercise price noted above multiplied by the Conversion Factor
converted into US$ at the Exchange Rate.For the purposes of this
Section the Conversion Factor shall be the sum of the total number of
ordinary shares of 1 pence each in the capital of the Company in issue
at Closing and the total number of ordinary shares of 1 pence each in
the capital of the Company under option at Closing all divided by
5,800,000.The Buyer undertakes to file with the SEC a registration
statement on form S8 in respect of all common stock to be issued to
option holders under the Buyers 1998 Stock Option Plan.
7.20.3 Notwithstanding any other provision hereof the Buyer hereby consents to
the issue of up to 800,000 options to employees by the Company over
ordinary shares of 1 pence each in the share capital of the Company
prior to the Closing Date (subject to each of Peter Wilson and William
Hugh Evans each cancelling and releasing 400,000 options in the capital
of the Company with a last exercise date of November 30, 2007) which
options may at the discretion of the Company be granted either under
the UK Inland Revenue approved employee share option scheme or as
unapproved options.
7.21 Filings
The Buyer (in relation to itself and the Company and the Subsidiary
following Closing) and the Executive Directors (in relation to the
Company and the Subsidiary in the period prior to Closing) shall each
cause to be made, as promptly as practicable, any necessary filings and
submissions under the laws of the UK or the US to the extent to which
the provisions thereof are applicable to the Buyer, the Company or the
Subsidiary as the case may be in connection with the transactions
contemplated by this Agreement, and the Buyer and the Executive
Directors will cause such filings and submissions for which he or it is
responsible to be made timeously. The Sellers and the Company hereby
agree to render all assistance reasonably necessary to the Buyer in
connection with the preparation of the information statement to be
filed with the Commission.
7.22 Standstill
For a period of (1) year from the Closing Date, neither the Company nor
the Sellers nor any of them shall acquire any shares of Common Stock of
the Buyer other than the MicroFrame Shares.
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7.23 Exclusivity
From the date hereof to the Closing Date, each of the Sellers severally
covenants that he, she or it shall not directly or indirectly, through
any representative or otherwise, (a) solicit, initiate or in any manner
encourage, accept or consider any proposal or offer from any person
relating to the acquisition of any interest in the Shares, the Company,
the Subsidiary, the Business or any of the assets of the Company or the
Subsidiary (other than sales of inventory goods or services in the
ordinary and usual course consistent with past practice), or (b)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or in any manner
facilitate any effort or attempt by any person to do or seek any of the
foregoing.
7.24 Employment Agreements
Subject to the satisfaction of the other conditions to Closing
hereunder, (i) Peter Wilson agrees that he will execute and deliver at
the Closing to the Buyer, an amendment to his employment agreement in
the form of Exhibit B annexed hereto (the "Wilson Employment Agreement
Amendment"), (ii) Hugh Evans agrees he will execute and deliver at
Closing to the Buyer, an amendment to his employment agreement in the
form of Exhibit C annexed hereto (the "Evans Employment Agreement
Amendment"), (iii) Keith Laing agrees that he will execute and deliver
at the Closing to the Buyer, an amendment to his terms and conditions
of employment in the form of Exhibit D annexed hereto (the "Laing
Employment Agreement Amendment"). The Buyer agrees subject to the
satisfaction of its other conditions to Closing to enter into the Other
Employment Agreement Amendments and each of the agreements referred to
in (i), (ii) and (iii) above and the Company undertakes to execute each
of the foregoing agreements.
7.25 Registration Rights Agreement
Subject to the satisfaction of the other conditions to Closing
hereunder, the Buyer and each of the Sellers shall enter into the
Registration Rights Agreement substantially in the form of Exhibit E
annexed hereto (the "Registration Rights Agreement").
7.26 Further Assurance
Each of the parties hereto agrees to use his, her or its reasonable
efforts to take, or cause to be taken all reasonable action, and to do,
or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations or otherwise (including executing all
relevant agreements to which he is a party which are to be entered into
pursuant to this Agreement at Closing and in the case of the Buyer
obtaining the requisite approval of stockholders to the transaction and
of the SEC to the Information Statement, and otherwise taking all
action necessary which it is reasonably able to take to satisfy the
conditions set out in Section 8) to consummate and make effective the
transactions contemplated by this Agreement as
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expeditiously as practicable and such that the Closing Date shall occur
as soon as practicable after the date hereof and in any event no later
than December 31, 1998 unless otherwise agreed by the Buyer and the
Sellers Representatives. If at any time after the date hereof any
further action is necessary or desirable to carry out the purposes of
this Agreement, each of the parties shall take or use reasonable
endeavours to cause to be taken all such necessary action, including,
without limitation, the execution and delivery of such further
instruments and documents as may be reasonably requested by any party
for such purposes or otherwise to complete or perfect the transactions
contemplated hereby provided that this does not involve such party
incurring substantial expenditure or that such party is indemnified to
his reasonable satisfaction against such expenditure where it is
substantial. This Section shall not apply to the obligations in Section
7.18. The obligations in this Section in so far as they apply to the
Sellers will bind each Seller only to the extent that he, she or it is
reasonably capable of taking the action or doing the thing in question
and the obligations specified in this Section 7.26 on the part of each
of the Sellers are undertaken by each Seller solely in relation to
himself and not in relation to any other Seller and accordingly one
Seller shall not be liable in any way for breach of obligation in this
Section 7.26 by any other Seller.
7.27.1 Conditions to Closing
As soon as practicable after the date hereof (i) the Buyer shall
confirm in writing to the Sellers' Representatives whether all of the
conditions of the Buyer set out in Section 8 have been satisfied or
where appropriate waived or that the Buyer is in a position to satisfy
such conditions and (ii) the Sellers' Representatives shall confirm in
writing to the Buyer whether all of the conditions of the Sellers set
out in Section 9 have been satisfied or where appropriate waived or
that the Sellers are in a position to satisfy such conditions.
7.27.2 The Buyer and the Sellers' Representatives shall advise one another if
and when they are in a position to deliver the written confirmations
referred to in Section 7.27.1 subject only to receipt of the relevant
documents specified in the relevant condition. Closing shall take place
on the seventh business day following such advice being received by
each of the Buyer and the Sellers' Representatives that they are in a
position to deliver such confirmations (or at such other date as they
may agree).
7.27.3 From the date hereof to Closing each of the Buyer and the Sellers'
Representatives shall keep each other advised as to the satisfaction of
the relevant conditions in Sections 8 and 9.
7.28 Closing Share Allocation List
Prior to the Closing the Buyer shall consult the Sellers'
Representatives about the Closing Share Allocation List and at the
Closing the Buyer shall deliver to the Sellers' Representatives a list
in the form set out in Schedule 7.28 the ("Closing Share Allocation
List") in a form agreed between them which sets out the MicroFrame
Shares including the Escrowed
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MicroFrame Shares to which each of the Sellers is entitled as
calculated in accordance with Section 1.4.
7.29 Trustees
Those of the Sellers who are trustees (other than Other Nominee
Holders) undertake in respect of their respective trusts that it will
not be wound up prior to the expiration of the longest time limit for
making any Relevant Claim hereunder, and further that if the MicroFrame
Shares delivered as consideration for the sale of their Shares in the
Company are disposed of prior to the expiration of any such time limit
a capital value equivalent to the value of such shares when disposed of
shall be retained until expiry of the longest time limit for making a
Relevant Claim hereunder.
7.29.2 Those of the Sellers who are Other Nominee Holders undertake not to
divest themselves of their legal ownership of the Escrowed MicroFrame
Shares delivered for the sale of their Shares in the Company prior to
the expiry or discharge of the appointment of the Escrow Agent or any
substitute therefor.
7.30 Consent to Conversion of Preference Shares
Each of the Sellers hereby gives all consents necessary on his part to
the subdivision and conversion of the Preference Shares referred to in
the fourth recital hereto and to the conversion of the CULS as
contemplated by Section 7.18.
Shareholder Matters and Buyer Securities
The Buyer agrees in the period up to the Closing Date not to:-
(a) cause, permit or propose any amendment to the Buyer's Certificate
of Incorporation or By-laws or otherwise take any action or agree
to take any action which would require the approval of the
stockholders of the Buyer other than in the ordinary course
including without limitation annual board and stockholders
meetings, or
(b) issue or agree to issue any Buyer Securities as defined in
Section 6.1(g) but for the avoidance of doubt excluding any shares
issued pursuant to the exercise of options outstanding on the date
hereof and any employee options granted pursuant to the Buyer's
employee stock option plan as constituted on July 14, 1998 and any
shares issued pursuant to the exercise thereof..
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7.32 Public Filings
The Buyer hereby covenants that it shall use all reasonable efforts to
file on a timely basis all public filings required to be filed by the
Buyer under the Securities Act of 1933 as amended.
7.33 Investor SPA
The Buyer undertakes to each of the Sellers that it will use its
reasonable endeavours to negotiate the Investor SPA with any third
party or third parties who are to provide all or part of the Funding
and to execute the same provided that the obligations contained therein
are no more onerous than the obligations in the LIFE Agreement.
7.34 HP
The Buyer undertakes to the Company and the Sellers to provide
reasonable assistance in the manner substantially similar to that
provided prior to date hereof in connection with the Company's
relationship with HP (as hereinafter defined) including the use of the
equipment already provided to the Company prior to the date hereof.
Deed of Adherence
As soon as practicable after Closing each of the Buyer and Anderson Strathern
Nominees Limited shall execute the A & S Deed of Adherence. LIFE Agreement
The Buyer undertakes to the Sellers upon Closing to fulfil all obligations on
its part under the LIFE Agreement.
Subject to Section 14.11 the covenants in this Section 7 given by the Executive
Directors are provided for the benefit of the Buyer only.
SECTION 8
BUYER'S CLOSING CONDITIONS
The obligations of the Buyer to purchase the Shares pursuant to this Agreement
are subject to the fulfilment to the reasonable satisfaction of the Buyer, or
(with the exception of (h), (i) , (j), (k) and (l) of this Section) the waiver
by the Buyer, at or prior to the Closing, of the conditions set forth below.
(a) That the Buyer does not exercise its rights of recission under
Section 10 or that there is no Supplemental Disclosure Letter.
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(b) Each Seller shall so far as the Buyer is actually aware, have
performed and complied in all material respects with all covenants
and undertakings required to be performed or complied with by such
Seller under this Agreement (excluding Section 7.18) on or prior to
the Closing Date and the relevant Sellers or the Funding Sellers
shall have complied in all respects with their undertaking under
Section 7.18.
(c) If Closing takes place after October 16, 1998 the Sellers
shall have delivered to the Buyer the management accounts of the
Company and the Subsidiary as at September 30, 1998.
(d) The Sellers Representatives and the Sellers shall have delivered or
procured the delivery to the Buyer at the Closing of share
certificates representing the Shares being sold by the Sellers
together with share transfer forms duly executed by a Seller or his
attorney in favour of the Buyer, and the board of directors of the
Company shall have approved the same for registration subject to
stamping.
(e) The Buyer shall have received the opinions of Mayer Brown & Platt
Murray Beith & Murray, Counsel to the Company, Anderson Strathern
and Maclay Murray & Spens, Counsel to certain Sellers addressed to
the Buyer, dated the Closing Date, substantially in the forms
annexed hereto as Exhibit G.
(f) There shall be no order, decree, judgement, injunction or interdict
of a court of competent jurisdiction, of which the Buyer is aware,
which prevents or delays the consummation of the transactions
contemplated by this Agreement.
(g) The Sellers shall have delivered or cause to be delivered to the
Buyer the following additional items:
(i) in respect of those Sellers who are individuals personal
searches free from incumbrance
(ii) a copy of the Certificate or Articles of Incorporation of
the Company and the Subsidiary, certified as true and
correct by the appropriate officials of their respective
jurisdictions of formation; a copy of the by-laws or
Memorandum and Articles of Association of the Company and
the Subsidiary certified as true and correct by the
Secretary of the Company and the Subsidiary;
(iii) evidence that all known third party waivers or consents
referred to in Section 7.19 have been obtained (excluding
for these purposes from The Scottish Office) and the
Consents;
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(iv) the resignation, dated the Closing Date, of Peter
MacLaren as director of the Company and of the Secretary
of the Company and the Subsidiary and the resignation of
Michael David Rutterford, Peter Wilson and William Hugh
Evans as directors of the Company and in respect of the
Subsidiary resignation as directors of Peter Wilson,
William Hugh Evans and Frances Loretta DeLaura in
substantially the form annexed as Exhibit Q.
(v) any power of attorney under which this Agreement or any
document referred to herein or executed in pursuance
hereof is executed on behalf of any of the Sellers;
(vi) a written waiver in the form annexed as Exhibit P from
each Seller in respect of any claims which such Seller
may have against the Company and/or the Subsidiary as at
Closing;
(vii) any Certificate of Incorporation or Change of Name,
statutory and minute and other record books (written up
to the Closing Date) and share certificate books of the
Company together with all unused forms of share
certificates (if any) of the Company and such of the same
or the equivalent under the law of its respective
jurisdiction for the Subsidiary as is readily available;
(viii) definitive certificates in respect of the outstanding
shares of capital stock beneficially owned by the Company
in the Subsidiary together with duly executed transfers
in blank or as the Buyer may require in favour of the
Buyer in respect of all shares of common stock in the
Subsidiary (if any) not registered in the name of the
Company;
(ix) a written resignation (in duplicate) in the form of
Exhibit R from the auditors of the Company such
resignation to take effect as of Closing and which shall
contain in respect of the Company the statement required
to be made pursuant to Section 394(1) of the Companies
Act 1985 of the U.K. and a statement confirming that as
at Closing no sums are due to such auditors by the
Company in respect of outstanding invoices or in respect
of work carried out but not invoiced and a statement
disengaging itself from any involvement with the
Subsidiary;
(x) a statement in respect of each bank account of the
Company and the Subsidiary as at a date not more than
seven business days prior to Closing together with
reconciliations in respect of each such bank account as
at the close of business on the day immediately preceding
the Closing Date.
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(xi) a letter from each holder of a bond and floating charge
affecting the property and undertaking of the Company or
any part thereof confirming that it has taken no steps to
crystallise the relevant bond and floating charge.
(h) The Stock Option Contract substantially in the form annexed hereto
as Exhibit H shall have been duly executed by the Sellers who are
the parties thereto
(i) The Buyer shall have received all requisite shareholder approvals
in connection with the transactions contemplated by this Agreement
as required under applicable federal or state law and the rules
and regulations of the National Association of Securities Dealers
Automated Quotation System (NASDAQ) and that NASDAQ shall have
approved any and all requisite shareholder approvals of the Buyer
authorising the transactions contemplated hereby.
(j) The Commission shall have cleared an Information Statement
pursuant to Regulation 14C under the Exchange Act in connection
with the transactions contemplated by this Agreement and any and
all consents from PriceWaterhouseCoopers LLP and Grant Thornton in
connection with the use of their respective financial statements
therein.
(k) The issuance of the MicroFrame Shares shall be exempt from the
registration requirements under the Act pursuant to Regulation S
promulgated thereunder or other exemptions therefrom reasonably
satisfactory to the Buyer and its counsel.
(l) The Buyer shall have received all requisite shareholder approvals
in connection with the adoption of its 1998 Stock Option Plan and
the Sub Plan.
(m) Peter Wilson, Hugh Evans and Keith Laing and the Company shall
have executed and delivered to the Buyer the Wilson Employment
Agreement Amendment, the Evans Employment Agreement Amendment, the
Laing Employment Agreement Amendment and each of Keith Baker,
Robert Struthers and Stephen Connelly and the Company shall have
executed and delivered to the Buyer amendments to their employment
contracts in the forms set out in Exhibit F ("Other Employment
Agreement Amendments").
(n) The Sellers and the Sellers' Representatives and Dundas & Wilson
C.S. shall have executed and delivered to the Buyer the Escrow
Agreement.
(o) The Sellers shall have executed and delivered to the Buyer the
Registration Rights Agreement substantially in the form set out in
Exhibit E.
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(p) The Buyer shall have received an update to the Fairness Opinion
for the Buyer dated as of June 10, 1998 of Van Kasper & Company
reasonably satisfactory to the board of directors of the Buyer and
affirming that, as of the Closing Date, the transactions
contemplated herein are fair and reasonable to the holders of
Common Stock of the Buyer from a financial point of view.
(q) The Buyer shall have received a Full and Final release duly
executed by Technically Elite, Inc, David A. Norman, Richard J
Wixted, Harvey Yap and the Company in respect of litigation
between the Company and Network Application Technology, Inc;
Technically Elite Concepts, Inc Corp. No. C1414912; Technically
Elite Concepts, Inc Corp No. C1950473; NAT Acquisition
Corporation; Technically Elite, Inc; David A. Norman; Richard J
Wixted and Harvey Yap together with the executed Certification of
the respective attornies of Technically Elite, Inc and the
Company;
(r) (i) The Company has delivered to Hewlett-Packard Company ("HP") to
the Buyer's reasonable satisfaction and notwithstanding any prior
breach of the HP Agreement:-
(a) the items set out as "Deliverables" code named Vesuvius under
Phase 8 in Appendix A-4 to Amendment 6 of the Technology
Licence Agreement (the "HP Agreement") between the Company
and HP (such agreement being annexed to the Disclosure Letter
as Disclosure Document 21 ) in respect of the undernoted
Daughter Cards (or such other items as have been agreed or may
be agreed between the Company and HP as Deliverables) on or
prior to 1 August 1998 (or such later date as may be agreed
between the Company and HP for the delivery of the
aftermentioned items);
(i) T1 Daughter Card;
(ii) E1 Daughter Card;
(iii) V-Series Daughter Card;
(iv) ATM-OC3 Daughter Card; and
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(b) the items set out as Deliverables referred to as T3 Lucent
Project under Phase 5 in Appendix A-4 to Amendment 6 of the HP
Agreement in respect of ABT3 Daughter Card (or such other
items as have been agreed or may be agreed between the Company
and HP as Deliverables in respect of such Daughter Card) on or
prior to 1 September 1998 (or such later date as may be agreed
between the Company and HP for delivery of the relevant
items).
(r) (ii) HP has not terminated the HP Agreement and neither the
Company nor the Executive Directors nor any of them has
received notice of termination of the HP Agreement.
(s) There shall have not been proposed or enacted so far as the Buyer
is aware, any statute, rule or regulation, or any change in any
existing statute, rule or regulation, which prohibits or delays,
or threatens to prohibit or delay the performance of the
transactions contemplated by this Agreement.
(t) The Company and the other parties thereto shall have executed and
delivered to the Buyer the Termination Agreements.
(u) The Sellers shall have procured and completed the Funding and in
so far as such Funding is not provided by a Seller, the Investor
SPA shall have been completed in accordance with its terms subject
only to Closing.
(v) The Preference Shares have been subdivided and subsequently
converted into 731,428 ordinary shares of 1 pence each and
2,268,572 preference shares of 1 pence each and the LIFE Agreement
shall have been completed in accordance with its terms subject
only to Closing.
(w) Frances Loretta DeLaura shall have executed and delivered to the
Buyer an investment representation letter substantially in the
form of Exhibit M.
(x) That in so far as not converted into ordinary shares of 1 pence
each in the capital of the Company pursuant to Section 7.18 the
whole amount of principal and interest outstanding under the CULS
shall have been redeemed.
(y) The Landlord of the premises at Block 1, Garbett Road, Livingston
shall not have irritated the lease of the Property.
(z) The Retrocession shall have been duly executed and delivered to
the Buyer.
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(aa) Peter Wilson and William Hugh Evans shall each have cancelled and
released 400,000 options granted to him in the share capital of
the Company with a last exercise date of November 30, 2007 and the
Company shall have granted up to 800,000 options over ordinary
shares of 1 pence each in the capital of the Company to certain
employees at an exercise price of 11 pence per share, which
options may at the discretion of the Company be granted either as
options in the UK Inland Revenue approved employee share option
scheme of the Company or as unapproved options and in respect of
any such employees who have elected for unapproved options the
Buyer shall have offered to enter into a Stock Option Contract
substantially in the form of Exhibit H.
SECTION 9
SELLERS' CLOSING CONDITIONS
The obligations of the Sellers to sell the Shares pursuant to this Agreement
shall be subject to the fulfilment, or the waiver by the Sellers (acting through
the Sellers' Representatives), at or prior to the Closing, of the conditions set
forth below.
(a) The Buyer shall so far as the Sellers Representatives are aware
have performed and complied in all material respects with all
covenants and undertakings required to be performed or complied
with by it under this Agreement on or prior to the Closing Date.
(b) The Buyer shall have delivered to the Sellers Representatives
stock certificates for all of the MicroFrame Shares to which each
Seller is entitled hereunder except for the Escrowed MicroFrame
Shares and the Buyer shall have delivered the Escrowed MicroFrame
Shares to the Escrow Agent to be held by the Escrow Agent under
the Escrow Agreement.
(c) The Buyer shall have delivered or caused to be delivered to the
Sellers or their legal advisers the following additional items:
(i) a certificate executed by the Secretary of State in the
State of New Jersey certifying the Certificate of
Incorporation of the Buyer dated within one week of the
Closing Date and a Certificate dated as of the date of
the Closing Date, executed by the Secretary of the
Buyer, certifying the By-laws, resolutions of the board
of directors and shareholders of the Buyer authorising
the transactions contemplated hereby and the incumbency
of the officers of the Buyer; and
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(ii) "good standing" documents, including certifications by
appropriate officials of its jurisdiction of
incorporation, of the valid incorporation and good
standing of the Buyer.
(d) The Buyer shall have obtained all consents and approvals required
on the part of the Buyer to purchase the Shares hereunder.
(e) There shall be no order, decree or injunction of a court of
competent jurisdiction of which the Sellers Representatives are
aware which prevents or delays the consummation of the
transactions contemplated by this Agreement.
(f) The Buyer shall have elected or caused to be elected two persons
nominated in writing by the Sellers' Representatives on behalf of
the Sellers to serve on the board of directors of the Buyer where
the relevant notice has been delivered by the Sellers
Representatives pursuant to Section 7.17 and as a consequence the
board of Directors of the Buyer shall consist of no more than
seven (7) persons.
(g) The Company and the Buyer shall have executed and delivered the
Wilson Employment Agreement Amendment, the Evans Employment
Agreement Amendment, the Laing Employment Agreement Amendment, and
the Company and the Buyer shall have executed and delivered the
other amendments to service contracts referred to in Section 8(m).
(h) Clearance shall have been obtained from the Inland Revenue under
Section 138 of the TCGA and Section 707 of ICTA 1988 that the
transactions contemplated by this Agreement are being effected for
bona fide commercial purposes and not for tax avoidance purposes.
(i) There shall have not been proposed or enacted so far as the
Sellers are aware any statute, rule or regulation, or any change
in any existing statute, rule or regulation, which prohibits or
delays, or threatens to prohibit or delay the performance of the
transactions contemplated by this Agreement.
(j) The Sellers' Representatives shall have received an opinion of
Parker Chapin Flattau & Klimpl LLP addressed to the Sellers dated
the Closing Date substantially in the form annexed hereto as part
of Exhibit G.
(k) The Buyer shall have executed and delivered the Registration
Rights Agreement, the Stock Option Contracts in favour of the
persons specified in Section 7.20.2 and the Escrow Agreement.
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(l) (i) The Buyer shall have certified to the Sellers
Representatives that no event shall have occurred
which constitutes or would be reasonably likely to
constitute a material adverse effect on the business,
financial position, assets or operations of the Buyer
as evidenced by a 25% reduction in the revenues and/or
assets of the Buyer from those pertaining in the June
30 1998 financial statements of the Buyer and that to
the best of the knowledge, information and belief of
the directors of the Buyer there are no material
actions investigations enquiries or administrative or
arbitration proceedings by or against the Buyer or its
affiliates or any of the same pending or threatened;
(ii) No matter shall have been disclosed to the Sellers
Representatives pursuant to Section 10.6 and the Buyer
shall have certified to the Sellers Representatives
that it is not in breach, or the Buyer shall not have
been proved to be in breach, in either case, subject
to Schedule 6.1(g) of any of the warranties given
under Section 6.1 as given by the Buyer at the date of
this Agreement in either case giving rise to a
liability on the part of the Buyer of an amount in
excess of $200,000.
(m) The Buyer shall have received all requisite shareholder approvals
in connection with the transactions contemplated by this Agreement
as required under applicable federal or state law and the rules
and regulations of the National Association of Securities Dealers
Automated Quotation System (NASDAQ) and that NASDAQ shall have
approved any and all shareholder approvals of the Buyer
authorising the transaction contemplated hereby.
(n) The Commission shall have cleared an Information Statement
pursuant to Regulation 14C under the Exchange Act in connection
with the transactions contemplated by this Agreement and any and
all consent from PriceWaterhouseCoopers LLP and Grant Thornton in
connection with the use of their respective financial statements
therein.
(o) The issuance of the MicroFrame Shares shall be exempt from the
registration requirements under the Act pursuant to Regulation S
promulgated thereunder or other exemptions therefrom reasonably
satisfactory to the Buyer and its counsel.
(p) The Buyer shall have received all requisite shareholder approvals
in connection with the adoption of its 1998 Stock Option Plan and
the Sub Plan.
(q) All necessary approvals have been granted by the Board of
Directors of the Buyer or otherwise in accordance with the
proposed 1998 Stock Option Plan to permit options to be granted at
the exercise prices and numbers thereof under or pursuant to this
Agreement.
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(r) Peter Wilson and William Hugh Evans shall each have cancelled and
released 400,000 options granted to him in the share capital of
the Company with a last exercise date of November 30, 2007 and the
Company shall have granted up to 800,000 options over ordinary
shares of 1 pence each in the capital of the Company to certain
employees at an exercise price of 11 pence per share, which
options may at the discretion of the Company be granted either as
options in the UK Inland Revenue approved employee share option
scheme of the Company or as unapproved options and in respect of
any such employees who have elected for unapproved options the
Buyer shall have offered to enter into a Stock Option Contract
substantially in the form of Exhibit H.
SECTION 10
SURVIVAL OF WARRANTIES
ADDITIONAL CLOSING WARRANTIES
10.1 Survival of Representations and Warranties of the Sellers
Notwithstanding any right of the Buyer or its agents fully to
investigate the affairs of the Company and the Subsidiary and
notwithstanding any knowledge of facts determined by the Buyer pursuant
to such investigation or right of investigation, the Buyer has the
right subject to the terms of this Agreement to rely fully upon the
warranties, covenants, undertakings and agreements of the Sellers
contained in this Agreement. For the avoidance of doubt the foregoing
sentence is without prejudice to the other terms of this Agreement
including Sections 4 and 11.
10.2 Subject to the provisions of Section 11, immediately before the Closing
Date each of the Sellers shall be deemed to warrant to the Buyer that
each of the Warranties set forth in Section 3 and the warranties in
Section 5 is by reference to the facts then existing true and accurate
in all respects (all references to "the date hereof" and "the date of
this Agreement" and similar expressions being amended mutatis mutandis
subject to, in the case of the Warranties contained in Section 3 and
the warranties in Section 10.5, the terms of Section 4 of this
Agreement and matters fairly disclosed in or by the Disclosure Letter
and any letter from the Sellers addressed to the Buyer (the
"Supplemental Disclosure Letter") which is expressed to be
supplementary to the Disclosure Letter. The Supplemental Disclosure
Letter shall be delivered to the Buyer not later than 3 business days
prior to the proposed time for the Closing Date in accordance with
Section 10.3 or such later time as the Buyer may agree.
10.3.1 In the event that the Supplemental Disclosure Letter discloses
a fact, matter or event which had it not been disclosed would
have resulted in a Relevant Claim under the Warranties as
given at the date of execution of this Agreement of an amount
in excess of $300,000 and the Buyer has delivered to the
Sellers' Representatives an opinion
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from a Queens Counsel in Scotland, with a minimum of ten years
experience in dealing with corporate and commercial matters,
selected by the Buyer together with relevant instructions to
such Queens Counsel that the Relevant Claim would in fact be a
relevant and prima facie valid claim on the basis of the facts
presented to him taking into account inter alia Section 4 of
this Agreement then without prejudice to Section 11 the Buyer
shall have the right:-
(a) to rescind this Agreement provided always that, if the Buyer elects to
rescind this Agreement, save in the case of fraud or as otherwise set
forth in Section 13.2 (where applicable) the Buyer shall have no right
to damages or compensation on any ground under or in respect of this
Agreement whether in relation to a breach of Warranty or otherwise and
in the case of fraud only those Sellers guilty of fraud will be liable.
(b) to proceed to Closing provided always that, for the avoidance of doubt,
if the Buyer elects to proceed to Closing subject in all events to
Section 1.2.1 the Buyer shall have no right to claim for damages or
compensation in respect of any matter fairly disclosed in the
Disclosure Letter or the Supplemental Disclosure Letter or apparent
from the face of the documents annexed thereto.
10.3.2 In the event that following delivery of the Supplemental
Disclosure Letter a fact, matter or event occurs which is
disclosed in writing to the Buyer (such disclosure to be
deemed for all purposes of the Agreement to be included within
the Supplemental Disclosure Letter and the liability of the
Sellers shall be limited accordingly) which would, if not so
disclosed, result in a Relevant Claim under the Warranties as
given at the date of execution of this Agreement of an amount
in excess of $300,000 then the Buyer shall have the right:-
(a) to postpone Closing of this Agreement for 3 business days until the
Buyer has had an opportunity to consult a Queens Counsel as referred to
above and the provisions of Section 10.3.1 shall apply mutatis mutandis;
or
(b) to rescind this Agreement and the proviso in Section 10.3.1 (a) shall
apply mutatis mutandis; or
(c) to proceed to Closing and the proviso in Section 10.3.1 (b) shall apply
mutatis mutandis.
10.4 Survival of Representations and Warranties of the Buyer
10.4.1 The Sellers have the right to rely fully upon the warranties,
covenants, undertakings and agreements of the Buyer contained
in this Agreement. All warranties given by the
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Buyer hereunder shall be deemed repeated immediately before
the Closing Date by reference to the facts then existing all
references to "the date hereof" and "the date of this
Agreement" and similar expressions being amended mutatis
mutandis and subject to matters fairly disclosed in or by
Schedule 6.1(g) as supplemented immediately before the Closing
Date.
10.4.2 The Buyer shall have the right to supplement Schedule 6.1 (g)
by reference to the warranties given by the Buyer hereunder
immediately before the Closing Date by delivering a supplement
thereto at that time to the Sellers Representatives provided
always that the Buyer shall have delivered to the Sellers
Representatives a final draft of such supplement on the second
business day prior to the Closing Date.
10.4.3 The entire contents of Schedule 6.1(g) and Schedule 6.1(g) as
so supplemented shall be deemed to have formed part of this
Agreement as if fully set out mutatis mutandis herein.
10.5 Additional Closing Warranties of Sellers
The Sellers hereby warrant to the Buyer in addition to the Warranties
set out in Section 3 and the warranties set out in Section 5 as follows
as of immediately before the Closing Date:-
(a) all consents have been obtained and all corporate actions have been
performed by the Company in order validly to effect the subdivision and
conversion of the Preference Shares as referred to in the recitals to
this Agreement and the allotment and issue of the Third Party Shares;
and
(b) At the Closing Date all warrants to subscribe for shares in the capital
of the Company have lapsed and are of no effect.
10.6 The Buyer undertakes that it will forthwith disclose in writing to the
Sellers Representatives any matter or thing which may occur or become
known to it between the date of this Agreement and immediately prior to
the Closing Date, which subject to Schedule 6.1(g), is inconsistent
with any of the warranties given by the Buyer at the date of this
Agreement and which would give rise to a liability on the part of the
Buyer of an amount in excess of $100,000 and for the purposes only of
this Section 10.6, and separately condition 9 (l) (ii) only, and
separately for the purposes of Section 11.15 (b) only, all the
warranties in Section 6.1 shall be deemed to survive Closing for the
purpose only of determining liability or possible liability for the
purposes of this Section 10.6 only, or as the case may be condition 9
(l) (ii) only or Section 11.15 (b) only.
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SECTION 11
LIABILITY OF SELLERS and BUYER
11.1 Other than as set out in this Section 11 and Section 13.2(a), no Seller
shall have any liability or obligation to the Buyer of any nature
whatsoever under or in respect of this Agreement or in connection
herewith (whether under breach of contract or to implement any term of
this Agreement, or in delict or in quasi delict or in respect of unjust
enrichment or recompense, under any statute or otherwise). The Company
shall not have nor shall the Subsidiary have any rights of any nature
against any Seller. Neither the Company nor the Subsidiary shall have
any liability or obligation of any nature under or in respect of this
Agreement save in the case of the Company to execute and deliver
certain documents at Closing subject to fulfilment or waiver of the
other conditions to Closing. For the avoidance of doubt the provisions
of this Section 11 shall not apply to release a Seller from liability
to the Buyer in the case of fraud on the part of such Seller.
11.2 The liability of each Seller to the Buyer under or in respect of or in
connection with this Agreement shall be determined and satisfied solely
in accordance with the following provisions of this Section 11 and
Section 13.2(a) and each of the Sellers has agreed to assume liability
accordingly and the Buyer shall have no other rights of any nature
whatsoever against the Sellers or any of them.
11.3 The Buyer shall be obliged to quantify and denominate all claims
hereunder in US dollars.
11.4 If Closing does not occur for any reason whatsoever except in the case
of a breach by any Seller of Section 7.26 prior to Closing where
Closing does not occur none of the Sellers or the Company shall have
any liability or obligation of any nature whatsoever to the Buyer save
as regards a claim under Section 13.2(a) or Section 14.4, where
applicable and this provision shall survive termination of this
Agreement. The liability of the Sellers in respect of a claim under
Section 13.2(a) shall be as set out in that Section. The sole liability
of the Sellers in respect of a claim under Section 7.26 shall be as set
out in Section 11.16.
11.5 If Closing occurs the only liability of the Sellers shall be under
Sections 3, (as updated pursuant to Section 10.2), 5, 10.5, 7.8, 7.22,
7.29 and Schedule 7.18 and Section 12 and none of the Sellers shall
have any other liability of any nature whatsoever to the Buyer for any
breach of this Agreement of any nature which shall have occurred prior
to the Closing or in respect of any non-satisfaction of any condition
in Section 8.
11.6 The maximum aggregate liability of each Seller for all claims under or
in respect of this Agreement following Closing shall not exceed the
value in US dollars of all of the MicroFrame Shares which he has
received as consideration for the sale of his Shares hereunder valued
in accordance with Section 11.7 provided that where any MicroFrame
Share has been sold by a Seller and the gross proceeds of sale received
by him from the sale of such
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MicroFrame Share is less than the Closing Value, such Seller's maximum
aggregate liability shall be reduced by the amount of the difference
between the gross proceeds of sale as received in respect of such
MicroFrame Share and the Closing Value thereof (the maximum aggregate
liability of a Seller calculated (and where appropriate reduced from
time to time) as aforesaid being hereinafter referred to as such
Seller's "Maximum Liability"). Where such gross proceeds are greater
than the Closing Value then such Seller's Maximum Liability in respect
of such MicroFrame Share shall remain limited to the Closing Value.
11.7 The Closing Value of each MicroFrame Share shall be $3.12 ("the Closing
Value").
11.8 Each Seller shall satisfy his liability in respect of any claim under
this Agreement at his option by the transfer to the Buyer of MicroFrame
Shares or by the payment of cash, as the case may be, in accordance
with this Section.
11.9 For the purposes of satisfying liabilities in terms of the following
Sections of this Section 11, MicroFrame Shares (including Escrowed
MicroFrame Shares) shall be valued at the Closing Value.
11.10 In respect of a breach by a Seller of Section 7.8 or 7.22 or 7.29 or of
a warranty given by him or it in Section 5, the liability of such
Seller shall be solely in respect of his own breach, and in no
circumstances shall one Seller be liable for the breach of such a
provision by another Seller.
11.11 In respect of or in connection with Relevant Claims resolved in favour
of the Buyer in accordance with this Agreement the extent of the
liability of each Seller and the manner of satisfaction of such
liability shall be as follows:-
11.11.1 In respect of each Relevant Claim resolved in favour of the
Buyer each of the Executive Directors shall be liable for an
amount in US dollars equal to such Executive Director's
Proportion (as defined in 11.11.2 below) of such Relevant
Claim provided always that the liability of each of the
Executive Directors under this Section 11.11.1 shall in no
circumstances exceed his Primary Liability Amount and none of
the other Sellers shall be liable therefor until the aggregate
of all Relevant Claims resolved in favour of the Buyer exceeds
the aggregate of all of the Executive Directors' Primary
Liability Amounts calculated in accordance with 11.11.3 below.
11.11.2 The Proportion (the "Executive Director's Proportion")
applicable to each Executive Director shall be as set out
opposite such Executive Director's name as provided below:
Name Executive Director's Proportion
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Peter Atholl Wilson 2/5ths
William Hugh Evans 2/5ths
Peter MacLaren 1/5th
11.11.3 Each of the Executive Director's Primary Liability Amount
shall be an amount in US dollars calculated as follows:-
Name Primary Liability Amount
Peter Atholl Wilson 400,000 multiplied by the Closing
Value
William Hugh Evans 400,000 multiplied by the Closing
Value
Peter MacLaren 200,000 multiplied by the Closing
Value
11.11.4 In respect of a Relevant Claim where, prior to the Buyer's
recovery in whole or in part for that Relevant Claim, the
amount of all Relevant Claims resolved in favour of the Buyer
exceeds the Primary Liability Amount of the Executive
Directors in aggregate, the liability, if any, of each of the
Sellers (including the Executive Directors) in respect of that
Relevant Claim (or any balance thereof not satisfied by the
Executive Directors pursuant to the above provisions) shall be
determined as follows. Each Seller shall only be liable to the
extent of that Seller's Pro Rata Share of the Relevant Claim
(or balance thereof, if appropriate) subject always to such
Seller's liability in respect of all Relevant Claims resolved
in favour of the Buyer not exceeding such Seller's Maximum
Liability.
11.11.5 For the purposes of Section 11.11.4 a Pro Rata Share shall
mean, in respect of a Seller, a fraction (a) the numerator of
which is (i) in the case of a Seller who is not an Executive
Director, the total number of MicroFrame Shares issued to that
Seller at Closing (including Escrowed MicroFrame Shares); and
(ii) in the case of a Seller who is an Executive Director, the
total number of MicroFrame Shares issued to that Executive
Director (including Escrowed MicroFrame Shares) minus the
number of MicroFrame Shares set out opposite such Executive
Director's name below; and (b) the denominator of which is the
aggregate number of MicroFrame Shares (including Escrowed
MicroFrame Shares) issued by the Buyer to all Sellers at
Closing (less 1,000,000 MicroFrame Shares).
Name No. of MicroFrame Shares
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Peter Atholl Wilson 400,000
William Hugh Evans 400,000
Peter MacLaren 200,000
11.12 Each Seller shall be entitled to satisfy his liability to the Buyer in
respect of any claim hereunder including Relevant Claims by the release
and delivery to the Buyer of the relevant number of MicroFrame Shares
as have an aggregate value calculated in accordance with Section 11.9
which is equal to the amount of the claim which falls to be satisfied
by that Seller. The only circumstances in which a Seller shall be
obliged to pay cash to the Buyer shall be where, in respect of a claim
under this Agreement, the Seller is not able to release and deliver a
sufficient number of MicroFrame Shares to satisfy the amount of the
claim which falls to be satisfied by that Seller (as such Seller has
sold the relevant MicroFrame Shares). The provisions of Section 11.6
shall apply to limit the amount of cash payable by such Seller such
that in no circumstances shall the liability of a Seller to the Buyer
exceed such Seller's Maximum Liability. Each Seller shall be entitled
(but in no circumstances obliged) at his sole option to settle his
liability in respect of a claim in cash in whole or in part rather than
by the transfer of MicroFrame Shares to the Buyer.
11.13 In respect of any claim hereunder, where there are any Escrowed
MicroFrame Shares, the Buyer shall be entitled to have released and
delivered to it pursuant to Clause 6 of the Escrow Agreement ("Clause
6") from a Seller such number of Escrowed MicroFrame Shares as will
satisfy in whole or in part such Seller's liability in respect of that
claim as determined in accordance with this Section 11 provided always
that where a Seller at his sole option pays cash to the Buyer prior to
the release and delivery of Escrowed MicroFrame Shares to the Buyer
pursuant to Clause 6 the Buyer shall only be entitled to have released
and delivered to it such number of Escrowed MicroFrame Shares rounded
upwards as have a value calculated in accordance with Section 11.9
equal to the balance of the claim for which such Seller is liable.
11.14 The foregoing provisions of this Section 11 are without prejudice to
the terms of Section 4.
11.15 The rights of the Sellers and/or the Sellers Representatives for breach
of this Agreement or otherwise on the part of the Buyer (except under
Section 4, Sections 7.16 and 7.17, Sections 7.20 and 7.21, Sections
7.31 and 7.32 and 7.35, Section 10.6, Section 12, Sections 14.1 to 14.3
inclusive, Section 14.5 and Sections 14.11 and 14.12, if Closing does
occur where the liability of the Buyer shall not be limited as set out
below) shall be as follows:-
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(a) if the Closing does not occur by reason of any of the Sellers
closing conditions not being met and satisfied the right only to
terminate this Agreement under Section 13.1(a) (iv) without any
liability (excluding for these purposes any liability under
Sections 14.2, 14.3, 14.5, 14.12 which continue ("Section 14
Liabilities") on the part of the Buyer (whether under breach of
contract, or in delict or quasi delict or to make restitution,
under any statute or otherwise) provided that if Closing does not
occur by reason only of a breach by the Buyer of Section 7.26
Section 11.16 shall apply.
(b) if the Buyer is proved to be in breach of any of the warranties
given under Section 6.1 as given by the Buyer at the date of this
Agreement subject to Schedule 6.1(g) to such extent as gives rise
to a liability on the part of the Buyer of an amount in excess of
$200,000 the right only not to proceed to Closing without any
liability (excluding "Section 14 Liabilities" which shall
continue) on the part of the Buyer, (whether under breach of
contract, or in delict or quasi delict or to make restitution,
under any statute or otherwise).
(c) if the Buyer is in breach of any of the warranties given in
Section 6.1 as at the date of this Agreement subject to Schedule
6.1(g) to such extent as gives rise to a liability on the part of
the Buyer of an amount below $200,000 the right only to sue the
Buyer subject to Section 6.2 without any other liability on the
part of the Buyer (whether under breach of contract, or in delict
or quasi delict or to make restitution, under any statute or
otherwise).
(d) if the Buyer is in breach of any of the warranties given in
Section 6.1 immediately before the Closing Date subject to
Schedule 6.1(g) as updated immediately before the Closing Date as
referred to in Section 10.4.2 the right only to sue the Buyer
subject to Section 6.2 without any other liability on the part of
the Buyer (whether under breach of contract, or in delict or quasi
delict or to make restitution, under any statute or otherwise).
(e) if the Buyer breaches Section 7.26 and Closing does not occur
Section 11.16 shall apply.
11.16 In the event of Closing not occurring by reason only of a breach by the
Buyer or the Sellers of Section 7.26 the liability of the persons or
entity in default shall be an amount not exceeding $400,000. If the
Sellers are liable for $400,000 the Buyer shall recover such sum from
each of the Sellers, other than Anderson Strathern Nominees Limited who
shall have no liability, in the proportion which such Sellers Shares at
the Closing Date bears to the total Shares in the capital of the
Company at the Closing Date (excluding those Shares held by Anderson
Strathern Nominees Limited).
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11.17 The provisions of Sections 11.15 and 11.16 shall survive any
termination of this Agreement.
11.18 Where there is any subdivision or consolidation and division of shares
of common stock of the Buyer following the date of this Agreement, the
Closing Value of a MicroFrame Share and the number of MicroFrame Shares
for the purposes of this Section 11 shall be adjusted appropriately in
a manner which is agreed between the Buyer and the Sellers
Representatives within two weeks of the event or, failing agreement,
certified in writing by PriceWaterhouseCoopers, auditors to the Buyer.
11.19 The Sellers shall not be entitled to recover against the Buyer
hereunder more than once in respect of the same loss, liability or
damage.
SECTION 12
TAXATION UNDERTAKING
All the provisions of this Section 12 shall be read subject to the other terms
of this Agreement.
In this Section:-
"Claim for Taxation" shall mean any notice, demand, assessment, letter or other
document issued or action taken by or on behalf of the Inland Revenue or Customs
and Excise or any other statutory or governmental authority or body whatsoever
in any part of the world from which it appears that a Liability to Taxation is
or will or may come to be imposed on the Company or the Subsidiary (whether or
not such Liability to Taxation is primarily imposed upon or payable by the
Company or the Subsidiary and whether or not the Company or the Subsidiary has
or may have any right of relief or reimbursement);
"Event" shall mean any transaction, action or omission of any person and any
event or occurrence of whatever nature, whether or not in the ordinary course of
business (including, without limitation, any failure to take any action which
would avoid an apportionment of deemed distribution of income) and shall include
Closing;
"Final Determination" shall mean in relation to a Claim for Taxation where there
is an appeal against such claim: (a) an agreement under Section 54 of the Taxes
Management Act 1970 or any legislative provision having an effect similar to the
effect of that section; or (b) a decision of a court or tribunal from which no
appeal lies or in respect of which no appeal is made within the prescribed time
limit;
"Liability to Taxation" shall mean any liability of the Company or the
Subsidiary to make any actual payment of or in respect of Taxation and also
means and includes: (a) the loss of, reduction in the amount of, cancellation or
set off of any right to repayment of Taxation treated as an asset in preparing
the March 1998 Accounts or the Subsidiary March 1998 Accounts which would
otherwise have been available to the Company or the Subsidiary; (b) the setting
off against income, profits or gains or against any Taxation (in either case in
respect of which, but for such setting off, the
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Company or the Subsidiary would have had a Liability to Taxation in respect of
which the Sellers are liable to make a payment to the Buyer under the Taxation
undertaking) of any Relief not available before Closing but which arises in
respect of any Event occurring after Closing but does not include the loss,
counteracting or reduction in the amount of any Relief arising in respect of any
Event occurring before Closing.
"Relief" shall mean any relief, allowance, exemption, credit or set-off against
any Taxation, and any relief, allowance, set-off or deduction in computing or
against profits, income or gains of any description or from any source for the
purposes of any Taxation;
"Taxation" shall mean all forms of taxation, duties, imposts, charges,
withholdings, contributions, impositions and levies in the nature of taxation
whatsoever and whenever imposed and whether of the UK or the U.S. and without
prejudice to the generality of the foregoing includes: (a) income tax,
corporation tax, advance corporation tax, capital gains tax, inheritance tax,
stamp duty, stamp duty reserve tax, rates, value added tax, customs and other
import duties, national insurance and social security contributions which the
Company or the Subsidiary may be or become bound to make to any person, revenue,
customs or fiscal authority or any other body or authority as a result of any
enactment relating to taxation and any other taxes, duties, levies or imposts
supplementing or replacing any of the foregoing; and (b) interest, fines or
penalties incurred in respect of any of the foregoing, except to the extent that
such interest, fine or penalties are attributable to the negligent or fraudulent
conduct of the Company or the Subsidiary after Closing.
12.1 The Sellers hereby undertake and covenant to pay to the Buyer but
subject always to the provisions of Sections 11 and 4 and the other
provisions of this Section 12 :-
(a) an amount equal to each and every Liability to Taxation which
arises in respect of or by reference to any income, profits or
gains earned or accrued or deemed for the purposes of any Taxation
to have been earned or accrued on or before Closing; and
(b) an amount equal to each and every Liability to Taxation which
arises as a consequence of or by reference to any Event occurring
or deemed for the purposes of any Taxation to have occurred on or
before Closing or as a consequence of or by reference to the
combined effect of two or more Events of which at least one occurs
or is deemed to have occurred on or before Closing but only to the
extent that the first mentioned Event is outside the ordinary
course of business of the Company or the Subsidiary and the second
or successive Events occur after Closing and are inside the
ordinary course of business of the Company or the Subsidiary; and
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(c) all reasonable costs and expenses properly incurred by the Company
or the Subsidiary or the Buyer in relation to any Liability to
Taxation in respect of which the Sellers are liable pursuant to
the foregoing provisions of this Section to make any payment to
the Buyer.
(d) No Liability to Taxation shall arise under this Clause 12.1 to the
extent that such Liability to Taxation represents deductions of
income tax, PAYE or national insurance contributions made from
payments by the Company or deductions of payroll withholding taxes
or social security tax from payments made by the Subsidiary after
31 March 1998, or to the extent that such Liability to Taxation
consists of value added tax chargeable after 31 March 1998 in the
usual way on supplies made by the Company or sales in use tax
chargeable after March 31, 1998 in the usual way on supplies made
by the Subsidiary but excluding interest, surcharge, penalties or
fine relating thereto or to the extent that such liability to
taxation consists of employers liability to national insurance
contributions or other payroll taxes in respect of wages or
salaries paid in the usual way.
12.2 The Sellers shall be liable to make payment under Section 12.1 above
notwithstanding the existence of any Reliefs, rights of repayment or
other rights or claims of a similar nature (in each case arising by
reason of an Event occurring after Closing) which may be set against or
available to set against or otherwise mitigate any Liability to
Taxation so that Section 12.1 shall take effect as though no such
Reliefs, rights of repayment or other rights or claims were available.
12.3 (a) All amounts payable by the Sellers to the Buyer under Section 12.1
above shall be paid free and clear of all deductions,
withholdings, set-offs or counterclaims whatsoever save only as
may be required by law. If any deductions or withholdings are
required by law to be made from any such amount the Sellers shall
be obliged to pay to the Buyer such additional amount or amounts
as will in aggregate be sufficient to ensure that after all
required deductions and withholdings have been made the Buyer
shall have received the same amount as it would have been entitled
to receive in the absence of any requirement to make a deduction
or withholding.
(b) If any amount payable by the Sellers to the Buyer under Section
12.1 shall itself be subject to any Taxation then the amount which
the Sellers shall pay to the Buyer shall be increased to such
larger amount as will ensure that after payment of the amount of
all Taxation payable on such larger amount there shall be left in
the hands of the Buyer the amount which the Buyer would have been
entitled to receive from the Sellers under Section 12.1 if such
amount was not subject to any Taxation.
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(c) The liability of the Sellers under this Clause 12.3 shall be no
greater than it would be were the Buyer UK resident for the
purposes of taxation and UK taxation law only applied to the
payments.
(a) The amount of any Liability to Taxation which arises as a result
of (a) in the definition of Liability to Taxation being applicable
shall be the amount of the repayment which has been lost,
cancelled or set off as the case may be.
(b) The amount of any Liability to Taxation which arises as a result
of (b) of the definition of Liability to Taxation applying shall
be the amount of Taxation that would have been payable but for the
set off of the Relief.
12.5 The Sellers shall make payment to the Buyer or otherwise satisfy in
respect of any matter for which they are liable under this Section
within seven days of receipt of a written demand (given reasonable
details of the matter giving rise to the payment) or if later:-
(i) insofar as the Company or the Subsidiary is required to make a payment
to discharge any Liability to Taxation, seven days before the date on
which that payment becomes due and payable; and
(ii) insofar as the Company or the Subsidiary would have required to make a
payment to discharge any Liability to Taxation but for the fact that
the Liability to Taxation has been set off against, or reduced or
otherwise mitigated by the availability of any Relief, seven days
before the date on which payment of the amount of the Liability to
Taxation would otherwise have become due and payable; and
(iii) insofar as the Liability to Taxation arises as a result of (a) in the
definition of Liability to Taxation being applicable, seven days before
the repayment of Taxation would have been received; and
(iv) insofar as the Liability to Taxation arises as a result of (b) in the
definition of Liability to Taxation being applicable, on the date upon
which the payment would have been due pursuant to the foregoing
provisions of this Section but for the setting off of the Relief
concerned.
12.6 (a) Upon Final Determination of any Claim for Taxation, the Sellers
shall within 7 days after a demand therefor pay to the Buyer such
amount or further amount in addition to the amounts already paid
as may be necessary to discharge in full the liability of the
Sellers under this Section.
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(b) Upon Final Determination of any Claim for Taxation where the
Liability to Taxation is less than the amount or amounts already
paid by the Sellers the Buyer will repay such shortfall within
seven days.
(c) If any payment due to be made by the Sellers or the Buyer under
this Section is not made on the due date for payment it shall
carry interest from the due date for payment until final payment
in full has been made at the rate of two per cent per annum above
base rate for lending from time to time of The Royal Bank of
Scotland plc provided that interest under this Clause 12.6 (c)
shall not be payable for any period for which the Sellers have
paid interest to the Buyer under Clause 12.1 or otherwise
discharges that liability to interest as part of the liability to
taxation.
12.7 The Sellers shall have no obligation to make any payment under this
Section in respect of any Liability to Taxation to the extent that
adequate provision reserve or allowance in respect thereof was
specifically and expressly made in the March 1998 Accounts or the
Subsidiary March 1998 Accounts.
12.8 (a) The Buyer shall notify the Sellers or shall procure that the
Sellers shall be notified, in writing of any Claim for Taxation
which comes to the notice of the Buyer or the Company or the
Subsidiary in respect of which the Buyer or the Company or the
Subsidiary considers that the Sellers are or may become liable to
make a payment to the Buyer under this Taxation Undertaking.
(b) Where a time limit for appeal applies to such Claim for Taxation,
the notification shall be given within 5 business days after the
date on which the Claim comes to the notice of the Company or the
Subsidiary but, where no time limit applies, the notification
shall be given within 21 days after that date.
(c) If the Sellers shall indemnify the Buyer and the Company or the
Subsidiary to their reasonable satisfaction against all liability,
costs, damages or expenses which may be reasonably and properly
incurred in respect of such Claim for Taxation the Buyer shall
procure that the Company or the Subsidiary shall take such action
as the Sellers Represenatives may reasonably request to avoid,
resist, defend or compromise the Claim for Taxation including
taking over conduct of the matter in the name of the Company or
the Subsidiary and shall afford reasonable access to the Company's
or the Subsidiary's relevant books and accounts and comply with
all reasonable directions given by the Sellers Representatives.
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12.9 In connection with the conduct of any dispute relating to a Claim for
Taxation to which this Section applies:-
(i) the Sellers Representatives shall keep the Buyer and the Company or
the Subsidiary informed of all relevant matters and the Sellers
Representatives shall forward or procure to be forwarded to the Buyer
copies of all correspondence and other written communications
pertaining to the Company or the Subsidiary;
(ii) the appointment by the Sellers Representatives of solicitors or other
professional advisers shall be subject to the prior approval in
writing of the Buyer (not to be unreasonably withheld or delayed);
(iii) the Sellers Representatives shall not make any settlement or
compromise of the dispute, (nor agree any matter in its conduct) which
is likely to increase the future Liability to Taxation of the Company
or the Subsidiary, without the prior approval in writing of the Buyer
(not to be unreasonably withheld or delayed);
(iv) if any dispute arises between the Company or the Subsidiary and the
Sellers Representatives as to whether the Claim for Taxation or
Liability to Taxation should at any time be settled in full or
contested in whole or in part, the dispute shall be referred for a
decision to a Queen's Counsel (or where relevant the appropriate
foreign equivalent) of at least ten years standing with expertise in
the relevant area of law, appointed by agreement between the Buyer and
the Sellers Representatives, or (failing agreement) upon the
application of either party to the President of the Law Society of
Scotland or where relevant the appropriate foreign equivalent. Such
Counsel shall be asked to advise whether, in his opinion, an appeal
against the Claim for Taxation or Liability to Taxation, would on the
balance of probabilities, be likely to succeed. If the opinion of such
Counsel is to the effect that on the balance of probabilities the
appeal would be likely to succeed then an appeal may be made if the
Sellers so decide. If the opinion of such Counsel is to the effect
that on the balance of probabilities an appeal against the Claim for
Taxation or Liability to Taxation would not succeed then the Claim for
Taxation or Liability to Taxation shall be settled as soon as
practicable. Any further dispute arising between the Sellers and the
Company or the Subsidiary as to whether any further appeal should be
pursued following determination of an earlier appeal (whether or not
in favour of the Company or the Subsidiary) shall be resolved in a
similar manner.
The Company or the Subsidiary shall be at liberty without reference to
the Sellers to admit, compromise, settle, discharge or otherwise deal
with any Claim for Taxation or Liability to
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Taxation if the Sellers Representatives do not give or delay
unreasonably in giving any such request as is mentioned in Section 12.8
above within twenty eight days notice to the Sellers Representatives.
SECTION 13
TERMINATION
13.1 Termination
(a) Notwithstanding anything to the contrary contained in this
Agreement, this Agreement may be terminated at any time by:
(i) the written consent of the Buyer and all of the
Sellers or the Sellers' Representatives on behalf of
the Sellers provided or supplied by Closing;
(ii) either the Buyer or the Sellers or the Sellers'
Representatives on behalf of the Sellers if the
Closing does not occur before December 31 1998;
provided, however, that the party seeking termination
under this Section 13.1 (a) (ii) shall not have
prevented the Closing from occurring or committed a
breach of Section 7.26 which has prevented Closing
from occurring;
(iii) the Buyer, if any of the conditions set forth in
Section 8 shall have become incapable of fulfilment
on or prior to December 31 1998, and shall not have
been waived by the Buyer in so far as capable of
waiver provided the Buyer shall not have prevented
any such conditions from being fulfilled or committed
a breach of Section 7.26;
(iv) the Sellers' Representatives on behalf of the
Sellers, if any of the conditions set forth in
Section 9 shall have become incapable of fulfilment
on or prior to December 31 1998, and shall not have
been waived by the Sellers' Representatives on behalf
of the Sellers provided none of the Sellers shall
have prevented any such conditions from being
fulfilled or committed a breach of Section 7.26;
(b) In the event of the termination of this Agreement by the Buyer
or Sellers' Representatives on behalf of the Sellers pursuant
to this Section 13.1, written notice thereof shall promptly be
given to the other party or parties and, except as otherwise
provided herein, the transactions contemplated by this
Agreement shall be terminated, without further action by any
party.
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13.2 Effect of Termination
(a) Upon the termination of this Agreement in accordance with
Section 13.1, this Agreement shall forthwith become null and
void save for this Section, and Sections 11, 14.2, 14.3, 14.4
and 14.5 and 14.6, without any liability on the part of the
parties hereto, and all obligations of the parties shall
terminate except those set out in this Section 13.2 (a) and
Sections 14.2, 14.3, 14.4,14.5 and 14.6. For the avoidance of
doubt Section 11.4 shall survive termination of this
Agreement. The parties agree that if this Agreement is
terminated pursuant to Section 13.1 by the Buyer by reason of
Sellers' failure or any of them to comply with the covenant
contained in Section 7.18, the Funding Sellers shall promptly
reimburse the Buyer the whole amount of its actual legal,
accounting, other professional and additional costs and
disbursements incurred in connection with the transactions
contemplated herein but not exceeding the amount of $400,000
and shall have no other liability or obligation. The Buyer
after evidence of such costs being given to the Sellers
Representatives shall only be entitled to collect these sums
from each of the Funding Sellers in the proportions set out
opposite their respective names in Section 7.18.
SECTION 14
MISCELLANEOUS
14.1 Fees
On Closing the Buyer shall make arrangements to pay the fees (including
VAT) and out-of-pocket expenses in respect of the transaction
contemplated hereby to those advisers whose names are listed in
Schedule 14.1 subject to the Buyer being reasonably satisfied that the
whole amount of the Funding has been received by the Company which fees
shall include any amounts paid to such advisers prior to Closing in
respect of this transaction (and such advisers shall account for such
sums to their respective clients).
14.2 Non Solicitation
14.2.1 If this Agreement does not become unconditional, the Buyer
covenants with each of the Sellers, the Company and the
Subsidiary that, for a period of 2 years from the date hereof,
it shall not solicit or induce any of the Company (or the
Subsidiary's) employees to leave their employment;
14.2.2 The Buyer undertakes that the statutory merger which it is
about to undertake will not, of itself, trigger termination of
options in the Buyer to be granted under this Agreement.
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14.3 Confidentiality/Buyer
The Buyer hereby covenants with the Company for itself and also for the
Subsidiary and with each of the Sellers that from the date hereof until
Closing and as from any termination of this Agreement, the Buyer will
hold, and will use its best efforts to cause its affiliates, officers,
directors, employees, accountants, counsel, consultants, advisors and
agents to hold, in confidence, unless compelled to disclose by judicial
or administrative process or by other requirements of law, all
confidential and proprietary information disclosed by or on behalf of
the Company or the Subsidiary orally or in writing with respect to
their respective businesses and operations ("Company Confidential
Information"), except to the extent that such information can be shown
to have been (i) previously known on a non-confidential basis by the
Buyer, (ii) in the public domain through no fault of the Buyer or (iii)
later lawfully acquired by the Buyer from sources other than the
Company or the Subsidiary or any Seller or their respective agents. If
the Closing does not occur the Buyer agrees that (i) it shall not use
any of the Company Confidential Information now or hereafter received
or obtained in furtherance of its business, or the business of anyone
else and shall return the same promptly to the Company (ii) it will use
its best efforts to cause its affiliates, officers, directors,
employees, accountants, counsel, consultants, advisors and agents to
destroy or deliver to the Company, upon request, all such Company
Confidential Information, obtained by the Buyer that contain or
constitute Company Confidential Information.
14.4 Confidentiality/Seller
Each of the Sellers hereby covenants that from the date hereof until
Closing and as from any termination of this Agreement, the each of the
Sellers will hold, and will use its best efforts to cause his
affiliates, accountants, counsel, consultants, advisors and agents to
hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all
confidential and proprietary information disclosed by or on behalf of
the Buyer orally or in writing with respect to its businesses and
operations ("Buyer Confidential Information"), except to the extent
that such information can be shown to have been (i) previously known on
a non-confidential basis by any of the Sellers, (ii) in the public
domain through no fault of any of the Sellers or (iii) later lawfully
acquired by any of the Sellers from sources other than the Buyer. If
the Closing does not occur each of the Sellers agrees that (i) he shall
not use any of the Buyer Confidential Information now or hereafter
received or obtained in furtherance of his business, or the business of
anyone else and shall return the same promptly to the Buyer (ii) he
will use its best efforts to cause his affiliates, accountants,
counsel, consultants, advisors and agents to destroy or deliver to the
Buyer, upon request, all such Buyer Confidential Information, obtained
by him that contain or constitute Buyer Confidential Information.
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4.5 Public Announcements
Each of the Sellers and the Buyer agrees that he or it shall not issue,
prior to the Closing Date, any press release or make any public
statement in respect of this Agreement or the transactions contemplated
hereby or by the documents to be entered into pursuant hereto without
the prior written consent of the Sellers' Representatives on behalf of
the Sellers and the Buyer, save as may be required by applicable law or
regulation (including regulations of the NASDAQ Small Cap Market). If
the Closing does not take place, the Buyer shall forthwith hand over or
procure the handing over of all accounts, records, documents and papers
of or relating to the Sellers and the Company and the Subsidiary which
shall have been made available to it including the Disclosure Letter
any Supplemental Disclosure Letter and their annexures and all copies
or other records derived from such materials, and expunge any
information derived from such materials or otherwise concerning the
subject matter of this Agreement from any computer, word processor or
other device containing information, provided that this shall not apply
to information available from public records or information acquired by
the Buyer otherwise than from the Sellers. For the avoidance of doubt
the Buyer's legal or financial advisers shall be entitled to retain
papers, records and documents reasonably necessary to be retained as
evidence of work done.
14.6 Whole Agreement
This Agreement, together with its Schedules and Exhibits and other
documents to be entered into pursuant hereto, contains the whole
agreement between the parties relating to the transactions provided for
therein. This Agreement and the Schedules and Exhibits, and the
documents to be entered into pursuant hereto supersede all previous
agreements (if any) between such parties in respect of such matters
(and it is hereby expressly agreed that the Letter of Intent dated 9
April 1998 between the Company, the Subsidiary and the Executive
Directors shall be expressly superseded) and each of the parties
acknowledges that, in agreeing to enter into this Agreement and the
documents to be entered into pursuant hereto:-
(i) it has not relied on any pre-contractual statement, representation or
opinion (whether oral or written and whether express or implied) made
by any person;
(ii) the Buyer hereby waives any right which it has or may have to raise
an action against any Seller based on innocent or negligent
misrepresentation in respect of any statement, opinion or
representation other than in respect of any breach of any of the
Warranties expressly granted to the Buyer under Section 3 or the
warranties expressly granted under Sections 5 or 10.5 of this
Agreement liability for which shall be determined in accordance with
Section 11;
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(iii) Section 14.6 (ii) above shall not operate so as to exclude any
remedies which the Buyer has or may have against the Sellers or any
of them for any fraudulent misrepresentation.
14.7 Amendment and Modification
This Agreement may be amended, modified or supplemented only by written
agreement of each of the Sellers, the Company and the Buyer.
14.8 Sellers' Representatives
14.8.1 Such of the Sellers ("the Investor Sellers") as hold in
aggregate 80% in nominal value of the Investors Shares (as
defined below) shall be entitled to appoint such person as
they in their sole discretion shall decide (and to remove such
person) as one of the Sellers' Representatives and his
alternate for the purpose of performing the functions set out
in this Agreement by notice in writing to the Buyer signed by
or on behalf of the Investor Sellers and (in case of
appointment) the relevant person accepting such appointment.
