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.
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(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
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b. Aggregate number of securities to which transaction applies:
3,000,000
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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):
$2.72 (average of high and low price on January 8, 1999)
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<PAGE>
d. Proposed maximum aggregate value of transaction:
$8,160,000
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e. Total fee paid:
$1,632.00
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[X] 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:
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b. Form, Schedule or Registration Statement No.:
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c. Filing Party:
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d. Date Filed:
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January __, 1999
To the Shareholders of MicroFrame, Inc.
Enclosed is an Information Statement relating to three matters of
importance to you as shareholders of MicroFrame, Inc. (the "Company"):
1. The purchase by the Company of all of the outstanding share capital of SolCom
Systems Limited ("SolCom"), a Scottish corporation in exchange for an aggregate
of shares of common stock of the Company ("Common Stock") and options to
purchase shares of Common Stock of up to 2,700,000 shares and options together
with up to 300,000 performance-based options;
2. The adoption of the Company's 1998 Stock Option Plan and the Company's 1998
U.K. Sub-Plan; and
3. The reincorporation of the Company in the State of Delaware pursuant to an
Agreement and Plan of Merger dated as of December 15, 1998.
The acquisition of SolCom is designed to enable the Company to broaden
its market presence by offering secure intelligent remote monitoring and
management of both the physical and logical aspects of voice and data networks.
The adoption of new stock option plans and the reincorporation of the
Company in the State of Delaware will create a more favorable and flexible
corporate structure through which the Company will be able to more effectively
carry out its business objectives and goals.
Each of the above items has been approved in writing by the holders of
a majority of the outstanding shares of Common Stock of the Company. No proxy is
being solicited from you and no meeting is being held. Under New Jersey law,
each of these items will become effective twenty (20) days from today.
Thank you for your continued confidence and support.
Very truly yours,
/s/ Stephen B. Gray
Stephen B. Gray
President and Chief Executive Officer
<PAGE>
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 December 30, 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 2,840,000 shares of Common
Stock, representing approximately 51% 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 shares of Common Stock and options to purchase shares of Common
Stock aggregating up to 2,700,000 shares and options together with up to 300,000
performance-based options, (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") and (iii) the reincorporation of the
Company in the State of Delaware pursuant to an Agreement and Plan of Merger
dated as of December 15, 1998 (the "Reincorporation"). The exact number of
shares of Common Stock and options to purchase shares of Common Stock to be
issued and/or granted by the Company in the Transaction will be determined in
accordance with a certain formula set forth in the Share Purchase Agreement (as
hereinafter defined) upon the completion of the Transaction. Based upon the
formula set forth in the Share Purchase Agreement (as hereinafter defined), if
the Transaction were consummated as of January 5, 1999, the Company would issue
2,200,000 shares of Common Stock and 500,000 options to purchase shares of
Common Stock. Upon completion of the Transaction, all Shareholders will
experience immediate and substantial dilution of percentage ownership and voting
power with respect to the Company's issued and outstanding Common Stock of
between approximately 39.6% (assuming 2,200,000 shares of Common Stock are
issued) and 48.6% (assuming 2,700,000 shares of Common Stock are issued).
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 at 21 Meridian Avenue, Edison, New Jersey 08820, Attention: John
F. McTigue, Chief Financial Officer (tel. 732-494-4440), of the Shareholder's
intention to so dissent within twenty (20) days of the date of the notice from
the Company to all nonconsenting Shareholders delivered simultaneously with the
mailing of this Information Statement informing each such Shareholder of the
right to dissent.
On November 16, 1998, the Board of Directors approved the Transaction
and the Reincorporation 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.
<PAGE>
This Information Statement describing the Transaction, the Plans and
the Reincorporation is first being mailed or furnished to Shareholders on or
about ________, 1999 and neither the Transaction nor the Plans nor the
Reincorporation 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 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"). This Information
Statement, as well as reports, proxy statements and other information filed by
the Company can be inspected and copied at the Commission's Public Reference
Room, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the public reference facilities maintained by the Commission at
its regional offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such materials can be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Commission's public reference room by calling
1-800-SEC-0330. Electronic registration statements filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system are
publicly available through the Commission's World Wide Web site
(http://www.sec.gov).
CERTAIN DOCUMENTS ATTACHED TO THIS INFORMATION STATEMENT
The Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1998, as amended (the "Company 10-KSB"), and the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1998 (the
"Company 10-QSB"), which were previously filed with the Commission on July 14,
1998 (as amended on August 7, 1998) and November 23, 1998, respectively, 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 the filing of 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 up to .2,700,000
Approximate shares of Common Stock to be issued(1)(2)...........................2,200,000
Approximate number of options to be granted by the Company(1)(2)................500,000
Number of performance-based options to be granted by the Company................300,000
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)
3,000,000
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1 The exact allocation between shares of Common Stock to be issued and
options to be granted in connection with the Transaction is to be
determined pursuant to a formula contained in the Share Purchase
Agreement (as hereinafter defined).
2 In the event that the Transaction were consummated on January 5, 1999,
the Company would have issued an aggregate of 2,200,000 shares of
Common Stock and options to purchase 500,000 shares of Common Stock.
3 Although there is no specific allocation with respect to option grants
as between the Plan and the Sub-Plan, it is the Company's intention to
issue options pursuant to the Sub-Plan only to U.K. personnel.
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ITEM 1 - APPROVAL OF THE TRANSACTION
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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 is in the process of developing products with two new
technologies, "NetworX" products and "ASIC" products. Below are descriptions of
these two new projects. See "Information With Respect to SolCom-Description of
Business."
NetworX is being developed by SolCom as the industry's first
comprehensive management tool. NetworX will be the industry's first integrated
platform for proactive, remote, secure management and monitoring of voice, data
and video networks. It uses "Dial Up", "Telnet" or "SNMP" connections so that
managers can monitor, evaluate and control all aspects of their network from a
single, remote point.
An ASIC is an Application Specific Integrated Circuit that incorporates
all the hardware and software required to carry out specific tasks on a single
chip. This will lead to a substantial increase in processing speed and reduction
in build cost. Designing the ASIC requires SolCom to experience a steep learning
curve while its engineers become familiar with this technology. Initially there
will be one ASIC but once the initial ASIC has been developed there will be an
ongoing development to introduce more capabilities and features into ASICs.
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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 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,
Shareholder votes are not being solicited and no meeting of Shareholders is
being held to approve the Transaction.
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 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,
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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 trade show 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,
then the Company's 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.
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 examine the 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
visit further confirmed the Company's position that this transaction had merits
from a product (including a substantial number of products currently under
technological development, customer, staff, target market and financial
perspective. The following items were most significant: technology of the target
company, 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 Directors of the Company authorized Mr.
Gray and Mr. McTigue to proceed with the proposed acquisition and take any
necessary action in connection therewith, including entering into a "letter of
intent" and performing the required due diligence. This included retaining Van
Kasper & Company, an investment banking firm, to advise the Board as to the
fairness of the proposed Transaction from a financial point of view, as well as
retaining PricewaterhouseCoopers LLP and Semple Fraser WS in connection with
accounting and legal services, respectively, 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 structure.
In April 1998, Messrs. McTigue and Gray returned to SolCom's facility
with representatives from Van Kasper and Company. During this visit, Van Kasper
was given unrestricted access to SolCom's staff and financial records to allow
them to perform the reviews
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necessary 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 Company entered into a letter of intent to
acquire SolCom which was publicly announced 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 that an
agreement with respect to the principal terms of the Transaction had been
reached. The principal terms thereof were substantially the same as on June 10,
1998, the date of Van Kasper's fairness opinion.
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 and SolCom renegotiated the principal terms of the
Transaction during the period of October through November 1998. On November 27,
1998, the principal terms and conditions of such renegotiation were agreed upon
and a press release was issued in connection therewith. On December 23, 1998, an
Amendment to the Share Purchase Agreement was executed and delivered by all
parties thereto. No update to the Fairness Opinion will be rendered by Van
Kasper & Company.
The Company's Reasons for the Transaction
Positive Factors:
i. The Company's management believes that the combined entity
will be able to provide a greater overall technology delivery
engine and will therefore be better able to capitalize on
market opportunities; accordingly, the Company's Board
believes that 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
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respect to growth and opportunity, the ability to develop
joint products and the fostering of economies of scale.
iii. The research and development products of SolCom are believed
to have great potential and are expected to create substantial
revenue growth for the combined Company.
iv. 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.
v. 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.
vi. The terms and conditions of the Share Purchase Agreement are
fair to the Shareholders. Accordingly, over the long term, the
issuance of the MicroFrame Shares (as hereinafter defined)
would not be likely to result in significant dilution to the
Shareholders as a function of earnings per share; however,
Shareholders in the short term will experience immediate and
substantial dilution of percentage ownership and voting power
with respect to the Company's issued and outstanding Common
Stock of between approximately 39.6% (assuming 2,200,000
shares of Common Stock are issued) and 48.6% (assuming
2,700,000 shares of Common Stock are issued). See "Risk
Factors-Dilution of Voting Power."
vii. The combination of the two companies should 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.
Negative Factors:
i. The Company's issuance of the MicroFrame Shares will result in
the Shareholders experiencing immediate and substantial
dilution of percentage ownership and voting power with respect
to the Company's issued and outstanding Common Stock of
between approximately 39.6% (assuming 2,200,000 shares of
Common Stock are issued) and 48.6% (assuming 2,700,000 shares
of Common Stock are issued).
ii. As a result of SolCom's substantial net operating losses for
each of the fiscal years ended June 30, 1996 and 1997 and the
six months ended September 30, 1998 of $78,000, $919,000 and
$180,000, respectively, together with SolCom's projection that
operating losses will continue into the near future,
consummation of the Transaction may result in net losses for
the Company.
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iii. As of December 31, 1998, SolCom had no available cash or cash
equivalents to conduct its business or operations.
iv. The validity of SolCom's technology has not been adequately
demonstrated in mass market applications. In addition,
SolCom's relationship with the Hewlett- Packard Company
constitutes a significant portion of its current business,
without which SolCom's business could be materially adversely
affected.
v. The possibility that the merged entity would not achieve
certain synergies with respect to the combination of distinct
technologies and corporate cultures could have a potential
adverse effect on the business as well as future financial
operations and results. In addition, if the research and
development efforts of SolCom currently in-process are
ultimately not successful, the financial condition and
operations of the Company could be materially adversely
affected.
