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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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,
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:
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
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 September 30, 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 September 30, 1998
SolCom Systems Ltd..-As of September 30, 1998
The following unaudited pro forma consolidated balance sheet and statements of
operations give effect to the share purchase as if it had occurred on September
30, 1998 for balance sheet purposes and April 1, 1997 for statement of
operations purposes, and should be read in conjunction with the consolidated
financial statements of MicroFrame and SolCom for the relevant period and the
related notes thereto included, or incorporated by reference, elsewhere herein.
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustment Pro Forma
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 268,710 8,497 $ 277,207
Accounts receivable, less allowance for doubtful
accounts of $122,000 3,553,863 265,106 3,818,969
Inventory, net 1,776,074 399,359 2,175,433
Deferred tax assets 391,166 391,166
Prepaid expenses and other current assets 412,593 62,878 475,471
------------ ----------------------------------- -----------------
Total current assets 6,402,406 735,840 7,138,246
Property and equipment, less accumulated depreciation of
$568,687 and $971,903 629,747 210,726 840,473
Capitalized software, less accumulated amortization of
$1,106,354 and $1,054,827 573,763 2,500,000(Note 2) 3,073,763
Goodwill, less accumulated amortization of $28,605 and
$26,130 70,530 2,417,460(Note 2) 2,487,990
Other intangible assets 250,000(Note 2) 250,000
Security deposits 39,496 39,496
Other assets 732,600 (732,600)(Note 2) 0
-------------------------------------------------------------------
Total assets $ 8,448,542 946,566 4,434,860 $ 13,829,968
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 900,000 343,279 $ 1,243,279
Accounts payable 1,247,402 662,766 950,000 (Note2) 2,860,168
Accrued payroll and related liabilities 371,698 371,698
Deferred income 328,777 328,777
Other current liabilities 433,989 542,110 267,400 (Note2) 1,243,499
-------------------------------------------------------------------
Total current liabilities 3,281,866 1,548,155 1,217,400 6,047,421
-------------------------------------------------------------------
Deferred tax liabilities, net 23,242 23,242
Other liabilities 39,086 39,086
Commitments and contingencies
Stockholders' equity
Common stock 5,537 701,852 (699,652) (Note 2) 7,737
Preferred stock - par value $10 per share; authorized
200,000 shares, none issued
Additional paid-in capital 7,324,828 1,449,588 4,524,997 (Note 2) 13,299,413
Accumulated deficit (1,982,053) (2,793,814) (606,186) (Note 2) (5,382,053)
Accumulated comprehensive income 2,321 1,699 (1,699) 2,321
-------------------------------------------------------------------
Less - Treasury stock, 62,031 shares, at cost (207,199) (207,199)
-------------------------------------------------------------------
Total stockholders' equity 5,143,434 (640,675) 3,217,460 7,720,219
-------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,448,542 946,566 4,434,860 $ 13,829,968
===================================================================
</TABLE>
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<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-Six Months Ended September 30, 1998
SolCom Systems, Ltd.-Six Months Ended September 30, 1998
<TABLE>
<CAPTION>
MicroFrame SolCom Pro Forma Adjustment Pro Forma
<S> <C> <C> <C> <C>
Net Sales $ 6,177,903 $ 910,855 $ (200,000) (Note4) $ 6,888,758
Cost of sales 2,064,436 241,791 2,306,227
--------------- ------------- ---------------------- -------------
Gross margin 4,113,467 669,064 (200,000) 4,582,531
1,053,107 246,759 200,000 (Note 4) 1,499,866
Research and Development expenses
Selling, general and administrative expenses 2,322,530 1,042,400 3,364,930
Depreciation and amortization 314,579 34,065 819,576 (Note 3) 1,168,220
--------------- ------------- ---------------------- -------------
Income (loss) from operations 423,251 (654,160) (1,219,576) (1,450,485)
Interest income 5,205 1,656 6,861
Interest expense (30,280) (44,715) (74,995)
--------------- ------------- ---------------------- -------------
Income (loss) before income tax provision (benefit) 398,176 (697,219) (1,219,576) (1,518,619)
--------------- ------------- ---------------------- -------------
Income tax provision (benefit) 148,591 0 (166,666) (18,075)
--------------- ------------- ---------------------- -------------
Net income (loss) $ 249,585 $ (697,219) $ (1,052,910) $ (1,500,544)
=============== ============= ====================== =============
Per share data (Note 5)
Net income (loss) per share
Basic $ 0.05 $ (0.20)
Diluted $ 0.04 $ (0.20)
Weighted average number of common shares 5,394,872 7,594,872
outstanding basic
Weighted average number of common shares 6,595,893 7,594,872
outstanding diluted
</TABLE>
-23-
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
MicroFrame, Inc.-Year ended March 31, 1998
SolCom Systems Ltd..-Year ended March 31, 1998
<TABLE>
<CAPTION>
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.
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 Scholes option valuation model. The
estimated value per option was $1.15. 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 $732,600 of costs
directly related to the transaction as of September 30, 1998. This
amount has been reclassed in the pro forma adjustment column to become
part of the estimated
-25-
<PAGE>
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 September 30, 1998 and have been
reflected as additional purchase price.
While the Company has not formally allocated the purchase price of the
transaction, it has preliminarily estimated the value of existing
technology ($2,500,000), which has been classified as capitalized
software, covenants not to compete ($250,000), the amount to be
reflected as in process research and development ($3.6 million) and
goodwill ($2.4 million). 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 the 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. 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
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 six
months ended September 30, 1998 reflects pro forma adjustments for the
semi-annual amortization of existing technology and goodwill of
$416,666 and $402,910, respectively.
-26-
<PAGE>
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 (September 30, 1998) for
the balance sheet and weighted average rate for the periods presented
on the statements of operations (six months ended September 30, 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,
-28-
<PAGE>
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 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
-29-
<PAGE>
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.
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
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<PAGE>
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 September 30, 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.
Lack of Cash Flow. As of September 30, 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.
-31-
<PAGE>
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 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.
-32-
<PAGE>
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%
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
-33-
<PAGE>
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 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.
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<PAGE>
(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
Fiscal 1999
-----------
June 30 $4.63 $2.84
September 30 3.19 1.44
December 31 2.94 1.50
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<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
Earnings Per Share
Basic 0.35 0.10 (0.54) 0.07 0.15 0.05
Diluted 0.32 0.10 (0.54) 0.07 0.14 0.04
Total Assets 3,885,587 4,337,929 3,558,171 4,682,373 6,375,432 8,448,542
Long-Term Obligations 0 0 (72,833) (30,398) 0 0
Dividends Declared 0 0 0 0 0 0
</TABLE>
-37-
<PAGE>
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,
-39-
<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
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.
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
-43-
<PAGE>
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
The following are descriptions of SolCom's NetWorx products:
o LRENG-E-DB
A 4 Port Ethernet Daughter Boards with 4 x 10 M Ethernet ports, a RJ 45
connection for a slot on the LRENG product.
-44-
<PAGE>
o LRENG-TR-DB
A 2 Port Token Ring Daughter Boards with 2 x 4/16 M Token Ring ports, a
RJ 45 connection for a slot on the LRENG product.
o LRENG-E100-DB
A Half Duplex 100 M Ethernet Daughter Boards with one 10/1000 Half
Duplex Ethernet card with a RJ45 connection for slot in the LRENG
product.
o LRENG-E100-FD
A Full Duplex 100 M Ethernet Daughter Boards with one 10/1000 Full
Duplex Ethernet card with a RJ45 connection. The connection requires
two slots in the LRENG product.
o LRENG-WAN-V-DB
A V Series WAN Daughter Boards with a single port WAN card with a V
series support via a Y-Cable into a 50 Pin Connector for V.11, V.35 and
V.24 that requires one slot in the LRENG product.
o LRENG-WAN-E1-DB
An E1 Series WAN Daughter Boards with a single port WAN Card with an E1
series support that requires one slot in the LRENG product.
o LRENG-WAN-T1-DB
A T1 Series WAN Daughter Boards with a single port WAN card with a T1
series support that requires one slot in the LRENG product.
o T3
A T3 Series WAN Daughter Boards with a single port WAN card with a T3
series support that requires two slots in the LRENG product.
o ATM FIBRE
An ATM Fibre Daughter Boards with a 155M ATM support and Fibre
connections. Requires two slots on the LRENG product.
o ATM RJ45
An ATM RJ45 Daughter Boards with a 155M ATM support and RJ45
connections. Requires two slots on the LRENG product.
-45-
<PAGE>
o ATM E3
An E3 Series WAN Daughter Boards with a single port WAN Card with an E3
series support that requires two slots in the LRENG product.
o ATM DS3
A DS3 Series ATM daughterdboard with a single port ATM Card with a DS3
series support that requires two slots in the LRENG product.
o LRENG-HSSI
A HSSI Series ATM Daughter Boards with a single port ATM Card with HSSI
series support that requires two slots in the LRENG product.
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
The following are descriptions of SolCom's ASIC products:
o LRE+
An Ethernet Remote Network Monitoring Probe with 8 MB Memory, and
support for RMON 2 with upgrade to 16, 32 or 64 MB by addition of
Memory Modules. The LRE+ has both AUI connection and RJ 45 connection,
plus a RS232 port for SLIP (Out of band) access.
o LRE+4
A 4-Port Ethernet Remote Network Monitoring Probe with 8 MB Memory that
is upgradeable to 16, 32 or 64 MB by addition of Memory Modules. Fully
supports RMON 2. The LRE+4 has both AUI connections and RJ 45 plus a
RS232 port for SLIP (Out of band) access.
-46-
<PAGE>
o LRE+4/100
A 4 Port 10/100 Ethernet Remote Network Monitoring Probe with 8 MB
Memory that is upgradeable to 16, 32 or 64 MB by addition of Memory
Modules. Fully supports RMON 2. Connections are AUI or RJ 45 for 10M
Ethernet and RJ45 for 100 M Ethernet. There is a RS232 port for SLIP
(Out of band) access.
o LRT
A Token Ring Remote Network Monitoring Probe with 8 MB Memory that is
upgradeable to 16, 32 or 64 MB by addition of Memory Modules. It has
full support for RMON 2. The connection is via a 9 pin IBM type 1
connection or RJ45. There is a RS232 port for SLIP (Out of band)
access.
o LRF-S
FDDI, Single attach, Remote Network Monitoring Probe with 8 MB Memory,
which is upgradeable to 16, 32 or 64 MB by addition of Memory Modules.
Provides full support for RMON 2. Connection is via a Multimode
transceiver. There is a RS232 port for SLIP (Out of band) access.
o LRF-D
FDDI, Dual attach, Remote Network Monitoring Probe with 8 MB Memory and
upgradeable to 16, 32 or 64 MB by addition of Memory Modules. Fully
supports RMON 2. The connection is via 2 Multimode transceivers.. There
is a RS232 port for SLIP (Out of band) access.
Development Stage of Research & Development Efforts
SolCom's IPR&D projects have not yet reached technological feasibility.
The two projects, NetWorx and ASIC, are expected to be commercially launched in
May or June of 1999 and April 2001, respectively. To date, $260,000 has been
spent on NetWorx products and $220,000 has been spent on ASIC products in
connection with research and development expenses. An additional $200,000 is
expected to be spent to complete the initial release of the NetWorx products.
The ASIC project will need another estimated $600,000 to release the first ASIC
product.
The Company's management expects that both the NetWorx and ASIC projects
will be successfully completed within the time frame described above. The
following points describe the developments that need to be completed for the
NetWorx project:
o Hardware development complete with all associated drivers
o New operating system running with completed developed code, ported to
NetWorx and launched
-47-
<PAGE>
o Daughter Cards must be completed with associated drivers o Software needs
to be completed for the Daughter Cards o Daughter Cards must be tested in
the NetWorx platform
ASIC is in the initial design stages and is undergoing initial design
implementation. The following points describe the development efforts that must
be completed for the ASIC project:
o Engineers need to complete familiarization with technology o A chip
manufacturer to work with must be found o Design has to be verified on the
complex simulation systems o Design will then have to be refined numerous
times o Manufacture of the chip will have to commence o Testing and
verification that the chip is successful will need to occur
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.
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.
-48-
<PAGE>
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.
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.
-49-
<PAGE>
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
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.
-50-
<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.
<TABLE>
<CAPTION>
SolCom Systems Ltd.
Consolidated Figures 1993-1998
(1998 figures are for 9 months ended 31 March 1998)
(Balance Sheet data is at March 31 of each respective year)
(Estimated Conversion Rate as of January 10, 1999 = 1.6 U.S. dollars per U.K. pound sterling)
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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<PAGE>
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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<PAGE>
Cost of Revenue. Cost of revenue consists primarily of purchases of
materials and contract manufacturing costs, shipping costs, and write-downs for
excess or obsolete inventory. SolCom's cost of revenue in 1996, 1997 and 1998
was (pound)205,758 ($318,925), (pound)193,000 ($318,450) and (pound)276,000
($455,400), respectively. Cost of revenue increased 43% from 1997 to 1998
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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<PAGE>
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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<PAGE>
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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<PAGE>
-----------------------------------------------
ITEM 2 - ADOPTION OF 1998 STOCK OPTION PLAN AND
1998 U.K. SUB-PLAN
-----------------------------------------------
The following is a summary of the Company's 1998 Stock Option Plan (the
"Plan"), substantially in the form annexed hereto as Appendix C, and the
Company's 1998 U.K. Sub-Plan (the "Sub-Plan" and together with the Plan, the
"Plans"), substantially in the form annexed hereto as Appendix D.
Eligibility. Options may be granted under the Plan to key employees (including
directors and officers who are key employees) and to consultants and directors
who are not employees of the Company. Options under the Sub-Plan may only be
granted to those individuals who are employees, consultants and/or directors of
SolCom and who reside in the U.K. Although options under the Plan may be granted
to such individuals, it is the Company's intention to grant options under the
Plan only to individuals who are not employees, consultants and/or directors of
SolCom and who do not reside in the U.K. 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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<PAGE>
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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<PAGE>
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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<PAGE>
----------------------------------------
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
Stephen B. Gray
President and Chief Executive Officer
_________, 1999
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<PAGE>
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
<PAGE>
APPENDIX A
SHARE PURCHASE AGREEMENT
<PAGE>
AGREEMENT
among
MICROFRAME, INC
and
OTHERS
and
SOLCOM SYSTEMS LIMITED
SEMPLE FRASER W.S.
Solicitors
10 Melville Street
EDINBURGH EH3 7LU
Tel: 0131 623 8777
Fax: 0131 623 7201
<PAGE>
AGREEMENT
among
MICROFRAME, INC a New Jersey
corporation having its
principal office at 21
Meridian Avenue, Edison, New
Jersey 08820, U.S.A. (the
"Buyer")
and
THE PERSONS whose names and
addresses are set forth in
columns 1 and 2 of the
Schedule annexed hereto (each,
a "Seller" and collectively
the "Sellers")
and
SOLCOM SYSTEMS LIMITED a
company incorporated under the
Companies Act 1985 of the
United Kingdom and having its
registered office at Solcom
House, Meikle Road, Kirkton
Campus, Livingston ("the
Company")
WHEREAS
A The parties hereto entered into an agreement on 14th and 17th August
1998 providing, subject to the fulfilment of certain conditions, for
the sale and purchase of the whole ordinary issued share capital of the
Company;
B The parties hereto wish to make certain amendments to the terms,
conditions and provisions of the sale and purchase agreement referred
to above and to document certain other arrangements agreed between
them.
NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS
1. INTERPRETATION AND DEFINITIONS
<PAGE>
1.1 In this agreement unless otherwise specified or the context
otherwise requires:
(i) reference to the "Sale and Purchase Agreement" shall
mean the sale and purchase agreement referred to in
the first recital hereto, and
(ii) the provisions set out in the "Interpretation"
section (A) of the Sale and Purchase Agreement shall
apply herein as therein subject to such amendments as
are set out herein, and
(iii) "the/this Amendment Agreement" shall mean this
agreement, and
(iv) "clauses" shall mean clauses of this Amendment Agreement.