The parties hereto agree that Barry Sealey shall be deemed to
be the first such Sellers' Representative appointed at the
date hereof pursuant to this Section 14.8.1.
14.8.2 Such of the Sellers as hold in aggregate 60% in nominal value
of the Ordinary Shares as at the date hereof other than the
Investor Shares in issue at the date hereof (the "Other
Shares") shall be entitled to appoint such person as they in
their sole discretion shall decide (and to remove such person)
as one of the Sellers' Representatives and his alternate for
the purpose of performing the functions set out in this
Agreement by notice in writing to the Buyer signed by or on
behalf of such Sellers holding in aggregate 60% in nominal
value of the Other Shares and (in case of appointment) the
relevant person accepting such appointment all as set out in
Schedule 14.8. The parties hereto agree that Peter Wilson
shall be deemed to be the first such Sellers' Representative
appointed at the date hereof pursuant to this Section 14.8.2.
14.8.3 Each of the Sellers undertakes to the Buyer that they shall
use all reasonable endeavours to procure (i) that the number
of Sellers' Representatives from time to time shall not be
less than two and (ii) the Sellers Representatives perform
their duties in terms of this Agreement.
14.8.4 Each of the Sellers' Representatives alternates shall have
full power and authority to carry out the functions of his
appointer in his absence. An alternate shall be entitled to
receive from the Buyer copies of any notices sent to his
appointer. An alternate shall continue to be an alternate if
his appointer ceases to be a Sellers' Representative unless
and until the relevant Sellers remove him. Any appointment or
removal or an
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alternate shall be by notice in writing delivered to the other
Sellers' Representative and to the Buyer.
14.8.5 For the purposes of this Section 14.8, "Investors Shares"
means those ordinary shares in the Company which are held at
the date hereof by Ann Gloag, Brian Souter, Andrew Sealey,
Helen Sealey, Lady Margaret Elliot, Michael Rutterford, June
Rutterford and EFG Reads Trustees Limited.
14.8.6 Each Seller hereby irrevocably grants the Sellers'
Representatives acting unanimously full power and authority on
behalf of such Seller:
(i) to waive any of the conditions set out in section 9 of this Agreement
in their absolute discretion or to agree that all or any of such
conditions are fulfilled or satisfied for the purpose of this
Agreement and to confirm the same to the Buyer in writing;
(ii) to (a) dispute or refrain from disputing any Relevant Claim made by
the Buyer under this Agreement; (b) remedy or seek to remedy the
circumstances giving rise to such a claim; (c) negotiate and
compromise any such claim where so permitted in terms of this
Agreement; (d) engage lawyers, attorneys and agents; (e) execute any
settlement agreement, release or other document with respect to such
claim; (f) refer or agree to refer to a Scottish Queen's Counsel the
question of whether or not there is a reasonable prospect of defending
such a claim within specified cost parameters; (g) operate under the
Escrow Agreement in accordance with its terms;
(iii) to give or agree to any and all consents and waivers deemed by the
Sellers' Representatives in their sole discretion to be necessary or
appropriate under this Agreement and, in each case, and, if
appropriate to return the same to such Seller to deliver any documents
that may be necessary or appropriate in connection therewith; and
(iv) to give such instruction or take such action or refrain from taking
such action in relation to this Agreement as the Sellers'
Representatives deem in their sole discretion necessary or
appropriate;
(v) to execute and deliver the Escrow Agreement;
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(vi) to accept in such Seller's name and on such Seller's behalf share
certificates in respect of the MicroFrame Shares deliverable pursuant
to Section 1.2, such certificates to be sent to each of the Sellers at
such Seller's address as set out in Schedule 1 by recorded delivery at
such Seller's sole risk and to deliver to the Escrow Agent the
Escrowed MicroFrame Shares;
(vii) to accept delivery of such Seller's share certificates and share
transfers pursuant to Section 1.3;
(viii) to execute and deliver in the name and on behalf of such Seller any
and all Closing documents, receipts or certificates required to be
delivered hereunder or in connection with any agreements contemplated
hereunder;
(ix) to receive from the Buyer a list in the form set out in Schedule 7.28
(the "Closing Share Allocation List") which sets out the MicroFrame
Shares including the Escrowed MicroFrame Shares to which each of the
Sellers is entitled as calculated in accordance with Section 1.2 and
to consult and agree the same with the Buyer; and
(x) to terminate this Agreement under Section 13
14.8.7 Each Seller hereby agrees that:
(i) if either of the Sellers' Representatives resigns or is removed or
otherwise ceases to function in his capacity as such for any reason
whatsoever, the sole Sellers' Representative shall be authorised to
act together with the alternate of the other Sellers' Representative
on behalf of the Sellers under this Section 14.8.7 until a second
Sellers' Representative is appointed;
(ii) the authority of the Sellers' Representatives hereunder shall be
effective until the rights and obligations under this Agreement shall
have terminated;
(iii) there shall at no time be more than two Sellers' Representatives;
(iv) the Sellers Representatives shall be authorised to carry out the
functions ascribed to them under this Agreement and the Escrow
Agreement.
14.8.8 In carrying out their functions hereunder, the Sellers'
Representatives shall be entitled to exercise their discretion
and shall not be obliged to consult with the Sellers,
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provided that if the Sellers' Representatives elect to consult
with the Sellers, such consultation shall not in any way
affect the right of the Sellers' Representatives to exercise
their discretion as aforesaid. The acts of the Sellers'
Representatives carried out in terms of this Agreement and the
Escrow Agreement shall in all circumstances bind the Sellers.
14.9 Waiver of Compliance: Consents
Except as otherwise provided in this Agreement, any failure of any of
the parties to comply with any obligation, covenant, undertaking,
agreement or condition herein may be waived by the party entitled to
the benefits thereof only by written instrument signed by the party
granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel or personal bar or acquiescence
with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of a party, such
consent shall be given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section
14.9.
14.10 Notices
All notices and other communications hereunder shall be given or served
by personal delivery or by registered or certified mail (return receipt
requested), postage prepaid, or by facsimile to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice, provided that notices of a change of address
shall be effective only upon receipt thereof):
If to the Buyer, to:
MicroFrame, Inc.
21 Meridian Avenue
Edison, New Jersey 08820
Attention: Stephen B. Gray
Fax No.: 732-494-4570
with copies to:
James Alterbaum, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Fax No.: 212-704-6288
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Kathleen Stewart
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
Fax No.: 0131 623 7201
("Buyer's UK Legal Advisers")
If to the Company, to:
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
Livingston EH54 7DE
Scotland
Fax No.: 1506-461-717
If to the Sellers or any of the Sellers, to each of them at their
respective addresses set out in Schedule 1 with a copy to:
Michael Sloyer Esq
Mayer Brown Platt
1675 Broadway, New York, New York 1009 5820
Fax No : 001-212-262-1910
and
Marian Glen
Shepherd & Wedderburn
155 St. Vincent Street
Glasgow G2 5WR
Scotland, UK
Fax No : 0141-565-1222
If to the Sellers' Representatives, to both of them and with a copy to
their alternates at their respective addresses set out in Schedule
14.10 with a copy to Michael Sloyer and Marian Glen (whose contact
details are set out above). If a new Sellers' Representative or
alternate is appointed, written notice of such appointment with
relevant contact details for the purpose of this Section 14.10 shall be
sent to the Buyer as soon as practicable after the relevant
appointment.
All such notices and other communications shall be deemed given or
delivered or served when received, or 48 hours after mailing, or 24
hours after facsimile whichever occurs first and in proving service by
mail it shall be necessary to prove that the communication was duly
addressed and posted in accordance with this Section.
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14.11 Assignation
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto, their heirs and their
respective successors and permitted assignees. The Buyer's rights
hereunder may only be assigned to any affiliate of the Buyer, and then
solely in connection with a corporate reorganisation of the Buyer
provided that the surviving entity resulting from such reorganisation
shall continue the business and operations of the Buyer and shall
assume all of the rights and obligations of the Buyer hereunder.
Neither the Company nor any Seller may assign or transfer any of its
rights or obligations hereunder without the prior written consent of
the Buyer. The Buyer shall not be entitled to transfer its obligations
under this Agreement. If the Buyer assigns its rights hereunder in
accordance with Section 14.11 Section 4 shall continue to apply and
reference therein to "the Buyer" shall be deemed to include a reference
to the relevant assignee.
14.12 Governing Law
(a) Subject as set forth in this Section this Agreement shall be construed
in accordance with and governed by the laws of Scotland.
Any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this Agreement as so construed and
governed shall be brought against any of the parties in the Court of
Session, Edinburgh, Scotland and each of the parties hereby submits in
respect of such matters to the exclusive jurisdiction of such Court
(and the appropriate appellate court) in any such action or proceeding.
The Buyer hereby undertakes to each of the parties hereto that it shall
observe the provisions of this Section 14.12 (a) and it shall not raise
any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this Agreement in respect of such matters
in any Court other than the Court of Session in Edinburgh.
(b) Solely for the purposes of establishing as a matter of fact whether a
warranty given by the Sellers in terms of which it is warranted that
the requirements of any piece of American legislation or any
regulations made in terms thereof has been breached or not, the parties
agree that the words and phrases within such legislation or regulations
will be interpreted in accordance with the law of the state of New
York. For the avoidance of doubt nothing in this section shall affect
the governing law provisions in Section 14.12 (a).
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(c) All matters whatsoever in connection with, or relating to, any U.S.
securities laws or regulations contained in this Agreement
("Securities Matters") namely those set out in Sections 5.1 (d); 5.2;
6.1(e), (h) and (i); 7.16; 7.20.1 (second paragraph), 7.20.2 (last
paragraph), 7.32; 8 (i), (j), (k) and (l); 9 (m), (n), (o) and (p),
shall be governed by and construed in accordance with the federal laws
of the United States (regardless of the laws that might otherwise
govern under applicable principles of choice or conflicts of law) as
to all matters, including but not limited to matters of validity,
construction, effect, performance and remedies. Jurisdiction and venue
of any suit or action to enforce any provisions contained in this
Agreement in connection with any Securities Matters shall rest solely
in the federal courts located in the State of New York, County of New
York and the Buyer, the Company and each Seller hereby submit to the
personal jurisdiction of the federal courts located in the State of
New York, County of New York for the purpose of resolving any and all
matters arising under or in respect of this Agreement in connection
with any Securities Matters and agree that personal service upon each
such party may be made by delivery thereof to such party at the
address specified herein (which, in the case of service upon any
Seller, shall include service upon the Sellers' Representatives).
14.13 Exchange Rate
For purposes of this Agreement, the exchange ratio between U.S.
dollars and U.K. pounds sterling in connection with any references to
U.S. dollars contained herein shall be $1.6319 for each U.K. pound
sterling.
14.14 Severability
The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision hereof.
IN WITNESS WHEREOF, the parties have subscribed this Agreement as follows:
SUBSCRIBED at on
for and on behalf of Anderson Strathern Nominees Limited by
John Kerr, Director in the presence of
SUBSCRIBED at on
for and on behalf of Frances Loretta DeLaura by Peter Atholl
Wilson her duly appointed attorney in the presence of:
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<PAGE>
SUBSCRIBED at on
for and on behalf of Andrew Edward Sealey, Helen Sealey, Brian
Souter, Lady Margaret Elliott and Ann Heron Gloag
by Barry Sealey, their duly appointed attorney in the
presence of:
SUBSCRIBED at on
by William Hugh Evans, a trustee of The Hugh Evans Family
Trust constituted by Declaration of Trust dated
September 13 1997 in the presence of:
SUBSCRIBED at on
by Keith Laing in the presence of:
SUBSCRIBED at on
by Keith Laing for and on behalf of Colin Laing as his duly
appointed attorney in the presence of:
SUBSCRIBED at on
by Peter James MacLaren for himself and and for and on behalf of
Elizabeth Marie McQuillan as her duly appointed
attorney in the presence of:
SUBSCRIBED at on
by John Kerr as the duly appointed attorney of EFG Reads
Trustees Limited the present and sole trustee of Mrs J
G Rutterford's 1991 Trust in the presence of:
SUBSCRIBED at on
by John Kerr as the duly appointed attorney of EFG Reads
Trustees Limited the present and sole trustee of M D
Rutterford's 1991 Trust in the presence of:
121
<PAGE>
SUBSCRIBED at on
by William Hugh Evans in the presence of:
SUBSCRIBED at on
by John Kerr as the duly appointed attorney of June Georgina
Rutterford in the presence of:
SUBSCRIBED at on
by John Kerr as the duly appointed attorney of Ali Reza Taheri in
the presence of:
SUBSCRIBED at on
by Peter Atholl Wilson for himself and separately as guardian of
Alison Elizabeth Wilson in the presence of:
SUBSCRIBED at on
by Michael David Rutterford in the presence of:
SUBSCRIBED at on
for and on behalf of the Company by Peter Atholl Wilson, Director
in the presence of:
SUBSCRIBED at on
for and on behalf of MicroFrame Inc. by John McTigue, its Chief
Financial Officer, in the presence of:
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<PAGE>
EXHIBIT A
ESCROW AGREEMENT
among
(1) MICROFRAME, INC
(2) CERTAIN OF THE SHAREHOLDERS OF SOLCOM SYSTEMS LIMITED
(3) THE SELLERS' REPRESENTATIVES (ON BEHALF OF CERTAIN OF THE
SHAREHOLDERS OF SOLCOM SYSTEMS LIMITED)
and
(4) DUNDAS & WILSON CS
relating to the deposit of shares of
the Common Stock of MicroFrame Inc.
Shepherd & Wedderburn WS
155 St Vincent Street
GLASGOW G2 5NR
[GRAPHIC OMITTED]
Tel: 0141-566-9900
Fax: 0141-565-1222
<PAGE>
AGREEMENT
among
MICROFRAME, INC. a New Jersey
corporation, having its principal
place of business at 21 Meridian
Avenue, Edison, New Jersey 08820
(hereinafter called the "Buyer");
and
THE INDIVIDUALS whose names and
addresses are set out in Part I of
the Schedule (the "Selling
Shareholders');
and
BARRY SEALEY AND PETER WILSON
(hereinafter called the "Sellers'
Representatives" which expression
shall include any replacement or
replacements and their respective
alternates in terms of the Share
Purchase Agreement (as defined
below)) acting for and on behalf of
the Selling Shareholders whose
addresses are set out in Part 1 of
the Schedule;
and
DUNDAS & WILSON CS, having its
principal place of business at
Saltire Court, 20 Castle Terrace,
Edinburgh EH1, 2EN (hereinafter
called the "Escrow Agent").
-------------------------------
WHEREAS
(A) Pursuant to an agreement dated 13 August 1998 (the "Share
Purchase Agreement") among the Buyer, the Selling Shareholders
and SolCom (as defined below) and pursuant to certain other
agreements, the Buyer is acquiring all of the issued shares in
SolCom Systems Limited, a company incorporated in Scotland
under the Companies Act (number SC 129008) ("SolCom") from
inter alios the Selling Shareholders in exchange for shares of
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<PAGE>
Common Stock, par value $.001 per share, of the Buyer ("Buyer
Stock") and completion of the Agreement ("Closing") is subject
to the fulfilment of certain conditions.
(B) The Share Purchase Agreement provides that the Buyer will
deliver to the Escrow Agent Escrowed MicroFrame Shares (as
hereinafter defined) to be held by the Escrow Agent on deposit
and released subject as hereinafter set out on the first
anniversary of the date on which Closing occurs (the
"Termination Date").
(C) The Sellers' Representatives are duly authorized pursuant to
the Share Purchase Agreement by the Selling Shareholders inter
alia to enter into this Escrow Agreement and act on behalf of
the Selling Shareholders and to deal with the Escrowed
MicroFrame Shares (as hereinafter defined) on the terms of
this Escrow Agreement.
NOW THEREFORE IT IS HEREBY AGREED as follows
1. Delivery of Escrowed MicroFrame Shares
1.1 On the date of Closing (the "Closing Date"),
the Buyer shall deposit with the Escrow
Agent on behalf of the Selling Shareholders
stock certificates in the names of the
Selling Shareholders in respect of the Buyer
Stock to be placed in escrow pursuant to
Section 1.4 of the Share Purchase Agreement.
The shares so deposited are hereinafter
referred to as the "Escrowed MicroFrame
Shares".
1.2 The Escrow Agent agrees to accept the
Escrowed MicroFrame Shares and to hold and
distribute them in the manner provided
herein.
1.3 Not later than three Business Days after the
Closing Date, the Buyer and the Sellers'
Representatives shall jointly deliver to the
Escrow Agent a list in the form set out in
Part 3 of the Schedule signed by or on
behalf of the Buyer and the Sellers'
Representatives showing inter alia the
number of Escrowed MicroFrame Shares
attributable to each Selling Shareholder and
a percentage figure opposite such Selling
Shareholder's name, being such Selling
Shareholder's "Pro Rata Share" for the
purposes of Clause 7 only of this Agreement
(such list together with any and all
supplementary lists delivered by the Buyer
to the Escrow Agent with a copy to the
Sellers' Representatives from time to time
being referred to as the "Escrowed
MicroFrame Share Allocation List"). For the
purposes of this Agreement, "Pro Rata Share"
shall mean with respect to each Selling
Shareholder, the percentage obtained by
dividing the total number of Escrowed
MicroFrame Shares allocated to such Selling
Shareholder in the Escrowed MicroFrame Share
Allocation List delivered under Clause 1.3
(as modified (if at all) by the provisions
of any of Clauses 6.1, 6.2(v) and 7.4) by
the total of all Escrowed MicroFrame Shares
shown in such Escrowed MicroFrame Share
Allocation List. Provided that it has been
copied to the Sellers' Representatives and
this has been confirmed in writing to the
Escrow Agent by the Buyer, the Escrow Agent
may rely on a Escrowed MicroFrame Share
Allocation List for all purposes unless and
until the
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<PAGE>
Sellers' Representatives deliver an
objection thereto in writing pursuant to
Clause 11.
2. Voting and Other Rights
(a) If a meeting of stockholders of the Buyer
occurs or there is a tender offer or any
other offer by a third party to acquire the
shares of common stock of the Buyer in whole
or in part (an "Offer"), in each case while
this Agreement is still in effect, the Buyer
shall promptly notify the Escrow Agent of
such fact and the Escrow Agent shall
promptly send to the Sellers'
Representatives for distribution to the
Selling Shareholders copies of any notices,
documents, proxies and proxy materials, if
any, received by the Escrow Agent in
connection with such meeting or offer. It is
acknowledged and agreed by all parties that
notwithstanding that the Escrowed MicroFrame
Shares are held by the Escrow Agent on the
terms of this Agreement, each of the Selling
Shareholders shall be entitled to (i)
exercise all rights as members in respect of
such shares; and (ii) execute and deliver,
up to the whole number of such Escrowed
MicroFrame Shares held on behalf of such
Selling Shareholder on acceptance of any
Offer for such Selling Shareholder's
Escrowed MicroFrame Shares and the Escrow
Agent shall release and deliver up the
relevant stock certificates to the Sellers'
Representatives on receipt of a joint notice
from the Buyer and the Sellers'
Representatives which has been agreed by the
Buyer and the Sellers' Representatives. It
is further agreed and acknowledged that,
without prejudice to the foregoing, at all
times, each of the Selling Shareholders
shall continue to be entitled to vote,
attend meetings and receive dividends
(whether in cash or scrip) in respect of his
Escrowed MicroFrame Shares and to receive
from the Buyer all notices, documents,
proxies and proxy materials as shareholders
in the Buyer.
3. Dividends and Distributions
3.1 For the avoidance of doubt the Buyer agrees
that any Buyer Stock issued by the Buyer in
respect of the Escrowed MicroFrame Shares of
a Selling Shareholder shall not become a
part of the Escrowed MicroFrame Shares and
shall be delivered directly by the Buyer to
such Selling Shareholder save for any Buyer
Stock which is issued by way of scrip issue
in respect of Escrowed MicroFrame Shares
which shall be delivered to the Escrow Agent
and held in escrow on behalf of the relevant
Selling Shareholders pursuant to this
Agreement and the provisions of this
Agreement regarding the delivery of revised
Escrowed MicroFrame Share Allocation Lists
shall apply mutatis mutandis.
3.2 For the avoidance of doubt, the Buyer agrees
that any cash, securities or other property
(not being Buyer Stock) paid or distributed
or issued by the Buyer in respect of the
Escrowed MicroFrame Shares of a Selling
Shareholder shall be paid directly to such
Selling Shareholder.
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<PAGE>
4. Claims Procedure - (1) Notice of Claim
4.1 If the Buyer has any claim under Section 11
in respect of Section 5, Section 10.5,
Section 3 as updated by Section 10.2 or
Section 12 or under Schedule 7.18 of the
Share Purchase Agreement (each for the
purposes of this Agreement, a "Buyer
Claim"), the Buyer shall deliver a written
notice thereof to (i) the Escrow Agent and
(ii) the Sellers' Representatives. Such
notice (a "Notice of Claim") shall contain a
brief description of the basis of the claim
and the other matters set out in Section 4.1
of the Share Purchase Agreement. For the
avoidance of doubt it is agreed between the
Buyer and the Sellers' Representatives that
such Notice of Claim shall be delivered in
addition to the relevant notice required to
be delivered by the Buyer to the Sellers
with a copy to the Sellers' Representatives
under Section 4.1 of the Share Purchase
Agreement.
4.2 No Notice of Claim may be delivered
hereunder after 5.00 pm on the Business Day
immediately prior to the Termination Date.
4.3 In this Agreement, a "Business Day" means
any day upon which the Escrow Agent is open
for the transaction of all business in
Edinburgh.
5. Claims Procedure - (2) Notice of Objection
5.1 If the Seller's Representatives wish to
object to a Notice of Claim for any reason
(whether as to liability or the amount
claimed for or otherwise), they shall give
written notice to the Buyer, with a copy to
the Escrow Agent, within 14 Business Days of
receipt of such notice of claim, advising
the Buyer that they object to the Notice of
Claim (a "Notice of Objection").
5.2 If no timeous Notice of Objection is
received by the Buyer and the Escrow Agent
from the Sellers' Representatives, the Buyer
may deliver to the Escrow Agent a notice
advising the Escrow Agent to release and
deliver to the Buyer in accordance with
Clause 6 hereof and Section 11 of the Share
Purchase Agreement from each Selling
Shareholder such number of Escrowed
MicroFrame Shares, if any, (rounded upwards
to the nearest whole number of Escrowed
MicroFrame Shares) as have an aggregate
value (such value being calculated as
specified in Clause 5.5) equal to the amount
claimed for in the Notice of Claim for which
such Selling Shareholder is liable under
Section 11 of the Share Purchase Agreement,
and the Escrow Agent shall release and
deliver to the Buyer such shares rounded
upwards to the nearest whole number of
shares from the Selling Shareholders in the
manner provided in Clause 6.2. If any such
notice is to be delivered by the Buyer it
shall be countersigned by the Sellers'
Representatives to signify their agreement
and the Sellers' Representatives hereby
agree to countersign a valid notice . The
Escrow Agent shall be entitled to rely on
the calculation of the number of Escrowed
MicroFrame Shares to be released and
delivered as set out in the joint notice
from the Buyer and the Sellers'
Representatives.
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<PAGE>
5.3 If a timeous Notice of Objection is received
by the Buyer from the Sellers'
Representatives, and if the Buyer and the
Sellers' Representatives are able to settle
the relevant claim, in whole or in part,
they shall document such settlement in
writing and immediately thereafter shall
deliver to the Escrow Agent a joint notice
instructing the Escrow Agent to release and
deliver from each Selling Shareholder (if
such Selling Shareholder is liable in
respect of the claim) such number of
Escrowed MicroFrame Shares to the Buyer as
have an aggregate value (such value being
calculated as specified in Clause 5.5) equal
to the amount of such agreed claim for which
such Selling Shareholder is liable under
Section 11 of the Share Purchase Agreement
and the Escrow Agent shall release and
deliver such shares rounded upwards to the
nearest whole number of shares in the manner
and otherwise as provided in Clause 6.
5.4 If a timeous Notice of Objection is received
by the Buyer from the Sellers'
Representatives, and if the Buyer and the
Sellers' Representatives are unable to reach
an agreement pursuant to Clause 5.3 within
three weeks after the delivery of the Notice
of Objection then the Buyer or the Sellers'
Representatives may raise proceedings in
respect of the matter in dispute in the
Court of Session in Scotland which shall
have exclusive jurisdiction in respect of
such matter. If the Court of Session renders
a final judgement or decree or if there is a
final settlement that the Buyer is entitled
to recover any or all of a disputed amount
of claim, the Buyer shall deliver such
written judgement, decree or settlement to
the Escrow Agent. Such written judgement,
decree or settlement shall constitute
instructions to the Escrow Agent when
delivered to the Escrow Agent together with
the joint notice served pursuant to Clause
5.3 advising the Escrow Agent to release and
deliver to the Buyer from each of the
Selling Shareholders such number of Escrowed
MicroFrame Shares specified in the written
judgement, decree or settlement or where
this is not specified, such number of
Escrowed MicroFrame Shares (rounded upwards
to the nearest whole number of Escrowed
MicroFrame Shares) as have an aggregate
value (such value being calculated as
specified in Clause 5.5) equal to the
amount, if any, which the written judgement,
decree or settlement specifies the Buyer is
entitled to recover from such Selling
Shareholder, and the Escrow Agent shall
release and deliver such shares in the
manner and otherwise as provided in Clause
6. The Escrow Agent shall be entitled to
rely on the calculation of the number of
Escrowed MicroFrame Shares to be transferred
as set out in a joint notice from the Buyer
and the Sellers Representatives and the
Sellers' Representatives agree to execute a
valid notice prepared by the Buyer within 48
hours of delivery of the same to each of
them.
5.5 For the purposes of this Agreement the value
of a Escrowed MicroFrame Share shall be that
set out in Section 11.9 of the Share
Purchase Agreement. Where there is any
subdivision or consolidation and division of
the Buyer Stock following the date of this
Agreement, the value of an Escrowed
MicroFrame Share and the number of Escrowed
MicroFrame Shares for the purposes of this
Agreement shall be adjusted appropriately in
a manner which is agreed between the Buyer
and the
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<PAGE>
Sellers' Representatives within 2 weeks of
the event or failing agreement certified in
writing by PriceWaterhouseCoopers LLP (or
such other firm of accountants as may be
agreed between the Buyer and the Sellers'
Representatives or failing agreement
nominated by the President of the Institute
of Chartered Accountants in Scotland). The
Escrow Agent shall be notified in writing by
the Buyer and the Sellers' Representatives
of any adjustment.
6. Transfer of Escrowed MicroFrame Shares
6.1 The Buyer shall only deliver to the Escrow
Agent stock certificates which are
denominated in amounts which are equal to or
less than 200,000 shares of Buyer Stock. If
the Escrow Agent is required pursuant to
Clauses 5.2, 5.3, 5.4 or 7 to release and
deliver Escrowed MicroFrame Shares, and if
the Escrow Agent is able only to release and
deliver in respect of a Selling Shareholder
to the Buyer stock certificates for the
Escrowed MicroFrame Shares as specified in
Clause 6 for Buyer Stock which is greater
than the amount for which such Selling
Shareholder is liable, the Escrow Agent
shall only do so against a letter from the
Buyer addressed to the Escrow Agent and the
Sellers Representatives undertaking to
redeliver to the Escrow Agent balancing
certificates in the appropriate names of the
relevant Selling Shareholders representing
the balance of shares of Buyer Stock which
will remain Escrowed MicroFrame Shares.
Within five Business Days after the transfer
of Escrowed MicroFrame Shares under this
Clause 6, the Buyer shall deliver to the
Escrow Agent and the Sellers'
Representatives a revised Escrowed
MicroFrame Share Allocation List. Provided
that it has been copied to the Sellers'
Representatives and this has been confirmed
in writing to the Escrow Agent by the Buyer,
the Escrow Agent may rely upon such revised
Escrowed MicroFrame Share Allocation List
unless and until the Sellers'
Representatives deliver an objection thereto
in writing.
6.2 Where any Escrowed MicroFrame Shares are to
be released and delivered to the Buyer in
respect of any claim where no Notice of
Objection is delivered under Clause 5.2 or
which is either in whole or in part agreed
between the Buyer and the Sellers'
Representatives under Clause 5.3 or is
resolved in favour of the Buyer under Clause
5.4 (any such claim being referred to as a
"successful claim") the following provisions
shall apply:
(i) all successful claims shall be
denominated in US dollars in accordance with
the Share Purchase Agreement;
(ii) the value attributable to an Escrowed
MicroFrame Share shall be ascertained in
accordance with Clause 5.5;
(iii) the Escrowed MicroFrame Shares shall
be released and delivered from the relevant
Selling Shareholders in respect of any
successful claim or claims
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<PAGE>
in the manner and proportions specified by
the Share Purchase
Agreement;
(iv) the Buyer shall deliver to the Escrow
Agent a notice in writing (a "Recovery
Notice") signed by the Buyer and the
Sellers' Representatives which shall set out
the names of each of the Selling
Shareholders and the number of Escrowed
MicroFrame Shares, if any, which the Buyer
is entitled to recover in respect of the
successful claim from the Selling
Shareholders in accordance with the
provisions of Section 11 of the Share
Purchase Agreement and the Sellers'
Representatives agree to execute a valid
Recovery Notice prepared by the Buyer within
48 hours of delivery of the same to each of
them;
(v) at the time of delivery of the Recovery
Notice, the Buyer shall deliver to the
Escrow Agent and the Sellers'
Representatives a revised Escrowed
MicroFrame Share Allocation List. Provided
that it has been copied to the Sellers'
Representatives and this has been confirmed
in writing to the Escrow Agent by the Buyer,
the Escrow Agent may rely upon such revised
Escrowed Share Allocation List unless and
until the Sellers' Representatives deliver
an objection thereto in writing pursuant to
Clause 11.
7. Expenses of the Sellers' Representatives
7.1 If a claim is submitted by the Buyer, the
Sellers' Representatives and the Buyer may
from time to time by joint written notice to
the Escrow Agent request the release and
delivery to the Buyer of such number of
Escrowed MicroFrame Shares as the Sellers'
Representatives in their reasonable opinion
consider necessary to meet the reasonable
professional fees and other expenses
together with the Sellers' Representatives'
out of pocket expenses incurred in properly
performing their obligations under this
Agreement and the Share Purchase Agreement
so as to enable a bankers draft to be issued
by the Buyer in accordance with Clause 7.3.
Such transfer of Escrowed MicroFrame Shares
shall be transferred from each Selling
Shareholder pro rata with any fractions of
shares being rounded upwards to the nearest
whole number of shares such that each
Selling Shareholder shall only be liable for
his Pro Rata Share of the relevant amount
and shall take place in accordance with the
same procedures as are set out in Clause 6
mutatis mutandis.
7.2 For the purposes of determining how many
Escrowed MicroFrame Shares to release and
deliver pursuant to Clause 7.1, each
Escrowed MicroFrame Share shall be
attributed a value calculated in accordance
with Clause 5.5.
7.3 In exchange for certificates in respect of
Escrowed MicroFrame Shares pursuant to
Clause 7.1 (in accordance with the same
procedures as are set out in Clause 6.1
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<PAGE>
as amended by Clause 7.1 mutatis mutandis)
the Buyer shall promptly issue a bankers
draft in US$ to the Sellers' Representatives
in an amount calculated in accordance with
the provisions of Clause 7.2.
7.4 Within five Business Days after the transfer
of the Escrowed MicroFrame Shares in terms
of this Clause 7, the Buyer shall deliver to
the Escrow Agent and the Sellers'
Representatives a revised Escrowed
MicroFrame Share Allocation List. Provided
that it has been copied to the Sellers'
Representatives and this has been confirmed
in writing to the Escrow Agent, the Escrow
Agent may rely upon such revised Escrowed
MicroFrame Share Allocation List unless and
until the Sellers' Representatives deliver
an objection thereto in writing.
7.5 The maximum amount which the Sellers'
Representatives shall be entitled to recover
hereunder shall be US$20,000.
8. The Escrow Agent
8.1 The Escrow Agent undertakes to perform only
such duties as are specifically set out in
or contemplated by this Agreement. The
Escrow Agent shall maintain records
separately identifying the Escrowed
MicroFrame Shares and shall hold the same
separate from any other investments held by
them and in safe custody. The Escrow Agent
will not during the currency of this
Agreement lend or release possession of any
Escrowed MicroFrame Shares nor borrow
against any such property nor deposit any of
the same as collateral.
8.2 The Escrow Agent may rely and shall be
protected in acting or refraining from
acting or relying upon any written notice,
direction, request, waiver, consent, receipt
or other paper or document which the Escrow
Agent believes in good faith to be genuine
and to have been signed or presented by the
proper party or parties. The Escrow Agent
will not act upon oral instructions. Within
three Business Days of the Closing Date the
Buyer shall provide to the Escrow Agent
details of persons authorised to sign on its
behalf together with specimen signatures and
the Sellers' Representatives shall provide
to the Escrow Agent a specimen signature and
details of any other persons authorised to
sign a Notice of Objection or other document
hereunder on their behalf together with
specimen signatures and the Escrow Agent
shall provide to the Buyer and the Sellers'
Representatives details of persons
authorised to sign on its behalf.
8.3 The Escrow Agent shall not be liable for any
error of judgement, or for any act done or
step taken or omitted by it in good faith
for any mistake in fact or law, or for
anything which it may do or refrain from
doing in connection with this Agreement,
except if and only to the extent such error,
act or mistake is the result of its own
negligence, wilful misconduct, wilful
default or bad faith.
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<PAGE>
8.4 The Escrow Agent may seek the advice of a
solicitor and/or counsel of its choice in
the event of any dispute or question as to
the construction of any of the provisions of
this Agreement or its duties hereunder, and
it will incur no liability and will be fully
protected in respect of any action taken,
omitted or suffered by it in good faith in
accordance with the opinion of such
solicitor or counsel.
8.5 The Escrow Agent shall be remunerated for
its services hereunder on the basis of a fee
of (pound)1,000 plus VAT per annum and
reasonable out-of-pocket expenses or such
other sum as may be agreed between the
Escrow Agent and the Buyer plus all
reasonable out-of-pocket expenses (including
for the avoidance of doubt professional
expenses) incurred by it in connection with
its review and negotiation of the terms of
this Agreement and performance of this
Agreement (including the reasonable fees and
costs of lawyers or agents which it may find
necessary to engage in performing its duties
under this Agreement). The Buyer shall be
responsible for payment of such fee and
reimbursement of such expenses, such fee to
be paid annually in advance.
8.6 The Escrow Agent shall be indemnified by the
Buyer against all losses, costs and expenses
(including reasonable legal costs) which may
be incurred by it as a result of or arising
out of this Agreement, including its
involvement in any litigation arising from
performance of its duties under this
Agreement, other than litigation resulting
from or with respect to any action taken or
omitted by the Escrow Agent for which it
will have been adjudged grossly negligent or
guilty of wilful misconduct or bad faith.
Such indemnification shall survive
termination of this Agreement.
9. Distribution of Escrowed MicroFrame Shares to
Sellers' Representatives
9.1 On the first Business Day following the
Termination Date, the Escrow Agent shall
release and deliver to the Sellers'
Representatives stock certificates for and
in the name of each Selling Shareholder with
respect to such Escrowed MicroFrame Shares
to which each Selling Shareholder is
entitled in accordance with the then
existing Escrowed MicroFrame Share
Allocation List at such address as the
Sellers Representatives shall direct,
PROVIDED THAT the Escrow Agent shall exclude
from such number of Escrowed MicroFrame
Shares such number of Escrowed MicroFrame
Shares subject to (i) any unresolved claim
where a Notice of Claim has been validly
delivered prior to 5.00 pm on the last
Business Date immediately preceding the
Termination Date or (ii) a resolved claim
still to be satisfied.
9.2 If, following the Termination Date there is
an outstanding unresolved claim where a
Notice of Claim has been validly delivered
prior to 5.00 pm on the last Business Day
immediately preceding the Termination Date,
the Escrow Agent shall continue to hold
stock certificates in the name of the
relevant Selling Shareholders representing
the aggregate number of Escrowed MicroFrame
Shares as to which claims are outstanding
and not resolved in accordance with this
Agreement.
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<PAGE>
9.3 The Buyer shall procure that, where there is
an unresolved claim or a resolved claim
still to be satisfied, there are delivered
timeously to the Escrow Agent stock
certificates to enable it to comply with its
duties under Clause 9.1.
9.4 The Escrow Agent shall retain any Escrowed
MicroFrame Shares for the relevant Selling
Shareholders on the terms of this Agreement
which would otherwise have been delivered to
the relevant Selling Shareholders in
accordance with Clause 9.1 pending
resolution of outstanding and unresolved
claims on the terms of this Agreement.
10. Disputes
10.1 If a dispute arises between two or more of
the parties to this Agreement as to whether
or not the Escrow Agent will distribute any
of the Escrowed MicroFrame Shares, or as to
any other matters arising out of or relating
to the Escrowed MicroFrame Shares or the
operation of this Agreement, the Escrow
Agent shall not be required to determine the
matter in dispute and need not make any
distribution of the Escrowed MicroFrame
Shares but may retain the same until it
receives a joint notice in writing from the
Buyer and the Sellers' Representatives
confirming the parties have resolved the
dispute or the rights of the parties to the
dispute have finally been determined by the
Court of Session in Scotland.
11. Any dispute regarding a Escrowed MicroFrame Share
Allocation List shall be resolved in the manner
specified in Clause 5 with respect to a disputed
claim and if the Sellers' Representatives deliver an
objection to an Escrowed MicroFrame Share Allocation
List under the terms of this Agreement, the Escrow
Agent shall not be obliged to take any action
hereunder until such objection or dispute is resolved
and it receives a joint notice in writing from the
Buyer and the Sellers' Representatives to this
effect.
12. Escrowed MicroFrame Share Allocation Lists
(a) Where under this Agreement the Buyer is to
deliver an Escrowed MicroFrame Share
Allocation List to the Escrow Agent, the
Buyer shall two Business Days prior to such
delivery, deliver a copy of the same to the
Sellers' Representatives.
13. Notices
13.1 Any notice to a party hereto pursuant to
this Agreement shall be in writing and shall
be delivered by hand, mailed by first class
post (air mail if sent internationally) or
sent by fax:
-11-
<PAGE>
(i) If to the Buyer:
(a) MicroFrame Inc
21 Meridian Avenue
Edison, New Jersey 08820
Attention: Stephen B Gray
Fax No: 732-494-4570
with copies to:
James Alterbaum Esq
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10056
Fax No: 212-704 6288
Kathleen Stewart
Semple Fraser WS
10 Melville Crescent
Edinburgh EH3 7LU
Fax No: 0131-623-7201
(ii) If to the Selling Shareholders, to them at
their respective addresses as set out in
Schedule 1
(iii) If to the Sellers' Representatives (with a
copy to their alternates) to them at their
respective addresses as set out in Schedule
2:
with a copy to:
Marian Glen
Shepherd & Wedderburn
155 St Vincent Street
Glasgow
G2 5NR
Fax: 0141-565-1222
(iv) If to the Escrow Agent:
Dundas & Wilson CS
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2EN
Fax: 0131 228 8838
-12-
<PAGE>
FAO: Michael Polson/David Hardie
(a) or to such other address or
individuals as may be
designated by notice given
by any party to the others.
Notices under this Clause
12 shall be deemed given if
delivered to the parties
personally or by mail as
aforesaid or by fax.
14. Replacement of Escrow Agent
14.1 The Escrow Agent may resign (without stating
any reason) by giving 30 days' written
notice of such resignation to the other
parties to this Agreement.
14.2 The Escrow Agent may be removed and replaced
following the giving of 30 days' prior
written notice to the Escrow Agent by the
Buyer and the Sellers' Representatives.
14.3 In either of the foregoing events, the
duties of the Escrow Agent shall terminate,
and the appointment of any successor Escrow
Agent shall become effective, when, and only
when, save as provided in Clause 14.4, such
successor has notified all parties that it
accepts the appointment (or upon such
earlier date as may be mutually agreed); and
the Escrow Agent shall on settlement of all
outstanding fees and expenses due to it in
terms of this Agreement then release and
deliver the Escrowed MicroFrame Shares, if
any, to such successor. The successor shall,
subject to Clause 14.4, be appointed jointly
by the Buyer and the Sellers'
Representatives by written instrument and a
copy thereof shall be delivered to the then
acting Escrow Agent.
14.4 If the Buyer and the Sellers'
Representatives are unable to agree upon a
successor Escrow Agent prior to the
expiration of 30 days following the date of
receipt of the notice of resignation or
removal, the then acting Escrow Agent may,
in its sole discretion, release and deliver
the Escrowed MicroFrame Shares to such
person as may be nominated by the President
of the Law Society of Scotland.
14.5 Upon receipt by the successor Escrow Agent
or such person as may be nominated by the
President of the Law Society of Scotland, as
the case may be, of the Escrowed MicroFrame
Shares, the predecessor Escrow Agent shall
thereupon be fully relieved of all duties,
responsibilities and obligations under this
Agreement, except with respect to previous
acts or omissions of such Escrow Agent and
except as provided in Clause 14.6. Upon the
appointment of any successor Escrow Agent
becoming effective, the successor Escrow
Agent shall succeed to and be vested with
all the rights, powers and duties of the
predecessor Escrow Agent as if a party to
this Agreement in the capacity of the Escrow
Agent. The predecessor Escrow Agent shall
continue to have the benefit of Clause 8 of
this Agreement in respect of the period
while it was Escrow Agent.
-13-
<PAGE>
14.6 A retiring Escrow Agent shall, at the cost
of the Buyer, make available to the
successor Escrow Agent such documents and
records, and provide such assistance, as the
successor Escrow Agent may reasonably
request for the purpose of performing its
functions as the Escrow Agent under this
Agreement.
15. Termination of Agreement
(a) Except as may otherwise be agreed in writing
by all of the parties hereto, this Agreement
shall terminate by delivery to the Escrow
Agent of a joint notice from the Buyer and
the Sellers' Representatives if the Share
Purchase Agreement is terminated in
accordance with Section 13 thereof or upon
the delivery and disbursement by the Escrow
Agent in accordance with this Agreement of
all of the Escrowed MicroFrame Shares in its
possession in terms of Clauses 6 and/or 9
provided always that the Buyer shall within
5 business days of such termination settle
all outstanding fees and expenses of the
Escrow Agent.
16. Miscellaneous
16.1 Assignation: Without prejudice to the
operation of Clause 14.4, no party may
assign its rights or delegate its duties
hereunder without the prior written consent
of the other parties hereto.
16.2 Successors and assignees: This Agreement
shall inure to the benefit of and be binding
upon the successors, assignees, heirs and
personal representatives of the parties
hereto and to the Sellers. Any reference to
the Sellers' Representatives or the Escrow
Agent shall be construed so as to include
any person or persons for the time being the
Sellers' Representatives pursuant to the
Share Purchase Agreement, or any person for
the time being the Escrow Agent under this
Agreement respectively.
16.3 Complete agreement: This Agreement sets out
the complete agreement between (i) the
Escrow Agent and (ii) the Buyer, the Sellers
and the Sellers' Representatives, with
respect to the subject matter hereof and
supersedes all other oral or written
understandings and agreements with respect
to the matters referred to herein.
16.4 Sellers' Representatives: The appointment of
new Sellers' Representatives or their
alternates pursuant to the Share Purchase
Agreement will be of no force or effect
under or in relation to this Agreement until
the Buyer and the Escrow Agent have each
been delivered written notice of such
appointment in accordance with this
Agreement specifying the identity and
address of the new Sellers' Representatives
(or alternates), and the Buyer and the
Escrow Agent will be entitled to rely on
such notice without conducting an
investigation into the contents thereof.
-14-
<PAGE>
(a) Any action taken by, or notice or
instruction received from, the
Sellers' Representatives or their
alternates shall be deemed to be
action by, or notice or instruction
from, each and all of the Selling
Shareholders and shall be binding on
the Sellers.
(b) The Buyer may, and the Escrow Agent
will, disregard any notice or
instruction received from any
Selling Shareholder other than the
then acting Sellers' Representatives
with regard to this Agreement.
16.5 Variations of Agreement: This Agreement may
only be amended in writing signed by, or by
the duly authorized representatives of, all
parties.
16.6 Interpretation: In this Agreement, unless the
context otherwise requires:
(i) words importing the singular only shall also
include the plural and vice versa;
(ii) the headings and sub-headings in this
Agreement shall not be deemed part hereof or
be taken into consideration in the
interpretation or construction hereof;
(iii) all references to Clauses shall be construed
as Clauses of this Agreement;
(iv) all references to documents include all
amendments and replacements thereof and
supplements thereto;
(v) all references to this Agreement shall be a
reference to this document, including the
Schedule hereto;
(vi) a reference to a time of day is a reference
to London time;
(vii) $ denotes the lawful currency of the United
States of America; and
(viii) all references to any gender include a
reference to all genders.
16.7 Severability: The invalidity or
unenforceability of any provision of this
Agreement shall not affect the validity or
enforceability of any other provision.
16.8 Governing law: This Agreement shall be
governed by, interpreted and enforced in
accordance with the laws of Scotland.
16.9 Jurisdiction: The Court of Session in
Scotland shall have exclusive jurisdiction
to settle any disputes which may arise out
of or in connection with this Agreement. The
Buyer hereby undertakes that it will not
raise any action or proceeding seeking
-15-
<PAGE>
to enforce any provision of, or based on any
right arising out of, this Agreement in any
court other than the Court of Session in
Edinburgh:
IN WITNESS WHEREOF this Agreement consisting of this page and
the preceding thirteen pages together with the Schedule is executed as follows
at Edinburgh on August 1998 (unless otherwise stated below):-
It is SUBSCRIBED for and on behalf of the said
MicroFrame, Inc. at on the
day of August Nineteen hundred
and ninety eight as follows:-
- ------------------------------------- -------------------------------------
Witness
- -------------------------------------
Full Name
-------------------------------------
Full Name
-------------------------------------
-------------------------------------
Address
-------------------------------------
It is SUBSCRIBED by the said Barry
Sealey and the said Peter Atholl Wilson
at Edinburgh on the
day of August Nineteen hundred and
ninety eight as follows:-
- ------------------------------------- -------------------------------------
Barry Sealey Witness
-------------------------------------
Full Name
- ------------------------------------- -------------------------------------
Peter Atholl Wilson
-------------------------------------
Address
-------------------------------------
-16-
<PAGE>
It is subscribed by the following persons-
- ------------------------------------
Barry Sealey as attorney for:- all before this witness:-
Andrew Edward Sealey
Helen Sealey
Brian Souter ------------------------------------
Lady Margaret Elliot Witness
Ann Heron Gloag
------------------------------------
- ------------------------------------ Full Name
William Hugh Evans as Trustee of the ------------------------------------
Family Trust
------------------------------------
Address
- ------------------------------------
Keith Laing
------------------------------------
Hugh Evans
- ------------------------------------
Peter James MacLaren
- ------------------------------------
William Hugh Evans
- ------------------------------------
John Kerr as attorney for:-
EFG Read's Trustees Limited as Trustees of
Mrs J G Rutterford's Trust,
EFG Read's Trustees Limited as Trustees of
Mr M D Rutterford's Trust,
June Georgina Rutterford
Ali Reza Taheri
- ------------------------------------
Michael David Rutterford
- ------------------------------------
Keith Laing as attorney for
Colin Laing
-17-
<PAGE>
- ------------------------------------
Peter Atholl Wilson
- ------------------------------------
Peter Atholl Wilson as guardian of
Alison Wilson and as attorney for
Frances Loretta DeLaura
- ------------------------------------
Peter MacLaren as attorney for:-
Frances Loretta deLaura
Elizabeth Marie McQuillan
- ------------------------------------
John Kerr
as Director of Anderson Strathern Nominees
Limited
It is SUBSCRIBED for and on behalf of the said
Dundas & Wilson CS at Edinburgh on the
day of August Nineteen hundred
and ninety eight as follows,
the firm name being adhibited by
, one of its partners
- ------------------------------------- -------------------------------------
Dundas & Wilson CS Witness
-------------------------------------
Full Name
-------------------------------------
-------------------------------------
Address
-------------------------------------
-18-
<PAGE>
This is the Schedule referred to in the foregoing Agreement
between MicroFrame Inc, Barry Sealey and Peter Wilson as
Sellers' Representatives, the Selling Shareholders and
Dundas & Wilson CS as Escrow Agent dated 13 August 1998
Schedule
Part 1
Selling Shareholders
1. Andrew Edward Sealey
The Coach House
99 Blackheath Park
London
SE3 0EU
2. Helen Sealey
4 Castlelaw Road
Edinburgh
EH13 0DN
3. Brian Souter
Murrayfield House
St Magdalene's Road
Perth
PH2 0BT
4. Lady Margaret Elliott
8 Howe Street
Edinburgh
EH3 6TD
5. Ann Heron Gloag
Balcraig House
Scone
Perth
PH2 7PJ
-19-
<PAGE>
6. William Hugh Evans, Ruth Evans and David James Thomas Henderson as
Trustees of
The Hugh Evans Family Trust
19 Pentland Drive
Edinburgh
EH10 6PU
7. Keith Laing
43 Wester Bankton
Livingston
EH54 9DY
8. Peter James MacLaren
2 Glencairn Crescent
Edinburgh
EH12 5BS
9. EFG Read's Trustees Limited (Mrs JG Rutterford's 1991 Trust)
PO Box 641
1 Seaton Place
St Helier
Jersey
JE4 8YJ
10. EFG Read's Trustees Limited (MD Rutterford's 1991 Trust)
PO Box 641
1 Seaton Place
St Helier
Jersey
JE4 8YJ
11. Michael David Rutterford
Sherwood
28 Redford Road
Edinburgh
EH13 0AA
12. June Georgina Rutterford
Sherwood
28 Redford Road
Edinburgh
EH13 0AA
-20-
<PAGE>
13. Ali Reza Taheri
29 North Gyle Terrace
Edinburgh
EH12 8JT
14. Colin Laing
72 Gateside Avenue
Haddington
East Lothian
15. Peter Atholl Wilson
6 Hermand Gardens
West Calder
EH55 8BT
16. Frances Loretta de Laura
9061 Blarney Stone Drive
Springfield
VA 22152
USA
17. Elizabeth Marie McQuillan
2 Glencairn Crescent
Edinburgh
EH12 5BS
18. Anderson Strathern Nominees Limited
48 Castle Street
Edinburgh
EH2 3LX
19. William Hugh Evans
19 Pentland Drive
Edinburgh EH10 6PU.
20. Alison Wilson
6 Hermand Gardens
West Calder
EH55 8BT.
-21-
<PAGE>
Part 2
Details of Sellers' Representatives and their alternates
Sellers Representatives
Barry Sealey
4 Castlelaw Road
Edinburgh
EH13 0DN
Fax No. 0131 228 2995
Peter Wilson
6 Hermand Gardens
West Calder
EH55 8BT
Alternates
For Barry Sealey Mike Rutterford
111 George Street
Edinburgh
Fax No. 0131 441 4224
For Peter Wilson Hugh Evans
19 Pentland Drive
Edinburgh
EH10 6PU
-22-
<PAGE>
Schedule 3
Form of Escrowed MicroFrame Share Allocation List
Name of Seller Address Number of Escrowed Pro Rata Share
Shareholder MicroFrame Shares
-23-
<PAGE>
EXHIBIT B
AGREEMENT
among
PETER ATHOLL WILSON
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among
PETER ATHOLL WILSON, residing at 6
Hermand Gardens, West Calder EH55
8BT ("Mr. Wilson") (Of the First
Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame") (of the Third Part)
-------------------------------
WHEREAS
(A) Mr. Wilson and the Company entered into a contract of
employment on 17th March 1993 as amended by Supplemental
Letter from the Company to Mr. Wilson dated and accepted by
Mr. Wilson on 28th June 1996 ("the Service Contract").
(B) The parties hereto have agreed to amend further the Service
Contract and consequently have and do hereby agree and
undertake as follows:-
1. Salary
With effect on and from the date of Closing of the acquisition
of the entire issued share capital of the Company by
MicroFrame ("date of Closing") Mr. Wilson's salary will be
increased to (pound)70,000 per annum. Such salary will be
reviewed annually on the first anniversary of the date of
Closing and each anniversary thereafter and shall be increased
by whichever is the lower of 5% or the amount by which the
Retail Prices Index published by or on behalf of the
Department of Employment of the UK government has increased
between the date of Closing and such first anniversary or
between the relevant anniversary and the following anniversary
as the case may be.
-2-
<PAGE>
2. With effect on and from the date of Closing all references to
the period of notice applicable to Mr. Wilson shall be deleted
and the following substituted therefor:-
"The period of notice applicable to Mr. Wilson shall be 12
months by notice given by Mr. Wilson or by the Company to
expire on or at any time after the second anniversary of the
date of Closing subject as hereinafter provided."
3. Restrictive Covenant
With effect on and from date of Closing all references in
Clause 15 of the Company's Employees Handbook and Clause 9.2
and 9.3 of the schedule to the Service Contract to
non-solicitation of employees or prohibition on inducement to
move business after the date of termination of the employment
of Mr. Wilson shall be delete and the following substituted
therefor:-
15.1 "In these provisions the following expressions shall
have the following meanings:-
"Business" shall mean any business carried on by any
Relevant Group Member at the Termination Date or
within one year prior thereto in which Mr. Wilson has
been directly concerned at any time during the period
of one year prior to the Termination Date.
"Protected Information" shall mean all information
which is at the Termination Date confidential in
relation to the Business including, for the avoidance
of doubt, all business, financial, operational,
customer and marketing information, intellectual
property (including, without limitation, computer
programmes and codes, software and others in respect
of which, in all cases, intellectual property rights
subsist or are capable of subsisting subject to the
making of the appropriate application or
registration), and trade secrets in relation to the
Business but excepting therefrom:-
(a) information which is in or enters the public
domain other than as a result of a breach of
this Agreement by Mr. Wilson;
(b) information known to Mr. Wilson prior to his
employment by the Company;
(c) information which Mr. Wilson is required to
disclose by law or by the regulations of any
recognised stock exchange; and
(d) information which Mr. Wilson receives after
the Termination Date from any third party
which is free to disclose same.
"Relevant Group Member" shall mean any member of the
Group (meaning the Company any subsidiary or parent
company of the Company and any other
-3-
<PAGE>
subsidiary of that parent (as such are defined in the
Companies Act 1985)) at the Termination Date in whose
business Mr. Wilson has been directly concerned
pursuant to the provisions of the Service Contract as
amended and further amended herein at any time during
the period of one year prior to the Termination Date.
"Restricted Period" shall mean the period of 12
months commencing on the Termination Date.
"Termination Date" shall mean the date on which the
employment terminates.
15.2 Since Mr. Wilson is likely to obtain Protected
Information in the course of the employment and
personal knowledge of and influence over suppliers,
customers and employees of the Company and Relevant
Group Members, Mr. Wilson agrees with the Company
that in addition to the other terms of his employment
and without prejudice to other restrictions imposed
upon him by law, he will, save with the prior written
consent of the Company, be bound by the covenants set
out below:-
(a) Mr. Wilson hereby undertakes that he will not during
the Restricted Period directly or indirectly canvass,
solicit or interfere with or endeavor to canvass,
solicit or interfere with either on his own behalf or
for any other person, firm, company or other
undertaking competing with the Business, the custom
of any person, firm, company or other undertaking who
at any time during the last year of his service with
the Company was a customer of, or in the habit of
dealing with or supplying, the Company or (as the
case may be) any Relevant Group Member and with whom
Mr. Wilson shall have been personally concerned or
have had personal knowledge;
(b) Mr. Wilson hereby undertakes that he will not during
the Restricted Period either on his own behalf or for
any other person, firm, company or other undertaking,
directly or indirectly solicit or endeavor to entice
away from the Company or any relevant Group Member
any person who is an employee, director, office,
agent or consultant of the Company or any Relevant
Group Member at the Termination Date;
(c) Mr. Wilson hereby undertakes that he shall not
following the Termination Date directly or
indirectly, divulge or make use of any Protected
Information in relation to, or for the benefit of,
any business competing with the Business unless
ordered to do so by a court of competent
jurisdiction;
(d) Mr. Wilson hereby undertakes that he shall not
following the Termination Date represent himself as
being in any way connected with the business of the
Company or that of any Relevant Group Member (save as
a shareholder in or option holder of the Company or
the Relevant Group Member, as the case may be);
-4-
<PAGE>
(e) Mr. Wilson hereby undertakes that during the
Restricted Period he will not be employed in any
business in Scotland or United States of America
which is engaged in the manufacture and/or marketing
and/or distribution of and/or provision of products
in and/or services in competition with the Company or
any Relevant Group Member. He will not during the
Restricted Period carry on for his own account either
alone or with others or be concerned as a director,
employee, agent, consultant or in any other capacity
whatsoever in or assist any company, entity or person
engaged in any such business.
4. Services
Mr. Wilson hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Vice President Marketing of
the Company exercise such powers and perform such duties of a similar
status in relation to the Company's business and exercise such powers
and perform such duties in relation to the business of any Relevant
Group Member as may from time to time be assigned to or vested in him
by the Board of Directors of the Company and that in the discharge of
such duties and in the exercise of such powers he shall observe, obey
and comply with all lawful resolutions, regulations and directions from
time to time made or given by or under the authority of the Board of
Directors of the Company and promptly, whenever required so to do, give
a full account to the Board of Directors of the Company or a person
duly authorised by the same of all matters with which he is entrusted.
-5-
<PAGE>
5. Motor Car
In addition to his salary outlined above it is agreed that Mr. Wilson
shall be entitled to receive and shall receive from the Company an
allowance of (pound)5,000 per annum payable monthly towards the use for
business purposes of the motor car owned and used by him for private
purposes.
6. 0ptions
MicroFrame undertakes as soon as reasonably practicable after the date
of Closing to grant to Mr. Wilson an option or options to subscribe for
50,000 shares of common stock par value $.001 per share at fair market
value at date of grant under the 1998 Stock Option Plan of MicroFrame.
7. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
-6-
<PAGE>
EXHIBIT C
AGREEMENT
among
WILLIAM HUGH EVANS
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among WILLIAM HUGH EVANS, residing
at 19 Pentland Drive, Edinburgh
EH10 ("Mr Evans") (Of the First
Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame")(of the Third Part)
-----------------------
WHEREAS
A. Mr Evans and the Company entered into a contract of employment
on 17th March 1993 as amended by Supplemental Letter from the
Company to Mr Evans dated and accepted by Mr Evans on 28th
June 1996 ("the Service Contract").
B. The parties hereto have agreed to amend further the Service
Contract and consequently have and do hereby agree and
undertake as follows:-
1. Salary
With effect on and from the date of Closing of the acquisition of the
entire issued share capital of the Company by MicroFrame ("date of
Closing") Mr Evans' salary will be increased to (pound)70,000 per
annum. Such salary will be reviewed annually on the first anniversary
of the date of Closing and each anniversary thereafter and shall be
increased by whichever is the lower of 5% or the amount by which the
Retail Prices Index published by or on behalf of the Department of
Employment of the UK government has increased between the date of
Closing and such first anniversary or between the relevant anniversary
and the following anniversary as the case may be.
2. With effect on and from the date of Closing all
references to the period of notice applicable to Mr
Evans shall be deleted and the following substituted
therefor:-
-2-
<PAGE>
"The period of notice applicable to Mr Evans shall be 12 months by
notice given by Mr Evans or by the Company to expire on or at any time
after the second anniversary of the date of Closing subject as
hereinafter provided"
3. Restrictive Covenant
With effect on and from date of Closing all references in Clauses 9.2
and 9.3 of the schedule to the Service Contract and in Clause 15 of the
Company's Employees Handbook to non-solicitation of employees or
prohibition on inducement to move business after the date of
termination of the employment of Mr Evans shall be delete and the
following substituted therefor:-
15.1 "In these provisions the following expressions shall have the
following meanings:-
"Business" shall mean any business carried on by any Relevant
Group Member at the Termination Date or within one year prior
thereto in which Mr Evans has been directly concerned at any
time during the period of one year prior to the Termination
Date.
"Protected Information" shall mean all information which is at
the Termination Date confidential in relation to the Business
including, for the avoidance of doubt, all business,
financial, operational, customer and marketing information,
intellectual property (including, without limitation, computer
programmes and codes, software and others in respect of which,
in all cases, intellectual property rights subsist or are
capable of subsisting subject to the making of the appropriate
application or registration), and trade secrets in relation to
the Business but excepting therefrom:-
a. information which is in or enters the public
domain other than as a result of a breach of
this Agreement by Mr Evans;
b. information known to Mr Evans prior to his
employment by the Company;
c. information which Mr Evans is required to
disclose by law or by the regulations of any
recognized stock exchange; and
d. information which Mr Evans receives after
the Termination Date from any third party
which is free to disclose same.
"Relevant Group Member" shall mean any member of the Group
(meaning the Company any subsidiary or parent company of the
Company and any other subsidiary of that parent (as such are
defined in the Companies Act 1985)) at the Termination Date in
whose business Mr Evans has been directly concerned pursuant
to the provisions of the Service Contract as amended and
further amended herein at any time during the period of one
year prior to the Termination Date.
-3-
<PAGE>
"Restricted Period" shall mean the period of 12 months
commencing on the Termination Date.
"Termination Date" shall mean the date on which the employment
terminates.
15.2 Since Mr Evans is likely to obtain Protected Information in
the course of the employment and personal knowledge of and
influence over suppliers, customers and employees of the
Company and Relevant Group Members, Mr Evans agrees with the
Company that in addition to the other terms of his employment
and without prejudice to other restrictions imposed upon him
by law, he will, save with the prior written consent of the
Company, be bound by the covenants set out below:-
a. Mr Evans hereby undertakes that he will not
during the Restricted Period directly or
indirectly canvass, solicit or interfere
with or endeavor to canvass, solicit or
interfere with either on his own behalf or
for any other person, firm, company or other
undertaking competing with the Business, the
custom of any person, firm, company or other
undertaking who at any time during the last
year of his service with the Company was a
customer of, or in the habit of dealing with
or supplying, the Company or (as the case
may be) any Relevant Group Member and with
whom Mr Evans shall have been personally
concerned or have had personal knowledge;
b. Mr Evans hereby undertakes that he will not
during the Restricted Period either on his
own behalf or for any other person, firm,
company or other undertaking, directly or
indirectly solicit or endeavor to entice
away from the Company or any relevant Group
Member any person who is an employee,
director, office, agent or consultant of the
Company or any Relevant Group Member at the
Termination Date;
c. Mr Evans hereby undertakes that he shall not
following the Termination Date directly or
indirectly, divulge or make use of any
Protected Information in relation to, or for
the benefit of, any business competing with
the Business unless ordered to do so by a
court of competent jurisdiction;
d. Mr Evans hereby undertakes that he shall not
following the Termination Date represent
himself as being in any way connected with
the business of the Company or that of any
Relevant Group Member (save as a shareholder
in or option holder of the Company or the
Relevant Group Member, as the case may be);
e. Mr Evans hereby undertakes that during the
Restricted Period he will not be employed in
any business in Scotland or United States of
America which is engaged in the manufacture
and/or marketing and/or distribution of
and/or provision of products in and/or
services in competition with the
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<PAGE>
Company or any Relevant Group Member. He
will not during the Restricted Period carry
on for his own account either alone or with
others or be concerned as a director,
employee, agent, consultant or in any other
capacity whatsoever in or assist any
company, entity or person engaged in any
such business.
4. Services
Mr Evans hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Vice President Engineering
of the Company exercise such powers and perform such duties of a
similar status in relation to the Company's business and exercise such
powers and perform such duties in relation to the business of any
Relevant Group Member as may from time to time be assigned to or vested
in him by the Board of Directors of the Company and that in the
discharge of such duties and in the exercise of such powers he shall
observe, obey and comply with all lawful resolutions, regulations and
directions from time to time made or given by or under the authority of
the Board of Directors of the Company and promptly, whenever required
so to do, give a full account to the Board of Directors of the Company
or a person duly authorized by the same of all matters with which he is
entrusted.
5. Motor Car
In addition to his salary outlined above it is agreed that Mr Evans
shall be entitled to receive and shall receive from the Company an
allowance of (pound)5,000 per annum payable monthly towards the use for
business purposes of the motor car owned and used by him for private
purposes.
6. Options
MicroFrame undertakes as soon as reasonably practicable after the date
of Closing to grant to Mr Evans an option or options to subscribe for
50,000 shares of common stock par value $.001 per share at fair market
value at date of grant under the 1998 Stock Option Plan of MicroFrame.
7. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
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<PAGE>
EXHIBIT D
AGREEMENT
amongst
KEITH LAING
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
-----
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among
KEITH LAING, residing at 43 Wester
Bankton, Livingston, EH54 9DY ("Mr.
Laing") (Of the First Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC. a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame") (Of the Third Part)
-------------------------------
WHEREAS
(A) Mr. Laing and the Company entered into a contract of
employment on 26 September 1995 ("the Service Contract").