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 than
SolCom is now, will be better able to capitalize on market
opportunities; accordingly, SolCom's Board believes that
shareholder value will be likely to increase in the future as
shareholders of the Company rather than as shareholders of
SolCom.
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 Sentinel product) 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.
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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.
vii. The terms and conditions of the Share Purchase Agreement are
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. At the meeting of the Board of Directors of the Company on
June 10, 1998, Van Kasper & Company, 600 California Street, Suite 1700, San
Francisco, California 94108 ("Van Kasper") delivered a written opinion, as of
June 10, 1998, to the Board as to the fairness of the Transaction, as structured
on June 10, 1998, to the Company and the shareholders of the Company from a
financial point of view (the "Fairness Opinion"). Van Kasper's opinion is
limited to the fairness of the terms and conditions of the Transaction as
structured on June 10, 1998, from a financial point of view, to the shareholders
of the Company and does not address the Company's underlying business decision
to proceed with the Transaction.
In conducting its review and rendering its opinion, Van Kasper, without
any independent verification, (i) relied on the accuracy and completeness of all
the financial and other publicly available information reviewed by them or
furnished or otherwise communicated to them as written by the Company or SolCom
and (ii) assumed that the projections for the Company, SolCom, and the combined
company after completion of the Transaction were reasonably prepared based on
assumptions reflecting good faith judgments of the management teams preparing
them as the most likely future performance of the Company, SolCom, and the
combined company after completion of the Transaction and that neither the
management of the Company nor the management of SolCom has any information or
belief that would make any such projections misleading in any respect. Van
Kasper was not retained to, and Van Kasper did not, make any independent
evaluation or appraisal of the assets, liabilities or prospects of the Company,
SolCom or the combined company after completion of the Transaction.
Fairness Opinion Not Updated. Van Kasper delivered the Fairness Opinion
on June 10, 1998. Since that date, Van Kasper has not been requested to and has
not updated the Fairness Opinion. Among the principal considerations taken into
account by Van Kasper in rendering the Fairness Opinion were the financial
condition, results of operations, projections and business prospects of both the
Company and SolCom, as well as the consideration proposed to be paid by the
Company in connection with the Transaction as structured on June 10, 1998. Based
on a current evaluation by the Board of Directors of the Company of the
financial condition, results of operations, projections and business prospects
of both the Company and SolCom, the terms of the Transaction were substantially
renegotiated by the Company and the Sellers in December 1998. Accordingly, the
Fairness Opinion by its terms is not directed at, and cannot be relied upon
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with respect to, the fairness of the Transaction as presently structured to the
shareholders of the Company.
However, based in part on the conclusions reached in the Fairness
Opinion as of the date of its delivery, the Board of Directors of the Company
has carefully evaluated the changes that have occurred in the financial
condition, results of operations, projections and business prospects of both
SolCom and the Company since June 1998, particularly the adverse changes that
have occurred in the financial condition, results of operations and projections
of SolCom, and the Board of Directors of the Company has concluded that the
renegotiated reduced level of consideration to be paid by the Company in the
Transaction results in a Transaction that is fair, from a financial point of
view, to the shareholders of the Company.
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 Fairness Opinion, is attached hereto as Appendix B and
incorporated herein by reference. The summary contained herein is qualified in
its entirety by reference to the full text of the Fairness Opinion.
Summary of Methods Utilized. Set forth below is a brief summary of the
analyses performed by Van Kasper in conjunction with the delivery of its written
Fairness Opinion stating that the Transaction, as structured on June 10, 1998,
was fair to the Company and the shareholders of the Company from a financial
point of view.
Comparisons to Selected Publicly Traded Comparable Companies. Van
Kasper performed a valuation of SolCom using selected financial ratios and
multiples of seven comparable publicly traded companies identified by Van Kasper
(consisting of Applied Digital Access, Inc., Concord Communications, Inc., Jyra
Research, Inc., Peregrine Systems, Inc., Sync Research, Inc., Visual Networks,
Inc., and Wandel & Goltermann Technologies, Inc.). Because most of these
companies are not currently profitable, Van Kasper utilized the market value of
invested capital (i.e., market capitalization plus interest bearing debt)
("MVIC") as a multiple of revenues for the twelve months ended March 31, 1998 to
derive an indicated equity value for SolCom. The range of multiples of MVIC to
revenues for the twelve months ended March 31, 1998 was 1.6 to 213.4, with an
adjusted average (eliminating the highest and lowest values) of 8.8. On the
basis of this average multiple, Van Kasper then calculated an approximate
indicated equity value of SolCom on a stand-alone basis of $20.0 million.
No company used in the above analysis for comparison purposes is
identical to SolCom. Accordingly, an analysis of the results of the foregoing is
not purely mathematical; rather it involves complex considerations and judgments
as to the financial and operating characteristics of the companies and other
factors that could affect the value of the companies to which SolCom is being
compared.
Discounted Cash Flow Analysis. Van Kasper performed a discounted cash
flow analysis of SolCom utilizing the anticipated future cash flow streams that
SolCom would produce over the period from June 30, 1998 through March 31, 2001
if SolCom performed in accordance with forecasts provided by the management of
SolCom. Van Kasper also estimated a terminal value of
-12-
<PAGE>
SolCom as of March 31, 2001 by applying multiples ranging from 23.0 to 27.0
times SolCom's projected net income for the fiscal year ending March 31, 2001.
Van Kasper based the range of terminal value multiples, in part, on the trading
multiples of the publicly traded comparable companies. The cash flow streams and
terminal value were discounted to their present value as of June 30, 1998 using
a range of discount rates from 23.0% to 27.0%, reflecting different assumptions
regarding SolCom's weighted average cost of capital. On the basis of these
calculations, Van Kasper determined an approximate indicated equity value of
SolCom, on a stand alone basis, of $20.9 million. However, it should be noted
that from June 30, 1998 through December 31, 1998, SolCom has performed
significantly below the forecasts provided by SolCom's management.
Van Kasper also performed a discounted cash flow analysis of the
post-Transaction combined company utilizing the anticipated future cash flow
streams that the combined company would produce over the period from June 30,
1998 through March 31, 2001 if the post- Transaction combined company performed
in accordance with forecasts provided by management of the Company. Van Kasper
also estimated a terminal value for the post-Transaction combined company as of
March 31, 2001 by applying multiples ranging from 23.0 to 27.0 times the post-
Transaction combined company's projected net income for the fiscal year ending
March 31, 2001. Van Kasper based the range of terminal value multiples, in part,
on the trading multiples of the publicly traded comparable companies. The cash
flow streams and terminal value were discounted to their present values as of
June 30, 1998 using a range of discount rates from 21.0% to 25%, reflecting
different assumptions regarding the post-Transaction combined company's weighted
average cost of capital. On the basis of these calculations, Van Kasper
calculated an approximate indicated equity value for the post-Transaction
combined company of $38.4 million and an indicated equity value of the proposed
ownership interest in the post-Transaction combined company to be held by the
shareholders of the Company following the Transaction of $21.3 million. However,
it should be noted that from June 30, 1998 through December 31, 1998, SolCom has
performed significantly below the forecasts provided by SolCom's management.
Comparable Merger and Acquisition Transaction Analysis. Van Kasper
researched a variety of merger and acquisition transaction data sources,
including on-line databases, public filings, press releases and newspapers for
the time period from January 1, 1996 to the date of its analysis. Van Kasper
located 305 potentially comparable merger and acquisition transactions, however,
only 18 such transactions disclosed sufficient details to draw conclusions
regarding valuation. Upon further examination, an additional 14 transactions
were eliminated for a variety of reasons including differences in transaction
size, incompatible underlying deal structures or lack of data. Van Kasper
utilized the remaining four transactions (consisting of Visual Networks,
Inc./Net2Net Corporation, Network General Corporation/Cinco Networks, Inc., 3Com
Corporation/Axon Networks, Inc., and Bay Networks, Inc./Armon Networking Ltd.)
to derive a valuation of SolCom utilizing the multiple of total deal value to
latest twelve months revenues. The range of multiples of total deal value to
latest twelve months revenues were 6.9 to 13.0, with an average of 8.6. On the
basis of this average multiple, Van Kasper then calculated an approximate
indicated equity value of $19.8 million.
-13-
<PAGE>
The summary set forth above describes the material analyses performed
by Van Kasper and does not purport to be a complete description of such
analyses. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In addition,
the evaluation of fairness of the Transaction, from a financial point of view,
as of the date of the opinion was to some extent a subjective one based on the
experience and judgment of Van Kasper, and not merely the result of mathematical
analysis of the financial data. Therefore, notwithstanding the separate factors
summarized above, Van Kasper believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses by which Van Kasper reached its opinion.
In performing its analyses, Van Kasper made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, in addition to the financial assumptions described above. The
analyses performed by Van Kasper are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
those suggested by such analyses. Such analyses were prepared solely as part of
Van Kasper's analysis of the Transaction. The analyses do not purport to be
appraisals or to reflect the prices at which a company might be sold or the
prices at which any securities of the Company or the post-Transaction combined
company may trade at any time in the future. Furthermore, Van Kasper may have
given certain analyses more or less weight than other analyses and may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be Van Kasper's view of the actual value of the Company,
SolCom, or the post-Transaction combined company.
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 connection with mergers
and acquisitions, private placements and valuations for corporate and other
purposes.
Relationship/Compensation. The Company paid Van Kasper a fee of $80,000
in connection with the rendering of the opinion and has agreed to pay
approximately $21,500 in expenses thereof. Van Kasper is a private investment
bank with no affiliations with the Company, SolCom or the Sellers. The Company
has had no material relationship with Van Kasper within the last two years and
has no present intention to retain Van Kasper in connection with any future
services.
Management of the Company determined the amount of consideration to be
paid to the Sellers (as hereinafter defined) 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.
-14-
<PAGE>
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, as amended on December 23, 1998, entered
into by and among the Company, SolCom, each of the Sellers (as defined below)
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 shares of Common Stock and options to purchase shares of Common Stock
aggregating up to 2,700,000. It is currently estimated that the Company will
issue approximately 2,200,000 shares of Common Stock and grant approximately
500,000 options to purchase shares of Common Stock. In addition, the Company
will issue up to 300,000 performance-based 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.
Approval by the Shareholders. Holders of a majority of the shares of
Common Stock of the Company have approved the Transaction pursuant to the
Written Consents.