1.2 In construing this Amendment Agreement the
euisdem generis rule shall not apply and
accordingly the interpretation of general
words shall not be restricted by being
preceded by words indicating a particular
class of acts, matters or things or being
followed by particular examples, and
1.3 In this Amendment Agreement the headings to
clauses are used for convenience only and
shall not affect the construction hereof,
and
1.4 Reference in the Sale and Purchase Agreement
to "the/this Agreement" shall be deemed to
be a reference to the Sale and Purchase
Agreement as amended by the Amendment
Agreement.
2. AMENDMENTS TO SALE AND PURCHASE AGREEMENT
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<PAGE>
2.1 With effect on and from the date of final
execution hereof it is agreed by and among
the parties hereto that the terms,
conditions and provisions of the Sale and
Purchase Agreement shall be amended as
follows:-
(a) In the fourth recital the words "as
amended by an agreement amongst the
same parties dated on or around the
final date of execution of the
Amendment Agreement (the "LIFE
Amendment Agreement")" shall be
inserted at the end thereof, and
(b) The fifth recital shall be deleted,
and
(c) In the sixth recital, the words "and
the Buyer intends to place the
Company in sufficient funds on and
following Closing to so redeem all
of the CULS in 12 equal monthly
payments from Closing to the day
being the eleventh monthly
anniversary of the Closing Date"
shall be inserted after "July 23,
1998" in the last line thereof, and
(d) In the Interpretation Section
(A)(i), the words "and the amendment
agreement entered into among the
Sellers, the Buyer and the Company
dated on or around December 21, 1998
in terms of which the parties hereto
agreed to amend the terms of this
Agreement with effect from the last
date of execution of the amendment
agreement (the "Amendment
Agreement")" shall be added at the
end thereof, and
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<PAGE>
(e) In the Interpretation Section (F),
the second to seventh lines thereof
inclusive shall be deleted and the
following substituted therefor "the
30,000 cumulative redeemable
preference shares of (pound)1 each
in the capital of the Company
registered in the name of and
beneficially owned by Lothian
Investment Fund for Enterprise
Limited", and
(f) In Section 1.2.1 the number
"2,675,401" shall be substituted for
the number "5,800,000", and all
references to "c" shall be deleted
as well as the words from "and 'c'
equals ....... Closing Date" in the
tenth and eleventh lines thereof,
and
the words from "Without prejudice
............. Consideration" shall
be deleted and the following
substituted thereof "In the event
that the condition set forth in
Section 8 (r)(ii) is not satisfied
for any reason whatsoever the
parties explicitly agree and
acknowledge that the Buyer shall
have the option in its sole
discretion either (i) not to proceed
to Closing with no liability to the
Buyer or the Sellers or (ii) proceed
to Closing in which event the
aggregate consideration for the sale
of the Shares shall be reduced by a
number equal to 15% of the
Consideration or in the event that
the warranty set out in clause 3.6
of the Amendment Agreement is agreed
or proved to have been breached
before Closing the parties
explicitly agree and acknowledge
that, that part of the Consideration
attributable to the Executive
Directors shall be reduced by a
number equal to the amount by which
the management accounts referred to
in clause 3.6 are understated
divided by $2.75", and
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<PAGE>
(g) In Section 1.4, the numbers "186206"
"186206" and "93103" respectively
shall be substituted for the numbers
"400,000", "400,000" and "200,000"
where they appear in the eleventh,
twelfth and fourteenth lines thereof
and the number "465515" shall be
substituted for the number
"1,000,000" in the twenty- eighth
line thereof, and the words "as
amended by the agreement amongst the
Buyer, the Sellers, the Sellers'
Representatives and the Escrow Agent
annexed hereto as Exhibit AA (the
"Escrow Amendment Agreement") shall
be inserted after the words "(the
"Escrow Agreement")" in the thirty
third line thereof, and
(h) In Section 2, the words and date
"June 30, 1999" shall be substituted
for the words and date "December 31,
1998" in the fifth line thereof, and
(i) In Section 3.58, all references to
"The Supplemental Disclosure Letter"
shall be deleted, and
(j) In Section 4 (including Sections 4.1
to 4.26 and the introductory
paragraph thereto) all references to
Section 10.2 and the Supplemental
Disclosure Letter shall be deleted;
and
(k) In Section 4 the words ", in the
case of the warranties given in
Section 10.5," shall be inserted
after the words "Agreement and" in
the fourth line thereof and the
words "in each case" shall be
deleted from the third line thereof,
and
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<PAGE>
(l) In Section 4.15 the words "before
or" shall be inserted after the word
"done" on the third line thereof and
the words "and the Sellers shall
have no liability under the
Warranties, Section 10.5 or Section
12 in respect of such knowing
creation or increase in liability"
shall be inserted after the words
"Section 12" in the fifth line
thereof , and
(m) In Section 4.24, the words "or under
Sections 7.18 or Schedule 7.18"
shall be deleted, and
(n) The existing Section 4.26 shall be
deleted, and the following
substituted therefor "The Sellers
shall not be liable for any breach
of Warranty where the breach has
been solely and directly caused by
the failure of the Buyer to meet its
obligations under clauses 3.1,
3.2(a) and 3.3 of the Amendment
Agreement provided that the Buyer's
failure has not been caused by
inaccurate information supplied to
the Buyer for the purposes of
meeting such obligations or by any
failure to provide information in
due time.", and
(o) In Section 5.1(c), the words "the
CULS and the sum of (pound)40,000
advanced as a loan by Michael David
Rutterford and another in the period
prior to the execution of the
Amendment Agreement " shall be
inserted after the word "Date" on
the last line thereof, and
(p) In Section 7, the following sentence
shall be added to the end of the
introductory paragraph immediately
prior to Section 7.1
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<PAGE>
"Where the Executive Directors, the
Company or one or more of the
Sellers covenant(s) or undertake(s)
to do or not to omit to do anything
in terms of this Section 7, the
Buyer shall not voluntarily and
deliberately do anything and shall
use its best endeavors to procure
that its officers and employees do
not voluntarily or deliberately do
anything which it/they know would of
itself obstruct, interfere or
inhibit in any way the performance
of such covenant or undertaking by
the Executive Directors, the Company
or the Sellers (as appropriate) and
in so far as the Buyer or others as
aforesaid shall be guilty of any
such voluntary, deliberate and
knowing act prior to the date on
which Closing would otherwise have
occurred the Buyer shall not be
entitled to rely on non performance
of the relevant covenant or
undertaking as a reason to decline
to proceed to Closing in terms of
Sections 8(b) and 13.1", and
(q) In Section 7.1 the words "and in any
event the Buyer hereby consents to
the conversion of the warrants
referred to in Section 8 (p)" shall
be added at the end thereof, and
(r) In Section 7.7 the words "unless the
Buyer or its officers or employees
are already actually aware of such
occurrence or incidence" shall be
inserted after the word "loss" in
the last line thereof, and
(s) In Section 7.14, the words "with the
prior written consent of the Buyer
(such consent not to be unreasonably
withheld or
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<PAGE>
delayed)" shall be substituted for
the words "for the purpose of
.......... Section 7.18," and
(t) Section 7.18 shall be deleted and
the following substituted therefor:
"7.18 Additional Undertakings
7.18.1 The Company undertakes to the Buyer in the
period between the date of final execution
of the Amendment Agreement to Closing,
without prejudice to but notwithstanding the
foregoing provisions of this Section, as
follows:-
(a) to deliver to the Buyer ten (10)
days in advance of each calendar
month a revenue and capital budget
for the calendar month immediately
following and to adopt the same only
with the prior approval of the Buyer
(given or refused within three (3)
business days (meaning a day when
banks in Scotland and New Jersey,
U.S.A. are open for all normal
banking business) of delivery of
such budget by the Company. In the
event of refusal the Buyer shall set
out in reasonable detail its reasons
for refusing and where the Company
then resubmits the relevant budget
the foregoing provisions as to
approval or refusal shall apply) and
to ensure that the operations of the
Company during that month do not
result in any expenditure or loss
having an adverse impact (meaning by
more than $50,000) on the projected
figures contained in such budgets,
and
-8-
<PAGE>
(b) to deliver to the Buyer within ten
(10) days of the end of each
calendar month monthly management
accounts including profit and loss
accounts for the calendar month and
year to date with comparison to
budget, cash flow for the calendar
month and year to date with
comparison to budget, and balance
sheet with comparison to budget
together with a report by Peter
MacLaren whom failing one of the
other Executive Directors of the
Company commenting specifically on
the key features of the management
accounts, reasons for variations
from budget and any proposed action
to rectify negative variations, and
(c) to procure that there is e-mailed to
the chief financial officer of the
Buyer on the Monday immediately
following the end of each calendar
week the opening and closing cash
balances from the books of account
of the Company in respect of that
week and details of all movements of
cash in/out at bank.
7.18.2 The Company undertakes to the Buyer that,
without prejudice to but notwithstanding the
foregoing provisions of this Section or any
other Section of this Agreement, during the
period from the date of final execution of
the Amendment Agreement to Closing except
with the prior written consent of the Buyer
(such consent being signed by the Chief
Financial Officer of the Buyer) not to:
(a) incur any material (meaning of an
amount in excess of $50,000)
expenditure or commitment on any
individual item (or an aggregate of
individual items in respect of a
related matter) of a capital nature
not provided for in the budgets
-9-
<PAGE>
approved by the Buyer as referred to
in Section 7.18.1(a) and save in all
events in respect of pursuance of
any obligation of and binding on the
Company pre-existing as at the last
date of execution of the Amendment
Agreement, or
(b) dispose of or agree to dispose of or
grant any option in respect of any
part of its assets other than stock
in the ordinary and usual course of
trading, or
(c) materially vary the terms of any
Material Contract (as defined in
Section 3.6), or
(d) borrow any money (except borrowings
from the Buyer banks and other
institutions under the arrangements
currently in force at the date of
the Amendment Agreement and in any
event except where the Buyer has
failed to comply with any of its
funding obligations in terms of
clauses 3.1, 3.2(a) and 3.3 of the
Amendment Agreement) or make any
payments out of or drawings on its
bank accounts other than payments
made in the ordinary and usual
course of business, or
(e) grant or issue or agree to grant or
issue any mortgages, charges,
debentures or other securities for
money or redeem or agree to redeem
any such securities or give or agree
to give any guarantees or
indemnities or similar obligations
(other than in the ordinary and
normal course of business), or
(f) appoint or dismiss any employee of
the Company whose entitlement to
basic salary under his contract or
terms of
-10-
<PAGE>
employment exceeds $50,000 per annum
(save in the case of a rightful
dismissal in terms of the relevant
contract of employment), or
(g) alter the terms of any consultancy
contract or offer to enter into a
consultancy contract or contract for
services (which would be if entered
into by the Company a Material
Contract (as defined in Section
3.6)) with any person or entity, or
(h) acquire any business or acquire or
constitute any company, corporation
or body corporate or acquire or
subscribe for shares or other
securities or any interest therein,
or
(i) pay any fees or commissions to any
persons other than fees payable on
arms-length terms to a third party
who has rendered or will render bona
fide service or advice to the
Company or within the ordinary and
usual course of business and save in
all events in respect of pursuance
of any obligation of the Company
pre-existing as at the last date of
execution of the Amendment
Agreement, or
(j) enter into or undertake any contract
or arrangement other than in the
ordinary and usual course of
business which provides for
aggregate payments of more than
$10,000 or enter into any contract
or arrangement with its directors or
any person or company related to or
connected with any of its directors
save for contracts referred to in
the Sale and Purchase Agreement.
-11-
<PAGE>
and generally, but without prejudice
to the foregoing to consult with the
Buyer with reasonable frequency as
regards the day to day conduct of
the business of the Company and the
Subsidiary and procure compliance
with each of the foregoing
provisions of this Section 7.18
mutatis mutandis on the part of the
Subsidiary," and
(u) In Section 7.20.2, the number
"2,675,401" shall be substituted for
the number "5,800,000" in the fifty
first line thereof and the following
shall be inserted as a new Section
7.20.4:
"7.20.4 The Buyer hereby undertakes to each
of Hugh Evans, Peter Wilson and
Peter MacLaren that in the event of
the consolidated revenues of the
Buyers' Group (meaning the Buyer and
each of its subsidiaries as defined
in the Companies Acts) of the
Company as verified by the audited
consolidated financial statements of
the Buyer's Group in respect of
certain financial years reaching
certain level then within fourteen
(14) days of the end of the relevant
financial year, the Buyer will enter
into a second Stock Option Contract
for performance based option with
each such party substantially in the
form annexed as Exhibit H as
follows:
In the event of the consolidated
revenues of the Buyer's Group for
the financial year ending March 31,
2000 exceeding $$30,000,000, in
respect of 60,000 options to each of
Hugh Evens and Peter Wilson provided
the relevant ones of then have not
resigned or been given notice by the
Company of the termination of his
employment by the
-12-
<PAGE>
Company of the termination of his
employment with the Company and
30,000 options to Peter MacLaren
provided he is still an employee of,
or consultant to, the Company and,
similarly, in the event of the
consolidated revenues of the Buyer's
Group for the financial year ending
March 31, 2001 exceeding
$60,000,000, the same number of
options to each of the foregoing
persons all as aforesaid."
(v) In Section 7.26, the words and date
"June 30, 1999" shall bd substituted
for the words and date "December 31,
1998" in the fourteenth line
thereof, and the following words
shall be inserted between the words
"substantial." and "The" on the
twenty-fifth line thereof: "In
addition to (and not in substitution
for) the other obligations on the
Buyer contained in this Section
7.26, the Buyer undertakes to use
its reasonable endeavours to effect
Closing by March 31, 1999 and to
obtain all requisite shareholder and
other approvals in connection with
the transactions pursuant to or
contemplated by this Agreement
required under applicable state law,
federal law and the rules and
regulations of the National
Association of Securities Dealers
Authorised Quitation System. Such
reasonable endeavours shall be
deemed to include, without prejudice
to the foregoing generality: (a) as
soon as practicable after the date
of the Amendment Agreement filing an
Information Statement with the U.S.
Securities and Exchange Commission
("SEC"); (b) responding as soon as
reasonably practicable to any and
all comments received on such
Information Statement for SEC and
thereafter as soon as reasonably
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<PAGE>
practicable amending the Information
Statement accordingly; and (c) as
soon as reasonably practicable
filing such amended version or
versions of the Information
Statement with the SEC."Statement
(w) In Section 7.30, the words from "and
to .......... Section 7.18" shall be
deleted, and
(x) Section 7.33 shall be deleted, and
(y) In Section 7.36 the following words
shall be inserted after the words
"LIFE Agreement" in the second line
thereof "as amended by the LIFE
Amendment Agreement", and
(z) Section 8(a) shall be deleted, and
(aa) Section 8(b) shall be deleted and
the following substituted therefor
"Each Seller shall so far as the
Buyer is actually aware have
performed and complied in all
material respects with all covenants
and undertakings required to be
performed or complied with by such
Seller under this Agreement and the
Company shall have so far as the
Buyer is actually aware complied in
all respects with Section 7.18 of
this Agreement and no notification
shall have been given to the Buyer
under Section 7.7 of this Agreement,
and
-14-
<PAGE>
(bb) Section 8(c) shall be deleted, and
the following substituted therefor
"Each of the persons/entities
referred to in Section 14.1 and
Schedule 14.1 shall have confirmed
to the Company in terms satisfactory
to the Buyer that, in respect of the
transactions contemplated hereby,
there will upon payment in full as
referred to in Section 14.1 be no
grounds upon which the Company has
or could have any obligation or
liability to pay any sums in respect
of fees, outlays and/or charges to
any such persons or entities and
further each of such persons or
entities shall have confirmed, in
terms satisfactory to the Buyer,
that so long as the Buyer complies
with its obligations under Section
14.1 to make monthly payments to
such persons or entities, they shall
not instigate any proceedings
(whether legal or otherwise) against
the Company in respect of
professional fees or outlays or
charges of any kind for a period of
eleven (11) months following
Closing", and
(cc) In Section 8(m) the words "Keith
Baker" shall be deleted, and
(dd) Section 8(p) shall be deleted, and
the following substituted therefor
"All existing warrants to subscribe
for ordinary shares of 1 pence each
in the capital of the Company shall
have been exercised in full and
shall otherwise be of no effect",
and
(ee) Section 8(q) shall be deleted, and
the following substituted therefor
"The terms of any loans from Michael
David Rutterford and/or Barry Sealey
to the Company do not
-15-
<PAGE>
conflict with the repayment terms in
respect thereof referred to in
Section 14.1", and
(ff) Section 8(r) (i) shall be deleted,
and
(gg) Section 8 (u) shall be deleted, and
(hh) Section 8 (v) shall be deleted.