(B) The parties hereto have agreed to amend further the Service
Contract and consequently have and do hereby agree and
undertake as follows:-
1. Period of Notice
All express or implied references to a period of notice
required to terminate the employment of Mr. Laing under the
Service Contract referring either to notice by him or to
notice by the Company shall be deleted and the following
substituted therefor:-
"The employment of Mr. Laing shall continue until terminated
by Mr. Laing giving to the Company 3 months' notice in writing
or by the Company giving to Mr. Laing 3 months' notice in
writing to expire at any
-7-
<PAGE>
time on or after the date falling 3 months after the first
anniversary of the date of Closing subject as hereinafter
provided."
2. Salary
With effect on and from the date of acquisition of the
entire issued share capital of the Company by MicroFrame
("the date of Closing") Mr. Laing's salary will be increased
to (pound)55,000 per annum.
3. Restrictive Covenant
With effect on and from the date of Closing all references
in the Service Contract to non-solicitation of employees or
prohibition on inducement to remove business after the date
of termination of the employment of Mr. Laing shall be
delete and the following substituted therefor:-
"In these provisions the following expressions shall have
the following meanings:-
"Business" shall mean any business carried on by any
Relevant Group Member at the Termination Date or within 6
months prior thereto in which Mr. Laing has been directly
concerned at any time during the period of 6 months prior to
the Termination Date.
"Protected Information" shall mean all information which is
at the Termination Date confidential in relation to the
Business including, for the avoidance of doubt, all
business, financial, operational, customer and marketing
information, intellectual property including, without
limitation, computer programmes and codes, software and
others in respect of which, in all cases, intellectual
property rights subsist or are capable of subsisting subject
to the making of the appropriate application or
registration, and trade secrets in relation to the Business.
"Relevant Group Member" shall mean any member of the Group
(meaning the Company, any subsidiary or parent company of
the Company and any other subsidiary of that parent (as such
are defined in the Companies Act 1985)) at the Termination
Date in whose business Mr. Laing has been directly concerned
pursuant to the provisions of the Service Contract as
amended and further amended herein at any time during the
period of 6 months prior to the Termination Date.
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<PAGE>
"Restricted Period" shall mean the period of 3 months
commencing on the Termination Date.
"Termination Date" shall mean the date on which the
employment terminates. Since Mr. Laing is likely to obtain
Protected Information in the course of the employment and
personal knowledge of and influence over suppliers,
customers and employees of the Company and Relevant Group
Members, Mr. Laing agrees with the Company that in addition
to the other terms of his employment and without prejudice
to other restrictions imposed upon him by law, he will, save
with the prior written consent of the Company, be bound by
the covenants set out below:-
(a) Mr. Laing hereby undertakes that he will not during
the Restricted Period directly or indirectly canvass,
solicit or interfere with or endeavor to canvass,
solicit or interfere with either on his own behalf or
for any other person, firm, company or other
undertaking competing with the Business, the custom
of any person, firm, company or other undertaking who
at any time during the last 6 months of his service
with the Company was a customer of, or in the habit
of dealing with or supplying, the Company or (as the
case may be) any Relevant Group Member and with whom
Mr. Laing shall have been personally concerned or
have had personal knowledge;
(b) Mr. Laing hereby undertakes that he will not during
the Restricted Period either on his own behalf or for
any other person, firm, company or other undertaking,
directly or indirectly solicit or endeavor to entice
away from the Company or any Relevant Group Member
any person who is an employee, director, officer,
agent or consultant of the Company or any Relevant
Group Member at the Termination Date;
(c) Mr. Laing hereby undertakes that he shall not
following the Termination Date directly or
indirectly, divulge or make use of any Protected
Information in relation to, or for the benefit of,
any business competing with the Business unless
ordered to do so by a court of competent
Jurisdiction;
(d) Mr. Laing hereby undertakes that he shall not
following the Termination Date represent himself as
being in any way connected with the business of the
Company or that of any Relevant Group Member;
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<PAGE>
(e) Mr. Laing hereby undertakes that during the
Restricted Period he will not be employed in any
business in Scotland or United States of America
where he will be directly involved with any products
which are directly competitive with any of the
Company's products with which he had direct
involvement at any time during the period of 6 months
prior to the Termination Date. He will not during the
same Restricted Period carry on for his own account
either alone or with others or be concerned as a
director, employee, agent, consultant or in any other
capacity whatsoever in or assist any company, entity
or person engaged or about to be engaged in
producing, marketing or distributing any such
products as aforesaid."
4. Services
Mr. Laing hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Senior Manager of Research
of the Company exercise such powers and perform such duties in
relation to the Company's business and that of any Relevant Group
Member as may from time to time be assigned to or vested in him by
the Board of Directors of the Company and that in the discharge of
such duties and in the exercise of such powers he shall observe, obey
and comply with all lawful resolutions, regulations and directions
from time to time made or given by or under the authority of the
Board of Directors of the Company and promptly, whenever required so
to do, give a full account to the Board of Directors of the Company
or a person duly authorised by the same of all matters with which he
is entrusted.
5. Options
MicroFrame undertakes as soon as reasonably practicable after the
date of Closing to grant to Mr. Laing an option or options to
subscribe for 7,500 shares of common stock par value $.001 per share
at fair market value at date of grant under the 1998 Stock Option
Plan of MicroFrame.
6. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
-10-
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
Dated _____________, 1998
AGREEMENT, by and among MicroFrame, Inc., a New Jersey
corporation (the "Company") and the Sellers (as hereinafter defined).
WHEREAS, simultaneously with the execution and delivery of this
Agreement, pursuant to that certain share purchase agreement dated as of
________, 1998 (the "Share Purchase Agreement") by and among the Company,
certain Sellers (as such term is defined in the Share Purchase Agreement) and
SolCom Systems Limited, the Sellers are acquiring shares of common stock, par
value $.001 per share of the Company (the "Common Stock").
WHEREAS, subject to the terms and conditions set forth in the
Share Purchase Agreement, the Company desires to provide to the Sellers certain
rights regarding the registration of the Common Stock issued to the Sellers (the
"Shares"), all upon the terms and conditions set forth below.
It is therefore agreed as follows:
1. Piggyback/Limited Demand Registration.
1.1 Right to Include Registrable Securities.
(a) Subject to Section 1.1(c), if the Company at any time through
and including the first anniversary of the date hereof, but not thereafter,
proposes to register any of its Common Stock under the Securities Act (as
defined below) by registration on Forms S-1, S-2, S-3, SB-1 or any successor or
similar form(s) (except registrations on such Forms or similar form(s) for
registration of securities in connection with (i) an employee benefit plan or
dividend reinvestment plan, (ii) merger, consolidation or sale of all or
substantially all of the assets of the Company (on Form S-4 or otherwise) or
(iii) debt securities that are not convertible into Common Stock), whether or
not for sale for its own account, it shall, each such time until the Holders
have exercised their right to a Request (as defined below), give written notice
to each Holder (as defined below) of its intention to do so and of the Holders'
rights under this Section 1 at least twenty (20) days prior to the filing of a
registration statement with respect to such registration with the Commission (as
defined below), which notice shall describe in reasonable detail the proposed
registration and distribution and, subject to the provisions hereof, shall offer
the Holder the opportunity to register that number of shares of Registrable
Securities (as defined below) that the Holder shall request, subject to the
limitations set forth herein. Upon the written request of any Holder that is
delivered to the Sellers' Representatives (as such term is defined in the Share
Purchase Agreement) within ten (10) days after the receipt of the aforementioned
notice and subsequently delivered to the Company by the Sellers' Representatives
within five (5) days thereafter (a "Request"), which Request shall specify the
Registrable Securities (as defined below)
<PAGE>
intended to be registered and disposed of by such Holder, the Company shall,
subject to the provisions hereof, use all reasonable efforts to effect the
registration under the Securities Act of all Registrable Securities that the
Company has been so requested to register by such Holder, except as otherwise
provided herein, and, subject to the provisions hereof, to cause the
underwriters, if any, to permit the Holders of Registrable Securities to
participate in such offering on the same terms and conditions as the Company.
(b) In the event that the Company breaches any covenant contained
in Section 5 hereof (a "Breach"), and only in such event, subject to Section
1.1(c), through and including the first anniversary of the date hereof, but not
thereafter, Holders of at least a majority of the Registrable Securities shall
have one (1) "demand" registration right pursuant to which, upon notice from
such Holders to the Sellers' Representatives within ten (10) days after the
event giving rise to the Breach, and provided that, such notice is subsequently
delivered to the Company within five (5) days thereafter (a "Demand Request"),
which Demand Request shall specify the Registrable Securities intended to be
registered and disposed of by such Holders, the Company shall, subject to the
provisions hereof, use all reasonable efforts to effect the registration under
the Securities Act of all Registrable Securities that the Company has been so
requested to register by such Holders pursuant to such Demand Request, except as
otherwise provided herein.
(c) If, at any time after giving written notice of its intention
to register any securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company or, in the
case of an underwritten offering, the underwriter, shall determine for any
reason not to register or to delay registration of such securities, the Company
may, at its election, give written notice of such determination to the Sellers'
Representatives and upon giving that notice (i) in the case of a determination
not to register, the Company shall be relieved of its obligation to register any
Registrable Securities in connection with such registration (but not from any
obligation of the Company to pay the Registration Expenses (as defined below) in
connection therewith), without prejudice; and (ii) in the case of a
determination to delay registering, the Company shall be permitted to delay
registering any Registrable Securities for the same period as the delay in
registering such other securities.
(d) The Company shall pay all Registration Expenses (as defined
below) in connection with registration of Registrable Securities requested
pursuant to this Section 1.
(e) As used in this Agreement (i) "Registrable Securities" means
the Registrable Shares and any other securities issuable in connection therewith
or in replacement thereof by way of a dividend, distribution, recapitalization,
exchange, merger, consolidation, reorganization or other transaction, (ii)
"Registrable Shares" includes the Shares held by the Sellers including the
Escrow Shares (to the extent that such Escrow Shares have been released from
Escrow), provided that, any such Shares shall cease to be Registrable Shares
when (A) a registration statement with respect to the public sale of such Shares
shall have become effective under the Securities Act, (B) such Shares have been
disposed of, or are eligible for disposable as permitted by, and in compliance
with, Rule 144 (or successor provision) promulgated under the Securities Act or
(C) such Shares shall have ceased to be outstanding, (iii) "Holder" means each
Seller, and (iv) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any subsequent
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<PAGE>
similar federal statute, and the rules and regulations of the United States
Securities and Exchange Commission or any other federal agency at the time
administering the Securities Act (the "Commission").
(f) As used in this Agreement, "Registration Expenses" means all
expenses incident to the Company's performance of or compliance with the
provisions of Section 1, Section 2 and Section 3 including, without limitation,
all registration, filing and National Association of Securities Dealers, Inc.
fees, all listing fees, all fees and expenses of complying with securities or
blue sky laws (including, without limitation, reasonable fees and disbursements
of counsel for the underwriters in connection with blue sky qualifications of
the Registrable Securities), all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and each Seller and of its independent public accountants,
including the expenses of "comfort" letters required by or incident to such
performance and compliance, and any fees and disbursements of underwriters
customarily paid by issuers of securities; provided that, such expenses
attributable solely to the Holders, including without limitation, any and all
expenses in connection with a Demand Request, shall not in the aggregate exceed
$1,500, and further provided that, Registration Expenses shall exclude, and each
Holder shall pay, underwriters fees and underwriting discounts and commissions
and transfer taxes in respect of the Registrable Securities being registered for
such Holder as well as any fees and expenses of counsel to such Holder of the
Registrable Securities.
1.2 Decrease in Amount of Registrable Securities. Anything in
Section 1.1 to the contrary notwithstanding, if a registration hereunder
involves an underwritten offering and the managing underwriter advises the
Company that, in its opinion, the number of securities proposed to be included
in such registration should be limited due to market conditions, then the
Company will include in such registration (i) first, the securities the Company
proposes to sell and (ii) second the Registrable Securities requested by the
Sellers to be included in such registration that, in the opinion of the managing
underwriter, can be sold, such amount to be allocated among the participating
Sellers on a pro rata basis. Notwithstanding any provision to the contrary
contained herein, including without limitation Section 1.1(e)(ii), in the event
of any such cutback by the underwriters in the number of securities included in
a registration, any Registrable Securities of the Sellers so excluded from the
registration shall remain Registrable Securities.
2. Registration Procedures. In connection with the registration of any
Registrable Securities under the Securities Act as provided in Section 1, the
Company shall:
(i) prepare and file with the Commission as promptly as
practicable (but in the event of a Demand Request, not later than 180
days after receipt of such Demand Request from the Sellers'
Representatives) the requisite registration statement to effect such
registration and thereafter use all reasonable efforts to cause such
registration statement to become and remain effective (subject to clause
(ii) below);
(ii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions
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<PAGE>
of the Securities Act with respect to the disposition of all Registrable
Securities covered by such registration statement for a period of not
less than 9 months, which period shall terminate when all Registrable
Securities covered by such Registration Statement have been sold;
(iii) furnish to each Holder such number of conformed
copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of
copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus) and
any other documents for delivery in conformity with the requirements of
the Securities Act, as such Holder may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable
Securities;
(iv) use all reasonable efforts (x) to register or qualify
all Registrable Securities and other securities covered by such
registration statement under such other securities or Blue Sky laws of
such states of the United States of America where an exemption is not
available and as the Holders shall reasonably request, but in no event
greater than five (5) such states, (y) to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and (z) to take any other action that may reasonably
be necessary or advisable to enable the Holders to consummate the
disposition in such jurisdictions of the securities to be sold by the
Holders, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it would not, but for the requirements of this
paragraph (iv), be obligated to be so qualified or to consent to general
service of process in any such jurisdiction;
(v) use all reasonable efforts to cause all Registrable
Securities covered by such registration statement to be registered with
or approved by such other federal or state governmental agencies or
authorities as may be necessary in the opinion of counsel to the Company
to consummate the disposition of such Registrable Securities in
accordance with their intended method of disposition;
(vi) promptly notify each Holder of Registrable Securities
covered by such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act during the period
mentioned in Section 2(ii) above, if the Company becomes aware that the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and, at the request
of any such Holder, deliver a reasonable number of copies of an amended or
supplemental prospectus as may be necessary so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing.
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<PAGE>
(vii) otherwise use all reasonable efforts to comply with
all applicable rules and regulations of the Commission; and
(viii) use all reasonable efforts to cause all such
Registrable Securities to be listed on each securities exchange on which
similar securities issued by the Company are then listed or quoted.
It is expressly agreed by the parties that as a condition to the
performance of the Company's obligations hereunder, the Holders shall furnish
the Company such information regarding the Holders and the distribution of the
Holders' Registrable Securities as the Company may from time to time reasonably
request in writing.
3. Underwritten Offerings.
3.1 Piggyback Underwritten Offerings. If the Company proposes to
register any of its securities under the Securities Act as contemplated by
Section 1 and such securities are to be distributed by or through one or more
underwriters, the Company will, subject to and in accordance with Section 1
(including, without limitation, the provisions of Section 1.2 hereof), if
requested by any Holders and the Sellers' Representatives in accordance with
Section 1 hereof, arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such Holders with the securities of the
Company to be distributed by such underwriters. Such Holders shall become
parties to the underwriting agreement negotiated between the Company and such
underwriters and shall make all representations and warranties to and shall
enter into all agreements with the Company or the underwriters as shall be
reasonably requested of them including all representations and warranties
customarily given by selling shareholders in an underwritten public offering.
3.2 Holdback Agreements. In connection with any registration of
Registrable Securities pursuant to an underwritten public offering, the Company
and each Holder shall, if requested by the underwriter, agree to reasonable and
customary restrictions relating to the sale or distribution of the Registrable
Securities or any other securities as are imposed by the underwriter or
underwriters for such underwritten public offering.
3.3 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company shall give the Holders, their
underwriters, if any, and their respective counsel and accountants the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and give each of them such access to
its books and records, such opportunities to discuss the business of the Company
with officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of the Holders' and
such underwriters' respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
3.4 Comfort Letter. In the event the offering is an underwritten
offering, the Company shall use all reasonable efforts to obtain a "cold
comfort" letter from the independent
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<PAGE>
public accountants for the Company in customary form and covering such matters
of the type customarily covered by such letters as the Sellers of such
Registrable Securities reasonably request.
4. Indemnification.
4.1 Indemnification by the Company. In the event of any
registration statement filed pursuant to Section 1, the Company shall, and
hereby does, indemnify and hold harmless each of the Holders and each of their
directors, officers, partners, agents, attorneys, representatives and affiliates
(each of the foregoing, a "Holder Indemnitee"), insofar as losses, claims,
damages, or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus, final prospectus, or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and the Company shall
reimburse each Holder Indemnitee for any legal or any other fees, costs and
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon an untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Holder for use in the preparation thereof; and
provided, further, that the Company shall not be liable to any Holder Indemnitee
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of such person or
entity's failure to send or give a copy of the final prospectus, as the same may
be then supplemented or amended, to the person or entity asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person or entity if such statement or omission was corrected in such final
prospectus so long as such final prospectus, and any amendments or supplements
thereto, have been furnished to such Holder.
4.2 Indemnification by the Holders. Each Holder severally, and
not jointly, hereby indemnifies and holds harmless (in the same manner and to
the same extent as set forth in Section 4.1 above) the Company, each director
and officer of the Company, each of their respective attorneys and
representatives and each other person or entity, if any, who controls the
Company within the meaning of the Securities Act, with respect to (i) any
statement contained in, or omission from, such registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Holder
specifically stating that it is for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement or (ii) the breach of any agreement or covenant by such
Holder contained herein.
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<PAGE>
4.3 Notice of Claims, Etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in Sections 4.1 or 4.2, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
promptly give written notice to the latter of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its indemnity
obligations, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an indemnified party, unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist in respect of such claim, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs
related to the indemnified party's cooperation with the indemnifying party,
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties arises in respect of such
claim after the assumption of the defense thereof. No indemnifying party shall
be liable for any settlement of any action or proceeding effected without its
written consent, which consent shall not be unreasonably withheld. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement that does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
4.4 Contribution. If indemnification shall for any reason be held
by a court to be unavailable to an indemnified party under Section 4.1 or
Section 4.2 in respect of any loss, claim, damage or liability, or any action in
respect thereof, then, in lieu of the amount paid or payable under Section 4.1
or Section 4.2, as applicable, the indemnified party and the indemnifying party
shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating the same), (i) in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and such Holder on the other hand
that resulted in such loss, claim, damage or liability, or action in respect
thereof, with respect to the statements or omissions that resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations or (ii) if the allocation provided by item (i)
above is not permitted by applicable law, in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and such Holder on the other. No person or entity guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. In addition, no person or entity shall be obligated to
contribute hereunder any amounts in payment for any settlement of any action or
claim, effected without such person or entity's consent, which consent shall not
be unreasonably withheld.
4.5 Other Indemnification. Indemnification and contribution
similar to that specified in the preceding provisions of this Section 4 (with
appropriate modifications) shall be
-7-
<PAGE>
given by the Company and, severally and not jointly, by each Holder with respect
to any required registration or other qualification of securities under any
federal or state law or regulation of any governmental authority other than the
Securities Act.
5. Rule 144. With a view to making available the benefits of certain
rules and regulations of the Commission that may at any time permit the sale of
the Registrable Securities to the public without registration, the Company
shall:
(a) use all reasonable efforts to make and keep public
information available, as those terms are understood and defined in Rule 144
promulgated under the Securities Act at all times;
(b) use all reasonable efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder ("Exchange Act"); and
(c) deliver a written statement as to whether it has complied
with such requirements of this Section, to the Holders upon any Holder's
request.
6. Miscellaneous.
(a) Notices. All notices, instructions and other communications
in connection with this Agreement shall be in writing and may be given by
personal delivery or mailed, certified mail, return receipt requested, postage
prepaid or by a nationally recognized overnight courier to the parties at the
addresses set forth in the Share Purchase Agreement (or at such other addresses
as the parties may specify in a notice made in accordance with this Section).
(b) No Waiver. No course of dealing and no delay on the part of
any party hereto in exercising any right, power or remedy conferred by this
Agreement shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers and remedies conferred by this Agreement or shall preclude any
other or further exercise thereof or the exercise of any other right, power and
remedy.
(c) Binding Effect; Assignability. This Agreement shall be
binding upon and shall inure to the benefit of the respective parties and their
permitted successors and assigns. The registration rights contained herein may
be transferred to any subsequent holder of Registrable Securities, provided that
(i) such holder has not acquired such securities in a transaction with respect
to which a registration statement under the Securities Act is effective at the
time or pursuant to a sale in which Rule 144 is then available to such holder
and (ii) such holder executes and delivers a counterpart to this Agreement.
(d) Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable
-8-
<PAGE>
such provision in any other jurisdiction. To the extent permitted by applicable
law, the parties hereby waive any provision of law which renders any provisions
hereof prohibited or unenforceable in any respect.
(e) Modification. No term or provision of this Agreement may be
amended, altered, modified, rescinded or terminated except upon the express
written consent of the party against whom the same is sought to be enforced.
(f) Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to conflict or choice of law principles thereof.
(g) Headings. All headings and captions in this Agreement are for
purposes of reference only and shall not be construed to limit or affect the
substance of this Agreement.
(h) Entire Agreement. This Agreement contains, and is intended
as, a complete statement of all the terms of the arrangements between the
parties with respect to the matters provided for, supersedes any previous
agreements and understandings between the parties with respect to those matters
and cannot be changed or terminated orally.
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which, when taken
together, shall constitute one and the same instrument.
-9-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above herein.
MICROFRAME, INC.
By:______________________________________
Name:
Title:
SELLERS:
By: Sellers' Representatives (as such term is
defined in the Share Purchase Agreement),
as attorney-in-fact
--------------------------------------
--------------------------------------
[Name of each Seller]
<PAGE>
EXHIBIT F
AGREEMENT
amongst
KEITH BAKER
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
-----
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among
KEITH BAKER residing at 4 Braehead
Row, Edinburgh EH4 ("Mr Baker") (Of
the First Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC. a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame") (Of the Third Part)
-------------------------------
WHEREAS
(A) Mr Baker and the Company entered into a contract of employment on 9
January 1996 ("the Service Contract").
(B) The parties hereto have agreed to amend further the Service Contract
and consequently have and do hereby agree and undertake as follows:
1. Period of Notice
All express or implied references to a period of notice required to
terminate the employment of Mr Baker under the Service Contract
referring either to notice by him or to notice by the Company shall be
deleted and the following substituted therefor:-
"The employment of Mr Baker shall continue until terminated by Mr Baker
giving to the Company 3 months' notice in writing or by the Company
giving to Mr Baker 3 months' notice in writing to expire at any time on
or after the date falling 3 months after the first anniversary of the
date of Closing subject as hereinafter provided."
2. Salary
With effect on and from the date of acquisition of the entire issued
share capital of the Company by MicroFrame ("the date of Closing") Mr
Baker's salary will be increased to (pound)43,000 per annum.
-2-
<PAGE>
3. Restrictive Covenant
With effect on and from the date of Closing all references in the
Service Contract to non- solicitation of employees or prohibition on
inducement to remove business after the date of termination of the
employment of Mr Baker shall be delete and the following substituted
therefor:-
"In these provisions the following expressions shall have the following
meanings:-
"Business" shall mean any business carried on by any Relevant Group
Member at the Termination Date or within 6 months prior thereto in
which Mr Baker has been directly concerned at any time during the
period of 6 months prior to the Termination Date.
"Protected Information" shall mean all information which is at the
Termination Date confidential in relation to the Business including,
for the avoidance of doubt, all business, financial, operational,
customer and marketing information, intellectual property including,
without limitation, computer programmes and codes, software and others
in respect of which, in all cases, intellectual property rights subsist
or are capable of subsisting subject to the making of the appropriate
application or registration, and trade secrets in relation to the
Business.
"Relevant Group Member" shall mean any member of the Group (meaning the
Company, any subsidiary or parent company of the Company and any other
subsidiary of that parent (as such are defined in the Companies Act
1985)) at the Termination Date in whose business Mr Baker has been
directly concerned pursuant to the provisions of the Service Contract
as amended and further amended herein at any time during the period of
6 months prior to the Termination Date.
"Restricted Period" shall mean the period of 3 months commencing on the
Termination Date.
"Termination Date" shall mean the date on which the employment
terminates.
Since Mr Baker is likely to obtain Protected Information in the course
of the employment and personal knowledge of and influence over
suppliers, customers and employees of the Company and Relevant Group
Members, Mr Baker agrees with the Company that in addition to the other
terms of his employment and without prejudice to other restrictions
imposed upon him by law, he will, save with the prior written consent
of the Company, be bound by the covenants set out below:-
(a) Mr Baker hereby undertakes that he will not during the
Restricted Period directly or indirectly canvass, solicit or
interfere with or endeavor to canvass, solicit or interfere
with either on his own behalf or for any other person, firm,
company or other undertaking competing with the Business, the
custom of any person, firm, company or other undertaking who
at any time during the last 6 months of his service with the
Company was a customer of, or in the habit of dealing with or
supplying, the
-3-
<PAGE>
Company or (as the case may be) any Relevant Group Member and
with whom Mr Baker shall have been personally concerned or
have had personal knowledge;
(b) Mr Baker hereby undertakes that he will not during the
Restricted Period either on his own behalf or for any other
person, firm, company or other undertaking, directly or
indirectly solicit or endeavor to entice away from the Company
or any Relevant Group Member any person who is an employee,
director, officer, agent or consultant of the Company or any
Relevant Group Member at the Termination Date;
(c) Mr Baker hereby undertakes that he shall not following the
Termination Date directly or indirectly, divulge or make use
of any Protected Information in relation to, or for the
benefit of, any business competing with the Business unless
ordered to do so by a court of competent jurisdiction;
(d) Mr Baker hereby undertakes that he shall not following the
Termination Date represent himself as being in any way
connected with the business of the Company or that of any
Relevant Group Member;
(e) Mr Baker hereby undertakes that during the Restricted Period
he will not be employed in any business in Scotland or United
States of America where he will be directly involved with any
products which are directly competitive with any of the
Company's products with which he had direct involvement at any
time during the period of 6 months prior to the Termination
Date. He will not during the same Restricted Period carry on
for his own account either alone or with others or be
concerned as a director, employee, agent, consultant or in any
other capacity whatsoever in or assist any company, entity or
person engaged or about to be engaged in producing, marketing
or distributing any such products as aforesaid."
4. Services
Mr Baker hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Senior Hardware Engineer of
the Company exercise such powers and perform such duties in relation to
the Company's business and that of any Relevant Group Member as may
from time to time be assigned to or vested in him by the Board of
Directors of the Company and that in the discharge of such duties and
in the exercise of such powers he shall observe, obey and comply with
all lawful resolutions, regulations and directions from time to time
made or given by or under the authority of the Board of Directors of
the Company and promptly, whenever required so to do, give a full
account to the Board of Directors of the Company or a person duly
authorised by the same of all matters with which he is entrusted.
5. Options
MicroFrame undertakes as soon as reasonably practicable after the date
of Closing to grant to Mr Baker an option or options to subscribe for
7,500 shares of common stock par value $.001 per share at fair market
value at date of grant under the 1998 Stock Option Plan of MicroFrame.
-4-
<PAGE>
6. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
-5-
<PAGE>
AGREEMENT
amongst
ROBERT STRUTHERS
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among
ROBERT STRUTHERS, residing at
Primrose Place, Eliburn,
Livingston, EH54 6RN ("Mr
Struthers") (Of the First Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC. a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame") (Of the Third Part)
-------------------------------
WHEREAS
(A) Mr Struthers and the Company entered into a contract of' employment on
21 February 1995 ("the Service Contract").
(B) The parties hereto have agreed to amend further the Service Contract
and consequently have and do hereby agree and undertake as therefor:-:
1. Period of Notice
All express or implied references to a period of notice required to
terminate the employment of Mr Struthers under the Service Contract
referring either to notice by him or to notice by the Company shall be
deleted and the following substituted therefor:-
"The employment of Mr Struthers shall continue until terminated by Mr
Struthers giving to the Company 3 months' notice in writing or by the
Company giving to Mr Struthers 3 months' notice in writing to expire at
any time on or after the date falling 3 months after the first
anniversary of the date of Closing subject as hereinafter provided."
2. Salary
<PAGE>
With effect on and from the date of acquisition of the entire issued
share capital of the Company by MicroFrame ("the date of Closing") Mr
Struthers' salary will be increased to (pound)43,000 per annum.
3. Restrictive Covenant
With effect on and from the date of Closing all references in the
Service Contract to non- solicitation of employees or prohibition on
inducement to remove business after the date of termination of the
employment of Mr Struthers shall be delete and the following
substituted therefor:-
"In these provisions the following expressions shall have the following
meanings:-
"Business" shall mean any business carried on by any Relevant Group
Member at the Termination Date or within 6 months prior thereto in
which Mr Struthers has been directly concerned at any time during the
period of 6 months prior to the Termination Date.
"Protected Information" shall mean all information which is at the
Termination Date confidential in relation to the Business including,
for the avoidance of doubt, all business, financial, operational,
customer and marketing information, intellectual property including,
without limitation, computer programmes and codes, software and others
in respect of which, in all cases, intellectual property rights subsist
or are capable of subsisting subject to the making of the appropriate
application or registration, and trade secrets in relation to the
Business.
"Relevant Group Member" shall mean any member of the Group (meaning the
Company, any subsidiary or parent company of the Company and any other
subsidiary of that parent (as such are defined in the Companies Act
1985)) at the Termination Date in whose business Mr Struthers has been
directly concerned pursuant to the provisions of the Service Contract
as amended and further amended herein at any time during the period of
6 months prior to the Termination Date.
"Restricted Period" shall mean the period of 3 months commencing on the
Termination Date.
"Termination Date" shall mean the date on which the employment
terminates.
Since Mr Struthers is likely to obtain Protected Information in the
course of the employment and personal knowledge of and influence over
suppliers, customers and employees of the Company and Relevant Group
Members, Mr Struthers agrees with the Company that in addition to the
other terms of his employment and without prejudice to other
restrictions imposed upon him by law, he will, save with the prior
written consent of the Company, be bound by the covenants set out
below:-
(a) Mr Struthers hereby undertakes that he will not during the
Restricted Period directly or indirectly canvass, solicit or
interfere with or endeavor to canvass, solicit or interfere
with either on his own behalf or for any other person, firm,
company or other undertaking competing with the Business, the
custom of any person, firm, company
-2-
<PAGE>
or other undertaking who at any time during the last 6 months
of his service with the Company was a customer of, or in the
habit of dealing with or supplying, the Company or (as the
case may be) any Relevant Group Member and with whom Mr
Struthers shall have been personally concerned or have had
personal knowledge;
(b) Mr Struthers hereby undertakes that he will not during the
Restricted Period either on his own behalf or for any other
person, firm, company or other undertaking, directly or
indirectly solicit or endeavor to entice away from the Company
or any Relevant Group Member any person who is an employee,
director, officer, agent or consultant of the Company or any
Relevant Group Member at the Termination Date;
(c) Mr Struthers hereby undertakes that he shall not following the
Termination Date directly or indirectly, divulge or make use
of any Protected Information in relation to, or for the
benefit of, any business competing with the Business unless
ordered to do so by a court of competent jurisdiction;
(d) Mr Struthers hereby undertakes that he shall not following the
Termination Date represent himself as being in any way
connected with the business of the Company or that of any
Relevant Group Member;
(e) Mr Struthers hereby undertakes that during the Restricted
Period he will not be employed in any business in Scotland or
United States of America where he will be directly involved
with any products which are directly competitive with any of
the Company's products with which he had direct involvement at
any time during the period of 6 months prior to the
Termination Date. He will not during the same Restricted
Period carry on for his own account either alone or with
others or be concerned as a director, employee, agent,
consultant or in any other capacity whatsoever in or assist
any company, entity or person engaged or about to be engaged
in producing, marketing or distributing any such products as
aforesaid."
4. Services
Mr Struthers hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Software Development Manager
of the Company exercise such powers and perform such duties in relation
to the Company's business and that of any Relevant Group Member as may
from time to time be assigned to or vested in him by the Board of
Directors of the Company and that in the discharge of such duties and
in the exercise of such powers he shall observe, obey and comply with
all lawful resolutions, regulations and directions from time to time
made or given by or under the authority of the Board of Directors of
the Company and promptly, whenever required so to do, give a full
account to the Board of Directors of the Company or a person duly
authorised by the same of all matters with which he is entrusted.
5. Options
MicroFrame undertakes as soon as practicable after the date of Closing
to grant to Mr Struthers an option or options to subscribe for 7,500
shares of common stock par value $.001
-3-
<PAGE>
per share at fair market value at the date of grant under the 1998
Stock Option Plan of MicroFrame.
6. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
-4-
<PAGE>
AGREEMENT
amongst
STEPHEN CONNELLY
and
SOLCOM SYSTEMS LIMITED
and
MICROFRAME, INC
-----
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
<PAGE>
AGREEMENT
among
STEPHEN CONNELLY residing at Flat
3F1, 10 Dalgety Avenue, Meadowbank,
Edinburgh ("Mr Connelly") (Of the
First Part)
and
SOLCOM SYSTEMS LIMITED (Company
Number 129008) having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company") (Of the
Second Part)
and
MICROFRAME, INC. a New Jersey, USA
corporation and having its
principal office at 21 Meridian
Avenue, Edison, New Jersey 08820
("MicroFrame") (Of the Third Part)
-------------------------------
WHEREAS
(A) Mr Connelly and the Company entered into a contract of employment on 21
February 1995 ("the Service Contract").
(B) The parties hereto have agreed to amend further the Service Contract
and consequently have and do hereby agree and undertake as therefor:-:
1. Period of Notice
All express or implied references to a period of notice required to
terminate the employment of Mr Connelly under the Service Contract
referring either to notice by him or to notice by the Company shall be
deleted and the following substituted therefor:-
"The employment of Mr Connelly shall continue until terminated by Mr
Connelly giving to the Company 3 months' notice in writing or by the
Company giving to Mr Connelly 3 months' notice in writing to expire at
any time on or after the date falling 3 months after the first
anniversary of the date of Closing subject as hereinafter provided."
<PAGE>
2. Salary
With effect on and from the date of acquisition of the entire issued
share capital of the Company by MicroFrame ("the date of Closing") Mr
Connelly's salary will be increased to (pound)33,000 per annum.
3. Restrictive Covenant
With effect on and from the date of Closing all references in the
Service Contract to non- solicitation of employees or prohibition on
inducement to remove business after the date of termination of the
employment of Mr Connelly shall be delete and the following substituted
therefor:-
"In these provisions the following expressions shall have the following
meanings:-
"Business" shall mean any business carried on by any Relevant Group
Member at the Termination Date or within 6 months prior thereto in
which Mr Connelly has been directly concerned at any time during the
period of 6 months prior to the Termination Date.
"Protected Information" shall mean all information which is at the
Termination Date confidential in relation to the Business including,
for the avoidance of doubt, all business, financial, operational,
customer and marketing information, intellectual property including,
without limitation, computer programmes and codes, software and others
in respect of which, in all cases, intellectual property rights subsist
or are capable of subsisting subject to the making of the appropriate
application or registration, and trade secrets in relation to the
Business.
"Relevant Group Member" shall mean any member of the Group (meaning the
Company, any subsidiary or parent company of the Company and any other
subsidiary of that parent (as such are defined in the Companies Act
1985)) at the Termination Date in whose business Mr Connelly has been
directly concerned pursuant to the provisions of the Service Contract
as amended and further amended herein at any time during the period of
6 months prior to the Termination Date.
"Restricted Period" shall mean the period of 3 months commencing on the
Termination Date.
"Termination Date" shall mean the date on which the employment
terminates.
Since Mr Connelly is likely to obtain Protected Information in the
course of the employment and personal knowledge of and influence over
suppliers, customers and employees of the Company and Relevant Group
Members, Mr Connelly agrees with the Company that in addition to the
other terms of his employment and without prejudice to other
restrictions imposed upon him by law, he will, save with the prior
written consent of the Company, be bound by the covenants set out
below:
(a) Mr Connelly hereby undertakes that he will not during the
Restricted Period directly or indirectly canvass, solicit or
interfere with or endeavor to canvass, solicit or
-2-
<PAGE>
interfere with either on his own behalf or for any other
person, firm, company or other undertaking competing with the
Business, the custom of any person, firm, company or other
undertaking who at any time during the last 6 months of his
service with the Company was a customer of, or in the habit of
dealing with or supplying, the Company or (as the case may be)
any Relevant Group Member and with whom Mr Connelly shall have
been personally concerned or have had personal knowledge;
(b) Mr Connelly hereby undertakes that he will not during the
Restricted Period either on his own behalf or for any other
person, firm, company or other undertaking, directly or
indirectly solicit or endeavor to entice away from the Company
or any Relevant Group Member any person who is an employee,
director, officer, agent or consultant of the Company or any
Relevant Group Member at the Termination Date;
(c) Mr Connelly hereby undertakes that he shall not following the
Termination Date directly or indirectly, divulge or make use
of any Protected Information in relation to, or for the
benefit of, any business competing with the Business unless
ordered to do so by a court of competent jurisdiction;
(d) Mr Connelly hereby undertakes that he shall not following the
Termination Date represent himself as being in any way
connected with the business of the Company or that of any
Relevant Group Member;
(e) Mr Connelly hereby undertakes that during the Restricted
Period he will not be employed in any business in Scotland or
United States of America where he will be directly involved
with any products which are directly competitive with any of
the Company's products with which he had direct involvement at
any time during the period of 6 months prior to the
Termination Date. He will not during the same Restricted
Period carry on for his own account either alone or with
others or be concerned as a director, employee, agent,
consultant or in any other capacity whatsoever in or assist
any company, entity or person engaged or about to be engaged
in producing marketing or distributing any such products as
aforesaid."
4. Services
Mr Connelly hereby agrees that in the performance of his functions and
duties under the Service Contract he shall, in addition to the
performance of his functions and duties as Senior Analyst of the
Company exercise such powers and perform such duties in relation to the
Company's business and that of any Relevant Group Member as may from
time to time be assigned to or vested in him by the Board of Directors
of the Company and that in the discharge of such duties and in the
exercise of such powers he shall observe, obey and comply with all
lawful resolutions, regulations and directions from time to time made
or given by or under the authority of the Board of Directors of the
Company and promptly, whenever required so to do, give a full account
to the Board of Directors of the Company or a person duly authorised by
the same of all matters with which he is entrusted.
-3-
<PAGE>
5. Options
MicroFrame undertakes as soon as reasonably practicable after the date
of Closing to grant to Mr Connelly an option or options to subscribe
for 7,500 shares of common stock par value $.001 per share at fair
market value at date of grant under the 1998 Stock Option Plan of
MicroFrame.
6. Continuation of Agreement
All other provisions of the Service Contract as amended and further
amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF
-4-
<PAGE>
EXHIBIT G
Opinion Letter to be given by:-
(i) Maclay Murray & Spens
and
(ii) Anderson Strathern
Referable to Trustee Shareholders for
whom they act in the acquisition
Dear Sirs,
[ ] ("the Trust")
1. The Trust is constituted by Declaration of Trust by [ ]
dated [ ] and registered in Books of Council and Session on
[ ]. The Trust is validly constituted under Scots Law and
the Trustees have all requisite powers to act in accordance with the
provisions of the said Declaration of Trust.
2. The [original/present] Trustees of the Trust are [
] residing at [ ] ("the Trustees").
3. The Trustees have the requisite power and authority to execute and
deliver the Share Purchase Agreement with MicroFrame Inc relative to
the acquisition of the whole of the issued share capital of SolCom
Systems Limited ("the Share Purchase Agreement") dated of even date
with this Opinion and to perform their obligations thereunder and grant
warranties and indemnities thereunder and consummate the transactions
on its part contemplated thereby.
The execution delivery and performance by the Trustees of the Share
Purchase Agreement and without limitation the granting of warranties
and indemnities thereunder and the consummation by the Trustees of the
transactions contemplated thereby have been duly authorised by all
necessary action on the part of the Trustees.
The Share Purchase Agreement and all agreements delivered in connection
therewith to which the Trustees are parties, have been duly and validly
executed and delivered by the Trustees on behalf of the Trust, and each
constitutes a legal, valid and binding obligation of the Trustees
enforceable against the Trust in accordance with their respective
terms.
4. The Escrow Agreement, and the Registration Rights Agreement to be
entered into by the Trustees as applicable (the "Material Agreements")
have been duly and validly executed and
<PAGE>
delivered by the Trustees and constitute the legal, valid and binding
obligation of the Trustees enforceable against the Trust in accordance
with its terms.
5. The execution and delivery of the Material Agreements and the
performance and consummation by the Trustees of the transactions
contemplated thereby do not result in any conflict with, breach or
violation of or default, termination, forfeiture or lien under (or upon
the failure to give notice over lapse of time or both, result in any
conflict with, breach or violation of or default, termination,
forfeiture or lien under) any terms or provisions of (i) the
Declaration of Trust under which the Trustees are acting or (ii) any
Material Agreement.
6. This Opinion is given to Semple Fraser as legal advisers to MicroFrame
Inc solely in connection with the entering into and performance of the
Share Purchase Agreement and the Material Agreements by the Trustees
and is not to be disclosed to or relied upon by any third parties
without our express written consent.
Yours faithfully
-2-
<PAGE>
The Directors
MicroFrame, Inc
21 Meridian Avenue
Edison
New Jersey 08820 USA("the Buyer")
Dear Sirs
Scottish Legal Opinion
Share Purchase Agreement amongst MicroFrame, Inc, the Sellers (as therein
defined), and SolCom Systems Limited ("the Company") dated August 1998 ("the
Agreement")
1. We have acted as the Company's Scottish legal advisers in connection with the
Agreement.
2. We have taken instructions from the Company and have received no instructions
from you.
3. All terms defined in the Agreement shall, unless the context other
requires, have the same meanings in this letter. This letter together
with the Schedule ("the Schedule") annexed constitutes our formal legal
opinion (the "Opinion").
4. This Opinion is given in relation to the Company only.
5. This Opinion is limited to Scots law as applied by the Scottish courts
as at the date of this letter, so far as published and available
publicly. It is given on the basis that the matters on which our
opinion is expressed will be governed by and construed in accordance
with Scots law. We express no opinion and have not reviewed the law of
any other jurisdiction which may apply to the Agreement or to any of
the other parties to the Agreement.
6. For the purposes of this Opinion, we have examined only the documents,
fiches, drafts or copies specified in the Schedule to this letter. No
further searches against the Company have been carried out since the
date the fiches referred to, were obtained. A search will be carried
out by us prior to the execution of the Agreement for any petition for
the appointment of any administrator, liquidator or receiver to the
Company.
7. For the purposes of this Opinion, the following assumptions have been
made:
7.1 the Agreement and the Material Agreements (as hereinafter defined) and
all other related documents will be complete, duly executed by all
parties other than the Company and conform to any final draft documents
presented to us;
7.2 any original or execution copy documents presented to us were complete
and have not been and will not be altered;
7.3 all signatures are or will be genuine and no unlawful or fraudulent
acts have occurred or will occur in the obtaining of any signatures;
-3-
<PAGE>
7.4 no resolution for the appointment of an administrator, liquidator,
administrative receiver or receiver to the whole or any part of the
business or undertaking of the Company has been passed and no such
person has been appointed and no petition has been lodged for the
appointment of any such person;
7.5 the execution of the Agreement and the Material Agreements (as
hereinafter defined) is in the best interests of each of the parties to
the Agreement and the Material Agreements (as hereinafter defined);
7.6 the Agreement and the Material Agreements (as hereinafter defined) will
constitute legally valid and binding obligations on each of the parties
other than the Company;
7.7 the information contained in the fiches from the Registrar of Companies
relating to the Company is complete.
8. In our opinion:
8.1 The Company is a company duly incorporated under the laws of Scotland
and has all requisite corporate power and authority to own, operate and
lease its properties and/or assets and carry on its business and
undertaking as now conducted.
8.2 The Company has the requisite corporate power and authority to (1)
execute and deliver the Agreement, and (ii) perform its obligations
under the Agreement. The execution, delivery and performance by the
Company of its obligations under the Agreement have been duly
authorised by all necessary corporate action on the part of the
Company. The Agreement has been duly and validly executed and delivered
by the Company, and constitutes the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms.
8.3 Each Employment Agreement Amendment, the LIFE Agreement and the
Termination Agreements to be entered into by the Company ("the Material
Agreements") has been duly and validly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
8.4 The execution and delivery of the Material Agreements, and the
performance by the Company of its obligations thereunder, do not result
in any conflict with, breach or violation of or default, termination,
forfeiture or lien under (or upon the failure to give notice or the
lapse of time, or both, result in any conflict with, breach or
violation of or default, termination, forfeiture or lien under) any
terms or provisions of the Memorandum and Articles of Association of
the Company.
9. The term "enforceable" as used above means that the obligations assumed
by the Company under the Agreement or as the case may be the Material
Agreements are of a type which the Scottish courts enforce. It does not
mean that those obligations will necessarily be enforced in the
following circumstances:-
-4-
<PAGE>
9.1 enforcement may be limited by administration, bankruptcy, insolvency,
liquidation, receivership, reorganisation and other laws of general
application relating to or affecting the rights of creditors;
9.2 enforcement may be limited where damages are not considered by the
court to be an adequate remedy or where specific performance is not
considered by the court to be appropriate;
9.3 claims may become barred pursuant to the Prescription & Limitation
(Scotland) Act 1973, as amended, or may be or become subject to setoff,
retention or counterclaim;
9.4 where obligations are to be performed in a Jurisdiction outside
Scotland, they may not be enforceable in Scotland to the extent that
performance would be illegal under the Law of Scotland.
9.5 obligations enforceable outside Scotland may not be enforceable in
Scotland if a Scottish Court was to take the view that the obligations
were res judicata, or would be illegal or contrary to public policy in
Scotland. Without limitation to the foregoing generality, a Scottish
Court might take the view that the restrictive covenants in the
Employment Agreement Amendments were contrary to public policy and
accordingly such restrictive covenants may not be enforceable in
Scotland.
10. This Opinion is addressed to you, the Buyer, and is solely for the
benefit of the Buyer and is given only for the purposes of the
Agreement. It shall not be transmitted or disclosed to any other person
nor shall it be relied upon by any other person or for any other
purpose or quoted or referred to in any public document or filed with
anyone without our express written consent.
Yours faithfully,
Murray Beith Murray W.S.
Schedule
Documents
1. A draft copy of the Agreement dated [ ].
2. Draft copies of the Material Agreements dated [ ].
3. Copies of the documents appearing on the fiche issued by the Registrar
of Companies for the Company dated [ ].
-5-
<PAGE>
4. Board Minutes for the Company.
5. Resolutions of the members of the Company.
-6-
<PAGE>
________________, 1998
Microframe, Inc.
[address]
Re: SolCom Systems Limited and SolCom Systems, Inc.
----------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to the shareholders (the
"Shareholders") of SolCom Systems Limited, a corporation organized under the
laws of Scotland (the "Parent"), which has a wholly-owned subsidiary, SolCom
Systems, Inc., a Delaware corporation (the "Subsidiary"), in connection with the
sale of all of the issued and outstanding capital stock of the Parent to
Microframe, Inc., a New Jersey corporation (the "Buyer") pursuant to a Share
Purchase Agreement, dated as of ) 1998 (the "Agreement"), by and between Buyer,
Parent and the Shareholders, and those documents, agreements and other
instruments contemplated thereby or in connection therewith (the "Related
Agreements"). Capitalized terms used and not otherwise defined herein shall have
the meanings assigned thereto in the Agreement. We are delivering this opinion
to you pursuant to Section ___ of the Agreement.
In connection with this opinion we have examined and are familiar with
originals or copies of (i) the Certificate of Incorporation and By-Laws of the
Subsidiary, each as amended to date and (ii) the corporate proceedings of the
Subsidiary and (iii) such other documents, corporate records, certificates of
officers of the Subsidiary and other instruments as we have deemed relevant or
necessary as the basis of our opinions set forth herein. We have been furnished
with, and have relied upon without independent verification, certificates of the
Subsidiary with respect to certain factual matters. In addition, we have relied
upon without independent verification certificates and assurances from public
officials as we have deemed for purposes of expressing the opinions expressed
herein.
In our examination, and for all purposes of the opinions expressed
herein, we have assumed, with your permission, and without independent
investigation, that, as of the date hereof and (except as otherwise specifically
noted) at all relevant times thereafter:
1. the signatures of individuals signing all documents which we have
examined, on which we have relied or in connection with which this opinion is
rendered are genuine and authorized;
2. all documents submitted to us as copies, whether certified or not,
conform to authentic original documents;
Based on the foregoing, and subject to the limitations and
qualifications stated herein, we are of the opinion that:
1. The Subsidiary is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware and has the requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted.
<PAGE>
________________, 1998
Page 2
The opinions set forth above are subject to the following
qualifications:
A. Our opinions expressed herein are limited to the laws of the State
of New York, the Federal law of the United States, and the General Corporation
Law of the State of Delaware ("Delaware Corporation Law'), and we do not express
any opinion concerning any other law. With respect to any matters concerning
Delaware Corporation Law involved in the opinions set forth above, we draw your
attention to the fact that we are not admitted to practice law in the State of
Delaware and are not experts in the law of such jurisdiction, and that any such
opinions concerning Delaware Corporation Law are based upon our reasonable
familiarity with Delaware Corporation Law and as a result of our prior
involvement in transactions concerning such laws.
B. For purposes of our opinion set forth in paragraph 1 above with
respect to good standing, we are relying solely on those certificates of good
standing issued by the appropriate governmental agencies of the State of
Delaware, and we express no opinion with to such matters beyond the dates of
which such certificates were issued.
The opinions expressed herein shall be effective only as of the date of
this opinion letter. We do not assume responsibility for updating this opinion
letter as of any date subsequent to the date of this opinion letter, and assume
no responsibility for advising you of any changes with respect to any matters
described in this opinion letter that may occur subsequent to the date of this
opinion letter or from the discovery subsequent to the date of this opinion
letter of information not previously known to us pertaining to the events
occurring prior to the date of this opinion letter.
The foregoing opinions are being furnished to you pursuant to the terms
of the Agreement and are not to be used, referred to, furnished to any person or
relied upon by any other person without prior written consent.
Very truly yours,
MAYER, BROWN & PLATT
<PAGE>
________________, 1998
Page 3
Form of Buyer's Counsel Opinion
1. The Buyer (i) is a corporation duly organized and validly existing
in good standing under the laws of the State of New Jersey, and (ii) has the
requisite power and authority to own its material property and to carry on its
business as now conducted and to enter into the Share Purchase Agreement and the
[Related Agreements - insert correct defined term for the various ancillary
documents] and to carry out the terms thereof.
2. The execution, delivery and performance by the Buyer of the Share
Purchase Agreement and each of the Related Agreements to which it is a party has
been duly authorized by all necessary corporation action.
3. The Share Purchase Agreement and each of the Related Agreements to
which the Buyer is a party is a legal, valid and binding obligation of the
Buyer, enforceable in accordance with the terms thereof.
4. The execution, delivery and performance of the Share Purchase
Agreement and each of the Related Agreements to which the Buyer is a party, and
the consummation of the transactions contemplated thereby by the Buyer, do not
and will not violate any provision of the Articles of Incorporation or Bylaws of
the Buyer.
5. The authorized capital stock of the Buyer consists of ________
shares of Common Stock, ___ par value. Except as disclosed in the Share Purchase
Agreement or the Buyer's disclosure schedules pursuant thereto, none of the
shares of Common Stock of the Buyer issued and prior to the Closing are subject
to any preemptive rights. Upon Closing, the issued and outstanding capital stock
of the Buyer consists of shares of Common Stock, ___ par value. All shares of
Common Stock of the Buyer issued pursuant to the Share Purchase Agreement are
duly authorized, validly issued, fully paid and nonassessable.
6. An aggregate of shares of Common Stock of the Buyer have been
reserved for issuance upon exercise of the options to be issued at the Closing.
7. No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is required
for the issue and sale of the Common Stock of the Buyer or the consummation by
the Buyer of the transactions contemplated by the Share Purchase Agreement or
the Related Agreements, except for compliance with any applicable requirements
of the Securities Act, the Exchange Act, state securities or Blue Sky laws, and
the rules and regulations of NASDAQ.
<PAGE>
EXHIBIT H
1998 STOCK OPTION PLAN
STOCK OPTION CONTRACT
THIS STOCK OPTION CONTRACT entered into as of _____________ by
and between MICROFRAME, INC., a New Jersey corporation (the "Company"), and
____________ (the "Optionee").
W I T N E S S E T H:
1. The Company, in accordance with the allotment made by the
Compensation/Stock Option Committee (the "Committee") and subject to the terms
and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants
on the date hereof to the Optionee an option to purchase an aggregate of
________ shares of the common stock, $.001 par value per share, of the Company
("Common Stock") at an exercise price of $_______ per share. This Option is a
[nonqualified stock option or incentive stock option] within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. The term of this Option shall be [period of time remaining
with respect to each original SolCom option grant, not to exceed ten (10) years
from respective date of grant] from the date hereof, subject to earlier
termination as provided in the Plan. [Vesting to the extent of, and in
accordance with, original SolCom option grants]. The right to purchase shares of
Common Stock under this Option shall be cumulative, so that if the full number
of shares purchasable in a period shall not be purchased, the balance may be
purchased at any time or from time to time thereafter, but not after the
expiration of this Option. Notwithstanding any of the foregoing, in no event may
a fraction of a share of Common Stock be exercised or purchased under this
Option.
3. This Option shall be exercised by giving written notice to the
Company at its principal office, presently located at 21 Meridian Road, Edison,
New Jersey 08820, Attention: Compensation/Stock Option Committee, stating that
the Optionee is exercising the Option hereunder, specifying the number of shares
being purchased and accompanied by payment in full of the aggregate purchase
price therefor in cash or by certified check.
4. The Company may withhold cash and/or shares of Common Stock to
be issued to the Optionee in the amount which the Company determines is
necessary to satisfy its obligation, if any, to withhold taxes or other amounts
incurred by reason of the grant or exercise of this Option or the disposition of
the underlying shares of Common Stock. Alternatively, the Company may require
the Optionee to pay the Company such amount in cash promptly upon demand.
5. Notwithstanding the foregoing, shares of Common Stock issuable
upon exercise of this Option shall not be sold by the Optionee unless (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the shares of Common Stock to be received upon
the exercise of this Option shall be effective and current at the time of
exercise or (b) there is an
<PAGE>
exemption from registration under the Securities Act for the issuance of the
shares of Common Stock upon such exercise. The Optionee hereby represents and
warrants to the Company that, unless such a Registration Statement is effective
and current at the time of exercise of this Option, the shares of Common Stock
to be issued upon the exercise of this Option will be acquired by the Optionee
for his own account, for investment only and not with a view to the resale or
distribution thereof. In any event, the Optionee shall notify the Company of any
proposed resale of the shares of Common Stock issued to him upon exercise of
this Option. Any subsequent resale or distribution of shares of Common Stock by
the Optionee shall be made only pursuant to (x) a Registration Statement under
the Securities Act which is effective and current with respect to the sale of
shares of Common Stock being sold, or (y) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the Optionee shall, prior to any offer of sale or sale of such shares of Common
Stock, provide the Company (unless waived by the Company) with a favorable
written opinion of counsel, in form and substance satisfactory to the Company,
as to the applicability of such exemption to the proposed sale or distribution.
Such representations and warranties shall also be deemed to be made by the
Optionee upon each exercise of this Option. Nothing herein shall be construed as
requiring the Company to register the shares subject to this Option under the
Securities Act.
6. Notwithstanding anything herein to the contrary, if at any
time the Committee shall determine, in its discretion, that the listing or
qualification of the shares of Common Stock subject to this Option on any
securities exchange or under any applicable law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition to,
or in connection with, the granting of an option or the issue of shares of
Common Stock hereunder, this Option may not be exer cised in whole or in part
unless such listing, qualification, consent or approval shall have been effected
or obtained free of any conditions not acceptable to the Committee. The
Committee shall use reasonable efforts to obtain such listing, qualification,
consent or approval to the extent necessary in connection therewith.
7. The Company may affix appropriate legends upon the
certificates for shares of Common Stock issued upon exercise of this Option and
may issue such "stop transfer" instructions to its transfer agent in respect of
such shares as it determines, in its discretion, to be necessary or appropriate
to (a) prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act, or (b) implement the provisions of the Plan
or this Option or any other agreement between the Company and the Optionee with
respect to such shares of Common Stock.
8. Nothing in the Plan or herein shall confer upon the Optionee
any right to continue as an employee or director, as applicable, of the Company,
its parent or any of its subsidiaries, or interfere in any way with any right to
terminate such directorship at any time for any reason whatsoever without
liability to the Company, its parent or any of its subsidiaries or any
shareholder of the Company, its parent or any of its subsidiaries.
9. The Company and the Optionee agree that they will both be
subject to and bound by all of the terms and conditions of the Plan, a copy of
which is attached hereto and made a part hereof. Any capitalized term not
defined herein shall have the meaning ascribed to it in the Plan. In the event
of a conflict between the terms of this Option and the terms of the Plan, the
terms of the Plan shall govern.
10. The Optionee represents and agrees that he will comply with
all applicable laws relating to the Plan and the grant and exercise of this
Option and the disposition of the shares of Common
<PAGE>
Stock acquired upon exercise of the Option, including without limitation,
federal and state securities and "blue sky" laws.
11. This Option is not transferable by the Optionee otherwise
than by will or the laws of descent and distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee or the Optionee's
legal representatives.
12. This Option shall be binding upon and inure to the benefit of
any successor or assign of the Company and to any heir, distributee, executor,
administrator or legal representative entitled by law to the Optionee's rights
hereunder.
13. This Option shall be governed by, and construed and enforced
in accordance with, the laws of the State of Delaware, without regard to the
conflicts of law rules thereof.
14. The invalidity, illegality or unenforceability of any
provision herein shall not affect the validity, legality or enforceability of
any other provision.
15. The Optionee agrees that the Company may amend the Plan and
the options granted to the Optionee under the Plan, subject to the limitations
contained in the Plan.
IN WITNESS WHEREOF, the parties hereto have executed this Option
as of the day and year first above written.
MICROFRAME, INC.
By:
Optionee
Address
<PAGE>
EXHIBIT I
To be typed on MicroFrame Headed Paper
Dear Colleague/Option Holder
I am pleased to confirm that MicroFrame, Inc has purchased the whole of the
share capital of SolCom Systems Ltd.
You currently hold an option to purchase shares in SolCom Systems Ltd, (SSL),
between [ ] August 2000 and [ ] August 2007 at [ ] per share.
Following the purchase of SSL we appreciate that the option to purchase a
minority stake in a subsidiary company may not be attractive to you.
[MicroFrame Inc wishes to ensure that employees benefit, and feel that they
benefit from the future growth of the business]. We would therefore provide you
with the following three alternatives:-
1. An option granted under the 1998 MicroFrame stock option plan to
purchase [ ] MicroFrame shares for every [ ] SSL shares under options
previously held at a price of [ ] per share. This option may be
exercised between [ ] August 2000 and [ ] August 2007.
Unfortunately, due to the operation of the UK approved option schemes
legislation these will be unapproved options. This is likely to mean
that:-
o you will be liable for national insurance contributions on the
difference between the market value of MicroFrame shares on
the date of grant, and the option price payable, if you do not
already pay the maximum contributions;
o you will pay income tax, via the PAYE system, on the benefit
you receive at the time when you exercise the options and
acquire MicroFrame shares (i.e. market value of the shares you
acquire less exercise price); and
o your base cost in the shares for capital gains tax on a
subsequent sale will be the market value of the shares at the
date when you exercise the options and acquire the shares.
We would recommend that you take independent advice with regard to your
particular circumstances.
A summary of the terms of the 1998 MicroFrame stock option plan is
attached at Appendix A.
<PAGE>
2. An option to purchase [ ] MicroFrame shares for every [ ] SSL shares
under options previously held at a price of [market value at time of
grant] per share under the 1998 UK sub-plan of the 1998 MicroFrame
stock option plan. These options may be exercised between [ 3 years
after date of grant] and [ 10 years after date of grant ].
The UK sub-plan [is/will be] a plan approved by the Inland Revenue. As
a result, provided you exercise the options in an approved manner, no
income tax nor national insurance liabilities will arise on either the
grant, or the exercise, of the option. Instead capital gains tax may be
payable on the difference between the sale proceeds and the exercise
price on a subsequent sale, (subject to taper relief).
A summary of the terms of the UK sub-plan of the 1998 MicroFrame stock
option plan is attached at Appendix B.
3. Do nothing and continue to hold options in SSL which you may exercise
under the terms of that company's' scheme acquiring a minority
shareholding in SSL.
Please complete and return the [ ], attached at Appendix C together with your
current option certificate in relation to the SSL Employee Share Option Scheme.
If you wish more details regarding these schemes or an explanation of any aspect
thereof please contact [ ]. However, no member of the group may advise you how
you should proceed except in purely administrative terms as we are not
authorised investment advisors. If you are in any doubt as to how to proceed
please consult your financial advisor.
[I look forward to working with each of you in the future].
<PAGE>
EXHIBIT J
AGREEMENT
amongst
SOLCOM SYSTEMS LIMITED
and
THE EXECUTIVES
and
THE INVESTORS
August 1998
MURRAY BEITH MURRAY W. S.
39 Castle Street
Edinburgh
Tel: (0131) 225 1200
Fax: (0131) 225 9212
Reference: AGSOL002
<PAGE>
AGREEMENT between SOLCOM SYSTEMS
LIMITED, a private limited company,
incorporated under the Companies
Acts, in Scotland, registered
number SC 129008, and having its
registered office at SolCom House,
Meikle Road, Kirkton Campus,
Livingston ("the Company")
and
THE EXECUTIVES and THE INVESTORS
detailed in parts 1 and 2 of the
schedule annexed hereto
(respectively "the Executives" and
"the Investors")
WHEREAS
The Company, the Executives and the Investors entered into an Investment
Agreement dated 28 June 1996 ("the Investment Agreement") and have agreed that
all outstanding claims or rights of each party to the Investment Agreement in
respect of any antecedent breaches should be waived and further that, subject to
Closing (as defined in the Share Purchase Agreement amongst the Company, certain
of the shareholders of the Company and MicroFrame Inc, to be dated on or around
the date of this Agreement ("the SPA")) the Investment Agreement should be set
aside.
Therefore the parties have agreed and do hereby agree as follows:
1. WAIVER OF RIGHTS
Subject to Closing (as defined in the SPA), the parties hereto hereby
waive all and any rights under the Investment Agreement which they may
now have or may have had in respect of any antecedent breaches of the
Investment Agreement by any party thereto and hereby relieve, release
and discharge all other parties from all claims, rights, debts,
liabilities, demands and obligations of whatever nature in respect of
such breaches.
2. DISCONTINUANCE OF THE INVESTMENT AGREEMENT
Subject to Closing (as defined in the SPA), the parties hereto hereby
(a) agree that the Investment Agreement shall be set aside and
terminated with immediate effect from Closing and that with effect from
that date it shall be of no further force or effect; and (b) waive any
and all of their rights under the Investment Agreement in all time
coming and hereby relieve, release and discharge the other parties
hereto and their successors, claims and assignees from any and
<PAGE>
all claims, rights, debts, liabilities, demands and obligations of
whatever nature arising out of the Investment Agreement. All
liabilities, claims, rights, debts, demands, obligations of whatever
nature of the parties arising out of the Investment Agreement shall
terminate accordingly.
3. INVESTOR CONSENTS
In terms of and for the purposes of the Investment Agreement and the
Articles of Association of the Company ("the Articles"), the Investors
hereby consent to and waive all of their rights under the Investment
Agreement, the Articles or otherwise in respect of:
7. The Company and the Executives entering into, completing and performing
their obligations under the SPA and any agreements or transactions
referred to therein, contemplated thereby, or ancillary thereto;
8. The allotment and issue of shares in the share capital of the Company
pursuant to the conversion of all or part of the outstanding loan stock
of the Company and the issue of warrants to subscribe for shares
pursuant thereto or the exercise of any outstanding warrants to
subscribe for shares in the Company (whether conditional or otherwise)
or of any warrants to be issued pursuant to the conversion of any of
the outstanding loan stock of the Company referred to above;
9. The entry into an investment agreement or agreements by the Company
setting out the terms and conditions on which a third party or parties
will subscribe for shares in the Company in connection with the
provision of funding to the Company in terms of Section 7.18 of the SPA
and the allotment and issue of shares in the Company to a third party
or parties in connection with the provision of such funding, all on
such terms and conditions as the Directors of the Company may
determine;
10. The amendment of any of the terms of the outstanding warrants to
subscribe for shares in the Company and of the terms of any warrants to
be issued in connection with the conversion of the outstanding loan
stock of the Company referred to in (2) above, provided always that
such amendment shall not result in any increase in the number of shares
which may be subscribed for pursuant to the exercise of each warrant;
11. The granting of options to subscribe for up to 800,000 ordinary shares
of (pound)0.01 each in the Company on such terms and conditions as the
Directors of the Company may determine to employees and shareholders of
the Company and the allotment and issue of shares in the Company
pursuant to the exercise of such options; and
12. The increase in the authorised share capital of the company if required
in connection with any or all of paragraphs (1) to (5) above.