Management of the Business Following the Proposed Transaction.
Effective as of the Closing (as such term is defined in the Share Purchase
Agreement), the Company's Board of Directors shall consist of six (6) members,
four (4) of whom currently constitute the Board (and who will remain as members
thereof) and the remaining two (2) of whom shall constitute 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, as well as, from SolCom, Peter Wilson, Executive Vice
President-Marketing and Hugh Evans-Executive Vice President-Development.
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 at 21 Meridian
Avenue, Edison, New Jersey 08820, Attention: John F. McTigue, Chief Financial
-15-
<PAGE>
Officer (tel. 732-494-4440), 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
Information Statement informing each such Shareholder of the right to dissent.
Section 14A:11-1 of the NJBCA sets forth the rights of Shareholders who object
to the Transaction or the Reincorporation. Any Shareholder who does not vote in
favor of the Transaction or the Reincorporation, or who duly revokes his vote in
favor of the same, may, if the Transaction and/or Reincorporation are
consummated, obtain payment in cash of the fair value of his shares by strictly
complying with the requirements of Chapter 11 of the NJBCA. The Company, within
20 days after the date on which the Transaction and Reincorporation take effect,
shall give written notice of the effective date thereof, by certified mail to
each Shareholder that has filed a written notice of dissent and not voted to
approve the same. Within 20 days after the mailing of such notice, any
Shareholder may make written demand on the Company for the payment of the fair
value of such Shareholder's shares. Not later than 20 days after demanding
payment for the shares of Common Stock held by such Shareholder, the Shareholder
shall submit the certificate or certificates representing such shares of Common
Stock to the Company. The Company shall note that such demand has been made on
the certificate or certificates and return such certificate or certificates to
the Shareholder. Not later than 10 days after the expiration of the period in
which Shareholders may make written demand to be paid the fair value for their
shares of Common Stock, the Company shall mail to any Shareholders making a
written demand the balance sheet of the Company, as of the latest available date
which shall not be earlier than 12 months prior to the making of the demand and
a profit and loss statement for not less than a 12- month period ended on the
date of such balance sheet. The fair market value of any shares of Common Stock
to which dissenters' rights are exercised shall be the fair market value of such
Common Stock as of the Closing. Reference is made to Sections 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 (as hereinafter
defined) 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 following the consummation of the
Transaction with respect to percentage ownership and voting power of the
Company's issued and outstanding Common Stock of between approximately 39.6%
(assuming 2,200,000 shares of Common Stock are issued) and 48.6% (assuming
2,700,000 shares of Common Stock are issued).
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.
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
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<PAGE>
promulgated thereunder. Sellers will be permitted to sell certain shares held by
them in accordance with Regulation S and Rule 144 promulgated under the Act. In
general, Regulation S prohibits resales of securities sold pursuant thereto in
the United States for a period of one (1) year, after which such "restricted
securities" may be sold in reliance on Rule 144. 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 are 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
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 an aggregate of up to 2,700,000
shares of Common Stock and options to purchase shares of Common Stock in
accordance with the following formula:
(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:
a x 2,700,000
---------
a + b + c
where 'a' equals the number of Shares held by Sellers as of the
Closing; '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 divided by (y) the Conversion Factor. The
Conversion Factor is determined in accordance with the following
formula:
a + b
---------
2,700,000
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<PAGE>
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.
It should be noted that the greater the number of shares of Common
Stock issued pursuant to the Share Purchase Agreement, the greater the
dilutive effect upon the Shareholders.
Performance-Based Stock Options. In addition to the 2,700,000 shares of
Common Stock and options therefor, the Company has agreed to grant 300,000
performance-based options upon the Closing to certain key management members of
SolCom, 150,000 of which will vest if the newly-combined entity achieves
revenues of at least $30 million in fiscal year 2000 and the remaining 150,000
of which will vest if the newly-combined entity achieves revenues of $60 million
in fiscal year 2001. In the event that such targets are not reached, the options
will not vest and will expire.
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 event 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, a
Scottish law firm, as escrow agent.
Exchange of Certificates. Upon the execution of the Share Purchase
Agreement, there were delivered to a representative of the Sellers (the
"Sellers' Representative") certificates representing all of the outstanding
Shares together with duly executed share transfers to be held in custody by the
Sellers' Representative until the Closing, at which time the Sellers'
Representative shall deliver the Shares and transfers to the Company. 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 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,
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<PAGE>
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. Effective at the Closing, SolCom will
become a wholly-owned subsidiary of the Company. The directors of the Company
shall be Stephen B. Gray, Stephen M. Deixler, Michael Radomsky, Alexander C.
Stark (each of whom is currently a director of the Company), and two (2)
nominees of 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, as well as, from SolCom, Peter Wilson, Executive Vice
President-Marketing and Hugh Evans-Executive Vice President- Development.
Conditions to the Transaction. The respective obligations of the
Company and SolCom to consummate the Transaction are 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, and clearance from the
Inland Revenue of the United Kingdom. The Share Purchase Agreement contains no
condition of closing with respect to fluctuations in the price of the Common
Stock; accordingly, no party may terminate the Share Purchase Agreement or their
respective obligations contained therein as a result of any such fluctuations.
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 June
30, 1999 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 June 30, 1999. Upon termination of the Share Purchase Agreement, all
obligations of all parties terminate, except those relating to non-solicitation,
confidentiality and public announcements.
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, Keith Laing, Robert Struthers and Stephen Connelly, (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.
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<PAGE>
Employment Agreement Amendment of Peter Wilson. Effective as of the
Closing, the Company, SolCom and Peter Wilson shall enter into an amendment to
that certain Employment Agreement by and among SolCom and Mr. Wilson dated March
17, 1993, as amended on June 28, 1996, which shall, among other things, (i)
increase his annual salary to (pound)70,000 per year with a provision for annual
salary increases, (ii) grant 50,000 options to purchase Common Stock, (iii)
provide an automobile allowance of (pound)5,000 per year and (iv) impose a
one-year covenant not to compete.
Employment Agreement Amendment of Hugh Evans. Effective as of the
Closing, the Company, SolCom and Hugh Evans shall enter into an amendment to
that certain Employment Agreement by and among SolCom and Mr. Evans dated March
17, 1993, as amended on June 28, 1996, which shall, among other things, (i)
increase his annual salary to (pound)70,000 per year with a provision for annual
salary increases, (ii) grant 50,000 options to purchase Common Stock, (iii)
provide an automobile allowance of (pound)5,000 per year and (iv) impose a
one-year covenant not to compete.
Employment Agreement Amendment of Keith Laing. Effective as of the
Closing, the Company, SolCom and Keith Laing shall enter into an amendment to
that certain Employment Agreement by and among SolCom and Mr. Laing dated
September 26, 1995, which shall, among other things, (i) increase his annual
salary to (pound)55,000 per year, (ii) grant 7,500 options to purchase Common
Stock and (iii) impose a three-month covenant not to compete.
Employment Agreement Amendment of Robert Struthers. Effective as of
the Closing, the Company, SolCom and Robert Struthers shall enter into an
amendment to that certain Employment Agreement by and among SolCom and Mr.
Struthers dated February 21, 1995, which shall, among other things, (i) increase
his annual salary to (pound)43,000 per year, (ii) grant 7,500 options to
purchase Common Stock and (iii) impose a three-month covenant not to compete.
Employment Agreement Amendment of Stephen Connelly. Effective as of the
Closing, the Company, SolCom and Stephen Connelly shall enter into an amendment
to that certain Employment Agreement by and among SolCom and Mr. Connelly dated
February 21, 1995, which shall, among other things, (i) increase his annual
salary to (pound)33,000 per year, (ii) grant 7,500 options to purchase Common
Stock and (iii) impose a three-month covenant not to compete.
Registration Rights Agreement. Effective as of the Closing, the Company
will enter into a registration rights agreement with the SolCom shareholders
which shall entitle each such shareholder, for a period of one year from the
Closing, to (i) "piggyback" registration rights in the event that the Company
registers any Common Stock and (ii) certain limited "demand" registration rights
in the event the Company breaches certain covenants contained therein relating
to the availability of Rule 144 promulgated under the Act.
Stock Option Contracts. Effective as of the Closing and pursuant to the
Sub-Plan, the Company shall grant stock options to certain employees of SolCom
who currently
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<PAGE>
hold options to purchase shares in SolCom (the "Original Options") evidencing
the grant of options to purchase approximately 500,000 shares of Common Stock
(the "Employee Options"). The Employee Options shall contain terms substantially
similar to the Original Options, including without limitation, exercise price
(fair market value) and vesting period (between approximately 5 and 7 years from
the Closing) thereof.