(ii) In Section 8(x) the words "pursuant
to Section 7.18" shall be deleted
and the word "not" shall be inserted
between the words "shall" and
"have", and the words "at Closing,
and the terms of all the CULS in
issue shall have been altered to the
reasonable satisfaction of the Buyer
to provide for redemption by the
Company over a period of 12 months
on Closing and in 11 equal monthly
instalments thereafter with a waiver
of the former rights to redeem set
out in clause 10 of the loan stock
instrument constituting the CULS
dated July 23, 1998 and the right to
convert set out in clause 6 of that
instrument " shall be added at the
end thereof, and
(jj) In Section 10.2 all references to
"the Supplemental Disclosure
Letter," the "Warranties set forth
in Section 3", the "Warranties
contained in Section 3" and "Section
10.3" shall be deleted, and the
words "and the relevant Sellers
shall be deemed to so warrant in
respect of clause 3.6 of the
Amendment Agreement" shall be added
after the words "in all respects",
and the following sentence shall be
added at the end thereof "For the
avoidance of doubt the Warranties
set
-16-
<PAGE>
forth in Section 3 are given only on
signing of this Agreement and are
not repeated at Closing or at any
other time", and
(kk) Section 10.3.1 and Section 10.3.2
shall be deleted, and
(ll) In the introductory paragraph of
Section 10.5 the words "the
Warranties set out in Section 3 and"
shall be deleted, and
(mm) Section 10.5(b) shall be deleted and
the following substituted therefor
"All warrants to subscribe for
shares in the capital of the Company
have been exercised in full and are
otherwise of no effect and with the
exception of the Third Party Shares,
the Shares constitute the whole of
the issued share capital of the
Company, and the CULS constitute the
only loan stocks or similar
convertible securities in the
capital of the Company", and
(nn) In Section 11, all references to
"Section 13.2(a)" shall be deleted,
and
(oo) In Section 11.1 the words "or
pursuant to clause 3 of the
Amendment Agreement or Section 7.18
of this Agreement (for breach of the
latter the Buyer having the right
not to close pursuant to Section
8(b) and not to any other remedy)"
shall be inserted after the words
"the other conditions of Closing",
and
(pp) In Section 11.4, the words "or in
the case of the Company only, clause
3 of the Amendment Agreement" shall
be inserted after the words "Section
14.4", and
-17-
<PAGE>
(qq) In Section 11.5, the words "(as
updated pursuant to Section 10.2)"
and the words "and Schedule 7.18"
shall be deleted, and the words "and
(in the case of those Sellers who
are Executive Directors but no other
Sellers) clause 3.6 of the Amendment
Agreement for any liability in
respect of a breach of Section 7.7"
shall be inserted after the words
"Section 12", and
(rr) In Section 11.7 $2.75 shall be
substituted for $3.12 where it
appears in the first line thereof,
and
(ss) In Section 11.11 the words "or under
clause 3.6 of the Amendment
Agreement or for any liability in
respect of a breach of Section 7.7"
shall be added after the words "this
Agreement" in the second line
thereof, and
(tt) In Section 11.11.1 the words "or
claim under clause 3.6 of the
Amendment Agreement (for which the
Executive Directors shall be solely
liable) or for any liability in
respect of a breach of Section 7.7
(for which the Executive Directors
shall be solely liable)" shall be
added after the words "Relevant
Claim" in the first line thereof,
and
(uu) In Section 11.11.3, the numbers
"186,206", "186,206" and "93103"
respectively shall be substituted
for the numbers "400,000", "400,000"
and "200,000" where they appear in
the fourth, sixth and eighth lines
thereof, and
-18-
<PAGE>
(vv) In Section 11.11.5, the number
"465515" shall be substituted for
the number "1,000,000" in the
twelfth line thereof and the numbers
"186,206", "186,206" and "93103"
shall be substituted for the numbers
"400,000", "400,000" and "200,000"
respectively in the fourteenth,
fifteenth and sixteenth lines
thereof, and
(ww) [intentionally blank], and
(xx) In Section 11.16 the words "or in
the case of the Buyer $600,000"
shall be added after the figure
"$400,000" where first used, and the
following shall be added at the end
thereof "In the event of Closing not
occurring any liability on the part
of the Buyer for any breach of any
obligations incumbent upon it under
the Amendment Agreement shall be
limited to and shall not exceed
$600,000 and the Buyer's aggregate
liability for breach under the
Amendment Agreement and for breach
of Section 7.26 in the event of
Closing not occurring shall be
limited to $600,000 such sum or
sums, if payable, to be payable to
the Sellers' Representatives for
distribution amongst the Sellers",
and
(yy) In Section 13.1(a) (ii), (iii) and
(iv), the words and date "June 30,
1999" shall be substituted for the
words and date "December 31, 1998"
where they appear in the third,
second and third lines thereof
respectively, and
-19-
<PAGE>
(zz) In Section 13.2, the words "this
Section 13.2(a) and" and from "The
parties agree that if this Agreement
.............. their respective
names in Section 7.18" shall be
deleted, and
(aaa) In Section 14.1, the words "in equal
monthly instalments over a period of
12 months commencing on Closing"
shall be inserted after the words
"arrangements to pay" and the words
"in the aggregate amounts delivered
to the Buyer on or around the date
of execution of the Amendment
Agreement" shall be inserted after
the words "Schedule 14.1" and the
words "subject to the Buyer being
reasonably satisfied ..............
has been received by the Company"
shall be deleted, and the following
sentence shall be added at the end
thereof "On Closing the Buyer shall
make arrangements to pay in equal
monthly instalments at Closing and
on each of the following eleven
monthly anniversaries thereof the
amount of (pound)40,000 owing by the
Company to Michael David Rutterford
and Barry Sealey jointly against
delivery to the Buyer of a waiver in
the agreed form", and
(bbb) the whole of Schedule 7.18 shall be
deleted, and
(ccc) In Section 14.11 the words "or under
the Amendment Agreement" shall be
inserted after the word "hereunder"
on the fourth line thereof and the
word "hereunder" in the tenth line
thereof and the word "Agreement" in
the twelfth line thereof and the
words "or under the Amendment
Agreement (as appropriate)" shall be
inserted after the word "hereunder"
on the eighth line thereof.
-20-
<PAGE>
2.2 Save as aforesaid the terms, conditions and provisions of the
Sale and Purchase Agreement shall remain in full force and
effect.
3. NEW UNDERTAKINGS
3.1 The Buyer has prior to the date hereof
advanced and will continue to advance
certain sums to the Company to meet cash
requirements of the Company for the purpose
of enabling it to meet its
obligations/arrangements to the Buyer under
a contract(s) for the supply of RMON
technology and Networx technology
constituted by a course of dealing. The
Buyer undertakes to continue to supply
certain sums to the Company for the
foregoing purposes and to the extent
reasonably required for the foregoing
purposes in the period up to Closing. A
certificate under the hand of the chief
financial officer of the Buyer shall in the
absence of manifest error be conclusive and
binding on the parties hereto as to the
aggregate amount so advanced at any time by
the Buyer to the Company. The aggregate
amount so advanced at any time is
hereinafter referred to as "the loan".
3.2 The following provisions shall apply to the
loan:-
(a) the loan shall be interest free and
the whole principal amount
outstanding of the loan or any part
thereof shall be repayable and
repaid on demand served by the Buyer
on the Company provided that no such
demand in respect of any amount not
currently due to the Buyer at the
relevant time by the Company on
trading account (for the supply of
goods or services on an arms length
basis) shall be served by the Buyer
prior to Closing. In the event of
Closing not occurring the
-21-
<PAGE>
Company agrees to deliver up to the
Buyer (at the cost and expense of
the Company) in repayment or part
repayment of the loan all materials,
equipment, cards and other items
prepared for supply to the Buyer
under the foregoing agreement(s) in
respect of which the Buyer has not
exercised its rights of set off or
counter claim with subsequent
delivery to the Buyer and valued at
the normal sale price therefor and,
in any event, the loan shall be and
become immediately due and repayable
and the Buyer shall be entitled to
demand immediate repayment thereof
in the event of the appointment of a
receiver or receiver and manager or
administrative receiver or
administrator in respect of the
whole or any part of the
undertaking, property and/or assets
of the Company, or if an order is
made or an effective resolution is
passed for the winding up or
liquidation of the Company, or
(provided the following is not
solely and directly caused by a
breach by the Buyer) if the Company
defaults in the payment when due
under the terms of any relevant
agreement of any principal of or
interest on any other indebtedness
of or assumed by the Company, or the
Company becomes bound to repay any
other indebtedness prior to its due
date in consequence of a default by
the Company. The Company agrees that
until Closing all such materials and
others as aforesaid shall be held by
the Company separate and
identifiable and to the order of the
Buyer, and
(b) The Buyer is hereby authorized to
deduct or set off and plead
compensation or balancing of
accounts in respect of any amount
owed by it to the Company for any
arm's length trade
-22-
<PAGE>
supplies made and invoiced by the
Company to the Buyer in the ordinary
course of business of the Company
between the period from the last
date of execution of the Amendment
Agreement to Closing from sums
advanced to the Company by the Buyer
by way of loan under clauses 3.1,
3.2(a) or 3.3 of this Amendment
Agreement.
3.3 The Buyer undertakes on the same terms
mutatis mutandis as set out in the foregoing
clause 3.2 (but for these purposes excluding
all references to the delivery of materials,
equipment and similar items) to fund the
monthly operating costs of the Company set
out in the budgets approved pursuant to
Section 7.18.1 (a) of the Sale and Purchase
Agreement in the period between the date of
final execution hereof and Closing.
3.4 is expected that during the three (3) month
period following the last date of execution
of this Amendment Agreement the obligations
of the Buyer under the foregoing provisions
of this clause 3 shall be between $200,000
and $300,000.
3.5 The Buyer undertakes to ensure that upon and
after Closing the Company is in funds to the
extent necessary to redeem outstanding
principal and interest on the CULS and the
Buyer shall ensure that the Company shall
redeem the same in terms of Section 8(x) of
the Sale and Purchase Agreement.
3.6 The Executive Directors hereby warrant to
the Buyer that the management accounts of
the Company and the Subsidiary as at October
31 1998, delivered to the Buyer on or around
the date of final
-23-
<PAGE>
execution hereof, were properly prepared and
the accounting principles, policies and
procedures applied in the preparation of
such accounts were applied in a manner
consistent with that adopted in the
preparation of the last audited accounts of
the Company and the Subsidiary and such
management accounts are not misleading in
any significant respect and neither
significantly overstate the value of the
assets nor significantly understate the
liabilities of the Company and the
Subsidiary as at the date thereof and for
these purposes "significant" shall mean by
or of an amount in excess of $50,000. No
claim may be made for breach of this clause
3.6 after the date falling 30 days after the
Closing Date.
4. GOVERNING LAW AND JURISDICTION
This Amendment Agreement shall be construed in accordance with and
governed by the laws of Scotland. Any action or proceedings seeking to
enforce any provision of, or based on any right arising out of, this
Amendment Agreement as so construed and governed shall be brought
against any of the parties in the Court of Session, Edinburgh, Scotland
and each of the parties hereby submits in respect of such matters to
the exclusive jurisdiction of such Court (and the appropriate appellate
Court) in any such action or proceeding. The Buyer hereby undertakes to
each of the parties hereto that it shall observe the provisions of this
Clause 4 and it shall not raise any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this
Amendment Agreement in respect of such matter in any Court other than
the Court of Session in Edinburgh.
5. NOTICES
All notices, demands and other communications hereunder shall be given
or served by personal delivery or by registered or certified mail
(return receipt requested), postage
-24-
<PAGE>
prepaid, or by facsimile to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice,
provided that notices of a change of address shall be effective only
upon receipt thereof):
If to the Buyer, to:
MicroFrame, Inc.
21 Meridian Avenue
Edison, New Jersey 08820
Attention: Stephen B Gray
Fax No.: 001-732-494-4570
with copies to:
James Alterbaum, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Fax No.: 001-212-704-6288
Kathleen Stewart
Semple Fraser W.S.
10 Melville Crescent
Edinburgh EH3 7LU
Fax No.: 0131-623-7201
If to the Company, to:
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
Livingston EH54 7DE
Scotland
Fax No.: 01506-461-717
If to the Sellers or any of the Sellers, to each of them at their respective
addresses set out in the Schedule with a copy to:
-25-
<PAGE>
Michael Sloyer Esq
Mayer Brown Platt
1675 Broadway, New York, New York
1009 5820
Fax No.: 001-212-262-1910
and
Marian Glen
Shepherd & Wedderburn
155 St Vincent Street
Glasgow G2 5WR
Scotland, UK
Fax No.: 0141-565-1222
All such notices and other communications shall be deemed given or delivered or
served when received, or 48 hours after mailing, or 24 hours after facsimile
whichever occurs first and in proving service by mail it shall be necessary to
prove that the communication was duly addressed and posted in accordance with
this clause.
IN WITNESS WHEREOF this Amendment Agreement consisting of this and the
preceding twenty two pages has been executed as follows:
SUBSCRIBED at Edinburgh on
for and on behalf of
Anderson Strathern Nominees Limited
by John Kerr, Director
in the presence of:
SUBSCRIBED at Edinburgh on
for an on behalf of
Frances Loretta De Laura
by Peter Atholl Wilson her duly
appointed attorney in the presence of:
SUBSCRIBED at Edinburgh on
for and on behalf of
-26-
<PAGE>
Andrew Edward Sealey, Helen
Sealey, Brian Souter, Lady
Margaret Elliott and Ann Heron Gloag
by Barry Sealey, their duly appointed
attorney in the presence of:
SUBSCRIBED at Edinburgh
on by William Hugh Evans a trustee
of The Hugh Evans Family Trust
constituted by Declaration of Trust
dated September 13, 1997 in the
presence of:
SUBSCRIBED at Edinburgh on
by Keith Laing in the presence of:
SUBSCRIBED at Edinburgh on
by Keith Laing for and on behalf
of Colin Laing as his duly
appointed attorney in the
presence of:
SUBSCRIBED at Edinburgh on
by Peter James MacLaren for
himself and for and on behalf
of Elizabeth Marie McQuillan
as her duly appointed attorney
in the presence of:
SUBSCRIBED at Edinburgh on by John Kerr
as the duly appointed
attorney of EFG Reads Trustees
Limited the present and sole trustee of
Mrs JG Rutterford's 1991 Trust
in the presence of:
SUBSCRIBED at Edinburgh on
by John Kerr as the duly appointed
attorney of EFG Reads Trustees
Limited the present and sole trustee of
-27-
<PAGE>
MD Rutterford's 1991 Trust in the
presence of:
SUBSCRIBED at Edinburgh on
by William Hugh Evans in
the presence of:
SUBSCRIBED at Edinburgh on
by John Kerr as the duly appointed
attorney of June Georgina Rutterford
in the presence of:
SUBSCRIBED at Edinburgh on
by John Kerr as the duly appointed
attorney of Ali Reza Taheri in the
presence of:
SUBSCRIBED at Edinburgh on
by Peter Atholl Wilson for himself
and separately as guardian of
Alison Elizabeth Wilson in the presence of:
SUBSCRIBED at Edinburgh on
by Michael David Rutterford in
the presence of:
SUBSCRIBED at Edinburgh on
for and on behalf of the Company
by Peter Atholl Wilson, Director
in the presence of:
SUBSCRIBED at on
for and on behalf of MicroFrame, Inc
by John McTigue, its Chief Financial
Officer in the presence of:
-28-
<PAGE>
SCHEDULE
SHAREHOLDERS OF SOLCOM SYSTEMS LIMITED
(ordinary shares)
Name Address
W. Hugh Evans 19 Pentland Drive, Edinburgh EH10 6PU
William Hugh Evans, Ruth 19 Pentland Drive, Edinburgh EH10 6PU
Evans and David James
Thomas Henderson as
trustees of the Hugh Evans
Family Trust
Keith Laing 43 Wester Bankton
Livingston EH54 9DY
Colin Laing 72 Gateside Avenue
Haddington
East Lothian
Peter J. MacLaren 2 Glencairn Crescent
Edinburgh EH12 5BS
E Marie McQuillan 2 Glencairn Crescent
Edinburgh EH12 5BS
Peter A Wilson 6 Hermand Gardens,
West Calder EH55 8BT
Alison Wilson 6 Hermand Gardens,
West Calder EH55 8BT
Lady Margaret Elliott 8 Howe Street
Edinburgh EH3 6TD
Ann H. Gloag Balcraig House, Scone,
Perth PH2 7PJ
-29-
<PAGE>
EFG Reads Trustees Ltd as PO Box 641
Trustee of MD Rutterford's 1 Seaton Place, St. Helier,
Trust Jersey, JE4 8YJ
EFG Reads Trustees Ltd as PO Box 641
Trustee of Mrs J.G. 1 Seaton Place, St. Helier,
Rutterford's 1991 Trust Jersey, JE4 8YJ
Michael David Rutterford Sherwood, 28 Redford Road, Edinburgh EH12 0AA
June Georgina Rutterford Sherwood, 28 Redford Road, Edinburgh EH13 0AA
Andrew Sealey The Coach House, 99 Blackheath Park, Blackheath,
London SE3 0EU
Helen Sealey 4 Castlelaw Road, Edinburgh EH13 0DN
Brian Souter Murrayfield House, St. Magdalene's Road, Perth PH2
0BT
Ali Taheri 29 North Gyle Terrace, Edinburgh EH12 8JT
Ms Fran De Laura 9061 Blarney Stone Drive, Springfield,
VA 22152 U.S.A.