-2-
<PAGE>
4. GOVERNING LAW
This agreement shall be governed by Scottish law and the parties hereto
hereby prorogate the non exclusive jurisdiction of the Scottish courts.
IN WITNESS WHEREOF these presents typewritten on this and the preceding two
pages are executed as follows:
They are subscribed for and on behalf of SOLCOM SYSTEMS LIMITED by s/Peter
MacLaren Director at Edinburgh on 13th August Nineteen hundred and Ninety Eight
before this witness:
- ------------------------------ Witness
/s/ Alexander Nathaniel Gerver Full Name
- -------------------------------
39 Castle Street Address
- -------------------------------
Edinburgh
- -------------------------------
They are subscribed by or for and on behalf of
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BRIAN SOUTER /s/ PETER JAMES MACLAREN /s/
-------------------------------- ---------------------------
B Souter P J MacLaren
ANN HERON GLOAG /s/ HELEN SEALEY /s/
-------------------------------- ---------------------------
A H Gloag H Sealey
ALI TAHERI /s/ ANDREW EDWARD SEALEY /s/
-------------------------------- ---------------------------
For and on behalf of A E Sealey
A Taheri
KEITH LAING /s/ LADY MARGARET ELLIOT /s/
-------------------------------- ---------------------------
K Laing Attorney for
Lady M Elliot
-3-
<PAGE>
E F G READS TRUSTEES
WILLIAM HUGH LIMITED AS TRUSTEES OF M
EVANS /s/ D RUTTERFORD'S TRUST /s/
-------------------------------- ---------------------------
W H Evans Authorised Signatory
E F G READS TRUSTEES
LIMITED AS TRUSTEES OF
PETER ATHOLL MRS J G RUTTERFORD'S 1991
WILSON /s/ TRUST /s/
-------------------------------- ---------------------------
P A Wilson Authorised Signatory
LOTHIAN
INVESTMENT FUND
FOR ENTERPRISE
LIMITED /s/
--------------------------------
Authorised Signatory
</TABLE>
at Edinburgh on 13th August
Nineteen hundred and Ninety Eight
before this witness:
- ---------------------------- Witness
- ---------------------------- Full Name
- ---------------------------- Address
- ----------------------------
-4-
<PAGE>
SCHEDULE
PART 1
EXECUTIVES
Name Address
William Hugh Evans Formerly of 33 Stoneyflats
Crescent, South Queensferry and now
of 19 Pentland Drive, Edinburgh, EH
10 6PU
Peter Atholl Wilson 6 Hermand Gardens, West Calder,
EH55 8BT
Peter James MacLaren Formerly of 19 Wester Coates
Terrace, Edinburgh and now of 2
Glencairn Crescent Edinburgh, EH12
5BS
-5-
<PAGE>
PART 2
INVESTORS
Name Address
Brian Souter Murrayfield House, St Magdalene's
Road, Perth, PH2 0BT
Ann Heron Gloag Balcraig House, Scone, Perth, PH2
7PJ
Peter James MacLaren 2 Glencairn Crescent, Edinburgh,
EH12 5BS
William Hugh Evans 19 Pentland Drive, Edinburgh, EH10
6PU
Keith Laing 43 Wester Bankton, Livingston, EH54
9DY
Ali Taheri 29 North Gyle Terrace, Edinburgh,
EH12 8JT
Peter Atholl Wilson 6 Hermand Gardens, West Calder,
EH55 8BT
Lady Margaret Elliot 8 Howe Street, Edinburgh, EH3 6TD
EFG Reads Trustees Limited the successors PO Box 641, No 1 Seaton Place, St
of Royal Bank of Canada Trust Company Helier, Jersey, JE4 8YJ
Limited as trustees of M D Rutterford's Trust
EFG Reads Trustees Limited the successors PO Box 641, No 1 Seaton Place, St
of Royal Bank of Canada Trust Company Helier, Jersey, JE4 8YJ
Limited as trustees of Mrs J G Rutterford's
1991 Trust
Andrew Edward Sealey The Coach House, 99 Blackheath
Park, London, SE3 0EU
Helen Sealey 4 Castlelaw Road, Edinburgh, EH13
0DN
Lothian Investment Fund for Enterprise 21 Ainslie Place, Edinburgh, EH3
Limited 6AJ
-6-
<PAGE>
AGREEMENT
amongst
SOLCOM SYSTEMS LIMITED
and
THE EXECUTIVES
and
THE INVESTORS
August 1998
MURRAY BEITH MURRAY W. S.
39 Castle Street
Edinburgh
Tel: (0131) 225 1200
Fax: (0131) 225 9212
Reference: AGSOL001
<PAGE>
AGREEMENT
between
SOLCOM SYSTEMS LIMITED, a private
limited company, incorporated under
the Companies Acts, in Scotland,
registered number SC 129008, and
having its registered office at
SolCom House, Meikle Road, Kirkton
Campus, Livingston ("the Company")
and
THE EXECUTIVES and THE INVESTORS
detailed in parts 1 and 2 of the
schedule annexed hereto
(respectively "the Executives" and
"the Investors")
WHEREAS
The Company, the Executives and the Investors entered into an Investment
Agreement dated 17 March 1993 ("the Investment Agreement") and have agreed that
all outstanding claims or rights of each party to the Investment Agreement in
respect of any antecedent breaches should be waived and further that, subject to
Closing (as defined in the Share Purchase Agreement amongst the Company, certain
of the shareholders of the Company and MicroFrame Inc, to be dated on or around
the date of this Agreement ("the SPA")) the Investment Agreement should be set
aside.
Therefore the parties have agreed and do hereby agree as follows:
1. WAIVER OF RIGHTS
Subject to Closing (as defined in the SPA), the parties hereto hereby
waive all and any rights under the Investment Agreement which they may
now have or may have had in respect of any antecedent breaches of the
Investment Agreement by any party thereto and hereby relieve, release
and discharge all other parties from all claims, rights, debts,
liabilities, demands and obligations of whatever nature in respect of
such breaches.
2. DISCONTINUANCE OF THE INVESTMENT AGREEMENT
Subject to Closing (as defined in the SPA), the parties hereto hereby
(a) agree that the Investment Agreement shall be set aside and
terminated with immediate effect from Closing and that with effect from
that date it shall be of no further force or effect; and (b) waive any
and
<PAGE>
all of their rights under the Investment Agreement in all time coming
and hereby relieve, release and discharge the other parties hereto and
their successors, claims and assignees from any and all claims, rights,
debts, liabilities, demands and obligations of whatever nature arising
out of the Investment Agreement. All liabilities, claims, rights,
debts, demands, obligations of whatever nature of the parties arising
out of the Investment Agreement shall terminate accordingly.
3. INVESTOR CONSENTS
In terms of and for the purposes of the Investment Agreement and the
Articles of Association of the Company ("the Articles"), the Investors
hereby consent to and waive all of their rights under the Investment
Agreement, the Articles or otherwise in respect of:
1. The Company and the Executives entering into, completing and performing
their obligations under the SPA and any agreements or transactions
referred to therein, contemplated thereby, or ancillary thereto;
2. The allotment and issue of shares in the share capital of the Company
pursuant to the conversion of all or part of the outstanding loan stock
of the Company and the issue of warrants to subscribe for shares
pursuant thereto or the exercise of any outstanding warrants to
subscribe for shares in the Company (whether conditional or otherwise)
or of any warrants to be issued pursuant to the conversion of any of
the outstanding loan stock of the Company referred to above;
3. The entry into an investment agreement or agreements by the Company
setting out the terms and conditions on which a third party or parties
will subscribe for shares in the Company in connection with the
provision of funding to the Company in terms of Section 7.18 of the SPA
and the allotment and issue of shares in the Company to a third party
or parties in connection with the provision of such funding, all on
such terms and conditions as the Directors of the Company may
determine;
4. The amendment of any of the terms of the outstanding warrants to
subscribe for shares in the Company and of the terms of any warrants to
be issued in connection with the conversion of the outstanding loan
stock of the Company referred to in (2) above, provided always that
such amendment shall not result in any increase in the number of shares
which may be subscribed for pursuant to the exercise of each warrant;
5. The granting of options to subscribe for up to 800,000 ordinary shares
of (pound)0.01 each in the Company on such terms and conditions as the
Directors of the Company may determine to employees and shareholders of
the Company and the allotment and issue of shares in the Company
pursuant to the exercise of such options; and
6. The increase in the authorised share capital of the company if required
in connection with any or all of paragraphs (1) to (5) above.
-2-
<PAGE>
4. GOVERNING LAW
This agreement shall be governed by Scottish law and the parties hereto
hereby prorogate the non exclusive jurisdiction of the Scottish courts.
IN WITNESS WHEREOF these presents typewritten on this and the preceding two
pages are executed as follows:
They are subscribed for and on behalf of SOLCOM SYSTEMS LIMITED by s/Peter
MacLaren Director at Edinburgh on 13th August Nineteen hundred and Ninety Eight
before this witness:
- ----------------------------- Witness
Alexander Nathaniel Gerver Full Name
- -----------------------------
39 Castle St. Address
- -----------------------------
Edinburgh
- -----------------------------
They are subscribed by or for and on behalf of
WILLIAM HUGH EVANS
-------------------------------------------
W H Evans
PETER ATHOLL WILSON
-------------------------------------------
P A Wilson
PETER JAMES MACLAREN
-------------------------------------------
P J MacLaren
HELEN SEALEY
-------------------------------------------
H Sealey
-3-
<PAGE>
ANDREW EDWARD SEALEY
--------------------------------
A E Sealey
LADY MARGARET ELLIOT
--------------------------------
Lady M Elliot
E F G READS TRUSTEES LIMITED AS
TRUSTEES OF M D RUTTERFORD'S TRUST
--------------------------------
Authorised Signatory
E F G READS TRUSTEES LIMITED AS
TRUSTEES OF MRS J G RUTTERFORD'S 1991
TRUST
--------------------------------
Authorised Signatory
at Edinburgh
on 13th August
Nineteen hundred and Ninety Eight before this witness:
- ----------------------------- Witness
Alexander Nathaniel Gerver Full Name
- -----------------------------
39 Castle St. Address
- -----------------------------
Edinburgh
- -----------------------------
-4-
<PAGE>
SCHEDULE
PART 1
EXECUTIVES
Name Address
William Hugh Evans Formerly of 33 Stoneyflats
Crescent, South Queensferry and now
of 19 Pentland Drive, Edinburgh, EH
10 6PU
Peter Atholl Wilson 6 Hermand Gardens, West Calder,
EH55 8BT
Peter James MacLaren Formerly of 19 Wester Coates
Terrace, Edinburgh and now of 2
Glencairn Crescent Edinburgh, EH12
5BS
-5-
<PAGE>
PART 2
INVESTORS
Name Address
Helen Sealey 4 Castlelaw Road, Edinburgh, EH13
0DN
Andrew Edward Sealey Formerly 2a Vanbrugh Terrace,
London and now The Coach House, 99
Blackheath Park, London, SE3 0EU
EFG Reads Trustees Limited the successors PO Box 641, No 1 Seaton Place, St
of Royal Bank of Canada Trust Company Helier, Jersey, JE4 8YJ
Limited as trustees of M D Rutterford's Trust
EFG Reads Trustees Limited the successors PO Box 641, No 1 Seaton Place, St
of Royal Bank of Canada Trust Company Helier, Jersey, JE4 8YJ
Limited as trustees of Mrs J G Rutterford's
1991 Trust
Lady Margaret Elliot 8 Howe Street, Edinburgh, EH3 6TD
-6-
<PAGE>
AGREEMENT
amongst
SOLCOM SYSTEMS LIMITED
and
THE EXECUTIVES
and
LIFE
August 1998
MURRAY BEITH MURRAY W. S.
39 Castle Street
Edinburgh
Tel: (0131) 225 1200
Fax: (0131) 225 9212
Reference: AGSOL003
<PAGE>
AGREEMENT
between
SOLCOM SYSTEMS LIMITED, a private
limited company, incorporated under
the Companies Acts, in Scotland,
registered number SC 129008, and
having its registered office at
SolCom House, Meikle Road, Kirkton
Campus, Livingston ("the Company")
and
WILLIAM HUGH EVANS, formerly of 33
Stoneyflats, South Queensferry and
now of 19 Pentland Drive,
Edinburgh, EH10 6PU
PETER ATHOLL WILSON, of 6 Hermand
Gardens, West Calder, EH55 8BT
PETER JAMES MACLAREN, formerly of
19 Wester Coates Terrace, Edinburgh
and now of 2 Glencairn Crescent,
Edinburgh, EH12 5BS (together "the
Executives")
and
LOTHIAN INVESTMENT FUND FOR
ENTERPRISE LIMITED, a company
limited by guarantee (SC 137938)
and having its registered office at
21 Ainslie Place, Edinburgh
("LIFE")
WHEREAS
The Company, The Executives and LIFE entered into a Minute of Agreement dated 21
December 1993 ("The Investment Agreement") and have agreed that all outstanding
claims or rights of each party to The Investment Agreement in respect of any
antecedent breaches should be waived and further that, subject to Closing (as
defined in The Share Purchase Agreement amongst The Company, certain of The
<PAGE>
shareholders of The Company and MicroFrame Inc, to be dated on or around The
date of this Agreement ("The SPA")) The Investment Agreements should be set
aside.
Therefore The parties have agreed and do hereby agree as follows:
1. WAIVER OF RIGHTS
The parties hereto hereby waive all and any rights under The Investment
Agreement which they may now have or may have had in respect of any
antecedent breaches of The Investment Agreement by any party thereto
and hereby relieve, release and discharge all other parties from all
claims, rights, debts, liabilities, demands and obligations of whatever
nature in respect of such breaches.
2. DISCONTINUANCE OF THE INVESTMENT AGREEMENT
Subject to Closing (as defined in The SPA), the parties hereto hereby
(a) agree that the Investment Agreement shall be set aside and
terminated with immediate effect from Closing and that with effect from
that date it shall be of no further force or effect; and (b) waive any
and all of their rights under the Investment Agreement in all time
coming and hereby relieve, release and discharge the other parties
hereto and their successors, claims and assignees from any and all
claims, rights, debts, liabilities, demands and obligations of whatever
nature arising out of the Investment Agreement. All liabilities,
claims, rights, debts, demands, obligations of whatever nature of the
parties arising out of the Investment Agreement shall terminate
accordingly.
3. LIFE CONSENTS
In terms of and for the purposes of the Investment Agreement and the
Articles of Association of the Company ("The Articles"), LIFE hereby
consents to and waives all of its rights under the Investment
Agreement, the Articles or otherwise in respect of
1. The Company and the Executives entering into, completing and
performing their obligations under the SPA and any agreements
or transactions referred to therein, contemplated thereby, or
ancillary thereto;
2. The allotment and issue of shares in the share capital of the
Company pursuant to the conversion of all or part of the
outstanding loan stock of the Company and the issue of
warrants to subscribe for shares pursuant thereto or the
exercise of any outstanding warrants to subscribe for shares
in the Company (whether conditional or otherwise) or of any
warrants to be issued pursuant to the conversion of any of the
outstanding loan stock of the Company referred to above;
3. The entry into an investment agreement or agreements by the
Company setting out the terms and conditions on which a third
party or parties will subscribe for shares in the
-2-
<PAGE>
Company in connection with the provision of funding to the
Company in terms of Section 7.18 of the SPA and the allotment
and issue of shares in the Company to a third party or parties
in connection with the provision of such funding, all on such
terms and conditions as the Directors of the Company may
determine;
4. The amendment of any of the terms of the outstanding warrants
to subscribe for shares in the Company and of the terms of any
warrants to be issued in connection with the conversion of the
outstanding loan stock of the Company referred to in (2)
above, provided always that such amendment shall not result in
any increase in the number of shares which may be subscribed
for pursuant to the exercise of each warrant;
5. The granting of options to subscribe for up to 800,000
ordinary shares of (pound)0.01 each in the Company on such
terms and conditions as the Directors of the Company may
determine to employees and shareholders of the Company and the
allotment and issue of shares in the Company pursuant to the
exercise of such options; and
6. The increase in the authorised share capital of the company if
required in connection with any or all of paragraphs (1) to
(5) above.
4. GOVERNING LAW
This agreement shall be governed by Scottish law and the parties hereto
hereby prorogate the non exclusive jurisdiction of the Scottish courts.
IN WITNESS WHEREOF these presents typewritten on this and the preceding two
pages are executed as follows:
They are subscribed for and on behalf They are subscribed for and on behalf
of SOLCOM SYSTEMS LIMITED of LOTHIAN INVESTMENT FUND FOR
by s/Peter MacLaren Director ENTERPRISE LIMITED
at Edinburgh by s/Peter MacLaren Attorney
on 13th August at Edinburgh
Nineteen hundred and Ninety Eight on 13th August
before this witness: Nineteen hundred and Ninety Eight
before this witness:
-3-
<PAGE>
- ----------------------------- Witness ------------------------- Witness
Alexander Nathaniel Gerver Full Name John Macrae Caldwell Full Name
- ---------------------------- -------------------------
39 Castle St Address c/o Saltire Court Address
- ---------------------------- -------------------------
Edinburgh Edinburgh
- ---------------------------- -------------------------
They are subscribed by or for and on behalf of
WILLIAM HUGH EVANS /s/
-----------------------------------
W H Evans
PETER ATHOLL WILSON /s/
-----------------------------------
P A Wilson
PETER JAMES MACLAREN /s/
-----------------------------------
P J MacLaren
at Edinburgh
on 13th August
Nineteen hundred and Ninety Eight before this witness:
- ----------------------------- Witness
Alexander Nathaniel Gerver Full Name
- -----------------------------
39 Castle St Address
- -----------------------------
Edinburgh
- -----------------------------
-4-
<PAGE>
EXHIBIT K
DEED OF ADHERENCE
among
MICROFRAME, INC.
and
ANDERSON STRATHERN
NOMINEES LIMITED
and
JAMES WILSON RAMSAY, WILLIAM RAMSAY,
ERIC PETER MEYERS, IRENE VASS, ROBERT FORBES,
RENATE RITCHIE, KEVIN RITCHIE, IAN QUINNEY,
ROBERT STRUTHERS, GAYNOR CHRISTINE STRUTHERS,
STEWART STRUTHERS, GEOFFREY MICHAEL GWYNN,
RICHARD ANDREW SMITH, JOAN SMITH, DAVID MICHAEL SMITH,
GRAHAM WILLIAM SMITH, KAREN MARGARET SMITH,
HENRY COX, ANKE-BEATE STAHL, WILLIAM LILLIS
and GERARD COX
ANDERSON STRATHERN WS
SOLICITORS
48 Castle Street,
Edinburgh
FAS02080mm
<PAGE>
DEED of ADHERENCE
among
MICROFRAME, INC., a New Jersey
Corporation ("Microframe")
and
ANDERSON STRATHERN NOMINEES
LIMITED, a company incorporated
under the Companies Act 1985 of the
United Kingdom and having its
registered office at 48 Castle
Street, Edinburgh ("Nominees")
and
JAMES WILSON RAMSAY, of 16 Easter
Crescent, Wishaw, Lanarkshire ML2
8XB, WILLIAM RAMSAY, of 7 Huntly
Quadrant, Wishaw, Lanarkshire ML2
7LP, ERIC PETER MEYERS, of 79
Mowbray Grove, South Queensferry,
West Lothian EH30 9PD, IRENE VASS
of 8 Seafield Court, Princes Park,
Falkirk, ROBERT FORBES of 70 Saint
Andrews Drive, Bridge of Weir,
Renfrewshire, RENATE RITCHIE of 3
Grange Drive, Falkirk FK2 9ES,
KEVIN RITCHIE, care of 3 Grange
Drive, Falkirk FK2 9ES, IAN QUINNEY
of Victoria Cottage, Lammerlaws,
Burntisland, Fife KY3 9BS, ROBERT
STRUTHERS, of 34 Primrose Place,
Livingston EH54 6RN, GAYNOR
CHRISTINE STRUTHERS, of 34 Primrose
Place, Livingston EH54 6RN, STEWART
STRUTHERS, of 2 Murrell Road,
Aberdour, GEOFFREY MICHAEL GWYNN of
Rose Cottage, Roseford Lane, Acton
Trussell, Stratford ST17 ORD,
RICHARD ANDREW SMITH of 65 Foxknowe
Place, Eliburn, Livingston EH54
6TX, JOAN SMITH of Furzefield,
Abbey Road, Bourne, Lincs PEl0 9AP,
DAVID MICHAEL SMITH of 18 Edwin
Gardens, Bourne, Lincs PE10 9QN,
GRAHAM WILLIAM SMITH of The Setter
Dog, Walkers Barn, Reinow,
Macclesfield, Cheshire, KAREN
MARGARET SMITH, of 65 Foxknowe
Place, Eliburn, Livingston EH54
6TX, HENRY COX of 1/4 Caledonian
Crescent, Edinburgh EHl1 2BD,
ANKE-BEATE STAHL of 1/4 Caledonian
Crescent, Edinburgh EHl1 2BD,
WILLIAM LILLIS of 18 lnvergarry
Drive, Glasgow and GERARD COX of 5
Rhindmuir Grove, Glasgow ("the
Beneficiaries")
WHEREAS:-
-2-
<PAGE>
(G) Microframe has entered into a Share Purchase
Agreement for the purchase of the entire issued share
capital of the Company as hereinafter defined and
Nominees is a party to the Share Purchase Agreement
as a Seller.
(H) Nominees held certain shares in the Company on behalf
of the Beneficiaries which were acquired by
Microframe pursuant to the Share Purchase Agreement
and in respect of which Nominees has had issued to it
certain shares of common stock in Microframe.
(I) Nominees wishes to transfer its shares of common
stock in Microframe to the Beneficiaries as
beneficial owners thereof which Microframe is
prepared to agree to do subject to the entering into
of these presents.
NOW THEREFORE IT IS AGREED as follows:-
1. Definitions and Interpretation
1.1 For the purposes of this Deed of Adherence the
following words and expressions shall have the
following meanings:-
"Company" means SolCom Systems
Limited, a company
incorporated under the
Companies Act 1985 of
the United Kingdom and
having its
-3-
<PAGE>
registered office at
SolCom House, Meikle
Road, Kirkton Campus,
Livingston;
"Escrow Agreement" means the escrow
agreement entered into
pursuant to the Share
Purchase Agreement a
copy of which is annexed
as Appendix 2;
"Registration Rights Agreement" means the registration
rights agreement entered
into pursuant to the
Share Purchase
Agreement, a copy of
which is annexed as
Appendix 3; "Share
Purchase Agreement"
means the Share Purchase
Agreement entered into
between Microframe, the
Company and the parties
named therein as Sellers
relative to the purchase
of the entire issued
share capital of the
Company, a copy of which
is annexed as Appendix
1;
"Shares" means the shares of
common stock in
Microframe specified in
the Schedule against the
name of each of the
individual
Beneficiaries;
"Warranties" means the warranties of
the Sellers set out in
Section 3 of the Share
Purchase Agreement and
of each Seller set out
in Section 5 of the
Share Purchase Agreement
and of the Sellers
-4-
<PAGE>
set out in Section 10.5
of the Share Purchase
Agreement as qualified
by the Disclosure Letter
and the Supplemental
Disclosure Letter in
accordance with their
terms.
1.2 Words and expressions defined in the Share
Purchase Agreement shall have the same meaning in this
Deed of Adherence except where provided otherwise in
Clause 1.1 or elsewhere in these presents.
1.3 The provisions of the Interpretation Act 1978 with
respect to interpretation and construction shall apply
to this Deed of Adherence mutatis mutandis.
1.4 The headings herein are for convenience only and
shall not be construed as forming part of this Deed of
Adherence or be taken into account in the
interpretation hereof.
1.5 References to a Clause, Schedule or an Appendix
are to a Clause, Schedule or an Appendix to this Deed
of Adherence.
2. Adherence by Beneficiaries
In consideration of Microframe entering into this deed
and issuing the Shares to Nominees and the
acknowledgment by Microframe as provided for in Clause
3 each of the Beneficiaries undertakes and agrees to
be bound as if he were a Seller and executing party by
the provisions and obligations incumbent upon Nominees
in respect of the Shares by virtue of: -
2.1 the Share Purchase Agreement, such provisions and
obligations including, without prejudice to the
generality, the warranties subject always to the
limitations on liability set out in Section 4 of the
Share Purchase Agreement or as may be available to the
Sellers, the covenant of the Sellers regarding
standstill set out in Section 7.22 of the Share
Purchase Agreement, the provisions regarding title
survival of representations and warranties set out in
Section 10 of the Share Purchase
-5-
<PAGE>
Agreement and the obligations of indemnification set
out in Section 12 of the Share Purchase Agreement
subject always to the limitations provided for
therein;
2.2 the Escrow Agreement;
2.3 the Registration Rights Agreement;
3. Acknowledgment by Microframe
3.1 in consideration of the undertakings by the
Beneficiaries provided for in Clause 2 Microframe
undertakes to agree to the transfer of the Shares into
the names of each of the relevant Beneficiaries and
acknowledges that the provisions and obligations
incumbent upon Microframe to inter alia Nominees by
virtue of the documents listed in Clause 3.2 shall be
enforceable by each of the Beneficiaries as if each of
the Beneficiaries were a party to the documents in
respect of the number of Shares set out against that
Beneficiaries name in the Schedule in the place of
Nominees;
3.2 The documents referred to in Clause 3.1 are:-
3.2.1 the Share Purchase Agreement, such provisions
and obligations including, without prejudice to the
generality, warranties by the Buyer set out in Section
6 of the Share Purchase Agreement, and the covenant of
the Buyer to set up, by way of a sub plan an Employee
Share Option Scheme pursuant to Section 7.20 of the
Share Purchase Agreement, and the provisions regarding
the survival of warranties set out in Section 10 of
the Share Purchase Agreement;
3.2.2 the Escrow Agreement
3.2.3 the Registration Rights Agreement.
-6-
<PAGE>
4. Release of Nominees
(a) In consideration for each of the Beneficiaries
fulfilling the provisions and obligations incumbent
upon Nominees as provided for in Clause 2, Microframe
releases Nominees from any obligations in respect of
the Shares by virtue of the Share Purchase Agreement,
the Escrow Agreement and the Registration Rights
Agreement; and
(b) each of the Beneficiaries acknowledges that
Nominees has fulfilled its obligations to each of the
Beneficiaries in respect of the Beneficiaries holdings
of shares in the Company and that they have no right
of recourse against Nominees in respect of the same.
5. General
5.1 Each individual executing this Deed of Adherence on
behalf of a party to it represents and warrants that
he or she has been fully empowered to execute this
Deed of Adherence and that all necessary action to
authorize the execution of this Deed of Adherence has
taken place;
5.2 This Deed of Adherence is governed by and shall be
construed in accordance with Scots Law and the
parties hereto submit to the non-exclusive
jurisdiction of the Scottish Courts: IN WITNESS
WHEREOF
-7-
<PAGE>
This is the SCHEDULE referred to in the foregoing DEED of ADHERENCE among
MICROFRAME, INC. and ANDERSON STRATHERN NOMINEES LIMITED and JAMES WILSON
RAMSAY, WILLIAM RAMSAY, ERIC PETER MEYERS, IRENE VASS, ROBERT FORBES, RENATE
RITCHIE, KEVIN RITCHIE, IAN QUINNEY, ROBERT STRUTHERS, GAYNOR CHRISTINE
STRUTHERS, STEWART STRUTHERS, GEOFFREY MICHAEL GWYNN, RICHARD ANDREW SMITH, JOAN
SMITH, DAVID MICHAEL SMITH, GRAHAM WILLIAM SMITH, KAREN MARGARET SMITH, HENRY
COX, ANKE-BEATE STAHL, WILLIAM LILLIS and GERARD COX [ ] dated [ ] 1998 [ ]
shares of common stock in Microframe
Name Number of Shares of Common
Stock in Microframe
Henry Cox
Anke-Beate Stahl
Gerard Cox
William Lillis
Geoffrey Michael Gwynn
Eric Peter Meyers
Ian Quinney
James Wilson
Ramsay William
Ramsay Renate
Ritchie Kevin
Ritchie Richard
Andrew Smith
Joan Smith
Karen Margaret Smith
Graham William Smith
David Michael Smith
Robert Gordon Struthers
Gaynor Christine Struthers
Stewart Struthers
Irene Vass
Robert Forbes
-8-
<PAGE>
This is the SCHEDULE referred to in the foregoing DEED of ADHERENCE among
MICROFRAME, INC. and ANDERSON STRATHERN NOMINEES LIMITED and JAMES WILSON
RAMSAY, WILLIAM RAMSAY, ERIC PETER MEYERS, IRENE VASS, ROBERT FORBES, RENATE
RITCHIE, KEVIN RITCHIE, IAN QUINNEY, ROBERT STRUTHERS, GAYNOR CHRISTINE
STRUTHERS, STEWART STRUTHERS, GEOFFREY MICHAEL GWYNN, RICHARD ANDREW SMITH, JOAN
SMITH, DAVID MICHAEL SMITH, GRAHAM WILLIAM SMITH, KAREN MARGARET SMITH, HENRY
COX, ANKE-BEATE STAHL, WILLIAM LILLIS and GERARD COX [ ] dated [
] 1998
Share Purchase Agreement
-9-
<PAGE>
This is the SCHEDULE referred to in the foregoing DEED of ADHERENCE among
MICROFRAME, INC. and ANDERSON STRATHERN NOMINEES LIMITED and JAMES WILSON
RAMSAY, WILLIAM RAMSAY, ERIC PETER MEYERS, IRENE VASS, ROBERT FORBES, RENATE
RITCHIE, KEVIN RITCHIE, IAN QUINNEY, ROBERT STRUTHERS, GAYNOR CHRISTINE
STRUTHERS, STEWART STRUTHERS, GEOFFREY MICHAEL GWYNN, RICHARD ANDREW SMITH, JOAN
SMITH, DAVID MICHAEL SMITH, GRAHAM WILLIAM SMITH, KAREN MARGARET SMITH, HENRY
COX, ANKE-BEATE STAHL, WILLIAM LILLIS and GERARD COX [ ] dated [
] 1998
Escrow Agreement
-10-
<PAGE>
This is the SCHEDULE referred to in the foregoing DEED of ADHERENCE among
MICROFRAME, INC. and ANDERSON STRATHERN NOMINEES LIMITED and JAMES WILSON
RAMSAY, WILLIAM RAMSAY, ERIC PETER MEYERS, IRENE VASS, ROBERT FORBES, RENATE
RITCHIE, KEVIN RITCHIE, IAN QUINNEY, ROBERT STRUTHERS, GAYNOR CHRISTINE
STRUTHERS, STEWART STRUTHERS, GEOFFREY MICHAEL GWYNN, RICHARD ANDREW SMITH, JOAN
SMITH, DAVID MICHAEL SMITH, GRAHAM WILLIAM SMITH, KAREN MARGARET SMITH, HENRY
COX, ANKE-BEATE STAHL, WILLIAM LILLIS and GERARD COX [ ] dated [
] 1998
Registration Rights Agreement
-11-
<PAGE>
EXHIBIT L
RETROCESSION
by
Lothian Investment Fund for Enterprise Limited
in favour of
Solcom Systems Limited
August 1998
MURRAY BEITH MURRAY W.S.
39 Castle Street
Edinburgh
Tel: (0131) 225-1200
Fax: (0131) 225-9112
Reference RESOL001
<PAGE>
We, LOTHIAN INVESTMENT FUND FOR ENTERPRISE LIMITED incorporated under the
Companies Acts in Scotland with registered number SC137938 and having our
registered office at 21 Ainslie Place, Edinburgh WHEREAS by assignation dated
21st December 1993 SOLCOM SYSTEMS LIMITED incorporated under the Companies Acts
in Scotland with registered number SC129008 and having its registered office at
Solcom House, Meikle Road, Kirkton Campus, Livingston assigned to us the
following Policies of Assurance with Allied Dunbar Assurance PLC, namely
008557-322, 008559-322 and 008572-322 on the lives of Hugh Evans, Peter MacLaren
and Peter Wilson respectively, AND WHEREAS we have agreed to grant these
presents DO HEREBY RETROCESS to the said Solcom Systems Limited the said
policies of assurance together with bonus and other additions and benefits
accrued or that may accrue thereon; and we warrant the foregoing retrocession
from our own facts and deeds only:
IN WITNESS WHEREOF these presents type written on this page are executed as
follows:-
They are subscribed for and on behalf of
LOTHIAN INVESTMENT FUND FOR
ENTERPRISE LIMITED
at
on
Nineteen hundred and Ninety
by Director/Attorney
before this witness:-
Director/Attorney
Witness
Full Name
Address
Director/Attorney
-2-
<PAGE>
EXHIBIT M
INVESTOR REPRESENTATION AGREEMENT
In connection with the acquisition by the undersigned (the
"Undersigned") of shares of Common Stock (the "Shares") of MicroFrame, Inc., a
New Jersey corporation (the "Company"), the Undersigned hereby acknowledges,
represents, warrants and agrees as follows:
10. I am aware of the Company's business affairs and financial condition,
and have acquired all such publicly available information about the
Company as I deem necessary and appropriate in connection with the
acquisition of the Shares. I am acquiring these Shares for my own
account for investment and not with a view to, or for the resale in
connection with, any "distribution" thereof for purposes of the
Securities Act of 1933, as amended (the "Securities Act").
11. I understand that the Shares have not been registered under the
Securities Act in reliance upon a specific exemption from registration,
which exemption depends upon, among other things, the bona fide nature
of my investment intent as expressed herein.
12. I further understand that the Shares may not be sold publicly and must
be held indefinitely unless they are subsequently registered under the
Securities Act or unless an exemption from registration is available. I
am able, without impairing my financial condition, to hold the Shares
for an indefinite period of time and to suffer a complete loss on my
investment. I understand that the Company is under no obligation to
register the Shares other than as provided in that certain registration
rights agreement dated as of the date hereof by and among the Company
and certain holders of shares of Common Stock of the Company (the
"Registration Rights Agreement"). In addition, I understand that (i)
any subsequent resale or distribution of the Shares will be made only
pursuant to a registration statement under the Securities Act or an
exemption from the registration requirements thereof and that in
claiming the applicability of any such exemption, I shall, prior to any
offer or sale of the Shares, provide the Company with a favorable
written opinion of counsel, in form and substance reasonably
satisfactory to the Company, as to the applicability of the exemption
and (ii) the certificate(s) evidencing the Shares will be imprinted
with a legend referring to such restriction on transfer.
13. I am familiar with the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of the issuer), in a non-public
offering subject to the satisfaction of certain conditions, including,
among other things: (1) the availability of certain public information
about the Company; (2) the resale occurring not less than one year
after the party has purchased, and made full payment for, within the
meaning of Rule 144, the Shares to be sold; and, in the case of an
affiliate, or of a non-affiliated who has held the Shares less than two
years, the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934, as amended)
and the amount of Shares being sold during any three-month period not
exceeding the specified limitations stated therein, if applicable.
<PAGE>
14. I further understand that at the time I wish to sell the Shares there
may be no public market upon which to make such a sale, and that, even
if such a public market then exists, the Company may not be satisfying
the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Shares under Rule 144
even if the one-year minimum holding period had been satisfied. Except
as otherwise set forth in the Registration Rights Agreement, I
understand that the Company is under no obligation to make Rule 144
available.
15. I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the
Securities Act, or some other registration exemption, will be required;
and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the Securities and Exchange Commission has expressed its
opinion that persons proposing to sell private placement Shares other
than in a registered offering and otherwise than pursuant to Rule 144
will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk.
16. I represent that I have full power and authority to execute and deliver
this Agreement and all other related agreements and certificates and to
carry out the provisions hereof and thereof, and to hold the Shares,
and this Agreement is a legal, valid and binding obligation upon me.
The execution and delivery of this Agreement will not violate or be in
conflict with any order, judgment, injunction, agreement or controlling
document to which I am a party or by which I am bound.
IN WITNESS WHEREOF, the Undersigned has executed this
Agreement as of the [closing date of SolCom acquisition].
Name of Undersigned Social Security Number
Address:
ACCEPTED AND AGREED:
MICROFRAME, INC.
By:
Name: Stephen B. Gray
Title: President
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<PAGE>
Name of Undersigned Social Security Number
Address:
ACCEPTED AND AGREED:
MICROFRAME, INC.
By:
Name: Stephen B. Gray
Title: President
<PAGE>
1998 STOCK OPTION PLAN
of
MICROFRAME, INC.
17. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to key employees (including directors and officers who
are key employees) and to consultants and directors who are not employees
of MicroFrame, Inc., a New Jersey corporation (the "Company"), or any of
its Subsidiaries (as such term is defined in Paragraph 19), and to offer an
additional inducement in obtaining the services of such individuals. The
Plan provides for the grant of "incentive stock options" ("ISOs") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and nonqualified stock options which do not qualify as ISOs
("NQSOs"). The Company makes no representation or warranty, express or
implied, as to the qualification of any option as an "incentive stock
option" under the Code.
18. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the
aggregate number of shares of Common Stock, $.01 par value per share, of
the Company ("Common Stock") for which options may be granted under the
Plan shall not exceed 3,000,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of
Directors"), consist either in whole or in part of authorized but unissued
shares of Common Stock or shares of Common Stock held in the treasury of
the Company. Subject to the provisions of Paragraph 13, any shares of
Common Stock subject to an option which for any reason expires, is canceled
or is terminated unexercised or which ceases for any reason to be
exercisable shall again become available for the granting of options under
the Plan. The Company shall at all times during the term of the Plan
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
19. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board of
Directors or a committee of the Board of Directors (the "Committee")
consisting of not less than two (2) directors, each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (as the same may be in
effect and interpreted from time to time, "Rule 16b-3"). Unless otherwise
provided in the By-Laws of the Company or by resolution of the Board of
Directors, a majority of the members of the Committee shall constitute a
quorum, and the acts of a majority of the members present at any meeting at
which a quorum is present, and any acts approved in writing by all members
without a meeting, shall be the acts of the Committee.
Subject to the express provisions of the Plan, the Committee
shall have the authority, in its sole discretion, to determine the persons who
shall be granted options; the times when they shall receive options; whether an
option granted to an employee shall be an ISO or a NQSO; the number of shares of
Common Stock to be subject to each option; the term of each option; the date
each option shall become exercisable; whether an option shall be exercisable in
whole or in installments, and, if in installments, the number of shares of
Common Stock to be subject to each installment; whether the installments shall
be cumulative; the date each installment shall become exercisable and the term
of each installment; whether to accelerate the date of exercise of any option or
installment; whether shares of Common Stock may be issued
<PAGE>
upon the exercise of an option as partly paid, and, if so, the dates when future
installments of the exercise price shall become due and the amounts of such
installments; the exercise price of each option; the form of payment of the
exercise price; the fair market value of a share of Common Stock; whether and
under what conditions to restrict the sale or other disposition of the shares of
Common Stock acquired upon the exercise of an option and, if so, whether and
under what conditions to waive any such restriction; whether and under what
conditions to subject the exercise of all or any portion of an option to the
fulfillment of certain restrictions or contingencies as specified in the
contract referred to in Paragraph 11 (the "Contract"), including without
limitation, restrictions or contingencies relating to entering into a covenant
not to compete with the Company, its Parent (as such term is defined in
Paragraph 19) and Subsidiaries, to financial objectives for the Company, any of
its Subsidiaries, a division, a product line or other category, and/or the
period of continued employment of the optionee with the Company or any of its
Subsidiaries, and to determine whether such restrictions or contingencies have
been met; the amount, if any, necessary to satisfy the obligation of the
Company, any of its Subsidiaries or a Parent to withhold taxes or other amounts;
whether an optionee is Disabled (as such term is defined in Paragraph 19); with
the consent of the optionee, to cancel or modify an option, provided that the
modified provision is permitted to be included in an option granted under the
Plan on the date of the modification, and provided further, that in the case of
a modification (within the meaning of Section 424(h) of the Code) of an ISO,
such option as modified would be permitted to be granted on the date of such
modification under the terms of the Plan; to construe the respective Contracts
and the Plan; to prescribe, amend and rescind rules and regulations relating to
the Plan; to approve any provision of the Plan or any option granted under the
Plan or any amendment to either which, under Rule 16b-3, requires the approval
of the Board of Directors, a committee of non-employee directors or the
shareholders to be exempt (unless otherwise specifically provided herein); and
to make all other determinations necessary or advisable for administering the
Plan. Any controversy or claim arising out of or relating to the Plan, any
option granted under the Plan or any Contract shall be determined unilaterally
by the Committee in its sole discretion. The determinations of the Committee on
the matters referred to in this Paragraph 3 shall be conclusive and binding on
the parties.
No member or former member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any option granted hereunder. In addition, each member and former member of the
Committee shall be indemnified and held harmless by the Company from and against
any liability, claim for damages and expenses in connection therewith by reason
of any action or failure to act under or in connection with the Plan, any option
granted hereunder or any Contract to the fullest extent permitted with respect
to directors under the Company's certificate of incorporation, By-Laws and
applicable law.
20. ELIGIBILITY. The Committee may from time to time, consistent with the
purposes of the Plan, grant options to such key employees (including
officers and directors who are key employees) of, or consultants to, the
Company or any of its Subsidiaries, and to such directors of the Company
who, at the time of grant, are not common law employees of the Company or
of any of its Subsidiaries, as the Committee may determine in its sole
discretion. Such options granted shall cover such number of shares of
Common Stock as the Committee may determine in its sole discretion;
provided, however, that the maximum number of shares subject to options
that may be granted to any employee during any calendar year under the Plan
shall be 400,000 shares; and provided further that the aggregate market
value (determined at the time the option is granted) of the shares of
Common Stock for which any eligible employee may be granted ISOs under the
Plan or any other plan of the Company, or of a Parent or a Subsidiary of
the Company, which are exercisable for the first time by such optionee
during any calendar year shall not exceed $100,000. The $100,000 ISO
limitation shall be applied by taking ISOs into
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<PAGE>
account in the order in which they were granted. Any option (or the portion
thereof) granted in excess of such ISO limitation amount shall be treated
as a NQSO to the extent of such excess.
21. EXERCISE PRICE. The exercise price of the shares of Common Stock under each
option shall be determined by the Committee in its sole discretion;
provided, however, that the exercise price of an ISO shall not be less than
the fair market value of the Common Stock subject to such option on the
date of grant; and provided further that if, at the time an ISO is granted,
the optionee owns (or is deemed to own under 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, of any of its Subsidiaries or of a Parent,
the exercise price of such ISO shall not be less than 110% of the fair
market value of the Common Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day
shall be (a) if the principal market for the Common Stock is a national
securities exchange, the average of the highest and lowest sales prices per
share of the Common Stock on such day as reported by such exchange or on a
consolidated tape reflecting transactions on such exchange, (b) if the principal
market for the Common Stock is not a national securities exchange and the Common
Stock is quoted on the Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales
price information is available with respect to the Common Stock, the average of
the highest and lowest sales prices per share of the Common Stock on such day on
Nasdaq, or (ii) if such information is not available, the average of the highest
bid and the lowest asked prices per share for the Common Stock on such day on
Nasdaq, or (c) if the principal market for the Common Stock is not a national
securities exchange and the Common Stock is not quoted on Nasdaq, the average of
the highest bid and lowest asked prices per share for the Common Stock on such
day as reported on the OTC Bulletin Board Service or by National Quotation
Bureau, Incorporated or a comparable service; provided that if clauses (a), (b)
and (c) of this Paragraph are all inapplicable, or if no trades have been made
or no quotes are available for such day, the fair market value of a share of
Common Stock shall be determined by the Committee by any method consistent with
applicable regulations adopted by the Treasury Department relating to stock
options.
22. TERM. Each option granted pursuant to the Plan shall be for such term as is
established by the Committee, in its sole discretion, at or before the time
such option is granted; provided, however, that the term of each ISO
granted pursuant to the Plan shall be for a period not exceeding 10 years
from the date of grant thereof, and provided further that if, at the time
an ISO is granted, the optionee owns (or is deemed to own under 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, of any of its
Subsidiaries or of a Parent, the term of the ISO shall be for a period not
exceeding five years from the date of grant. Options shall be subject to
earlier termination as hereinafter provided.
23. EXERCISE. An option (or any installment thereof), to the extent then
exercisable, shall be exercised by giving written notice to the Company at
its principal office stating which option is being exercised, specifying
the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise
price therefor (or the amount due on exercise if the applicable Contract
permits installment payments) (a) in cash and/or by certified check or (b)
with the authorization of the Committee, with cash, a certified check
and/or with previously acquired shares of Common Stock, having an aggregate
fair market value (determined in accordance with Paragraph 5), on the date
of exercise, equal to the aggregate exercise price of all options being
exercised; provided, however, that in no case may shares be tendered if
such tender would require the Company to incur a charge against its
earnings for financial accounting purposes.
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<PAGE>
The Committee may, in its sole discretion, permit payment of
the exercise price of an option by delivery by the optionee of a properly
executed notice, together with a copy of his irrevocable instructions to a
broker acceptable to the Committee to deliver promptly to the Company the amount
of sale or loan proceeds sufficient to pay such exercise price. In connection
therewith, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
An optionee shall not have the rights of a shareholder with
respect to such shares of Common Stock to be received upon the exercise of an
option until the date of issuance of a stock certificate to him for such shares
or, in the case of uncertificated shares, until the date an entry is made on the
books of the Company's transfer agent representing such shares; provided,
however, that until such stock certificate is issued or until such book entry is
made, any optionee using previously acquired shares of Common Stock in payment
of an option exercise price shall continue to have the rights of a shareholder
with respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be
purchased or issued under the Plan.
24. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly provided
in the applicable Contract, any optionee whose employment or consulting
relationship with the Company (and its Parent and Subsidiaries) has
terminated for any reason other than the death or Disability of the
optionee may exercise any option granted to him as an employee or
consultant, to the extent exercisable on the date of such termination, at
any time within three months after the date of termination, but not
thereafter and in no event after the date the option would otherwise have
expired; provided, however, that if such relationship is terminated either
(a) for cause, or (b) without the consent of the Company, such option shall
terminate immediately. Except as may otherwise be expressly provided in the
applicable Contract, options granted under the Plan to an employee or
consultant of the Company or any of its Subsidiaries shall not be affected
by any change in the status of the holder so long as he continues to be an
employee or a consultant of the Company, its Parent or any of the
Subsidiaries (regardless of a change in status from one to the other or
having been transferred from one corporation to another).
For the purposes of the Plan, an employment relationship shall
be deemed to exist between an individual and a corporation if, at the time of
the determination, the individual was an employee of such corporation for
purposes of Section 422(a) of the Code. As a result, an individual on military,
sick leave or other bona fide leave of absence shall continue to be considered
an employee for purposes of the Plan during such leave if the period of the
leave does not exceed 90 days, or, if longer, so long as the individual's right
to reemployment with the corporation, any of its Subsidiaries or a Parent is
guaranteed either by statute or by contract. If the period of leave exceeds 90
days and the individual's right to reemployment is not guaranteed by statute or
by contract, the employment relationship shall be deemed to have terminated on
the 91st day of such leave.
Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose directorship with the Company has
terminated for any reason other than his death or Disability may exercise the
options granted to him as a director who was not an employee of or consultant to
the Company or any of its Subsidiaries, to the extent exercisable on the date of
such termination, at any time within three months after the date of termination,
but not thereafter and in no event after the date the option would
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<PAGE>
otherwise have expired; provided, however, that if his directorship is
terminated for cause, such option shall terminate immediately.
Nothing in the Plan or in any option granted under the Plan
shall confer on any person any right to continue in the employ or as a
consultant of the Company, its Parent or any of its Subsidiaries, or as a
director of the Company, or interfere in any way with any right of the Company,
its Parent or any of its Subsidiaries to terminate such relationship at any time
for any reason whatsoever without liability to the Company, its Parent or any of
its Subsidiaries.
25. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be expressly
provided in the applicable Contract, if an optionee dies (a) while he is
employed by, or a consultant to, the Company, its Parent or any of its
Subsidiaries, (b) within three months after the termination of his
employment or consulting relationship with the Company, its Parent and its
Subsidiaries (unless such termination was for cause or without the consent
of the Company) or (c) within one year following the termination of such
employment or consulting relationship by reason of his Disability, the
options granted to him as an employee of, or consultant to, the Company or
any of its Subsidiaries, may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative (as such term is defined in
Paragraph 19), at any time within one year after death, but not thereafter
and in no event after the date the option would otherwise have expired.
Except as may otherwise be expressly provided in the applicable Contract,
any optionee whose employment or consulting relationship with the Company,
its Parent and its Subsidiaries has terminated by reason of his Disability
may exercise such options, to the extent exercisable upon the effective
date of such termination, at any time within one year after such date, but
not thereafter and in no event after the date the option would otherwise
have expired.
Except as may otherwise be expressly provided in the
applicable Contract, if an optionee dies (a) while he is a director of the
Company, (b) within three months after the termination of his directorship with
the Company (unless such termination was for cause) or (c) within one year after
the termination of his directorship by reason of his Disability, the options
granted to him as a director who was not an employee of or consultant to the
Company or any of its Subsidiaries, may be exercised, to the extent exercisable
on the date of his death, by his Legal Representative at any time within one
year after death, but not thereafter and in no event after the date the option
would otherwise have expired. Except as may otherwise be expressly provided in
the applicable Contract, an optionee whose directorship with the Company has
terminated by reason of Disability, may exercise such options, to the extent
exercisable on the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.
26. COMPLIANCE WITH SECURITIES LAWS. It is a condition to the exercise of any
option that either (a) a Registration Statement under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of
Common Stock to be issued upon such exercise shall be effective and current
at the time of exercise, or (b) there is an exemption from registration
under the Securities Act for the issuance of the shares of Common Stock
upon such exercise. Nothing herein shall be construed as requiring the
Company to register shares subject to any option under the Securities Act
or to keep any Registration Statement effective or current.
The Committee may require, in its sole discretion, as a
condition to the grant or exercise of an option, that the optionee execute and
deliver to the Company his representations and warranties, in form, substance
and scope satisfactory to the Committee, which the Committee determines is
necessary or
-5-
<PAGE>
convenient to facilitate the perfection of an exemption from the registration
requirements of the Securities Act, applicable state securities laws or other
legal requirement, including without limitation, that (a) the shares of Common
Stock to be issued upon exercise of the option are being acquired by the
optionee for his own account, for investment only and not with a view to the
resale or distribution thereof, and (b) any subsequent resale or distribution of
shares of Common Stock by such optionee will be made only pursuant to (i) a
Registration Statement under the Securities Act which is effective and current
with respect to the shares of Common Stock being sold, or (ii) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption, the optionee, prior to any offer of sale or sale of
such shares of Common Stock, shall provide the Company with a favorable written
opinion of counsel satisfactory to the Company, in form, substance and scope
satisfactory to the Company, as to the applicability of such exemption to the
proposed sale or distribution.
In addition, if at any time the Committee shall determine that
the listing or qualification of the shares of Common Stock subject to such
option on any securities exchange, Nasdaq or under any applicable law, or that
the consent or approval of any governmental agency or regulatory body, is
necessary or desirable as a condition to, or in connection with, the granting of
an option or the issuance of shares of Common Stock thereunder, such option may
not be granted or exercised in whole or in part, as the case may be, unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
27. STOCK OPTION CONTRACTS. Each option shall be evidenced by an appropriate
Contract which shall be duly executed by the Company and the optionee. Such
Contract shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee in its sole
discretion. The terms of each option and Contract need not be identical.
28. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of any change in the outstanding Common
Stock by reason of a stock dividend, recapitalization, merger in which the
Company is the surviving corporation, spinoff, split-up, combination or
exchange of shares or the like which results in a change in the number or
kind of shares of Common Stock which is outstanding immediately prior to
such event, the aggregate number and kind of shares subject to the Plan,
the aggregate number and kind of shares subject to each outstanding option
and the exercise price thereof, and the maximum number of shares subject to
options that may be granted to any employee in any calendar year, shall be
appropriately adjusted by the Board of Directors, whose determination shall
be conclusive and binding on all parties thereto. Such adjustment may
provide for the elimination of fractional shares that might otherwise be
subject to options without payment therefor.
In the event of (a) the liquidation or dissolution of the
Company, (b) a merger in which the Company is not the surviving corporation or a
consolidation, or (c) any transaction (or series of related transactions) in
which (i) more than 50% of the outstanding Common Stock is transferred or
exchanged for other consideration or (ii) shares of Common Stock in excess of
the number of shares of Common Stock outstanding immediately preceding the
transaction are issued (other than to shareholders of the Company with respect
to their shares of stock in the Company), any outstanding options shall
terminate upon the earliest of any such event, unless other provision is made
therefor in the transaction.
29. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the Board
of Directors on June 12, 1998. No option may be granted under the Plan
after June 11, 2008. The Board
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<PAGE>
of Directors, without further approval of the Company's shareholders, may
at any time suspend or terminate the Plan, in whole or in part, or amend it
from time to time in such respects as it may deem advisable, including
without limitation, in order that ISOs granted hereunder meet the
requirements for "incentive stock options" under the Code, to comply with
the provisions of Rule 16b-3 promulgated the Exchange Act or Section 162(m)
of the Code or any change in applicable law or regulation, ruling or
interpretation of any governmental agency or regulatory body; provided,
however, that no amendment shall be effective without the requisite prior
or subsequent shareholder approval which would (a) except as contemplated
in Paragraph 12, increase the maximum number of shares of Common Stock for
which options may be granted under the Plan or change the maximum number of
shares for which options may be granted to employees in any calendar year,
(b) change the eligibility requirements for individuals entitled to receive
options hereunder or (c) make any change for which applicable law or any
governmental agency or regulatory body requires shareholder approval. No
termination, suspension or amendment of the Plan shall adversely affect the
rights of an optionee under any option granted under the Plan without such
optionee's consent. The power of the Committee to construe and administer
any option granted under the Plan prior to the termination or suspension of
the Plan shall continue after such termination or during such suspension.
30. NON TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be
transferable other than by will or the laws of descent and distribution,
and options may be exercised, during the lifetime of the optionee, only by
the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall
not be subject to execution, attachment or similar process, and any such
attempted assignment, transfer, pledge, hypothecation or disposition shall
be null and void ab initio and of no force or effect.
31. WITHHOLDING TAXES. The Company, or its Subsidiary or Parent, as applicable,
may withhold (a) cash or (b) with the consent of the Committee, shares of
Common Stock to be issued upon exercise of an option or a combination of
cash and shares, having an aggregate fair market value (determined in
accordance with Paragraph 5) equal to the amount which the Committee
determines is necessary to satisfy the obligation of the Company, a
Subsidiary or Parent to withhold Federal, state and local income taxes or
other amounts incurred by reason of the grant, vesting, exercise or
disposition of an option or the disposition of the underlying shares of
Common Stock. Alternatively, the Company may require the optionee to pay to
the Company such amount, in cash, promptly upon demand. The Company shall
not be required to issue any shares of Common Stock pursuant to any such
option until all required payments have been made.
32. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it
determines, in its sole discretion, to be necessary or appropriate to (a)
prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act, applicable state securities laws or
other legal requirements, (b) implement the provisions of the Plan or any
agreement between the Company and the optionee with respect to such shares
of Common Stock, or (c) permit the Company to determine the occurrence of a
"disqualifying disposition," as described in Section 421(b) of the Code, of
the shares of Common Stock transferred upon the exercise of an ISO granted
under the Plan.
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<PAGE>
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock upon the exercise of an option granted under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issuance.
33. USE OF PROCEEDS. The cash proceeds to be received upon the exercise of an
option under the Plan shall be added to the general funds of the Company
and used for such corporate purposes as the Board of Directors may
determine, in its sole discretion.
34. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the
Board of Directors may, without further approval by the shareholders,
substitute new options for prior options of a Constituent Corporation (as
such term is defined in Paragraph 19) or assume the prior options of such
Constituent Corporation.
35. DEFINITIONS.
a. "Constituent Corporation" shall mean any corporation which
engages with the Company, its Parent or any Subsidiary in a
transaction to which Section 424(a) of the Code applies (or
would apply if the option assumed or substituted were an ISO),
or any Parent or any Subsidiary of such corporation.
b. "Disability" shall mean a permanent and total disability
within the meaning of Section 22(e)(3) of the Code.
c. "Legal Representative" shall mean the executor, administrator
or other person who at the time is entitled by law to exercise
the rights of a deceased or incapacitated optionee with
respect to an option granted under the Plan.
d. "Parent" shall have the same definition as "parent
corporation" in Section 424(e) of the Code.
e. "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.
36. GOVERNING LAW. The Plan, such options as may be granted hereunder, the
Contracts and all related matters shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to
conflict or choice of law provisions.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
-8-
<PAGE>
37. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability of any
provision in the Plan, any option or Contract shall not affect the
validity, legality or enforceability of any other provision, all of which
shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
38. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by a majority
of the votes of all outstanding shares entitled to vote hereon at the next
duly held meeting of the Company's shareholders at which a quorum is
present or by majority written consent of the Company's shareholders. No
options granted hereunder may be exercised prior to such approval, provided
that, the date of grant of any option shall be determined as if the Plan
had not been subject to such approval. Notwithstanding the foregoing, if
the Plan is not approved by a vote of the shareholders of the Company on or
before October 1, 1998, the Plan and any options granted hereunder shall
terminate.
-9-
<PAGE>
EXHIBIT 0
To: The Directors
Solcom Systems Limited
Solcom House
Meikle Road
Kirkton Campus
Livingston
Date: 1998
Dear Sirs
Solcom Systems Limited ("the Company")
I hereby resign office as Director and Secretary of the Company with immediate
effect. I confirm that in respect of such resignation I have no claim against
the Company in respect of breach of contract, compensation for loss of office,
wrongful or unfair dismissal, redundancy, arrears of remuneration or on any
other account.
Yours faithfully
- --------------------------------
Peter James MacLaren
<PAGE>
To: The Directors
Solcom Systems Limited
Solcom House
Meikle Road
Kirkton Campus
Livingston
Date: 1998
Dear Sirs
Solcom Systems Limited ("the Company")
I hereby resign office as a Director of the Company with immediate effect. I
confirm that in respect of such resignation I have no claim against the Company
in respect of breach of contract, compensation for loss of office, wrongful or
unfair dismissal, redundancy, arrears of remuneration or on any other account.
The above is without prejudice to my ongoing employment by the Company and all
rights accrued or due to me by the Company in my capacity as an employee
thereof.
Yours faithfully
- -----------------------
William Hugh Evans
<PAGE>
To: The Directors
Solcom Systems Limited
Solcom House
Meikle Road
Kirkton Campus
Livingston
Date: 1998
Dear Sirs
Solcom Systems Limited ("the Company")
I hereby resign office as a Director of the Company with immediate effect. I
confirm that in respect of such resignation I have no claim against the Company
in respect of breach of contract, compensation for loss of office, wrongful or
unfair dismissal, redundancy, arrears of remuneration or on any other account.
The above is without prejudice to my ongoing employment by the Company and all
rights accrued or due to me by the Company in my capacity as an employee
thereof.
Yours faithfully
- -----------------------
Peter Atholl Wilson
<PAGE>
To: The Directors
Solcom Systems Limited
Solcom House
Meikle Road
Kirkton Campus
Livingston
Date: 1998
Dear Sirs
Solcom Systems Limited ("the Company")
I hereby resign office as a Director of the Company with immediate effect. I
confirm that in respect of such resignation I have no claim against the Company
in respect of breach of contract, compensation for loss of office, wrongful or
unfair dismissal, redundancy, arrears of remuneration or on any other account.
Yours faithfully
- -----------------------
Michael David Rutterford
<PAGE>
EXHIBIT P
WAIVER OF CLAIMS
against
SOLCOM SYSTEMS LIMITED
and
SOLCOM SYSTEMS., INC.
by
THE SELLERS (as herein defined)
<PAGE>
We, the undersigned ("the Sellers"), being the registered holders of all of the
issued ordinary shares of one penny each in the share capital of SolCom Systems
Limited ("the Company") as at the date of the Share Purchase Agreement amongst
us, the Company and MicroFrame Inc ("the Buyer") in respect of the sale of such
ordinary shares in the share capital of the Company to the Buyer ("the
Agreement"), subject to and conditional upon Closing (as defined in the
Agreement) hereby waive any claim we may now have or may have at Closing against
the Company or SolCom Systems, Inc. (save in respect of or arising from (1) our
employment by the Company or (2) any share or stock option entitlement we may
have in respect of the share capital of the Company including for the avoidance
of doubt but without prejudice to the foregoing generality in respect of or
arising from any stock option contract to which we are a party or any option
entitlement we may have in terms of any share option scheme of the Company).
This waiver shall be governed by Scots Law and the Scottish courts shall have
exclusive jurisdiction in respect thereof: IN WITNESS WHEREOF these presents
consisting of this page and the schedule annexed hereto are executed by us at
Edinburgh on August 1998 as follows:
- ------------------------------ -----------------------------------
William Hugh Evans For and on behalf of EFG Read's
Trustees Limited as Trustee of MD
Rutterford's 1991 Trust
- ------------------------------ -----------------------------------
William Hugh Evans, For and on behalf of EFG Read's
on behalf of the Hugh Evans Family Trust Trustees Limited as Trustee of Mrs.
JG Rutterford's 1991 Trust
- ------------------------------ -----------------------------------
Keith Laing Michael David Rutterford
- ------------------------------ -----------------------------------
Colin Laing (per his attorney) June Georgina Rutterford (per her
attorney)
- ------------------------------ -----------------------------------
Peter James MacLaren Andrew Edward Sealey (per his
attorney)
- ------------------------------ -----------------------------------
Elizabeth Marie McQuillan (per her attorney) Helen Sealey (per her attorney)
-2-
<PAGE>
- ------------------------------ -----------------------------------
Peter Atholl Wilson Brian Souter (per his attorney)
- ------------------------------ -----------------------------------
Alison Wilson Ali Taheri (per his attorney)
(per her guardian Peter Atholl Wilson)
- ------------------------------ -----------------------------------
Lady Margaret Elliot (per her attorney) Frances Loretta DeLaura (per her
attorney)
- ------------------------------ -----------------------------------
Ann Heron Gloag (per her attorney) For and on behalf of Anderson
Strathern Nominees Limited
all before this witness:
- ------------------------------
Name
- ------------------------------ ------------------------- (witness)
Address
-3-
<PAGE>
Clydesdale Bank PLC
Our ref SMCK/4432/JAC/L1 Business Banking Centre
Your ref Clydesdale Bank Plaza
Date 8 July, 1998 Festival Square
50 Lothian Road
Edinburgh
EH3 9AN
FOR THE ATTENTION OF: PETER MACLAREN DX 500500/Box 162
- -------------------------------------
SolCom Systems Limited
Meikle Road Telephone 0131 456 4432
Kirkton Campus Fax 0131 456 4460
LIVINGSTON
EH54 7DE
Dear Sirs
SOLCOM SYSTEMS LIMITED ("THE COMPANY")
SALE OF THE ENTIRE ISSUED SHARE CAPITAL OF THE COMPANY TO
MICROFRAME INC. ("MICROFRAME")
We refer to:
1. Small Firms Loan Guarantee Scheme Facility Letter dated 7 November 1996
setting out the terms and conditions of the facility of (pound)200,000
provided by Clydesdale Bank Plc ("The Bank") to the Company ("the First
Loan Agreement").
2. Small Firms Loan Guarantee Scheme Facility Letter dated 7 November 1996
setting out the terms and conditions of the facility of
(pound)26,786.74 provided by the Bank to the Company ("the Second Loan
Agreement"); and
3. Small Firms Loan Guarantee Scheme Facility Letter dated 7 November 1996
setting out the terms and conditions of the facility of (pound)9,632.70
provided by the Bank to the Company ("the Third Loan Agreement").
In terms of clause 10.01(h) of each of the First Loan Agreement, the Second Loan
Agreement and the Third Loan Agreement (together "the Loan Agreements"), the
Bank shall be under no obligation to advance monies under the Loan Agreements
and may by notice to the Company require payment forthwith of all sums
outstanding under the Loan Agreements together with all interest accrued
<PAGE>
Page 2
thereon and/or cancel any portion of the facilities then undrawn under the
respective Loan Agreements if (save as may have been approved in writing by the
Bank) there is any alteration in the legal or beneficial ownership or control of
inter alia 25% or more of the issued share capital of the Company.
We understand that the entire issued share capital of the Company will be
purchased by Microframe pursuant to a share purchase agreement to be entered
into between inter alia the then current shareholders of the Company and
Microframe ("the Transfer").
We hereby approve, consent to and waive our rights under the Loan Agreements in
relation to the Transfer and confirm that we do not and will not regard the
Transfer as an event of default under the Loan Agreement. In particular, we
confirm that we will not as a result of the Transfer require repayment of the
facility advanced under each of the Loan Agreements (nor the interest accrued
thereon) and will not cancel any undrawn portion of such facility.