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<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet
MicroFrame, Inc.-As of December 31, 1998
SolCom Systems Ltd..-As of December 31, 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 December
31, 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 Adjustment Pro Forma
ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 345,892 135,300 $ 481,192
Accounts receivable, less allowance for doubtful
accounts of $95,249 2,823,565 610,500 3,434,065
Inventory, net 2,036,567 358,050 2,394,617
Deferred tax assets 337,512 337,512
Prepaid expenses and other current assets 461,557 207,900 669,457
-------------------------------------------------------------------
Total current assets 6,005,093 1,311,750 7,316,843
Property and equipment, less accumulated depreciation of
$585,015 and $971,903 693,423 234,300 927,723
Capitalized software, less accumulated amortization of
$1,309,856 and $1,054,827 1,426,567 3,855,000(Note 2) 5,281,567
Goodwill, less accumulated amortization of $33,555 and
$26,130 68,055 931,636(Note 2) 999,691
Other intangible assets 250,000(Note 2) 250,000
Security deposits 39,798 39,798
Other assets 1,026,064 (1,026,064)(Note 2) 0
-------------------------------------------------------------------
Total assets $ 9,259,000 1,546,050 4,010,572 $ 14,815,622
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 1,100,428 66,000 $ 1,166,428
Accounts payable 1,694,260 1,009,800 950,000 (Note2) 3,654,060
Accrued payroll and related liabilities 212,348 212,348
Deferred income 95,673 95,673
Other current liabilities 337,697 994,950 267,400 (Note2) 1,600,047
-------------------------------------------------------------------
Total current liabilities 3,440,406 2,070,750 1,217,400 6,728,556
-------------------------------------------------------------------
Deferred tax liabilities, net 48,808 48,888
Long-Term debt 500,000 500,000
Other liabilities 85,800 85,800
Commitments and contingencies
Stockholders' equity
Common stock 6,652 701,852 (699,652) (Note 2) 8,852
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued
Additional paid-in capital 7,366,221 1,449,588 4,524,997 (Note 2) 13,340,806
Accumulated deficit (1,886,534) (2,763,639) (1,030,474)(Note 2) (5,680,647)
Accumulated comprehensive income (9,434) 1,699 (1,699) (9,434)
-------------------------------------------------------------------
Less - Treasury stock, 62,031 shares, at cost (207,199) (207,199)
-------------------------------------------------------------------
Total stockholders' equity 5,269,706 (610,500) 2,793,172 7,452,378
-------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,259,000 1,546,050 4,010,572 $ 14,815,622
===================================================================
</TABLE>
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<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-Nine Months Ended December 31, 1998
SolCom Systems, Ltd.-Nine Months Ended December 31, 1998
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustment Pro Forma
<S> <C> <C> <C> <C>
Net Sales $ 9,451,604 $ 2,314,950 $ (350,000) (Note4) $ 11,416,554
Cost of sales 3,436,590 277,200 3,713,790
------------- ------------- ----------------- ---------------
Gross margin 6,015,014 2,037,750 (350,000) 7,702,764
Research and Development expenses 1,285,809 562,650 350,000 (Note 4) 2,198,459
5,545,647
Selling, general and administrative
expenses 3,671,247 1,874,400
Depreciation and amortization 454,418 186,450 1,229,364(Note 3) 1,870,232
------------- ------------- ----------------- ---------------
Income (loss) from operations 603,540 (585,750) (1,929,364) (1,911,574)
Interest income 5,139 1,656 6,795
Interest expense (55,725) (34,650) (90,375)
------------- ------------- ----------------- ---------------
Income (loss) before income tax provision 552,954 (618,744) (1,929,364) (1,995,154)
(benefit)
------------- ------------- ----------------- ---------------
Income tax provision (benefit) 207,850 0 (241,452) (33,602)
------------- ------------- ----------------- ---------------
Net income (loss) $ 345,104 $ (618,744) $ (1,687,912) $ (1,961,552)
============= ============= ================= ===============
Per share data (Note 5)
Net income (loss) per share
Basic $ 0.06 $ (0.26)
Diluted $ 0.05 $ (0.26)
Weighted average number of common 5,490,922 7,690,922
shares outstanding basic
Weighted average number of common 6,455,398 7,690,922
shares outstanding diluted
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-Year ended March 31, 1998
SolCom Systems Ltd..-Year ended March 31, 1998
SolCom
MicroFrame (Note 6) Pro Forma Adjustments Pro Forma
<S> <C> <C> <C>
Net sales $ 10,217,911 $ 2,168,313 $ $ 12,386,224
Cost of sales 4,285,134 456,225 4,741,359
-------------- ----------- ------------------- ----------------
Gross Margin 5,932,777 1,712,088 7,644,865
Research and development expenses 1,117,151 562,401 1,679,552
Selling, general and administrative expenses 3,933,783 2,002,727 5,936,510
Depreciation and amortization 485,738 76,000 1,889,153(Note 3) 2,450,891
-------------- ----------- ------------------- ----------------
Income (loss) from operations 396,105 (929,040) (1,889,153) (2,422,088)
Interest income 14,888 1,659 16,547
Interest expense (4,344) (43,134) (47,478)
-------------- ----------- ------------------- ----------------
Income (loss) before income tax provision (benefit) 406,649 (970,515) (1,889,153) (2,453,019)
Income tax provision (benefit) (304,661) (433,333) (737,994)
-------------- ----------- ------------------- ----------------
Net income (loss) $ 711,310 $ (970,515) $ (1,455,820$ (1,715,025)
============== =========== =================== ================
Per share data (Note 5)
Net income (loss) per share
Basic $ 0.15 $ (0.24)
-------------- ----------------
Diluted $ 0.14 $ (0.24)
-------------- ----------------
Weighted average number of common shares
outstanding basic 4,840,357 7,040,357
-------------- ----------------
Weighted average number of common shares
outstanding diluted 5,195,357 7,040,357
-------------- ----------------
</TABLE>
-24-
<PAGE>
MicroFrame, Inc.
SolCom Systems, Ltd.
Notes to Unaudited Pro Forma 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 revised purchase agreement specifies that MicroFrame will acquire
all of the outstanding shares of SolCom in exchange for a maximum of
3,000,000 MicroFrame equity units, 2,700,000 of which will be comprised
of common shares and stock options subject to a formula contained in
the Revised Purchase Agreement. Included in the 3,000,000 equity units
is a grant of 300,000 performance-based options that will occur at
consummation to certain key management members of SolCom, 150,000 of
which will vest if the newly-combined entity achieves revenues of at
least $30 million in fiscal year 2000 and the remaining 150,000 of
which will vest if the newly-combined entity achieves revenues of $60
million in fiscal year 2001.
The following tables detail the estimated purchase price calculation
and the estimated purchase price allocation that was utilized in the
pro forma financial statements:
<TABLE>
<CAPTION>
Calculation of Purchase Price
<S> <C> <C>
Number of shares to be issued by MicroFrame 2,200,000
Average stock price for three days before and after
November 27, 1998 2.46 $5,401,786
Number of options to be issued in the Transaction 500,000
Estimate fair value using Black Scholes model 1.15 575,000
-----------
Total value of equity consideration $ 5,976,786
Estimated transaction costs of MicroFrame 1,000,000
Assumption of additional SolCom debt 950,000
SolCom deficit at September 30, 1998 609,850
---------
Total Consideration $ 8,536,636
=========
Purchase Price Allocation
Existing and core technology products $ 3,855,000
Covenant not to compete 250,000
In-process research and development 3,500,000
Goodwill 931,636
----------
Total Purchase Price $ 8,536,636
==========
</TABLE>
-25-
<PAGE>
For purposes of the pro forma financials, the Company has split the
equity units into the following classes of equity to determine the
consideration in the transaction:
o 2,200,000 common shares
o 500,000 stock options
o 300,000 performance-based options
The Company has utilized an average stock price for a short period (3
days)prior to and after the announcement of the newly negotiated terms
to the public that occurred on November 27, 1998. The average, as
computed, is $2.46 per share. This average was applied to the 2,200,000
common shares to arrive at the applicable value for consideration
exchanged. In addition, the Company has estimated the value of the
500,000 stock options using a Black Scales option valuation model. The
estimated value per option was $1.15. The assumption utilized in the
model include an expected validity of 80%; a dividend yield of 0, a
risk free interest rate of 5.33% and an expected option term of 5
years. The Company has not included the value of the 300,000
performance-based options in its consideration, as the options are
contingent upon the realization of the future revenues as noted above.
If the contingency is resolved, additional purchase price consideration
will be recorded at that time.
The consideration will be adjusted at consummation as the composition
of shares and options will then be known. However, the Company believes
that the consideration utilized in the calculations underlying the pro
forma financial statements will not change materially.
In addition to the consideration noted above, the Company has estimated
that transaction costs will be $1,000,000. The costs are primarily
comprised of professional fees and other incremental costs directly
related to the transaction. The Company had incurred $1,026,064 of
costs directly related to the transaction as of December 31, 1998. This
amount has been reclassed in the pro forma adjustment column to become
part of the estimated purchase price allocation. Additionally, the
Company will assume approximately $950,000 of liabilities related to
SolCom in connection with the transaction. These amounts are not
recorded on SolCom's historical balance sheet as of December 31, 1998
and have been reflected as additional purchase price.
The preliminary purchase price allocation results in a value for
existing and core technology of $3,855,000, which has been classified
as capitalized software, covenants not to compete of $250,000, and
IPR&D of $3,490,177. These estimates will be refined upon the final
purchase price allocation. Management believes that these are
reasonable estimates for pro forma purposes, as it knows of no events
that would currently cause a material change to preliminary estimates.
In-process research and development, which is not expected to have
reached technological feasibility by the consummation date of the
Transaction and which will have no alternative future use, includes
certain of the research and development projects currently underway at
SolCom. The projects fall into two broad categories: "NetworX" products
and Application Specific Integrated Circuit ("ASIC") products.
"Modular" and "Sentinel III" products, although categorized and valued
separately due to the nature of the lifecycle and expense assumptions,
falls under the NetworX technology as defined. NetworX products will
allow network managers to evaluate and control all aspects of their
networks. The ASIC projects underway are likely to create products
where all the application hardware and software necessary to carry out
specific tasks will be resident on a single computer chip. The chips
will have substantial increases in processing speed and a lower cost to
the consumer. This will lead to increased benefits to the SolCom
product set.
As stated above, none of these projects has met technological
feasibility. If, as a result of the uncertainties surrounding the
successful completion of these projects, the Company is unable to
establish technological feasibility and is unable to produce a
commercially viable product, then the anticipated incremental future
cash flows attributable to expected sales and profits from the NetworX
-26-
<PAGE>
and ASIC products will not be realized. This could have a material
adverse effect on the combined Company's future financial position,
results of operations and cash flows.
The Company does believe, however, that it will be able to complete
these projects and produce commercially viable products using the new
NetworX and ASIC technologies that are currently being developed.
3 Pro Forma Statement of Operations
The statement of operations for the year ended March 31, 1998 reflects
pro forma adjustments for the annual amortization of existing
technology, covenants not to compete and goodwill. Based on the
estimated lives of the technology that is being acquired, the Company
has assigned a three-year life to these assets and to the goodwill for
amortization purposes. The covenants not to compete will be amortized
over one year, the contractual life of the restriction. Amortization
expense was $833,333, $250,000 and $805,820, respectively for the
capitalized software, the covenant not to compete, and the goodwill for
the year ended March 31, 1998. The statement of operations for the nine
months ended December 31, 1998 reflects pro forma adjustments for
9/12ths amortization of existing technology and goodwill of $624,999and
$604,365, respectively.
4 Inter-Company Transactions
All inter-company transactions between MicroFrame and SolCom during the
periods presented have been properly eliminated.
5 Weighted Average Shares and Earnings Per Share
The weighted average shares outstanding has been adjusted to reflect
the issuance of 2,200,000 shares of MicroFrame's common stock. The
500,000 options to purchase MicroFrame's common stock as a result of
this transaction have not been included, as to include such shares
would be anti-dilutive. All of the 2,200,000 shares have been reflected
as outstanding despite the transaction provision that stipulates that
50% of the shares are to be held in escrow for up to one year after
consummation, as the Company believes beyond any reasonable doubt that
the shares will be issued.