Anderson Strathern 48 Castle Street,
Nominees Limited Edinburgh
EH2 3LX
-30-
<PAGE>
APPENDIX B
FAIRNESS OPINION
PREVIOUSLY FILED
<PAGE>
APPENDIX C
1998 STOCK OPTION PLAN
PREVIOUSLY FILED
<PAGE>
APPENDIX D
1998 U.K. SUB-PLAN
PREVIOUSLY FILED
<PAGE>
APPENDIX E
FINANCIAL STATEMENTS OF SOLCOM
<PAGE>
SolCom Systems Ltd.
Unaudited Interim Financial Statements
September 1998
Notes:
- -----
1. These financial statements have been prepared by the directors using the
same accounting principles as were applied in the preparation of the audited
financial statements at March 31, 1998.
2. These financial statements have not been audited.
3. In the opinion of the directors, these financial statements include all
adjustments which are necessary in order to make the financial statements
not misleading.
<PAGE>
SOLCOM SYSTEMS LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
(except per share data)
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 5 - 12
Accounts receivable 135 64 147
Other receivables 21 26 23
Prepaid merger expenses 5 - -
Other prepayments 32 34 44
Inventories 235 306 251
------------ ------------ --------------
Total current assets 433 430 477
Property and equipment, net 124 134 147
------------ ------------ --------------
Total assets 557 564 624
------------ ------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 54 17 11
Current portion of bank loans 46 84 112
Current portion of capital leases 6 9 11
Convertible Loan Notes 150
Accounts payable 336 553 605
Accrued expenses 319 264 257
------------ ------------ --------------
Total current liabilities 911 927 996
Long term portion of capital leases - - -
Long term portion of bank loans 23 16 18
Cumulative redeemable preference(pound)1 stated value, 30,000 shares
authorised and outstanding 30 30 30
Commitments and contingencies - - -
Shareholders' deficit
Ordinary(pound)0.01 stated value, 54,250,000 (March 31, 1998 - 48,960,000)
shares authorised, issued and outstanding 38,814,390 (March 31, 1998 -
36,140,000) shares 413 388 361
Additional paid-in capital 823 662 433
Accumulated deficit (1,644) (1,461) (1,217)
Cumulative translation adjustment 1 2 3
------------ ------------ --------------
Total shareholder's deficit (407) (409) (420)
------------ ------------ --------------
Total liabilities and shareholders' deficit 557 564 624
------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
(except per share data)
3 months 3 months 9 months
ended ended ended
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Sales 312 238 1,031
Cost of sales (91) (55) (221)
----------- ----------- --------------
Gross profit 221 183 810
Operating expenses (317) (333) (965)
Research and development expenses (73) (76) (264)
Interest income - 1 1
Interest expense (11) (16) (21)
----------- ----------- --------------
Net loss (180) (241) (439)
----------- ----------- --------------
Loss per share - basic and diluted (.00) (.01) (.01)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT
- --------------------------------------------------------------------------------
Addi-
tional Accumu- Cumulative
Ordinary Shares Paid-in lated Translation
Shares Amount Capital Deficit Adjustment Total
No. (pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 30,740 307 222 (768) - (239)
Net income (439) - (439)
Share capital issued 5,400 54 211 265
Translation adjustment 3 3
Preference dividend declared (10) (10)
------------ ----------- -------------- ----------- ---------------- -------
Balance at March 31, 1998 36,140 361 433 (1,217) 3 (420)
Net income (241) (241)
Share capital issued 2,674 27 229 256
Translation adjustment (1) (1)
Preference dividend declared (3) (3)
------------ ----------- -------------- ----------- ---------------- -------
Balance at June 30, 1998 38,814 388 662 (1,461) 2 (409)
Net income (180) (180)
Share capital issued 5,148 25 161 186
Translation adjustment (1) (1)
Preference dividend declared (3) (3)
------------ ----------- -------------- ----------- ---------------- -------
Balance at September 30, 1998 41,288 413 823 (1,644) 1 (407)
------------ ----------- -------------- ----------- ---------------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
In thousands
(except per share data)
3 months 3 months 9 months
ended ended ended
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss (180) (24) (439)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 34 17 57
Employee stock compensation - - -
(Increase) in inventories 16 (55) (34)
Decrease/(increase) in receivables and prepayments 24 90 38
Increase in accounts payable and accrued expenses (207) (45) 370
---------------- ------------ --------------
Total adjustments (133) 7 431
Net cash used in operating activities (313) (234) (8)
Cash flows from investing activities
Capital expenditures (11) (4) (35)
---------------- ------------ --------------
Net cash used in investing activities (11) (4) (35)
Cash flows from financing activities
Bank overdraft 43 6 (122)
Proceeds from issuance of long term debt - - -
Principal payments under long term debt and capital leases (66) (32) (98)
Proceeds from issuance of shares 422 256 265
---------------- ------------ --------------
Net cash provided by financing activities 419 230 45
Effect of exchange rate changes on cash and cash equivalents 1 2 3
Net increase/(decrease) in cash and cash equivalents (7) (12) 5
Cash and cash equivalents at beginning of period 12 12 7
---------------- ------------ --------------
Cash and cash equivalents at end period 5 - 7
---------------- ------------ --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on bank loans and overdraft 11 15 18
---------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories at September 30, June 30 & March 31, 1998, consist of the following: (In thousands)
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Raw materials 119 172 115
Finished goods 116 134 136
------------- ------------ ----------------
235 306 251
------------- ------------ ----------------
</TABLE>
NOTE B - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at September 30, June 30 and March 31, 1998, consists of
the following:
(In thousands)
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Plant and machinery 214 209 206
Fixtures and fittings 89 87 86
------------- ------------ ----------------
303 296 292
Less accumulated depreciation (179) (62) (145)
------------- ------------ ----------------
124 134 147
------------- ------------ ----------------
</TABLE>
NOTE C - ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses at September 30, June 30 and March 31, 1998, consists of the
following:
(In thousands)
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Social Security and other taxes 84 82 85
Other 30 30 29
Sundry creditors 154 103 97
Provision for preference dividend and provision on redemption of preference share 51 49 46
------------- ------------ ----------------
319 264 257
------------- ------------ ----------------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations at September 30, June 30 & March 31, 1998, consist of the
following:
(In thousands)
Sept. 30, June 30, March 31,
1998 1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
Secured loan repayable in yearly installments of(pound)3,000 (excluding interest)
until November 1999, carrying interest of 10% per annum. 7 8 8
Secured loans - the loans are secured by a floating charge over the assets of the
Company. The interest rate is 2.5% over bank base rate (7.25%). 62 92 122
------------- ------------ ----------------
69 100 130
Less current portion 46 84 112
------------- ------------ ----------------
23 16 18
------------- ------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
Aggregate maturities of long-term obligations at September 30, 1998 are as
follows:
(In thousands)
(pound) (pound)
<S> <C> <C>
1998 84 84
1999 8 8
2000 8 8
2001 2 2
------------ ----------------
102 102
-7-
</TABLE>
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
AND THE YEAR ENDED JUNE 30, 1997
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
SolCom Systems Limited
We have audited the accompanying consolidated balance sheets of SolCom System's
Limited and its subsidiary as of March 31, 1998 and June 30, 1997 and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the nine months ended March 31, 1998 and the year ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SolCom Systems
Limited and its subsidiary as of March 31, 1998 and June 30, 1997 and the
consolidated results of their operations and their consolidated cash flows for
the nine months ended March 31, 1998 and the year ended June 30, 1997 in
conformity with generally accepted accounting principles in the United States.
GRANT THORNTON
Edinburgh
United Kingdom
August 1998
<PAGE>
[Letterhead of Grant Thornton]
The Members
SolCom Systems Limited
SolCom House
Meikle Road
Kirkton Campus
Livingston EH54 7DE
January 1999
Dear Sirs
SOLCOM SYSTEMS LIMITED
UK STATUTORY FINANCIAL STATEMENTS FOR THE PERIOD
ENDED 31 MARCH 1998
Reference is made to our audit report dated 14 August 1998 in respect of the
accompanying financial statements.
The financial statements are prepared in accordance with Generally Accepted
Accounting Principles in the United Kingdom ("UK GAAP").
Our audit was conducted in accordance with Auditing Standards in the United
Kingdom ("UK GAAS") that are similar in all material respects to US GAAS.
Yours faithfully,
Grant Thornton
January 1999
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
except per share data
March 31, 1998 June 30, 1997
(pound) (pound)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 12 7
Accounts receivable 147 204
Other receivables 23 24
Prepayments 44 24
Inventories 251 217
--- ---
Total current assets 477 476
Property and equipment, net 147 169
--- ---
Total assets 624 645
=== ===
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 11 133
Current portion of bank loans 112 123
Current portion of capital leases 11 10
Accounts payable 605 311
Accrued expenses 257 171
--- ---
Total current liabilities 996 748
Capital leases, less current position - 9
Bank loans, less current position 18 97
Cumulative redeemable preference (pound)1 stated value, 30,000 shares authorized
and outstanding 30 30
Commitments and contingencies - -
Shareholders' deficit
Ordinary(pound)0.01 stated value, 48,960,000 (June 30, 1997 - 40,460,000) shares
authorized, issued and outstanding, 36,140,000 (June 30, 1997 - 30,740,000)
shares 361 307
Additional paid in capital 433 222
Accumulated deficit (1,217) (768)
Cumulative translation adjustment 3 -
------ --------
Total shareholders' deficit (420) (239)
----- -----
Total liabilities and shareholders' deficit 624 645
==== ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
except per share data
nine months year
ended ended
March 31, 1998 June 30, 1997
(pound) (pound)
<S> <C> <C>
Sales 1,031 1,003
Cost of sales (221) (193)
----- -----
Gross profit 810 810
Operating expenses (965) (1,073)
Research and development expense (264) (279)
Interest income 1 3
Interest expense (21) (18)
----- -----
Net loss (439) (557)
-----
Loss per share - basic and diluted ((pound)0.01) ((pound)0.02)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Additional Cumulative
Ordinary Shares paid in Accumulated translation
Shares Amount capital deficits adjustments Total
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 3 (pound)3 (pound)498 (pound)(201) (pound)- (pound)300
Net Loss - - - (557) - (557)
Capitalization of share premium 30,737 304 (304) - - -
Employee stock compensation - - 28 - - 28
Preference dividend declared - - - (10) - (10)
-----------------------------------------------------------------------------
Balance at June 30, 1997 30,740 307 222 (768) - (239)
Net income - - - (439) - (439)
Share capital issued 5,400 54 211 - - 265
Translation adjustment - - - - 3 3
Preference dividend declared - - - (10) - (10)
-----------------------------------------------------------------------------
Balance at March 31, 1998 36,140 (pound)361 (pound)433 (pound)(1,127) (pound)3 (pound)(420)
=============================================================================
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In Thousands)
except per share data
nine months year
ended ended
March 31, 1998 June 30, 1997
(pound) (pound)
<S> <C> <C>
Cash flows from operating activities
Net loss (439) (557)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation
Employee stock compensation 57 56
(Increase) in Inventories - 28
Decrease/(Increase) in receivables and prepayments (34) (114)
Increase in accounts payable and accrued expenses 370 237
------ ------
Total adjustments 431 68
------ ------
Net cash used in operating activities (8) (489)
Cash flows from investing activities
Capital expenditures (35) (157)
------- ------
Net cash used in investing activities (35) (157)
Cash flows from financing activities
Bank overdraft (122) 132
Proceeds from issuance of long term debt - 247
Principal payments under long-term debt and capital losses (98) (76)
Proceeds from issuance of shares 265 -
------ ------
Net cash provided by financing activities 45 303
Effect of exchange rate changes on cash and cash equivalents 3 -
------ ------
Net increase/(decrease) in cash and cash equivalents 5 (343)
Cash and cash equivalent at beginning of the period 7 350
----- -----
Cash and cash equivalents at the end of the period 12 7
===== =====
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest 18 13
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - DESCRIPTION OF THE BUSINESS
The Company
SolCom Systems Limited and its subsidiary (the "Company") are principally
engaged in the provision of outsourced services to the technology and
information industries.
Incorporation and history
The Company was incorporated in Scotland on December 13, 1990 as SolCom Systems
Limited. The subsidiary was incorporated in the state of Virginia in USA on
September 16, 1996 as SolCom System Inc.
Companies Act 1985
These financial statements do not comprise accounts within the meaning of
Section 240 of the UK Companies Act 1985 (the "Companies Act"). The Company's
statutory accounts, which are its primary financial statements are prepared in
accordance with generally accepted accounting principles in the United Kingdom
("UK GAAP") in compliance with the Companies Act and are presented in Great
Britain pounds sterling ("pounds sterling").
Change of fiscal year end
The Company has changed its fiscal year end to March 31, 1998 in anticipation of
its acquisition by MicroFrame, Inc. The Consolidated Financial Statements
present results for the 9 months ended March 31, 1998 with comparatives for the
year ended June 30, 1997.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of SolCom Systems
Limited and its subsidiary, SolCom Systems, Inc. All significant intercompany
balances and transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. Actual results may differ from those estimates.
-5-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Revenue Recognition
The Company records revenue in accordance with Statement of Position 91-I.
"Software Revenue Recognition") (the "SOP"). In accordance with the SOP, the
Company records revenue from product sales upon shipment to the customer if
there exists no significant vendor obligations and collectibility is probable.
Earnings Per Share
During 1997, the Company adopted Statements of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share (EPS) and, for companies with potential dilutive
securities, such as options, diluted EPS.
Basic earnings per share is computed using the weighted average number of shares
of common stock and convertible preferred stock outstanding. Diluted earnings
per share is computed using the weighted average number of shares of common
stock outstanding and when dilutive, common equivalent shares from options to
purchase common stock using the treasury stock method.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Fair value of Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate their carrying values due to
the relatively short maturities of these instruments.
Inventories
Inventories are priced at the lower of cost (determined by first-in, first-out)
or market value (defined as not realizable value).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets less estimated
residual value to operations over their estimated useful lives, principally on
the straight-line basis. The estimated lives used in determining depreciation
are:
-6-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Plant and machinery 3 years
Motor vehicles (new) 5 years
Motor vehicles (second band) 3 years
Fixtures and fittings 3 - 5 years
Leased plant are amortized over the lives of the respective leases or the
service life of the asset, whichever is shorter. Repair and maintenance cost are
charged to expenses as incurred. Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting
Standards No. 109 (SFAS No 109). "Accounting for Income Taxes." Under SFAS No.
109, income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using accrued tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes that
enactment dates.
Foreign Currency Translation
The reporting currency of the Company is the pound sterling. The functional
currency of the US subsidiary is the US dollar.
The assets and liabilities of the Company's foreign subsidiaries whose
functional currency is other than the pound sterling are translated at the
exchange rates in effect on the reporting date, and income and expenses are
translated at the weighted average exchange rate during the period. The net
effect of translation gains and loses are not included in determining net
income, but are accumulated as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining net
income.