For the avoidance of doubt we confirm that the remaining Terms and Conditions of
the Loan Agreements remain in full force and effect.
Yours faithfully
Scott McKerracher
Business Banking Manager
For and on behalf of Clydesdale Bank Plc.
<PAGE>
BCE BCE Business Funding Limited
Business 1 Commercial Gate, Mansfield, Notinghamshire, NG18 IEJ
Funding Ltd. Telephone: (01623) 620100 Facsimile: (01623) 421400
8 June 1998
Mr. P. MacLaren
Finance Director
SolCom Systems Ltd.
Meikle Road
Kirkton Campus
LIVINGSTON
EH54 7DE
Dear Mr. MacLaren:
LOAN REFERENCE 11259
I refer to your fax dated 7 June 1998 and write to confirm our agreement to the
change of ownership subject to the outstanding debt being repaid in full.
I propose that you leave the direct debit in place until such time that you have
a completion date at which time you should request a redemption figure from
ourselves.
Yours sincerely,
GORDON MACHEJ
DIRECTOR
<PAGE>
SolCom Systems Ltd
Fax: *44 (0)1506 461717; Telephone: *44 (0)1506 461707
email: [email protected]
SolCom House, Meikle Road, Kirkton Campus. Livingston,
Scotland EH5 7DE
From Peter J. MacLaren, Financial Director
04:00 PM 07 June 1 1998
To: Gordon Mackie Esq.
BCE Business Funding Ltd
01623 420400
Dear Mr. Mackie:
Loan ref 11259
I understand that John Caldwell of Shepherd & Wedderburn has spoken to you about
our proposed merger with MicroFrame Inc. and the possible handling of the above
loan. I understand that you have suggested either repayment of principle or an
interest rate increase of 2% pa. I think it would be simpler for us to repay the
principal outstanding and we would propose to do this immediately following
completion of the merger. I would appreciate it if you could signify your
agreement to this.
<PAGE>
EXHIBIT Q
10th July 1998
Lothian and
Edinburgh
Enterprise
Limited
The Directors
SolCom Systems Limited
Kirkton Campus
Meikle Road
Livingston
Dear Sirs
Acquisition of SolCom Systems Limited ("the Company")
We have been advised by the Company that the entire issued share capital of the
Company will be purchased by MicroFrame, Inc. ("the Buyer") pursuant to a share
purchase agreement ("the Agreement") to be entered into between inter alia, the
Company and the Buyer ("the Transfer"). We understand that there is to be a gap
between signing of the Agreement and completion of the Transfer.
From time to time we have offered, awarded and/or provided and anticipate that
in the future we may offer, award and/or provide to the Company grants or other
forms of financial assistance under certain terms and conditions ("Grants"). The
Grants awarded or offered by us to the Company include those listed in the
schedule to this letter ("Completed Grants").
We hereby consent for all purposes to the entry into the Agreement and to the
Transfer and the consequent change in the control and ownership of the share
capital of the Company and waive any and all of our rights under the terms and
conditions of any and all of the Completed Grants awarded or offered to (i)
terminate any or all of the Completed Grants and (ii) require repayment of the
sums paid by us to the Company under any or all of the Completed Grants awarded
or offered. We further hereby confirm that we do not and will not subsequently
regard the Transfer as an event of default under the terms and conditions of any
Completed Grants awarded or offered or other existing Grant awarded or offered
or of any Grant awarded or offered prior to completion of the Transfer.
Yours faithfully
<PAGE>
For and on behalf of
Lothian & Edinburgh Enterprise Limited
<PAGE>
Acquisition of SolCom Systems Limited ("the Company")
Completed Grants Schedule 10 July 1998
Purchase Order Number Budget
- ---------------------------------------- ---------------------------------------
5038 P1252 - ODP
5406 P1252 - ODP
6906 P1641 - Business Services
7618 P1252 - ODP
8871 P1860 - LEEL company support
9093 P1252 - ODP
10272 P1252 - ODP
10274 P1252 - ODP
10963 P10271 - Graduates Into Software
11327 P10320 - Skills For Small Business
13086 P10271 - Graduates into Software
13087 P10271 - Graduates into Software
- ---------------------------------------- ---------------------------------------
<PAGE>
EXHIBIT R
Grant Thornton
The Company Secretary
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
LIVINGSTON
EH54 7DE
[Date as at Closing]
Dear Sir
In accordance with the Companies Act 1985, sections 392 to 394, we write to
inform you of our resignation as auditors of SolCom Systems Limited with
immediate effect.
There are no circumstances connected with our ceasing to hold office which we
consider should be brought to the attention of the members or creditors of the
company.
We also confirm that there are no sums due to us by the company in respect of
outstanding invoices or in respect of work carried out but not invoiced.
You are required to send a copy of this notice to the Registrar of Companies
within fourteen days.
Yours faithfully
Grant Thornton
Registered Auditors
1/4 Atholl Crescent
Edinburgh EH3 8LQ
Tel 0131 229 9181
Fax 0131 229 4560
DX ED428
Authorised by The Institute of Chartered Accountants in England and Wales to
carry on investment business. A list of partners may be inspected at the above
address and at Grant Thornton House Euston Square London NW1 2EP
<PAGE>
Grant Thornton
The Company Secretary
SolCom Systems Ltd
SolCom House
Meikle Road
Kirkton Campus
LIVINGSTON
EH54 7DE
[Date as at Closing]
Dear Sir
We refer to our resignation letter in respect of our appointment as auditors of
SolCom Systems Limited. As requested, we confirm that neither we nor our USA
firm hold or have held the position of auditors to your USA subsidiary company,
SolCom Systems Inc.
For US GAAP purposes and for the purposes of certifying the consolidated
financial statements of the group for the periods to June 30, 1997 and March 31,
1998, we performed such limited audit work on the subsidiary company's records
as we deemed necessary in order to certify the consolidated financial
statements.
We confirm that our resignation as auditor of the parent company also is deemed
to include our ceasing to hold any position or having any involvement with
SolCom Systems Inc.
Yours faithfully
Leslie Duncan
Partner
1/4 Atholl Crescent
Edinburgh EH3 8LQ
Tel 0131 229 9181
Fax 0131 229 4560
DX ED428
Authorised by The Institute of Chartered Accountants in
England and Wales to carry on investment business. A list of
partners may be inspected at the above address and at Grant
Thornton House Euston Square London NW1 2EP
<PAGE>
APPENDIX B
----------
FAIRNESS OPINION
<PAGE>
[Letterhead of Van Kasper & Company]
June 10, 1998
Board of Directors
MicroFrame, Inc.
21 Meridian Road
Edison, NJ 08820
Gentlemen:
You have requested our opinion, as investment bankers, as to whether
the consideration to be issued by MicroFrame, Inc. ("MicroFrame") in connection
with the proposed acquisition of SolCom Systems Limited and its subsidiaries
("SolCom") through the purchase of all outstanding shares of SolCom in exchange
for an aggregate of 4.2 million shares of MicroFrame common stock and 1.3
million options to purchase shares of MicroFrame common stock (the
"Transaction") is fair to the shareholders of MicroFrame from a financial point
of view.
In connection with our opinion, among other things, we have (i)
discussed the proposed Transaction and related matters with certain members of
management of MicroFrame and SolCom; (ii) reviewed the draft Share Purchase
Agreement dated May 19, 1998, that we have been advised is representative of the
final agreement to be executed by the parties shortly hereafter; (iii) reviewed
audited financial statements of MicroFrame at and for the two years ended March
31, 1996 and 1997 and the accompanying Reports of Independent Accountants, and
unaudited financial statements of MicroFrame at and for the year ended March 31,
1998; (iv) reviewed audited financial statements of SolCom Systems Limited at
and for the two years ended June 30, 1997 and the accompanying reports of
Independent Accountants, and draft audited financial statements of SolCom at and
for the year ended June 30, 1997 and the nine months ended March 31, 1998; (v)
reviewed documents filed by MicroFrame with the Securities and Exchange
Commission; (vi) reviewed projections for MicroFrame, SolCom, and MicroFrame and
SolCom combined after the Transaction, as prepared and provided to us by
MicroFrame and SolCom; (vii) reviewed certain marketing materials provided to us
by MicroFrame and SolCom; (viii) performed a discounted cash flow analysis using
various discount rates based upon financial projections provided by MicroFrame
and SolCom, (ix) compared publicly available recent information for companies
that we determined to be comparable, (x) reviewed recent historical stock prices
for MicroFrame and other companies we have determined to be comparable and (xi)
reviewed the financial terms of certain other recent business combinations that
we determined to be comparable.
<PAGE>
Board of Directors
MicroFrame, Inc.
June 10, 1998
Page 2
With your permission and without any independent verification, (i) we
have assumed that the documents to be prepared and used to effect the
Transaction will do so on the terms set forth in the draft Share Purchase
Agreement dated May 19, 1998, without material modification, and (ii) we have
relied on the accuracy and completeness of all the financial and other publicly
available information reviewed by us or that was furnished or otherwise
communicated to us by MicroFrame and SolCom. Independent of the foregoing, we
have assumed (i) that the projections for MicroFrame, SolCom, and MicroFrame and
SolCom combined after completion of the Transaction were reasonably prepared
based on assumptions reflecting good faith judgments of the management preparing
them as to the most likely future performance of MicroFrame, SolCom, and
MicroFrame and SolCom combined after the Transaction and (ii) neither the
management of MicroFrame (with respect to projections for MicroFrame and
MicroFrame and SolCom combined after completion of the Transaction) nor the
management of SolCom (with respect to the projections of SolCom) has any
information or belief that would make any such projections misleading in any
material respect. In this regard, however, we have made certain adjustments to
the financial projections provided to us for MicroFrame, SolCom, and MicroFrame
and SolCom combined after completion of the Transaction, where we have
determined that it may have been appropriate to do so for purposes of our work
for this opinion.
We have not independently verified the accuracy or completeness of any
of the information provided to us or obtained by us from publicly available
sources and do not take any responsibility with respect to any such information.
Also, we have not made an independent valuation or appraisal of the assets or
liabilities of MicroFrame or SolCom and have not been furnished with any such
evaluation or appraisal.
Our opinion is based upon an analysis of the foregoing in light of our
assessment of general economic and financial market conditions as they exist and
can be evaluated by us as of the date hereof. In this regard, we have assumed
there has been no material change in the business, condition (financial or
other) or prospects of MicroFrame or SolCom since the respective dates of the
information provided to us. We have not participated in the negotiation of the
Transaction, provided any legal or other advice with respect to the Transaction
or proposed any possible alternatives to the Transaction.
Our engagement and the opinion expressed herein are for the benefit of
MicroFrame's Board of Directors. Our opinion does not address the underlying
decision by MicroFrame to undertake the Transaction or the prices at which
MicroFrame's common stock will actually trade at any time and we express no
recommendation or opinion to any shareholder of MicroFrame as to how such
shareholder should vote. It is understood that this letter is for the
information of the Board of Directors of MicroFrame and may not be used for any
other purpose or be disclosed or otherwise referred to without our prior
consent, except in any filing with the Securities and Exchange Commission in
connection with the Transaction or as may otherwise be required by law or by a
court of competent jurisdiction.
<PAGE>
Board of Directors
MicroFrame, Inc.
June 10, 1998
Page 3
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Transaction is fair to the Company and the shareholders
of the Company from a financial point of view.
Very truly yours,
VAN KASPER & COMPANY
<PAGE>
APPENDIX C
----------
1998 STOCK OPTION PLAN
<PAGE>
1998 STOCK OPTION PLAN
of
MICROFRAME, INC.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan")
is designed to provide an incentive to key employees (including directors and
officers who are key employees) and to consultants and directors who are not
employees of MicroFrame, Inc., a New Jersey corporation (the "Company"), or any
of its Subsidiaries (as such term is defined in Paragraph 19), and to offer an
additional inducement in obtaining the services of such individuals. The Plan
provides for the grant of "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified stock options which do not qualify as ISOs ("NQSOs"). The
Company makes no representation or warranty, express or implied, as to the
qualification of any option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 12, the aggregate number of shares of Common Stock, $.01 par value per
share, of the Company ("Common Stock") for which options may be granted under
the Plan shall not exceed 3,000,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of Directors"),
consist either in whole or in part of authorized but unissued shares of Common
Stock or shares of Common Stock held in the treasury of the Company. Subject to
the provisions of Paragraph 13, any shares of Common Stock subject to an option
which for any reason expires, is canceled or is terminated unexercised or which
ceases for any reason to be exercisable shall again become available for the
granting of options under the Plan. The Company shall at all times during the
term of the Plan reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered
by the Board of Directors or a committee of the Board of Directors (the
"Committee") consisting of not less than two (2) directors, each of whom shall
be a "non-employee director" within the meaning of Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (as the same may be in effect
and interpreted from time to time, "Rule 16b-3"). Unless otherwise provided in
the By-Laws of the Company or by resolution of the Board of Directors, a
majority of the members of the Committee shall constitute a quorum, and the acts
of a majority of the members present at any meeting at which a quorum is
present, and any acts approved in writing by all members without a meeting,
shall be the acts of the Committee.
Subject to the express provisions of the Plan, the Committee
shall have the authority, in its sole discretion, to determine the persons who
shall be granted options; the times
<PAGE>
when they shall receive options; whether an option granted to an employee shall
be an ISO or a NQSO; the number of shares of Common Stock to be subject to each
option; the term of each option; the date each option shall become exercisable;
whether an option shall be exercisable in whole or in installments, and, if in
installments, the number of shares of Common Stock to be subject to each
installment; whether the installments shall be cumulative; the date each
installment shall become exercisable and the term of each installment; whether
to accelerate the date of exercise of any option or installment; whether shares
of Common Stock may be issued upon the exercise of an option as partly paid,
and, if so, the dates when future installments of the exercise price shall
become due and the amounts of such installments; the exercise price of each
option; the form of payment of the exercise price; the fair market value of a
share of Common Stock; whether and under what conditions to restrict the sale or
other disposition of the shares of Common Stock acquired upon the exercise of an
option and, if so, whether and under what conditions to waive any such
restriction; whether and under what conditions to subject the exercise of all or
any portion of an option to the fulfillment of certain restrictions or
contingencies as specified in the contract referred to in Paragraph 11 (the
"Contract"), including without limitation, restrictions or contingencies
relating to entering into a covenant not to compete with the Company, its Parent
(as such term is defined in Paragraph 19) and Subsidiaries, to financial
objectives for the Company, any of its Subsidiaries, a division, a product line
or other category, and/or the period of continued employment of the optionee
with the Company or any of its Subsidiaries, and to determine whether such
restrictions or contingencies have been met; the amount, if any, necessary to
satisfy the obligation of the Company, any of its Subsidiaries or a Parent to
withhold taxes or other amounts; whether an optionee is Disabled (as such term
is defined in Paragraph 19); with the consent of the optionee, to cancel or
modify an option, provided that the modified provision is permitted to be
included in an option granted under the Plan on the date of the modification,
and provided further, that in the case of a modification (within the meaning of
Section 424(h) of the Code) of an ISO, such option as modified would be
permitted to be granted on the date of such modification under the terms of the
Plan; to construe the respective Contracts and the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; to approve any provision of
the Plan or any option granted under the Plan or any amendment to either which,
under Rule 16b-3, requires the approval of the Board of Directors, a committee
of non-employee directors or the shareholders to be exempt (unless otherwise
specifically provided herein); and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Committee in its sole discretion. The
determinations of the Committee on the matters referred to in this Paragraph 3
shall be conclusive and binding on the parties.
No member or former member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any option granted hereunder. In addition, each member and former member of the
Committee shall be indemnified and held harmless by the Company from and against
any liability, claim for damages and expenses in connection therewith by reason
of any action or failure to act under or in connection with
-2-
<PAGE>
the Plan, any option granted hereunder or any Contract to the fullest extent
permitted with respect to directors under the Company's certificate of
incorporation, By-Laws and applicable law.
4. ELIGIBILITY. The Committee may from time to time,
consistent with the purposes of the Plan, grant options to such key employees
(including officers and directors who are key employees) of, or consultants to,
the Company or any of its Subsidiaries, and to such directors of the Company
who, at the time of grant, are not common law employees of the Company or of any
of its Subsidiaries, as the Committee may determine in its sole discretion. Such
options granted shall cover such number of shares of Common Stock as the
Committee may determine in its sole discretion; provided, however, that the
maximum number of shares subject to options that may be granted to any employee
during any calendar year under the Plan shall be 400,000 shares; and provided
further that the aggregate market value (determined at the time the option is
granted) of the shares of Common Stock for which any eligible employee may be
granted ISOs under the Plan or any other plan of the Company, or of a Parent or
a Subsidiary of the Company, which are exercisable for the first time by such
optionee during any calendar year shall not exceed $100,000. The $100,000 ISO
limitation shall be applied by taking ISOs into account in the order in which
they were granted. Any option (or the portion thereof) granted in excess of such
ISO limitation amount shall be treated as a NQSO to the extent of such excess.
5. EXERCISE PRICE. The exercise price of the shares of Common
Stock under each option shall be determined by the Committee in its sole
discretion; provided, however, that the exercise price of an ISO shall not be
less than the fair market value of the Common Stock subject to such option on
the date of grant; and provided further that if, at the time an ISO is granted,
the optionee owns (or is deemed to own under 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, of any of its Subsidiaries or of a Parent, the exercise
price of such ISO shall not be less than 110% of the fair market value of the
Common Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day
shall be (a) if the principal market for the Common Stock is a national
securities exchange, the average of the highest and lowest sales prices per
share of the Common Stock on such day as reported by such exchange or on a
consolidated tape reflecting transactions on such exchange, (b) if the principal
market for the Common Stock is not a national securities exchange and the Common
Stock is quoted on the Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales
price information is available with respect to the Common Stock, the average of
the highest and lowest sales prices per share of the Common Stock on such day on
Nasdaq, or (ii) if such information is not available, the average of the highest
bid and the lowest asked prices per share for the Common Stock on such day on
Nasdaq, or (c) if the principal market for the Common Stock is not a national
securities exchange and the Common Stock is not quoted on Nasdaq, the average of
the highest bid and lowest asked prices per share for the Common Stock on such
day as reported on the OTC Bulletin Board Service or by National Quotation
Bureau, Incorporated or a comparable service; provided that if clauses (a), (b)
and (c) of this Paragraph are all inapplicable, or if no
-3-
<PAGE>
trades have been made or no quotes are available for such day, the fair market
value of a share of Common Stock shall be determined by the Committee by any
method consistent with applicable regulations adopted by the Treasury Department
relating to stock options.
6. TERM. Each option granted pursuant to the Plan shall be for
such term as is established by the Committee, in its sole discretion, at or
before the time such option is granted; provided, however, that the term of each
ISO granted pursuant to the Plan shall be for a period not exceeding 10 years
from the date of grant thereof, and provided further that if, at the time an ISO
is granted, the optionee owns (or is deemed to own under 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, of any of its Subsidiaries or of a Parent, the
term of the ISO shall be for a period not exceeding five years from the date of
grant. Options shall be subject to earlier termination as hereinafter provided.
7. EXERCISE. An option (or any installment thereof), to the
extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the applicable Contract permits
installment payments) (a) in cash and/or by certified check or (b) with the
authorization of the Committee, with cash, a certified check and/or with
previously acquired shares of Common Stock, having an aggregate fair market
value (determined in accordance with Paragraph 5), on the date of exercise,
equal to the aggregate exercise price of all options being exercised; provided,
however, that in no case may shares be tendered if such tender would require the
Company to incur a charge against its earnings for financial accounting
purposes.
The Committee may, in its sole discretion, permit payment of
the exercise price of an option by delivery by the optionee of a properly
executed notice, together with a copy of his irrevocable instructions to a
broker acceptable to the Committee to deliver promptly to the Company the amount
of sale or loan proceeds sufficient to pay such exercise price. In connection
therewith, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
An optionee shall not have the rights of a shareholder with
respect to such shares of Common Stock to be received upon the exercise of an
option until the date of issuance of a stock certificate to him for such shares
or, in the case of uncertificated shares, until the date an entry is made on the
books of the Company's transfer agent representing such shares; provided,
however, that until such stock certificate is issued or until such book entry is
made, any optionee using previously acquired shares of Common Stock in payment
of an option exercise price shall continue to have the rights of a shareholder
with respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be
purchased or issued under the Plan.
-4-
<PAGE>
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be
expressly provided in the applicable Contract, any optionee whose employment or
consulting relationship with the Company (and its Parent and Subsidiaries) has
terminated for any reason other than the death or Disability of the optionee may
exercise any option granted to him as an employee or consultant, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the date
the option would otherwise have expired; provided, however, that if such
relationship is terminated either (a) for cause, or (b) without the consent of
the Company, such option shall terminate immediately. Except as may otherwise be
expressly provided in the applicable Contract, options granted under the Plan to
an employee or consultant of the Company or any of its Subsidiaries shall not be
affected by any change in the status of the holder so long as he continues to be
an employee or a consultant of the Company, its Parent or any of the
Subsidiaries (regardless of a change in status from one to the other or having
been transferred from one corporation to another).
For the purposes of the Plan, an employment relationship shall
be deemed to exist between an individual and a corporation if, at the time of
the determination, the individual was an employee of such corporation for
purposes of Section 422(a) of the Code. As a result, an individual on military,
sick leave or other bona fide leave of absence shall continue to be considered
an employee for purposes of the Plan during such leave if the period of the
leave does not exceed 90 days, or, if longer, so long as the individual's right
to reemployment with the corporation, any of its Subsidiaries or a Parent is
guaranteed either by statute or by contract. If the period of leave exceeds 90
days and the individual's right to reemployment is not guaranteed by statute or
by contract, the employment relationship shall be deemed to have terminated on
the 91st day of such leave.
Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose directorship with the Company has
terminated for any reason other than his death or Disability may exercise the
options granted to him as a director who was not an employee of or consultant to
the Company or any of its Subsidiaries, to the extent exercisable on the date of
such termination, at any time within three months after the date of termination,
but not thereafter and in no event after the date the option would otherwise
have expired; provided, however, that if his directorship is terminated for
cause, such option shall terminate immediately.
Nothing in the Plan or in any option granted under the Plan
shall confer on any person any right to continue in the employ or as a
consultant of the Company, its Parent or any of its Subsidiaries, or as a
director of the Company, or interfere in any way with any right of the Company,
its Parent or any of its Subsidiaries to terminate such relationship at any time
for any reason whatsoever without liability to the Company, its Parent or any of
its Subsidiaries.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise
be expressly provided in the applicable Contract, if an optionee dies (a) while
he is employed by, or a consultant to, the Company, its Parent or any of its
Subsidiaries, (b) within three months after
-5-
<PAGE>
the termination of his employment or consulting relationship with the Company,
its Parent and its Subsidiaries (unless such termination was for cause or
without the consent of the Company) or (c) within one year following the
termination of such employment or consulting relationship by reason of his
Disability, the options granted to him as an employee of, or consultant to, the
Company or any of its Subsidiaries, may be exercised, to the extent exercisable
on the date of his death, by his Legal Representative (as such term is defined
in Paragraph 19), at any time within one year after death, but not thereafter
and in no event after the date the option would otherwise have expired. Except
as may otherwise be expressly provided in the applicable Contract, any optionee
whose employment or consulting relationship with the Company, its Parent and its
Subsidiaries has terminated by reason of his Disability may exercise such
options, to the extent exercisable upon the effective date of such termination,
at any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.
Except as may otherwise be expressly provided in the
applicable Contract, if an optionee dies (a) while he is a director of the
Company, (b) within three months after the termination of his directorship with
the Company (unless such termination was for cause) or (c) within one year after
the termination of his directorship by reason of his Disability, the options
granted to him as a director who was not an employee of or consultant to the
Company or any of its Subsidiaries, may be exercised, to the extent exercisable
on the date of his death, by his Legal Representative at any time within one
year after death, but not thereafter and in no event after the date the option
would otherwise have expired. Except as may otherwise be expressly provided in
the applicable Contract, an optionee whose directorship with the Company has
terminated by reason of Disability, may exercise such options, to the extent
exercisable on the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.
10. COMPLIANCE WITH SECURITIES LAWS. It is a condition to the
exercise of any option that either (a) a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Common Stock to be issued upon such exercise shall be effective and
current at the time of exercise, or (b) there is an exemption from registration
under the Securities Act for the issuance of the shares of Common Stock upon
such exercise. Nothing herein shall be construed as requiring the Company to
register shares subject to any option under the Securities Act or to keep any
Registration Statement effective or current.
The Committee may require, in its sole discretion, as a
condition to the grant or exercise of an option, that the optionee execute and
deliver to the Company his representations and warranties, in form, substance
and scope satisfactory to the Committee, which the Committee determines is
necessary or convenient to facilitate the perfection of an exemption from the
registration requirements of the Securities Act, applicable state securities
laws or other legal requirement, including without limitation, that (a) the
shares of Common Stock to be issued upon exercise of the option are being
acquired by the optionee for his own account, for investment only and not with a
view to the resale or distribution thereof, and (b) any subsequent resale or
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<PAGE>
distribution of shares of Common Stock by such optionee will be made only
pursuant to (i) a Registration Statement under the Securities Act which is
effective and current with respect to the shares of Common Stock being sold, or
(ii) a specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption, the optionee, prior to any offer of sale or
sale of such shares of Common Stock, shall provide the Company with a favorable
written opinion of counsel satisfactory to the Company, in form, substance and
scope satisfactory to the Company, as to the applicability of such exemption to
the proposed sale or distribution.
In addition, if at any time the Committee shall determine that
the listing or qualification of the shares of Common Stock subject to such
option on any securities exchange, Nasdaq or under any applicable law, or that
the consent or approval of any governmental agency or regulatory body, is
necessary or desirable as a condition to, or in connection with, the granting of
an option or the issuance of shares of Common Stock thereunder, such option may
not be granted or exercised in whole or in part, as the case may be, unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by
an appropriate Contract which shall be duly executed by the Company and the
optionee. Such Contract shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee in its sole
discretion. The terms of each option and Contract need not be identical.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.
Notwithstanding any other provision of the Plan, in the event of any change in
the outstanding Common Stock by reason of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, spinoff, split-up,
combination or exchange of shares or the like which results in a change in the
number or kind of shares of Common Stock which is outstanding immediately prior
to such event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof, and the maximum number of shares subject to options that
may be granted to any employee in any calendar year, shall be appropriately
adjusted by the Board of Directors, whose determination shall be conclusive and
binding on all parties thereto. Such adjustment may provide for the elimination
of fractional shares that might otherwise be subject to options without payment
therefor.
In the event of (a) the liquidation or dissolution of the
Company, (b) a merger in which the Company is not the surviving corporation or a
consolidation, or (c) any transaction (or series of related transactions) in
which (i) more than 50% of the outstanding Common Stock is transferred or
exchanged for other consideration or (ii) shares of Common Stock in excess of
the number of shares of Common Stock outstanding immediately preceding the
transaction are issued (other than to shareholders of the Company with respect
to their shares of stock in the Company),
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<PAGE>
any outstanding options shall terminate upon the earliest of any such event,
unless other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on June 12, 1998. No option may be granted
under the Plan after June 11, 2008. The Board of Directors, without further
approval of the Company's shareholders, may at any time suspend or terminate the
Plan, in whole or in part, or amend it from time to time in such respects as it
may deem advisable, including without limitation, in order that ISOs granted
hereunder meet the requirements for "incentive stock options" under the Code, to
comply with the provisions of Rule 16b-3 promulgated the Exchange Act or Section
162(m) of the Code or any change in applicable law or regulation, ruling or
interpretation of any governmental agency or regulatory body; provided, however,
that no amendment shall be effective without the requisite prior or subsequent
shareholder approval which would (a) except as contemplated in Paragraph 12,
increase the maximum number of shares of Common Stock for which options may be
granted under the Plan or change the maximum number of shares for which options
may be granted to employees in any calendar year, (b) change the eligibility
requirements for individuals entitled to receive options hereunder or (c) make
any change for which applicable law or any governmental agency or regulatory
body requires shareholder approval. No termination, suspension or amendment of
the Plan shall adversely affect the rights of an optionee under any option
granted under the Plan without such optionee's consent. The power of the
Committee to construe and administer any option granted under the Plan prior to
the termination or suspension of the Plan shall continue after such termination
or during such suspension.
14. NON TRANSFERABILITY OF OPTIONS. No option granted under
the Plan shall be transferable other than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process, and any such attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void ab initio and of no force or effect.
15. WITHHOLDING TAXES. The Company, or its Subsidiary or
Parent, as applicable, may withhold (a) cash or (b) with the consent of the
Committee, shares of Common Stock to be issued upon exercise of an option or a
combination of cash and shares, having an aggregate fair market value
(determined in accordance with Paragraph 5) equal to the amount which the
Committee determines is necessary to satisfy the obligation of the Company, a
Subsidiary or Parent to withhold Federal, state and local income taxes or other
amounts incurred by reason of the grant, vesting, exercise or disposition of an
option or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the optionee to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.
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<PAGE>
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such
legend or legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it determines,
in its sole discretion, to be necessary or appropriate to (a) prevent a
violation of, or to perfect an exemption from, the registration requirements of
the Securities Act, applicable state securities laws or other legal
requirements, (b) implement the provisions of the Plan or any agreement between
the Company and the optionee with respect to such shares of Common Stock, or (c)
permit the Company to determine the occurrence of a "disqualifying disposition,"
as described in Section 421(b) of the Code, of the shares of Common Stock
transferred upon the exercise of an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock upon the exercise of an option granted under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issuance.
17. USE OF PROCEEDS. The cash proceeds to be received upon the
exercise of an option under the Plan shall be added to the general funds of the
Company and used for such corporate purposes as the Board of Directors may
determine, in its sole discretion.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the shareholders,
substitute new options for prior options of a Constituent Corporation (as such
term is defined in Paragraph 19) or assume the prior options of such Constituent
Corporation.
19. DEFINITIONS.
(a) "Constituent Corporation" shall mean any
corporation which engages with the Company, its Parent or any Subsidiary in a
transaction to which Section 424(a) of the Code applies (or would apply if the
option assumed or substituted were an ISO), or any Parent or any Subsidiary of
such corporation.
(b) "Disability" shall mean a permanent and
total disability within the meaning of Section 22(e)(3) of the Code.
(c) "Legal Representative" shall mean the
executor, administrator or other person who at the time is entitled by law to
exercise the rights of a deceased or incapacitated optionee with respect to an
option granted under the Plan.
(d) "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
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<PAGE>
(e) "Subsidiary" shall have the same definition
as "subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW. The Plan, such options as may be granted
hereunder, the Contracts and all related matters shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to conflict or choice of law provisions.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan, any option or Contract shall not
affect the validity, legality or enforceability of any other provision, all of
which shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
22. SHAREHOLDER APPROVAL. The Plan shall be subject to
approval by a majority of the votes of all outstanding shares entitled to vote
hereon at the next duly held meeting of the Company's shareholders at which a
quorum is present or by majority written consent of the Company's shareholders.
No options granted hereunder may be exercised prior to such approval, provided
that, the date of grant of any option shall be determined as if the Plan had not
been subject to such approval. Notwithstanding the foregoing, if the Plan is not
approved by a vote of the shareholders of the Company on or before October 1,
1998, the Plan and any options granted hereunder shall terminate.
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<PAGE>
APPENDIX D
----------
1998 U.K. SUB-PLAN
<PAGE>
MICROFRAME, INC.
1998 STOCK OPTION PLAN
1998 U.K. Sub-Plan/U.K. Approved Rules
In pursuance of its powers under the MicroFrame, Inc. 1998 Stock Option Plan
(the "Plan"), the Board of Directors, or a duly appointed committee of the Board
of Directors (the "Committee") of MicroFrame, Inc. (the "Company") has adopted
these rules (the "UK Rules") for the purposes of operating the Plan with regard
to such options which the UK Rules are expressed to extend at the time when the
option is granted. Unless the context requires otherwise, all expressions used
in the UK Rules have the same meaning as the Plan. The Plan, as supplemented by
the UK Rules, is referred to hereinafter as the "Sub-Plan". For the avoidance of
doubt, the terms of the Plan (insofar as they have not been disapplied by Rule o
of the UK Rules) shall form part of the Sub-Plan.
(a) The shares over which options may be granted under the
Sub-Plan form part of the ordinary share capital (as defined
in Section 832(1) Income and Corporation Taxes Act 1988)
("ICTA 1988") of the Company and must at all times, including
the time of grant and the time of exercise, comply with the
terms of the Plan and comply with the requirements of
paragraphs 10 to 14 Schedule 9 ICTA 1988.
(b) The companies participating in this Sub-Plan are the Company
and all companies controlled by the Company within the meaning
of Section 840 ICTA 1988 ("Subsidiaries").
(c) The shares of Common Stock to be acquired on exercise of the
option in accordance with the terms of the Sub-Plan will be:
(i) fully paid up;
(ii) not redeemable;
(iii) not subject to any restrictions other than
restrictions which attach to all shares of the same
class. For the purpose of this clause, the term
"restrictions" includes restrictions which are deemed
to attach to the shares under any contract,
agreement, arrangement or condition as referred to in
paragraph 13 Schedule 9 ICTA 1988.
(d) To the extent any restrictions or contingencies have been
imposed by the Committee under the provisions contained in
Paragraph 3 of the Plan, these restrictions or contingencies
shall:
<PAGE>
(i) be objective and set out in full at the time of grant
in the stock option contract referred to at Paragraph
11 of the Plan;
(ii) be such that rights to exercise such option after the
fulfillment or attainment of any restrictions or
contingencies so specified shall not be dependent on
the further discretion of any person; and
(iii) not be capable of amendment, variation or waiver
unless an event occurs which causes the Committee
reasonably to consider that waived, varied or amended
restrictions or contingencies would be a fairer
measure of performance and would be no more difficult
to satisfy.
(e) No option will be granted to an employee or director under
this Sub-Plan, or where an option has previously been granted,
no option shall be exercised by an optionholder if at that
time he has, or any time within the preceding 12 months has
had, a material interest for the purposes of Schedule 9 ICTA
1988 in either the Company being a close company (within the
meaning of Chapter I of Part XI of ICTA 1988) or in a company
being a close company which has control (within the meaning of
Section 840 ICTA 1988) of the Company or in a company being a
close company and a member of a consortium (as defined in
Section 187(7) ICTA 1988) which owns the Company. In
determining whether a company is a close company for this
purpose, Section 414(1)(a) ICTA 1988 (exclusion of companies
not resident in the United Kingdom) and Section 415 of ICTA
1988 (exclusion of certain companies with listed shares) shall
be disregarded.
(f) Notwithstanding any provision of the Plan, no option will be
granted to an employee or director under this Sub-Plan in
relation to which the exercise price is manifestly less than
the fair market value (as defined in Section 187(2) ICTA 1988)
of the Company's Common Stock on the date of grant of the
option. The exercise price shall be stated at the date of
grant of the option and determined in accordance with
Paragraph 5 of the Plan, save that the exercise price of an
option granted under the Sub-Plan shall be not less than one
hundred percent (100%) of the fair market value of the stock
on the date of grant, and shall be agreed in advance with the
Shares Valuation Division of the Inland Revenue or otherwise
determined with the agreement of the Shares Valuation
Division.
(g) Notwithstanding Paragraph 7 of the Plan, settlement of the
exercise price may not be in the form of previously acquired
shares of Common Stock and payment of the amount due on
exercise may not be made in installments.
(h) Any alteration or amendment to this Sub-Plan shall not have
effect until approved by the Board of Inland Revenue. The
Company undertakes to provide details thereof to the Board of
Inland Revenue without delay for this purpose.
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<PAGE>
(i) Notwithstanding Paragraph 11 of the Plan, any material
alteration of the standard form of stock option agreement
shall not have effect unless approved by the Board of Inland
Revenue.
(j) No adjustment pursuant to Paragraph 12 of the Plan shall be
made to any option which has been granted under the Sub-Plan
unless such adjustment would be permitted under the Plan and
under paragraph 29 Schedule 9 ICTA 1988. Where so permitted,
no such adjustment shall take effect until the approval of the
Board of Inland Revenue shall have been obtained thereto.
(k) For the avoidance of doubt it is stated that the Company is
the grantor as defined in paragraph 1(1) Schedule 9 ICTA 1988.
(l) Any option granted to an employee or director under this
Sub-Plan shall be limited to take effect so that immediately
following such grant, the aggregate market value (determined
at the time prescribed by paragraph 28 Schedule 9 ICTA 1988
and calculated in accordance with the provisions of the said
Schedule 9) of shares of Common Stock which the optionholder
can acquire under this Sub-Plan and any other scheme or
schemes, not being a savings-related share option scheme,
approved under the said Schedule 9 and established by the
grantor or by any associated company (as defined in Section
416 ICTA 1988) of the grantor (and not exercised), shall not
exceed(pound)30,000 or such other sum as may be prescribed
from time to time by paragraph 28 Schedule 9 ICTA 1988,
provided always that this limit shall not exceed the
limitations set out in the Plan.
(m) An option will only be granted under this Sub-Plan to an
employee (other than one who is a director) or a full-time
director of the Company or a subsidiary participating in this
Sub-Plan. For this purpose, a full-time director is one who is
employed by the Company required to work at least 25 hours a
week excluding meal-times in the business of the Company or
its Subsidiaries. For the avoidance of doubt an option will
not be granted under this Sub-Plan to a consultant or director
who is not an employee of the Company or any of its
Subsidiaries, and all references in the Plan to options
granted to consultants shall be disregarded.
(n) The Company shall, not later than 30 days after the actual
receipt of the written notice of exercise of an option given
in accordance with the provisions of the Plan, together with
the payment of the aggregate exercise price in respect of the
shares of Common Stock to be issued or transferred pursuant to
the exercise of an option, allot and issue credited as fully
paid or transfer to the Optionee and cause to be registered in
his name the number of shares of Common Stock specified in the
written notice.
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<PAGE>
(o) The following shall not form part of and shall therefore be
disregarded for the purposes of the Sub-Plan:
(i) in Paragraph 3 of the Plan, the words "the fair
market value of a share of Common Stock; whether and
under what conditions to restrict the sale or other
disposition of the shares of Common Stock acquired
upon the exercise of an option and if so whether and
under what circumstances to waive such restriction";
and
(ii) in the first paragraph of Paragraph 7, the
parenthetical that reads, "or the amount due on
exercise if the applicable Contract permits
installment payments" and the language from "(b)" to
the end of that paragraph.
(p) This Sub-Plan shall not become effective in any manner until
and unless a closing occurs in connection with that certain
Share Purchase Agreement dated as of August 17, 1998 by and
among the Company, SolCom Systems Limited ("SolCom") and
certain shareholders and shareholders' representatives of
SolCom.
Adopted on behalf of the Company:
By:_____________________________________
Stephen B. Gray
President and Chief Executive Officer
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<PAGE>
APPENDIX E
----------
FINANCIAL STATEMENTS OF SOLCOM
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands
(except per share data)
June 30, March 31,
1998 1998
(pound) (pound)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents -- 12
Accounts receivable 64 147
Other receivables 26 23
Prepayments 34 44
Inventories 306 251
----------------------------------------
Total currents assets 430 477
Property and equipment, net 134 147
----------------------------------------
Total assets 564 624
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 17 11
Current portion of bank loans 84 112
Current portion or capital leases 9 11
Accounts payable 553 605
Accrued expenses 264 257
----------------------------------------
Total current liabilities 927 996
Long term portion of capital leases - -
Long term portion of bank loans 16 18
Cumulative redeemable preferences (pound)1 stated value, 30,000 shares
authorized and outstanding 30 30
Commitments and contingencies - -
Shareholders deficit
Ordinary (pound)0.01 stated value, 53,000,000 (March 31, 1998 -
48,960,000) shares authorized, issued and outstanding 38,814,390
(March 31, 1998 - 36,140,000) shares 388 361
Additional paid in capital 662 433
Accumulated deficit (1,461) (1,217)
Cumulative translation adjustment 2 3
----------------------------------------
Total shareholders' deficit (409) (420)
----------------------------------------
Total liabilities and shareholders' deficit 564 624
========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
(except per share data)
3 months ended 9 months ended
June 30, 1998 March 31, 1998
(pound) (pound)
Sales 238 1,031
Cost of sales (55) (221)
------------------- -------------------
Gross profit 183 810
Operating expenses (336) (965)
Research and development expenses (76) (264)
Interest income 1 1
Interest expense (16) (21)
------------------- -------------------
Net loss (244) (439)
=================== ===================
Loss per share - basic and diluted (.01) (.01)
The accompanying notes are an integral part of these consolidated financial
statements
-2-
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ordinary Shares
Additional Accumulated Cumulative
Shares Amount paid in capital deficit translation
No. (pound) (pound) (pound) adjustment Total
(pound) (pound)
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 3 3 498 (201) 300
Net loss (557) (557)
Capitalisation of share premium 30,737 304 (304) -
Employee stock compensation 28 28
Preference dividend declared (10) (10)
--------------------------------------------------------------------------------------------
Balance at June 30, 1997 30,740 307 222 (768) - (239)
Net loss (439) - (439)
Share capital issued 5,400 54 211 265
Translation adjustment 3 3
Preference dividend declared (10) (10)
--------------------------------------------------------------------------------------------
Balance at March 31, 1998 36,140 361 433 (1,217) 3 (420)
Net loss (244) (244)
Share capital issued 2,674 27 229 (1) 256
Translation adjustment (1)
Preference dividend declared (3) (3)
--------------------------------------------------------------------------------------------
Balance at June 30, 1998 38,814 388 662 (1,461) 2 (409)
============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-3-
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands
(except per share data)
3 months 9 months
ended ended
June 30 March 31
1998 1998
(pound) (pound)
<S> <C> <C>
Cash flows from operating activities
Net loss (244) (439)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 17 57
Employee stock compensation - -
(Increase) in inventories (55) (34)
Decrease/(increase) in receivables and prepayments 90 38
Increase in accounts payable and accrued expenses (45) 370
------------------------------
Total adjustments 7 431
------------------------------
Net cash used in operating activities (227) (8)
Cash flows from investing activities
Capital expenditures (9) (35)
------------------------------
Net cash used in investing activities (9) (35)
Cash flows from financing activities
Bank overdraft 6 (122)
Proceeds from issuance of long term debt - -
Principal payments under long term debt and capital leases (30) (98)
Proceeds from issuance of shares 256 265
------------------------------
Net cash provided by financing activities 232 45
Effect of exchange rate changes on cash and cash equivalents 2 3
------------------------------
Net increase/(decrease) in cash and cash equivalents (12) 5
Cash and cash equivalents at beginning of period 12 7
------------------------------
Cash and cash equivalents at end of period 0 12
==============================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest on bank loans and overdraft 15 13
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-4-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - INVENTORIES
Inventories at June 30, 1998 and March 31 consist of the following:
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
Raw Materials 172 115
Finished Goods 134 136
------------------------------
306 251
==============================
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment at June 30 and March 31 consist of the following:
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
Plant and machinery 209 206
Fixtures and fittings 87 86
------------------------------
296 292
Less accumulated depreciation (162) (145)
------------------------------
134 147
==============================
NOTE C - ACCRUED EXPENSES
Accrued expenses at June 30 and March 31 consist of the following:
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
Social Security and other taxes 82 85
Other 30 29
Sundry creditors 103 97
Provision for preference dividend
and provision on redemption of
preference shares 49 46
------------------------------
264 257
==============================
-5-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at June 30 and March 31 consist of the following:
<TABLE>
<CAPTION>
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
<S> <C> <C>
Secured loan repayable in yearly installments of (pound)3,000 (excluding interest)
until November 1999, carrying interest of 10% per annum. 8 8
------------------------------
Secured loans - the loans are secured by a floating charge over the assets of the
Company. The interest rate is 2.5% over bank base rate (7.25%). 92 122
------------------------------
100 130
less current portion 84 112
------------------------------
16 18
==============================
</TABLE>
Aggregate maturities of long-term obligations at June 30, 1998 are as follows:
(In Thousands)
(pound)
1998 84
1999 8
2000 8
2001 2
----------------
102
================
-6-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment providing services.
Information about the Company's operations by geographic area for the three
months ended June 30, 1998 and the nine months ended March 31, 1998 is as
follows:
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
Sales 71% 170 772
United States 17% 40 196
United Kingdom 12% 29 63
-----------------------------
Other 240 1,031
=============================
Expenditure from operations
United States (162) (302)
United Kingdom (38) (86)
Other (28) (31)
-----------------------------
(228) (419)
=============================
Identifiable assets
United States 163 178
United Kingdom 400 446
-----------------------------
564 624
=============================
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Losses
The Company leases certain facilities and items of equipment under
noncancellable operating leases. The following is a schedule, by years, of
minimum rental payments under such operating leases which expire at various
dates through 2011 (in thousands):
(In Thousands)
Li.
1998 43
1999 43
2000 43
2001 43
Thereafter 451
---
623
Total rent expenses for the nine months ended June 30, 1998 and the nine months
ended March 31, 1998 were approximately Li.15,500 and Li.46,000, respectively.
-7-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capital Leases
The Company also leases certain assets under capital leases. The related assets
and obligations have been recorded using the Company's incremental borrowing
rate at the inception of the lease. The leases, which are noncancellable, expire
at various dates through 1999. The following is a schedule of leased property
under capital leases as of March 31 and June 30:
(In Thousands)
30 June 31 March
1998 1998
(pound) (pound)
Plant and Machinery 26 26
------------------------------
Less accumulated depreciation (17) (15)
------------------------------
9 11
==============================
The following is a schedule of the present value of the net minimum payments
under capital leases as of March 31, 1998:
(In Thousands)
Li.
Present Value of net minimum lease payments, all current 7
====
Government Grants
The Company has received government grants principally of a revenue nature and
these grants have been credited to Income in the period in which the related
expenditure has been incurred. The grants of a capital nature are deferred and
released to the Income Statement over the lives of the assets to which they
relate. No portion of capital grants were deferred at June 30, 1998 or March 31,
1998.
NOTE H - CONCENTRATION OF CREDIT
Approximately 65% (1998 56%) of the Company's revenue is from one customer.
During the three months ended June 30, 1998, approximately 74% (1998 74%) of the
Company's net revenues were from 5 (1998 - 5) major customers. At June 30, 1998
accounts receivable included balances of approximately Li.79,931 (1998
Li.131,000) from 5 major customers, of which Li.37,305 (1998 Li.83,000) is due
from the one most significant customer.
-8-
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
AND THE YEAR ENDED JUNE 30, 1997
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
SolCom Systems Limited
We have audited the accompanying consolidated balance sheets of SolCom System's
Limited and its subsidiary as of March 31, 1998 and June 30, 1997 and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the nine months ended March 31, 1998 and the year ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. 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 statements
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 consolidated financial position of SolCom Systems
Limited and its subsidiary as of March 31, 1998 and June 30, 1997 and the
consolidated results of their operations and their consolidated cash flows for
the nine months ended March 31, 1998 and the year ended June 30, 1997 in
conformity with generally accepted accounting principles in the United States.
GRANT THORNTON
Edinburgh
United Kingdom
August 1998
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
except per share data
March 31, 1998 June 30, 1997
(pound) (pound)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 12 7
Accounts receivable 147 204
Other receivables 23 24
Prepayments 44 24
Inventories 251 217
--- ---
Total current assets 477 476
Property and equipment, net 147 169
--- ---
Total assets 624 645
=== ===
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 11 133
Current portion of bank loans 112 123
Current portion of capital leases 11 10
Accounts payable 605 311
Accrued expenses 257 171
--- ---
Total current liabilities 996 748
Capital leases, less current position - 9
Bank loans, less current position 18 97
Cumulative redeemable preference (pound)1 stated value, 30,000 shares authorized
and outstanding 30 30
Commitments and contingencies - -
Shareholders' deficit
Ordinary (pound)0.01 stated value, 48,960,000 (June 30, 1997 - 40,460,000)
shares authorized, issued and outstanding, 36,140,000 (June 30, 1997 -
30,740,000) shares 361 307
Additional paid in capital 433 222
Accumulated deficit (1,217) (768)
Cumulative translation adjustment 3 -
------ --------
Total shareholders' deficit (420) (239)
----- -----
Total liabilities and shareholders' deficit 624 645
==== ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(In Thousands)
except per share data
nine months year
ended ended
March 31, 1998 June 30, 1997
(pound) (pound)
Sales 1,031 1,003
Cost of sales (221) (193)
----- -----
Gross profit 810 810
Operating expenses (965) (1,073)
Research and development expense (264) (279)
Interest income 1 3
Interest expense (21) (18)
-------- ------
Net loss (439) (557)
-----
Loss per share - basic and diluted ((pound)0.01) ((pound)0.02)
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Additional Cumulative
Ordinary Shares paid in Accumulated translation
Shares Amount capital deficits adjustments Total
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 3 (pound)3 (pound)498 (pound)(201) (pound)- (pound)300
Net Loss - - - (557) - (557)
Capitalization of share premium 30,737 304 (304) - - -
Employee stock compensation - - 28 - - 28
Preference dividend declared - - - (10) - (10)
-------------------------------------------------------------------------------
Balance at June 30, 1997 30,740 307 222 (768) - (239)
Net income - - - (439) - (439)
Share capital issued 5,400 54 211 - - 265
Translation adjustment - - - - 3 3
Preference dividend declared - - - (10) - (10)
-----------------------------------------------------------------------------
Balance at March 31, 1998 36,140 (pound)361 (pound)433 (pound)(1,127) (pound)3 (pound)(420)
===============================================================================
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
-3-
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
except per share data
nine months year
ended ended
March 31, 1998 June 30, 1997
(pound) (pound)
<S> <C> <C>
Cash flows from operating activities
Net loss (439) (557)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation
Employee stock compensation 57 56
(Increase) in Inventories - 28
Decrease/(Increase) in receivables and prepayments (34) (114)
Increase in accounts payable and accrued expenses 370 237
------ ------
Total adjustments 431 68
------ -------
Net cash used in operating activities (8) (489)
Cash flows from investing activities
Capital expenditures (35) (157)
------- --------
Net cash used in investing activities (35) (157)
Cash flows from financing activities
Bank overdraft (122) 132
Proceeds from issuance of long term debt - 247
Principal payments under long-term debt and capital losses (98) (76)
Proceeds from issuance of shares 265 -
------ ------
Net cash provided by financing activities 45 303
Effect of exchange rate changes on cash and cash equivalents 3 -
------ ------
Net increase/(decrease) in cash and cash equivalents 5 (343)
Cash and cash equivalent at beginning of the period 7 350
------ -----
Cash and cash equivalents at the end of the period 12 7
===== =======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest 18 13
===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - DESCRIPTION OF THE BUSINESS
The Company
SolCom Systems Limited and its subsidiary (the "Company") are principally
engaged in the provision of outsourced services to the technology and
information industries.
Incorporation and history
The Company was incorporated in Scotland on December 13, 1990 as SolCom Systems
Limited. The subsidiary was incorporated in the state of Virginia in USA on
September 16, 1996 as SolCom System Inc.
Companies Act 1985
These financial statements do not comprise accounts within the meaning of
Section 240 of the UK Companies Act 1985 (the "Companies Act"). The Company's
statutory accounts, which are its primary financial statements are prepared in
accordance with generally accepted accounting principles in the United Kingdom
("UK GAAP") in compliance with the Companies Act and are presented in Great
Britain pounds sterling ("pounds sterling").
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of SolCom Systems
Limited and its subsidiary, SolCom Systems, Inc. All significant intercompany
balances and transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. Actual results may differ from those estimates.
Revenue Recognition
The Company records revenue in accordance with Statement of Position 91-I.
"Software Revenue Recognition") (the "SOP"). In accordance with the SOP, the
Company records revenue from product sales upon shipment to the customer if
there exists no significant vendor obligations and collectibility is probable.
-5-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Earnings Per Share
During 1997, the Company adopted Statements of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share (EPS) and, for companies with potential dilutive
securities, such as options, diluted EPS.
Basic earnings per share is computed using the weighted average number of shares
of common stock and convertible preferred stock outstanding. Diluted earnings
per share is computed using the weighted average number of shares of common
stock outstanding and when dilutive, common equivalent shares from options to
purchase common stock using the treasury stock method.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Fair value of Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate their carrying values due to
the relatively short maturities of these instruments.
Inventories
Inventories are priced at the lower of cost (determined by first-in, first-out)
or market value (defined as not realizable value).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets less estimated
residual value to operations over their estimated useful lives, principally on
the straight-line basis. The estimated lives used in determining depreciation
are:
Plant and machinery 3 years
Motor vehicles (new) 5 years
Motor vehicles (second band) 3 years
Fixtures and fittings 3 - 5 years
Leased plant are amortized over the lives of the respective leases or the
service life of the asset, whichever is shorter. Repair and maintenance cost are
charged to expenses as incurred.
-6-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting
Standards No. 109 (SFAS No 109). "Accounting for Income Taxes." Under SFAS No.
109, income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using accrued tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes that
enactment dates.
Foreign Currency Translation
The reporting currency of the Company is the pound sterling. The functional
currency of the US subsidiary is the US dollar.
The assets and liabilities of the Company's foreign subsidiaries whose
functional currency is other than the pound sterling are translated at the
exchange rates in effect on the reporting date, and income and expenses are
translated at the weighted average exchange rate during the period. The net
effect of translation gains and loses are not included in determining net
income, but are accumulated as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining net
income.
Such gains and losses are not material for any period presented.
NOTE C - INVENTORIES
<TABLE>
<CAPTION>
Inventories at March 31, and June 30, consist of the following: (In Thousands)
1998 1997
(pound) (pound)
<S> <C> <C>
Raw materials 115 102
Finished Goods 136 115
------- -------
251 217
======= =======
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at March 31 and June 30, consists of the following: (In Thousands)
1998 1997
(pound) (pound)
<S> <C> <C>
Plant and machinery 206 170
Fixtures and fittings 86 89
------- -------
292 259
Less accumulated depreciation (145) (90)
----- ----
147 169
====== ======
</TABLE>
-7-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE E - ACCRUED EXPENSES
Accrued expenses at March 31 and June 30, consist of the following:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
(pound) (pound)
<S> <C> <C>
Social security and other taxes 85 36
Other 29 21
Sundry creditors 97 78
Provision for preference dividend and provision on redemption of preference
shares 46 36
----- -----
257 171
===== =====
</TABLE>
NOTE F - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
(pound) (pound)
<S> <C> <C>
Long-term obligations at March 31 and June 30, consists of the following:
Secured loan repayable in yearly installments of (pound)3,000 (excluding interest)
until November 1999, carrying interest of 10% per annum 8 10
Secured loans - the loans are secured by a floating charge over the assets of
the company. The interest rate is 2.5% over bank base rate (7.25%) 122 210
----- -----
130 220
less current portion 112 123
----- -----
18 97
===== ======
</TABLE>
Aggregate maturities of long-term obligations at March 31, 1998 are as follows:
(In Thousands)
(pound)
1998 112
1999 8
2000 8
2001 2
------
130
======
NOTE G - INCOME TAXES
As of March 31, 1998 the Company has available UK and foreign net operation loss
carry forwards of approximately (pound)600,000 and (pound)250,000 respectively,
to offset future taxable income. In the UK net operating loss carry forwards
expire indefinitely, the US operating loss carry forwards at March 31, 1998
expire 2013.
-8-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Deferred tax assets represent the tax effects, based on current tax law or
future deductible or taxable amounts attributable to events that have been
recognized in the financial statements. Deferred tax assets consists of the
following at March 31, 1998 and June 30, 1997:
(In Thousands)
1998 1997
(pound) (pound)
Net operating loss carry forward 280 160
Valuation allowance
Net deferred tax asset (280) (160)
------------- -------------
0 0
============= =============
The deferred tax valuation allowance increased (pound)120,000 for the nice
months ended March 31, 1998, since this benefit may not be realized.
NOTE H - BENEFIT PLANS
Personal Pension Plans
The Company has a defined contribution agreement for the benefit of its
employees. The assets of the agreement are administered by trustees in a fund
independent from those of the Company. Costs charged against profits represents
the amount of the contributions payable to the scheme in respect of the
accounting period. The company contributed to the scheme Li.8,745, and Li.9,037
for the nine months ended March 31, 1997 and the year ended June 30, 1997
respectively.
NOTE I - PREFERRED STOCK
The holders of preference stock, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end of 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
Redemption
Price
Date of redemption per Share
Li.
January 1, 1997 to December 31, 1997 1.80
January 1, 1998 to December 31, 1998 2.20
December 31, 1998 to December 30, 1999 2.80
On or after December 31, 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of Li.3
per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those
-9-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of the ordinary shareholders (one vote per ordinary share). Due to the
unavailability of distributable profits, at the end of the period preference
dividends totaling Li.9,600 were in arrears (1997 - Li.8,400).
NOTE J - GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment providing services.
Information about the Company's operations by geographic area for the nine
months ended March 31, 1998 and the year ended June 30, 1997 is as follows:
(In Thousands)
1998 1997
Li. Li.
Sales
United States 772 762
United Kingdom 196 168
Other 63 73
---- ----
1031 1003
==== ====
Expenditure from operations
United States (302) (412)
United Kingdom (86) (91)
Other (31) (39)
------ ------
(419) (542)
===== =====
Identifiable assets
United States 178 231
United Kingdom 446 414
--- ---
624 645
=== ===
NOTE K - COMMITMENTS AND CONTINGENCIES
Operating Losses
The Company leases certain facilities and items of equipment under
noncancellable operating leases. The following is a schedule, by years, of
minimum rental payments under such operating leases which expire on various
dates through 2011 (in thousands):
(In Thousands)
Li.
1998 43
1999 43
2000 43
2001 43
Thereafter 451
---
623
===
-10-
<PAGE>
Total rent expenses for the nine months ended March 31, 1998 and the year ended
June 30, 1997 were approximately Li.46,000 and Li.60,000, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capital Leases
The Company also leases certain assets under capital leases. The related assets
and obligations have been recorded using the Company's incremental borrowing
rate at the inception of the lease. The leases, which are noncancellable, expire
at various dates through 1999. The following is a schedule of leased property
under capital leases as of March 31 and June 30:
(In Thousands)
1998 1997
Li. Li.
Plant and machinery 26 26
Less accumulated depreciation (15) (8)
------ -------
11 18
===== =====
The following is a schedule of the present value of the net minimum payments
under capital leases as of March 31, 1998:
(In Thousands)
Li.
Present Value of net minimum lease payments, all current 11
==
Government Grants
The Company has received government grants principally of a revenue nature and
these grants have been credited to Income in the period in which the related
expenditures has been incurred. The grants of a capital nature are deferred and
released to the Income Statement over the lives of the assets to which they
relate. No portion of capital grants were deferred at March 31, 1998 or June 30,
1997.
NOTE L - CONCENTRATION OF CREDIT
Approximately 56% (1997 33%) of the Company's revenue is from one customer.
During the nine months ended March 31, 1998, approximately 74% (1997 76%) of the
Company's net revenues were from 5 (1997 - 5) major customers. At March 31, 1998
accounts receivable included balances of approximately Li.131,000 (1997
Li.166,000) from 5 major customers, of which Li.83,000 (1997 Li.26,000) is due
from the one most significant customer.
-11-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE M - STOCK OPTIONS
The Group accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which Li.28,000 of
compensation cost was recognized in 1997. Had compensation cost been determined
consistent with SFAS NO 123, "Accounting for Stock-Based Compensation", the
company's net loss and respective loss per share would have been reduced to the
following pro forma amounts:
1998 1997
Li. Li.
Net loss As reported (432) (557)
Pro forma (432) (529)
Basic and diluted loss per share As reported Li.(0.01) Li.(0.02)
Pro forma Li.(0.01) Li.(0.02)
The fair value of each option granted is estimated on the date of grant using
the minimum value method of which the following weighted-average assumptions
were used for grants, risk-free interest rates 6.5%; and expected life of 5
years.
A summary of the status of the company's stock option plans as of March 31, 1998
and June 30, 1997, and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
average average
Shares exercise Shares exercise
000 price 000 price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 8,160 0.04 5,900 0.04
Granted 3,934 0.13 2,260 0.04
Outstanding at end of year 12,094 0.10 8,160 0.04
------------ ----------
Options exercisable at year end 12,094 0.10 8,160 -
------------ ----------
Weighted average fair value of options Li.- Li.45,000
granted during the year
============ ===========
</TABLE>
The exercise price of share options granted during the nine months ended March
31, 1998 exceeded the market price.
-12-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding at
March 31, 1998:
Weighted
Average
Number remaining Weighted
Outstanding contractual life Average
Range of Exercise Price 000 (Years) Exercise Price
Li. .0.04 8,160 5 Li. 0.04
NOTE N - ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", and this SFAS is effective for fiscal years
beginning after December 15, 1997. The Company has considered the effects of
this statement and believes the cumulative transition adjustment is the only
component of comprehensive income as defined by this statement.
In May 1997 the Financial Accounting Standards Board issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information" and this is
effective for fiscal years beginning after December 15, 1997. The Company is
evaluating the disclosure impact of SFAS No. 131 on its financial statements and
believes that the effect of adoption of SFAS No. 131 will not be material.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1, "Software Revenue Recognition", SOP 97-2, and
amendments thereto, provide guidance on applying generally accepted principles
in recognizing revenue on software transactions and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company is currently evaluating the impact of SOP 97-2 on its financial
statements.
NOTE O - SUBSEQUENT EVENTS
On June 5, and July 23, 1998, the company issued a total of 4,174,390 new
ordinary shares (2,674,390 and 1,500,000 respectively) for a total consideration
of Li.417,439. Each new share has attached to it a warrant permitting the holder
to subscribe between January 1, and June 30, 1999 for one further share to be
issued at par. In the event that control of the company is obtained by a certain
third party prior to December 31, 1998 then all unexercised warrants will be
cancelled.
On July 23, 1998 the company issued Li.150,000 of convertible unsecured loan
stock, entitled to interest at 10% per and convertible at Li.0.10 per share to
ordinary shares with warrants attached (with rights as above).
On July 23, 1998 options over 980,000 shares were exercised for a total
subscription of Li.36,750.
-13-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
On August 17, 1998 agreement was reached under which the entire ordinary share
capital of the company will be acquired by MicroFrame Inc., a company based in
New Jersey whose shares are quoted on NASDAQ. This agreement is subject to a
number of conditions precedent which will require to be satisfied prior to
execution of the transfers of shares. These conditions include (i) the issue of
new ordinary shares (to be included in the acquisition) for cash sufficient to
offset certain indebtedness of the company (ii) conversion of the preference
shares to ordinary shares (also to be included in the acquisition) (iii)
approval by the Stock Exchanged Commission in the USA (iv) approval by the
shareholders of MicroFrame Inc.
-14-
<PAGE>
SolCom Systems Ltd 1997
Registered in Scotland No. 129008
SolCom Systems Ltd.
Directors' Report and Financial Statements
For the year ended 30 June 1997
<PAGE>
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1997
CONTENTS Page
Directory 1
Directors' report 2-4
Auditors' report 5
Profit and loss account 6
Balance sheet 7
Notes to the financial statements 8-19
<PAGE>
SolCom Systems Ltd 1997
Registered in Scotland No. 129008
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1997
DIRECTORS
W. Hugh Evans
Peter J. MacLaren
Michael D. Rutterford (Chairman)
Peter A. Wilson
SECRETARY
Peter J. MacLaren
REGISTERED OFFICE AND PRINCIPAL TRADING ADDRESS
SolCom House
Meikle Road, Kirkton Campus
Livingston
EH54 7DE
USA SUBSIDIARY
SolCom Systems Inc
1801 Robert Fulton Drive
Suite 400
Reston
VA 22091
BANKERS
Clydesdale Bank Riggs National Bank of Virginia
Business Banking Centre Burke Centre Office
Clydesdale Plaza 6035 Burke Centre Parkway
Festival Square Burke
50 Lothian Road VA 22015
Edinburgh USA
EH3 9AN
SOLICITORS
MacLay Murray & Spens Murray Beith Murray
151 St. Vincent Street 39 Castle Street
Glasgow Edinburgh
G2 SNJ EH2 3BH
AUDITORS
Grant Thornton
1/4 Atholl Crescent
Edinburg
EH3 8LQ
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
DIRECTORS' REPORT
The Directors present their report together with the financial statements for
the year ended 30 June 1997.
PRINCIPAL ACTIVITIES
The company is engaged in the development and manufacture of both hardware and
software products and the supply of consultancy, training and other services,
all aimed at supporting the management of computer networks.
REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS
A principal feature of the year has been the formation of a wholly owned
subsidiary in the USA and the opening of a full office in Reston., VA. The
company is continuing its programme of new product releases and the development
of sales operations in both Europe and the USA.
RESULTS
The loss for the period after taxation and provisions for preference dividends
and premium on redemption of preference shares, amounts to Li.497,420 and is
dealt with as shown in the profit and loss account on page 6. In view of the
accumulated deficit, the directors cannot propose the payment of a dividend, and
the loss has been deducted from reserves.
DIRECTORS AND THEIR INTERESTS
The directors who served during the year and their interests in the share
capital of the company are set out below. All directors served throughout the
year.