6 Foreign Currency Translation
The financial statements of SolCom were prepared in local currency
(British pounds sterling) and translated into U.S. dollars based on the
current exchange rate at the end of the period (December 31, 1998) for
the balance sheet and weighted average rate for the periods presented
on the statements of operations (nine months ended December 31, 1998
and the year ended March 31, 1998).
-27-
<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 and 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 business 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, including without limitation,
Net Scout Inc., Hewlett- Packard, Inc., 3Com Corp., Technically Elite, Inc., Bay
Networks Inc., Shomiti Systems Inc., Visual Networks, Inc., Concord
Communications, Inc. and Sync Research, Inc. Such companies may succeed in
producing and distributing competitive products more effectively than the
Company can produce and distribute its products, and may also develop new
products which compete effectively with those of the Company.
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 material 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.
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 communications industry.
There can be no assurance that the Company will be successful in modifying or
developing its existing or
-28-
<PAGE>
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, or 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 in 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. Currently, the Company maintains no "key man" insurance
policies with respect to any employees of the Company.
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 expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock could be materially
adversely affected.
Potential Negative Financial Impact of In-Process Research &
Development. The Company's in-process research and development products have not
yet met technological feasibility. If, as a result of the uncertainties
surrounding the successful completion of these projects, the Company is unable
to establish technological feasibility and is unable to produce a commercially
viable product, the anticipated incremental future cash flows attributable to
expected sales and profits from the NetworX and ASIC products will not be
realized. This could have a material adverse effect on the Company's future
financial position, results of operations and cash flows.
-29-
<PAGE>
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 January 5, 1999, an aggregate of 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 Act and the rules and regulations
thereunder. Rule 144 provides, in essence, that all shareholders must hold
restricted securities for a minimum period of one (1) year. After holding
restricted securities for a period of one year, any shareholder 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 shareholders holding restricted securities for more than
two years are not subject to volume limitations and may sell unlimited amounts
of Common Stock under Rule 144. The price of the Company's Common Stock might be
adversely affected if a substantial portion of the Common Stock is 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 three
months ended December 31, 1998 of $78,000, 919,000 and $180,000, 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.
-30-
<PAGE>
Lack of Cash Flow. As of December 31, 1998, SolCom had no available
cash or cash equivalents to conduct its business or operations. There can be no
assurance that SolCom will be able to increase its cash flow in the future.
Accordingly, this may result in the necessity for the Company to infuse
substantial capital into SolCom which could have a material adverse effect upon
the Company's business, results of operations and financial condition.
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. In addition, the Company may
require substantially more time to bring the technology of the combined entities
and the corresponding new products to the marketplace than its competitors, many
of which have established products and markets. Competitors include Net Scout
Inc., Hewlett-Packard, Inc., 3Com Corp., Technically Elite, Inc., Bay Networks
Inc., Shomiti Systems Inc., Visual Networks, Inc., Concord Communications, Inc.
and Sync Research, Inc. Accordingly, 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.
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, as then contemplated, were fair to the Shareholders from a
financial point of view, the Company does not presently intend to obtain an
update to such opinion.
Dilution of Voting Power. Consummation of the Transaction will result
in immediate and substantial dilution of percentage ownership and voting power
with respect to the Common Stock of between approximately 39.6% (assuming
2,200,000 shares of Common Stock are issued) and 48.6% (assuming 2,700,000
shares of Common Stock are issued).
OUTSTANDING VOTING SECURITIES
As of the Written Consent Date, there were 5,557,980 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
-31-
<PAGE>
and adopting the Share Purchase Agreement, the agreements contemplated thereby
and authorizing the consummation of the Transaction, the Plans and the
Reincorporation.
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.
Name and Address Shares Owned Percent of Percent of Class
Class Subsequent to
Prior to Transaction*
Transaction
Stephen M. Deixler (1) 760,532 13.7 9.8
371 Eagle Drive % %
Jupiter, Florida 33477
Stephen B. Gray (2)(10) 477,309 8.6 6.2
% %
Michael Radomsky (3)(10) 356,643 6.4 4.6
% %
Robert M. Groll (4)(10) 100,852 1.8 1.3
% %
John F. McTigue (5)(10) 100,760 1.8 1.3
% %
Alexander C. Stark (6) 85,000 1.5 1.1
356 Eagle Drive % %
Jupiter, Florida 33477
Special Situations Fund, III, L.P.(7) 855,863 15.4 11.0
% %
MGP Advisers Limited Partnership (7) 855,863 15.4 11.0
% %
AWM Investment Company, Inc. (7) 1,170,133 21.1 15.1
% %
Austin W. Marxe (7) 1,170,133 21.1 15.1
% %
-32-
<PAGE>
Name and Address Shares Owned Percent of Percent of Class
Class Subsequent to
Prior to Transaction*
Transaction
Jay Associates LLC (8) 480,000 8.6 6.2
1118 Avenue J % %
Brooklyn, New York 11230
Alpha Investments LLC (9) 336,000 6.0 4.3
5611 North 16th Street #300 % %
Phoenix, Arizona 85016
Stephen P. Roma 403,569 7.3 5.2
91 Durand Drive % %
Marlboro, New Jersey 07748
Directors and executive 1,881,096 33.8 24.2
officers as a group (6 Persons) % %
- -------------------
(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) Consists of 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.
(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) Includes 35,000 shares of Common Stock which may be acquired pursuant
to currently exercisable options.
(7) 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 February 7, 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
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<PAGE>
respect to 855,863 shares; MGP has sole dispositive power with respect
to 855,863 shares; AWM has sole voting power with respect to 314,270
shares and sole dispositive power with respect to 1,170,133 shares; and
Mr. Marxe has sole voting power with respect to 314,270 shares, shared
voting power with respect to 855,863 shares and sole dispositive power
with respect to 1,170,133 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 and Chief Executive Officer 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 (the "Cayman Fund").
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, Mr.
Marxe and the Cayman Fund.
(8) Includes 320,000 shares of Common Stock issuable upon exercise of
currently exercisable Class A and Class B Warrants. A principal of such
entity is Sidney Borenstein.
(9) Includes 224,000 shares of Common Stock issuable upon exercise of
currently exercisable Class A and Class B Warrants. A Schedule 13D
dated June 27, 1996 filed by such entity discloses that Daniel Lemberg
and Daniel A. Bock are members thereof.
(10) The address of such person is c/o the Company, 21 Meridian Avenue,
Edison, New Jersey 08820.
* Assumes the issuance of 2,200,000 shares of Common Stock pursuant to
the Transaction.
MARKET PRICE
The Common Stock is traded on The NASDAQ SmallCap System. The high and
low sales prices for the Common Stock on November 25, 1998, two days before the
Company publicly announced the principal terms of the Transaction, were $2.63
and $2.38, respectively. 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 during fiscal year 1997, 1998 and 1999, by quarter, as reported by NASDAQ.
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
-34-
<PAGE>
Fiscal 1999
June 30 $4.63 $2.84
September 30 3.19 1.44
December 31 2.94 1.50
-35-
<PAGE>
INFORMATION WITH RESPECT TO MICROFRAME
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 September 30, 1998 (the "Company 10-QSB"),
which were previously filed with the Commission, 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
Background. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as the "Year 2000 problem."
Assessment. The Year 2000 problem could affect computers, software and other
equipment used, operated or maintained by the Company. Accordingly, the Company
is reviewing its internal computer programs and systems to ensure that the
programs and systems will be Year 2000 compliant. The Company has already
upgraded its software programs and has carried out certain tests of its accounts
payable and accounts receivable files which are date sensitive and found all
systems to operate properly. The Company believes that its internal management
information systems, billing, payroll and other information services are Year
2000 compliant. Furthermore, the Company presently believes that all of its
computer systems will be Year 2000 compliant in a timely manner. However, while
the estimated cost of these efforts are not expected to be material to the
Company's financial position or any year's results of operations, there can be
no assurance to this effect.
In addition, there can be no assurance that the computer systems of
other companies on which the Company's systems rely will be timely modified, or
that a failure to modify such systems by another company, or modifications that
are incompatible with the Company's systems or software, would not have a
material adverse effect on the Company. The Company has had discussions with its
material vendors and suppliers with respect to the Year 2000 compliance of such
entities. Based upon such discussions, the Company believes that it is not
likely that the Company's relationships with such entities will result in a
material adverse effect on the Company's business or results of operations in
connection with Year 2000 compliance.
-36-
<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 included
elsewhere in this Information Statement. The consolidated statement of
operations data set forth below for each of the two years ended March 31, 1998
and March 31, 1997 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 included elsewhere 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 included elsewhere in this Information Statement. The
balance sheet data as of September 30, 1998 and the statement of operations data
for the six months ended September 30, 1998 have been derived from unaudited
consolidated financial statements included in the Company's Form 10-QSB as of
September 30, 1998 annexed hereto as Appendix G. The historical financial
information may not be indicative of the Company's future performance.
<TABLE>
<CAPTION>
Year Ended March 31, (1)
Six Months
1994 1995 1996 1997 1998 ended 9/30/98
---- ---- ---- ----- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 4,744,554 $ 7,126,391 $ 6,258,243 $ 7,343,624 $ 10,217,911 $ 6,177,903
Income Before
Cumulative Effect of
an Accounting Change 233,092 364,797 (1,993,700) 342,451 711,310 249,585
Cumulative Effect of
Accounting Change (Note
A) 950,000 --- --- --- --- ---
Income (Loss) from
Continuing Operations 1,183,092 364,797 (1,993,700) 342,451 711,310 249,585
0.3 0.1 (0.5 0.0 0.1 0.0
Earnings Per Share 5 0 4) 7 5 5
Basic 0.3 0.1 (0.5 0.0 0.1 0.0
Diluted 2 0 4) 7 4 4
Total Assets 3,885,587 4,337,929 3,558,171 4,682,373 6,375,432 8,448,542
-37-
<PAGE>
Year Ended March 31, (1)
Six Months
1994 1995 1996 1997 1998 ended 9/30/98
---- ---- ---- ----- ---- -------------
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 year and at September 30, 1998.