Such gains and losses are not material for any period presented.
NOTE C - INVENTORIES
Inventories at March 31, and June 30, consist of the following: (In Thousands)
1998 1997
(pound) (pound)
Raw materials 115 102
Finished Goods 136 115
------- -------
251 217
======= =======
-7-
<PAGE>
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at March 31 and June 30, consists of the following: (In Thousands)
1998 1997
(pound) (pound)
<S> <C> <C>
Plant and machinery 206 170
Fixtures and fittings 86 89
----- -----
292 259
Less accumulated depreciation (145) (90)
----- -----
147 169
===== =====
NOTE E - ACCRUED EXPENSES
Accrued expenses at March 31 and June 30, consist of the following:
(In Thousands)
1998 1997
(pound) (pound)
Social security and other taxes 85 36
Other 29 21
Sundry creditors 97 78
Provision for preference dividend and provision on redemption of preference
shares 46 36
----- -----
257 171
===== =====
NOTE F - LONG-TERM OBLIGATIONS
(In Thousands)
1998 1997
(pound) (pound)
Long-term obligations at March 31 and June 30, consists of the following:
Secured loan repayable in yearly installments of(pound)3,000 (excluding
interest) until November 1999, carrying interest of 10% per annum 8 10
Secured loans - the loans are secured by a floating charge over the assets of
the company. The interest rate is 2.5% over bank base rate (7.25%) 122 210
----- -----
130 220
less current portion 112 123
----- -----
18 97
===== =====
</TABLE>
-8-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Aggregate maturities of long-term obligations at March 31, 1998 are as follows:
(In Thousands)
(pound)
1998 112
1999 8
2000 8
2001 2
------
130
NOTE G - INCOME TAXES
As of March 31, 1998 the Company has available UK and foreign net operation loss
carry forwards of approximately (pound)600,000 and (pound)250,000 respectively,
to offset future taxable income. In the UK net operating loss carry forwards
expire indefinitely, the US operating loss carry forwards at March 31, 1998
expire 2013.
Deferred tax assets represent the tax effects, based on current tax law or
future deductible or taxable amounts attributable to events that have been
recognized in the financial statements. Deferred tax assets consists of the
following at March 31, 1998 and June 30, 1997:
(In Thousands)
1998 1997
(pound) (pound)
Net operating loss carry forward 280 160
Valuation allowance
Net deferred tax asset (280) (160)
------------------ ----------------
0 0
================== ================
The deferred tax valuation allowance increased (pound)120,000 for the nice
months ended March 31, 1998, since this benefit may not be realized.
NOTE H - BENEFIT PLANS
Personal Pension Plans
The Company has a defined contribution agreement for the benefit of its
employees. The assets of the agreement are administered by trustees in a fund
independent from those of the Company. Costs charged against profits represents
the amount of the contributions payable to the scheme in respect of the
accounting period. The company contributed to the scheme Li.8,745, and Li.9,037
for the nine months ended March 31, 1997 and the year ended June 30, 1997
respectively.
NOTE I - PREFERRED STOCK
The holders of preference stock, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end of 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
-9-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Redemption
Price
Date of redemption per Share
Li.
January 1, 1997 to December 31, 1997 1.80
January 1, 1998 to December 31, 1998 2.20
December 31, 1998 to December 30, 1999 2.80
On or after December 31, 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of Li.3
per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those of the ordinary
shareholders (one vote per ordinary share). Due to the unavailability of
distributable profits, at the end of the period preference dividends totaling
Li.9,600 were in arrears (1997 - Li.8,400).
NOTE J - GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment providing services.
Information about the Company's operations by geographic area for the nine
months ended March 31, 1998 and the year ended June 30, 1997 is as follows:
(In Thousands)
1998 1997
Li. Li.
Sales
United States 772 762
United Kingdom 196 168
Other 63 73
------- -------
1031 1003
==== ====
Expenditure from operations
United States (302) (412)
United Kingdom (86) (91)
Other (31) (39)
------ ------
(419) (542)
===== =====
Identifiable assets
United States 178 231
United Kingdom 446 414
--- ---
-10-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE K - COMMITMENTS AND CONTINGENCIES
Operating Losses
The Company leases certain facilities and items of equipment under
noncancellable operating leases. The following is a schedule, by years, of
minimum rental payments under such operating leases which expire on various
dates through 2011 (in thousands):
(In Thousands)
Li.
1998 43
1999 43
2000 43
2001 43
Thereafter 451
---
623
Total rent expenses for the nine months ended March 31, 1998 and the year ended
June 30, 1997 were approximately Li.46,000 and Li.60,000, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capital Leases
The Company also leases certain assets under capital leases. The related assets
and obligations have been recorded using the Company's incremental borrowing
rate at the inception of the lease. The leases, which are noncancellable, expire
at various dates through 1999. The following is a schedule of leased property
under capital leases as of March 31 and June 30:
(In Thousands)
1998 1997
Li. Li.
Plant and machinery 26 26
Less accumulated depreciation (15) (8)
---- ----
11 18
==== ====
-11-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following is a schedule of the present value of the net minimum payments
under capital leases as of March 31, 1998:
(In Thousands)
Li.
Present Value of net minimum lease payments, all current 11
=========
Government Grants
The Company has received government grants principally of a revenue nature and
these grants have been credited to Income in the period in which the related
expenditures has been incurred. The grants of a capital nature are deferred and
released to the Income Statement over the lives of the assets to which they
relate. No portion of capital grants were deferred at March 31, 1998 or June 30,
1997. The following is an analysis of government grants credited to the Income
Statement:
(In Thousands)
1998 1997
Li. Li.
Amortization of capital grant -- 1
Revenue grants receivable:
Small Company Innovation Support Scheme grant 12 --
Training grants 3 15
Marketing grants -- 5
----- -----
15 21
===== =====
The Small Company Innovation Support Scheme grant was awarded to offset revenue
costs incurred in the period on the development of an Ethernet RMON switch.
The training grants were awarded to support training of specific employees and
the marketing grants were specifically for strategic consultancy.
NOTE L - CONCENTRATION OF CREDIT
Approximately 56% (1997 33%) of the Company's revenue is from one customer.
During the nine months ended March 31, 1998, approximately 74% (1997 76%) of the
Company's net revenues were from 5 (1997 - 5) major customers. At March 31, 1998
accounts receivable included balances of approximately Li.131,000 (1997
Li.166,000) from 5 major customers, of which Li.83,000 (1997 Li.26,000) is due
from the one most significant customer.
-12-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE M - STOCK OPTIONS
The Group accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which Li.28,000 of
compensation cost was recognized in 1997. Had compensation cost been determined
consistent with SFAS NO 123, "Accounting for Stock-Based Compensation", the
company's net loss and respective loss per share would have been reduced to the
following pro forma amounts:
1998 1997
Li. Li.
Net loss As reported (432) (557)
Pro forma (432) (529)
Basic and diluted loss per share As reported Li.(0.01) Li.(0.02)
Pro forma Li.(0.01) Li.(0.02)
The fair value of each option granted is estimated on the date of grant using
the minimum value method of which the following weighted-average assumptions
were used for grants, risk-free interest rates 6.5%; and expected life of 5
years.
A summary of the status of the company's stock option plans as of March 31, 1998
and June 30, 1997, and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
average average
Shares exercise Shares exercise
000 price 000 price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 8,160 0.04 5,900 0.04
Granted 3,934 0.13 2,260 0.04
Outstanding at end of year 12,094 0.10 8,160 0.04
------------ ------------
Options exercisable at year end 12,094 0.10 8,160 -
------------ ------------
Weighted average fair value of options Li.- Li.45,000
granted during the year ============ ============
</TABLE>
The exercise price of share options granted during the nine months ended March
31, 1998 exceeded the market price.
-13-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding at
March 31, 1998:
Weighted
Average
Number remaining Weighted
Outstanding contractual life Average
Range of Exercise Price 000 (Years) Exercise Price
Li..0.04 8,160 5 Li.0.04
NOTE N - ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", and this SFAS is effective for fiscal years
beginning after December 15, 1997. The Company has considered the effects of
this statement and believes the cumulative transition adjustment is the only
component of comprehensive income as defined by this statement.
In May 1997 the Financial Accounting Standards Board issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information" and this is
effective for fiscal years beginning after December 15, 1997. The Company is
evaluating the disclosure impact of SFAS No. 131 on its financial statements and
believes that the effect of adoption of SFAS No. 131 will not be material.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1, "Software Revenue Recognition", SOP 97-2, and
amendments thereto, provide guidance on applying generally accepted principles
in recognizing revenue on software transactions and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company is currently evaluating the impact of SOP 97-2 on its financial
statements.
NOTE O - SUBSEQUENT EVENTS
On June 5, and July 23, 1998, the company issued a total of 4,174,390 new
ordinary shares (2,674,390 and 1,500,000 respectively) for a total consideration
of Li.417,439. Each new share has attached to it a warrant permitting the holder
to subscribe between January 1, and June 30, 1999 for one further share to be
issued at par. In the event that control of the company is obtained by a certain
third party prior to December 31, 1998 then all unexercised warrants will be
cancelled.
On July 23, 1998 the company issued Li.150,000 of convertible unsecured loan
stock, entitled to interest at 10% per and convertible at Li.0.10 per share to
ordinary shares with warrants attached (with rights as above).
On July 23, 1998 options over 980,000 shares were exercised for a total
subscription of Li.36,750.
-14-
<PAGE>
SOLCOM SYSTEMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
On August 17, 1998 agreement was reached under which the entire ordinary share
capital of the company will be acquired by MicroFrame Inc., a company based in
New Jersey whose shares are quoted on NASDAQ. This agreement is subject to a
number of conditions precedent which will require to be satisfied prior to
execution of the transfers of shares. These conditions include (i) the issue of
new ordinary shares (to be included in the acquisition) for cash sufficient to
offset certain indebtedness of the company (ii) conversion of the preference
shares to ordinary shares (also to be included in the acquisition) (iii)
approval by the Stock Exchanged Commission in the USA (iv) approval by the
shareholders of MicroFrame Inc.
-15-
<PAGE>
SolCom Systems Ltd 1997
Registered in Scotland No. 129008
SolCom Systems Ltd.
Directors' Report and Financial Statements
For the year ended 30 June 1997
<PAGE>
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1997
CONTENTS Page
Directory 1
Directors' report 2-4
Auditors' report 5
Profit and loss account 6
Balance sheet 7
Notes to the financial statements 8-21
<PAGE>
SolCom Systems Ltd 1997
Registered in Scotland No. 129008
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1997
DIRECTORS
W. Hugh Evans
Peter J. MacLaren
Michael D. Rutterford (Chairman)
Peter A. Wilson
SECRETARY
Peter J. MacLaren
REGISTERED OFFICE AND PRINCIPAL TRADING ADDRESS
SolCom House
Meikle Road, Kirkton Campus
Livingston
EH54 7DE
USA SUBSIDIARY
SolCom Systems Inc
1801 Robert Fulton Drive
Suite 400
Reston
VA 22091
BANKERS
Clydesdale Bank Riggs National Bank of Virginia
Business Banking Centre Burke Centre Office
Clydesdale Plaza 6035 Burke Centre Parkway
Festival Square Burke
50 Lothian Road VA 22015
Edinburgh USA
EH3 9AN
SOLICITORS
MacLay Murray & Spens Murray Beith Murray
151 St. Vincent Street 39 Castle Street
Glasgow Edinburgh
EH2 3BH
AUDITORS
G2 SNJGrant Thornton
1/4 Atholl Crescent
Edinburg
EH3 8LQ
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
DIRECTORS' REPORT
The Directors present their report together with the financial statements for
the year ended 30 June 1997.
PRINCIPAL ACTIVITIES
The company is engaged in the development and manufacture of both hardware and
software products and the supply of consultancy, training and other services,
all aimed at supporting the management of computer networks.
REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS
A principal feature of the year has been the formation of a wholly owned
subsidiary in the USA and the opening of a full office in Reston., VA. The
company is continuing its programme of new product releases and the development
of sales operations in both Europe and the USA.
RESULTS
The loss for the period after taxation and provisions for preference dividends
and premium on redemption of preference shares, amounts to Li.497,420 and is
dealt with as shown in the profit and loss account on page 6. In view of the
accumulated deficit, the directors cannot propose the payment of a dividend, and
the loss has been deducted from reserves.
DIRECTORS AND THEIR INTERESTS
The directors who served during the year and their interests in the share
capital of the company are set out below. All directors served throughout the
year.
<TABLE>
<CAPTION>
After Post Balance
Sheet Events
(See Below) 30 June 1997 30 June 1996
Options Options Options
Ordinary Over Ordinary Over Ordinary Over
Shares of Ordinary Shares of Ordinary Shares of Ordinary
Li.0.01 each Shares Li.0.01 each Shares Li.1 each Shares
<S> <C> <C> <C> <C> <C> <C>
W. Hugh Evans 5,710,000 3,858,607 5,610,000 2,920,000 561 292
Peter J. MacLaren 3,070,000 1,714,255 3,070,000 1,240,000 307 124
Michael D. Rutterford 5,400,000 Nil 4,600,000 Nil 460 Nil
Peter A. Wilson 5,710,000 3,858,607 5,610,000 2,920,000 561 292
</TABLE>
PRODUCT DEVELOPMENT
During the year the company has capitalized expenditure related to the
development of its product range amounting to Li.120,785.
-2-
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
SHARE CAPITAL
In December 1996 the company resolved to (i) subdivide each of its Li.1 ordinary
shares into 100 ordinary shares of Li.0.01; and (ii) convert the sum of
Li.304,326 from the share premium account into 30,432,600 ordinary shares of
Li.0.01 allotted proportionately to the existing ordinary shareholders.
EMPLOYEE SHARE OPTION SCHEME
The company has instituted an Employee Share Option Scheme, approved by the
Inland Revenue in terms of Paragraph 1, Schedule 9 ICTA 1988. No options under
this scheme were granted prior to the year end but options were granted in
August 1997 as noted below.
POST BALANCE SHEET EVENTS
In August 1997 the company granted (i) options under its Employee Share Option
Scheme in respect of a total of 846,944 shares at a price of Li.0.11 per share;
(ii) other options in respect of 560,000 shares at a price of Li.0.1084 per
share and 27,273 shares at a price of Li.0.11 per share.
In November and December 1997 the company issued a total of 5,400,000 new
ordinary shares for a total consideration of Li.270,000 and granted options to
subscribe for 2,500,000 ordinary shares at prices ranging from Li.0.14 per share
depending on date of exercise.
DIRECTORS' RESPONSIBILITIES AND THE FINANCIAL STATEMENTS
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently
make judgments and estimates that are reasonable and prudent
prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
-3-
<PAGE>
SolCom Systems Ltd 1997
DIRECTORS' REPORT (CONTINUED)
AUDITORS
Grant Thornton offer themselves for re-appointment as auditors in accordance
with section 385 of the Companies Act of 1985.
BY ORDER OF THE BOARD
P J MacLaren
Secretary
30 April 1998
-4-
<PAGE>
SolCom Systems Ltd 1997
REPORT OF THE AUDITORS TO THE MEMBERS OF SOLCOM SYSTEMS LIMITED
We have audited the financial statements on pages 6 to 17 which have been
prepared under the accounting policies set out on pages 8 and 9.
Respective Responsibilities of Directors and Auditors
As described on page 4, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Going Concern
In forming our opinion, we have considered the adequacy of the disclosures made
in Note 2 of the financial statements relating to the uncertainty concerning the
company's ability to raise funds adequate to its needs. In view of the
significance of this uncertainty, we consider it should be drawn to your
attention, but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 30 June 1997 and of its loss for the year then ended
and have been properly prepared in accordance with the Companies Act 1985.
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Edinburgh
30 April 1998
-5-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1997
Note 1997 1996
Li. Li.