<TABLE>
<CAPTION>
After Post Balance
Sheet Events
(See Below) 30 June 1997 30 June 1996
Options Options Options
Ordinary Over Ordinary Over Ordinary Over
Shares of Ordinary Shares of Ordinary Shares of Ordinary
Li.0.01 each Shares Li.0.01 each Shares Li.1 each Shares
<S> <C> <C> <C> <C> <C> <C>
W. Hugh Evans 5,710,000 3,858,607 5,610,000 2,920,000 561 292
Peter J. MacLaren 3,070,000 1,714,255 3,070,000 1,240,000 307 124
Michael D. Rutterford 5,400,000 Nil 4,600,000 Nil 460 Nil
Peter A. Wilson 5,710,000 3,858,607 5,610,000 2,920,000 561 292
</TABLE>
PRODUCT DEVELOPMENT
During the year the company has capitalized expenditure related to the
development of its product range amounting to Li.120,785.
-2-
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
SHARE CAPITAL
In December 1996 the company resolved to (i) subdivide each of its Li.1 ordinary
shares into 100 ordinary shares of Li.0.01; and (ii) convert the sum of
Li.304,326 from the share premium account into 30,432,600 ordinary shares of
Li.0.01 allotted proportionately to the existing ordinary shareholders.
EMPLOYEE SHARE OPTION SCHEME
The company has instituted an Employee Share Option Scheme, approved by the
Inland Revenue in terms of Paragraph 1, Schedule 9 ICTA 1988. No options under
this scheme were granted prior to the year end but options were granted in
August 1997 as noted below.
POST BALANCE SHEET EVENTS
In August 1997 the company granted (i) options under its Employee Share Option
Scheme in respect of a total of 846,944 shares at a price of Li.0.11 per share;
(ii) other options in respect of 560,000 shares at a price of Li.0.1084 per
share and 27,273 shares at a price of Li.0.11 per share.
In November and December 1997 the company issued a total of 5,400,000 new
ordinary shares for a total consideration of Li.270,000 and granted options to
subscribe for 2,500,000 ordinary shares at prices ranging from Li.0.14 per share
depending on date of exercise.
DIRECTORS' RESPONSIBILITIES AND THE FINANCIAL STATEMENTS
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently
make judgments and estimates that are reasonable and prudent
prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
AUDITORS
Grant Thornton offer themselves for re-appointment as auditors in accordance
with section 385 of the Companies Act of 1985.
-3-
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
BY ORDER OF THE BOARD
P J MacLaren
Secretary
30 April 1998
-4-
<PAGE>
SolCom Systems Ltd 1997
REPORT OF THE AUDITORS TO THE MEMBERS OF SOLCOM SYSTEMS LIMITED
We have audited the financial statements on pages 6 to 17 which have been
prepared under the accounting policies set out on pages 8 and 9.
Respective Responsibilities of Directors and Auditors
As described on page 4, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Going Concern
In forming our opinion, we have considered the adequacy of the disclosures made
in Note 2 of the financial statements relating to the uncertainty concerning the
company's ability to raise funds adequate to its needs. In view of the
significance of this uncertainty, we consider it should be drawn to your
attention, but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 30 June 1997 and of its loss for the year then ended
and have been properly prepared in accordance with the Companies Act 1985.
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Edinburgh
30 April 1998
-5-
<PAGE>
SolCom Systems Ltd 1997
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1997
<TABLE>
<CAPTION>
Note 1997 1996
Li. Li.
<S> <C> <C> <C>
TURNOVER 3 776,822 788,450
Cost of Sales 286,750 205,758
----------------------------------
Gross Profit 490,072 582,692
Distribution Costs 85,405 180,657
Administrative Expenses 877,161 379,936
----------------------------------
OPERATING PROFIT/(LOSS) BEFORE PRP (472,494) 22,099
Profit Related Pay - 1,670
Employer's NI on PRP - 159
----------------------------------
OPERATING PROFIT/(LOSS) (472,494) 20,270
Interest Received 3,248 -
Interest Paid 6 (17,974) (5,402)
----------------------------------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES 3 (487,220) 14,868
BEFORE TAXATION
Taxation 7 - -
----------------------------------
PROFIT FOR THE FINANCIAL YEAR 487,220 14,868
Provision for Preference Dividend and Premium on 10,200 10,200
Redemption of non-Equity Shares
----------------------------------
RETAINED PROFIT/(LOSS) FOR YEAR (497,420) 4,668
==================================
</TABLE>
There were no recognized gains or losses other than the profit/(loss) for the
financial year
The accompanying notes form an integral part of these Financial Statements
-6-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
BALANCE SHEET AT JUNE 1997
Note 1997 1996
Li. Li.
<S> <C> <C> <C>
FIXED ASSETS
Intangible Assets 8 176,865 133,169
Tangible Assets 8 154,901 68,116
Investments 9 226,975 -
----------------------------------
558,741 201,285
CURRENT ASSETS
Stock 10 124,203 103,215
Debtors 11 134,304 112,969
Cash at Bank and in Hand 803 349,783
----------------------------------
259,310 565,967
CREDITORS: amounts falling due within one year 12 684,520 204,028
----------------------------------
NET CURRENT (LIABILITIES)/ASSETS (425,210) 361,939
----------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 133,531 563,224
CREDITORS: amounts falling due after more than 13 106,947 47,867
one year
DEFERRED INCOME 15 - 1,553
----------------------------------
26,584 513,804
==================================
SHARE CAPITAL AND RESERVES
Called up Share Capital 16 337,400 33,074
Share Premium Account 17 193,540 497,866
Reserve for Preference Dividend and Premium on 35,700 25,500
Redemption
Profit & Loss Account 17 (540,056) (42,636)
----------------------------------
Shareholders' Funds 18 26,584 513,804
==================================
</TABLE>
The financial statements were approved by the Board of Directors on 30 April
1998.
P J MacLaren
Financial Director
The accompanying notes form an integral part of these Financial Statements
-7-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS
Year ended 30 June 1997
1 ACCOUNTING POLICIES
The principal accounting policies adopted are described below. The policies have
remain unchanged from the previous year.
Basis of Preparation
The financial statements have been prepared under the historical cost
convention.
The Company is exempt from preparing consolidated financial statements on the
grounds that, taken together with its subsidiaries, it qualifies as a small
group under S248 of the Companies Act 1985.
These financial statements therefore present information about the Company as an
individual undertaking and not about its group.
Depreciation
Depreciation is calculated to write down the cost of all tangible fixed assets
by equal instalments over their expected useful lives. The rates generally
applicable are:
Plant and Machinery 3 Years
Motor Vehicles (New) 5 Years
Motor Vehicles (Second Hand) 3 Years
Fixtures, Fittings, Tools and Equipment 3-5 Years
Stocks
Stock are valued at the lower of cost and net realisable value.
Product Development
Expenditure (including staff salaries, NI, and certain overheads) which is
incurred directly for the purpose of developing marketable products is
capitalised when recoverability can be assessed with reasonable certainty and
amortised over the expected product life from the date of the product launch.
Grants receivable in respect of such expenditure are similarly deferred and
released to profit over the same period. For the present range of products, the
product life is estimated to be 3 years.
All other product development costs are written off in the year of expenditure.
Product Warranties
Provision is made for all known and expected claims under the terms of product
warranties.
Turnover
-8-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
Turnover is the total amount receivable by the company for goods supplied and
services provided, excluding VAT and trade discounts.
Foreign Currencies
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. All exchange differences are dealt with through the profit and loss
account.
Contributions to Pension Funds
Defined Contribution Scheme
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
Leased Assets
Assets held under finance leases and hire purchase contracts are capitalised in
the balance sheet and depreciated over their expected useful lives. The interest
element of leasing payments represents a constant proportion of the capital
balance outstanding and is charged to the profit and loss account over the
period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the profit and loss account on a straight line basis over
the lease term.
Government Grants
Government grants in respect of capital expenditure are credited to a deferred
income account and are released to the profit and loss account by equal annual
installments over the expected useful life of the relevant assets. Government
grants of a revenue nature are credited to the profit and loss account in the
same period as the related expenditure.
Investments
Investments are included at cost, less amounts written off.
2 BASIS OF ACCOUNTING
The financial statements have been prepared on the going concern basis. The
arrangements with the company's bankers are such that overdraft facilities are
only available from time to time and on a short term, temporary basis. The
nature of the company's business is such that there can be considerable
unpredictable variations in the quantum and timing of sales and hence cash
inflows and the directors recognise the need to ensure that the company has
access to adequate levels of funds so as to ensure that commitments can be met
as and when they fall due for the foreseeable future. The directors are
therefore exploring a variety of options
-9-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
for securing additional new financing for the company, including the raising of
equity finance from both new and existing shareholders. Based on informal
discussions to date, the directors are confident that, if it became necessary,
it would be possible to raise the finance required from these sources although
it is appreciated that there is no certainty in this regard. On this basis, the
directors consider it appropriate to prepare the financial statements on the
going concern basis. The financial statements do not reflect any adjustment that
would result from a failure to secure adequate new financing.
3 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and profit/(loss) on ordinary activities before taxation are
attributable to the continuing activities of development and manufacture of
hardware and software products and the supply of consultancy, training, and
other services aimed at supporting the management of computer networks. The
percentage of the company's turnover that, in the opinion of the directors, is
attributable to export markets is 75% (1996:
48%). The profit/(loss) on ordinary activities is after:
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Staff Costs:
Wages & Salaries (excl. PRP) 529,141 251,112
Payroll Taxes and Social Security Costs (excl. NI related to PRP) 52,899 24,397
Pension Costs 11,332 6,612
Charges to Subsidiary for Seconded Staff (58,833) -
---------------------------------
534,539 282,121
=================================
Research and Development - Current Year Expenditure (including allocated 80,834 34,495
overheads and excluding capitalised expenditure on product development)
Depreciation and Amortisation:
Intangible fixed assets 77,089 43,332
Tangible fixed assets owned 44,465 17,226
Tangible fixed assets held under finance leases and hire purchase contracts 6,839 1,324
Hire of Equipment - 2,894
Auditors' Remuneration 5,000 2,815
=================================
Credits in Respect of Government Grants:
Amortisation of Capital Grants 1,553 8,946
Revenue Grants Receivable 19,529 39,868
---------------------------------
4 DIRECTORS' REMUNERATION (INCLUDING PENSION CONTRIBUTIONS,
EXCLUDING PRP)
Management Remuneration 103,824 66,455
=================================
</TABLE>
During the year 2 directors (1996: 2 directors) participated in money purchase
pension schemes.
-10-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
In addition, a company controlled by Mr. MacLaren, received Li.24,550 (1996:
Li.15,628) for financial management services.
5 STAFF NUMBERS
The average number of persons employed by the company during the year, including
directors, was 25 (1996: 13).
6 INTEREST PAID
1997 1996
Li. Li.
On bank loans and overdrafts 15,901 4,802
Finance charges in respect of finance leases 2,073 600
---------------------------
17,974 5,402
===========================
7 TAXATION
No liability to UK corporation tax arises for the year due to the availability
of tax losses.
8 FIXED ASSETS
<TABLE>
<CAPTION>
Intangible Tangible
----------------- --------------------------------------------------------
Fixtures,
Expenditure fittings,
on Product Plant and Motor tools and Total
Development machinery vehicles equipment Tangible
Li. Li. Li. Li. Li.
<S> <C> <C> <C> <C> <C>
Cost:
At 30 June 1996 233,612 94,193 3,500 7,809 105,502
Additions 120,785 57,121 - 80,968 138,089
Disposals - - (3,500) - (3,500)
----------------- --------------------------------------------------------
At 30 June 1997 354,397 151,314 - 88,777 240,091
----------------- --------------------------------------------------------
Depreciation and amortisation:
At 30 June 1996 100,443 30,461 3,500 3,425 37,386
Charge for the year 77,089 38,016 - 13,288 51,304
Accumulated in relation to disposals - - (3,500) - (3,500)
----------------- --------------------------------------------------------
At 30 June 1997 177,532 68,477 - 16,713 85,190
----------------- --------------------------------------------------------
Net book value
At 30 June 1997 176,865 82,837 - 72,064 154,901
================= ========================================================
</TABLE>
-11-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
<TABLE>
<CAPTION>
Intangible Tangible
----------------- --------------------------------------------------------
Fixtures,
Expenditure fittings,
on Product Plant and Motor tools and Total
Development machinery vehicles equipment Tangible
Li. Li. Li. Li. Li.
<S> <C> <C> <C> <C> <C>
At 30 June 1996 133,169 63,732 - 4,384 68,116
================= ========================================================
</TABLE>
The net book value of plant and machinery includes Li.18,839 9(1996: Li.14,566)
in respect of assets held under finance leases and hire purchase contracts.
9 FIXED ASSET INVESTMENT
<TABLE>
<CAPTION>
Share in Loans to
Subsidiary Subsidiary
Undertaking Undertaking Total
<S> <C> <C> <C>
Additions in year 60 226,915 226,975
---------------------------------------------------------
At 30 June 1997 60 226,915 226,975
---------------------------------------------------------
Net Book Value at 30 June 1997 60 226,915 226,975
=========================================================
Net Book Value at 30 June 1996 - - -
=========================================================
</TABLE>
At 30 June 1997 the company held more than 20 % of the equity of the following
undertaking.
<TABLE>
<CAPTION>
Capital &
Country of Class of share Proportion Nature of Reserves at 30 Loss for the
Incorporation capital held Held Business June 1997 Financial Year
Li. Li.
<S> <C> <C> <C> <C> <C> <C>
SolCom Systems Inc. USA Ordinary 100% Marketing of (16,082) (16,142)
Network
Management
Products
</TABLE>
The entire share capital of SolCom Systems Inc. was acquired on 1 September
1996.
10 STOCKS
1997 1996
Li. Li.
Components 101,773 55,808
Finished goods 22,430 47,407
-----------------------------
124,203 103,215
=============================
-12-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
11 DEBTORS
Trade Debtors 89,866 90,334
Prepayments & Accrued Income 20,000 16,952
Other Debtors 24,438 5,683
---------------------------------
134,304 112,969
=================================
12 CREDITORS - amounts falling due within one year
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Loans from Bank of Scotland - 9,500
Loans from Clydesdale Bank (see Note 13) 119,385 -
Bank Overdraft (Note 13) 132,422 -
Loan from British Coal Enterprise Ltd (Note 13) 3,889 4,444
Amounts due under finance leases (Note 13) 9,742 5,297
Trade creditors 305,814 118,286
Social security and other taxes 36,574 11,123
Warranty Provision 20,505 27,210
Accrued PRP and Associated Employer's NI - 1,829
Accruals 56,189 26,339
---------------------------------
684,520 204,028
=================================
</TABLE>
13 CREDITORS - amounts falling due after more than one year
<TABLE>
<CAPTION>
Interest Last
Rate Repayment
<S> <C> <C> <C> <C>
Loans from Bank of Scotland - 30,893
Loan from Clydesdale Bank Feb-1999 72,804 -
Loan from Clydesdale Bank Oct-1998 1,475 -
Loan from Clydesdale Bank Aug-2001 17,895 -
Loan from British Coal Enterprise Ltd 10% pa Jan-2001 5,397 8,886
Amounts due under finance leases (Note 14) 9,376 8,088
--------------------------------
106,947 47,867
================================
</TABLE>
The above loans are repayable in monthly instalments ending on the dates
indicated. The current portions are shown under Note 12.
The loans from the Clydesdale Bank and the bank overdraft are secured by a bond
and floating charge over all the assets of the company. Amounts due under
finance leases are secured on the assets concerned.
-13-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
-14-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
14 BORROWINGS
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Borrowings are repayable as follows:
Repayable within one year:
Bank and other borrowings 255,696 13,944
Finance Lease 9,742 5,297
Repayable after one and within two years:
Bank and other borrowings 83,813 12,336
Finance Lease 8,342 5,297
Repayable after two and within five years:
Bank and other borrowings 13,758 21,086
Finance Lease 1,034 2,791
---------------------------------
Repayable after 5 years:
Bank and other borrowings - 6,357
---------------------------------
372,385 67,108
=================================
15 DEFERRED INCOME
Capitalised Grants:
Gross amount brought forward and carried forward 31,332 31,332
=================================
Amortisation of Capitalised Grants:
Accumulated amortisation brought forward 29,779 20,833
Amortisation during the year 1,553 8,946
---------------------------------
Accumulated amortisation carried forward 31,332 29,779
=================================
Net Capitalised Grants at 30 June - 1,553
=================================
</TABLE>
-15-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
<TABLE>
<CAPTION>
16 SHARE CAPITAL
1997 1997 1996 1996
No Li. No Li.
<S> <C> <C> <C> <C>
Authorised:
Ordinary shares of Li.1 each - - 3,889 3,889
Ordinary shares of Li.0.01 each 40,460,000 404,600 - -
Preference Shares of Li.1 each 30,000 30,000 30,000 30,000
------------- --------------
434,600 33,889
============= ==============
Allotted, called up and fully paid:
Ordinary shares of Li.1 each - - 3,074 3,074
Ordinary shares of Li.0.01 each 30,740,000 307,400 - -
Preference Shares of Li.1 each 30,000 30,000 30,000 30,000
------------- --------------
337,400 33,074
=============== ==============
</TABLE>
During the year the company divided each ordinary share of Li.1 into 100 shares
of Li.0.01 and issued, by way of a scrip issue funded by capitalisation of
Li.304,326 of the Share Premium Account, a total of 30,432,600 new ordinary
shares. The effect of these two transactions was to replace each Li.1 ordinary
share with 10,000 ordinary shares of Li.0.01.
Holders of the preference shares, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
Redemption
Price
per Share
Date of Redemption Li.
1 January 1997 to 31 December 1997 1.80
1 January 1998 to 30 December 1998 2.20
31 December 1998 to 30 December 1999 2.80
On or after 31 December 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of Li.3
per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those of the ordinary
shareholders (one vote per ordinary share). Due to the unavailability of
distributable profits, at the end of the year preference dividends totalling
Li.8,400 were in arrears (1996 - Li.6,000).
-16-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
At 30 June 1997 the company had granted options over a total of 8,160,000
ordinary shares. All options are exercisable up to December 2003, at the
following prices:
Price per
Date of Exercise Share (Li.)
1 January 1997 to 31 December 1997 0.021875
1 January 1998 to 31 December 2003 0.037500
17 SHARE PREMIUM ACCOUNT AND RESERVES
Share Profit &
Premium Loss
Account Account
Li. Li.
At 30 June 1996 497,866 (42,636)
Loss for the year - (497,420)
Capitalized in respect of shares issued
during the year (304,326) -
----------------------------
At June 30, 1997 193,540 (540,056)
============================
In accordance with S263 of the Companies Act 1985 the balance on the share
premium account may not be distributed.
18 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Retained Loss for the year (497,420) 4,668
Issue of shares - 425,063
Preference Dividend and Premium on Redemption of Preference Shares
(not paid) 10,200 10,200
---------------------------------
Net increase/(decrease) in shareholders' funds (487,220) 439,931
Shareholders' funds at 1 July 1996 513,804 73,873
---------------------------------
Shareholders' funds at 30 June 1997 26,584 513,804
=================================
Attributable to:
Equity shareholders (39,116) 458,304
Non-equity shareholders 65,700 55,500
---------------------------------
=================================
26,584 513,804
=================================
</TABLE>
-17-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
19 LEASING COMMITMENTS
Operating lease payments amounting to Li.32,250 (1996: Li.12,550) are due within
one year. The property lease to which these payments relate expires after
between 10 and 20 years.
20 CAPITAL COMMITMENTS
The Company had no capital commitments at 30 June 1997 or at 30 June 1996.
21 CONTINGENT LIABILITIES
The company raised a claim against a customer in the USA amounting to Li.91,518
for non-payment of invoices, Li.598,075 for actual damages and Li.512,048 for
punitive damages. This led to a counter claim from the customer for an
unspecified amount for alleged non-performance of goods supplied.
The directors believe that the counter-claim is spurious, and has been raised
solely as a consequence of the claim initiated by the company. This belief is
supported by the fact that, since raising the counter-claim the customer has
tabled an offer to settle the original claim, which has been rejected by the
company. The directors are confident, therefore that no liability will
ultimately crystallise.
With this exception, the company had no contingent liabilities at 30 June 1997
or at 30 June 1996.
22 POST BALANCE SHEET EVENTS
Post balance sheet events are detailed in the Directors' Report on page 3.
23 PENSIONS
Defined Contribution Scheme
The company operates a defined contribution pension scheme for the benefit of
certain directors and employees. The assets of the scheme are administered by
trustees in a fund independent from those of the company.
-18-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
24 TRANSACTIONS WITH RELATED PARTIES
During the year the company traded with SolCom Systems Inc, a wholly owned
subsidiary. Details of transactions are as follows:
1997
Li.
Sales 191,085
Purchases and other charges net of recharges 31,946
During the year the company paid Malloy & Ball Ltd a fee of Li.24,550 (1996:
Li.15,628). Peter J. MacLaren is a director and shareholder in both Malloy &
Ball Ltd and SolCom Systems Ltd.
-19-
<PAGE>
SolCom Systems Ltd 1997
SOLCOM SYSTEMS LTD AND ITS SUBSIDIARY, SOLCOM SYSTEMS INC
UNAUDITED CONSOLIDATED
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1997
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
TURNOVER 972,141 788,450
Cost of Sales 191,906 205,758
----------------------------------
Gross Profit 780,235 582,692
Distribution Costs 140,506 180,657
Administrative Expenses 1,128,569 379,936
----------------------------------
OPERATING (LOSS)/PROFIT BEFORE PRP (488,840) 22,099
Profit Related Pay -- 1,670
Employer's NI on PRP -- 159
----------------------------------
OPERATING LOSS/PROFIT (488,840) 20,270
Interest Received 3,452 --
Interest Paid (17,974) (5,402)
----------------------------------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES
BEFORE TAXATION (503,363) 14,868
Taxation -- --
----------------------------------
PROFIT FOR THE FINANCIAL YEAR (503,363) 14,868
Provision for Preference Dividend and Premium on Redemption
of non-Equity Shares 10,200 10,200
----------------------------------
RETAINED PROFIT FOR YEAR (513,563) 4,668
==================================
</TABLE>
There were no recognised gains or losses other than the profit for the financial
year
The information presented on this page has been prepared by the directors for
memorandum purposes. It has not been audited and does not form part of the
Statutory Financial Statements
-20-
<PAGE>
SolCom Systems Ltd 1997
SOLCOM SYSTEMS LTD AND ITS SUBSIDIARY, SOLCOM SYSTEMS INC
UNAUDITED CONSOLIDATED
BALANCE SHEET AT 30 JUNE 1997
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
FIXED ASSETS
Intangible Assets 176,865 133,169
Tangible Assets 168,933 68,116
------------------------------
345,798 201,285
CURRENT ASSETS
Stock 217,196 103,215
Debtors 252,797 112,969
Cash at Bank and in Hand 7,155 349,783
------------------------------
477,148 565,967
CREDITORS: amounts falling due
within one year 705,558 204,028
------------------------------
NET CURRENT ASSETS/(LIABILITIES) (228,410) 361,939
------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 117,388 563,224
CREDITORS: amounts falling due
after more than one year 106,947 47,867
DEFERRED INCOME -- 1,553
------------------------------
10,441 513,804
==============================
SHARE CAPITAL AND RESERVES
Called up Share Capital 337,400 33,074
Share Premium Account 193,540 497,866
Provision for Preference Dividend and Premium on Redemption 35,700 25,500
Profit & Loss Account (556,199) (42,636)
------------------------------
Shareholders' Funds 10,441 513,804
==============================
</TABLE>
The information presented on this page has been prepared by the directors for
memorandum purposes. It has not been audited and does not form part of the
Statutory Financial Statements
-21-
<PAGE>
SolCom Systems Ltd.
Directors' Report and Financial Statements
For the year ended 30 June 1996
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1996
CONTENTS Page
Directory 1
Directors' report 2-4
Auditors' report 5
Profit and loss account 6
Balance sheet 7
Notes to the financial statements 8-16
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1996
DIRECTORS
W Hugh Evans
Peter J MacLaren
Michael D Rutterford (Chairman)
Peter A Wilson
SECRETARY
Peter J MacLaren
REGISTERED OFFICE AND PRINCIPAL TRADING ADDRESS
SolCom House
Meikle Road, Kirkton Campus
Livingston
EH54 9DF
USA SUBSIDIARY
SolCom Systems Inc
1801 Robert Fulton Drive
Suite 400
Reston
VA 22091
BANKERS
Clydesdale Bank Riggs National Bank of Virginia
27 George Street Burke Centre Office
Edinburgh 6035 Burke Centre Parkway
EH2 2PA Burke, VA 22015, USA
AUDITORS
Grant Thornton
1/4 Atholl Crescent
Edinburgh
EH3 8LQ
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT
The Directors present their report together with the financial statements for
the 12 months ended 30 June 1996.
PRINCIPAL ACTIVITIES
The company is engaged in the development and manufacture of both hardware and
software products and the supply of consultancy, training and other services,
all aimed at supporting the management of computer networks.
REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS
A principal feature of the year has been a major expansion of selling activity
in the USA, both through product sales and technology partnerships. This
activity is expected to bear substantial fruit during 1996-97. In terms of
product development, there has been an on-going programme of enhancements across
the company's product range.
RESULTS
The profit for the period after taxation, PRP and provisions for preference
dividends and premium on redemption of preference shares amounts to Li.4,668 and
is dealt with as shown in the profit and loss account on page 5. In view of the
accumulated deficit, the directors cannot propose the payment of a dividend, and
the profit has been added to reserves. The profit reported is after making
provision of Li.89,414 in respect of a doubtful debtor in the USA. Legal action
to recover this sum is proceeding.
DIRECTORS AND THEIR INTERESTS
The directors who served during the year and their interests in the share
capital of the company are set out below.
<TABLE>
<CAPTION>
30 June 1996 30 June 1995
Ordinary Shares Options Over Ordinary Shares Options Over
of Li.1 each Ordinary Shares of Li.1 each Ordinary Shares
<S> <C> <C> <C> <C>
W Hugh Evans 561 292 454 240
Peter J MacLaren 307 124 245 102
Michael D Rutterford 460 Nil 378 Nil
Peter A Wilson 561 292 454 240
</TABLE>
PRODUCT DEVELOPMENT
During the year the company has capitalised expenditure related to the
development of its product range amounting to Li.77,803.
-2-
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT (CONTINUED)
SHARE CAPITAL
In December 1995 the company raised a total of Li.30,063 by issue of 481 Li.1
ordinary shares at Li.62.50 per share to existing shareholders. In June 1996 the
company raised a total of Li.400,000 by issue of 369 Li.1 ordinary shares at
Li.1.084 per share to shareholders new to the company.
In December 1996 the company resolved to (i) subdivide each of its Li.1 ordinary
shares into 100 ordinary shares of Li.0.01; and (ii) capitalise the sum of
Li.303,510 from the share premium account into 30,351,000 ordinary shares of
Li.0.01 allotted proportionately to the existing ordinary shareholders.
POST BALANCE SHEET EVENTS
In October 1996, SolCom Systems Inc, a wholly owned subsidiary of the company,
was formed in the State of Delaware, USA. This subsidiary took over the trade
previously carried on by the company in the USA using the trading name, "SolCom
Systems Inc".
In November 1996 the company moved from its office at Brucefield Industrial Park
in Livingston to a newly constructed 4,300 sq ft facility at Meikle Road,
Kirkton Campus, also in Livingston. The lease on the new property is for 15
years.
In December 1996 the company drew down a loan of Li.200,000 and secured an
overdraft facility totalling Li.150,000, both from the Clydesdale Bank. In
addition the Clydesdale Bank acquired from the Bank of Scotland the outstanding
balances of loans totalling Li.34,047, and an overdraft facility of Li.50,000
from the Bank of Scotland has been cancelled. A new floating charge over the
business and undertaking of the company has been granted in favour of the
Clydesdale Bank and that in favour of the Bank of Scotland has been released.
The new loan from the Clydesdale Bank is repayable in equal installments over
the period May 1997 to April 1999.
DIRECTORS' RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently
make judgements and estimates that are reasonable and prudent
prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
AUDITORS
Grant Thornton offer themselves for re-appointment as auditors in accordance
with section 385 of the Companies Act of 1985.
-3-
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT (CONTINUED)
BY ORDER OF THE BOARD
P J MacLaren
Secretary
26 June 1997
-4-
<PAGE>
SOLCOM SYSTEMS LTD 1996
REPORT OF THE AUDITORS TO THE MEMBERS OF SOLCOM SYSTEMS LIMITED
We have audited the financial statements on pages 5 to 15 which have been
prepared under the accounting policies set out on pages 7 and 8.
Respective responsibilities of directors and auditors
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Going Concern
In forming our opinion, we have considered the adequacy of the disclosures made
in note 2 of the financial statements concerning the uncertainty as to the
continuation and renewal of the company's bank overdraft facility. In view of
the significance of this uncertainty we consider that it should be drawn to your
attention, but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 30 June 1996 and of its profit for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Edinburgh
27 June 1997
-5-
<PAGE>
SOLCOM SYSTEMS LTD 1996
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1996
<TABLE>
<CAPTION>
Note 1996 1997
Li. Li.
<S> <C> <C> <C>
TURNOVER 3 788,450 524,615
Cost of Sales 205,758 188,291
--------------------------------
Gross Profit 582,692 336,324
Distribution Costs 180,657 78,263
Administrative Expenses 379,936 223,569
--------------------------------
OPERATING PROFIT BEFORE PRP 22,099 34,492
Profit Related Pay 1,670 3,200
Employer's NI on PRP 159 304
--------------------------------
OPERATING PROFIT 20,270 30,988
Interest Received - 28,499
Interest Paid 6 5,402 -
--------------------------------
PROFIT ON ORDINARY ACTIVITIES BEFORE 3 14,868 52
TAXATION
Taxation 7 - 2,541
--------------------------------
PROFIT FOR THE FINANCIAL YEAR 14,868 28,499
Provision for Preference Dividend and Premium on
Redemption of non-Equity Shares 10,200 10,200
--------------------------------
RETAINED PROFIT FOR YEAR 4,668 18,299
================================
</TABLE>
There were no recognized gains or losses other than the profit for the financial
year
The accompanying notes form an integral part of these Financial Statements
-6-
<PAGE>
SOLCOM SYSTEMS LTD 1996
BALANCE SHEET AT 30 JUNE 1996
<TABLE>
<CAPTION>
Note 1996 1995
<S> <C> <C> <C>
Intangible Assets 8 133,169 98,698
Tangible Assets 8 68,116 35,213
-------------------------------
201,285 133,911
CURRENT ASSETS
Stock 9 103,215 49,803
Debtors 10 112,969 102,420
Cash at Bank and in Hand 349,783 621
-------------------------------
565,967 152,844
CREDITORS: amounts falling due within one year 11 204,028 188,728
-------------------------------
NET CURRENT ASSETS/(LIABILITIES) 361,939 (35,884)
-------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 563,224 98,027
CREDITORS: amounts falling due after more than one year 12 47,867 13,655
DEFERRED INCOME 14 1,553 10,499
-------------------------------
513,804 73,873
===============================
SHARE CAPITALS AND RESERVES
Called up Share Capital 15 33,074 32,224
Share Premium Account 16 497,866 73,653
Provision for Preference Dividend and Premium on 25,500 15,300
Redemption
Profit & Loss Account 16 (42,636) (47,304)
-------------------------------
Shareholders' Funds 17 513,804 73,873
===============================
</TABLE>
The financial statements were approved by the Board of Directors on 26 June 1997
PJ MacLaren
Financial Director
The accompanying notes form an integral part of these Financial Statements
-7-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
NOTES TO THE FINANCIAL STATEMENTS
Year ended 30 June 1996
1 ACCOUNTING POLICIES
The principal accounting policies adopted are described below. The policies have
remained unchanged from the previous year.
Accounting Convention
The financial statements are prepared under the historical cost convention.
Depreciation
Depreciation is calculated to write down the cost of all tangible fixed assets
by equal installments over their expected useful lives. The rates generally
applicable are:
Plant and Machinery 3 Years
Motor Vehicles (New) 5 Years
Motor Vehicles (Second Hand) 3 Years
Fixtures, Fittings, Tools and Equipment 5 Years
Stocks
Stocks are valued at the lower of cost and net realisable value.
Intangible Assets - Product Development
Expenditure (including staff salaries, NI, and certain overheads) which is
incurred directly for the purpose of developing marketable products is
capitalised when recoverability can be assessed with reasonable certainty and
amortised over the expected product life from the date of the product launch.
Grants receivable in respect of such expenditure are similarly deferred and
released to profit over the same period. For the present range of products, the
product life is estimated to be 3 years.
Product Warranties
Provision is made for all known and expected claims under the terms of product
warranties.
Turnover
Turnover is the total amount receivable by the company for goods supplied and
services provided, excluding VAT.
Foreign Currencies
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. All other exchange differences are dealt with through the profit and loss
account.
Contributions to Pension Funds
-8-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
Defined Contribution Scheme
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
Leased Assets
Assets held under finance leases and hire purchase contracts are capitalised in
the balance sheet and depreciated over their expected useful lives. The interest
element of leasing payments represents a constant proportion of the capital
balance outstanding and is charged to the profit and loss account over the
period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the profit and loss account on a straight line basis over
the lease term.
Government Grants
Government grants in respect of capital expenditure are credited to a deferred
income account and are released to the profit and loss account by equal annual
instalments over the expected useful life of the relevant assets. Government
grants of a revenue nature are credited to the profit and loss account in the
same period as the related expenditure.
2 BASIS OF ACCOUNTING
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand. The nature of the company's
business is such that there can be considerable unpredictable variation in the
timing of sales and hence cash inflows. On the basis of current trading, the
directors consider that the company will continue within the facility currently
agreed and within that which they expect to be agreed on the 30th June 1997, the
facility review date. However, the margin of facilities over requirements is not
large, and inherently there can be no certainty in relation to these matters. On
this basis, the directors consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not reflect
any adjustments that would result from a withdrawal of the overdraft facility by
the company's bankers.
-9-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
3 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and profit on ordinary activities before taxation are attributable
to the continuing activities of development and manufacture of hardware and
software products and the supply of consultancy, training and other services
aimed at supporting the management of computer networks. The percentage of the
company's turnover that, in the opinion of the directors, is attributable to
export markets is 48%. The profit on ordinary activities is after:
<TABLE>
<CAPTION>
1996 1995
(pound) (pound)
<S> <C> <C>
Staff Costs:
Wages & Salaries (excl PRP) 251,112 129,241
Social Security Costs (excl NI related to PRP) 24,397 11,675
Pension Costs 6,612 6,312
-------------------------------
282,121 147,228
===============================
Research and Development - Current Year Expenditure (including allocated
overheads and excluding capitalised expenditure on product development) 34,495 25,468
Depreciation and Amortisation:
Intangible fixed assets 43,332 37,374
Tangible fixed assets owned 17,226 12,440
Tangible fixed assets held under finance leases and hire purchase contracts 1,324 -
Hire of Equipment 2,894 3,712
Auditors' Remuneration 2,815 1,750
===============================
Credits in Respect of Government Grants:
Amortisation of Capital Grants 8,946 11,110
Revenue Grants Receivable 39,868 22,250
===============================
4 DIRECTORS' REMUNERATION (INCLUDING PENSION CONTRIBUTIONS
EXCLUDING PRP)
Management Remuneration 66,455 62,354
===============================
The Chairman - -
The Highest Paid Director 32,017 29,913
===============================
The remuneration of the Directors fell within the following ranges: Number Number
(pound)0-(pound)5,000 2 2
(pound)25,001-(pound)30,000 - 2
(pound)30,001-(pound)35,000 2 -
</TABLE>
In addition, Malloy & Ball Ltd. a company controlled by Mr. MacLaren, received
(pound)15,628 (1995: (pound)13,467) for financial management services.
-10-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
5 STAFF NUMBERS
The average number of persons employed by the company during the year, including
directors, was 13 (1995: 7).
6 INTEREST PAID
1996 1995
(pound) (pound)
On bank loans and overdrafts 4,802 2,541
Finance charges in respect of finance leases 600 -
--------------------------------
5,402 2,541
================================
7 TAXATION
No liability to UK corporation tax arises for the year due to the availability
of tax losses.
8 FIXED ASSETS
<TABLE>
<CAPTION>
Intangible Tangible
--------------- ---------------------------------------------------------------
Expenditure Fixtures,
on Product Plant and Motor Fittings, tools Total
Development machinery Vehicles and equipment Tangible
(pound) pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Cost:
At 30 June 1995 155,809 46,537 3,500 6,695 56,732
Additions 77,803 50,676 - 1,114 51,790
Disposals - (3,020) - - (3,020)
--------------- ------------------------------------------------------------------
At 30 June 1996 233,612 94,193 3,500 7,809 105,502
--------------- ------------------------------------------------------------------
Depreciation and
amortisation:
At 30 June 1995 57,111 17,024 2,528 1,967 21,519
Charge for the year 43,332 16,120 972 1,458 18,550
Accumulated in relation
to disposals - (2,683) - - (2,683)
--------------- ------------------------------------------------------------------
At 30 June 1996 100,443 30,461 3,500 3,425 37,386
--------------- ------------------------------------------------------------------
Net book value
At 30 June 1996 133,169 63,732 - 4,384 68,116
=============== ==================================================================
At 30 June 1995 98,698 29,513 972 4,728 35,213
=============== ==================================================================
</TABLE>
The net book value of plant and machinery include (pound)14,566 (1995 Nil) in
respect of assets held under finance leases and hire purchase contracts.
-11-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
9 STOCKS
<TABLE>
<CAPTION>
1996 1995
(pound) (pound)
<S> <C> <C>
Components 55,808 28,606
Finished Goods 47,407 21,197
-----------------------------
103,215 49,803
=============================
10 DEBTORS
Trade Debtors 90,334 90,063
Prepayments & Accrued Income 16,952 156
Other Debtors 5,683 12,201
-----------------------------
112,969 102,420
=============================
11 CREDITORS - amounts falling due within one year
Bank of Scotland loans (Note 12) 9,500 5,200
British Coal Enterprise Ltd loan (Note 12) 4,444 2,937
Trade creditors 118,286 106,221
Amounts due under finance leases (Note 12) 5,297 -
Social security and other taxes 11,123 5,135
Bank Overdraft (Note 12) - 27,818
Warranty Provision 27,210 16,535
Accrued PRP and Associated Employer's NI 1,829 3,504
Accruals 26,339 21,378
-----------------------------
204,028 188,728
=============================
</TABLE>
12 CREDITORS - amounts falling due after more than one year
<TABLE>
<CAPTION>
Interest Rate Last Repayment
<S> <C> <C> <C> <C>
Loan from Bank of Scotland Base + 3.0% pa Feb-1999 6,300 10,329
Loan from Bank of Scotland Base + 2.5% pa Jan-1998 1,036 3,326
Loan from Bank of Scotland Base + 2.5% pa Nov-2002 23,557 -
Loan from British Coal Enterprise Ltd. 10% pa Jan-2001 8,886 -
Amounts due under finance leases (Note 11) 8,088 -
-----------------------------------
47,867 13,655
===================================
</TABLE>
The above loans are repayable in monthly installments ending on the dates
indicated. The current portions are shown under Note 11.
The loans from the Bank of Scotland and the bank overdraft are secured by a bond
and floating charge over all the assets of the company. Amounts due under
finance leases are secured on the assets concerned.
-12-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
13 BORROWINGS
1996 1995
(pound) (pound)
Borrowings are repayable as follows:
Repayable within one year:
Bank and other borrowings 13,944 35,955
Finance Lease 5,297 -
Repayable after one and within two years:
Bank and other borrowings 12,336 5,200
Finance Lease 5,297 -
Repayable after two and within five years:
Bank and other borrowings 21,086 8,455
Finance Lease 2,791 -
Repayable after 5 years:
Bank and other borrowings 6,357 -
-----------------------------
67,108 49,610
=============================
14 DEFERRED INCOME
Capitalised Grants:
Gross amount brought forward 31,332 25,508
Grants receivable and capitalised during the year - 5,824
-----------------------------
Gross amount carried forward 31,332 31,332
=============================
Amortisation of Capitalised Grants:
Accumulated amortisation brought forward 20,833 9,723
Amortisation during the year 8,946 11,110
-----------------------------
Accumulated amortisation carried forward 29,779 20,833
=============================
Net Capitalised Grants at 30 June 1,553 10,499
=============================
-13-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
15 SHARE CAPITAL
<TABLE>
<CAPTION>
1996 1996 1995 1995
No (pound) No (pound)
<S> <C> <C> <C> <C>
Authorised:
Ordinary shares of(pound)1 each 3,889 3,889 2,814 2,814
Preference Shares of(pound)1 each 30,000 30,000 30,000 30,000
------------------ ------------------
33,889 32,814
================== ==================
Allotted, called up and fully paid:
Ordinary shares of(pound)1 each 3,074 3,074 2,224 2,224
Preference Shares of(pound)1 each 30,000 30,000 30,000 30,000
------------------ ------------------
33,074 32,224
================== ==================
</TABLE>
Holders of the preference shares, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
Redemption
Price
per Share
Date of Redemption (pound)
On or prior to 31 December 1995 1.25
1 January 1996 to 31 December 1996 1.48
1 January 1997 to 31 December 1997 1.80
1 January 1998 to 30 December 1998 2.20
31 December 1998 to 30 December 1999 2.80
On or after 31 December 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of
(pound)3 per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those of the ordinary
shareholders (one vote per ordinary share). Due to the unavailability of
distributable profits, at the end of the year preference dividends totalling
(pound)6,000 were in arrears (1995-(pound)3,600).
Allotments during the year
On 30 November 1995 the company made an allotment of 481 ordinary shares of
(pound)1 at (pound)62.50 per share by way of an issue to existing members. A
further issue of 369 ordinary (pound)1 shares at (pound)1,084 per share was made
on 21 June 1996 by an issue to new investors. The difference between the total
consideration of (pound)430,063 and the total nominal value of (pound)850 has
been credited to the share premium account, less issue costs of (pound)5,000.
-14-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
15 SHARE CAPITAL (CONTINUED)
The company has granted options over a total of 816 ordinary shares. All options
are exercisable up to December 2003, at the following prices:
Price per Share
Date of Exercise (pound)
On or prior to 31 December 1995 156
1 January 1996 to 31 December 1996 188
1 January 1997 to 31 December 1997 219
1 January 1998 to 31 December 2003 375
16 SHARE PREMIUM ACCOUNT AND RESERVES
Share Premium Profit & Loss
Account Account
(pound) (pound)
At 30 June 1995 73,653 (47,304)
Profit for the year - 4,668
In respect of shares issued during the year 424,213 -
--------------------------------
At 30 June 1996 497,866 (42,636)
================================
In accordance with S263 of the Companies Act 1985 the balance on the share
premium account may not be distributed.
17 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
1996 1995
(pound) (pound)
Retained Profit for the year 4,668 18,299
Issue of shares 425,063 -
Preference Dividend and Premium on Redemption of 10,200 10,200
Preference Shares (not paid)
--------------------------
Net increase in shareholders' funds 439,931 28,499
Shareholders' funds at 1 July 1995 73,873 45,374
--------------------------
Shareholders' funds at 30 June 1996 513,804 73,873
==========================
Attributable to:
Equity shareholders 458,304 28,573
Non-equity shareholders 55,500 45,300
--------------------------
513,804 73,873
==========================
18 LEASING COMMITMENTS
-15-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
Operating lease payments amounting to (pound)12,550 (1995; (pound)12,550) are
due within one year. The property lease to which these payments relate expires
between one and five years.
19 CAPITAL COMMITMENTS
The company had no capital commitments at 30 June 1996 or at 30 June 1995.
20 CONTINGENT LIABILITIES
The company had no contingent liabilities at 30 June 1996 or at 30 June 1995.
21 POST BALANCE SHEET EVENTS
Post balance sheet events are detailed in the Directors' Report on Page 3.
22 PENSIONS
Defined Contribution Scheme
The company operates a defined contribution pension scheme for the benefit of
certain directors and employees. The assets of the scheme are administered by
trustees in a fund independent from those of the company.
-16-
<PAGE>
APPENDIX F
----------
MICROFRAME, INC. FORM 10-KSB
FOR THE PERIOD ENDED MARCH 31, 1998
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-13117
MICROFRAME, INC.
---------------
(Name of Small Business Issuer in Its Charter)
New Jersey 22-2413505
---------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
21 Meridian Road, Edison, New Jersey 08820
------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (732) 494-4440
--------------
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
[ ] Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year totaled $10,217,911.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and asked prices as reported by the
National Quotation Bureau as of June 25, 1998 was approximately $17,531,345.
There were 5,296,479 shares of Common Stock outstanding as of June 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Description of Business.
General
MicroFrame, Inc., a New Jersey corporation (the "Company"),
founded in 1982, designs, develops and markets a broad range of remote network
management and remote maintenance and security products for mission critical
voice and data communications networks. The Company's products provide for alarm
and fault monitoring, proactive administration and reporting capabilities which
are being used as a basis for remote, intranet and internet network management
and maintenance. In addition, by incorporating a variety of hardware and
software options for security and user authentication, these products can deter,
as well as prevent, unauthorized dial-in and/or in- band access to network
elements and systems (such as computers, local area networks (LANs), wide area
networks (WANs), routers, hubs, servers, Private Branch Exchange telephone
switches ("PBXs") as well as other network elements). In addition they continue
to allow authorized personnel access to perform needed administration and
maintenance of host devices and networks from remote locations.
In May 1993, the Company completed a private placement to
accredited investors of an aggregate of 800,000 shares (after giving effect to a
reverse stock split as noted below) of common stock, par value $.001 per share,
of the Company (the "Common Stock"), for $1,000,000.
In September 1993, the Company effected a one-for-five reverse
stock split of the issued and outstanding shares of the Common Stock (the
"Reverse Stock Split").
In September 1995, the Company formed a wholly-owned subsidiary,
MicroFrame Europe N.V., which, in turn, acquired all of the issued and
outstanding shares of capital stock of European Business Associates BVBA ("EBA")
of Brussels, Belgium.
In April 1996, the Company completed a private placement (the
"1996 Private Placement") to accredited investors of an aggregate of 1,101,467
Units for gross proceeds of $1,376,933.75, each unit consisting of one share of
Common Stock and one Class A Warrant and one Class B Warrant, each of which is
exercisable into one share of Common Stock at an exercise price of $1.50 and
$2.00, respectively.
Principal Products and Markets
The Company has established a strong customer base (both
domestically and internationally) through the development of a family of modular
industry standards based hardware and software offerings designed to interface
with a customer's existing dial-up and/or in-band WAN communications and network
management environment and/or on a standalone basis. The Company
-2-
<PAGE>
believes that each of these offerings, when combined with the programmability as
provided by the Company's software, support and meet the needs of wide varieties
of customer element network management and intranet/internet security
requirements. The software is designed to permit relatively easy modification,
thus allowing customized solutions for monitoring and controlling telemanagement
(intelligent agent) and/or network access.
The Company develops and markets a broad range of network
management, remote maintenance and security products for voice and data
communications networks. The Company's products are based upon a family of
hardware and software components that, when combined with the Company's software
"engine," provide programmability and modification wherein customized solutions
for network access, monitoring and telemanagement of mission-critical
applications and network elements can readily be accommodated.
In fiscal 1997 and continuing in fiscal 1998, the Company
continued its evolutionary development of products to address its strategic
direction and goal of establishing a competitive position in the combined data
and voice Network Management/ Distributed Device Management and Security
marketplaces. The introduction of a new family of products referred to
collectively as Secure Network Systems/ 2000 ("SNS/2000") based on industry
standards-based products is designed to address the growing demand for remote
network management of mission critical integrated voice and data network
elements. The SNS/2000 product family consists primarily of Sentinel 2000,
Sentinel 2000S and Manager 2000.
These products integrate element monitoring, fault management and
security management as well as remote access and problem
identification/resolution into a suite of network management solutions to
monitor, maintain and increase the operational integrity, availability and
access for mission-critical networks.
As telecommunications networks continue to expand to support more
and more mission- critical applications, the economic impact of downtime and the
importance of secure remote access to manage and maintain these networks
increase exponentially. According to a third party study, "network downtime for
a typical network consisting of two servers and 100 personal computers" can cost
companies, on average, up to $1,000 per minute in lost revenues and employee
productivity. The technical support staff necessary to administer, support and
maintain combined voice and data networks of a large distributed base of legacy
and standards-based networking devices remain extremely costly and inefficient.
Faced with budget constraints and a lack of skilled staff resources due to
downsizing programs, network and system managers today are searching for new
tools to more effectively manage, secure and control their expanding and
increasingly more complex networks. The Company believes that the SNS/2000
family of products provides cost effective solutions to these problems. The
products are completely modular by design. Each product element provides a
stand-alone feature/function set enabling one to choose only the products needed
to enhance the performance of their existing network management systems. For
maximum advantage, the elements may be integrated into a secured telemanagement
and remote access control solution that can be customized and tailored to meet
specific organizational requirements.
-3-
<PAGE>
Secure Remote Telemanagement/Telemaintenance. One major aspect of
the SNS/2000 family of products is its design which is to specifically reduce
network "downtime" by significantly enhancing and bringing new capabilities for
detection, reporting, handling and resolution of alarm/fault conditions. It also
directly addresses the requirement to manage both "legacy" as well as
standards-based communications resources across widely dispersed heterogeneous
network environments. The SNS/2000 product set is fully Simple Network
Management Protocol ("SNMP") compliant. It offers stand-alone network management
and remote access solutions which can be fully integrated into existing
SNMP-based central management systems and/or Trouble Ticket Management Systems.
Its SNMP proxy agent capability enables non-SNMP legacy devices, such as PBXs,
to communicate with SNMP network managers (e.g., HP/Openview, Cabletron
Spectrum, IBM's Netview, et al.) for more cohesive centralized control of all
communications resources.
SNS/2000 provides redundant, secured access and alarm monitoring
to all network resource maintenance ports via both in-band and out-of-band
connectivity to increase system reliability, access and availability. All
network access and/or access to network elements may be channeled through a
secure central gateway where users are authenticated and transparently routed
only to authorized destinations. Network elements are monitored by local
intelligent agents to proactively detect (and in many cases resolve) alarms and
fault conditions as well as threshold violations. This monitoring includes
ensuring that environmental conditions (e.g. temperature, moisture, battery
voltage, etc.) at various points in the network are also within preset
thresholds. Critical fault conditions are promptly identified and 1) resolved
via the intelligent agent technology of these products and/or 2) immediately
transmitted to the appropriate management center for analysis, trouble ticket
generation, corrective action, and escalation where appropriate. This enables
organizations to improve network availability through proactive response to
potential network problems before they manifest themselves in potential network
outages.
Secure Remote Access. A second aspect of the SNS/2000 family of
products is designed to address a rapidly growing group of telecommuters who are
redefining the boundaries of the traditional workplace. They are placing an
increasing demand for convenient remote access to network resources. By opening
the networks to meet these demands, the networks are left vulnerable to
unauthorized entry. Such unauthorized access carries security liabilities and
exposure to critical company resources, data and information. In addition,
unauthorized users are consuming valuable network bandwidth, thus reducing
availability for legitimate users. SNS/2000 offers remote access security
solutions for host computers, LANs and WANs, as well as other network elements
by providing front-end barriers to prevent unauthorized entry. Access control is
managed, monitored and administered via client server architecture. Centralized
administration is provided to facilitate ease of administration, monitoring and
maintenance. Alerts are issued when user defined events occur and/or thresholds
are exceeded. Reporting capabilities are provided which are useful for
identifying trends and analyzing network utilization. A wide range of
authentication technology is supported and, based on operational needs, can be
incorporated into the Company's remote access security solutions.
-4-
<PAGE>
SNS/2000 feature/function/benefit set. The primary benefits of
SNS/2000 include:
o SNMP Agent/Proxy
Standards-based SNMP Proxy alarm reporting for non-compliant
legacy devices. Centralized telemaintenance for both voice and
data communications networks.
o Alarm Reporting & Evaluation
Distributed Rules Based (Intelligent Agent) alarm filtering to
reduce network bandwidth consumption as well as insure delivery of
critical alarms/faults. Multilevel alarm reporting with
programmable escalation to insure prompt response. PBX toll fraud
detection and reporting to reduce/minimize toll fraud loss
potential.
o Remote Maintenance & Monitoring
Programmed monitoring of device fault tables to enable proactive
maintenance activity. Locally executed auto-recovery procedures to
reduce costly downtime.
o Security
Secured in-band/out-of-band access to insure network integrity.
Secured remote tele commuting access to eliminate unauthorized
network access.
o Graphical User Interface ("GUI") Based System
Central GUI-based system administration for convenient system
management.
o Open Database ("ODBC") Compliant
Integration with major database offerings (Oracle, Sybase,
SQL/Server, Informix, etc.)
o Controlled Access & Ethernet Capabilities
Controlled vendor access for secure out-of-band device management
and administration. Ethernet and dial access allowing for
redundant access/reporting paths for increased network
reliability. Distributed intelligent agent device controllers for
reduced bandwidth utilization.
o Buffering/Database Capabilities
Central relational database with ad hoc report generation for
convenient activity/ utilization analysis. Buffering system for
storage/retrieval of data (i.e. CDR Records, Critical Logs, etc.).
SENTINEL 2000. Represents the flagship member of the Company's new
family of SNS/2000 products. In the first quarter of fiscal 1997, MicroFrame
introduced the Sentinel 2000. The Sentinel 2000 is a stand-alone, secure
multi-port programmable Remote Site Element Manager which utilizes integrated
application software designed to provide alarm/fault monitoring, security and
remote access for controlling/managing remote voice and data network elements
via their out-of- band dial-up maintenance ports as well as via in-band Ethernet
connectivity. The system provides device alarm/fault monitoring and reporting,
SNMP management and SNMP proxy functionality, PCMCIA high speed modem(s) plus
Ethernet connectivity, environmental monitoring and control, and secured
in-band/out-of-band access to device maintenance and control ports. The Sentinel
2000 is an element management solution that facilitates convenient, reliable,
remote network element telemanagement and telemaintenance of voice and data
networks.
-5-
<PAGE>
Based on the Motorola 68360 Multi-controller processor chip, the
Sentinel 2000 is administered and maintained with the Company's new GUI-based
Manager 2000 software product offering. The Sentinel 2000 integrates a wide
range of applications that provide for Secure Remote Network Management for a
wide variety of network elements (either directly or via an SNMP proxy
function). These include Access Security, Alarm Management, Environmental
Monitoring and Control, PBX Toll Fraud Detection and Remote Device Reboot and
power management capabilities.
The Company has continued seeing strong acceptance of the Sentinel
2000 from such companies as PTT Holland, MCI, AT&T, Vyvx, Ameritech, U.S. West,
TeleFinland, Kaiser Permanente, and Telstra Australia. In fiscal 1998, the
Company shipped approximately 2,500 units of the Sentinel 2000, generating net
revenues of approximately $6,000,000, representing 60% of the Company's net
revenues for the year. In fiscal 1997, the Company shipped approximately 1,100
units of the Sentinel 2000, generating net revenues of approximately $2,670,000,
representing 36% of the Company's net revenues for the year.
MANAGER 2000. During the fourth quarter of fiscal 1997, the
Company introduced a second member of the SNS/2000 family of products, Manager
2000, a set of software applications that collectively provide a solution for
remote site-management and the servicing of real-time alarms generated by remote
monitoring equipment. Manager 2000 integrates the Sentinel 2000 and IPC/Secure
Sentinel programmable remote-site managers with central-site management tools to
provide maintenance managers and technicians with a seamless network overview.
Manager 2000 automates many time-consuming remote management tasks for a faster
response time, improved fault isolation, identification and resolution, and
differentiation of critical and non-critical events. In conjunction with
Sentinel systems, Manager 2000 can limit access to maintenance ports and devices
to authorized individuals only. The authorized access is controlled at the
central management site. This permits frequent changes and the assignment of
temporary privileges to outsiders. Manager 2000 features include Alarm
Processing, Trouble Ticket Management, Secured Remote Site Access, Security, and
Remote Site Administration. All of this is done based on industry standard
architecture (Windows 3.1, Windows/95, Windows N/T, ODBC, etc.), and is designed
for scalability.
New Products and Markets
During fiscal 1998, the Company introduced the Sentinel 2000S
Slimline programmable Remote Site Manager that is designed to provide a "Virtual
Technician" that operates 24-hours-a- day, 7-days-a-week to manage, monitor and
provide secured remote access to voice, video, and data network elements such as
PBXs, bridges, hubs and routers. The Slimline is a lower-cost offering with a
feature set comparable to the Sentinel 2000(TM) from the Company, with the
exception of the 28 host port expandability.
The Sentinel 2000S Slimline provides alarm/fault management by
monitoring data from remote network elements. When the Sentinel determines an
alarm status, the appropriate corrective- action procedures are initiated, and
the alarms can be sent to a technician via ASCII text, pager or
-6-
<PAGE>
E-mail, or to a central SNMP management product such as HP OpenView or Cabletron
Spectrum. Alarms can be escalated if a timely response is not received. Network
security is managed by a variety of authentication technologies. The Sentinel
monitors, controls and logs all activity on each port and provides central
and/or local audit reports, and can also detect PBX toll fraud by monitoring CDR
ports for activity that violates pre-defined threshold levels in various call
classifications.
On April 9, 1998, the Company signed a letter of intent to acquire
privately held Solcom Systems, Ltd. (Solcom), based in Livingston, Scotland. The
Company proposes to issue to the shareholders of SolCom an aggregate of
approximately 5,600,000 shares of its common stock and/or options to purchase
shares of its common stock in exchange for all of the issued and outstanding
share capital and options of SolCom. SolCom is a leading developer of remote
monitoring (RMON) technology. Originally approved by the Internet Engineering
Task Force (IETF) in 1992, Remote MONitoring, or RMON, is a standard protocol
for users to proactively manage multiple LANS and WANs from a central site. RMON
1 identifies errors, alerts administrators to network problems and baselines
networks in addition to its remote network analyzer capabilities. RMON's recent
enhancement, RMON 2, enables trouble-shooting and effective network capacity
planning. Consummation of the transaction is subject to execution and delivery
of a definitive acquisition agreement, approval of the shareholders of both the
Company and Solcom as well as various regulatory approvals.
Other Products and Markets
The Company's first major product success, the DL-4000(TM), was
introduced in 1986 and is designed to protect mainframe computers from
unauthorized dial-up access. Since that time, more than 1,000 units have been
installed worldwide and the product continues to be a part of the Company's
product offerings.
Recognizing that organizations were restructuring data processing
away from centralized mainframes and into various network configurations, the
Company re-engineered its original fixed- function, "black box" product into a
flexible, programmable hardware/software system capable of securing access at a
wide variety of "nodes" in the network. The foundation of this re-design was the
development of a proprietary software "engine," which maximizes the
programmability of the hardware, defining and controlling the functions to be
performed by various hardware components.
Beginning in 1991, the Company determined that an additional
related market opportunity was developing with the proliferation of PBXs,
voice-mail systems and other privately owned voice communications systems and
security devices. The Company believes that theft of long distance telephone
services ("toll fraud") through unauthorized access to these devices has
resulted in substantial losses. Thus the support of PBXs through the development
and marketing of data communications security products has witnessed substantial
customer demand for greater system reliability, protection against toll fraud
and security against network intrusion.
-7-
<PAGE>
A vulnerability of these systems results from the fact that PBXs
and other devices used in the voice communications system have remote
maintenance and administrative "ports." These ports permit a system
administrator or maintenance personnel to "dial in" or gain access to a device
electronically, by telephone, and to monitor and, if necessary, change or
manipulate the software and hardware embedded in the equipment. This can be
accomplished without having a physical presence at the site where the equipment
is located. Without proper security, an unauthorized user can gain access to a
system through one of these ports, a potential exposure of PBX customers to toll
fraud. With a remote maintenance facility, PBX and other telecommunications
product vendors can respond to and provide their customers with cost-effective
solutions that address customer demand for highly responsive service for their
products.
After initiating discussions with major PBX suppliers, the Company
developed a group of products, referred to as "Intelligent Port Controllers"
("IPC"), designed to provide security for the dial-in access remote ports. Among
these products are a Remote Port Security Device (RPSD(TM)), which was designed
and manufactured exclusively for AT&T (now Lucent Technologies) beginning in
1991 and the Secure Sentinel(TM) family of devices, which were introduced by the
Company in 1992.
The RPSD is provided on an original equipment manufacturer ("OEM")
basis under Lucent Technologies' own label as a security device for Lucent
Technologies' Definity PBX. Over 16,200 RPSD units have been shipped to Lucent
Technologies since 1991 and the Company has commenced shipping the product to
other customers as well. During fiscal 1997, sales from the RPSD product line
were responsible for approximately 15% of the Company's overall revenue.
The Secure Sentinel(TM) is a family of programmable hardware
platforms that combine security management of remote maintenance ports,
protection against toll fraud, fault and alarm reporting functions and real-time
call detail record analysis. Since its introduction, the Company has expanded
both the number of Secure Sentinels(TM) offered and the functionality of each,
shipping more than 12,000 units which has accounted for more than $14,500,000 in
revenue. During fiscal 1998, sales from the Secure Sentinel(TM) product line
were responsible for approximately 15% of the Company's overall revenue.
Beginning in fiscal 1993, the Company began offering a new
product, the Secured Database Server (SDS(TM)). Like the DL-4000, this is a
programmable system designed to prevent unauthorized dial-in access to a
computer or data communications network. The SDS, however, incorporates the
technology of the DL-4000 in a personal computer, allowing storage of greater
amounts of user data, which permits a customer to both monitor a greater number
of users and to store more detailed identification data about each user. The SDS
also incorporates redundant processor elements, reducing the possibility of
system downtime. This product is thus suitable for protecting significantly
larger systems and is currently implemented by MCI to provide secured access for
network administration of over 500 of its long distance service switching
facilities, as well as for Chemical Bank, Key Corp., Lockheed/Marietta and other
major companies worldwide.
-8-
<PAGE>
Building on the SDS, in fiscal 1994, the Company introduced the
Secured Gateway System (SeGaSys(TM)), designed to provide centrally controlled
access to and administration of a large number of remotely located maintenance
ports on both voice and data communications devices. The SeGaSys system contains
a "communication firewall" or secured gateway that controls and routes all
access to remote port destinations, a central database management server which
uses the SDS software to administer and control user access and resource
authorizations, remote security modems and/or alarm reporting devices which
provide fault/alarm management capabilities. SeGaSys effectively manages a
number of Secure Sentinel devices located at remote locations that provide the
security, alarm monitoring and reporting for those locations.
Overall Target Markets
The Company believes its products are well positioned to take
advantage of what it believes are current significant trends in data
communications and voice communications networks. In the view of the Company's
management, organizations are seeking to increase productivity by providing
sophisticated communications networks that connect all of their separate units,
whether locally, nationally or internationally. As the price of equipment
decreases and power increases, such networks become cost effective, justifiable
and possible for more and more groups, and it becomes feasible to introduce
sophisticated networks into technologically less advanced regions regardless of
size. At the same time, more of such organizations' data and other resources are
being made available to more users by means of these systems. These market
dynamics are causing networks to become an ever increasing and vital source of
revenue generation as well as employee productivity. Therefore, proactive
management of these networks to insure network availability, which, in turn
supports employee productivity as well as revenue generation, is increasingly
becoming a necessary imperative for all companies. Because of these market
factors, the Company believes that the security and network management issues
resulting from this growth will generate demand for the Company's products.
Remote Network Management and Remote Telemaintenance Markets
The requirement for increased service levels and overall network
availability, especially for mission-critical networks, has created a rapidly
growing market demand for remote element network management and distributed
device management. Remote element network management offerings include alarm
monitoring systems which monitor network elements and their internal diagnostic
routines and fault tables, determine alarm status, and automatically execute
appropriate reporting and/or corrective action procedures.
Alarm Monitoring: The Sentinel 2000 and Secure Sentinel(TM) alarms
can be transmitted/reported to central network management systems (such as
Cabletron's Spectrum, HP's Openview, IBM's Netview, etc.), trouble ticket
management packages (such as Remedy), a single or multiple PCS (personal
communication system), personal pagers,. as well as provide for an alarm
-9-
<PAGE>
to be escalated to ensure timely response. The Sentinel 2000 and Secure
Sentinel(TM) also allow programmed administration of the host devices via their
maintenance port connection.
Alarm Reporting: This provides for automatic transmission of
information regarding network element statuses, alarms, etc. It allows for
automatic escalation of alarms when there is no response. Information may be
automatically transmitted to computers via modem, or to humans via pager and
recorded voice.
"Help Desk" Enhancements: Most data networks include a "help desk"
operator, a resource available to assist other personnel and to resolve network
problems encountered by dial-in users. The Company's proprietary HelpNET(TM)
software permits the user to page the help desk terminal and automatically
effect an interactive link with the help desk operator when the page is
acknowledged. Without leaving the control station, the help desk operator can
then directly observe and participate in the user's session with the relevant
network device and, if necessary, take temporary command of the session to
correct the problem, thus providing more cost-effective corrections than would
occur if the help desk operator physically had to visit the device in question
or had to "talk the user through" the necessary procedures.