Note A
Effective April 1, 1993, the Company adopted SFAS No. 109. Adopting this
accounting standard permitted the Company to increase net income for fiscal
1994 by $950,000, by accruing the anticipated future benefits of applying the
Company's available net operating loss carry forwards against anticipated
future taxable income on which tax would otherwise be payable. In connection
with the Company's adoption of SFAS No. 109, the Company considered a
valuation allowance to be unnecessary.
-38-
<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 enable 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
See SolCom's financial statements attached as Appendix 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's 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.
Existing Products
Hardware Products. The SolCom range of hardware (generically referred
to as "RMON probes") are devices that are distributed to LANs and WANs and
perform data collection and consolidation functions. Each RMON probe connects to
a specific media type, e.g., Ethernet,
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<PAGE>
Token Ring or FDDI. SolCom currently produces 18 different products that are
capable of monitoring the complete range of LAN/WAN media types.
SolCom provides an extensive range of RMON probes to monitor RMON1 and
RMON2 data across the full range of LAN/WAN media. Used in conjunction with
"Information Consolidation" management packages, the network manager has
complete overview of the operational functionality of the network. The following
are descriptions of SolCom's RMON probe products:
o RMON Engine
With full RMON1/RMON2 support and powerful hardware this product
simplifies network management in mixed LAN/WAN environments. The
chassis can be customized via three slots that may be populated with
combinations of a wide range of network interface cards. Interface
cards are now available for many popular LAN and WAN topologies
including ATM and Frame Relay. As network environments evolve, managers
will find they can keep pace simply by altering the combination of
interface cards in the RMON Engine.
All of the data gathered by the RMON Engine may be retrieved by a
management station via the SLIP port or the 10/100 Mbps Ethernet port,
both of which are built into the engine.
o FDDI RMON Probe
With 20 group RMON-style implementation, the FDDI probe is an ideal
solution for monitoring heavily loaded segments. Available for single-
and dual-attach connections, the probe comes with 16MB memory standard
(upgradeable to 64 MB), and optional SLIP port.
o Token Ring RMON Probe
The Token Ring RMON probe monitors 4M and 16M bps Token Ring LANs, and
is an ideal solution for monitoring heavily loaded Token Ring networks.
o 4-port 10/100 (Fast) Ethernet + (Multi-segment Fast Ethernet
Environment)
With up to 128 MB of memory and full RMON support, the four-port 10/100
Ethernet probe provides 10 MB or 100MB Ethernet monitoring on each
port. This proactive, centralized solution pinpoints potential faults
and provides the reactive power of an analyzer.
o 4-port Ethernet + RMON Probe (Multi-segment Ethernet
environment)
-40-
<PAGE>
The SolCom four-port Ethernet probe is designed for wire speed
monitoring of multi- segment Ethernet networks. This high performance
RMON (1& 2 compliant) is an ideal solution for monitoring heavily
loaded distributed Ethernet segments.
o Ethernet + RMON Probe (Heavily loaded Ethernet environment)
Designed for full wire speed monitoring of Ethernet networks, the
SolCom Ethernet+ probe has full RMON support, plus SolCom MIB
extensions. It is an ideal solution for monitoring heavily loaded
distributed Ethernet segments.
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 WANs 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
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.
-41-
<PAGE>
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, identify 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:
<TABLE>
<CAPTION>
Business Benefits
(Questions you can RMON Groups
Benefits Description answer) Used
<S> <C> <C> <C>
Link and Host and Conversation Are you paying too RMON 1 History,
Network Usage Statistics: much for under utilized RMON 2 User
Are your links under networks? Are busy History, Protocol
utilized or over utilized, networks interfering Distribution.
who is causing the usage, with your ability to
who is hogging the carry out work in a
bandwith, which timely manner? Can
protocols are the most "chatty" protocols on
bandwidth hungry, what your network be
times of the day are your reconfigured to lessen
networks under strain usage? Can retiming of
and when are they quiet? 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
-42-
<PAGE>
Business Benefits
(Questions you can RMON Groups
Benefits Description answer) Used
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.
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. confidence is high. information.
</TABLE>
New/In-Process Research & Development Products and Markets
Modular Products. Modular products fall under the NetworX technology
definition as described below. Modular products has been categorized and valued
separately due to the nature of the Modular product's lifecycle and expense
margins.
NetworX Products. During the last 12 months, SolCom has continued to
develop, and in late 1999 it is expected that it will begin to introduce, a
range of products that enhances SolCom's ability to provide large scale
enterprise management solutions. SolCom is developing "NetworX" products that
will provide network managers the ability to monitor, evaluate and control all
aspects of their network from a single, remote point.
-43-
<PAGE>
NetworX is being developed by SolCom as the industry's first
comprehensive management tool. NetworX will be the industry's first integrated
platform for proactive, remote, secure management and monitoring of voice, data
and video networks. It uses Dial up, Telnet or SNMP connections so that managers
can monitor, evaluate and control all aspects of their network from a single,
remote point. Network managers will have the unique capability of being able to
remotely monitor and proactively react to alarms received from any piece of
legacy equipment or triggered by Remote MONitoring ("RMON") traffic monitoring.
(i.e., based on a user-configured set of circumstances ION can remotely reboot a
router, send out SNMP requests to restart a link, reconfigure a PBX etc.).
The capability is extremely flexible and customizable, allowing the
user to automatically do repetitive tasks. This self-healing capability alone
results in substantial time and cost savings. The powerful feature set includes:
flexible, high density RMON 1 and 2 traffic monitoring for LAN, VLAN, WAN and
ATM networks; remote element management via expandable serial ports and
environmental control through an expandable Real World Interface. IN and OUT of
band, multi level, secure access is via 2 PCMCIA slots for modem/ISDN
connections in addition to 2x10/100 Ethernet ports. The full feature set
positions NetworX as a Proactive, Remote, Intelligent, Integrated Secure
Management Solution. The NetworX product range brings the following benefits to
the network managers:
o Cost savings
o less equipment required
o less travel time to and from remote sites
o less technician intervention
o ability to manage multiple remote elements
o Flexibility
o customizable product
o capability to evolve with the network and legacy equipment
o can be integrated with standards based network software
o Time savings
o reduced network downtime
o increased user productivity
o more effective planning of deployment network equipment
o onboard flash for remote software
o utilizes dial up capabilities
o technicians can remotely log on for a real time view
o information overload for managers is prevented
Sentinel III Products. Sentinel products offer a range of comprehensive
site management tools for centralized remote maintenance of large distributed
voice and data network. All Sentinel products will feature alarm & Fault
Management, PBX Toll Fraud Detection, Environmental Monitoring and control as
well as Security Access Management. Sentinel III is an intelligent port
controller that will secure remote access to voice and data network node
maintenance ports. The
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<PAGE>
technology will combine RMON and Sentinel network device management, allowing
control of a network, as well as a comprehensive picture of its activities. It
is expected to be a low cost integrated platform for proactive, remote, secure
management and monitoring of voice, data and video networks. Sentinel III has
all the security features of Sentinel and Sentinel Slimline, combined with the
RMON Monitoring capabilities of NetworX. Sentinel III technology will provide
the following benefits when incorporated into SolCom products:
o Multiple remote elements and network segments controlled from
one platform
o Effective network planning
o Reduced downtime
o Integration of legacy equipment and standards based software
o Automatic resolution of predefined problems
ASIC Products. Application Specific Integrated Circuit ("ASIC")
products incorporate all the hardware and software required to carry out
specific tasks on a single computer chip. This has the potential to lead to a
substantial increase in processing speed and reduction in the cost of
manufacturing. Designing ASIC systems will require SolCom to experience a steep
learning curve while the engineers become familiar with this technology. SolCom
is attempting to position itself so that it has ASIC design capability in-house
and that the increase in ASIC processing speed is incorporated into its product
range. SolCom expects the ASIC to provide increases in processing speed in the
magnitude of 10 times greater speed as compared with SolCom's current offerings
as well as significantly lower its build costs. The ASIC technology will provide
the following benefits when incorporated into SolCom products:
o Very high packet processing speeds
o Significantly lower build costs
Development Stage of Research & Development Efforts
Modular products have been in development since early fiscal year 1999
and $230,928 will have been spent on Modular products at the time of closing.
Another $57,732 will need to be spent in order to release the Modular products
by their expected release date of April 1999. The Sentinel III product is
expected to be released in the market in June 1999. To date, SolCom has spent
$67,354 on research and development and expects to spend $15,395 prior to
release. Management has projected revenues for Sentinel III beginning in 2000.
As of March 31, 1999, $250,172 will have been spent on research and development
for the NetworX products. Another $45,395 of research and development expenses
has been budgeted to complete these products. NetworX products are expected to
be commercially released in June of 1999 but management has projected NetworX
products to start generating revenues in fiscal year 2000. ASIC based products
are less complete than NetworX. As of the acquisition only $105,842 in research
and development expenses will have been spent and ASIC products will need
another $350,000 in order to become technologically and commercially feasible.
ASIC is expected to be launched in the first half of fiscal year 2001 and
management has projected revenues beginning in fiscal year 2001.
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<PAGE>
The Company's management expects that all the IPR&D projects will be
successfully completed within the time frame described above. The
following points describe the developments needed to be completed for
the IPR&D projects:
Modular Project
o ensuring that the cards operate as expected when fitted to the RMON
Engine
o that the products reach the expected performance levels during
testing
NetworX Project
o hardware development is complete with all associated drivers
o new operating system running with completed developed code,
ported to NetworX and launched
o Daughter cards completed with all associated drivers
o software needs to be completed for the Daughter cards
o Daughter cards need to be tested in the NetworX platform
Sentinel III
o complete hardware development
o associated software drivers need to be completed and operational
ASIC Project
o engineers need to complete their familiarization with the
technology.
o find a chip manufacturer to work with
o cards need design verified and have to be tested both with the
NetworX motherboard and the new NetworX operating system
o design will need many refinements
o chip will need to be manufactured
o testing and verification that will meet performance levels
Since future revenues are primarily generated from the products in
development, should these projects not be successfully developed or
completed, the negative impact on SolCom's future results from
operations would be significant.
Marketing and Distribution
Original Equipment Manufacturer (OEM). SolCom has attracted
substantial OEM and "re-badge" opportunities and approximately 50% of its gross
income is presently derived from such opportunities. SolCom has developed
relationships with certain significant participants in the network management
markets and the introduction of its latest products is likely to expand these
opportunities. In the nine months ended March 31, 1998, SolCom realized gross
revenue of (pound)534,000 ($881,000) from OEM sources.