<S> <C> <C> <C>
TURNOVER 3 776,822 788,450
Cost of Sales 286,750 205,758
----------------------------------
Gross Profit 490,072 582,692
Distribution Costs 85,405 180,657
Administrative Expenses 877,161 379,936
----------------------------------
OPERATING PROFIT/(LOSS) BEFORE PRP (472,494) 22,099
Profit Related Pay - 1,670
Employer's NI on PRP - 159
----------------------------------
OPERATING PROFIT/(LOSS) (472,494) 20,270
Interest Received 3,248 -
Interest Paid 6 (17,974) (5,402)
----------------------------------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES 3 (487,220) 14,868
BEFORE TAXATION
Taxation 7 - -
----------------------------------
PROFIT FOR THE FINANCIAL YEAR 487,220 14,868
Provision for Preference Dividend and Premium on 10,200 10,200
Redemption of non-Equity Shares
----------------------------------
RETAINED PROFIT/(LOSS) FOR YEAR (497,420) 4,668
==================================
</TABLE>
There were no recognized gains or losses other than the profit/(loss) for the
financial year
The accompanying notes form an integral part of these Financial Statements
-6-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
BALANCE SHEET AT JUNE 1997
Note 1997 1996
Li. Li.
<S> <C> <C> <C>
FIXED ASSETS
Intangible Assets 8 176,865 133,169
Tangible Assets 8 154,901 68,116
Investments 9 226,975 -
----------------------------------
558,741 201,285
CURRENT ASSETS
Stock 10 124,203 103,215
Debtors 11 134,304 112,969
Cash at Bank and in Hand 803 349,783
----------------------------------
259,310 565,967
CREDITORS: amounts falling due within one year 12 684,520 204,028
----------------------------------
NET CURRENT (LIABILITIES)/ASSETS (425,210) 361,939
----------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 133,531 563,224
CREDITORS: amounts falling due after more than 13 106,947 47,867
one year
DEFERRED INCOME 15 - 1,553
----------------------------------
26,584 513,804
==================================
SHARE CAPITAL AND RESERVES
Called up Share Capital 16 337,400 33,074
Share Premium Account 17 193,540 497,866
Reserve for Preference Dividend and Premium on 35,700 25,500
Redemption
Profit & Loss Account 17 (540,056) (42,636)
----------------------------------
Shareholders' Funds 18 26,584 513,804
==================================
The financial statements were approved by the Board of Directors on 30 April
1998.
P J MacLaren
Financial Director
</TABLE>
The accompanying notes form an integral part of these Financial Statements
-7-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
NOTES TO THE FINANCIAL STATEMENTS
Year ended 30 June 1997
1 ACCOUNTING POLICIES
The principal accounting policies adopted are described below. The policies have
remain unchanged from the previous year.
Basis of Preparation
The financial statements have been prepared under the historical cost
convention.
The Company is exempt from preparing consolidated financial statements on the
grounds that, taken together with its subsidiaries, it qualifies as a small
group under S248 of the Companies Act 1985.
These financial statements therefore present information about the Company as an
individual undertaking and not about its group.
Depreciation
Depreciation is calculated to write down the cost of all tangible fixed assets
by equal instalments over their expected useful lives. The rates generally
applicable are:
Plant and Machinery 3 Years
Motor Vehicles (New) 5 Years
Motor Vehicles (Second Hand) 3 Years
Fixtures, Fittings, Tools and Equipment 3-5 Years
Stocks
Stock are valued at the lower of cost and net realisable value.
Product Development
Expenditure (including staff salaries, NI, and certain overheads) which is
incurred directly for the purpose of developing marketable products is
capitalised when recoverability can be assessed with reasonable certainty and
amortised over the expected product life from the date of the product launch.
Grants receivable in respect of such expenditure are similarly deferred and
released to profit over the same period. For the present range of products, the
product life is estimated to be 3 years.
All other product development costs are written off in the year of expenditure.
Product Warranties
Provision is made for all known and expected claims under the terms of product
warranties.
-8-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
Turnover
Turnover is the total amount receivable by the company for goods supplied and
services provided, excluding VAT and trade discounts.
Foreign Currencies
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. All exchange differences are dealt with through the profit and loss
account.
Contributions to Pension Funds
Defined Contribution Scheme
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
Leased Assets
Assets held under finance leases and hire purchase contracts are capitalised in
the balance sheet and depreciated over their expected useful lives. The interest
element of leasing payments represents a constant proportion of the capital
balance outstanding and is charged to the profit and loss account over the
period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the profit and loss account on a straight line basis over
the lease term.
Government Grants
Government grants in respect of capital expenditure are credited to a deferred
income account and are released to the profit and loss account by equal annual
installments over the expected useful life of the relevant assets. Government
grants of a revenue nature are credited to the profit and loss account in the
same period as the related expenditure.
Investments
Investments are included at cost, less amounts written off.
2 BASIS OF ACCOUNTING
The financial statements have been prepared on the going concern basis. The
arrangements with the company's bankers are such that overdraft facilities are
only available from time to time and on a short term, temporary basis. The
nature of the company's business is such that there can be considerable
unpredictable
-9-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
variations in the quantum and timing of sales and hence cash inflows and the
directors recognise the need to ensure that the company has access to adequate
levels of funds so as to ensure that commitments can be met as and when they
fall due for the foreseeable future. The directors are therefore exploring a
variety of options for securing additional new financing for the company,
including the raising of equity finance from both new and existing shareholders.
Based on informal discussions to date, the directors are confident that, if it
became necessary, it would be possible to raise the finance required from these
sources although it is appreciated that there is no certainty in this regard. On
this basis, the directors consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not reflect
any adjustment that would result from a failure to secure adequate new
financing.
3 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and profit/(loss) on ordinary activities before taxation are
attributable to the continuing activities of development and manufacture of
hardware and software products and the supply of consultancy, training, and
other services aimed at supporting the management of computer networks. The
percentage of the company's turnover that, in the opinion of the directors, is
attributable to export markets is 75% (1996:
48%). The profit/(loss) on ordinary activities is after:
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Staff Costs:
Wages & Salaries (excl. PRP) 529,141 251,112
Payroll Taxes and Social Security Costs (excl. NI related to PRP) 52,899 24,397
Pension Costs 11,332 6,612
Charges to Subsidiary for Seconded Staff (58,833) -
----------------- ---------------
534,539 282,121
================= ===============
Research and Development - Current Year Expenditure (including allocated 80,834 34,495
overheads and excluding capitalised expenditure on product development)
Depreciation and Amortisation:
Intangible fixed assets 77,089 43,332
Tangible fixed assets owned 44,465 17,226
Tangible fixed assets held under finance leases and hire purchase contracts 6,839 1,324
Hire of Equipment - 2,894
Auditors' Remuneration 5,000 2,815
================= ===============
Credits in Respect of Government Grants:
Amortisation of Capital Grants 1,553 8,946
Revenue Grants Receivable 19,529 39,868
----------------- ---------------
</TABLE>
-10-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
4 DIRECTORS' REMUNERATION (INCLUDING PENSION CONTRIBUTIONS,
EXCLUDING PRP)
Management Remuneration 103,824 66,455
============== ===========
During the year 2 directors (1996: 2 directors) participated in money purchase
pension schemes.
In addition, a company controlled by Mr. MacLaren, received Li.24,550 (1996:
Li.15,628) for financial management services.
5 STAFF NUMBERS
The average number of persons employed by the company during the year, including
directors, was 25 (1996: 13).
6 INTEREST PAID
1997 1996
Li. Li.
On bank loans and overdrafts 15,901 4,802
Finance charges in respect of finance leases 2,073 600
----------- ----------
17,974 5,402
=========== ==========
7 TAXATION
No liability to UK corporation tax arises for the year due to the availability
of tax losses.
8 FIXED ASSETS
<TABLE>
<CAPTION>
Intangible Tangible
----------------- --------------------------------------------------------
Fixtures,
Expenditure fittings,
on Product Plant and Motor tools and Total
Development machinery vehicles equipment Tangible
Li. Li. Li. Li. Li.
Cost:
<S> <C> <C> <C> <C> <C>
At 30 June 1996 233,612 94,193 3,500 7,809 105,502
Additions 120,785 57,121 - 80,968 138,089
Disposals - - (3,500) - (3,500)
------------- -------------- ------------ ---------------------------
At 30 June 1997 354,397 151,314 - 88,777 240,091
------------- -------------- ------------ ---------------------------
</TABLE>
Depreciation and amortisation:
-11-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
Intangible Tangible
---------- ----------------------------------------------------
Fixtures,
Expenditure fittings,
on Product Plant and Motor tools and Total
Development machinery vehicles equipment Tangible
Li. Li. Li. Li. Li.
<S> <C> <C> <C> <C> <C>
At 30 June 1996 100,443 30,461 3,500 3,425 37,386
Charge for the year 77,089 38,016 - 13,288 51,304
Accumulated in relation to disposals - - (3,500) - (3,500)
------------ --------------------------------------------------------
At 30 June 1997 177,532 68,477 - 16,713 85,190
------------ --------------------------------------------------------
Net book value
At 30 June 1997 176,865 82,837 - 72,064 154,901
============ ========================================================
At 30 June 1996 133,169 63,732 - 4,384 68,116
============ ========================================================
</TABLE>
The net book value of plant and machinery includes Li.18,839 9(1996: Li.14,566)
in respect of assets held under finance leases and hire purchase contracts.
9 FIXED ASSET INVESTMENT
Share in Loans to
Subsidiary Subsidiary
Undertaking Undertaking Total
Additions in year 60 226,915 226,975
----------- ----------- ---------
At 30 June 1997 60 226,915 226,975
----------- ----------- ---------
Net Book Value at 30 June 1997 60 226,915 226,975
=========== =========== =========
Net Book Value at 30 June 1996 - - -
=========== =========== =========
At 30 June 1997 the company held more than 20 % of the equity of the following
undertaking.
<TABLE>
<CAPTION>
Capital &
Country of Class of share Proportion Nature of Reserves at 30 Loss for the
Incorporation capital held Held Business June 1997 Financial Year
Li. Li.
<S> <C> <C> <C> <C> <C> <C>
SolCom Systems Inc. USA Ordinary 100% Marketing of (16,082) (16,142)
Network
Management
Products
</TABLE>
The entire share capital of SolCom Systems Inc. was acquired on 1 September
1996.
-12-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
10 STOCKS
1997 1996
Li. Li.
<S> <C> <C>
Components 101,773 55,808
Finished goods 22,430 47,407
----------------- ---------------
124,203 103,215
================= ===============
11 DEBTORS
Trade Debtors 89,866 90,334
Prepayments & Accrued Income 20,000 16,952
Other Debtors 24,438 5,683
----------------- ---------------
134,304 112,969
================= ===============
12 CREDITORS - amounts falling due within one year
1997 1996
Li. Li.
Loans from Bank of Scotland - 9,500
Loans from Clydesdale Bank (see Note 13) 119,385 -
Bank Overdraft (Note 13) 132,422 -
Loan from British Coal Enterprise Ltd (Note 13) 3,889 4,444
Amounts due under finance leases (Note 13) 9,742 5,297
Trade creditors 305,814 118,286
Social security and other taxes 36,574 11,123
Warranty Provision 20,505 27,210
Accrued PRP and Associated Employer's NI - 1,829
Accruals 56,189 26,339
----------------- ---------------
684,520 204,028
================= ===============
</TABLE>
13 CREDITORS - amounts falling due after more than one year
Interest Last
Rate Repayment
Loans from Bank of Scotland - 30,893
Loan from Clydesdale Bank Feb-1999 72,804 -
Loan from Clydesdale Bank Oct-1998 1,475 -
Loan from Clydesdale Bank Aug-2001 17,895 -
-13-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
Loan from British Coal Enterprise Ltd 10% pa Jan-2001 5,397 8,886
Amounts due under finance leases (Note 14) 9,376 8,088
-------- --------
106,947 47,867
======== ========
The above loans are repayable in monthly instalments ending on the dates
indicated. The current portions are shown under Note 12.
The loans from the Clydesdale Bank and the bank overdraft are secured by a bond
and floating charge over all the assets of the company. Amounts due under
finance leases are secured on the assets concerned.
-14-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
14 BORROWINGS
1997 1996
Li. Li.
<S> <C> <C>
Borrowings are repayable as follows:
Repayable within one year:
Bank and other borrowings 255,696 13,944
Finance Lease 9,742 5,297
Repayable after one and within two years:
Bank and other borrowings 83,813 12,336
Finance Lease 8,342 5,297
Repayable after two and within five years:
Bank and other borrowings 13,758 21,086
Finance Lease 1,034 2,791
----------------- ---------------
Repayable after 5 years:
Bank and other borrowings - 6,357
----------------- ---------------
372,385 67,108
================= ===============
15 DEFERRED INCOME
Capitalised Grants:
Gross amount brought forward and carried forward 31,332 31,332
================= ===============
Amortisation of Capitalised Grants:
Accumulated amortisation brought forward 29,779 20,833
Amortisation during the year 1,553 8,946
----------------- ---------------
Accumulated amortisation carried forward 31,332 29,779
================= ===============
Net Capitalised Grants at 30 June - 1,553
================= ===============
</TABLE>
-15-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
16 SHARE CAPITAL
1997 1997 1996 1996
No Li. No Li.
Authorised:
<S> <C> <C> <C> <C>
Ordinary shares of Li.1 each - - 3,889 3,889
Ordinary shares of Li.0.01 each 40,460,000 404,600 - -
Preference Shares of Li.1 each 30,000 30,000 30,000 30,000
------------- --------------
434,600 33,889
============= ==============
Allotted, called up and fully paid:
Ordinary shares of Li.1 each - - 3,074 3,074
Ordinary shares of Li.0.01 each 30,740,000 307,400 - -
Preference Shares of Li.1 each 30,000 30,000 30,000 30,000
------------- --------------
337,400 33,074
=============== ==============
</TABLE>
During the year the company divided each ordinary share of Li.1 into 100 shares
of Li.0.01 and issued, by way of a scrip issue funded by capitalisation of
Li.304,326 of the Share Premium Account, a total of 30,432,600 new ordinary
shares. The effect of these two transactions was to replace each Li.1 ordinary
share with 10,000 ordinary shares of Li.0.01.
Holders of the preference shares, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
Redemption
Price
per Share
Date of Redemption Li.
1 January 1997 to 31 December 1997 1.80
1 January 1998 to 30 December 1998 2.20
31 December 1998 to 30 December 1999 2.80
On or after 31 December 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of Li.3
per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those of the ordinary
shareholders (one vote per ordinary share). Due to the unavailability of
distributable profits, at the end of the year preference dividends totalling
Li.8,400 were in arrears (1996 - Li.6,000).
-16-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
At 30 June 1997 the company had granted options over a total of 8,160,000
ordinary shares. All options are exercisable up to December 2003, at the
following prices:
Price per
Date of Exercise Share (Li.)
1 January 1997 to 31 December 1997 0.021875
1 January 1998 to 31 December 2003 0.037500
17 SHARE PREMIUM ACCOUNT AND RESERVES
Share Profit &
Premium Loss
Account Account
Li. Li.
At 30 June 1996 497,866 (42,636)
Loss for the year - (497,420)
Capitalized in respect of shares issued during the year (304,326) -
------------ -----------
At June 30, 1997 193,540 (540,056)
============ ===========
In accordance with S263 of the Companies Act 1985 the balance on the share
premium account may not be distributed.
18 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1997 1996
Li. Li.
<S> <C> <C>
Retained Loss for the year (497,420) 4,668
Issue of shares - 425,063
Preference Dividend and Premium on Redemption of Preference Shares
(not paid) 10,200 10,200
----------------- ---------------
Net increase/(decrease) in shareholders' funds (487,220) 439,931
Shareholders' funds at 1 July 1996 513,804 73,873
----------------- ---------------
Shareholders' funds at 30 June 1997 26,584 513,804
================= ===============
Attributable to:
Equity shareholders (39,116) 458,304
Non-equity shareholders 65,700 55,500
----------------- ---------------
================= ===============
26,584 513,804
================= ===============
</TABLE>
-17
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
19 LEASING COMMITMENTS
Operating lease payments amounting to Li.32,250 (1996: Li.12,550) are due within
one year. The property lease to which these payments relate expires after
between 10 and 20 years.
20 CAPITAL COMMITMENTS
The Company had no capital commitments at 30 June 1997 or at 30 June 1996.
21 CONTINGENT LIABILITIES
The company raised a claim against a customer in the USA amounting to Li.91,518
for non-payment of invoices, Li.598,075 for actual damages and Li.512,048 for
punitive damages. This led to a counter claim from the customer for an
unspecified amount for alleged non-performance of goods supplied.