Environmental Monitoring and Control: Since communications
equipment is sensitive to changes in the physical environment, the Sentinel
2000, as well as the Secure Sentinel(TM), can be enhanced to monitor changes in
temperature, humidity, moisture, battery voltage, LED indicators and other
similar environmental indicators to determine if current trends exceed pre-set
limits. If such limits are exceeded, the device can be programmed to issue an
appropriate alarm or take corrective action using multiple internal relays to
activate necessary environmental controls.
Security Market
As previously noted, widely distributed data and voice
communications networks incorporate network elements and devices with dial-in
ports. The Company offers a variety of products, e.g., Manager 2000 and
SeGaSys(TM), which when combined with the Sentinel 2000 and/or Secure
Sentinel/IPCs, permits centralized control for secure remote access to all ports
on the network. All users (such as maintenance providers and others authorized
to service or administer devices in the network) dial a single telephone number
and/or are connected/authorized in-band for access. Upon successful validation
of access for the requested device the user is automatically routed to the
targeted device by the Manager 2000 system and/or SeGaSys(TM). This eliminates
the security risk inherent in providing lists of telephone numbers and access
codes for numerous devices, as well as reduces the burden of administering many
remotely located security devices. Once authenticated and routed, the
transaction (including session activity, if desired), is logged to a central
database, available for audit review and analysis.
The Sentinel 2000 and IPC family of products - the Secure
Sentinel(TM) and the RPSD, are designed to secure the maintenance and
administration ports on a wide variety of network elements
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and communications equipment. In addition to preventing unauthorized access
through these ports, the products can be customized to provide the following
features:
Security Management: Provide a secure path to network elements
both via in-band (Ethernet) as well as out-of-band (dial up) protocols.
PBX Toll Fraud/Abuse Control: PBXs and voice-mail systems
frequently permit dial-in users access to outbound trunk lines to enable users
to take advantage of a company's WATs lines or similar services. However, abuse
of these services can result in substantial charges. The product offerings can
be programmed to monitor and analyze all dial-in call activity to determine if
current activity exceeds specified parameters or selected criteria indicative of
potential toll fraud or abuse. If the activity exceeds the parameters, the
system issues an alarm to the appropriate personnel or initiates protective
procedures.
The DL-4000 can be used to secure dial-up access to any host
computer, LAN or WAN by monitoring and centrally administering up to 4,096
dial-up "ports" or telephone access points located in up to 256 locations. The
SDS(TM), as noted above, expands the number of users and other features of the
DL-4000 by incorporating the same technology into a personal computer. Using
"open system" software, the products allow the system administrator to configure
each channel separately with one or more access control technologies as required
by the application assigned to the channel or as preferred by the user.
The Sentinel 2000, IPC and SeGaSys(TM) incorporate a high-level
programming language and program editor developed specifically for these
products, which is referred to as the Communication Control Language ("CCL").
This language allows standard programs incorporated into these products to be
modified or enhanced to meet specific customer requirements. The incorporation
of CCL into these products also facilitates the introduction of additional
product enhancements.
Support Services
In addition to the normal training, installation and repair
services, the Company also provides professional services, including consulting,
specialized programming and turnkey installations.
Marketing and Distribution
The Company believes that the markets for remote element network
management, distributed device management, and security are rapidly emerging and
growing. Therefore, the Company is approaching each of these markets with an
integrated marketing strategy. The SNS/2000 family of products, the DL-4000 and
the SDS(TM), data communications security products have been sold and will
continue to be sold to major telecommunications companies, networking
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companies, network security customers, systems integrators, facility managers
and others via the Company's direct sales organization, in-house telemarketing
efforts and selected distributors.
In fiscal 1995, the Company commenced expansion of its direct
sales force and its network of distributors into major geographic markets in the
United States as well as internationally. As this sales and distribution network
is established and continues to grow, the telemarketing effort will be
redirected to generate sales leads by the Company and to provide support for the
field organization. In addition, the Company will look to continue to expand its
channels of distribution via major systems integrators, facilities management
companies and network outsourcers.
With respect to the communications security market, the Company
has recognized that product sales could be effected more economically if major
telecommunications companies could be convinced to promote the products to their
own customers. The Company has established contractual relations in the United
States with Lucent Technologies, MCI, Southwestern Bell, US WEST and Ameritech.
During fiscal 1995, the Company expanded its distribution into Canada through a
non-exclusive distribution agreement with TTS Meridian Systems, Inc. of
Willowdale, Ontario, a Northern Telecom subsidiary. The Company expects to
continue to seek additional arrangements with the other network element and PBX
systems vendors and distributors in North America.
In connection with the foreign distribution of its products, the
Company appointed EBA of Brussels, Belgium in November 1993 as its exclusive
sales representative for Europe to provide sales and technical support to the
Company's authorized distributors and to directly sell the Company's products to
accounts in that region. In September 1995, the Company acquired through
MicroFrame Europe NV, its wholly-owned subsidiary, all of the issued and
outstanding shares of capital stock of EBA. In fiscal 1995, the Company signed a
five-year agreement with LM Ericsson ("Ericsson") of Stockholm, Sweden, a global
telecommunications equipment manufacturer and distributor. Ericsson has
qualified for use and will promote the Company's Secure Sentinel products with
Ericsson PBX equipment, worldwide, with an initial roll-out in Europe, the
Pacific Rim and the United States. During fiscal 1995, a three-year distribution
agreement was also entered into with Racal Australia PTY, Ltd. ("Racal
Australia") of Brookdale, South Wales, Australia, a wholly-owned subsidiary of
Racal Electronics plc of the United Kingdom. Racal Australia, which provides
data communications, data security and digital cellular equipment throughout the
Pacific Rim, will distribute the Company's product line throughout Australia,
New Zealand, Singapore and Hong Kong. Additionally, during fiscal 1995, the
Company signed its first distribution agreement in Eastern Europe with Netlink
of Prague, in the Czech Republic. With the acquisition of EBA in place and the
maturation of the agreements consummated in previous years, the revenues related
to the international market were approximately $1,530,000 (21%) in fiscal 1997
and approximately $2,500,000 (25%) in fiscal 1998.
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Competition
The markets for remote element network management, distributed
device management as well as security products to monitor and control access to
computer and telecommunications network elements are highly competitive. There
can be no assurance that the proprietary technology which forms the basis for
most of the Company's products will continue to enjoy market acceptance or that
the Company will be able to compete successfully on an on-going basis.
The Company believes the principal factors affecting competition
in this market include: (1) the products' ability to conform to the network
topologies and/or computer systems; (2) the products' ability to avoid
technological obsolescence; (3) the willingness and ability of a vendor to
support customization, training, and installation; and (4) price.
Although the Company believes that its present products and
services are competitive, the Company competes in its general markets with a
number of large computer, electronics and telecommunications manufacturers which
have financial, research and development, marketing, and technical resources
substantially greater than those of the Company. The Company also faces
competition from a variety of niche market players. In the context, such
competitors include Security Dynamics, Inc., Digital Pathways, Inc. and the Lee
Mah Data Systems Corp. In the remote network management and telemaintenance
context, they include TSB International, Inc. and Teltronics, Inc. Such
companies may succeed in producing and distributing competitive products more
effectively than the Company, and may also develop new products that compete
effectively with those of the Company.
Sources and Availability of Materials
The Company designs its products utilizing readily available parts
manufactured by multiple suppliers and the Company currently relies on and
intends to continue to rely on these suppliers. The Company has been and expects
to continue to be able to obtain the parts generally required to manufacture its
products without any significant interruption or sudden price increase, although
there can be no assurance that the Company will be able to continue to do so.
The Company sometimes utilizes a component available from only one
supplier. If a supplier were to cease to supply this component, the Company
would most likely have to redesign a feature of the affected device. In these
situations, the Company maintains a greater supply of the component on hand in
order to allow the time necessary to effectuate a redesign or alternative course
of action should the need arise.
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Dependence on Particular Customers
The Company has continued to expand its customer base and broaden
its sales mix. These efforts have resulted in the Company becoming less reliant
on any one particular customer. However, the Company sells a substantial portion
of its products to several major customers, i.e., PTT Holland, Lucent
Technologies and MCI. Sales to PTT Holland, Lucent Technologies, AT&T and MCI
represented approximately 61% of the Company's revenue in fiscal 1998. The loss
of any of these customers could have a material adverse effect on the Company's
business.
The Company's installed customer base is estimated to number over
200 companies constituting more than 2,300 customer sites worldwide. In the
United States, virtually all of the Company's customers are Fortune 1,000
industrial companies and large U.S. financial institutions. Customers in the
U.S. represented approximately 75% and 79% of the Company's revenue,
respectively, in fiscal 1998 and fiscal 1997.
Under an agreement with Lucent Technologies, the Company has been
manufacturing the RPSD for Lucent's resale to its PBX customers. As of the end
of fiscal 1998, Lucent had purchased and installed more than 17,000 RPSD units.
In fiscal 1996, MCI and the Company expanded their relationship
across multiple operating units within MCI, including that responsible for
outsourcing and "Concert", MCI's joint venture with British Telecom, as well as
with MCI/SHL.
Intellectual Property, Licenses and Labor Contracts
The Company holds no patents on any of its technology. Although
the Company licenses some of its technology from third parties, it does not
consider any of these licenses to be critical to the Company's operations.
The Company has made a consistent effort to minimize the ability
of competitors to duplicate the Company's software technology utilized in its
products. However, the possibility of duplication of the Company's products
remains and competing products have already been introduced.
The Company's name and the Secure Sentinel name are registered
trademarks of the Company filed with the United States Patent and Trademark
Office ("PTO"). The Company also has trademark applications pending with the PTO
for SeGaSys, Sentinel 2000, Sentinel 2000S, Manager 2000, PassKEY, SofKEY,
Secure Network Systems 2000, the Company's logo, the MicroFrame Wizard and the
tagline "We Bring Wizardry To Remote Network Management." The Company
anticipates that these trademarks shall be registered but there can be no
assurance that such will occur.
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None of the Company's employees are represented by labor unions.
The Company considers its relations with its employees to be satisfactory.
Governmental Approvals Required and Effect of Government Regulation
Due to the sophistication of the technology employed in the
Company's products, export thereof is subject to governmental regulation. As
required by law or demanded by customer contract, the Company obtains approval
of its products by Underwriters' Laboratories. Additionally, because many of the
Company's products interface with telecommunications networks, its products are
subject to several key Federal Communications Commission ("FCC") rules that
often requires FCC approval.
Part 68 of the FCC rules contains the majority of the technical
requirements with which telephone systems must comply to qualify for FCC
registration for interconnection to the public telephone network. Part 68
registration requires telecommunication equipment interfacing with the public
telephone network comply with certain interference parameters and other
technical specifications. FCC Part 68 registration for the Company's products
has been granted and the Company intends to apply for FCC Part 68 registration
for all of its new and future products.
Part 15 of the FCC rules requires equipment classified as
containing a Class A computing device to meet certain radio and television
interference requirements, especially as they relate to operation of such
equipment in a residential area. Certain of the Company's products are subject
to and comply with Part 15.
The European Community has developed a similar set of requirements
for its members and the Company has begun the compliance process of its products
for Europe.
Although the Company has not experienced any difficulties
obtaining such approvals, failure to obtain approval for new and future products
could have a material adverse effect on the Company's business. The Company has
obtained licenses to export certain of its products in limited quantities to
Sweden, Norway, Switzerland, South Africa, the United Kingdom, France, Italy,
Germany, Australia and Singapore.
Research and Development Activities
During fiscal 1998, the Company continued development of its "next
generation" of products built on a new architecture that is ultimately intended
to replace its IPC products - the Secure Sentinel(TM) and RPSD - referred to
collectively as SNS/2000. As discussed previously, this family of products is
designed to address the growing demand for remote element network management and
security of mission-critical integrated voice and data networks. Research and
development expenses in connection therewith were $1,117,151 in fiscal 1998 and
$893,852 in fiscal 1997.
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Costs of Compliance with Environmental Laws
The Company's business is not subject to regulations involving
discharge of materials into the environment.
Employees
As of June 23, 1998, the Company had 46 employees, all of whom are
full-time employees, and of which 20 are technical personnel, 9 are in sales,
marketing and support, 7 are in production and 10 are in executive, financial
and administrative capacities.
Item 2. Description of Property.
The Company currently leases 8,900 square feet of space at 21
Meridian Road, Edison, New Jersey for its administrative, sales and marketing
and research and development functions (the "Lease"). The Lease provides for a
monthly rental of $5,428.55 and expires on June 30, 1999. From the period
commencing July 1, 1997 through June 30, 1999, the total monthly rental is
$5,579.17 per month. An additional 2,000 square feet of office space and 2,600
square feet of warehouse space is currently leased to another tenant with a
concurrent expiration date of June 30, 1999. The Company is the sole guarantor
for the full performance of this tenant's obligations through the expiration
date.
In addition, the Company currently leases 5,112 square feet of
space at 300E Corporate Court, South Plainfield, New Jersey for its finance,
manufacturing, and warehousing functions. This lease provides for a monthly
rental of $3,408.00 and expires on June 30, 1999.
In addition, the Company currently leases 245 square meters of
office space in Antwerp, Belgium for its European operating headquarters.. This
lease provides for a monthly rental of 81,083 Belgian Francs per month
(US$2,316.00 at an exchange rate of 35BEF to 1US$) and expires on July 31, 2005,
with an option of the Company to terminate the lease on either July 31, 1999 or
July 31, 2002, as applicable.
Item 3. Legal Proceedings.
The Company reached a settlement with the New York State
Department of Taxation and Finance in April 1997 as it related to a sales tax
assessment of $227,391.90 imposed in a Notice of Determination in March 1996.
The settlement amount of $55,512.73 was paid in full as of April 1997.
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock commenced trading on August 17, 1995 on
the NASDAQ SmallCap Market under the symbol "MCFR". Prior to that date, the
Common Stock was not traded on any registered national securities exchange,
although several registered broker-dealers made a market in the Common Stock.
The following table sets forth the high and low bid prices of the Common Stock
in the over-the-counter market as reported by National Quotation Bureau through
August 16, 1995 and by NASDAQ from August 17, 1995 through March 31, 1998. The
quotations set forth below do not include retail markups, markdowns or
commissions and may not represent actual transactions.
HIGH LOW
---- ----
Fiscal 1997
-----------
June 30 $2.88 $1.75
September 30 2.25 1.06
December 31 2.56 1.50
March 31 2.44 1.56
Fiscal 1998
-----------
June 30 $1.88 $1.56
September 30 1.63 1.25
December 31 1.84 1.31
March 31 2.75 1.13
Holders
The Company believes that as of June 25, 1998, there were
approximately 363 record holders of its Common Stock (including brokers holding
in street name).
Dividends
The Company has not paid any cash dividends on its Common Stock
during the two fiscal years ended March 31, 1998 and March 31, 1997. The Company
presently intends to retain all earnings to finance its operations and therefore
does not presently anticipate paying any cash dividends in the foreseeable
future.
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Under the terms of the Company's credit agreement with United
National Bank, the Company may not, without the prior written consent of United
National Bank, declare or pay any dividends in cash or otherwise on any shares
of capital stock of the Company.
Item 6. Management's Discussion and Analysis.
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to, the recent introduction
and the costs associated with, a new family of products; dependence on the
acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on third parties; a
limited customer base; and liability risks.
Plan of Operation
During the next 12 months, the Company will continue its effort to
expand its existing customer relationships and marketplace penetration through
internal growth and the proposed acquisition of Solcom Systems, Ltd, a leading
developer of RMON technology, while tightly controlling operating costs. There
can be no assurance, however, that such acquisition will be consummated. The
Company anticipates placing substantial emphasis on the distribution of its new
family of products as well as its acquired products and begin development of a
new family of products based on a combination of existing features incorporated
in the Sentinel and Solcom's RMON technology, along with continued international
business expansion. The Company will also look to continue its three-year trend
of reducing its reliance on several major customer organizations, most notably,
MCI and Lucent.
During fiscal 1998, the Company continued its development of a new
generation of products based on more advanced technology. The products were
formally introduced at an industry trade show in January, 1996. The new network
management product family, known as SNS/2000, integrates network management,
security management and fault management as well as problem resolution into a
suite of network management solutions. This technology will allow for increased
operational integrity and access to voice and data networks. The Company
commenced shipment of the new product of this next generation product family,
the Sentinel 2000 in May, 1996 and volume production shipments began in June,
1996. To date, approximately 3,000 units of the Sentinel 2000 have been shipped.
In January, 1997, another member of the SNS/2000 family, the Manager 2000, was
introduced. Manager 2000 is a set of software applications that collectively
provide tools for remote site management and the servicing of real-time alarms
being generated by remote monitoring equipment. In October 1997 the Company
announced its newest product, the Sentinel 2000S Slimline, and began shipments
of this product in early 1998.
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With the addition of several major new customers, the Company
continues to strengthen its worldwide customer base, which includes U.S. and
international telecommunications providers, Private Branch Exchange ("PBX")
vendors, financial institutions, Fortune 500 companies and governmental
agencies. The Company has more than 2,300 installations across North America,
South America, Europe and the Pacific Rim. The September 1995 acquisition of
European Business Associates ("EBA") has caused the Company to focus more on
expanding the international customer base. Based in Brussels, Belgium, EBA had
acted as the Company's exclusive sales representative in the European market
since November, 1993, providing both sales support and technical support to the
Company's authorized distributors, as well as selling directly to accounts in
the region. During the latter part of fiscal 1996, the Company's international
revenue stream increased as it capitalized on relationships with new global PBX
suppliers including LM Ericsson of Stockholm, Sweden and Alcatel Bell of
Antwerp, Belgium. A major new contractual relationship was formed in fiscal 1997
as a result of this improved focus. After announcing this new relationship with
TELE Business Communications of Finland, a subsidiary of Telecom Finland, in
November, 1996, the Company proceeded to ship over $260,000 of product,
primarily the Sentinel 2000, in the last four months of fiscal 1996. As a result
of this continued focus, the Company entered into a relationship with PTT
Holland during fiscal 1998 for its Sentinel technology. This relationship
resulted in shipments of over $2,000,000 to PTT during the year ended March 31,
1998. The Company anticipates continuing this relationship into fiscal 1999.
Additionally, the Company expanded its distribution in the Pacific Rim with a
significant increase in shipments to Racal Australia.
During fiscal 1998, the Company forged several new domestic
relationships principally to offset a reduction in the Company's revenue stream
in respect of two major customers, MCI and Lucent Technologies (formerly AT&T).
The most significant was the new contractual relationship formed in September
1996 with US WEST Communications Services. Ongoing relationships, primarily with
Southwestern Bell Communications, were maintained. Relationships in fiscal 1996
improved, primarily Ameritech Information Systems. Finally, other new
relationships were formed, including Vyvx, Inc., Sprint Communications and in
fiscal 1998, PTT Holland. As a result of the above, overall revenues generated
from the Company's two primary customers has dropped from 60% in fiscal 1995 to
49% in fiscal 1996 to 34% in fiscal 1997 to 25% in fiscal 1998. In fiscal 1999,
the Company expects to continue to reduce such percentages through continued
diversification of its customer base and the creation of new relationships. MCI,
Lucent and PTT remain the three largest, and most significant to the Company.
The Company's relationship with MCI extends to multiple operating units within
the organization, each with divergent business needs and different market
characteristics. The Company ships multiple products to MCI for security and
alarm management of various internal switch installations, including shipments
to Concert Global Networks, MCI's joint venture with British Telecom, as well as
to various out-source relations which MCI manages. In its relationship with
Lucent Technologies, the Company has manufactured Remote Port Security Devices
(RPSDs) for Lucent's resale to its PBX customers. The RPSD is a secured-access
product provided under Lucent's own label and is custom designed to operate with
Lucent's PBX, Key Systems and Voice Processing products (primarily the Definity
product line). As of the fiscal year ended March 31, 1997, Lucent had purchased
and installed more than 16,200 RPSDs since 1991. In October 1995, the Company
signed a two-year renewal of an OEM agreement, through which Lucent purchases
RPSDs.
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The Company's employee base dropped from 42 full-time employees in
fiscal 1996 to 37 full-time employees during fiscal 1997. However, the Company's
employee base increased to 46 full-time during fiscal 1998 as the Company
returned to greater profitability. Additional resources resulting from such
profitability are being devoted primarily to the marketing and development of a
more extensive system integration capability that would enable the Company to
gain an increasing share of the market. Due to the growth that the Company
experienced in fiscal 1995, an additional facility in South Plainfield, New
Jersey was leased with expiration terms concurrent with its existing lease in
Edison, New Jersey. The Company's operations group relocated to this facility in
August 1995. The Company's European operation also moved to a new, larger
facility in Antwerp, Belgium in August 1996. The Company believes that it has
space adequate to meet its growth requirements for the foreseeable future.
The Company believes that as data and voice networks continue to
grow and companies grow more reliant on such networks for revenue generation and
employee productivity, the recognition of system vulnerability will continue to
increase and the Company's products will be in greater demand. After the
unsatisfactory performance in fiscal 1996, the Company rebounded in fiscal 1997,
achieving management's primary mission for such year of returning the Company to
profitability.
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenues for the year ended March 31, 1998 were $10,217,911 as
compared with revenues of $7,343,624 for the year ended March 31, 1997, an
increase of approximately 39%. The increase was primarily due to increased
international shipments of the Company's Sentinel 2000 product combined with an
overall increase in Sentinel 2000 shipments. The Company continued to see
revenues with respect to the other member of the family of SNS products, the
Manager 2000.
The Company's revenues were positively impacted by increased
domestic sales and as a result of increased shipments to the European market,
including shipments under its contract with PTT Holland. Shipments to Europe
were approximately $3,000,000 for the year ended March 31, 1998 compared to
approximately $1,000,000 for the year ended March 31, 1997.
The Company's cost of goods sold increased to $4,285,134 for the
year ended March 31, 1998 compared to $2,903,705 for the year ended March 31,
1997 as a result of increased shipment levels. Cost of goods sold as a
percentage of sales increased from 40% for the previous comparable fiscal period
to 42% for this fiscal period, primarily due to the increased sales volume of
the Company's newer product line.
Research and development expenses, net of capitalized software
development, increased from $893,852 in the year ended March 31, 1997 to
$1,117,151 in the current fiscal year, an increase
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of 25%. Research and development expenses as a percentage of revenues decreased
slightly from approximately 12% to 11%. Selling, general and administrative
expenses increased 32% from $3,355,961 for the prior year to $4,419,521 for the
year ended March 31, 1998. This increase was primarily the result of added sales
personnel during the fiscal year. However as a percentage of revenues, selling,
general and administrative expenses decreased from 46% for the previous period
to 43% for the current fiscal period.
The Company had income before taxes of $406,649 for the year ended
March 31, 1998 compared to income of $201,286 for the year ended March 31, 1997
primarily due to increased sales. The net income for the year ended March 31,
1998 was $711,310 compared to net income of $342,451 for the prior fiscal year.
At March 31, 1997, the Company had provided a partial valuation allowance
against its existing deferred tax assets. At March 31, 1998, the Company has
reversed the remaining approximately $300,000 of valuation allowance relating to
its federal net operating losses and has recorded a benefit for other
operational temporary difference items. The expiration dates for its net
operating losses range from the years 2001 through 2011.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company's revenues for fiscal 1997 were $7,343,624 as compared
with revenues of $6,258,243 for fiscal 1996, an increase of 17.3%. This increase
in revenues was primarily attributable to the expansion of the Company's
customer base outside of its two major customers, MCI and Lucent Technologies,
especially in the United States. Net revenues generated in the U.S., excluding
revenue attributable to MCI and Lucent, increased from approximately $1.91
million to $3.33 million that represented a 74% increase from fiscal 1997 to
fiscal 1996. The Company also showed substantial growth in the Pacific Rim,
where net revenues (primarily attributable to one major customer, Racal
Australia) increased over threefold from approximately $98,000 to $350,000.
The Company's cost of sales increased from $2,789,855 for fiscal
year 1996 to $2,903,705 for fiscal year 1997. However, cost of sales as a
percentage of sales decreased from 44.6% for fiscal 1996 to 39.5% for fiscal
1997. This substantial decrease is primarily the result of a reduced provision
for inventory obsolescence (from $150,000 to $75,000, or approximately 1.0% of
revenue), a reduction in capitalized software amortization (from $279,000 to
$163,000, or approximately 1.6% of revenue), and a general improvement in
purchasing and materials efficiencies, which was responsible for the remaining
2.5% reduction. This improvement was achieved despite the initial volume
shipments of the Sentinel 2000 that witnessed higher initial costs typically
associated with new product introductions. These initially lower gross margins
were more than offset by continuous improvements in the Company's mature product
lines.
Selling, general and administrative expenses decreased from
$4,043,356 for fiscal 1996 to $3,355,961 for fiscal 1997, a decrease of 17.0%.
As a percentage of revenues, the decrease was more pronounced as this reduction
occurred while revenues increased. Fiscal 1997 showed an improvement to 45.7% of
sales from 64.6% of sales in fiscal 1996. While approximately $250,000 of such
decrease was related to the one-time adjustments recorded at the end of fiscal
1996, the major
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factor contributing to this decrease was the Company's commitment to reduce
administrative overhead in order to achieve its targeted goal for fiscal 1997 of
a return to profitability.
Research and development costs, net of capitalized software
development, increased from $713,441 during fiscal year 1996 to $893,852 in
fiscal year 1997. As a percentage of sales, the Company's research and
development costs increased from 11.4% in fiscal year 1996 to 12.2% in fiscal
1997. This increase is directly attributable to the Company's increased activity
related to the development of the SNS/2000 family of products introduced in
fiscal 1997.
The income tax benefit of $141,165 in fiscal 1997 relates to the
Financial Accounting Standards Board's Statement No. 109, "Accounting for Income
Taxes." This Statement, issued in February 1992 and adopted by the Company
effective April 1, 1993, requires deferred tax assets and liabilities to be
recorded for the difference between the financial statement and tax bases of
assets and liabilities (temporary differences) using enacted tax rates. The
Statement also requires that the Company record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in resent years." Due to the operating loss in fiscal 1996,
the realization of the deferred tax asset was more uncertain and, as a result,
the Company provided a full valuation allowance against deferred tax assets at
March 31, 1996. At March 31, 1997, the deferred tax asset and related valuation
allowance have been reduced primarily due to the utilization of federal and
state net operating loss carry forwards.
Liquidity and Capital Resources
During fiscal 1998, the Company's financial position improved
substantially as assets increased from $4,682,373 to $6,375,432 and the
Company's working capital increased from $2,381,178 to $2,563,503, net of
deferred tax assets. The primary contributor to this improvement in the
Company's working capital position was net income of approximately $712,000.
Included in this income were non-cash charges of approximately $500,000 for
depreciation and amortization.
The Company's operations provided approximately $54,500 of cash,
which included a use of cash of approximately $55,000 to satisfy its New York
State tax settlement. The Company also utilized approximately $450,000 of cash
for capital and software-related expenditures and utilized approximately $50,000
of cash to pay down its long-term debt.
The Company previously had a credit agreement with CoreStates Bank
("CoreStates") for a credit line of $1,000,000 to finance future working capital
requirements, collateralized by accounts receivable, inventory, equipment and
all other assets of the Company, as well as a $150,000 credit facility to
finance purchases of machinery and equipment, convertible into a three-year
secured term loan when utilized. The Company borrowed $124,000 against this
facility in November, 1995, at which time this debt was converted into a
three-year term loan. As of March 31, 1997, $72,644 remained outstanding on this
loan. The Company was informed in June, 1996, that the working
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capital credit line would not be renewed upon its expiration date of July 31,
1996. The outstanding balance was repaid by the Company on September 5, 1996, in
accordance with an agreement with CoreStates. On August 30, 1996, the Company
executed a credit agreement with Farrington Bank of North Brunswick, New Jersey
(subsequently acquired by United National Bank of Bridgewater, New Jersey). This
agreement provides the Company with a $500,000 line of credit to finance future
working capital requirements, collateralized by accounts receivable of the
Company.
On August 30, 1997, the Company's line of credit agreement with
United National Bank of Bridgewater, New Jersey expired. In November 1997 the
Company successfully negotiated with United National to provide the Company with
a $1,000,000 line of credit, collateralized by all business assets of the
Company, to finance future working capital requirements. As of March 31, 1998,
the Company had utilized $300,000 of this line.
Based on its current cash and working capital position, as well as
its available line of credit, the Company believes that it will have sufficient
capital to meet its operational needs over the next twelve months.
Effective with the first quarter of fiscal year 1999 the Company
will adopt SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes
the standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) as part of a full set of
financial statements. This statement requires that all elements of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Since this standards applies only to
the presentation of comprehensive income, it will not have any impact on the
Company's results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
15, 1997. This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management is currently evaluating the
impact of SFAS 131 on the financial statements.
In February 1998, the Financial Accounting Standards Board issued
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which becomes effective for the Company's financial statements for the
year ended March 31, 1999. SFAS No. 132 requires revised disclosures about
pension and other postretirement benefits plans and is not expected to have a
material impact on the Company's financial statements.
In June 1998, The Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" which
becomes effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other
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<PAGE>
contracts, and for hedging activities. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
Item 7. Financial Statements.
The financial statements required hereby are located on pages F-1
through F-20.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
Name Age Position Held with the Company
- ---- --- ------------------------------
Stephen M. Deixler 62 Chairman of the Board of Directors
Stephen B. Gray 40 President, Chief Executive Officer,
Chief Operating Officer, Director
Michael Radomsky 45 Executive Vice President, Secretary,
Director
William H. Whitney 43 Chief Technology Officer, Director
(resigned effective May 19,1998)
John F. McTigue 37 Vice President Operations, Chief Financial
Officer, Assistant Secretary and Treasurer
Robert M. Groll 64 Vice President Business Development
David I. Gould 67 Director (resigned effective June 16,1998)
Stephen P. Roma 50 Director
Alexander C. Stark 65 Director
All directors of the Company hold office until the next annual
meeting of shareholders and until their successors have been elected and
qualified. No family relationship exists between any director or executive
officer and any other director or executive officer of the Company.
The officers of the Company are elected by the Board of Directors
at its first meeting after each annual meeting of the Company's shareholders and
hold office until their successors are chosen and qualified, until their death,
or until they resign or have been removed from office.
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<PAGE>
STEPHEN M. DEIXLER has been Chairman of the Board of Directors
since 1985 and served as Chief Executive Officer of the Company from April 1996
to May 1997, as well as from June 1985 through October 1994. He was President of
the Company from May 1982 to June 1985. Mr. Deixler served as Treasurer of the
Company from its formation in 1982 until September 1993 and since October 1994.
During April 1995, Mr. Deixler sold his interest in Princeton Credit
Corporation, a company engaged in the business of buying, selling, and leasing
high technology products, to Greyvest Capital Inc., a Toronto Stock Exchange
company. Prior to the sale, Mr. Deixler was Chairman of Princeton Credit
Corporation. He previously served as President of Atlantic International
Brokerage, a leasing company, which is a wholly owned subsidiary of Atlantic
Computer Systems, Inc., which was liquidated as a result of the bankruptcy
proceedings of its parent company, Atlantic Computer Systems PLC. Prior to
holding this position, he was President and sole shareholder of Princeton
Computer Associates, Inc. ("PCA"). PCA was a company engaged in the business of
buying, selling and leasing of large-scale computer systems as well as
functioning in consulting and facilities management and was sold to Atlantic
Computer Systems, Inc. in 1988.
STEPHEN B. GRAY has been President, Chief Operating Officer and a
director since April 1996. He was elected to serve in the additional capacity as
the Chief Executive Officer in May 1997. He also is a director of MicroFrame
Europe N.V. He Served as Senior Vice President-Sales, Marketing and Support of
the Company From December 1994 through March 1996. From July 1993 through
December 1994, Mr. Gray was an independent consultant, engaged in assisting both
private and publicly-held companies with strategy development, internal
operational reviews and shareholder value enhancement programs. From September
1988 through June 1993, he held a series of management positions within Siemens
Nixdorf USA, the last as Vice President, (reporting to the Chief Executive
Officer and Board of Directors), and a member of the executive committee
overseeing Siemens Information Systems businesses in the United States. Prior to
joining Siemens, Mr. Gray previously held a series of rapidly progressive
positions within IBM including various technical, sales and marketing
assignments.
ALEXANDER C. STARK JR. is the president of AdCon, Inc., a
consulting firm organized to advise and counsel senior officers of global
telecom companies. Mr. Stark previously worked for 40 years at AT&T. Ten of
those years he served as a Senior Vice President. Recently retired from AT&T,
Mr. Stark is a former member of the Institute of Radio Engineers and a past Vice
President and Treasurer and a past Vice President and Treasurer of Lambda Chi
Alpha. He is a former member of: the Board of Directors College Careers Fund of
Westchester; the Board of adjustment of Allendale; and the County Trust Company
Board of Advisors. He was the 1977 General Campaign Chairman, United Way of
Westchester, and cited by the National Conference of Christians and Jews for
imaginative community leadership. Mr. Stark was honored as the Distinguished
Engineer of the Year by Rutgers University in 1991. He also served for many
years as a Director-at Large of the American Electronics Association and Chaired
the International Public Affairs Committee.
MICHAEL RADOMSKY is an original founder of the Company and has
been the Executive Vice President and a director since the Company's formation
in 1982 and has served as Secretary of the Company since November 1994. He is
currently responsible for multiple tasks, the
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<PAGE>
most important being the identification of industry directions, and the
technical appropriateness of Company designs as well as products acquired,
licensed or jointly developed with others. In addition, Mr. Radomsky has been
responsible for the design of network topologies for large corporate customers,
ensuring compatibility for future products. Mr. Radomsky has also previously
been responsible for the Company's technical support, purchasing and
manufacturing operations. Prior to 1989, Mr. Radomsky was responsible for the
mechanical and electronic engineering of the Company's products.
WILLIAM H. WHITNEY is an original founder of the Company and has
been the Chief Technology Officer (formerly titled Vice President - Software
Development) and a director since the Company's formation in 1982 and has served
as Assistant Secretary of the Company since November 1994. Along with Mr.
Radomsky, he developed all of the Company's initial products, including the
DL-4000 and the IPC product line. As Chief Technology Officer, Mr. Whitney has
been responsible for development of hardware and software for all of the
Company's standard offerings, including all products being sold through OEM and
distributor channels. Mr. Whitney has tendered his resignation from the Company
and the Board effective May 19,1998.
JOHN F. MCTIGUE has been the Company's Vice President - Operations
and Chief Financial Officer and Treasurer since July 1997. His responsibilities
include finance, administration, information systems, quality and production.
Mr. McTigue is a finance professional and Certified Public Accountant. From 1996
through 1997, he was with the Fundtech Corporation, a software developer where
he served as Chief Financial Officer. From 1989 to 1996, Mr. McTigue was with
Dawn Technologies, Inc, a manufacturer of high-tech goods, where he served as
the Chief Executive Officer from 1994 through 1996 and Chief Financial Officer
and Treasurer from 1989 through 1994.
Prior to this, he was with Rothstein Kass & Company.
ROBERT M. GROLL has been Vice President - Marketing of the Company
since March 1986. From 1970 until joining the Company in June 1985, as Director
of Marketing, Mr. Groll was the President of PTM Associates, Inc. ("PTM"), a
firm engaged in management consulting in the areas of technical marketing and
computer system design. While with PTM, during 1983 and 1984, Mr. Groll became
Vice President of Cable Applications, Inc. a New York corporation, where he was
responsible for initiating and managing new product development efforts.
DAVID I. GOULD, retired as Vice Chairman of the Board of Directors
at the end of April 1995, a position in which he had served since December 1993.
He presently is a director of the Company and has been since April 1985 and he
is President of Gould Consulting since May 1, 1995. He served as President and
Chief Operating Officer of the Company from June 1985 until December 1993. He
was Vice President-Marketing of the Company from April 1985 until June 1985.
From 1982 until joining the Company in 1985, he was an officer of The Ultimate
Corporation ("Ultimate"), a computer manufacturer listed on the New York Stock
Exchange, eventually serving as Senior Vice President of Marketing. During his
three years at Ultimate, Mr. Gould managed the growth of that company's revenues
from $40 million to more than $100 million. Mr. Gould has tendered his
resignation from the Board of the Company effective June 16, 1998.
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<PAGE>
STEPHEN P. ROMA has been a director of the Company since August
1991 and since August 1994 is the President and Chief Executive Officer of WOW!
Work Out World a chain of neighborhood health and fitness centers. During April
1995, he sold his interest in Princeton Credit Corporation, a company engaged in
the business of buying, selling and leasing high technology products, to
Greyvest Capital, Inc., a Toronto Stock Exchange company. Prior to the sale, Mr.
Roma was President and Chief Operating Officer of Princeton Credit Corporation.
He previously served as Vice President of Sales/Northeast Region of Atlantic
Computer Systems, Inc., which was liquidated as a result of the bankruptcy
proceedings of its parent company, Atlantic Computer Systems, PLC. Prior to
holding this position, he was a principal and President and Chief Operating
Officer of Princeton Computer Group, Inc., which was sold to Atlantic Computer
Systems, Inc. in 1988.
Compliance with Section 16(a) of the Exchange Act
The following persons have failed to file on a timely basis
certain reports required by Section 16(a) of the Securities Exchange Act of 1934
as follows: Each of Messrs. Stephen M. Deixler, Stephen P. Roma and David I.
Gould filed one late report on Form 5, disclosing the grant of a non-employee
stock option pursuant to the Company's 1994 Stock Option Plan, as amended (the
"1994 Plan"). Each of Messrs. Stephen B. Gray, Michael Radomsky, William Whitney
and John F. McTigue filed one late report, a Form 4 disclosing the grant of
stock option. Mr. William Whitney has filed two late reports on Form 4,
disclosing the sale of stock. During the fiscal year ended March 31, 1998, the
Company is not aware of other late filings, or failure to file, any other
reports required by Section 16(a) of the Exchange Act.
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<PAGE>
Item 10. Executive Compensation.
The following table summarizes the compensation paid or accrued by
the Company during the three fiscal years ended March 31, 1998, to those
individuals who as of March 31, 1998 served as the Company's Chief Executive
Officer during fiscal 1998 and to the Company's four most highly compensated
officers other than those who served as the Chief Executive Officer during
fiscal 1998 (these five executive officers being hereinafter referred to as the
"Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted Securities All Other
Principal Compen- Stock Underlying LTIP Compen-
Position Year Salary($) Bonus($)(3) sation($) Award(s)($) Options (#) Payouts($) sation($)
- --------- ---- --------- ----------- --------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Deixler 1998
Chairman, Chief 1997 14,000(1) -- -- -- 10,000 -- --
Executive Officer(1) 1996 -- -- -- -- -- -- --
Stephen B. Gray 1998 252,829 75,000
President, Chief 1997 163,386 -- -- -- 400,000 -- --
Executive Officer (2), 1996 134,675 -- -- -- 2,309 -- --
Chief Operating
Officer
Michael Radomsky 1998 139,858 42,839
Executive Vice- 1997 128,773 -- -- -- 90,000 -- 541(4)
President 1996 122,800 -- -- -- 8,208 -- 1,047(4)
William H. Whitney 1998 127,980 42,839
Chief Technology 1997 128,773 -- -- -- 90,000 -- 2,318(4)
Officer 1996 122,800 -- -- -- 8,136 -- 2,152(4)
John F. McTigue (5) 1998 92,482 100,760 1,418(4)
V-P, Operations, Chief
Financial Officer, Treasurer
And Assistant Secretary
Mark A. Simmons 1998
V-P, Operations, Chief 1997 116,956 -- -- -- 40,000 -- 2,105(4)
Financial Officer 1996 92,800 -- -- -- 6,579 -- 1,612(4)
</TABLE>
(1) The Company does not have a written employment agreement with Mr.
Stephen M. Deixler, the Company's Chairman of the Board. However,
under an informal agreement, the Company has agreed to pay him $1,000
per day to perform such services as jointly agreed
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<PAGE>
to by the Company and Mr. Deixler, and approved by the Board of
Directors. Mr. Deixler ceased to serve as the Chief Executive Officer
of the Company on May 19, 1997.
(2) Mr. Gray was elected to serve in the additional capacity as the Chief
Executive Officer of the Company on May 19, 1997. Compensation for
Mr. Gray includes payments he earned as consultant to the Company in
the amount of $42,000. Mr. Gray served as a consultant to the Company
prior to the time he became a full-time employee pursuant to his
employment agreement with the Company dated March 27, 1995.
(3) Represents compensation earned under the Company's Incentive Bonus
Plan for the fiscal year ended March 31, 1995 (the "Incentive Plan").
The Incentive Plan covers all Company employees and was effective as
of October 1, 1994. The Incentive Plan is based on achievement in
three specific areas - Company revenue, Company operating income, and
individual/ departmental objectives.
(4) Represents contribution of the Company under the Company's 401(k)
Plan.
(5) Represents compensation for the period from July 2, 1997 (date of
hire) through March 31, 1998.
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<PAGE>
Option Grants in Fiscal Year 1998
The following table sets forth certain information concerning
stock option grants during the year ended March 31, 1998 to the Named Executive
Officers:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------------------
Percent
Number of of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ---- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Stephen M. Deixler 10,000(1) N/A $1.50 9/17/01
Stephen B. Gray 75,000(2) 4.2% $1.75 05/04/07
Michael Radomsky 42,839(2) 2.4% $1.75 05/04/07
William H. Whitney 42,839(2) 2.4% $1.75 05/04/07
John F. McTigue 70,760(2) 3.9% $1.34 07/02/07
30,000 2.5% $1.34 07/02/07
</TABLE>
- -----------------------
(1) Represents stock options granted to Mr. Deixler under the 1994 Stock
Option Plan in consideration of his service to the Company as a
director.
(2) Represent options issued under a Time Accelerated Restricted Stock
Award Program (TARSAP).
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<PAGE>
Aggregated Option Exercises in Fiscal Year 1998
and Fiscal Year-End Option Values
The following table sets forth certain information concerning each
exercise of stock options during the fiscal year ended March 31, 1998 by each of
the Named Executive Officers and the number and value of unexercised options
held by each of the Named Executive Officers on March 31, 1998.
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexer- In-the-Money
Shares cised Options Options at
Acquired on Value at FY-End(#) FY-End($)(1)
Name Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stephen M. Deixler -- -- 27,500/2,500 $22,625/$3,275
Stephen B. Gray -- -- 477,309/0 $725,250/$0
Michael Radomsky -- -- 142,239/0 $192,007/$0
William H. Whitney -- -- 142,184/0 $192,018/$0
John F. McTigue -- -- 100,760/0 $145,094/$0
- -----------------------
</TABLE>
(1) The average price for the Common Stock as reported by the National
Quotation Bureau on March 31, 1998 was $2.78 per share. Value is
calculated on the basis of the difference between the option exercise
price and $2.78 multiplied by the number of shares of Common Stock
underlying the options.
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<PAGE>
Compensation of Directors
On September 17, 1997 Stephen M. Deixler, Stephen P. Roma, David
I. Gould and Alexander C. Stark, the Company's non-employee directors, were each
granted a non-employee director option. Pursuant to the Company's 1994 Plan,
each Director received an option to purchase 10,000 shares of Common stock
exercisable as to 2,500 shares upon each three-month anniversary of the date of
grant, provided that such individual continues to serve as a non-employee
director of the Company on such dates.
In addition, the Company adopted a policy commencing October 1,
1995, that all non-employee directors traveling more than fifty miles to a
meeting of the Board of directors shall be reimbursed for all reasonable travel
expenses.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
The Company has no employment agreements other then the employment
agreement with Stephen B. Gray, the Company's Chief Executive Officer and
President.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the
Company's Common Stock owned by each person or institution who, as of June 29,
1998, owns of record or is known by the Company to own beneficially, more than
five (5%) percent of such securities, and by the Company's Named Executive
Officers and by its Directors, both individually and as a group, and the
percentage of such securities owned by each such person and the group. Unless
otherwise indicated, such persons have sole voting and investment power with
respect to shares listed as owned by them.
Name and Address Shares Owned Percent of Class
- ---------------- ------------ ----------------
Stephen M. Deixler (1) 760,532 15.4%
371 Eagle Drive
Jupiter, Florida 33477
David I. Gould (2) 199,337 4.0%
10844 White Aspen Way
Boca Raton, Florida 33428
Stephen B. Gray (3)(12) 477,309 9.7%
Michael Radomsky (4) 356,643 7.2%
8 Zaydee Drive
Edison, New Jersey 08837
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<PAGE>
William H. Whitney (5) 214,998 4.5%
15 Jackson Avenue
Chatham, New Jersey 07928
Robert M. Groll (6) 100,852 2.1%
52 Village Lane
Freehold, New Jersey 07728
John F. McTigue (7)(12) 100,760 2.0%
Stephen P. Roma (8) 484,399 9.8%
91 Durand Drive
Marlboro, New Jersey 07748
Special Situations Fund, III, L.P.(9) 855,863 16.7%
MGP Advisers Limited Partnership (9) 855,863 16.7%
AWM Investment Company, Inc. (9) 1,157,133 22.2%
Austin W. Marxe (9) 1,157,133 22.2%
Jay Associates LLC (10) 480,000 9.3%
1118 Avenue J
Brooklyn, New York 11230
Alpha Investments LLC (11) 336,000 6.6%
5611 North 16th Street #300
Phoenix, Arizona 85016
Alexander C. Stark (12)(13) 85,000 1.6%
Directors and executive
officers as a group (9 Persons) 2,779,830 52.5%
- -------------------
(1) Does not include 214,436 shares of Common Stock owned by Mr.
Deixler's wife, mother, children and grandchildren as to which shares
Mr. Deixler disclaims beneficial ownership. Includes 120,406 shares
of Common Stock held by Merrill Lynch Pierce Fenner & Smith custodian
f/b/o Stephen M. Deixler, IRA. Includes 27,500 shares of Common Stock
which may be acquired pursuant to currently exercisable non-employee
director options under the 1994 Plan. Also includes 53,330 shares
issuable upon exercise of currently exercisable Class A and Class B
Warrants of the 1996 Private Placement.
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<PAGE>
(2) Includes 50,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1984
Stock Option Plan and the 1994 Plan. Also includes 52,500 shares of
common Stock which may be acquired pursuant to currently exercisable
non-employee director options under the 1994 Plan.
(3) Includes 400,000 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted outside the
Company's 1994 Plan. Also includes 77,309 shares of Common Stock
which may be acquired pursuant to currently exercisable options
granted under the Company's 1994 Plan.
(4) Includes 90,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 52,339 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted under the
Company's 1994 Plan.
(5) Includes 90,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted outside the Company's 1994
Plan. Also includes 52,184 shares of Common Stock which may be
acquired pursuant to currently exercisable options granted under the
Company's 1994 Plan.
(6) Includes 56,684 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted under the 1994 Plan.
(7) Includes 100,760 shares of Common Stock which may be acquired
pursuant to currently exercisable options granted under the Company's
1994 Plan.
(8) Includes 47,877 shares of Common Stock held by Donaldson, Lufkin &
Jenrette Securities Corporation custodian f/b/o Stephen P. Roma, IRA.
Includes 8,400 shares of Common Stock held by Mr. Roma and his wife
as joint tenants. Also includes 27,500 shares of common Stock which
may be acquired pursuant to currently exercisable non-employee
director options under the 1994 Plan. Also includes 53,330 shares
issuable upon exercise of currently exercisable Class A and Class B
Warrants of the 1996 Private Placement. Does not include 1,200 shares
of Common Stock held by Mr. Roma as custodian for his son or 29,108
shares owned by Mr. Roma's wife, some of which are held in Mrs.
Roma's individual retirement account, as to which shares Mr. Roma
disclaims beneficial ownership.
(9) Special Situations Fund III, L.P., a Delaware limited partnership
(the "Fund"), MGP Advisers Limited Partnership, a Delaware limited
partnership ("MGP"), AWM Investment Company, Inc., a Delaware
corporation ("AWM"), and Austin W. Marxe have filed a Schedule 13G,
the latest amendment of which is dated January 27, 1997. All
presented information is based on the information contained in the
Schedule 13G and subsequent information known to the Company. The
address of each of the reporting persons is 153 East 53rd Street, New
York, New York 10022. The Fund has sole voting and dispositive power
with respect to 855,863 shares; MGP has sole dispositive power with
respect to
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<PAGE>
855,863 shares; AWM has sole voting power with respect to 301,270
shares and sole dispositive power with respect to 1,157,133 shares;
and Mr. Marxe has sole voting power with respect to 301,270 shares,
shared voting power with respect to 855,863 shares and sole
dispositive power with respect to 1,157,133 shares. MGP is a general
partner of and investment advisor to the Fund. AWM, which is
primarily owned by Mr. Marxe, is the sole general partner of MGP. Mr.
Marxe, the principal limited partner of MGP and the President of AWM,
is principally responsible for the selection, acquisition and
disposition of the portfolio securities by AWM on behalf of MGP, the
Fund and another fund that beneficially owns shares included in the
shares beneficially owned by AWM and Mr. Marxe. Also includes 267,242
shares issuable upon exercise of currently exercisable Class A and
Class B Warrants of the 1996 Private Placement held by the Fund and
MGP and 364,422 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996 Private
Placement held by AWM and Mr. Marxe.
(10) Includes 320,000 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996 Private
Placement.
(11) Includes 224,000 shares issuable upon exercise of currently
exercisable Class A and Class B Warrants of the 1996 Private
Placement.
(12) The address of such person is c/o the Company, 21 Meridian Avenue,
Edison, New Jersey 08820.
(13) Includes 35,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options granted under the Company's 1994
Plan.
Item 12. Certain Relationships and Related Transactions.
Mr. David I. Gould, formerly an executive officer and director of
the Company entered into a consulting agreement with the Company, that became
effective on May 1, 1995 upon the expiration date of his employment agreement on
April 30, 1995. The consulting agreement provides for a four-year term, with an
automatic one year renewal, and compensation at the rate of $1,000 per day for
services provided. The consulting agreement further provides that Mr. Gould will
not receive less than $40,000 nor more than $220,000 per year, and that the
rendering of any services above $40,000 must be with the prior approval of the
Company. During fiscal 1998, Mr. Gould was paid $40,000 under this agreement.
On April 1, 1996, the Company entered into a six-month
compensation agreement with Mr. Lonnie L. Sciambi, a former executive officer
and director of the Company after the expiration of the Company's employment
agreement with Mr. Sciambi. The compensation agreement provided for compensation
in the aggregate sum of $100,000, as well as certain benefits during the term.
In addition, Mr. Sciambi was granted a stock option under the Company's 1994
Plan to purchase 23,196 shares of Common Stock.
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<PAGE>
In April 1996, the Company completed the 1996 Private Placement to
accredited investors of an aggregate of 1,101,467 Units for gross proceeds of
$1,376,933.75, each Unit consisting of one share of Common Stock and one Class A
Warrant and one Class B Warrant, each of which are exercisable into one share of
Common Stock. Stephen M. Deixler, an executive officer and a director of the
Company and Stephen P. Roma, a director of the Company, who each held preemptive
rights to purchase Units in this offering, each purchased 26,665 Units at a
price of $1.25 per Unit for the aggregate consideration of $33,331.25
Additionally, in connection with the 1996 Private Placement, Special Situations
Fund III, L.P., also the holder of preemptive rights, purchased 133,621 Units at
$1.25 for the aggregate consideration of $167,026.25.
In September 1995, the Company formed a wholly-owned subsidiary,
MicroFrame Europe N.V., which, in turn, acquired all of the issued and
outstanding shares of capital stock of European Business Associates BVBA ("EBA")
of Brussels, Belgium from Marc Kegelaers, its sole shareholder. In connection
with such acquisition, MicroFrame Europe N.V. entered into a consulting
agreement with Mr. Kegelaers for a term of five years. The consulting agreement
provides for a consulting fee in the aggregate sum of U.S. $75,000 annually,
with annual 5% increases over the term, as well as the reimbursement of certain
expenses during the term.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of the
Company Form 10-K for the fiscal year ended March 31,
1992 (the "1992 10-K")
3.2 By-Laws of the Company Incorporated by reference to Exhibit 3.2 of
Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (No.
33-66688) dated October 26, 1993
("Amendment No. 1 to the Registration
Statement")
3.3 Amendment to Certificate of Incorporated by reference to Exhibit 3.3 of the
Incorporation filed September 14, Form 10-KSB for the fiscal year ended March
1992 31, 1993 (the "1993 10-KSB")
3.4 Amendment to Certificate of Incorporated by reference to Exhibit 3.4 of
Incorporation filed September 20, Amendment No. 1 to the Registration
1993 Statement
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<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
3.5 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of
Certificate Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (No.
33-66688) dated December 1, 1993
("Amendment No. 2 to the Registration
Statement")
10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4 of
the of the Form 10-K for the fiscal year ended
March 31, 1985
10.2 Amendment No. 2 to 1984 Stock Incorporated by reference to Exhibit 10.5 of
Option Plan the Form 10-K for the fiscal year ended March
31, 1986 (the "1986 10-K")
10.3 Lease Agreement Incorporated by reference to Exhibit 10.6 of
the Form 10-K for the fiscal year ended March
31, 1991 (the "1991 10-K")
10.4 Stock Purchase Agreement dated Incorporated by reference to Exhibit 10.4 of
May 10, 1993 pursuant to Private the 1993 10-KSB
Placement
10.5 Employment Agreement dated as Incorporated by reference to Exhibit 10.5 of
of May 2, 1992 between David I. Amendment No. 2 to the Registration
Gould and the Company Statement
10.6 Loan Agreement between the Incorporated by reference to Exhibit 10.6 of
Company and New Jersey the 199310-KSB
National Bank
10.7 Letter Agreement dated April 28, Incorporated by reference to Exhibit 10.7 of
1993 between the Company and Amendment No. 1 to the Registration
New Jersey National Bank Statement
10.8 Form of Consulting Agreement Incorporated by reference to Exhibit 10.8 of
between David I. Gould and the Amendment No. 1 to the Registration
Company Statement
-39-
<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
10.9 Agreement between American Incorporated by reference to Exhibit 10.9 of
Telephone and Telegraph Amendment No. 2 to the Registration
Company and the Company dated Statement
September 17, 1993
10.10 Joint Marketing Agreement Incorporated by reference to Exhibit 10.10 of
between MCI Telecommunica Amendment No. 2 to the Registration
tions Corporation and the Statement
Company dated September 1,
1992, together with Amendment
No. 1 dated July 7, 1993
10.11 Employment Agreement dated as Incorporated by reference to Exhibit 10.11 of
of January 1, 1994 between Form 10-KSB for the fiscal year ended March
Michael Radomsky and the 31, 1994 (the "1994 10-KSB")
Company
10.12 Employment Agreement dated as Incorporated by reference to Exhibit 10.12 of
of January 1, 1994 between the 1994 10-KSB
William H. Whitney and the
Company
10.13 Employment Agreement dated as Incorporated by reference to Exhibit 10.13 of
of January 1, 1994 between the 1994 10-KSB
Robert M. Groll and the Company
10.14 Employment Agreement dated as Incorporated by reference to Exhibit 10.15 of
of January 1, 1994 between P. Amendment No. 2 to the Registration
David Bocksch and the Company Statement
10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15 of
the 1994 10-KSB
10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16 of
Agreement between the Company Form 10-QSB for the quarter ended
and CoreStates Bank, N.A. dated September 30, 1994
September 8, 1994.
10.17 Consulting Agreement between Incorporated by reference to Exhibit 10.17 to
the Company and P. David Form 8-K dated November 30, 1994
Bocksch dated November 14,
1994
-40-
<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
10.18 Employment Agreement dated as Incorporated by reference to Exhibit 10.18 to
of October 11, 1994 between the Form 10-QSB for the quarter ended December
Company and Lonnie L. Sciambi 31, 1994
10.19 Incentive Bonus Plan of the Incorporated by reference to Exhibit 10.19 to
Company for the fiscal year ended Form 10-QSB for the quarter ended December
March 31, 1995 31, 1994
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20 to
Company to the Securities and Form 8-K dated March 13, 1995
Exchange Commission relating to
Item 4 of Form 8-K
10.21 1994 Stock Option Plan Incorporated by reference from the Company's
Proxy Statement dated August 15, 1994 for
the Company's Annual Meeting of
Shareholders held on September 19, 1994
10.22 Non-Qualified Stock Option Incorporated by reference to Exhibit 10.22 of
Agreement dated December 19, the 1994 10-KSB
1994 between the Company and
Cameron Towey Neilson, Inc.
10.23 Purchase Agreement dated Incorporated by reference to Exhibit 10.23 of
December 21, 1994 between the the 1994 10-KSB
Company and Ericsson Business
Networks AB
10.24 Employment Agreement dated as Incorporated by reference to Exhibit 10.24 of
of March 27, 1995 between the the 1994 10-KSB
Company and Stephen B. Gray
10.25 Letter dated April 5, 1995 from Incorporated by reference to Exhibit 10.25 of
the Company to P. David Bocksch the 1994 10-KSB
terminating his Consulting
Agreement
10.26 Incentive Bonus Plan of the Incorporated by reference to Exhibit 10.26 of
Company for the fiscal year ending the 1994 10-KSB
March 31, 1996
</TABLE>
-41-
<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
10.27 Letter of Intent dated April 9, Filed herewith
1998 With Solcom Systems, Ltd.
10.28 Line of Credit Agreement with Filed herewith
United National Bank Dated
November 17, 1997
23.1 Consent of Pricewaterhouse Filed herewith
Coopers LLP
(b) Reports on Form 8-K
On May 19, 1998, the Company filed a Current Report on Form 8-K
disclosing a press release in connection with the execution of a letter of
intent relating to the Company's proposed acquisition of SolCom Systems Limited.
-42-
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 1998 and 1997
<PAGE>
Index to Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets as of March 31, 1998
and March 31, 1997 F-2
Consolidated Statements of Operations for the years
ended March 31, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the years ended March 31, 1998 and March 31, 1997 F-5
Notes to Consolidated Financial Statements F-6-20
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
MicroFrame, Inc. and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of MicroFrame,
Inc. and Subsidiary (the "Company") at March 31, 1998 and 1997, and the results
of their operations, cash flows and changes in stockholders' equity for each of
the two years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
June 26, 1998
F-1
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Balance Sheets
as of March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
ASSETS
<S>
Current assets: <C> <C>
Cash and cash equivalents $ 507,726 $ 539,214
Accounts receivable, less allowance for doubtful
accounts of $126,000 and $100,000, respectively 2,667,319 1,898,810
Inventory, net 1,425,351 1,030,343
Current deferred tax assets 366,137 314,242
Prepaid expenses and other current assets 153,568 120,990
----------------- ------------------
Total current assets 5,120,101 3,903,599
Property and equipment at cost, net 421,701 343,123
Capitalized software, less accumulated amortization
of $1,054,827 and $812,257, respectively 396,351 315,568
Noncurrent deferred tax assets 326,083 -
Goodwill, less accumulated amortization of $26,130
and $16,230, respectively 75,480 85,380
Security deposits 35,716 34,703
----------------- ------------------
Total assets $ 6,375,432 $ 4,682,373
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 300,000 -
Current portion of long-term debt 30,009 42,266
Accounts payable 910,842 361,537
Accrued payroll and related liabilities 348,397 280,512
Deferred income 181,573 268,518
Other current liabilities 405,263 255,346
----------------- ------------------
Total current liabilities 2,176,084 1,208,179
----------------- ------------------
Commitments and contingencies (Notes 8 and 9)
Deferred tax liabilities 196,394 173,077
Long-term debt - 30,398
Stockholders' equity:
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued
Common stock - par value $.001 per share; authorized 50,000,000 shares,
issued 4,849,531 shares, outstanding 4,849,131 shares and subscribed
50,000 shares at March 31, 1998; issued 4,839,203 shares and outstanding
4,838,803 shares at March 31, 1997 4,899 4,839
Additional paid-in capital 6,345,613 6,212,828
Stock subscription receivable (104,000) -
Accumulated deficit (2,231,638) (2,942,948)
Cumulative translation adjustment (7,920) -
----------------- ------------------
4,006,954 3,274,719
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------------- ------------------
Total stockholders' equity 4,002,954 3,270,719
----------------- ------------------
Total liabilities and stockholders' equity $ 6,375,432 $ 4,682,373
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------
<S> <C> <C>
Net sales $ 10,217,911 $ 7,343,624
Cost of sales 4,285,134 2,903,705
------------------ ----------------
Gross margin 5,932,777 4,439,919
Research and development expenses 1,117,151 893,852
Selling, general and administrative expenses 4,419,521 3,355,961
------------------ ----------------
Income from operations 396,105 190,106
Interest income 14,888 35,560
Interest expense (4,344) (24,380)
------------------ ----------------
Income before income tax benefit 406,649 201,286
Income tax benefit (304,661) (141,165)
------------------ ----------------
Net income $ 711,310 $ 342,451
================== ================
Per share data:
Basic $ 0.15 $ 0.07
Diluted $ 0.14 $ 0.07
------------------ ----------------
Weighted average number of common shares outstanding 4,840,357 4,730,713
------------------ ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 711,310 342,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 485,738 360,263
Provision for doubtful accounts 26,000 55,751
Provision for inventory obsolescence (15,000) 75,000
Noncash stock-based compensation charge 15,150 --
Deferred tax provision (354,661) (141,165)
Changes in operating assets and liabilities:
Accounts receivable (794,509) (414,000)
Inventory (380,008) (20,473)
Prepaid expenses and other current assets (32,578) (43,564)
Security deposits (1,013) 280
Accounts payable 549,305 (34,082)
Accrued payroll and related liabilities 67,885 10,738
Deferred income (86,945) 9,662
Other current liabilities 141,997 (179,869)
----------------- -----------------
Net cash provided by operating activities 332,671 20,992
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (311,846) (120,131)
Capitalized software (323,353) (212,174)
----------------- -----------------
Net cash used in investing activities (635,199) (332,305)
----------------- -----------------
Cash flows from financing activities:
Borrowings under line of credit 300,000 --
Repayments of debt (42,655) (538,923)
Issuances of common stock 13,695 1,341,148
----------------- -----------------
Net cash provided by financing activities 271,040 802,225
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (31,488) 490,912
Cash and cash equivalents - beginning of period 539,214 48,302
----------------- -----------------
Cash and cash equivalents - end of period $ 507,726 539,214
================= =================
Supplemental information:
Cash paid during period for interest $ 4,344 24,380
----------------- -----------------
Noncash investing and financing activities:
Common stock issued in connection with European Business
Associates share earn out agreement 12,538 15,877
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Stock Cumulative Total
Common Stock Paid-in Subscription Accumulated Translation Treasury Stockholders'
Shares Par Capital Receivable Deficit Adjustment Stock Equity
Value
----------- ---------- ------------ ---------- -------------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,1996 3,717,675 3,718 $ 4,856,924 $ (3,285,399) $ $ (4000) $ 1,571,243
Net income 342,451 342,451
Issuances of common stock 1,121,128 1,121 1,355,904 1,357,025
----------- ---------- ------------ ---------- -------------- ----------- --------- ------------
Balance, March 31, 1997 4,838,803 4,839 6,212,828 (2,942,948) (4,000) 3,270,719
----------- ---------- ------------ ---------- -------------- ----------- --------- ------------
Net income 711,310 711,310
Issuances of common stock 10,328 10 13,685 13,695
Noncash stock-based
compensation 15,150 15,150
Stock subscription 50,000 50 103,950 $ (104,000)
Translation adjustments (7,920) (7,920)
----------- ---------- ------------ ---------- -------------- ----------- --------- ------------
Balance, March 31, 1998 4,899,131 4,899 $ 6,345,613 $ (104,000) $ (2,231,638) $ (7,920) $ (4,000) $ 4,002,954
=========== ========== ============ ========== ============== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended March 31, 1998 and 1997
1. Organization:
The Company
MicroFrame, Inc., founded in 1982, designs, develops and markets a
broad range of security, network management and remote maintenance
products for voice and data communications networks. By incorporating a
variety of hardware and software options for user authentication, these
products can deter unauthorized dial-in access to both devices and
systems (such as computers, local area networks and Private Branch
Exchange telephone switches), while allowing authorized personnel
access to perform needed administration and maintenance of host devices
and networks from remote locations. The products also provide alarm
monitoring and reporting capabilities, a basis for remote network
management and maintenance.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of MicroFrame, Inc. and its subsidiary (collectively, the "Company").
All material intercompany accounts and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or
market, and consists of hardware and software components designed to
interface with network communications environments.
The markets for the Company's products are characterized by rapidly
changing technology and the consequential obsolescence of relatively
new products. The Company has recorded certain estimated reserves
against inventories related to such technological obsolescence.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets, which are generally three to five years. Expenditures for
maintenance and repairs, which do not extend the economic useful life
of the related assets, are charged to operations as incurred. Gains or
losses on disposal of property and equipment are reflected in the
statements of operations in the period of disposal.
F-6
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
2. Summary of Significant Accounting Policies (Continued)
Capitalized Software
The Company capitalizes computer software development costs in
accordance with the provisions of Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" ("SFAS 86"). SFAS 86 requires that
the Company capitalize computer software development costs upon the
establishment of the technological feasibility of a product, to the
extent that such costs are expected to be recovered through future
sales of the product.