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<PAGE>
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 which 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 gross revenue of
(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 established
presence on 3 GSA contracts. In the nine months ended March 31, 1998, SolCom
realized gross revenue of (pound)168,000 ($277,000) from this market. SolCom has
identified the US, which accounts for 55% of the global market for its products,
as the 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, reference is made to
SolCom's financial statements attached hereto as Appendix E.
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, Inc., Visual Networks, Inc., Sync Research, Inc.,
Net2Net Corporation, Desktalk Systems, Inc. and Concord Communications, Inc.
Additional general competitors include 3Com Corp. and Bay Networks Inc., which
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 this approach. While SolCom does not anticipate any
significant price increases or supply interruption, there can be no assurance of
this.
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<PAGE>
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, Hewlett-Packard, Inc., that accounts
for approximately 50% of its business and contributes significantly to SolCom's
business and operations. SolCom has in place 3-year extendible contracts 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, two
in customer support, one internal information technology person, one in quality
assurance, four in sales, three in marketing, three in production, two in
finance and three in administration.
Description of Property
SolCom currently leases 4,000 square feet of space at 1 Meikle Road,
Livingston, Scotland at a rent of (pound)43,000 ($71,000) per year. SolCom's
wholly-owned subsidiary, SolCom Systems Inc., leases 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
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<PAGE>
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 hereof, there are
twenty (20) record holders of the share capital 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
within the most recent two fiscal years.
-49-
<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 annexed hereto as Appendix E. 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.
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 January 10, 1999 = 1.6 U.S. dollars per U.K.
pound sterling)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
UK FORMAT SEPTEMBER 30, US GAAP FORMAT
1993 1994 1995 1996 1997 1998 1998 1997 1998
---------- ---------- ------------ ----------- ------------- ---------- ------------ ----------- ----------
(pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Sales 61,891 399,789 524,615 788,450 972,141 1,028,145 550,000 1,003,000 1,031,000
Profit/(Loss) (48,292) (30,279) 18,299 14,868 (513,563) (406,110) (421,000) (557,000) (439,000)
Profit/(Loss) per share (26.80) (0.94) 0.57 0.45 (0.02) (0.01) 0.00 (0.02) (0.01)
Total Assets 18,419 197,000 286,000 767,000 818,000 1,012,000 557,000 645,000 624,000
Long Term Liabilities 7,407 17,296 13,655 47,867 106,947 18,336 23,000 106,000 18,000
Preference Shares 30,000 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 51,312 -- --
Dividend & Dividend on
Redemption
</TABLE>
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<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
nine-month fiscal year 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 six-month period ended September 30, 1998 were prepared in accordance with
both U.K. and U.S. GAAP, but are unaudited.
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'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 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 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.
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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
products, 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 increases in revenue from 1996 to 1997
((pound)183,000 ($304,000)) and 1997 to 1998 ((pound)298,000 ($495,000)) were
principally attributable to increases in royalty revenue ((pound)489,000
($812,000) over the two-year period. 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 SolCom's
financial performance, it is not expected to result in any substantial
competitive disadvantage on a going-forward basis.
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.
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.
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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
principally as a result of the expansion in sales. As a percentage of revenue,
cost of revenue was 26% in 1996, 19% in 1997 and 22% in 1998. The decrease in
cost of revenue from 1996 to 1997 resulted from a change in the overall product
base, with revenue from royalties and services (for which gross margins
typically approach 100%) accounting for 37% in 1997 as compared with 29% in
1996.
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 ((pound)124,000 ($206,000)) and the introduction of new
hardware products including the RMON Engine ((pound)68,000 ($113,000)) and the
range of WAN and ATM probes ((pound)85,000 ($141,000)). In addition, a
substantial portion of the research and development expenses relating to the
last two fiscal years ((pound)129,000 ($214,000)) can be attributed to
in-process research and development products which are expected to be completed
in fiscal 2000. SolCom anticipates that it will continue to devote substantial
resources to research and development and that these expenses will increase in
absolute amounts in 1999 and 2000.
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.
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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..
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 September 30, 1998, SolCom had no available cash
or cash equivalents. Losses in 1997 and 1998 ((pound)557,000 ($925,000) and
(pound)665,000 ($1,104,000), respectively) translated into cash deficits from
operations of (pound)489,000 ($812,000) in 1997 and (pound)242,000 ($402,000) in
1998, the principal difference in 1998 being an increase ((pound)325,000
($540,000)) in accounts payable and accrued expenses. In addition, cash used for
investment in property and equipment amounted in the two years to (pound)157,000
($261,000) and (pound)39,000 ($65,000), respectively. In addition to cash on
hand at June 30, 1996 ((pound)350,000 ($581,000)), financing of the cash
requirement in 1997 was achieved by securing both an overdraft ((pound)132,000
($219,000)) and a term loan ((pound)247,000 ($410,000)), both from the
Clydesdale Bank, although this was off-set by scheduled repayments under term
loans and capital leases of (pound)76,000 ($126,000). In 1998, the bank
overdraft was reduced by (pound)116,000 ($193,000) and there were scheduled
repayments under term loans and capital leases of (pound)130,000 ($216,000),
which together with the cash requirements for operations and investment were
financed by the issue of ordinary shares which generated (pound)521,000
($865,000).
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 principally
resulting from a significant increase in staffing, the opening of a new office
in Livingston, Scotland and the establishment of a branch office in Reston,
Virginia, all of which occurred in 1998. Of the total investment of
(pound)248,000 ($412,000) over the three-year period, (pound)166,000 ($276,000)
was sent on computer and development equipment and (pound)82,000 ($136,000) on
office equipment and furnishings. SolCom needs to increase its capital
expenditures 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 be controlled by the Company and will affect
SolCom's future growth.
Subsequent to consummation of the Transaction, SolCom's capital
resources will be provided by the Company. In the event the Transaction is 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
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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 believes that its internal management information systems,
billing, payroll and other information services are Year 2000 compliant. SolCom
has already carried out certain tests of its accounts payable and accounts
receivable files which are date sensitive and found all systems to operate
properly. SolCom has reviewed its product line and found that none of its
products are date sensitive. Accordingly, 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.
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ITEM 2 - ADOPTION OF 1998 STOCK OPTION PLAN AND
1998 U.K. SUB-PLAN
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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. 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 non-qualified stock
options not constituting ISOs ("NQSOs"). The aggregate market value of Common
Stock for which an eligible employee may be granted ISOs under the Plan which
are exercisable during any calendar year is $100,000.
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
500,000 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, canceled 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.
Differences between Plan and Sub-Plan. In order to comply with the U.K. Inland
Revenue, the Plan and the Sub-Plan differ in certain material respects,
including without limitation, the following:
1. Certain powers reserved for the Committee in the Plan are
prohibited in the Sub- Plan, including the Committee's discretion to
determine the fair market value of a share of Common Stock; whether
and under what conditions to restrict the sale or other
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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; 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 installment; and 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 terms of the
Plan.
2. In connection with the exercise of stock options, installment
payments and payments with shares of Common Stock is prohibited in the
Sub-Plan.
3. The Sub-Plan does not differentiate between "incentive stock
options" and "non-qualified stock options."
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 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.
The exercise price of shares of Common Stock under any Option Contract
granted under the Plans is determined in the discretion of the Board or
Committee, except that the exercise price of an ISO cannot be less than the fair
market value of the Common Stock subject to such option on the date of grant,
or, in the case of an optionee owning more than 10% of the combined voting power
of all classes of stock of the Company, less than 110% of the fair market value
of the Common Stock subject to such ISO on the date of grant.
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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 or without the
consent of the Company, 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.
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 Plans, 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
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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 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
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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 relating to ISOs and NQSOs under the Plans. This description is
based on current law including cases, administrative rulings, and final,
temporary and proposed regulations, all of which are subject to change (possibly
with retroactive effect). It should be understood that this summary is not
exhaustive, that final regulations have not yet been issued for all Code
provisions regarding ISOs, and that special rules not specifically discussed
herein may apply in certain situations. In addition, this description does not
apply to optionees who are not citizens or residents of the United States.
ISOs Exercised With Cash. No taxable income will be recognized by an
optionee upon the grant or exercise of an ISO. The optionee's tax basis in the
shares acquired upon on the exercise of an ISO with cash will be equal to the
exercise price paid by him for such shares.
If the shares received upon exercise of an ISO are disposed of more
than one year after the date of transfer of such shares to the optionee and more
than two years from the date of grant of the option, the optionee will recognize
long-term capital gain or loss on such disposition equal to the difference
between the selling price and the optionee's basis in the shares, and neither
the Company nor SolCom will not be entitled to a deduction. Long-term capital
gain is generally subject to more favorable tax treatment than short-term
capital gain or ordinary income.
If the shares received upon the exercise of an ISO are disposed of
prior to the end of the two-years-from-grant/one-year-after-transfer holding
period (a "disqualifying disposition"), the excess (if any) of the fair market
value of the shares on the date of transfer of such shares to the optionee over
the exercise price (but not in excess of the gain realized on the sale of the
shares) will be taxed as ordinary income in the year of such disposition, and
the Company (or, in the case of an optionee who is an employee of SolCom,
SolCom) generally will be entitled to a deduction in the year of disposition
equal to such amount. Any additional gain or any loss recognized by the optionee
on such disposition will be short-term or long-term capital gain or loss, as the
case may be, depending upon the period for which the shares were held.
NQSOs Exercised With Cash. No taxable income will be recognized by an
optionee upon the grant of an NQSO. Upon the exercise of an NQSO, the excess of
the fair market value of the shares received at the time of exercise over the
exercise price therefor will be taxed as ordinary income, and the Company (or,
in the case of an optionee who is an employee of SolCom, SolCom) will generally
be entitled to a corresponding deduction. The optionee's tax basis in the shares
acquired upon the exercise of such NQSO will be equal to the exercise price paid
by him or her for such shares plus the amount of ordinary income so recognized.
Any gain or loss recognized by the optionee on a subsequent
disposition of shares purchased pursuant to an NQSO will be short-term or
long-term capital gain or loss, depending
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upon the period during which such shares were held, in an amount equal to the
difference between the selling price and the optionee's tax basis in the shares.
Exercises of Options Using Previously Acquired Shares. If previously
acquired shares are surrendered in full or partial payment of the exercise price
of an option (whether an ISO or an NQSO), 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"). If the option exercised is an ISO or if the shares used
were acquired pursuant to the exercise of an ISO, the Replacement Shares are
treated as having been acquired pursuant to the exercise of an ISO.