The directors believe that the counter-claim is spurious, and has been raised
solely as a consequence of the claim initiated by the company. This belief is
supported by the fact that, since raising the counter-claim the customer has
tabled an offer to settle the original claim, which has been rejected by the
company. The directors are confident, therefore that no liability will
ultimately crystallise.
With this exception, the company had no contingent liabilities at 30 June 1997
or at 30 June 1996.
22 POST BALANCE SHEET EVENTS
Post balance sheet events are detailed in the Directors' Report on page 3.
23 PENSIONS
Defined Contribution Scheme
The company operates a defined contribution pension scheme for the benefit of
certain directors and employees. The assets of the scheme are administered by
trustees in a fund independent from those of the company.
-18-
<PAGE>
SolCom Systems Ltd 1997
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1997
24 TRANSACTIONS WITH RELATED PARTIES
During the year the company traded with SolCom Systems Inc, a wholly owned
subsidiary. Details of transactions are as follows:
1997
Li.
Sales 191,085
Purchases and other charges net of recharges 31,946
During the year the company paid Malloy & Ball Ltd a fee of Li.24,550 (1996:
Li.15,628). Peter J. MacLaren is a director and shareholder in both Malloy &
Ball Ltd and SolCom Systems Ltd.
-19-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LTD AND ITS SUBSIDIARY, SOLCOM SYSTEMS INC
UNAUDITED CONSOLIDATED
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1997
1997 1996
Li. Li.
<S> <C> <C>
TURNOVER 972,141 788,450
Cost of Sales 191,906 205,758
----------------------------------
Gross Profit 780,235 582,692
Distribution Costs 140,506 180,657
Administrative Expenses 1,128,569 379,936
----------------------------------
OPERATING (LOSS)/PROFIT BEFORE PRP (488,840) 22,099
Profit Related Pay -- 1,670
Employer's NI on PRP -- 159
----------------------------------
OPERATING LOSS/PROFIT (488,840) 20,270
Interest Received 3,452 --
Interest Paid (17,974) (5,402)
----------------------------------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES 14,868
BEFORE TAXATION (503,363)
Taxation -- --
----------------------------------
PROFIT FOR THE FINANCIAL YEAR (503,363) 14,868
Provision for Preference Dividend and Premium on Redemption
of non-Equity Shares 10,200 10,200
----------------------------------
RETAINED PROFIT FOR YEAR (513,563) 4,668
==================================
</TABLE>
There were no recognised gains or losses other than the profit for the financial
year
The information presented on this page has been prepared by the directors for
memorandum purposes. It has not been audited and does not form part of the
Statutory Financial Statements
-19-
<PAGE>
SolCom Systems Ltd 1997
<TABLE>
<CAPTION>
SOLCOM SYSTEMS LTD AND ITS SUBSIDIARY, SOLCOM SYSTEMS INC
UNAUDITED CONSOLIDATED
BALANCE SHEET AT 30 JUNE 1997
1997 1996
Li. Li.
<S> <C> <C>
FIXED ASSETS
Intangible Assets 176,865 133,169
Tangible Assets 168,933 68,116
------------------------------
345,798 201,285
CURRENT ASSETS
Stock 217,196 103,215
Debtors 252,797 112,969
Cash at Bank and in Hand 7,155 349,783
------------------------------
477,148 565,967
CREDITORS: amounts falling due
within one year 705,558 204,028
------------------------------
NET CURRENT ASSETS/(LIABILITIES) (228,410) 361,939
------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 117,388 563,224
CREDITORS: amounts falling due
after more than one year 106,947 47,867
DEFERRED INCOME -- 1,553
------------------------------
10,441 513,804
==============================
SHARE CAPITAL AND RESERVES
Called up Share Capital 337,400 33,074
Share Premium Account 193,540 497,866
Provision for Preference Dividend and Premium on Redemption 35,700 25,500
Profit & Loss Account (556,199) (42,636)
------------------------------
Shareholders' Funds 10,441 513,804
==============================
</TABLE>
The information presented on this page has been prepared by the directors for
memorandum purposes. It has not been audited and does not form part of the
Statutory Financial Statements
-21-
<PAGE>
SolCom Systems Ltd.
Directors' Report and Financial Statements
For the year ended 30 June 1996
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1996
CONTENTS Page
Directory 1
Directors' report 2-4
Auditors' report 5
Profit and loss account 6
Balance sheet 7
Notes to the financial statements 8-16
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
Year ended 30 June 1996
DIRECTORS
W Hugh Evans
Peter J MacLaren
Michael D Rutterford (Chairman)
Peter A Wilson
SECRETARY
Peter J MacLaren
REGISTERED OFFICE AND PRINCIPAL TRADING ADDRESS
SolCom House
Meikle Road, Kirkton Campus
Livingston
EH54 9DF
USA SUBSIDIARY
SolCom Systems Inc
1801 Robert Fulton Drive
Suite 400
Reston
VA 22091
BANKERS
Clydesdale Bank Riggs National Bank of Virginia
27 George Street Burke Centre Office
Edinburgh 6035 Burke Centre Parkway
EH2 2PA Burke, VA 22015, USA
AUDITORS
Grant Thornton
1/4 Atholl Crescent
Edinburgh
EH3 8LQ
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT
The Directors present their report together with the financial statements for
the 12 months ended 30 June 1996.
PRINCIPAL ACTIVITIES
The company is engaged in the development and manufacture of both hardware and
software products and the supply of consultancy, training and other services,
all aimed at supporting the management of computer networks.
REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS
A principal feature of the year has been a major expansion of selling activity
in the USA, both through product sales and technology partnerships. This
activity is expected to bear substantial fruit during 1996-97. In terms of
product development, there has been an on-going programme of enhancements across
the company's product range.
RESULTS
The profit for the period after taxation, PRP and provisions for preference
dividends and premium on redemption of preference shares amounts to Li.4,668 and
is dealt with as shown in the profit and loss account on page 5. In view of the
accumulated deficit, the directors cannot propose the payment of a dividend, and
the profit has been added to reserves. The profit reported is after making
provision of Li.89,414 in respect of a doubtful debtor in the USA. Legal action
to recover this sum is proceeding.
DIRECTORS AND THEIR INTERESTS
The directors who served during the year and their interests in the share
capital of the company are set out below.
30 June 1996 30 June 1995
Ordinary Shares Options Over Ordinary Shares Options Over
of Li.1 each Ordinary Shares of Li.1 each Ordinary Shares
W Hugh Evans 561 292 454 240
Peter J MacLaren 307 124 245 102
Michael D Rutterford 460 Nil 378 Nil
Peter A Wilson 561 292 454 240
PRODUCT DEVELOPMENT
During the year the company has capitalised expenditure related to the
development of its product range amounting to Li.77,803.
-2-
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT (CONTINUED)
SHARE CAPITAL
In December 1995 the company raised a total of Li.30,063 by issue of 481 Li.1
ordinary shares at Li.62.50 per share to existing shareholders. In June 1996 the
company raised a total of Li.400,000 by issue of 369 Li.1 ordinary shares at
Li.1.084 per share to shareholders new to the company.
In December 1996 the company resolved to (i) subdivide each of its Li.1 ordinary
shares into 100 ordinary shares of Li.0.01; and (ii) capitalise the sum of
Li.303,510 from the share premium account into 30,351,000 ordinary shares of
Li.0.01 allotted proportionately to the existing ordinary shareholders.
POST BALANCE SHEET EVENTS
In October 1996, SolCom Systems Inc, a wholly owned subsidiary of the company,
was formed in the State of Delaware, USA. This subsidiary took over the trade
previously carried on by the company in the USA using the trading name, "SolCom
Systems Inc".
In November 1996 the company moved from its office at Brucefield Industrial Park
in Livingston to a newly constructed 4,300 sq ft facility at Meikle Road,
Kirkton Campus, also in Livingston. The lease on the new property is for 15
years.
In December 1996 the company drew down a loan of Li.200,000 and secured an
overdraft facility totalling Li.150,000, both from the Clydesdale Bank. In
addition the Clydesdale Bank acquired from the Bank of Scotland the outstanding
balances of loans totalling Li.34,047, and an overdraft facility of Li.50,000
from the Bank of Scotland has been cancelled. A new floating charge over the
business and undertaking of the company has been granted in favour of the
Clydesdale Bank and that in favour of the Bank of Scotland has been released.
The new loan from the Clydesdale Bank is repayable in equal installments over
the period May 1997 to April 1999.
DIRECTORS' RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently
make judgements and estimates that are reasonable and prudent
prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
-3-
<PAGE>
SOLCOM SYSTEMS LTD 1996
DIRECTORS' REPORT (CONTINUED)
AUDITORS
Grant Thornton offer themselves for re-appointment as auditors in accordance
with section 385 of the Companies Act of 1985.
BY ORDER OF THE BOARD
P J MacLaren
Secretary
26 June 1997
-4-
<PAGE>
SOLCOM SYSTEMS LTD 1996
REPORT OF THE AUDITORS TO THE MEMBERS OF SOLCOM SYSTEMS LIMITED
We have audited the financial statements on pages 5 to 15 which have been
prepared under the accounting policies set out on pages 7 and 8.
Respective responsibilities of directors and auditors
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Going Concern
In forming our opinion, we have considered the adequacy of the disclosures made
in note 2 of the financial statements concerning the uncertainty as to the
continuation and renewal of the company's bank overdraft facility. In view of
the significance of this uncertainty we consider that it should be drawn to your
attention, but our opinion is not qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 30 June 1996 and of its profit for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Edinburgh
27 June 1997
-5-
<PAGE>
SOLCOM SYSTEMS LTD 1996
<TABLE>
<CAPTION>
PROFIT AND LOSS ACCOUNT
12 Months ended 30 June 1996
Note 1996 1997
Li. Li.
<S> <C> <C> <C>
TURNOVER 3 788,450 524,615
Cost of Sales 205,758 188,291
----------------------------------
Gross Profit 582,692 336,324
Distribution Costs 180,657 78,263
Administrative Expenses 379,936 223,569
----------------------------------
OPERATING PROFIT BEFORE PRP 22,099 34,492
Profit Related Pay 1,670 3,200
Employer's NI on PRP 159 304
----------------------------------
OPERATING PROFIT 20,270 30,988
Interest Received - 28,499
Interest Paid 6 5,402 -
----------------------------------
PROFIT ON ORDINARY ACTIVITIES BEFORE 3 14,868 52
TAXATION
Taxation 7 - 2,541
----------------------------------
PROFIT FOR THE FINANCIAL YEAR 14,868 28,499
Provision for Preference Dividend and Premium on
Redemption of non-Equity Shares 10,200 10,200
----------------------------------
RETAINED PROFIT FOR YEAR 4,668 18,299
==================================
</TABLE>
There were no recognized gains or losses other than the profit for the financial
year
The accompanying notes form an integral part of these Financial Statements
-6-
<PAGE>
SOLCOM SYSTEMS LTD 1996
<TABLE>
<CAPTION>
BALANCE SHEET AT 30 JUNE 1996
Note 1996 1995
<S> <C> <C> <C>
FIXED ASSETS
Intangible Assets 8 133,169 98,698
Tangible Assets 8 68,116 35,213
-------------- ---------------
201,285 133,911
CURRENT ASSETS
Stock 9 103,215 49,803
Debtors 10 112,969 102,420
Cash at Bank and in Hand 349,783 621
-------------- ---------------
565,967 152,844
CREDITORS: amounts falling due within one year 11 204,028 188,728
-------------- ---------------
NET CURRENT ASSETS/(LIABILITIES) 361,939 (35,884)
-------------- ---------------
TOTAL ASSETS LESS CURRENT LIABILITIES 563,224 98,027
CREDITORS: amounts falling due after more than one year 12 47,867 13,655
DEFERRED INCOME 14 1,553 10,499
-------------- ---------------
513,804 73,873
============== ===============
SHARE CAPITALS AND RESERVES
Called up Share Capital 15 33,074 32,224
Share Premium Account 16 497,866 73,653
Provision for Preference Dividend and Premium on 25,500 15,300
Redemption
Profit & Loss Account 16 (42,636) (47,304)
-------------- ---------------
Shareholders' Funds 17 513,804 73,873
============== ===============
</TABLE>
The financial statements were approved by the Board of Directors on 26 June 1997
PJ MacLaren
Financial Director
The accompanying notes form an integral part of these Financial Statements
-7-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
NOTES TO THE FINANCIAL STATEMENTS
Year ended 30 June 1996
1 ACCOUNTING POLICIES
The principal accounting policies adopted are described below. The policies have
remained unchanged from the previous year.
Accounting Convention
The financial statements are prepared under the historical cost convention.
Depreciation
Depreciation is calculated to write down the cost of all tangible fixed assets
by equal installments over their expected useful lives. The rates generally
applicable are:
Plant and Machinery 3 Years
Motor Vehicles (New) 5 Years
Motor Vehicles (Second Hand) 3 Years
Fixtures, Fittings, Tools and Equipment 5 Years
Stocks
Stocks are valued at the lower of cost and net realisable value.
Intangible Assets - Product Development
Expenditure (including staff salaries, NI, and certain overheads) which is
incurred directly for the purpose of developing marketable products is
capitalised when recoverability can be assessed with reasonable certainty and
amortised over the expected product life from the date of the product launch.
Grants receivable in respect of such expenditure are similarly deferred and
released to profit over the same period. For the present range of products, the
product life is estimated to be 3 years.
Product Warranties
Provision is made for all known and expected claims under the terms of product
warranties.
Turnover
Turnover is the total amount receivable by the company for goods supplied and
services provided, excluding VAT.
Foreign Currencies
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. All other exchange differences are dealt with through the profit and loss
account.
-8-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
Contributions to Pension Funds
Defined Contribution Scheme
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
Leased Assets
Assets held under finance leases and hire purchase contracts are capitalised in
the balance sheet and depreciated over their expected useful lives. The interest
element of leasing payments represents a constant proportion of the capital
balance outstanding and is charged to the profit and loss account over the
period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the profit and loss account on a straight line basis over
the lease term.
Government Grants
Government grants in respect of capital expenditure are credited to a deferred
income account and are released to the profit and loss account by equal annual
instalments over the expected useful life of the relevant assets. Government
grants of a revenue nature are credited to the profit and loss account in the
same period as the related expenditure.
2 BASIS OF ACCOUNTING
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand. The nature of the company's
business is such that there can be considerable unpredictable variation in the
timing of sales and hence cash inflows. On the basis of current trading, the
directors consider that the company will continue within the facility currently
agreed and within that which they expect to be agreed on the 30th June 1997, the
facility review date. However, the margin of facilities over requirements is not
large, and inherently there can be no certainty in relation to these matters. On
this basis, the directors consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not reflect
any adjustments that would result from a withdrawal of the overdraft facility by
the company's bankers.
-9-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
3 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and profit on ordinary activities before taxation are attributable
to the continuing activities of development and manufacture of hardware and
software products and the supply of consultancy, training and other services
aimed at supporting the management of computer networks. The percentage of the
company's turnover that, in the opinion of the directors, is attributable to
export markets is 48%. The profit on ordinary activities is after:
<TABLE>
<CAPTION>
1996 1995
(pound) (pound)
<S> <C> <C>
Staff Costs:
Wages & Salaries (excl PRP) 251,112 129,241
Social Security Costs (excl NI related to PRP) 24,397 11,675
Pension Costs 6,612 6,312
-------------------------------
282,121 147,228
===============================
Research and Development - Current Year Expenditure (including allocated
overheads and excluding capitalised expenditure on product development) 34,495 25,468
Depreciation and Amortisation:
Intangible fixed assets 43,332 37,374
Tangible fixed assets owned 17,226 12,440
Tangible fixed assets held under finance leases and hire purchase contracts 1,324 -
Hire of Equipment 2,894 3,712
Auditors' Remuneration 2,815 1,750
===============================
Credits in Respect of Government Grants:
Amortisation of Capital Grants 8,946 11,110
Revenue Grants Receivable 39,868 22,250
===============================
4 DIRECTORS' REMUNERATION (INCLUDING PENSION CONTRIBUTIONS
EXCLUDING PRP)
Management Remuneration 66,455 62,354
===============================
The Chairman - -
The Highest Paid Director 32,017 29,913
===============================
The remuneration of the Directors fell within the following ranges: Number Number
(pound)0-(pound)5,000 2 2
(pound)25,001-(pound)30,000 - 2
(pound)30,001-(pound)35,000 2 -
</TABLE>
In addition, Malloy & Ball Ltd. a company controlled by Mr. MacLaren, received
(pound)15,628 (1995: (pound)13,467) for financial management services.