The Company capitalized $323,353 and $212,174 of software development
costs for fiscal 1998 and 1997, respectively. These costs are amortized
by the greater of the amount computed using (i) the ratio that current
gross revenues from the sales of software bear to the total of current
and anticipated future gross revenues from sales of that software, or
(ii) the straight-line method over the estimated useful life of the
product (generally three years). It is reasonably possible that those
estimates of anticipated future gross revenues, the remaining estimated
economic life of the product, or both will be reduced significantly in
the near term (due to competitive pressures). As a result, the carrying
amount of the capitalized software costs may be reduced materially in
the near term. Amortization expense totaled $242,570 and $162,925 for
fiscal 1998 and fiscal 1997, respectively.
Goodwill
Goodwill, which represents the excess of cost over the net assets of
acquired companies, is being amortized on a straight-line basis over
ten years.
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development
expense.
Revenue Recognition Policy
The Company records revenue from product sales upon shipment to the
customer if no significant vendor obligations exist and collectibility
is probable. Maintenance contracts are sold separately and maintenance
revenue is recognized on a straight-line basis over the period the
service is provided, generally one year. At March 31, 1998 and 1997,
the Company has deferred income related to maintenance contracts of
$181,573 and $268,518 respectively.
F-7
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
2. Summary of Significant Accounting Policies (Continued)
Warranty Costs
Warranty costs associated with the sale of hardware and software are
accrued at the time of sale. The warranty reserve as of March 31, 1998
and 1997 included in other current liabilities amounts to $45,000 and
$35,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the year. Actual results could differ from those
estimates. The significant estimates include the allowance for doubtful
accounts, allowance for inventory obsolescence, deferred tax asset
valuation allowance and depreciation and amortization lives.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued payroll and related liabilities, deferred
income, and other current liabilities approximates fair value because
of the relatively short maturity of these instruments. The Company's
line of credit has a variable interest rate which adjusts with changes
in market interest rates and the book value of such indebtedness is
deemed to approximate fair value.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" ("SFAS 121"), requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset in question may not be
recoverable. The Company adopted SFAS 121 during fiscal 1997 and there
was no material impact on the Company's financial position or results
of operations.
Per Share Data
Earnings per share has been calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
The weighted average number of common shares outstanding during 1998
and 1997 were used to compute basic earnings per share. Diluted
earnings per share is computed using the weighted average number of
common shares outstanding plus the dilutive potential common shares
outstanding. Dilutive potential common shares are additional common
shares assumed to be exercised, which approximated 355,000 and 238,000
in 1998 and 1997, respectively.
F-8
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
2. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The financial statements of the foreign subsidiary were prepared in
local currency and translated into U.S. dollars based on the current
exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations.
Translation adjustments are reflected as foreign currency translation
adjustments in stockholders' equity and, accordingly, have no effect on
net income. Transaction adjustments for the foreign subsidiary are
included in income.
Income Taxes
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
return. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities ("temporary differences") using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Recognition of a deferred tax asset is allowed if
it is more likely than not that the asset will be realized in the
future.
Reclassification
The Company has reclassified certain prior year amounts to conform with
the 1998 presentation.
3. Inventory:
Inventory, net of reserve for obsolescence of $185,000 and $200,000 at
March 31, 1998 and 1997, respectively, consists of the following:
1998 1997
------------------ ---------------------
Raw materials $ 818,132 $ 625,583
Work-in-process 525,918 374,802
Finished goods 81,301 29,958
------------------ ---------------------
$ 1,425,351 $ 1,030,343
================== =====================
F-9
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
4. Property And Equipment At Cost, Net:
At March 31, 1998 and 1997 property and equipment consists of the
following:
1998 1997
---------------- ---------------
Demonstration and service equipment $ 1,125,987 $ 832,478
Furniture and fixtures 195,767 180,940
Leasehold improvements 71,850 68,340
---------------- ---------------
1,393,604 1,081,758
Less: Accumulated depreciation (971,903) (738,635)
---------------- ---------------
Total $ 421,701 $ 343,123
================ ===============
Depreciation expense for property and equipment for the years ended
March 31, 1998 and 1997 amounted to $233,268 and $186,874,
respectively.
5. Bank Borrowings:
The Company has an available line of credit through July 30, 1998, in
the amount of $1,000,000. At March 31, 1998, $300,000 had been drawn
down under this line of credit. All amounts were unused at March 31,
1997. The line is collateralized by all business assets of the Company.
Any advances under the bank line are payable at maturity, and bear
interest at the Wall Street prime rate (8.5% at March 31, 1998) plus
0.5%. At March 31, 1996, $500,000 was outstanding under a line of
credit. The final installment on this outstanding line of credit was
made on September 5, 1996 at which time the bank line was closed.
In addition, the Company had an outstanding facility of $150,000 to
support 80% of its capital expansion. In November 1995, $124,000 was
borrowed against the facility with a term of three years, payable
monthly, at an interest rate of 8.55%. Upon expiration of this facility
at July 31, 1996, the bank agreed to honor the existing terms of this
credit facility. At March 31, 1998 and 1997, respectively, $30,009 and
$72,664 was outstanding. Future principal repayments under this loan
are $30,009 for the year ending March 31, 1999.
The bank line of credit contains a covenant which restricts the payment
of a dividend without the prior approval of the bank.
F-10
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
6. Income Taxes:
As of March 31, 1998, the Company has available federal and foreign net
operating loss carryforwards of approximately $896,000 and $914,000,
respectively, to offset future taxable income. The federal net
operating loss carryforwards expire during the years 2001 through 2011.
In addition, the Company has investment credit and research and
development credit carryforwards aggregating approximately $136,098,
which may provide future tax benefits, expiring from 1999 through 2002.
The components of the income tax benefit for the years ended March 31,
1998 and 1997 are as follows:
1998 1997
--------------- ----------------
Current:
Federal $ 16,000 -
State 34,000 -
--------------- ----------------
50,000 -
--------------- ----------------
Deferred:
Federal $ (301,442) $ (119,990)
State (53,219) (21,175)
--------------- ----------------
(354,661) (141,165)
--------------- ----------------
$ (304,661) $ (141,165)
=============== ================
The reasons for the difference between the Company's effective tax rate
and the United States federal statutory rate are as follows:
March 31,
----------------------------
1998 1997
------------ -------------
Effective tax rate reconciliation:
Statutory federal tax rate 34% 34%
State taxes, net of federal benefit 6% 6%
Effect of reversal of valuation allowance (76)% (70)%
Foreign loss with no benefit 29% 53%
Utilization of NOL's (70)% (93)%
Other 2% -
------------ -------------
(75)% (70)%
============ =============
F-11
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
6. Income Taxes (Continued)
The tax effect of temporary differences which make up the significant
components of the net deferred tax asset and liability at March 31,
1998 and 1997 are as follows:
1998 1997
-------------- -------------
Current deferred tax assets:
Inventory $ 214,000 $ 192,000
Accrued expenses 83,737 82,242
Allowance for doubtful accounts 68,400 40,000
-------------- -------------
Total current deferred tax assets $ 366,137 $ 314,242
============== =============
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 715,669 $ 834,324
Research and development credit 136,098 131,046
Alternative minimum tax credit 21,572
-------------- -------------
Total noncurrent deferred tax assets 873,339 965,370
Valuation allowance (547,256) (965,370)
-------------- -------------
Net noncurrent deferred tax assets $ 326,083 $ -
============== =============
Deferred tax liabilities:
Depreciation $ (37,854) $ (46,849)
Capitalized software (158,540) (126,228)
-------------- -------------
Total deferred tax liabilities $ (196,394) $ (173,077)
============== =============
The Company has recorded a valuation allowance against the foreign net
operating loss carryforwards and the research and development credit as
it is more likely than not that such assets will not be realized. The
change in the valuation allowance is due to the reversal of the
valuation allowance recorded against the remaining federal net
operating loss carry forwards, as management believes these assets are
more likely than not to be utilized based on existing temporary taxable
differences and expected levels of future taxable income, as well as
the utilization of federal and state net operating loss carryforwards
offset partially by the increase in foreign net operating loss
carryfowards during the year ended March 31, 1998.
F-12
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity:
During the year ended March 31, 1998, the Company entered into a stock
subscription agreement with one of its directors, under which the
director agreed to acquire 50,000 shares of the Company's Common Stock.
During the years ended March 31, 1998 and 1997, respectively, options
to purchase 500 and 9,500 shares of common stock under the Company's
stock option plans were exercised, for an aggregate consideration of
$625 and $15,755. In addition, 9,828 and 10,161 shares of common stock
were issued as part of the stock earn out as stipulated in the Share
Purchase Agreement (see Note 12). The aggregate fair value of this
consideration was $13,070 and $15,877.
During the year ended March 31, 1996, options to purchase 5,877 shares
of common stock under the Company's stock option plans were exercised,
for an aggregate consideration of $9,425. In addition, 25,000 shares of
common stock were issued as part of the consideration for the purchase
of European Business Associates BVBA (see Note 12). The aggregate fair
market value of consideration of $78,124 was recorded as part of the
total consideration paid for this acquisition.
In April, 1996, the Company sold 860,000 shares of common stock to
unrelated investors, at $1.25 per share and received net proceeds of
approximately $1,023,559. In conjunction with this sale, warrants to
purchase 860,000 shares of common stock with an exercise price of $1.50
and warrants to purchase an additional 860,000 shares of common stock
with an exercise price of $2.00 were issued. These warrants expire in
April, 2000.
In addition, the Company sold 241,467 shares of common stock to four
current shareholders of record who held the contractual right to
maintain their share of ownership. The Company received net proceeds of
$301,834. In conjunction with this sale, warrants to purchase 241,467
shares of common stock with an exercise price of $1.50 and warrants to
purchase an additional 241,467 shares of common stock with an exercise
price of $2.00 were issued.
These warrants expire in April, 2000.
Warrants
During October 1995, in connection with services being performed by a
consultant, the Company issued 250,000 warrants to the consultant to
purchase shares of the Company's common stock. Warrants to purchase
50,000 shares of common stock at $3.25 per share vested immediately.
Warrants to purchase each additional block of 50,000 shares of common
stock are exercisable at $3.75, $4.25, $4.75 and $5.25 per share,
respectively, and shall vest on each three month anniversary of the
agreement. The warrants expire five years from the date of grant.
F-13
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Stock Option Plans
In August 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan"). The 1994 Plan, as amended, increased the number of shares
of common stock for which options may be granted to a maximum of
1,250,000 shares. The aggregate fair market value (determined at the
time the option is granted) of shares which are exercisable during any
calendar year by any one individual may not exceed $100,000. The term
of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the
outstanding common stock) of the fair market value of one common stock
on the date of grant. During the year ended March 31, 1997, the Company
granted options to purchase 657,629 shares of its common stock under
the 1994 Plan. At March 31, 1997, 298,693 options were outstanding
under the 1994 Plan, of which 270,483 options were exercisable.
Of the options granted in 1998, 455,645 were granted under the
Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The
options vest after seven years, however, under the TARSAP the vesting
is accelerated to the last day of the current fiscal year if the
Company meets certain predetermined sales and net income targets. The
Company met the targets for 1998 and, as such, all options granted
under the TARSAP in 1998 vested as of March 31, 1998.
Other Options
During the year ended March 31, 1998, the Company issued 30,000 options
to a consultant, of which 15,000 were immediately vested and 15,000
were to vest contingent on an extension of the consulting agreement.
This agreement and the unvested options were subsequently terminated.
Compensation expense of $15,150 was recorded relative to the grant of
the original 15,000 options during 1998.
During September 1996, the Company issued options to certain officers
and directors to purchase 620,000 shares of the Company's common stock,
of which 420,000 vested immediately and 100,000 vest each April 1 of
1998 and 1999. Options expire ten years from the date of grant. The
exercise price of the options is equal to the market value of the
Company's stock on the date of grant.
The Company also has outstanding options to purchase 130,000 shares of
the Company's stock. Options expire in terms ranging from 5 to 10 years
from the date of grant. The exercise price of the options is equal to
the market value of the Company's stock on the date of grant.
F-14
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Accounting for Stock-Based Compensation
The Company continues to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its options. Accordingly, no
compensation cost has been recognized for its fixed stock option plans
in its results of operations.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). If the Company had elected to recognize
compensation costs based on the fair value at the date of grant for
awards in fiscal 1998 and 1997, consistent with the provisions of SFAS
No. 123, the Company's net income and basic earnings per share would
have been reduced by $426,614 and $.09 and $462,088 and $.10,
respectively.
The proforma effect on net income for fiscal 1998 and 1997 may not be
representative of the pro forma effect on net income of future years
because the SFAS No. 123 method of accounting for pro forma
compensation expense has not been applied to options granted prior to
April 1, 1995.
The weighted-average fair values at date of grant for options granted
during fiscal 1998 and 1997 were $1.00 and $.96, respectively. The fair
value of each option grant for the Company's common stock is estimated
on the date of the grant using the Black Scholes option pricing model,
with the following weighted average assumptions used for grants in
fiscal 1998 and 1997:
1998 1997
-----------------------------------
Expected volatility 77% 77%
Risk-free interest rate 6.34% 6.56%
Expected option lives 5.54 years 6.34 years
F-15
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
7. Stockholders' Equity (Continued)
Accounting for Stock-Based Compensation (Continued)
Details of options granted are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Option Price
Shares Price Per Share ($)
-------------- --------------------- -----------------
<S> <C> <C> <C>
Options outstanding at March 31, 1996 435,998 2.11 1.25 to 3.13
Granted 1,277,629 1.31 1.16 to 2.00
Canceled (636,634) 1.55 1.25 to 3.13
Exercised (9,500) 1.66 1.25 to 1.83
-------------- -----------------
Options outstanding at March 31, 1997 1,067,493 1.49 1.16 to 2.87
Granted 807,740 1.78 1.34 to 3.13
Canceled (79,937) 1.85 1.25 to 2.87
Exercised (500) 1.25 1.25
-------------- -----------------
Options outstanding at March 31, 1998 1,794,796 1.60 1.16 to 3.13
Options exercisable at March 31, 1998 1,425,932 1.65 1.16 to 3.13
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Weighted
Average
Remaining Weighted
Years of Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Weighted
------------------- ----------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C>
$1.16 - $1.72 876,422 5.02 $ 1.25 615,422 $ 1.26
$1.83 - $2.14 817,542 4.81 $ 1.83 709,922 $ 1.81
$2.25 - $3.13 100,832 3.12 $ 2.86 100,588 $ 2.86
</TABLE>
F-16
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
8. Commitments:
Operating Leases
In June 1993, the Company amended its lease for office and
manufacturing facilities. Such amendment extends the term of the lease
until June 30, 1999. In July 1995, the Company executed an additional
building lease for the purpose of expanding its office and
manufacturing facilities. The terms of the new lease provide for an
expiration date concurrent with that of the existing building lease. In
August 1996, the Company executed a building lease for its European
operation in Antwerp, Belgium. The lease expires in August 1999.
The fixed minimum payments under operating leases for future periods is
as follows:
Year ending March 31,
1999 $ 150,800
2000 44,500
2001 0
2002 0
2003 0
Thereafter 0
------------------
Total minimum lease payments $ 195,300
==================
Rent expense, in addition to allocated occupancy expenses, for the
years ended March 31, 1998 and 1997 approximated $153,954 and $145,700,
respectively.
Consulting Contract
The Company entered into a consulting agreement with an officer which
became effective upon the expiration (or mutually agreed upon
termination) of his employment agreement on May 2, 1995. The agreement
provides that the officer will not receive less than $40,000 per year
nor more than $220,000 per year, the amount of which is dependent on
the level of services provided. The costs incurred related to the
consulting agreement are $33,000 and $40,000, respectively, for the
years ended March 31, 1998 and 1997.
In connection with the acquisition of European Business Associates BVBA
of Brussels, Belgium from Marc Kegelaers (see Note 12), the Company
entered into a consulting agreement with Mr. Kegelaers for a term of
five years. The consulting agreement provides for an annual consulting
fee of $75,000 with 5% annual increments, as well as reimbursement of
certain expenses.
F-17
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
9. Contingent Liabilities:
From time to time the Company and its subsidiary may be involved in
legal proceedings, claims and assessments arising in the ordinary
course of business. In the opinion of management, the outcome of such
current legal proceedings, claims and assessments would not have a
material effect on the Company's reported financial position, results
of operations or cash flows as of and for the years ended March 31,
1998 and 1997.
10. Employee Benefit Plans:
Effective April 1, 1993, the Company adopted a defined contribution
savings plan. The terms of the plan provide for eligible employees
("participants") who have met certain age and service requirements to
participate by electing to contribute up to 15% of their gross salary
to the plan, as defined, with the Company matching 30% of a
participant's contribution in cash up to a maximum of 6% of gross
salary, as defined. Company contributions vest at the rate of 25% of
the balance at each employee's second, third, fourth, and fifth
anniversary of employment. The employees' contributions are immediately
vested. The Company's contribution to the savings plan for the years
ended March 31, 1998 and 1997 was $28,222 and $27,641, respectively.
The Company has a plan in effect under which its employees earn a bonus
if the Company meets a predetermined revenue target for the year. The
Company met the target for 1998 and has accrued approximately $117,000
for payment of bonuses under the plan.
11. Sales:
Sales by geographic area for the years ended March 31, 1998 and 1997
are as follows:
1998 1997
------------------ --------------------
United States $ 7,435,586 $ 5,813,584
Europe 2,677,193 1,047,980
Pacific Rim 23,611 349,732
Other 81,521 132,328
------------------ -----------------
$ 10,217,911 $ 7,343,624
-================= =================
The Company sold a substantial portion of its products to four
customers. Sales to these customers amounted to $6,232,390 (61% of net
sales) in 1998 and $2,547,894 in 1997 (35% of net sales), respectively.
At March 31, 1998 and 1997, amounts due from these customers included
in accounts receivable, were $1,279,486 and $1,022,787, respectively.
The loss of any of these customers would have a material adverse effect
on the Company's financial position and results of operations.
F-18
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
12. Concentration of Credit Risk:
The Company maintains deposits in a financial institution which is
insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. At March 31, 1998 and periodically throughout 1998, the
Company had deposits in this financial institution in excess of the
amount insured by the FDIC.
13. Impact of The Future Adoption of Recently Issued Accounting Standards:
Effective with the first quarter of fiscal year 1999 the Company will
adopt SFAS No. 130, "Reporting Comprehensive Income". SFAS 130
establishes the standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) as
part of a full set of financial statements. This statement requires
that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Since this standards applies only to the presentation of
comprehensive income, it will not have any impact on the Company's
results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information"
which becomes effective for financial statements for periods beginning
after December 15, 1997. This Statement establishes standards for the
way that public business enterprises report information about operating
segments in annual financial reports and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. Management is currently
evaluating the impact of SFAS 131 on the financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which becomes effective for the Company's financial
statements for the year ended March 31, 1999. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefits
plans and is not expected to have a material impact on the Company's
financial statements.
In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" which
becomes effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The adoption of this standard is not expected to have a
material impact on the Company's financial statements.
F-19
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
For the Years Ended March 31, 1998 and 1997
14. Subsequent Events:
On June 23, 1998, the Company entered into an agreement to acquire
Solcom Systems, Ltd. ("Solcom"), a developer of remote monitoring
technology, for approximately 5.6 million shares and options to
purchase shares of the Company's common stock. The acquisition is
expected to be completed in the second quarter of 1999.
The acquisition of Solcom will be accounted for under the purchase
method, whereby the purchase price will be allocated to the underlying
assets and liabilities based upon their estimated fair values.
F-20
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in this City of
Edison and State of New Jersey, on June 29, 1998.
MICROFRAME, INC.
By: /s/ Stephen B. Gray
----------------------------------------
Stephen B. Gray, President, Chief
Executive Officer, and Chief Operating
Officer
In accordance with the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title
-------------------
/s/ Stephen B. Gray June 29, 1998
- -------------------------------------------------
Stephen B. Gray, President, Chief
Executive Officer, Chief Operating
Officer (Principal Executive Officer)
/s/ John F. McTigue June 29, 1998
- --------------------------------------------------
John F. McTigue, Vice President -
Operations, Chief Financial Officer, Treasurer and
Assistant secretary (Principal Financial Officer and
Principal Accounting Officer)
/s/ Stephen M. Deixler June 29, 1998
- -------------------------------------------------
Stephen M. Deixler, Chairman of the
Board of Directors, Treasurer
<PAGE>
/s/ Michael Radomsky
- ------------------------------------------------
Michael Radomsky, Executive Vice June 29, 1998
President, Secretary, Director
/s/ Stephen P. Roma June 29, 1998
- -------------------------------------------------
Stephen P. Roma, Director
/s/ Alexander C. Stark June 29, 1998
- -------------------------------------------------
Alexander C. Stark, Director
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.2 of the Form 10-
Company K for the fiscal year ended March 31, 1992 (the "1992
10-K")
3.2 By-Laws of the Company Incorporated by reference to Exhibit 3.2 of Amendment
No. 1 to the Company's Registration Statement on Form
SB-2 (No. 33-66688) dated October 26, 1993
("Amendment No. 1 to the Registration Statement")
3.3 Amendment to Certificate of Incorporation Incorporated by reference to Exhibit 3.3 of the Form 10- KSB
filed September 14,1992 for the fiscal year ended March 31, 1993 (the "1993 10-KSB")
3.4 Amendment to Certificate of Incorporation Incorporated by reference to Exhibit 3.4 of Amendment
filed September 20, 1993 No. 1 to the Registration Statement
3.5 Form of Specimen Common Stock Incorporated by reference to Exhibit 3.5 of Amendment
Certificate No. 2 to the Company's Registration Statement on Form
SB-2 (No. 33-66688) dated December 1, 1993
("Amendment No. 2 to the Registration Statement")
10.1 1984 Stock Option Plan Incorporated by reference to Exhibit 10.4 of the of the
Form 10-K for the fiscal year ended March 31, 1985
10.2 Amendment No. 2 to 1984 Stock Option Incorporated by reference to Exhibit 10.5 of the Form 10-
Plan K for the fiscal year ended March 31, 1986 (the "1986
10-K")
10.3 Lease Agreement Incorporated by reference to Exhibit 10.6 of the Form 10-
K for the fiscal year ended March 31, 1991 (the "1991
10-K")
10.4 Stock Purchase Agreement dated May 10, Incorporated by reference to Exhibit 10.4 of the 1993 10-
1993 pursuant to Private Placement KSB
10.5 Employment Agreement dated as of May Incorporated by reference to Exhibit 10.5 of Amendment
2, 1992 between David I. Gould and the No. 2 to the Registration Statement
Company
10.6 Loan Agreement between the Company Incorporated by reference to Exhibit 10.6 of the 199310-
and New Jersey National Bank KSB
10.7 Letter Agreement dated April 28, 1993 Incorporated by reference to Exhibit 10.7 of Amendment
between the Company and New Jersey No. 1 to the Registration Statement
National Bank
<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
10.8 Form of Consulting Agreement between Incorporated by reference to Exhibit 10.8 of Amendment
David I. Gould and the Company No. 1 to the Registration Statement
10.9 Agreement between American Telephone Incorporated by reference to Exhibit 10.9 of Amendment
and Telegraph Company and the Company No. 2 to the Registration Statement
dated September 17, 1993
10.10 Joint Marketing Agreement between MCI Incorporated by reference to Exhibit 10.10 of
Telecommunications Corporation and the Amendment No. 2 to the Registration Statement
Company dated September 1, 1992,
together with Amendment No. 1 dated
July 7, 1993
10.11 Employment Agreement dated as of Incorporated by reference to Exhibit 10.11 of Form 10-
January 1, 1994 between Michael KSB for the fiscal year ended March 31, 1994 (the "1994
Radomsky and the Company 10-KSB")
10.12 Employment Agreement dated as of Incorporated by reference to Exhibit 10.12 of the 1994
January 1, 1994 between William H. 10-KSB
Whitney and the Company
10.13 Employment Agreement dated as of Incorporated by reference to Exhibit 10.13 of the 1994
January 1, 1994 between Robert M. Groll 10-KSB
and the Company
10.14 Employment Agreement dated as of Incorporated by reference to Exhibit 10.15 of
January 1, 1994 between P. David Amendment No. 2 to the Registration Statement
Bocksch and the Company
10.15 Amendments to Lease Incorporated by reference to Exhibit 10.15 of the 1994
10-KSB
10.16 Amendment to Loan and Security Incorporated by reference to Exhibit 10.16 of Form 10-
Agreement between the Company and QSB for the quarter ended September 30, 1994
CoreStates Bank, N.A. dated September 8,
1994.
10.17 Consulting Agreement between the Incorporated by reference to Exhibit 10.17 to Form 8-K
Company and P. David Bocksch dated dated November 30, 1994
November 14, 1994
10.18 Employment Agreement dated as of Incorporated by reference to Exhibit 10.18 to Form 10-
October 11, 1994 between the Company QSB for the quarter ended December 31, 1994
and Lonnie L. Sciambi
10.19 Incentive Bonus Plan of the Company for Incorporated by reference to Exhibit 10.19 to Form 10-
the fiscal year ended March 31, 1995 QSB for the quarter ended December 31, 1994
<PAGE>
Exhibit
No. Description Exhibit Reference
- ------- ----------- -----------------
10.20 Letter from Feldman Sablosky & Incorporated by reference to Exhibit 10.20 to Form 8-K
Company to the Securities and Exchange dated March 13, 1995
Commission relating to Item 4 of Form 8-K
10.21 1994 Stock Option Plan Incorporated by reference from the Company's Proxy
Statement dated August 15, 1994 for the Company's
Annual Meeting of Shareholders held on September 19,
1994
10.22 Non-Qualified Stock Option Agreement Incorporated by reference to Exhibit 10.22 of the 1994
dated December 19, 1994 between the 10-KSB
Company and Cameron Towey Neilson,
Inc.
10.23 Purchase Agreement dated December 21, Incorporated by reference to Exhibit 10.23 of the 1994
1994 between the Company and Ericsson 10-KSB
Business Networks AB
10.24 Employment Agreement dated as of Incorporated by reference to Exhibit 10.24 of the 1994
March 27, 1995 between the Company 10-KSB
and Stephen B. Gray
10.25 Letter dated April 5, 1995 from the Incorporated by reference to Exhibit 10.25 of the 1994
Company to P. David Bocksch terminating 10-KSB
his Consulting Agreement
10.26 Incentive Bonus Plan of the Company for Incorporated by reference to Exhibit 10.26 of the 1994
the fiscal year ending March 31, 1996 10-KSB
10.27 Letter of Intent dated April 9, 1998 With Filed herewith
SolCom Systems, Ltd.
10.28 Line of Credit Agreement with United Filed herewith
National Bank Dated November 17, 1997
23.1 Consent of Pricewaterhouse Coopers LLP Filed herewith
</TABLE>
<PAGE>
Exhibit 10.27
MICROFRAME, INC.
21 Meridian Avenue
Edison, New Jersey 08820
April 9, 1998
CONFIDENTIAL
- ------------
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
Livingston EH547DE
Scotland
SolCom Systems, Inc.
1801 Robert Fulton Drive
Suite 400
Reston, Virginia 20191
Shareholders of SolCom Systems Limited
set forth on Signature Page hereto
Gentlemen:
MicroFrame, Inc., a New Jersey corporation ("MicroFrame") is
pleased to present to you this Letter of Intent with respect to MicroFrame's
interest in acquiring, as set forth in Sections 1 through 6 below (the
"Transaction"), all of the outstanding stock of SolCom Systems Limited, a
corporation organized under the laws of Scotland (the "Parent") and SolCom
Systems, Inc., a Delaware corporation and wholly-owned subsidiary of SolCom (the
"Subsidiary" and together with the Parent, "SolCom").
<PAGE>
The following Sections 1 through 5 of this Letter of Intent
reflect our current mutual understanding of the matters described therein
(collectively, the "Non-Binding Provisions"). Except as set forth in Section 6
hereof, none of the provisions set forth herein shall be binding upon any of the
parties hereto, and none of the parties to this Letter of Intent shall have any
liability to any other party based upon, arising from or relating to any of the
Non-Binding Provisions.
The terms of our proposal regarding the Transaction are as
follows:
1. Basic Transaction. MicroFrame or a newly-formed wholly-owned
subsidiary corporation of MicroFrame would acquire all or
substantially all of the outstanding capital stock or assets of
SolCom through a statutory merger or other acquisition structure.
The parties will consult with their respective attorneys,
accountants and advisors for the purpose of entering into a
definitive merger agreement or other applicable definitive
agreement together with any other necessary or appropriate
agreements or instruments (collectively referred to herein as the
"Merger Agreement"). In structuring the Transaction and the
Merger Agreement, the parties would seek to qualify for "pooling
of interest" accounting treatment and would seek to minimize any
taxes applicable to the Transaction or to the parties and their
respective affiliates and subsidiaries after the completion of
the Transaction, including, but not limited to, the treatment of
the Transaction as a tax-free reorganization under United States
and United Kingdom laws, the reduction or elimination of income
taxes, capital gains taxes and withholding taxes, and the
utilization and preservation of tax attributes (e.g., net
operating losses and foreign tax credits) arising prior to and
subsequent to completion of the Transaction. In connection with
the Transaction, MicroFrame may elect to reincorporate in the
State of Delaware.
2. Issuance of MicroFrame Common Stock. At the closing of the
Transaction pursuant to the Merger Agreement (the "Closing"),
MicroFrame would issue to the shareholders and optionholders of
SolCom that number of shares of common stock of MicroFrame, par
value $.001 per share (the "Common Stock"), or, in the case of
optionholders, if appropriate and agreed to by the parties,
options therefor, equal to one hundred (100%) percent of the sum
of (i) the number of issued and outstanding shares of Common
Stock as of the date of the Merger Agreement and (ii) any and all
outstanding options to purchase shares of Common Stock
(collectively, the "Merger Shares"), it being the intention of
the parties to exclude from the calculation of the Merger Shares
any and all outstanding warrants to purchase shares of Common
Stock. The Merger Shares would be issued in accordance with
Regulation S pursuant to the Securities Act of 1933, as amended
(the "Act") or other exemption under the Act as determined by
MicroFrame and its counsel. The Merger Shares would be
"restricted securities" within the meaning of the Act and could
only be resold in accordance with an exemption under the Act
satisfactory to counsel for MicroFrame or upon an effective
registration statement with respect to the Merger Shares.
3. Representations and Warranties. MicroFrame, SolCom and Peter
Wilson, Peter McLaren and Hugh Evans, as principal shareholders
of the Parent (collectively, the "Shareholders"), together with
any other shareholders of the Parent to be agreed to by
<PAGE>
the parties, will be expected to make representations and
warranties upon terms mutually agreed to by the relevant parties
and subject to disclosure schedules in the Merger Agreement. The
Merger Agreement will contain certain limitations of liability to
be agreed to by the parties with respect to the representations
and warranties and the indemnities referred to below.
4. Indemnification. MicroFrame, SolCom and the Shareholders would
also agree to indemnify each other in the Merger Agreement
against various potential liabilities, upon terms mutually agreed
to by the relevant parties and subject to disclosure schedules in
the Merger Agreement.
5. Conditions to Proposed Transaction. The Merger Agreement would
contain such representations, warranties, indemnities, conditions
and agreements appropriate to transactions of this nature as may
be agreed to by the relevant parties and in addition, would
specifically provide that the closing of the Transaction would be
subject to the following terms and conditions in a manner, form
and substance acceptable to MicroFrame, SolCom and their
respective attorneys:
a. completion of due diligence satisfactory to the parties,
which due diligence would be completed prior to the
execution and delivery of the Merger Agreement;
b. receipt of all necessary consents and approvals of
governmental bodies, lenders, lessors, vendors, landlords,
and other contractual and third parties;
c. absence of any material adverse change in SolCom's or
MicroFrame's business, financial condition, assets,
prospects or operations from the execution of the Merger
Agreement until such time as the Transaction is
consummated;
d. absence of material pending or threatened litigation with
respect to SolCom or MicroFrame;
e. delivery of a legal opinion, closing certificates and
other appropriate documentation requested by MicroFrame,
SolCom and their respective counsel as agreed by the
parties;
f. delivery by SolCom of (i) audited financial statements of
SolCom through March 31, 1998 and (ii) unaudited "stub
period" financial statements for subsequent periods
satisfactory to MicroFrame and its accountants, which
financial statements shall be prepared in a format
consistent with accounting policies in effect with respect
to those audited financial statements, together with
short-term projections for the period from April 1, 1998
through March 31, 1999 prepared in a quarterly format; and
delivery by MicroFrame of audited financial statements of
MicroFrame for the year ended March 31, 1998 and unaudited
"stub period" financial statements for subsequent periods,
which financial statements shall be prepared in accordance
with United States Generally Accepted Accounting
Principles;
<PAGE>
g. approval of the Transaction by the shareholders of
MicroFrame and SolCom;
h. clearance by the Securities and Exchange Commission (the
"Commission") of an Information Statement pursuant to
Regulation 14C under the Securities Exchange Act of 1934,
as amended;
i. delivery of a fairness opinion in connection with the
Transaction satisfactory to the boards of directors of
MicroFrame and SolCom, which opinion would be delivered
prior to the execution and delivery of the Merger
Agreement;
j. election to the MicroFrame Board of Directors of two (2)
nominees selected by SolCom; and
k. piggyback registration rights with respect to the Merger
Shares and an undertaking by MicroFrame to use its best
efforts to register the Merger Shares with the Commission
within 12 months of the consummation of the Transaction.
6. Binding Provisions. Upon execution by SolCom and the Shareholders
of this Letter of Intent, the matters described in each of the
following subsections of this Section 6 (collectively, the
"Binding Provisions") shall constitute the valid, legally binding
and enforceable agreements of the respective parties bound
therein and shall continue indefinitely from the date hereof
except as otherwise explicitly set forth herein.
a. Exclusivity. SolCom, the Shareholders and MicroFrame
acknowledge that each such party will devote substantial
time and resources and incur substantial expenses in
connection with the investigation and documentation of the
Transaction. To induce each such party to devote such time
and resources and to incur such expenses, the parties
agree that prior to the earlier of (I) the date of the
execution and delivery by the parties of the Merger
Agreement or (II) forty- five (45) days from the date
hereof, they will not (without the prior written consent
of the other party) directly or indirectly, nor will they
knowingly permit any officer, director, employee, agent or
advisor of MicroFrame or SolCom, as the case may be, to:
(i) solicit, initiate, accept, encourage or engage in any
discussions with respect to proposals or offers from any
corporation, partnership, limited liability entity, trust
or any other person or entity, or any group thereof,
relating to (A) any acquisition, purchase or option to
purchase any of the shares of capital stock of SolCom or
MicroFrame or any of the assets (other than sales of
inventory in the ordinary course of business) of, or any
other equity interest in, SolCom or MicroFrame, or (B) any
merger, consolidation or other form of business
combination or joint venture with SolCom or MicroFrame;
(ii) continue (and cause any officer, director, employee,
agent or advisor of SolCom or MicroFrame to discontinue)
any of the foregoing in the event that such has commenced
prior to the execution of this Letter of Intent; or (iii)
furnish to any such person or entity any information with
respect to any of the foregoing. If any party receives any
such proposals or offers, such party shall notify the
other party in writing of such proposals or offers as
promptly as reasonably practicable.
<PAGE>
b. Standstill. In the event that the Transaction is
consummated, for a period of one (1) year from the date of
such consummation, the Shareholders shall not acquire any
shares of Common Stock except in accordance with the
Merger Agreement.
c. Access. For the period through and including the earlier
of (I) the date of the execution and delivery by the
parties of the Merger Agreement or (II) forty-five (45)
days from the date hereof, each of SolCom and MicroFrame
shall hereafter provide to each other complete access to
its facilities, books and records, in each instance during
normal business hours and upon reasonable notice, and
shall cause its directors, officers, employees,
accountants, attorneys, agents, advisors and
representatives (collectively, "Representatives") to
cooperate fully with SolCom or MicroFrame, as the case may
be, and their respective Representatives in connection
with the Transaction, the review and investigation of each
party, and the assets, contracts, liabilities, operations,
records and other aspects of the business of SolCom and
MicroFrame.
d. Confidentiality. The parties hereby acknowledge and agree
that MicroFrame and the Subsidiary are parties to a
certain Mutual Non-Disclosure Agreement dated as of
January 30, 1998 (the "Non-Disclosure Agreement"). The
parties hereto hereby agree that the Non-Disclosure
Agreement shall (i) additionally apply in each and every
respect to the Parent and the Shareholders and (ii) be
supplemented such that neither SolCom, the Shareholders
nor MicroFrame shall, for a period of two (2) years from
the date hereof, solicit directly or indirectly, or cause
any third party to solicit directly or indirectly on
behalf of any party, as the case may be, any employee of
any other party or its affiliates (while such persons are
so employed by such other party or its affiliates) for
employment or other services.
e. Conduct of Business. For the period through and including
the earlier of (I) the date of the execution and delivery
by the parties of the Merger Agreement or (II) forty-five
(45) days from the date hereof, (i) each of SolCom and
MicroFrame shall hereafter (A) conduct its business and
operations only in the ordinary course, (B) not engage in
any material transaction outside the ordinary course
without the other party's prior written consent, and (C)
use its reasonable commercial efforts to preserve intact
its business organization, keep available the services of
its employees, and maintain satisfactory relationships
with suppliers, contractors, customers, potential
customers and others having business relationships with
such party; and (ii) except as otherwise required by
applicable law or contract (as determined in the sole
discretion of counsel to MicroFrame), MicroFrame shall not
issue any new equity securities or securities convertible
into equity securities.
f. Disclosure. Except as and to the extent required by law or
by the rules and regulations of NASDAQ (as determined in
the sole discretion of counsel to MicroFrame), without the
prior written consent of each of MicroFrame and SolCom,
neither SolCom or the Shareholders, on the one hand, nor
MicroFrame,
<PAGE>
on the other hand, shall, and each shall direct each
Representative of such party not to, directly or
indirectly make any public comment, statement or
communication with respect to, or otherwise disclose or
permit the disclosure or existence of discussions
regarding, a possible transaction among them or any of the
terms, conditions or other aspects of the Transaction
proposed in this Letter of Intent.
g. Costs. SolCom and MicroFrame shall each be responsible for
and bear its respective costs and expenses (including,
without limitation, any fees of attorneys, accountants,
brokers or finders) incurred in connection with this
Letter of Intent or the proposed Transaction, provided
that, in the event that during the time period subsequent
to the execution of this Letter of Intent and prior to the
execution and delivery of the Merger Agreement, either
SolCom or the Shareholders, on the one hand, or
MicroFrame, on the other hand, breaches any provision of
this Section 6 to any material extent and such breach, if
capable of remedy, is not remedied to the satisfaction of
the other parties within a period of fourteen (14) days of
notice such breach having been delivered to the other
relevant parties, the other party shall be entitled to
terminate this Letter of Intent and shall be entitled to
liquidated damages in an amount equal to the lesser of (i)
such party's actual legal, accounting and other costs
reasonably incurred in connection with the Transaction or
(ii) $150,000. Each of the parties hereto hereby
represents and warrants to the other parties that no
broker's or finder's fees have been or will be incurred by
any of them in connection with this Letter of Intent or
the proposed Transaction. SolCom shall only incur
liability hereunder if and to the extent that SolCom may
lawfully incur such liability in accordance with the
applicable laws of Scotland.
h. Governing Law; Venue. This Letter of Intent shall be
governed by and construed in accordance with the laws of
the State of New York without giving effect to conflict or
choice of law principles thereof. The parties hereto
hereby consent to the jurisdiction and venue of the
federal and state courts located in New York County, New
York, in any action or proceeding relating to the subject
matter of this Letter of Intent.
i. Entire Agreement; Assignment. This Letter of Intent,
together with the Non- Disclosure Agreement, as amended
herein, constitutes the entire agreement between the
parties, superseding all prior oral and written
agreements, understandings, representations and warranties
and courses of conduct dealing between the parties with
respect to the subject matter hereof. Except as otherwise
provided herein, this Letter of Intent may be amended or
modified only by a writing executed by each of the
parties. No party may assign this Letter of Intent or any
of its respective rights or obligations hereunder without
the prior written consent of the other parties.
j. Survival. This Letter of Intent shall be superseded in all
respects upon the execution and delivery of the Merger
Agreement, provided that, in the event that
<PAGE>
this Letter of Intent is terminated prior to the execution
and delivery of the Merger Agreement, Sections 6(a), (d),
(g) and (h) shall survive such termination in accordance
with their respective terms notwithstanding such
termination.
Kindly indicate your approval and agreement with the foregoing by
executing this Letter of Intent in the space provided below and returning a copy
thereof to the undersigned.
Very truly yours,
MICROFRAME, INC.
By:
Stephen B. Gray, President
AGREED AND ACCEPTED:
SOLCOM SYSTEMS LIMITED
By:______________________________
Name:
Title:
SOLCOM SYSTEMS, INC.
By:______________________________
Name:
Title:
SHAREHOLDERS:
- --------------------------------
Peter Wilson
- --------------------------------
Peter McLaren
- --------------------------------
Hugh Evans
<PAGE>
Exhibit 10.28
PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$1,000,000.00 11-17-1997 07-31-1998 NEW LINE U 921101700;01 LGW
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MicroFrame, Inc. (TIN: 22-2413505) Lender: UNITED NATIONAL BANK
21 Meridian Road 1130 ROUTE 22 EAST
Edison, NJ 08820 P.O. BOX 6000
BRIDGEWATER, NJ 08807
- --------------------------------------------------------------------------------
Principal Amount: $1,000,000.00 Initial Rate: 9.000%
Date of Note: November 17, 1997
PROMISE TO PAY. Microframe, Inc. ("Borrower") promises to pay to UNITED NATIONAL
BANK ("Lender"), or order, in lawful money of the United States of America, the
principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
Borrower also promises to pay all applicable fees and expenses.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on July
31, 1998. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning December 17, 1997, and all subsequent interest
payments are due on the same day of each month after that. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index, which is the "Prime Rate"
with respect to any day means the rate of interest adopted and made public from
time to time by the Chase Manhattan Bank, New York, N.Y.; or its successors, as
its Prime Rate, but does not reflect the rate of interest charged to any
particular class of borrower. In the event that there should be a change in the
announced Prime Rate of Chase Manhattan Bank which would result in a change in
the rate of interest on this Note, then, in that event, the rate of interest
herein shall change accordingly as of the date of the said change without notice
to the Borrower(s) or any Endorser, Guarantor, or Surety. Any such change shall
not effect or alter any of the terms and conditions of this Note, all of which
shall remain in full force and effect (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notice to Borrower. Lender
<PAGE>
PROMISSORY NOTE
(Continued)
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.500 percentage points over
the Index, resulting in an initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment. This late charge shall be paid to
Lender by Borrower for the purpose of defraying the expense incident to the
handling of the delinquent payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of or levy on any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within thirty (30) days; or (b) if
the cure requires more than thirty (30) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if
<PAGE>
PROMISSORY NOTE
(Continued)
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
This Note has been delivered to Lender and accepted by Lender in the State of
New Jersey. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of SOMERSET County, the State of New
Jersey. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other. This Note shall be governed by and construed in accordance with the
laws of the State of New Jersey.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a Perfected Security Interest by UCC-1
filings on business assets.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized as provided in this paragraph to
request advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority:
Stephen B. Gray, President; and John F. McTigue, Vice President & Chief
Financial Officer. Advances under this line are at the sole discretion of the
Bank and are in minimum amounts of One Thousand ($1,000.00) Dollars. To induce
the Bank to accept this Note and make advances under this Note, the undersigned
waives any rights that it may have arising out of past or present agreements or
representations that would obligate the Bank to make such advances. Requests for
such advances can be made by crediting the undersigned account # 400-335-9 (the
Borrower's account). Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note or
by Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
<PAGE>
PROMISSORY NOTE
(Continued)
ANNUAL RENEWAL. Not withstanding the foregoing, the unpaid principal balance of
the Note shall be due and payable, if not called earlier, together with all
accrued and unpaid interest, fees and charges from the date of this Note to July
31, 1998. The Lender will have the option to renew the Line of Credit created by
this Note and may terminate it at its absolute discretion by giving thirty (30)
days written notice to the Borrower at any time. Should the Bank choose not to
renew the facility, the Borrower(s) shall pay the Bank the entire outstanding
principal balance together with all accrued and unpaid interest, thereon and all
other unpaid fee, charges, and expenses.
BORROWER'S FINANCIAL STATEMENTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower shall furnish Lender with, as soon
as available, but in no event later than ninety (90) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower(s) as being true and correct.
INTERIM FINANCIAL STATEMENTS. Borrower shall furnish Lender with, as soon as
available, but in no event later than sixty (60) days after the end of each
fiscal quarter, Profit and Loss Statements and Account Receivables list and
aging report. All financial reports required to be provided under this Agreement
shall be supplied by Borrower, prepared on a consistent basis and certified by
Borrower as being true and correct.
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct
from Borrower's account numbered 400-335-9 the amount of any loan payment. If
the funds are insufficient to cover any payment, Lender shall not be obligated
to advance funds to cover the payment. At any time and for any reason, Borrower
or Lender may voluntarily terminate Automatic Payments.
BORROWING BASE REQUIREMENTS. Borrower covenants and agrees with Lender that
while this Agreement is in effect: I) Maximum borrowings shall be the lesser of
a) $1,000,000.00; or b) 75.000% of aggregate amount of "Eligible Accounts." II)
Eligible Accounts shall be Accounts Receivable that are under ninety (90) days
evidenced by monthly Borrowing Base Certificate. III) Monthly Accounts
Receivable aging reports are to be submitted to Lender, as soon as available,
but in no case later than ten (10) days after the end of each month. IV) Lender
will reserve the right to conduct an audit of Accounts Receivable, twice
annually, at the Borrower's expense or at any time and frequency should a
condition of default exist.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
<PAGE>
PROMISSORY NOTE
(Continued)
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MicroFrame, Inc.
By:________________________________________
John F. McTigue, Vice President
ATTEST:
____________________________________________ (Corporate Seal)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
---------
We consent to the incorporation by reference in the registration statements of
MicroFrame, Inc. on Form S-3 (File No. 333-09507) and Form S-8 (File Nos.
33-61837 and 333-14681) of our report dated June 26, 1998, on our audits of the
consolidated financial statements of MicroFrame, Inc. and Subsidiary as of March
31, 1998 and 1997, and for the years ended March 31, 1998 and 1997, which report
is included in this Annual Report on Form 10-KSB.
/s/ Pricewaterhouse Coopers LLP
New York, New York
July 10, 1998
<PAGE>
APPENDIX G
----------
MICROFRAME, INC. FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 1998
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-13117
-------
MICROFRAME, INC.
---------------
(Exact Name of Small Business Issuer in Its Charter)
New Jersey 22-2413505
---------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
21 Meridian Road, Edison, New Jersey 08820
------------------------------------------
(Address of Principal Executive Offices)
(732) 494-4440
--------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 5,403,480 shares of Common Stock outstanding as of August 4, 1998.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1998 and June 30, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1998 and June 30, 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis 8-9
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
PART I. Financial Information
Item 1. Condensed Consolidated Financial Information.
--------------------------------------------
The condensed consolidated financial statements included herein have
been prepared by the registrant without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Although the registrant
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed financial statements be read
in conjunction with the audited financial statements and the notes thereto
included in the registrant's Annual Report on Form 10-KSB for the year ended
March 31, 1998.
2
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1998 1998
<S> <C> <C>
Current assets
Cash and cash equivalents $ 447,186 $ 507,726
Accounts receivable, less allowance for doubtful
accounts of $126,000 and $126,000, respectively 3,578,280 2,667,319
Inventory, net 1,887,644 1,425,351
Deferred tax asset 371,822 366,137
Prepaid expenses and other current assets 186,172 153,568
---------------- ----------------
Total current assets 6,471,104 5,120,101
Property and equipment, less accumulated depreciation
of $568,687 and $971,903 458,685 421,701
Capitalized software, less accumulated amortization
of $1,106,354 and $1,054,827 433,682 396,351
Deferred tax assets, net 2,745 129,689
Goodwill, less accumulated amortization of $28,605 and $26,130 73,005 75,480
Security deposits 39,348 35,716
Other assets 293,135
---------------- ----------------
Total assets $ 7,771,704 $ 6,179,038
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 600,000 $ 300,000
Current portion of long-term debt 18,817 30,009
Accounts payable 1,066,763 910,842
Accrued payroll and related liabilities 225,541 348,397
Deferred income 268,751 181,573
Other current liabilities 452,673 405,263
----------------
----------------
Total current liabilities 2,632,545 2,176,084
---------------- ----------------
Other liabilities 69,529 0
Committments and contingencies
Stockholders' equity
Common stock - par value $.001 per share; authorized 50,000,000 shares,
issued 5,403,480 shares and outstanding 5,403,080 shares at June 30,
1998; issued 4,849,531 shares and outstanding 4,849,131
and subscribed 50,000 shares at March 31, 1998 5,403 4,899
Preferred stock - par value $10 per share;
authorized 200,000 shares, none issued
Additional paid-in capital 7,143,363 6,345,613
Stock subscription receivable 0 (104,000)
Accumulated deficit (2,070,494) (2,231,638)
Cumulative translation adjustment (4,642) (7,920)
---------------- ----------------
5,073,630 4,006,954
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
---------------- ----------------
Total stockholders' equity 5,069,630 4,002,954
---------------- ----------------
Total liabilities and stockholders' equity $ 7,771,704 $ 6,179,038
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
Condensed Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------
1998 1997
<S> <C> <C>
Net sales $ 2,963,973 $ 1,736,546
Cost of sales 1,008,005 741,046
--------------- --------------
Gross margin 1,955,968 995,500
412,967 286,552
Research and development expenses 1,219,648 887,191
--------------- --------------
Selling, general and administrative expenses
Income (loss) from operations 323,353 (178,243)
Interest income 2,336 5,645
Interest expense (8,969) (1,424)
--------------- --------------
Income (loss) before income tax provision(benefit) 316,720 (174,022)
Income tax provision(benefit) 155,576 (20,221)
--------------- --------------
Net income (loss) $ 161,144 $ (153,801)
=============== ==============
Per share data
BasicNet income (loss) per share $ 0.03 $ (0.03)
--------------- --------------
Diluted $ 0.02 $ (0.03)
--------------- --------------
Weighted average number of common shares
outstanding basic 5,134,272 4,883,704
--------------- --------------
Weighted average number of common shares
outstanding diluted 7,042,534 4,883,704
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 161,144 $ (153,801)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 123,115 94,738
Provision for bad debts 9,374
Provision for inventory obsolescence 15,000
Deferred tax provision 121,259 (20,221)
(Increase) decrease in
Accounts receivable (910,961) 236,675
Inventory (462,293) (23,649)
Prepaid expenses and other current assets (32,604) 2,939
Security deposits (3,632) 9,519
Increase (decrease) in
Accounts payable 155,921 30,246
Accrued payroll and related liabilities (122,856) (110,989)
Deferred income 87,178 (22,538)
Other current liabilities 47,410 52,605
Other liabilities 69,529
--------------------- ---------------------
Net cash (used in) provided by operating activities (766,790) 119,898
--------------------- ---------------------
Cash flows from investing activities
Capital expenditures (102,819) (40,039)
Capitalized software (88,858) (20,000)
Other assets (293,135) 0
--------------------- ---------------------
Net cash used in investing activities (484,812) (60,039)
--------------------- ---------------------
Cash flows from financing activities
Proceeds of short-term borrowings 300,000
Repayments of debt (11,192) (10,258)
Issuance of common stock 902,254
--------------------- ---------------------
Net cash provided by (used in) financing activities 1,191,062 (10,258)
--------------------- ---------------------
Net (decrease) increase in cash and cash equivalents (60,540) 49,601
Cash and cash equivalents - beginning of period 507,726 539,214
--------------------- ---------------------
Cash and cash equivalents - end of period $ 447,186 $ 588,815
===================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
The condensed consolidated balance sheets as of June 30, 1998 and March 31,
1998, the condensed consolidated statements of operations for the three month
periods ended June 30, 1998 and 1997 and the condensed consolidated statements
of cash flows for the three month periods then ended have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for the fair presentation
of the Company's financial position, results of operations and cash flows at
June 30, 1998 and 1997 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the annual report on Form 10-KSB for the year ended
March 31, 1998.
Note 2 - Inventory:
Inventory consists of the following:
June 30, 1998 March 31, 1998
------------- --------------
Raw materials $ 814,193 $ 1,003,132
Work in process 1,115,323 525,918
Finished goods 143,128 81,301
----------- -----------
2,072,644 1,610,351
Less, allowance for obsolescence (185,000) (185,000)
--------- ---------
Total $1,887,644 $1,425,351
========== ==========
Note 3 - Earnings Per Share:
The Company has adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") in the quarter ended December 31, 1997. All prior periods
presented have been restated to account for this change.
The computaion of Basic Earnings Per Share is based on the weighted average
number of common shares outstanding for the period. Diluted Earnings Per Share
is based on the weighted average number of common shares outstanding for the
period plus the dilutive effect of common stock equivalents, comprised of
outstanding stock options and warrants.
The following is a reconciliation of the denominator used in the calculation of
basic and diluted earnings per share:
6
<PAGE>
Three Months Three Months
Ended Ended
6/30/98 6/30/97
------- -------
Weighted Average # of Shares Outstanding 5,134,272 4,833,704
Incremental Shares for Common Equivalents 1,908,262
--------- ---------
Diluted Shares Outstanding 7,042,534 4,833,704
Note 4 - Recent Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
31, 1997. This Statement establishes standards for the way that public business
enterprises report information about operaing segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
7
<PAGE>
Item 2. Management's Discussion and Analysis
------------------------------------
A number of statements contained in this report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include, but are not limited to, the recent
introduction of, and the costs associated with, a new product line; dependence
on the acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on third parties; a
limited customer base; and liability risks.
Results of Operations
Revenues for the quarter ended June 30, 1998 were $2,963,973 as
compared with revenues of $1,736,546 for the same quarter of the previous fiscal
year, or an increase of approximately 71 %. The increase in revenues was
primarily the result of increased business activity and as a result of the
continued acceptance of its Sentinel product line as well interest in the other
member of the family of SNS products, the Manager 2000.
The Company's cost of goods sold increased from $741,046 for the
quarter ended June 30, 1997 to $1,008,005 for the quarter ended June 30, 1998 as
a result of increased business activity. Cost of goods sold as a percentage of
sales decreased from 42.7% for the previous comparable fiscal period to 34.0%
for this fiscal period, due to the increased volumes, manufacturing efficiencies
and higher margin software and services sales in the quarter.
Research and development expenses, net of capitalized software
development, increased from $286,552 in the quarter ended June 30, 1997 to
$412,967 in the current fiscal quarter, an increase of 44%. This is a direct
reflection of the Company's continued increased activity related to the
development of the Secure Network Systems/2000 set of products. Research and
development expenses as a percentage of revenues decreased from 17% to 14%.
Selling, general and administrative expenses increased approximately 37% from
$887,191 for the prior year's comparable fiscal period to $1,219,648 for the
fiscal period ended June 30, 1998. This increase results primarily from the
Company's aggressive growth plan in the sales and marketing area.
The Company had income from operations of $323,383 for the period ended
June 30, 1998, compared to a loss from operations of $178,243 for the same
period a year ago. Due to the reduction in interest costs to the Company and the
effects of the income tax benefit of $20,221, the net loss for the period ended
June 30, 1997 was $153,801 compared to net income of $161,144 for the quarter
ended June 30, 1998.
8
<PAGE>
Financial Condition and Capital Resources
During the first quarter of fiscal year 1999, the Company recorded net
income of approximately $161,000. Included in this net income were non-cash
charges of approximately $123,000 for depreciation and amortization and $121,000
of deferred taxes. As a result and in conjunction with the following items
discussed below, during the first three months of fiscal year 1999, the
Company's cash position remained relatively stable.
The Company's operations used $767,000 of cash, primarily as a result
of an increase in accounts receivable of $910,961 for sales that occurred later
in the quarter and an increase in inventory buildup of $462,293 as the Company
prepares to ship its backlog going into the second quarter These increases were
offset by the payment of accrued payroll and related liabilities. The Company
utilized approximately $200,000 of cash for capital and software-related
expenditures and an additional $293,000 for one-time merger related costs that
have been capitalized. Proceeds from stock option and warrant exercises were
approximately $900,000 and proceeds from borrowings under the company's line of
credit were $300,000. The Company utilized approximately $10,000 of cash to pay
down its long-term debt in the first quarter.
In November 1997, the Company successfully negotiated with United
National to provide the Company with a $1,000,000 line of credit, collateralized
by accounts receivable of the Company, to finance future working capital
requirements that was due to expire on July 31, 1998. In July 1998 the bank
extended this line of credit for a period of 60 days, in anticipation of
renewal, negotiations of which are progressing. As of August 3, 1998, the
Company has utilized $600,000 under this line.
Based on its current cash and working capital position, as well as
its available line of credit, the Company believes that it will have sufficient
capital to meet its operational needs over the next twelve months.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
31, 1997. This Statement establishes standards for the way that public business
enterprises report information about operaing segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
9
<PAGE>
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
On May 19, 1998, the Company filed a Current Report
on Form 8-K, disclosing a press release in connection
with the execution of a letter of intent relating to
the Company's proposed acquisition of SolCom Systems
Limited.
10
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 7, 1998
MICROFRAME, INC.
/s/ Stephen B. Gray
-----------------------------------------------
Stephen B. Gray, President, Chief Executive
Officer and Chief Operating Officer
/s/ John F. McTigue
----------------------------------------------
John F. McTigue, Chief Financial Officer and
Treasurer (Principal Financial Officer)
11
<PAGE>
EXHIBIT-27
FDS -- Qtr ended 06/30/98
ARTICLE 5
CIK 0000754813
NAME MICROFRAME, INC.
FISCAL-YEAR-END MAR-31-1999
PERIOD-START APR-01-1998
PERIOD-END JUN-30-1998
PERIOD-TYPE 6-MOS
CASH 447,186
SECURITIES 0
RECEIVABLES 3,578,280
ALLOWANCES (126,000)
INVENTORY 1,887,644
CURRENT-ASSETS 6,471,104
PP&E 1,027,372
DEPRECIATION (568,687)
TOTAL-ASSETS 7,771,704
CURRENT-LIABILITIES (2,632,545)
BONDS 0
COMMON 5,403
PREFERRED 0
PREFERRED-MANDATORY 0
OTHER-SE 5,064,227
TOTAL-LIABILITY-AND-EQUITY 7,771,704
SALES (2,963,973)
TOTAL-REVENUES (2,963,973)
CGS 1,008,005
TOTAL-COSTS 1,632,615
OTHER-EXPENSES 0
LOSS-PROVISION 0
INTEREST-EXPENSE (8,969)
INCOME-PRETAX 316,720
INCOME-TAX 155,576
INCOME-CONTINUING 161,144
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 161,144
EPS-PRIMARY 0.03
EPS-DILUTED 0.02
<PAGE>
APPENDIX H
----------
NEW JERSEY BUSINESS CORPORATION ACT
SECTIONS 14A:10-12, 14A:11-1 AND 14A:11-2
<PAGE>
14A:10-12 SHAREHOLDERS' RIGHTS ON OTHER CORPORATE
ACQUISITIONS. --(1) Shareholders of a corporation which proposes to acquire,
directly or through a subsidiary, in exchange for its shares, obligations or
other securities, some or all of the outstanding shares of another corporation,
or some or all of the assets of a corporation, a business trust, a business
proprietorship or a business partnership, shall have the same rights, if any, as
they would if they were shareholders of a surviving corporation in a merger
(a) To notice of the proposed acquisition;
(b) To vote on the proposed acquisition; and
(c) To dissent from the proposed acquisition and be paid the fair
value of their shares, if: (i) the number of voting shares outstanding
immediately after the transaction, plus the number of voting shares issuable on
conversion of other securities or on exercise of rights and warrants issued
pursuant to the transaction, will exceed by more than 40% the total number of
voting shares of the corporation outstanding immediately before transaction; or
(ii) the number of participating shares outstanding immediately after the
transaction, plus the number of participating shares issuable on conversion of
other securities or on exercise of rights and warrants issued pursuant to the
transaction will exceed by more than 40% the total number of participating
shares of the corporation outstanding immediately before the transaction.
(2) As used in subsection 14A:10-21(1):
(a) "Participating shares" means shares that entitle their holders to
participate without limitation in distributions.
(b) "Voting shares" means shares that entitle their holders to vote
unconditionally in elections of directors. (Last amended by Ch. 94 L. '88, eff.
12-1-88.)
14A:11-1 RIGHT OF SHAREHOLDERS TO DISSENT.--(1) Any shareholder of a
domestic corporation shall have the right to dissent from any of the following
corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation otherwise provides
(i) a shareholder shall not have the right to dissent from any plan of
merger or consolidation with respect to shares
(A) of a class or series which is listed on a national securities
exchange or is held of record by not less than 1,000 holders on the record date
fixed to determine the shareholders entitled to vote upon the plan of merger or
consolidation; or
(B) for which, pursuant to the plan of merger or consolidation, he will
receive (x) cash, (y) shares, obligations, on other securities which, upon
consummation of the merger or consolidation, will either be listed on a national
securities exchange or held of record by not less than 1,000 holders, or (z)
cash and such securities;
(ii) a shareholder of a surviving corporation shall not have the right
to dissent from a plan of merger, if the merger did not require for its approval
the vote of such shareholders as provided in section 14A:10-5.1 or in
subsections 14A:10-3(4), 14A:10-7(2) or 14A:10-7(4); or
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or regular
course of business as conducted by such corporation, other than a transfer
pursuant to subsection (4) of N.J.S. 14A:10-11, provided that, unless the
certificate of incorporation otherwise provides, the shareholder shall not have
the right to dissent
<PAGE>
(i) with respect to shares of a class or series which, at the record
date fixed to determine the shareholders entitled to vote upon such transaction,
is listed on a national securities exchange or is held of record by not less
than 1,000 holders; or
(ii) from a transaction pursuant to a plan of dissolution of the
corporation which provides for distribution of substantially all of its net
assets to shareholders in accordance with their respective interests within one
year after the date of such transaction, where such transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon consummation or
the plan of dissolution will either be listed on a national securities exchange
or held of record by not less than 1,000 holders; or
(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.
(3) A shareholder may not dissent as to less than all of the shares
owned beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
(4) A corporation may provide in its certificate of corporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter. (Last amended by
CH. 279, L. '95, eff. 12-15-95.)
14a:11-2 NOTICE OF DISSENT; DEMAND FOR PAYMENT;
ENDORSEMENT OF CERTIFICATES.--(1) Whenever a vote is to be taken, either at a
meeting of shareholders or upon written consents in lieu of a meeting pursuant
to section 14A:5- 6, upon a proposed corporate action from which a shareholder
may dissent under section 14A:11- 1, any shareholder electing to dissent from
such action shall file with the corporation before the taking of the vote of the
shareholders on such corporate action, or within the time specified in
paragraphs 14A:5-6(2)(b) or 14A:5-6(2)(c), as the case may be, if no meeting of
shareholders is to be held, a written notice of such dissent stating that he
intends to demand payment for his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall give written notice of the effective date of
such corporate action, by certified mail to each shareholder who filed written
notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for
or consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to
whom the corporation was required to give such notice and who has filed a
written notice of dissent pursuant to this section may make written demand on
the corporation, or, in the case of a merger
-2-
<PAGE>
or consolidation, on the surviving or new corporation, for the payment of the
fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to (1) section
14A:10-5.1 or subsection 14A:10-7(4) and shareholder approval is not required
under (2) subsections 14A:10- 5.1(5) and 14A:10-5.1(6), a shareholder who has
the right to dissent pursuant to section 14A:11- 1 may, not later than 20 days
after a copy or summary of the plan of such merger and the statement required by
subsection 14A:10-5.1(2) is mailed to such shareholder, make written demand on
the corporation or on the surviving corporation, for the payment of the fair
value of his shares.
(5) Whenever all the shares, or all the shares of a class or series,
are to be acquired by another corporation pursuant to section 14A:10-9, a
shareholder of the corporation whose shares are to be acquired may, not later
than 20 days after the mailing of notice by the acquiring corporation pursuant
to paragraph 14A:10-9(3)(b), make written demand on the acquiring corporation
for the payment of the fair value of his shares.
(6) Not later than 20 days after demanding payment for his shares
pursuant to this section, the shareholder shall submit the certificate or
certificates representing his shares to the corporation upon which such demand
has been made for notation thereon that such demand has been made, whereupon
such certificate or certificates shall be returned to him. If shares represented
by a certificate on which notation has been made shall be transferred, each new
certificate issued therefor shall bear similar notation, together with the name
of the original dissenting holder of such shares, and a transferee of such
shares shall acquire by such transfer no rights in the corporation other than
those which the original dissenting shareholder had after making a demand for
payment of the fair value thereof.
(7) Every notice or other communication required to be given or made by
a corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
(Last amended by Ch. 94, L. '88, eff. 12-1-88.)
-3-