However, if an ISO is exercised with shares which were previously
acquired pursuant to the exercise of an ISO but which were not held for the
required two-years-from-grant/one-year- after-transfer holding period, there is
a disqualifying disposition of such previously acquired shares. In such case,
the optionee would recognize ordinary income on such disqualifying disposition
equal to the difference between the fair market value of such shares on the date
of exercise of the prior ISO and the amount paid for such shares (but not in
excess of the gain realized). Special rules apply in determining which shares
are considered to have been disposed of and in allocating the basis among the
shares. No capital gain is recognized.
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 on 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 excess of the
Replacement Shares will be treated in the same manner as a cash exercise of an
option (either an ISO or NQSO, depending upon the nature of the underlying
option) for no consideration.
Alternative Minimum Tax. In addition to the Federal income tax
consequences described above, an optionee who exercises an ISO may be subject to
the alternative minimum tax, which is payable only to the extent it exceeds his
regular tax liability. For this purpose, upon the exercise of an ISO, the excess
of the fair market value of the shares over the exercise price is an adjustment
which increases the optionee's alternative minimum taxable income. In addition,
the optionee's basis in such shares is increased by such amount for purposes of
computing the gain or loss on disposition of the shares for alternative minimum
tax purposes. If the optionee is required to pay an alternative minimum tax, the
amount of such tax attributable to deferral preferences (including the ISO
adjustment) is allowable as a tax credit against the optionee's regular tax
liability (net of other non-refundable credits) in subsequent years. To the
extent the credit is not used, it is carried forward.
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ITEM 3 - APPROVAL OF THE REINCORPORATION
-----------------------------------------
Pursuant to the Reincorporation, the Company will merge with and into
Ion Networks, Inc., a Delaware corporation ("Ion"), pursuant to and in
accordance with that certain Agreement and Plan of Merger dated as of December
15, 1998 by and between the Company and Ion (the "Merger Agreement"). The Merger
Agreement is annexed hereto as Appendix I. The separate corporate identity of
the Company will cease upon such merger and all properties, rights and
obligations of the Company will immediately inure to Ion. The Company may
reconsider the Reincorporation in the event that more than one (1%) percent of
the Shareholders exercise dissenters' rights.
Reasons for the Reincorporation. The Board of Directors of the Company
believes that the proposed Reincorporation would create a more favorable and
flexible corporate structure through which the Company will have the ability to
carry out its business purposes.
Approval by the Board of Directors. The Board of Directors of the
Company believes that the Reincorporation is in the best interests of the
Company and the Shareholders and has unanimously approved the Reincorporation.
Approval of the Shareholders. The requisite number of Shareholders
have approved the Reincorporation pursuant to the Written Consents. The Company,
as the sole shareholder of Ion, has approved the Reincorporation.
Conduct of Business Following Reincorporation. The Company's
operations will not be affected by the Reincorporation. Following the
consummation of the Reincorporation, the Company's business and operations will
continue unchanged except that the Company will be operating as a Delaware
corporation.
Effect on the Company's Financial Statements. The consummation of the
Reincorporation will not have a material effect on the presentation of the
financial statements of the Company.
Effect on Shareholders. The Shareholders will not be materially
affected by the Reincorporation. Each share of Common Stock will be
automatically canceled and converted into an identical share of common stock of
Ion. Each share of common stock of Ion shall have substantially the same rights
and preferences as the shares of Common Stock.
Differences between Delaware and New Jersey Corporate Law
Disadvantages to Changing the State of Incorporation. The Delaware
General Corporation Law (the "DGCL") generally provides many advantages to the
controlling stockholders of a Delaware corporation at the expense of minority
stockholders. In addition, the DGCL provides less protection than the laws of
the State of New Jersey to stockholders desiring added protection against
takeover transactions with major stockholders, particularly with respect
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to the timing of such a transaction and the minimum price per share that must be
received by stockholders of a corporation incorporated in New Jersey.
New Jersey law also provides dissenting stockholders more
opportunities to receive the fair value of their shares when they object to
corporate transactions, providing a longer list of transactions to which
appraisal rights can apply. Delaware permits appraisal rights only in the case
of certain mergers or consolidations. Finally, Delaware law provides more
expansive indemnification protection for corporate officers and directors than
does New Jersey law. This difference means that there are fewer opportunities
for the assets of New Jersey corporations to be available for depletion
resulting from reimbursements of the costs of judgments and litigation expenses
incurred by corporate officers and directors.
Significant Differences Between the Delaware and New Jersey Corporate
Laws. Although it is impractical to note all the differences between the NJBCA
and the DGCL, the following is a brief summary of significant differences
between the rights which a stockholder of the Company presently has under New
Jersey law and the rights such stockholder would have under Delaware law.
1. Stockholder Voting Rights
New Jersey requires the affirmative vote of a majority of a
corporation's outstanding shares entitled to vote in order to authorize a merger
or consolidation and the affirmative vote of two-thirds (2/3) of a corporation's
outstanding shares entitled to vote in order to authorize a dissolution. See
NJBCA ss.14A:10-3 and 14A:12-4.
Except in certain limited situations when no vote of
stockholders is required, Delaware law requires the affirmative vote of only a
majority of the outstanding shares entitled to vote to authorize any such
action. See DGCL ss.251 and 275.
2. Dissenters' Appraisal Rights
New Jersey law provides that upon strict compliance with the
applicable statutory requirements and procedures, a dissenting stockholder has
the right to receive payment of the fair value of his shares if he objects to:
(i) most types of mergers; (ii) consolidations; or (iii) dispositions of assets
requiring stockholder approval. See ss. 14A:11-1.
Delaware law provides that appraisal rights do not apply: (i) to
a stockholder of the surviving corporation in a merger if approval by the
stockholders of such surviving corporation is not required; or (ii) with certain
limitation and qualifications, to any class of stock which is either listed on a
national securities exchange or held of record by more than 2,000 stockholders.
See DGCL ss.262.
Effect on Capitalization/Certificate of Incorporation/By-Laws. The
capitalization of Ion will be identical to the capitalization of the Company
following the Reincorporation. The certificate of incorporation and by-laws of
the Company will remain substantially similar to the certificate of
incorporation and by-laws of Ion following the Reincorporation.
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Certain Federal Income Tax Consequences. The following discussion
addresses certain material federal income tax consequences of the
Reincorporation to the Shareholders who hold their shares as capital assets
(within the meaning of Section 1221 of the Code). The discussion is based on the
current provisions of the Code, applicable Treasury Regulations, judicial
authority and administrative rulings and practice. It does not address all
aspects of federal income taxation that may be relevant to particular
Shareholders in light of their specific circumstances, or to certain types of
Shareholders subject to special treatment under the federal income tax laws,
including, without limitation, insurance companies, tax-exempt organizations,
foreign persons, financial institutions or broker-dealers, and Shareholders who
acquired their Common Stock pursuant to the exercise of employee stock options
or in other compensatory transactions. This discussion also does not address the
state, local, foreign, estate, gift or other federal tax consequences of the
Reincorporation. There can be no assurance that the Internal Revenue Service
will not take a contrary view to any expressed herein. No rulings have been or
will be requested from the Internal Revenue Service with respect to the tax
consequences of the Reincorporation. Moreover, legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein, possibly with
retroactive effect.
A Shareholder not exercising appraisal rights will not recognize any
gain or loss as a result of the Reincorporation. The tax basis of the Ion common
stock received by the Shareholder will be equal to the tax basis of the Common
Stock exchanged therefor, and the holding period of the Ion common stock will
include the holding period of the Common Stock surrendered in the
Reincorporation.
A Shareholder who exercises his appraisal rights with respect to the
Common Stock and receives payment therefor will generally recognize capital gain
or loss measured by the difference between the amount of cash received for the
Common Stock and the Shareholder's basis in the Common Stock, unless the
redemption is essentially equivalent to a dividend within the meaning of Section
302 of the Code (a "Dividend Equivalent Transaction"). The resulting capital
gain or loss, if any, will be long-term capital gain or loss if the Shareholder
held the Common Stock for more than twelve months at time the Common Stock is
redeemed pursuant to the Shareholder's exercise of the appraisal rights.
The determination of whether a Shareholder's exercise of appraisal
rights is a Dividend Equivalent Transaction is made by comparing the
Shareholder's proportionate interest in the Company after the Reincorporation
with the Shareholder's proportionate interest prior to the Reincorporation. In
making this comparison, there must be taken into account any shares considered
to be owned by the Shareholder by reason of the constructive ownership rules set
forth in Section 318 of the Code. A redemption involving a Shareholder owning
(both directly and by application of the foregoing constructive ownership rules)
a minority interest in the Company generally will not be deemed to be a Dividend
Equivalent Transaction if the Shareholder exercises no control over the affairs
of the Company and experiences a reduction in his proportionate interest in the
Company as result of the exercise of the appraisal rights.
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THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE
REINCORPORATION (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL
AND OTHER TAX LAWS).
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If you have any questions regarding this Information Statement, the
Transaction, the Plans or the Reincorporation, 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
/s/ Stephen B. Gray
Stephen B. Gray
President and Chief Executive Officer
_________, 1999
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INDEX OF APPENDICES
APPENDIX A Share Purchase Agreement, as amended *
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 September 30, 1998*
APPENDIX H New Jersey Business Corporation Act ss.14A:11-1 and ss.14A:11-2 *
APPENDIX I Agreement and Plan of Merger *
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* Previoiusly Filed.
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APPENDIX A
SHARE PURCHASE AGREEMENT
A-1
<PAGE>
APPENDIX B
FAIRNESS OPINION
A-2
<PAGE>
APPENDIX C
1998 STOCK OPTION PLAN
A-3
<PAGE>
APPENDIX D
1998 U.K. SUB-PLAN
A-4
<PAGE>
APPENDIX E
FINANCIAL STATEMENTS OF SOLCOM
A-5
<PAGE>
APPENDIX F
MICROFRAME, INC. FORM 10-KSB
FOR THE PERIOD ENDED MARCH 31, 1998
A-6
<PAGE>
APPENDIX G
MICROFRAME, INC. FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
A-7
<PAGE>
APPENDIX H
NEW JERSEY BUSINESS CORPORATION ACT
SECTIONS 14A:11-1 AND 14A:11-2
A-8
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
A-9