-10-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
5 STAFF NUMBERS
The average number of persons employed by the company during the year, including
directors, was 13 (1995: 7).
6 INTEREST PAID
1996 1995
(pound) (pound)
On bank loans and overdrafts 4,802 2,541
Finance charges in respect of finance leases 600 -
------------- -----------
5,402 2,541
============= ===========
7 TAXATION
No liability to UK corporation tax arises for the year due to the availability
of tax losses.
8 FIXED ASSETS
<TABLE>
<CAPTION>
Intangible Tangible
--------------- ------------------------------------------------------------------
Expenditure Fixtures,
on Product Plant and Motor ittings, tools Total
Development machinery Vehicles fand equipment Tangible
(pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Cost:
At 30 June 1995 155,809 46,537 3,500 6,695 56,732
Additions 77,803 50,676 - 1,114 51,790
Disposals - (3,020) - - (3,020)
--------------- ------------------------------------------------------------------
At 30 June 1996 233,612 94,193 3,500 7,809 105,502
--------------- ------------------------------------------------------------------
Depreciation and
amortisation:
At 30 June 1995 57,111 17,024 2,528 1,967 21,519
Charge for the year 43,332 16,120 972 1,458 18,550
Accumulated in relation -
to disposals - (2,683) - (2,683)
--------------- ------------------------------------------------------------------
At 30 June 1996 100,443 30,461 3,500 3,425 37,386
--------------- ------------------------------------------------------------------
Net book value
At 30 June 1996 133,169 63,732 - 4,384 68,116
=============== ==================================================================
At 30 June 1995 98,698 29,513 972 4,728 35,213
=============== ==================================================================
</TABLE>
The net book value of plant and machinery include (pound)14,566 (1995 Nil) in
respect of assets held under finance leases and hire purchase contracts.
-11-
<PAGE>
SOLCOM SYSTEMS LTD 1996
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
9 STOCKS
1996 1995
(pound) (pound)
<S> <C> <C>
Components 55,808 28,606
Finished Goods 47,407 21,197
-----------------------------------
103,215 49,803
===================================
10 DEBTORS
Trade Debtors 90,334 90,063
Prepayments & Accrued Income 16,952 156
Other Debtors 5,683 12,201
-----------------------------------
112,969 102,420
===================================
11 CREDITORS - amounts falling due within one year
Bank of Scotland loans (Note 12) 9,500 5,200
British Coal Enterprise Ltd loan (Note 12) 4,444 2,937
Trade creditors 118,286 106,221
Amounts due under finance leases (Note 12) 5,297 -
Social security and other taxes 11,123 5,135
Bank Overdraft (Note 12) - 27,818
Warranty Provision 27,210 16,535
Accrued PRP and Associated Employer's NI 1,829 3,504
Accruals 26,339 21,378
-----------------------------------
204,028 188,728
===================================
</TABLE>
12 CREDITORS - amounts falling due after more than one year
<TABLE>
<CAPTION>
Interest Rate Last Repayment
<S> <C> <C> <C> <C>
Loan from Bank of Scotland Base + 3.0% pa Feb-1999 6,300 10,329
Loan from Bank of Scotland Base + 2.5% pa Jan-1998 1,036 3,326
Loan from Bank of Scotland Base + 2.5% pa Nov-2002 23,557 -
Loan from British Coal Enterprise Ltd. 10% pa Jan-2001 8,886 -
Amounts due under finance leases (Note 11) 8,088 -
-----------------------------------
47,867 13,655
===================================
</TABLE>
The above loans are repayable in monthly installments ending on the dates
indicated. The current portions are shown under Note 11.
The loans from the Bank of Scotland and the bank overdraft are secured by a bond
and floating charge over all the assets of the company. Amounts due under
finance leases are secured on the assets concerned.
-12-
<PAGE>
SOLCOM SYSTEMS LTD 1996
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
13 BORROWINGS
1996 1995
(pound) (pound)
<S> <C> <C>
Borrowings are repayable as follows:
Repayable within one year:
Bank and other borrowings 13,944 35,955
Finance Lease 5,297 -
Repayable after one and within two years:
Bank and other borrowings 12,336 5,200
Finance Lease 5,297 -
Repayable after two and within five years:
Bank and other borrowings 21,086 8,455
Finance Lease 2,791 -
Repayable after 5 years:
Bank and other borrowings 6,357 -
-----------------------------------
67,108 49,610
===================================
14 DEFERRED INCOME
Capitalised Grants:
Gross amount brought forward 31,332 25,508
Grants receivable and capitalised during the year - 5,824
-----------------------------------
Gross amount carried forward 31,332 31,332
===================================
Amortisation of Capitalised Grants:
Accumulated amortisation brought forward 20,833 9,723
Amortisation during the year 8,946 11,110
-----------------------------------
Accumulated amortisation carried forward 29,779 20,833
===================================
Net Capitalised Grants at 30 June 1,553 10,499
===================================
</TABLE>
-13-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
15 SHARE CAPITAL
1996 1996 1995 1995
No (pound) No (pound)
Authorised:
Ordinary shares of(pound)1 each 3,889 3,889 2,814 2,814
Preference Shares of(pound)1 each 30,000 30,000 30,000 30,000
------ ------
33,889 32,814
====== ======
Allotted, called up and fully paid:
Ordinary shares of(pound)1 each 3,074 3,074 2,224 2,224
Preference Shares of(pound)1 each 30,000 30,000 30,000 30,000
------ ------
33,074 32,224
====== ======
Holders of the preference shares, which are non-equity shares, are entitled to a
cumulative dividend at the rate of 8% per year and to redemption of one half of
the shares by end 1998 and the remainder by end 1999 (or earlier, at the
company's option) at the following prices:
Redemption
Price
per Share
Date of Redemption (pound)
On or prior to 31 December 1995 1.25
1 January 1996 to 31 December 1996 1.48
1 January 1997 to 31 December 1997 1.80
1 January 1998 to 30 December 1998 2.20
31 December 1998 to 30 December 1999 2.80
On or after 31 December 1999 3.00
On a winding up or reduction of capital the holders of preference shares will
rank ahead of holders of ordinary shares in respect of a final dividend of
(pound)3 per share.
If any part of a preference dividend is in arrears at the time of a General
Meeting of the company, then the holders of the Preference Shares are entitled
to one vote per 30 shares, such votes ranking equally with those of the ordinary
shareholders (one vote per ordinary share). Due to the unavailability of
distributable profits, at the end of the year preference dividends totalling
(pound)6,000 were in arrears (1995-(pound)3,600).
Allotments during the year
On 30 November 1995 the company made an allotment of 481 ordinary shares of
(pound)1 at (pound)62.50 per share by way of an issue to existing members. A
further issue of 369 ordinary (pound)1 shares at (pound)1,084 per share was made
on 21 June 1996 by an issue to new investors. The difference between the total
consideration of (pound)430,063 and the total nominal value of (pound)850 has
been credited to the share premium account, less issue costs of (pound)5,000.
-14-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
15 SHARE CAPITAL (CONTINUED)
The company has granted options over a total of 816 ordinary shares. All options
are exercisable up to December 2003, at the following prices:
Price per Share
Date of Exercise (pound)
On or prior to 31 December 1995 156
1 January 1996 to 31 December 1996 188
1 January 1997 to 31 December 1997 219
1 January 1998 to 31 December 2003 375
16 SHARE PREMIUM ACCOUNT AND RESERVES
Share Premium Profit & Loss
Account Account
(pound) (pound)
At 30 June 1995 73,653 (47,304)
Profit for the year - 4,668
In respect of shares issued during the year 424,213 -
-----------------------------
At 30 June 1996 497,866 (42,636)
=============================
In accordance with S263 of the Companies Act 1985 the balance on the share
premium account may not be distributed.
17 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
1996 1995
(pound) (pound)
Retained Profit for the year 4,668 18,299
Issue of shares 425,063 -
Preference Dividend and Premium on Redemption of 10,200 10,200
Preference Shares (not paid)
---------------------------
Net increase in shareholders' funds 439,931 28,499
Shareholders' funds at 1 July 1995 73,873 45,374
---------------------------
Shareholders' funds at 30 June 1996 513,804 73,873
===========================
Attributable to:
Equity shareholders 458,304 28,573
Non-equity shareholders 55,500 45,300
---------------------------
513,804 73,873
===========================
-15-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Year ended 30 June 1996
SOLCOM SYSTEMS LTD 1996
18 LEASING COMMITMENTS
Operating lease payments amounting to (pound)12,550 (1995; (pound)12,550) are
due within one year. The property lease to which these payments relate expires
between one and five years.
19 CAPITAL COMMITMENTS
The company had no capital commitments at 30 June 1996 or at 30 June 1995.
20 CONTINGENT LIABILITIES
The company had no contingent liabilities at 30 June 1996 or at 30 June 1995.
21 POST BALANCE SHEET EVENTS
Post balance sheet events are detailed in the Directors' Report on Page 3.
22 PENSIONS
Defined Contribution Scheme
The company operates a defined contribution pension scheme for the benefit of
certain directors and employees. The assets of the scheme are administered by
trustees in a fund independent from those of the company.
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<PAGE>
APPENDIX F
MICROFRAME, INC. FORM 10-KSB
FOR THE PERIOD ENDED MARCH 31, 1998
PREVIOUSLY FILED
<PAGE>
APPENDIX G
MICROFRAME, INC. FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
PREVIOUSLY FILED
<PAGE>
APPENDIX H
NEW JERSEY BUSINESS CORPORATION ACT
SECTIONS 14A:11-1 AND 14A:11-2
PREVIOUSLY FILED
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
of
MICROFRAME, INC.
with and into
ION NETWORKS, INC.
--------------------------------
AGREEMENT AND PLAN OF MERGER dated as of December 15, 1998 (this
"Agreement") by and among MICROFRAME, INC., a New Jersey corporation having an
address at 21 Meridian Avenue, Edison, New Jersey 08820 ("MicroFrame") and ION
NETWORKS, INC., a Delaware corporation having an address at 21 Meridian Avenue,
Edison, New Jersey 08820 ("Ion"), as the constituent parties to the merger
contemplated by this Agreement (the "Merger").
W I T N E S S E T H :
WHEREAS, the laws of the States of New Jersey and Delaware permit
the merger of MicroFrame with and into Ion; and
WHEREAS, the Boards of Directors of MicroFrame and Ion deem it
desirable and in the best interest of the respective companies to merge
MicroFrame with and into Ion, and have approved this Agreement for that purpose.
NOW, THEREFORE, in consideration of the agreements, representations
and warranties contained in this Agreement, and in order to prescribe the terms
and conditions of the Merger and the procedures to effectuate the Merger, the
parties hereto agree as follows:
1. The Merger; Name of Surviving Company. MicroFrame and Ion
shall, pursuant to the provisions of the Delaware General
Corporation Law (the "DGCL") and the New Jersey Business
Corporation Act (the "NJBCA"), be merged with and into a
single corporation, to wit, Ion, which shall be the
surviving corporation from and after the Effective Date
(as hereinafter defined), and which is sometimes
hereinafter referred to as the "surviving corporation",
and which shall continue to exist as said surviving
corporation under its present name pursuant to the
provisions of the DGCL and the NJBCA. The separate
existence of MicroFrame, which is sometimes hereinafter
referred to as the "terminating corporation", shall cease
on the Effective Date in accordance with the provisions of
the DGCL and the NJBCA.
<PAGE>
2. Certificate of Incorporation of Surviving Corporation. The
certificate of incorporation of the surviving corporation
shall be the certificate of incorporation of Ion in effect
on the Effective Date, which certificate of incorporation
shall remain unchanged and unaffected by the Merger until
further amended as provided by law.
3. By-Laws. The By-Laws of Ion as in effect on the Effective
Date shall continue to be the By-Laws of the surviving
corporation following the Effective Date unless and until
the same shall be amended or repealed in accordance with
the provisions thereof and applicable law.
4. Authorized Capital. The authorized capital stock of Ion
following the Effective Date shall be 50,000,000 shares of
common stock, $.001 par value per share ("Ion Common
Stock"), and 200,000 shares of preferred stock, $10.00 par
value per share, unless and until the same shall be
amended in accordance with the laws of the State of
Delaware.
5. Effect of the Merger. On the Effective Date, MicroFrame
and Ion shall become a single corporation and Ion shall
continue to exist as the surviving corporation and shall
thereupon and thereafter, pursuant to the DGCL, have all
the rights, privileges, immunities, powers and franchises,
and be subject to all the duties, liabilities, obligations
and penalties of each of MicroFrame and Ion, and all
property, real, personal and mixed, and all debts due on
whatever account and all other choses in action, and all
and every other interest of, or belonging to or due to
each of MicroFrame and Ion shall be vested in Ion without
further act or deed, all in the manner and to the full
extent provided by the DGCL.
6. Conversion of Outstanding Securities. On the Effective
Date:
a. All of the shares of Ion Common Stock issued to
MicroFrame shall be immediately canceled and shall
be null and void and of no further force or effect
thereafter.
b. Each of the issued and outstanding shares of
common stock of MicroFrame ("MicroFrame Common
Stock") shall be converted into the
right to receive one (1) share of Ion Common Stock
(and each such share of MicroFrame Common Stock
shall be deemed canceled and the holder thereof
shall cease to have any rights with respect
thereto), and each certificate representing such
shares of MicroFrame Common Stock shall thereafter
and until surrendered be deemed to represent for
all corporate purposes the right to receive a like
number of shares of Ion Common Stock. Each issued
share of MicroFrame Common Stock
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<PAGE>
which is held in treasury, if any, on the
Effective Date, shall be cancelled and shall cease
to exist.
c. Each of the outstanding options, warrants and
shares reserved for issuance upon the conversion
of outstanding securities or indebtedness of
MicroFrame shall be converted into an option,
warrant or share, as the case may be, to purchase
the number of shares of Ion Common Stock which the
holder would have been entitled to receive
following the exercise or conversion thereof prior
to the Effective Date, with no other changes in
the terms or conditions of such securities.
7. Directors and Officers. The directors and officers of Ion
on the Effective Date shall continue to serve as directors
and officers of Ion for the balance of the terms of the
directors and officers of Ion and until their successors
are elected and qualified as provided in the By-Laws of
Ion and in accordance with applicable law.
8. Abandonment. Anything herein or elsewhere to the contrary
notwithstanding, and notwithstanding shareholder approval
hereof, this Plan may be terminated and abandoned by
action of the Board of Directors of any of the
corporations party hereto at any time prior to the
Effective Date of this Plan for any reason.
9. Effective Date. The Merger shall become effective upon the
filing of a Certificate of Merger with the Secretary of
State of the State of Delaware and the Secretary of State
of the State of New Jersey (the "Effective Date").
10. Miscellaneous.
a. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed
given (a) when delivered by hand at the respective
addresses hereinbefore designated or (b) upon
confirmed delivery by a standard overnight carrier
(or at such other address for a party as shall be
specified by like notice).
b. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the
State of New York without regard to principles of
conflict or choice of law thereof.
c. Interpretation. The headings contained in this
Agreement are for reference purposes only and
shall not affect in any way the meaning or
interpretation of this Agreement.
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<PAGE>
d. Entire Agreement. This Agreement and the documents
delivered pursuant to this Agreement constitute
the entire agreement of the parties with respect
to the subject matter hereof, and collectively
supersede all other prior or contemporaneous
negotiations, commitments, agreements and
understandings (whether written or oral), between
the parties with respect to the subject matter
hereof.
e. Binding Effect. This Agreement will be binding
upon, inure to the benefit of and be enforceable
by, the parties and their respective successors
and assigns.
f. Severability. The provisions of this Agreement
shall be severable, so that the enforceability,
validity or legality of one provision shall not
affect the enforceability, validity or legality of
the remaining provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first written above.
MICROFRAME, INC.
By: /s/ Stephen B. Gray
-----------------------------------
Name: Stephen B. Gray
Title: President
ION NETWORKS, INC.
By: /s/ Stephen B. Gray
-----------------------------------
Name: Stephen B. Gray
Title: President
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